SEI Investments Company — Q3 2014 Form 10-Q Summary
Business context and reporting period
SEI provides investment processing, investment management and investment operations solutions to financial institutions, advisors, institutional investors, investment managers and ultra-high-net-worth families. The filing covers the unaudited quarter and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
At September 30, 2014, SEI and its significant partnerships managed or administered $612.2 billion, including $249.1 billion under management and $363.1 billion under administration. LSV Asset Management, in which SEI held approximately 39.3%, managed $81.5 billion.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $322.0 million | $280.7 million | $943.2 million | $827.1 million |
| Income from operations | $90.5 million | $61.9 million | $262.5 million | $180.0 million |
| Operating margin | 28.1% | 22.1% | 27.8% | 21.8% |
| Net income attributable to SEI | $84.0 million | $67.2 million | $241.6 million | $222.6 million |
| Net margin | 26.1% | 23.9% | 25.6% | 26.9% |
| Diluted EPS | $0.49 | $0.38 | $1.39 | $1.26 |
| Operating cash flow | Not separately reported | Not separately reported | $240.9 million | $240.3 million |
Revenue consisted primarily of asset management, administration and distribution fees of $244.7 million in Q3 and $706.0 million for the nine months, information processing and software servicing fees of $70.0 million and $215.0 million, and transaction-based and trade execution fees of $7.3 million and $22.3 million, respectively.
Cash and cash equivalents were $577.9 million at September 30, 2014, compared with $578.3 million at December 31, 2013. SEI had no borrowings under its $300.0 million credit facility, which expires in February 2017, and was in compliance with its covenants. Management reported $435.6 million of free and immediately accessible cash as of October 21, 2014.
Total assets were $1.486 billion and total liabilities were $241.1 million at September 30, 2014. Shareholders’ equity was $1.245 billion. Nine-month capital expenditures were $26.4 million, software capitalization was $26.2 million, and investing cash outflows were $46.0 million.
Material changes versus the prior comparable period
- Q3 revenue increased 15% and nine-month revenue increased 14%, primarily from higher assets under management and administration, improved market valuations, positive client cash flows and new business.
- Q3 and nine-month operating income each increased 46%, with operating margin improving to approximately 28% from approximately 22%.
- Q3 net income increased 25%; nine-month net income attributable to SEI increased 9%. The nine-month comparison was affected by the $43.4 million 2013 litigation settlement and the larger 2013 gain on the sale of SEI Asset Korea.
- Equity earnings from unconsolidated affiliates increased 22% in Q3 and 21% for the nine months, principally reflecting stronger LSV earnings and higher LSV assets under management.
- Stock-based compensation declined to $9.5 million for the nine months from $27.0 million, primarily because performance-vesting expense had been accelerated in 2013.
- The effective tax rate increased to 34.7% from 28.5% in Q3 and to 35.4% from 33.3% for the nine months, reflecting the absence of certain 2013 Pennsylvania and research-and-development tax benefits.
- SEI repurchased 6.3 million shares for $215.8 million during the nine months, compared with 4.9 million shares for $144.1 million in 2013. The remaining repurchase authorization was $65.3 million as of October 21, 2014.
- Cash dividends paid increased to $74.3 million from $34.4 million; the company declared a $0.22-per-share dividend in May 2014.
Segment performance and management commentary
| Segment | 9M 2014 revenue | 9M 2014 operating profit | Operating margin | Prior-year margin |
|---|---|---|---|---|
| Private Banks | $329.5 million | $29.9 million | 9% | 1% |
| Investment Advisors | $210.9 million | $102.9 million | 49% | 44% |
| Institutional Investors | $212.2 million | $107.6 million | 51% | 49% |
| Investment Managers | $187.1 million | $68.3 million | 37% | 34% |
| Investments in New Businesses | $3.5 million | $(9.8) million | Negative | Negative |
Management attributed the performance to higher recurring fees, client wins and funding, market appreciation, increased assets processed on the SEI Wealth Platform and stronger LSV performance. A $6.0 million non-recurring professional-services fee from a single project was recorded in Q2 2014. Management also noted higher personnel, technology, third-party servicing and amortization costs as the business expanded.
SEI capitalized $26.2 million of Wealth Platform development costs in the first nine months and expects continued development through additional releases. The Platform had a net book value of $310.4 million at September 30, 2014.
Outlook, risks, contingencies and unusual items
- The filing provides no formal numerical revenue or earnings guidance. Management stated that operating cash flow, existing cash and available borrowing capacity should fund operations, product and equipment investment, repurchases and future dividends.
- Key risks include capital-market declines, investment-performance deterioration, dependence on LSV, client and market concentration, technology and data-security failures, third-party service-provider failures, operational processing risks, foreign-exchange and interest-rate movements, regulatory changes and senior-management retention.
- SEI and regulated subsidiaries face extensive regulatory examinations and investigations. Remediation, enforcement actions, fines, business restrictions and reputational damage could materially affect results, although the filing does not identify a probable loss amount.
- Pending Louisiana litigation related to Stanford Trust Company includes a certified class action and other claims. A separate shareholder derivative lawsuit alleges excessive investment-advisory fees under Section 36(b) of the Investment Company Act. SEI believes it has valid defenses, but cannot reasonably estimate potential losses.
- SEI guaranteed up to $45.0 million of LSV Employee Group III’s obligations; the remaining unpaid principal was $42.4 million as of October 21, 2014. Management expects the borrower to meet its obligations.
- The company recognized a $5.6 million contingent purchase-price gain from the 2012 sale of SEI Asset Korea in the first nine months of 2014. The 2013 comparison included a $22.1 million SEI Asset Korea gain and $43.4 million litigation settlement income.
- Accumulated other comprehensive loss was $3.0 million, primarily due to foreign-currency translation losses. The company had no Level 3 financial assets or liabilities.
- ASU 2014-09, Revenue from Contracts with Customers, becomes effective for SEI in the first quarter of 2017. The company was evaluating the transition method and expected financial-statement effects.
Investor verification points
- Verify the sustainability of revenue growth and margin expansion after excluding the $6.0 million non-recurring project fee and other unusual items.
- Monitor sensitivity to equity-market levels, client cash flows, fee rates and asset mix, particularly the concentration of earnings in asset-based fees and LSV.
- Reconcile operating cash flow with net income, including distributions from LSV and working-capital movements.
- Assess the effect of continued Wealth Platform capitalization and rising amortization on future margins and cash generation.
- Track share repurchases, dividend capacity and the remaining $65.3 million authorization against available cash.
- Follow the Louisiana Stanford-related litigation, the Section 36(b) lawsuit and ongoing regulatory examinations; the filing does not provide a reliable estimate of potential exposure.
- Review the higher effective tax rate and the potential impact of expired tax credits on future earnings.