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SEIC > SEC Filings for SEIC > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for SEI INVESTMENTS CO


26-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(In thousands, except asset balances and per share data)
This discussion reviews and analyzes the consolidated financial condition at March 31, 2013 and 2012, the consolidated results of operations for the three months ended March 31, 2013 and 2012 and other key factors that may affect future performance. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements.

Overview
Consolidated Summary
We are a leading global provider of investment processing, investment management, and investment operations solutions. We help corporations, financial institutions, financial advisors, and ultra-high-net-worth families create and manage wealth by providing comprehensive, innovative, investment and investment-business solutions. Investment processing fees are earned as monthly fees for contracted services, including computer processing services and investment operations services, as well as transaction-based fees for providing securities valuation and trade-execution. Investment operations and investment management fees are earned as a percentage of average assets under management or administration. As of March 31, 2013, through our subsidiaries and partnerships in which we have a significant interest, we manage or administer $494.8 billion in mutual fund and pooled or separately managed assets, including $206.2 billion in assets under management and $288.6 billion in client assets under administration. Our affiliate, LSV Asset Management (LSV), manages $66.3 billion of assets which are included as assets under management.
Our Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 were:

                                                       Three Months Ended March 31,         Percent
                                                         2013                 2012          Change
Revenues                                           $      271,879       $      237,898         14  %
Expenses                                                  211,837              189,809         12  %
Income from operations                                     60,042               48,089         25  %
Net gain from investments                                     280                3,205        N/M
Interest income, net of interest expense                      940                1,326        (29 )%
Equity in earnings from unconsolidated affiliates          27,588               27,330          1  %
Gain on sale of subsidiary                                 22,112                    -        N/M
Income before income taxes                                110,962               79,950         39  %
Income taxes                                               38,692               29,715         30  %
Net income                                                 72,270               50,235         44  %
Less: Net income attributable to noncontrolling
interest                                                     (350 )               (270 )       30  %
Net income attributable to SEI Investments Co.     $       71,920       $       49,965         44  %
Diluted earnings per common share                  $         0.41       $         0.28         46  %

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In our opinion, the following items had a significant impact on our financial results for the three months ended March 31, 2013 and 2012:
Revenue growth was primarily driven by higher Asset management, administration and distribution fees from improved cash flows from new and existing clients and market appreciation. Our average assets under management, excluding LSV, increased $20.9 billion, or 17 percent, to $145.0 billion in the first quarter 2013 as compared to $124.1 billion during the first quarter 2012.

Sales of new business in our Institutional Investors and Investment Managers business segments as well as positive cash receipts from new and existing advisor relationships in our Investment Advisors business segment contributed to the increase in our revenues and profits.

Revenue growth was also driven by increased recurring and one-time investment processing fees in our Private Banks segment. The increase was attributable to new business, higher one-time project revenue from new and existing bank clients and increased fees earned from our mutual fund trading solution.

Our proportionate share in the earnings of LSV was $27.8 million in first quarter 2013 as compared to $27.3 million in first quarter 2012, an increase of two percent. The increase in our earnings was primarily driven by the increase in assets under management of LSV from existing clients from market appreciation. Our earnings from LSV; however, were negatively impacted by the decrease in our ownership percentage which occurred in April 2012. Our ownership percentage was approximately 39.8 percent during the first quarter 2013 as compared to approximately 41.2 percent during the first quarter 2012.

Our operating expenses related to personnel and third-party service providers in our Private Banks and Investment Managers segments increased. These increased operational costs are mainly related to servicing new and existing clients and are included in Compensation, benefits and other personnel as well as Consulting, outsourcing and professional fees on the accompanying Consolidated Statements of Operations.

Amortization expense related to capitalized software increased to $8.2 million during the first quarter 2013 as compared to $7.2 million during the first quarter 2012 due to continued releases of the SEI Wealth Platform.

Our previously disclosed sale of SEI Asset Korea (SEI AK) was completed during the first quarter 2013 resulting in a gain of $22.1 million, or $0.08 diluted earnings per share. The gain from the sale is included in Gain on sale of subsidiary on the accompanying Consolidated Statement of Operations. The operating results of SEI AK were included in the Private Banks business segment (See Note 13 to the Consolidated Financial Statements for more information).

Our effective tax rate during the first quarter 2013 was 34.9 percent as compared to 37.2 percent in the first quarter 2012. Our tax rate in 2012 was negatively affected by the expiration of the research and development tax credit, which was not reinstated until January 2013. The tax credit was reinstated retroactively for 2012. The effect of the 2012 research and development tax credit is included in the first quarter 2013 tax rate; however, the rate in 2013 was negatively impacted by additional foreign taxes resulting from the sale of SEI AK.

We continued our stock repurchase program during 2013 and purchased 1,268,000 shares at an average price of approximately $28.54 per share in the first quarter.

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Ending Asset Balances
(In millions)
This table presents ending assets of our clients, or of our clients' customers,
for which we provide management or administrative services through our
subsidiaries and partnerships in which we have a significant interest.
                                                     As of March 31,       Percent
                                                    2013         2012       Change
Private Banks:
Equity and fixed income programs (A)             $  12,446    $  17,180      (28 )%
Collective trust fund programs                           9          435      (98 )%
Liquidity funds                                      5,143        5,549       (7 )%
Total assets under management                    $  17,598    $  23,164      (24 )%
Client proprietary assets under administration      12,970       10,916       19  %
Total assets                                     $  30,568    $  34,080      (10 )%
Investment Advisors:
Equity and fixed income programs                    34,166       29,722       15  %
Collective trust fund programs                          15        1,199      (99 )%
Liquidity funds                                      2,094        1,643       27  %
Total assets under management                    $  36,275    $  32,564       11  %
Institutional Investors:
Equity and fixed income programs                    64,214       54,537       18  %
Collective trust fund programs                         101          424      (76 )%
Liquidity funds                                      2,810        3,725      (25 )%
Total assets under management                    $  67,125    $  58,686       14  %
Investment Managers:
Equity and fixed income programs                        73           62       18  %
Collective trust fund programs                      17,656       12,781       38  %
Liquidity funds                                        522          147      255  %
Total assets under management                    $  18,251    $  12,990       41  %
Client proprietary assets under administration     275,632      228,327       21  %
Total assets                                     $ 293,883    $ 241,317       22  %
Investments in New Businesses:
Equity and fixed income programs                       552          568       (3 )%
Liquidity funds                                         42           34       24  %
Total assets under management                    $     594    $     602       (1 )%
LSV:
Equity and fixed income programs                 $  66,311    $  60,607        9  %
Total:
Equity and fixed income programs (A)               177,762      162,676        9  %
Collective trust fund programs                      17,781       14,839       20  %
Liquidity funds                                     10,611       11,098       (4 )%
Total assets under management                    $ 206,154    $ 188,613        9  %
Client proprietary assets under administration     288,602      239,243       21  %
Total assets under management and administration $ 494,756    $ 427,856       16  %

(A) Equity and fixed income programs in the Private Banks segment in 2012 includes $6.6 billion in assets related to SEI AK which was sold in first-quarter 2013 (See Note 13 to the Consolidated Financial Statements).

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Average Asset Balances
(In millions)
This table presents average asset balances of our clients, or of clients'
customers, for which we provide management or administrative services through
our subsidiaries and partnerships in which we have a significant interest.
                                                   Three Months Ended March 31,       Percent
                                                       2013              2012          Change
Private Banks:
Equity and fixed income programs (A)             $        19,197     $   17,116            12  %
Collective trust fund programs                                11            436           (97 )%
Liquidity funds                                            5,556          5,581             -  %
Total assets under management                    $        24,764     $   23,133             7  %
Client proprietary assets under administration            12,860         10,211            26  %
Total assets                                     $        37,624     $   33,344            13  %
Investment Advisors:
Equity and fixed income programs                          33,189         28,426            17  %
Collective trust fund programs                                14          1,238           (99 )%
Liquidity funds                                            2,085          2,015             3  %
Total assets under management                    $        35,288     $   31,679            11  %
Institutional Investors:
Equity and fixed income programs                          63,642         52,270            22  %
Collective trust fund programs                               101            427           (76 )%
Liquidity funds                                            2,960          3,765           (21 )%
Total assets under management                    $        66,703     $   56,462            18  %
Investment Managers:
Equity and fixed income programs                              68             58            17  %
Collective trust fund programs                            17,129         11,983            43  %
Liquidity funds                                              511            190           169  %
Total assets under management                    $        17,708     $   12,231            45  %
Client proprietary assets under administration           263,054        224,547            17  %
Total assets                                     $       280,762     $  236,778            19  %
Investments in New Businesses:
Equity and fixed income programs                             542            549            (1 )%
Liquidity funds                                               38             39            (3 )%
Total assets under management                    $           580     $      588            (1 )%
LSV:
Equity and fixed income programs                 $        64,448     $   59,200             9  %
Total:
Equity and fixed income programs (A)                     181,086        157,619            15  %
Collective trust fund programs                            17,255         14,084            23  %
Liquidity funds                                           11,150         11,590            (4 )%
Total assets under management                    $       209,491     $  183,293            14  %
Client proprietary assets under administration           275,914        234,758            18  %
Total assets under management and administration $       485,405     $  418,051            16  %

(A) Equity and fixed income programs in the Private Banks segment includes $7.0 billion and $6.8 billion in assets for the three months ended March 31, 2013 and 2012, respectively, related to SEI AK which was sold in first-quarter 2013 (See Note 13 to the Consolidated Financial Statements).

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In the preceding tables, assets under management are total assets of our clients or their customers invested in our equity and fixed-income investment programs, collective trust fund programs, and liquidity funds for which we provide asset management services. Assets under management and administration also include total assets of our clients or their customers for which we provide administrative services, including client proprietary fund balances for which we provide administration and/or distribution services. All assets presented in the preceding tables are not included in the accompanying Consolidated Balance Sheets because we do not own them.

Business Segments
Revenues, Expenses and Operating Profit (Loss) for our business segments for the
three months ended March 31, 2013 compared to the three months ended March 31,
2012 were as follows:
                                  Three Months Ended March 31,       Percent
                                     2013               2012          Change
Private Banks:
Revenues                       $      98,746       $      87,988         12 %
Expenses                              96,298              87,517         10 %
Operating Profit               $       2,448       $         471        420 %
Gain on sale of subsidiary            22,112                   -        N/M
Total Profit                   $      24,560       $         471        N/M
Operating Margin (A)                       2 %                 1 %
Investment Advisors:
Revenues                       $      55,191       $      49,468         12 %
Expenses                              31,625              29,301          8 %
Operating Profit               $      23,566       $      20,167         17 %
Operating Margin                          43 %                41 %
Institutional Investors:
Revenues                       $      63,162       $      53,317         18 %
Expenses                              31,509              28,100         12 %
Operating Profit               $      31,653       $      25,217         26 %
Operating Margin                          50 %                47 %
Investment Managers:
Revenues                       $      53,820       $      46,211         16 %
Expenses                              35,162              30,426         16 %
Operating Profit               $      18,658       $      15,785         18 %
Operating Margin                          35 %                34 %
Investments in New Businesses:
Revenues                       $         960       $         914          5 %
Expenses                               3,738               3,698          1 %
Operating Loss                 $      (2,778 )     $      (2,784 )      N/M

(A) Percentage determined exclusive of gain from sale of subsidiary (See Note 13 to the Consolidated Financial Statements).
For additional information pertaining to our business segments, see Note 10 to the Consolidated Financial Statements.

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Private Banks

                                                       Three Months Ended March 31,      Percent
                                                           2013              2012         Change
Revenues:
Information processing and software servicing fees   $        64,067     $   55,752         15 %
Asset management, administration & distribution fees          27,007         25,109          8 %
Transaction-based and trade execution fees                     7,672          7,127          8 %
Total revenues                                       $        98,746     $   87,988         12 %

Revenues increased $10.8 million, or 12 percent, in the three month period ended March 31, 2013 and were primarily affected by:
Increased recurring investment processing fees from new investment processing clients;

Increased one-time project revenue from new and existing bank clients;

Increased fees earned on our mutual fund trading solution due to an increase in assets processed on the system from new and existing clients;

Increased investment management fees from existing international clients due to higher average assets under management from improved capital markets during 2012 and in first quarter 2013; and

Increased transaction-based fees due to higher trading volumes across the majority of our bank clients; partially offset by

Lower recurring investment processing fees due to price reductions provided to existing clients that recontracted for longer periods and client losses.

Operating margin increased to two percent compared to one percent in the same period a year ago. Operating income increased by $2.0 million compared to the prior year corresponding period and was primarily affected by:
An increase in revenues; partially offset by

Increased direct expenses associated with increased investment management fees from existing international clients, mainly distribution fees; and

Increased operational costs, mainly salary, incentive compensation, consulting and outsourcing costs, for servicing new and existing investment processing clients.

Investment Advisors
Revenues increased $5.7 million, or 12 percent, in the three month period ended March 31, 2013 and were primarily affected by:
Increased investment management fees from existing clients due to higher average assets under management caused by market appreciation during 2012 and first quarter 2013 and an increase in net cash flows from new and existing advisors; and

An increase in the average basis points earned on assets due to the increase in average assets under management; partially offset by

Lower fees earned from our collective trust fund offering due to the closing of the SEI Stable Asset Fund at the end of 2012.

Operating margin increased to 43 percent compared to 41 percent in the same period a year ago. Operating income increased by $3.4 million, or 17 percent, compared to the prior year corresponding period and was primarily affected by:
An increase in revenues; partially offset by

Increased amortization expense relating to the SEI Wealth Platform as well as spending associated with building the necessary functionality and infrastructure for servicing financial institutions and investment advisors in the United States; and

Increased sales compensation expense due to new business activity and other personnel costs, mainly salary and incentive compensation.

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Institutional Investors
Revenues increased $9.8 million, or 18 percent, in the three month period ended March 31, 2013 and were primarily affected by:
Increased investment management fees from existing clients due to higher average assets under management caused by improved capital markets in first quarter 2013 as well as additional asset funding from existing clients; and

Asset funding from new sales of our retirement and not-for-profit solutions; partially offset by client losses.

Operating margin increased to 50 percent compared to 47 percent in the same period a year ago. Operating income increased $6.4 million, or 26 percent, compared to the prior year corresponding period and was primarily affected by:
An increase in revenues; partially offset by

Increased personnel costs, mainly salary and incentive compensation; and

Increased direct expenses associated with higher investment management fees.

Investment Managers
Revenues increased $7.6 million, or 16 percent, in the three month period ended March 31, 2013 and were primarily affected by:
Cash flows from new clients of our hedge funds and collective trust fund solutions; partially offset by client losses;

Net positive cash flows from existing hedge fund clients due to new funding along with higher valuations from capital market increases in late 2012 through the first three months of 2013; and

Increased accounts from our separately managed account program from new and existing clients.

Operating margin increased to 35 percent compared to 34 percent in the same period a year ago. Operating income increased $2.9 million, or 18 percent, compared to the prior year corresponding period and was primarily affected by:
An increase in revenues; partially offset by

Increased personnel expenses, technology and other operational costs to service new and existing clients of our hedge fund and separately managed accounts solutions.

Other
Corporate overhead expenses
Corporate overhead expenses primarily consist of general and administrative
expenses and other costs not directly attributable to a reportable business
segment. Corporate overhead expenses were $13.8 million and $11.1 million in the
three months ended March 31, 2013 and 2012, respectively.
Other income and expense
Other income and expense items on the accompanying Consolidated Statements of
Operations consists of:
                                                   Three Months Ended March 31,
                                                      2013               2012
Net gain from investments                       $         280       $       3,205
Interest and dividend income                            1,053               1,487
Interest expense                                         (113 )              (161 )
Equity in earnings of unconsolidated affiliates        27,588              27,330
Gain on sale of subsidiary                             22,112                   -
Total other income and expense items, net       $      50,920       $      31,861

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Net gain from investments
Net gain from investments consists of:

                                                               Three Months Ended March 31,
                                                                   2013              2012
Net realized and unrealized gains from marketable securities $          280     $        619
Gains from SIV securities                                                 -            2,882
Other losses                                                              -             (296 )
Net gain from investments                                    $          280     $      3,205

During the three months ended March 31, 2012, we recognized gains of $2.9 million from SIV securities, of which $2.1 million resulted from cash payments received from the SIV securities and $0.8 million was from an increase in fair value at March 31, 2012. In November 2012, we sold the last remaining SIV security and no longer own any SIV securities. Gain on sale of subsidiary
On March 28, 2013, the sale of all of our ownership interests in SEI AK was completed. We recorded a gain from the sale of $22.1 million in the first quarter 2013 which is included in Gain on sale of subsidiary on the accompanying Consolidated Statement of Operations (See Note 13 to the Consolidated Financial Statements for more information).
Equity in earnings of unconsolidated affiliates Equity in earnings of unconsolidated affiliates primarily includes our less than 50 percent ownership in LSV. Our proportionate share in the earnings of LSV was $27.8 million in first quarter 2013 as compared to $27.3 million in first quarter 2012, an increase of two percent. The increase in our earnings was primarily due to increased assets under management of LSV from existing clients because of improved capital markets. LSV's average assets under management increased $5.2 billion to $64.4 billion during the three months ended March 31, 2013 as compared to $59.2 billion during the three months ended March 31, 2012, an increase of nine percent. Our earnings from LSV; however, were negatively impacted by the decrease in our ownership percentage which occurred in April 2012. During the three months ended March 31, 2013 and 2012, our partnership interest in LSV was approximately 39.8 percent and 41.2 percent, respectively. In March 2009, certain partners of LSV, including SEI, agreed to designate a portion of their partnership interest for the purpose of providing an interest in the partnership to a select group of key LSV employees. In April 2013, these contributing partners agreed to provide certain key LSV employees an interest in LSV thereby reducing our interest in LSV from approximately 39.8 percent to approximately 39.3 percent.
Income Taxes
Our effective tax rates were 34.9 percent and 37.2 percent for the three months ended March 31, 2013 and 2012, respectively. The 2013 tax rate benefited from the reinstatement of the research and development tax credit. The tax credit was reinstated retroactively from January 1, 2012 through December 31, 2013 through The American Taxpayer Relief Act of 2012 (the Act), signed into law on January 2, 2013. The accounting rules require the determination of current and deferred taxes be based upon the provisions of the enacted tax law as of the balance . . .

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