SEI Investments Company: Q1 2014 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, institutional investors, investment managers, and high-net-worth families. This unaudited quarterly report covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
As of March 31, 2014, SEI and its significant affiliates managed or administered $581.7 billion, including $239.3 billion under management and $342.4 billion under administration. LSV Asset Management represented $78.0 billion of assets under management.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $302.4 million | $271.9 million | +11% |
| Income from operations | $78.4 million | $60.0 million | +31% |
| Operating margin | 25.9% | 22.1% | +3.8 percentage points |
| Income before taxes | $116.7 million | $111.0 million | +5% |
| Net income attributable to SEI | $74.8 million | $71.9 million | +4% |
| Diluted EPS | $0.43 | $0.41 | +5% |
| Net cash from operations | $43.9 million | $39.5 million | +11% |
Asset management, administration and distribution fees increased to $225.1 million from $198.6 million, while information processing and software servicing fees increased to $69.2 million from $64.5 million. Transaction-based and trade execution fees declined to $8.1 million from $8.7 million.
Equity in earnings of unconsolidated affiliates increased 16% to $31.9 million, primarily reflecting higher LSV earnings. LSV distributions received by SEI were $31.5 million, compared with $27.8 million in the prior-year quarter.
The effective tax rate was 35.9%, compared with 34.9%. The increase primarily reflected expiration of the research and development tax credit at December 31, 2013.
Liquidity, capital resources, and balance sheet
- Cash and cash equivalents were $545.6 million at March 31, 2014, down from $578.3 million at December 31, 2013.
- Cash, including cash used for subsidiary operations and regulatory purposes, totaled $545.6 million; management reported $385.2 million of free and immediately accessible cash as of April 22, 2014.
- The company had no borrowings under its $300.0 million revolving credit facility or its Canadian credit facility. The principal facility expires in February 2017, and SEI was in compliance with its covenants.
- Total assets were $1.439 billion and total shareholders’ equity was $1.204 billion at March 31, 2014.
- Operating cash flow was $43.9 million. Investing cash outflows were $14.6 million, including $9.4 million of capitalized software development and $7.6 million of capital expenditures. Financing cash outflows were $62.1 million, including $65.9 million of share repurchases and $37.3 million of dividends, partially offset by $35.8 million of stock-issuance proceeds.
- SEI repurchased 2.048 million shares for $69.0 million, or approximately $33.70 per share. Approximately $212.1 million remained authorized for repurchases as of April 22, 2014.
Material changes versus the prior comparable period
- Revenue growth was driven by higher average assets, market appreciation, positive client cash flows, new business, and increased fees from the SEI Wealth Platform.
- Average assets under management excluding LSV increased to $157.6 billion from $145.0 billion. Total ending assets under management and administration increased 18% to $581.7 billion from $493.4 billion.
- Segment operating profit increased in Private Banks to $5.0 million from $2.4 million, Investment Advisors to $31.8 million from $23.6 million, Institutional Investors to $34.6 million from $31.7 million, and Investment Managers to $21.8 million from $18.7 million. Investments in New Businesses generated a $3.1 million operating loss.
- Net income growth was limited by the reduction in the gain on sale of SEI Asset Korea: $5.6 million in Q1 2014 versus $22.1 million in Q1 2013. The 2014 amount represented a contingent purchase-price payment related to the 2013 sale and was received in April 2014.
- Stock-based compensation declined to $2.8 million from $5.3 million, while consulting, outsourcing, personnel, and direct asset-management costs increased.
- Capitalized software development increased to $9.4 million from $6.0 million. Management expected similar development spending on the SEI Wealth Platform throughout the remainder of 2014.
- Cash flow from investing improved primarily because the prior-year period included $26.7 million of net cash transferred in connection with the SEI Asset Korea sale.
Guidance, outlook, commentary, and risks
Management stated that operating cash flow, existing cash, and available borrowing capacity should fund ongoing operations, product and equipment investment, headquarters expansion, share repurchases, and future dividends. The headquarters expansion was expected to be completed in the second quarter of 2014; total cost was estimated at at least $10.8 million, with $5.0 million expended as of March 31, 2014.
Management highlighted continued opportunities from new client sales, positive cash flows, market appreciation, the SEI Wealth Platform, and international investment-management activity. No formal revenue or earnings guidance was provided in the filing text.
Principal risks include capital-market volatility, investment performance, LSV results, dependence on third-party service providers, technology and data-security failures, operational processing risks, regulatory changes and examinations, litigation, client and market consolidation, tax changes, foreign-currency movements, interest-rate changes, and retention of key personnel.
SEI disclosed an unsecured guaranty of up to $45.0 million relating to debt of LSV Employee Group III. The guaranteed balance was $45.0 million as of April 22, 2014; LSV Employee Group III was current on its obligations, and SEI expected it to meet future obligations.
Material legal matters included Louisiana litigation related to Stanford Trust Company and a shareholder derivative action alleging excessive investment-advisory fees under Section 36(b) of the Investment Company Act. SEI and its subsidiaries stated that they had valid defenses, but the company could not reasonably estimate any potential loss.
Management reported that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether asset growth and positive client cash flows continue to support recurring fee revenue if market conditions weaken.
- The sustainability of LSV’s earnings contribution and the effect of SEI’s reduced ownership percentage.
- The level and return on continued SEI Wealth Platform development spending, including future amortization expense.
- The impact of the expired research and development tax credit on subsequent effective tax rates.
- Cash availability at subsidiaries versus the $385.2 million reported as free and immediately accessible cash.
- Progress and final cost of the headquarters expansion and other capital expenditures.
- Potential exposure from the LSV guaranty, Louisiana Stanford-related litigation, the Section 36(b) lawsuit, and ongoing regulatory examinations.
- The extent to which reported earnings benefited from the $5.6 million contingent gain on the SEI Asset Korea sale, an unusual nonrecurring item.