SEI Investments Company: Q2 2013 Form 10-Q Summary
Business Context and Reporting Period
SEI Investments Company provides investment processing, investment management, and investment operations solutions to financial institutions, advisors, corporations, and ultra-high-net-worth families. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared with the same periods in 2012. At June 30, 2013, SEI managed or administered $507.2 billion of client assets, including $204.3 billion under management and $302.9 billion under administration.
Financial Results and Key Metrics
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Revenue | $274.6 million | $241.2 million | 14% |
| Income from operations | $58.0 million | $53.8 million | 8% |
| Operating margin | 21.1% | 22.3% | Down 1.2 points |
| Net income attributable to SEI | $83.5 million | $49.6 million | 68% |
| Diluted EPS | $0.47 | $0.28 | 68% |
| Dividends declared per share | $0.20 | $0.15 | 33% |
For the six months ended June 30, 2013, revenue increased 14% to $546.5 million, operating income increased 16% to $118.0 million, net income attributable to SEI increased 56% to $155.4 million, and diluted EPS increased 57% to $0.88. The six-month operating margin was approximately 21.6%, compared with 21.3% in 2012.
- Asset management, administration and distribution fees increased 15% in the second quarter and 15% for the six-month period.
- Information processing and software servicing fees increased 9% in the second quarter and 12% for the six-month period.
- Equity in earnings from unconsolidated affiliates increased 21% in the second quarter and 10% for the six-month period, principally reflecting LSV Asset Management.
- Q2 net income included $43.4 million of after-fees cash settlement income related to Cheyne Finance litigation. Six-month results also included a $22.1 million gain on the sale of SEI Asset Korea.
Cash Flow, Balance Sheet, Debt and Liquidity
| Metric | June 30, 2013 | December 31, 2012 |
|---|---|---|
| Cash and cash equivalents | $487.1 million | $452.2 million |
| Total assets | $1.348 billion | $1.310 billion |
| Total liabilities | $221.4 million | $252.5 million |
| Total equity | $1.126 billion | $1.057 billion |
- Operating cash flow for the first six months was $123.3 million, compared with $75.1 million in 2012.
- Investing cash flow used $14.0 million, including $22.2 million of capitalized software development costs and $3.6 million of property and equipment additions.
- Financing cash flow used $74.5 million, including $86.4 million for share repurchases and $34.4 million of dividends, partially offset by $39.6 million from stock issuance.
- SEI had no borrowings under its $300 million credit facility at June 30, 2013 and was in compliance with its covenants. The facility expires in February 2017.
- Management stated that operating cash flow, existing cash, and borrowing capacity should adequately fund operations, investment, repurchases, the planned corporate-campus expansion, and dividends. Free and immediately accessible cash was $383.9 million as of July 24, 2013.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected market appreciation, positive cash flows from new and existing clients, new business in Institutional Investors and Investment Managers, and increased processing revenue in Private Banks.
- Investment Advisors revenue increased 20% in Q2 and operating profit increased 30%; Investment Managers revenue increased 19% and operating profit increased 14%.
- Private Banks revenue increased 8%, but its Q2 operating result declined to a $2.6 million loss from $3.4 million of operating profit, primarily because of higher personnel, consulting, outsourcing, distribution, stock compensation, and software amortization costs.
- Institutional Investors revenue increased 14% and operating profit increased 13%; its Q2 operating margin declined modestly to 48% from 49%.
- Stock-based compensation expense increased to $15.9 million for the first six months from $7.9 million, including a $6.9 million increase resulting from revised estimates of option-vesting timing.
- SEI completed the sale of its 56.1% interest in SEI Asset Korea on March 28, 2013. The transaction generated $54.3 million of net proceeds and eliminated the related noncontrolling interest.
- SEI repurchased 2.993 million shares for $86.7 million during the first six months. Remaining repurchase authorization was $104.4 million at June 30.
- Capitalized software costs increased to $22.2 million from $18.2 million, including an $8.8 million one-time contractual payment related to the SEI Wealth Platform.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal numerical revenue or earnings guidance. Management expected continued investment in the SEI Wealth Platform and stated that liquidity was sufficient for planned operations, capital investment, repurchases, dividends, and a corporate-campus expansion expected to cost at least $10.8 million and be completed in the second quarter of 2014.
- Key business risks include capital-market declines, client losses, investment performance, LSV performance, technology and data-security failures, third-party service-provider failures, regulatory changes, foreign-exchange fluctuations, and senior-management retention.
- SEI and subsidiaries face extensive regulatory examinations and increased compliance costs. Management warned that enforcement actions, fines, remediation, or reputational damage could materially affect results.
- SIDCO prevailed in the Second Circuit in litigation concerning ProShares leveraged ETFs; the district-court dismissal was affirmed on July 22, 2013.
- SEI and SEI Private Trust Company remain defendants in Louisiana litigation related to Stanford International Bank certificates of deposit. A class was certified in one action, proceedings and appeals remained active, and the company could not reasonably estimate any potential loss.
- SEI provided unsecured guarantees related to LSV employee-group term loans. The company reported no current payment obligation and stated that the borrowers were current.
- The Q2 settlement income, the SEI Asset Korea sale gain, and the prior-year SIV securities gains make period-over-period net income and EPS less representative of recurring operating performance.
Important Facts for Investors to Verify
- Reconcile reported EPS growth with the $43.4 million litigation settlement and $22.1 million SEI Asset Korea sale gain.
- Assess recurring operating margins, particularly the deterioration in Private Banks and the increase in compensation, consulting, and software-related costs.
- Monitor assets under management and administration, client cash flows, market sensitivity, and LSV’s contribution to earnings.
- Review the status and potential exposure of the Louisiana Stanford-related litigation and the LSV employee-loan guarantees.
- Verify the sustainability of share repurchases and dividend payments against free cash, software investment, and the planned campus expansion.
- Track stock-based compensation, including the remaining $38.4 million of estimated unrecognized expense and management’s vesting assumptions.