SEI Investments Company: 2012 Third-Quarter Form 10-Q
Reporting period: Quarterly and year-to-date periods ended September 30, 2012, compared with the corresponding 2011 periods. The filing is unaudited. SEI provides investment processing, investment management, and investment operations solutions globally.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Change | 9M 2012 | 9M 2011 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $251.8 million | $233.2 million | +8% | $730.9 million | $703.5 million | +4% |
| Income from operations | $53.5 million | $51.1 million | +5% | $155.4 million | $159.7 million | -3% |
| Net income attributable to SEI | $50.7 million | $49.2 million | +3% | $150.3 million | $160.6 million | -6% |
| Diluted EPS | $0.29 | $0.27 | +7% | $0.85 | $0.86 | -1% |
| Operating margin | 21.3% | 21.9% | Down | 21.3% | 22.7% | Down |
| Net margin | 20.3% | 21.3% | Down | 20.7% | 23.0% | Down |
- Revenue growth was led by asset management, administration and distribution fees, which increased 9% in the quarter and 5% year to date. Information processing and software servicing fees increased 9% and 4%, respectively.
- Transaction-based and trade execution fees declined 20% in the quarter and 16% year to date, reflecting lower trading volumes.
- Personnel expense increased 20% in the quarter and 14% year to date. Amortization increased 48% in the quarter and 27% year to date, primarily due to the Global Wealth Platform.
- Net gain from investments was $3.7 million in Q3, compared with a $1.4 million loss in the prior-year quarter. Year-to-date gains were $7.6 million versus $3.9 million.
- Equity in earnings of LSV Asset Management increased 4% in Q3 to $24.9 million but declined 9% year to date to $75.0 million. SEI's ownership declined from approximately 41.2% to 39.8% in April 2012.
- Effective tax rates increased to 39.0% from 33.8% in Q3 and to 37.6% from 35.3% year to date, mainly because SEI accrued U.S. deferred taxes on undistributed earnings of SEI Asset Korea.
- At September 30, 2012, assets under management and administration were $447.7 billion, up 13% from $395.0 billion a year earlier. Assets under management were $195.2 billion, up 21%.
Cash flow, liquidity, debt and capital allocation
- Cash provided by operating activities was $145.9 million for the first nine months, down from $175.5 million in 2011, primarily because of lower net income and a $55.0 million increase in receivables.
- Cash used in investing activities was $34.8 million, including $21.7 million of capital expenditures and $25.9 million of capitalized software development costs.
- Cash used in financing activities was $134.4 million, including $111.6 million of share repurchases and $52.6 million of dividend payments.
- Cash and cash equivalents were $397.7 million at September 30, 2012, compared with $421.0 million at December 31, 2011. Management reported $273.6 million of free and immediately accessible cash as of October 24, 2012.
- SEI had no borrowings under its $300 million revolving credit facility or its Canadian credit facility. The U.S. facility expires in February 2017 and includes a 1.75-times leverage-ratio covenant and other restrictions.
- SEI repurchased 5.648 million shares for $113.5 million during the first nine months and had $82.8 million of repurchase authorization remaining at September 30, 2012. The company declared a $0.15 per-share dividend during the period.
Material changes, outlook and unusual items
- Private Banks revenue increased 5% in Q3 and 2% year to date, but operating profit declined 52% and 38%, respectively. The segment was affected by Global Wealth Platform costs, higher personnel and sales compensation expense, and lower transaction fees.
- Investment Advisors, Institutional Investors and Investment Managers delivered Q3 revenue growth of 10%, 11% and 8%, respectively. Investment Managers maintained a 35% operating margin; Institutional Investors' margin declined to 49% from 51%.
- SEI expensed $2.7 million during Q3 for the remaining book value of discontinued Global Wealth Platform functionality. The platform had a net book value of $292.6 million at September 30.
- SEI agreed to sell its 56.1% interest in SEI Asset Korea. Subject to regulatory and other closing conditions, management expected closing by the end of Q1 2013 and estimated an after-tax gain of approximately $8.9 million to $20.6 million. The transaction also generated a $4.7 million deferred-tax accrual in Q3.
- SEI provided an unsecured guarantee of up to $45.0 million related to an October 2012 LSV employee partnership-interest financing. A separate earlier LSV-related guarantee covered a remaining loan balance of $2.5 million at September 30. Management stated that it expected the borrowers to meet their obligations.
- Management identified capital-market conditions, product development, technology and data security, third-party service providers, regulatory change, operational processing, foreign exchange, and executive retention as principal risks.
- Regulatory examinations by more than eight authorities could result in remediation, enforcement actions, fines, business limitations or reputational damage. The filing does not quantify potential exposure.
- Litigation includes an appealed dismissal involving leveraged ETFs and multiple Louisiana lawsuits related to Stanford Trust Company. SEI stated that loss cannot reasonably be estimated for the Louisiana matters.
Important facts for investors to verify
- Whether revenue growth and higher assets under management translate into improved operating margins as Global Wealth Platform costs and compensation expense continue.
- The timing and final consideration, contingent gain, tax effects and cash distribution associated with the SEI Asset Korea sale.
- The recoverability and valuation assumptions for approximately $50.1 million of Level 3 SIV securities, which were valued using significant unobservable inputs.
- The status and potential exposure from the leveraged-ETF appeal, Louisiana litigation and LSV-related guarantees.
- Compliance with the revolving credit facility's leverage and other covenants, particularly if unexpected losses reduce EBITDA.
- Working-capital trends, especially receivables, and the continuing cash requirements for software development, repurchases and dividends.