SEI INVESTMENTS CO quarterly report, Q3 FY2016

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 financial institutions, advisors, institutional investors, investment managers, and ultra-high-net-worth families. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.

At September 30, 2016, SEI managed or administered $751.3 billion in client assets, including $280.9 billion of assets under management and $470.4 billion of client assets under administration. LSV Asset Management, an unconsolidated affiliate, managed $83.9 billion.

Key Financial Metrics

Metric	Q3 2016	Q3 2015	First 9 Months 2016	First 9 Months 2015
Total revenue	$354.6 million	$335.6 million	$1,032.7 million	$998.8 million
Income from operations	$97.2 million	$87.0 million	$277.6 million	$276.0 million
Operating margin	27.4%	25.9%	26.9%	27.6%
Net income	$86.7 million	$79.4 million	$245.2 million	$250.3 million
Diluted EPS	$0.53	$0.47	$1.49	$1.47
Net cash from operating activities	Not separately presented	Not separately presented	$283.5 million	$274.5 million

Q3 revenue increased 6%; nine-month revenue increased 3%.
Q3 operating income increased 12%; nine-month operating income increased 1%.
Q3 net income increased 9%, while nine-month net income decreased 2%.
Q3 diluted EPS increased 13%; nine-month diluted EPS increased 1%, aided by lower diluted share counts from repurchases.
Revenue mix for the first nine months included $785.6 million of asset management, administration and distribution fees, $224.8 million of information processing and software servicing fees, and $22.3 million of transaction-based and trade execution fees.

Liquidity, Capital Resources, and Balance Sheet

Cash and cash equivalents were $623.2 million at September 30, 2016, compared with $679.7 million at December 31, 2015.
Free and immediately accessible cash for general corporate purposes was $343.5 million as of October 13, 2016; some subsidiary and foreign cash may be restricted or subject to tax considerations.
The company generated $283.5 million of operating cash flow and used $67.1 million in investing activities and $268.4 million in financing activities during the first nine months.
Investing outflows included $33.2 million of capitalized software development, $26.7 million of property and equipment additions, and net marketable-security purchases of $11.3 million.
Financing outflows included $224.8 million of share repurchases and $84.7 million of dividend payments.
SEI entered into a new five-year, $300 million senior unsecured revolving credit facility maturing in June 2021. No borrowings were outstanding at September 30, 2016, and the company reported compliance with its covenants.
Shareholders’ equity was $1.313 billion at September 30, 2016, compared with $1.290 billion at December 31, 2015. The filing reports no material funded debt outstanding.

Material Changes Versus the Prior Comparable Period

Growth was driven primarily by higher asset management and administration fees, market appreciation, and positive cash flows from new and existing clients.
Average assets under management excluding LSV increased 8% to $188.3 billion, while average assets under administration increased 10% to $431.3 billion during the first nine months.
Investment Advisors revenue increased 12% in Q3 and 7% for the first nine months, with Q3 operating profit up 31%.
Investment Managers revenue increased 13% in Q3 and 8% for the first nine months; first-nine-month operating profit increased 3%.
Private Banks operating profit declined 14% in Q3 and 8% for the first nine months, primarily due to higher platform-related costs, amortization, lower transaction fees, and unfavorable foreign exchange effects.
Institutional Investors revenue was up 2% in Q3 but slightly down for the first nine months; nine-month operating profit was also slightly lower.
LSV equity-method earnings declined to $92.0 million from $104.9 million for the first nine months, primarily because of lower performance fees and lower average assets. SEI’s ownership interest declined from approximately 39.2% to 38.9%.
Platform-related capitalized software spending increased to $27.4 million from $19.3 million, while related amortization increased to $33.4 million from $31.6 million.
SEI recorded $1.6 million of nonrecurring Private Banks revenue from a client contract buyout.
The prior-year period included approximately $6.0 million of software write-offs, which benefited the year-over-year Q3 comparison.
Corporate overhead increased to $42.8 million from $39.0 million for the first nine months, primarily due to litigation and regulatory activity.

Guidance, Outlook, Risks, and Unusual Items

Management did not provide formal numerical revenue or earnings guidance in the filing.
Management expects costs associated with maintenance, enhancements, and support of the SEI Wealth Platform to continue increasing through the remainder of 2016 and into 2017.
Management stated that operating cash flow, available borrowing capacity, and existing cash should be adequate for operations, product and equipment investment, share repurchases, and future dividends.
Key risks include capital-market volatility, investment performance, LSV results, technology and cybersecurity failures, operational and third-party service-provider risks, extensive financial-services regulation, litigation, foreign-exchange fluctuations, interest-rate changes, and client or market consolidation.
The stronger U.S. dollar, particularly against the British pound, negatively affected international revenue and operating income. SEI does not currently hedge foreign currency exposure.
Brexit-related market and currency volatility increased pressure on the company’s U.K. operations and reported results.
SEI is defending Louisiana litigation related to Stanford Trust Company and Stanford International Bank certificates of deposit. The company cannot reasonably estimate a potential loss.
A shareholder derivative action alleges excessive fees under Section 36(b) of the Investment Company Act; discovery was expected to continue through early 2017. No loss estimate was provided.
A Belgian matter seeks approximately $84 million from multiple defendants, including two SEI subsidiaries; the Belgian court dismissed the claims for lack of jurisdiction, and plaintiffs appealed. No loss estimate was provided.
The company has an unsecured guaranty related to an LSV employee group loan. The remaining guaranteed principal was $7.9 million as of October 13, 2016, and management expected the borrower to meet its obligations.
Unrecognized tax benefits totaled $17.4 million, including interest and penalties. The ultimate timing and amount of resolution remain uncertain.
The company adopted new consolidation and fair-value disclosure guidance during 2016 and was evaluating the effects of several future accounting standards, including revenue recognition, leases, financial instruments, and share-based compensation.

Most Important Facts for Investors to Verify

Whether asset growth and client cash flows persist sufficiently to offset market sensitivity, fee pressure, and client losses.
The sustainability of LSV’s earnings contribution and the effect of performance-fee volatility on SEI’s results.
The level and return on continuing SEI Wealth Platform investment, including capitalization, amortization, and non-capitalized support costs.
The pace of share repurchases, remaining authorization of approximately $85.6 million at September 30, 2016, and their effect on per-share earnings and liquidity.
Potential financial, regulatory, and reputational exposure from the disclosed litigation and ongoing regulatory examinations.
Foreign-exchange effects on U.K., Canadian, and Irish operations, particularly following Brexit-related volatility.
Availability of subsidiary cash and the company’s ability to access the full $300 million revolving credit facility under its covenants.