SEI Investments Company — Q2 2019 Form 10-Q Summary
Business context and reporting period
SEI provides investment processing, investment management and investment operations platforms to financial institutions, advisors, institutional investors, investment managers and ultra-high-net-worth families. The unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. At June 30, 2019, SEI managed, advised or administered $970.2 billion of assets, including $335.3 billion under management and $630.5 billion under administration.
Financial performance and liquidity
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $409.6 million | $404.8 million | $810.4 million | $810.4 million |
| Income from operations | $120.1 million | $110.3 million | $223.7 million | $226.6 million |
| Net income | $126.5 million | $121.7 million | $240.5 million | $261.5 million |
| Diluted EPS | $0.82 | $0.75 | $1.54 | $1.61 |
| Operating margin | 29.3% | 27.2% | 27.6% | 28.0% |
| Net margin | 30.9% | 30.1% | 29.7% | 32.3% |
Second-quarter revenue increased 1%, operating income increased 9%, net income increased 4% and diluted EPS increased 9%. For the first six months, revenue was essentially flat, while operating income declined 1%, net income declined 8% and diluted EPS declined 4%.
- Asset management, administration and distribution fees were $324.9 million in the second quarter and $638.9 million year to date; information processing and software servicing fees were $84.7 million and $171.5 million, respectively.
- Equity in earnings from 38.9%-owned LSV Asset Management was $37.8 million in the second quarter and $75.1 million year to date, down 8% in both comparisons.
- The effective tax rate increased to 22.1% from 21.1% in the second quarter and to 22.1% from 16.5% year to date, primarily because of lower tax benefits from stock-option exercises.
- Net cash provided by operating activities was $217.6 million for the first six months, compared with $262.9 million in 2018. Cash used in investing activities was $30.3 million, and cash used in financing activities was $259.9 million.
- Capital expenditures and capitalized software totaled $37.4 million year to date. SEI repurchased 3.55 million shares for $185.8 million and paid $100.7 million of dividends.
- Cash, cash equivalents and restricted cash totaled $685.8 million at June 30, 2019, compared with $697.0 million at June 30, 2018. Cash and cash equivalents on the balance sheet were $682.3 million.
- SEI had no revolving-credit borrowings outstanding. Its $300 million credit facility expires in June 2021; $11.7 million of letters of credit reduced availability to $288.3 million. The company was in compliance with all covenants.
Material changes versus the prior comparable period
- Investment Managers was the strongest operating segment: second-quarter revenue rose 12% and operating profit rose 19%; six-month revenue rose 10% and operating profit rose 13%, supported by client cash flows and higher assets under administration.
- Private Banks revenue declined 4% in both periods because of client losses, lower non-recurring professional-services fees, negative client cash flows and foreign-exchange effects. Cost reductions improved second-quarter operating margin to 7% from 5%.
- Investment Advisors revenue was flat in the second quarter and declined 2% year to date. Separately managed account fees increased, but fund-management fees declined due to negative cash flows and client migration to lower-fee products.
- Institutional Investors revenue declined 3% in the second quarter and 5% year to date, primarily due to defined-benefit client losses and foreign-exchange effects.
- Average client assets under administration increased 13% year to date to $608.9 billion, while average assets under management excluding LSV declined 2% to $225.9 billion. Ending total assets under management, advisement and administration increased 10% to $970.2 billion.
- Operating expenses declined 2% in the second quarter, reflecting cost-containment actions, but increased slightly year to date. Corporate overhead increased year to date, partly due to non-recurring personnel-related costs, including severance.
- SEI adopted ASC 842 leases using the modified retrospective method, recording $44.2 million of right-of-use assets and lease liabilities. The adoption did not materially affect net income or cash flows.
Outlook, risks, contingencies and unusual items
Management stated that operating cash flow, available borrowing capacity and existing cash should provide adequate funding for operations, product and equipment investment, headquarters expansion, dividends and share repurchases. The filing does not provide formal revenue or earnings guidance.
- Management identified risks from capital-market performance, LSV results, client losses, pricing pressure, competition, technology and cybersecurity, third-party service providers, foreign exchange, interest rates, regulation, tax and accounting changes, employee retention and United Kingdom/EU developments.
- SEI remains subject to extensive regulatory examinations and investigations. Potential remediation, fines, business limitations and reputational effects are uncertain.
- In Stanford Trust Company litigation, the court granted SEI’s summary judgment motion in the Lillie proceeding on July 9, 2019; plaintiffs sought reconsideration. SEI and SPTC filed a summary judgment motion in the related Ahders proceeding. The company could not estimate any potential loss.
- SEI and the plaintiff filed notice of an intent to settle the Stevens ERISA class action involving the SEI Capital Accumulation Plan. Terms were not finalized and required court approval; potential losses were not estimable.
- Contingent consideration related to the Huntington Steele acquisition totaled $12.1 million at June 30, 2019, including $0.5 million current and $11.2 million long term.
- The board increased the share-repurchase authorization by $250 million on July 23, 2019, leaving approximately $280.1 million available.
Most important facts for investors to verify
- Whether growth in Investment Managers and assets under administration offsets weakness in Private Banks, Institutional Investors and lower LSV earnings.
- The sustainability of second-quarter cost reductions and the effect of severance, technology investment and SWP amortization on future margins.
- Cash conversion, working-capital requirements and the pace of share repurchases and dividends relative to operating cash flow.
- Future tax rates, particularly the effect of stock-option exercise activity on tax benefits.
- Developments and potential financial exposure in the Stanford and Stevens litigation and in regulatory examinations.
- The impact of market levels, client cash flows, foreign-exchange movements and fee compression on assets and revenue.
- Execution of SEI Wealth Platform enhancements and the related capitalized software balance, which was $286.5 million net at June 30, 2019.