SEI Investments Company — Form 10-Q Summary
Business context and reporting period
SEI Investments Company provides investment processing, investment management, and investment operations solutions to corporations, financial institutions, financial advisors, and ultra-high-net-worth families globally. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
As of September 30, 2013, SEI and its significant affiliates managed or administered $528.6 billion of client assets, including $218.5 billion under management and $310.1 billion under administration. LSV Asset Management accounted for $71.1 billion of assets under management.
Financial results and key metrics
| Metric | Q3 2013 | Q3 2012 | Change |
|---|---|---|---|
| Revenue | $280.7 million | $251.8 million | +11% |
| Income from operations | $61.9 million | $53.5 million | +16% |
| Operating margin | 22.1% | 21.2% | +0.9 percentage points |
| Net income attributable to SEI | $67.2 million | $50.7 million | +32% |
| Diluted EPS | $0.38 | $0.29 | +31% |
| Effective tax rate | 28.5% | 39.0% | Lower |
| Metric | Nine months 2013 | Nine months 2012 | Change |
|---|---|---|---|
| Revenue | $827.1 million | $730.9 million | +13% |
| Income from operations | $180.0 million | $155.4 million | +16% |
| Operating margin | 21.8% | 21.3% | +0.5 percentage points |
| Net income attributable to SEI | $222.6 million | $150.3 million | +48% |
| Diluted EPS | $1.26 | $0.85 | +48% |
| Effective tax rate | 33.3% | 37.6% | Lower |
Revenue growth was led by asset management, administration and distribution fees, which increased 14% in the third quarter and 15% for the nine-month period. Information processing and software servicing fees increased 6% and 10%, respectively. Transaction-based and trade execution fees declined 6% in the third quarter but increased 2% year to date.
Net income benefited from $43.4 million of settlement income related to Cheyne Finance litigation and a $22.1 million gain on the sale of SEI Asset Korea. Equity in earnings of unconsolidated affiliates increased to $31.0 million in the quarter and $86.2 million year to date, primarily reflecting higher LSV earnings.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow was $240.3 million for the first nine months of 2013, compared with $145.9 million in 2012.
- Investing cash flow was $(49.9) million, including $31.0 million of capitalized software development costs, $10.4 million of property and equipment additions, and $6.0 million of net proceeds from the SEI Asset Korea sale.
- Financing cash flow was $(115.4) million, principally reflecting $144.1 million of share repurchases and $34.4 million of dividend payments, partially offset by $54.8 million from stock issuance.
- Cash and cash equivalents increased to $527.2 million at September 30, 2013, from $452.2 million at December 31, 2012. Management reported $413.7 million of free and immediately accessible cash as of October 22, 2013.
- SEI had no borrowings under its $300 million credit facility or its Canadian credit facility and was in compliance with applicable covenants. The primary facility expires in February 2017.
- SEI repurchased 4.879 million shares for $145.3 million during the first nine months. Remaining repurchase authorization was $45.7 million at September 30, 2013.
Material changes versus the prior comparable period
- Average assets under management, excluding LSV, increased 12% to $143.3 billion for the first nine months, driven by market appreciation and client cash flows.
- Total assets under management and administration increased 18% to $528.6 billion at September 30, 2013.
- Investment Advisors revenue increased 17% year to date and operating profit increased 26%; Institutional Investors revenue increased 14% and operating profit increased 15%; Investment Managers revenue increased 17% and operating profit increased 15%.
- Private Banks revenue increased 9% year to date, but operating profit declined 66% before the gain on sale of SEI Asset Korea because of higher operating, personnel, consulting, outsourcing, and stock-based compensation costs.
- Stock-based compensation expense increased by $13.4 million year to date because management revised its estimate of when performance-based option vesting targets would be achieved. Total stock-based compensation expense was $27.0 million versus $11.8 million in the prior-year period.
- Capitalized software costs increased to $31.0 million from $25.9 million, including an $8.8 million one-time payment related to the SEI Wealth Platform.
- SEI’s ownership interest in LSV decreased from approximately 39.8% to 39.3% following an issuance of partnership interests to LSV employees.
- The company completed the sale of SEI Asset Korea on March 28, 2013. The transaction generated $56.9 million of gross proceeds, $54.3 million of net proceeds, and a $22.1 million gain, excluding potential contingent consideration of up to $11.2 million.
- The third-quarter and year-to-date tax rates benefited from Pennsylvania tax law changes, reinstatement of the research and development tax credit, and certain tax refund approvals.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects operating cash flow, existing cash, and available borrowing capacity to fund operations, product and technology investment, share repurchases, the corporate campus expansion, and dividends.
Management noted continued positive effects from market appreciation, new business sales, client cash flows, and higher LSV performance fees. The company also expects continued development of the SEI Wealth Platform. A corporate headquarters expansion began during the third quarter, with estimated cost of at least $10.6 million and expected completion in the second quarter of 2014.
- Material risks include capital-market declines, client losses, investment performance, LSV performance, technology and data-security failures, third-party service-provider failures, regulatory changes, litigation, foreign exchange fluctuations, and employee retention.
- SEI faces extensive regulatory examinations and investigations. A U.K. subsidiary was advised that the Financial Conduct Authority intends to pursue enforcement action related to alleged CASS handbook violations; the company recorded an appropriate reserve, but the filing does not provide a clear amount.
- Ongoing Louisiana litigation related to Stanford Trust Company includes a certified class action and other lawsuits. SEI states that it cannot reasonably estimate a potential loss because class composition, liability theories, damages, causation, and other matters remain uncertain.
- SEI provided unsecured guarantees related to LSV employee-group financing. As of October 22, 2013, the company’s remaining guaranteed principal balances were $1.0 million for one facility and $45.0 million for another; no payment obligation had arisen.
- The company had $13.7 million of gross uncertain tax positions, including interest and penalties, at September 30, 2013. It expects $5.0 million of unrecognized tax benefits may be recognized within twelve months, although timing and ultimate amounts remain uncertain.
Investor verification points
- Separate recurring operating performance from the $43.4 million litigation settlement and $22.1 million SEI Asset Korea sale gain.
- Assess the sustainability of LSV earnings, performance fees, distributions, and SEI’s reduced ownership percentage.
- Monitor stock-based compensation, including the estimated $29.2 million of remaining unrecognized expense and its effect on future margins.
- Evaluate client asset flows, market sensitivity, pricing pressure, and segment-level margin trends, especially in Private Banks and Investment Managers.
- Track the SEI Wealth Platform investment program, capitalization practices, amortization, and the headquarters expansion cost.
- Review developments in the FCA enforcement matter, Louisiana litigation, the Stanford-related class action, and the company’s LSV guarantees.
- Confirm the availability of cash held by subsidiaries and foreign entities, since some cash may be restricted by operating, regulatory, or tax considerations.