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

Show all filings for SEI INVESTMENTS CO

Form 10-Q for SEI INVESTMENTS CO


26-Jul-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 June 30, 2013 and 2012, the consolidated results of operations for the three and six months ended June 30, 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 June 30, 2013, through our subsidiaries and partnerships in which we have a significant interest, we manage or administer $507.2 billion in mutual fund and pooled or separately managed assets, including $204.3 billion in assets under management and $302.9 billion in client assets under administration. Our affiliate, LSV Asset Management (LSV), manages $65.4 billion of assets which are included as assets under management.
Our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012 were:

                                  Three Months Ended June 30,                             Six Months Ended June 30,
                                    2013               2012          Percent Change          2013             2012        Percent Change
Revenues                      $     274,574       $     241,237             14  %      $     546,453       $ 479,135            14  %
Expenses                            216,601             187,439             16  %            428,438         377,248            14  %
Income from operations               57,973              53,798              8  %            118,015         101,887            16  %
Net (loss) gain from
investments                            (177 )               664            N/M                   103           3,869           (97 )%
Interest income, net of
interest expense                        574               1,327            (57 )%              1,514           2,653           (43 )%
Equity in earnings from
unconsolidated affiliates            27,588              22,712             21  %             55,176          50,042            10  %
Gain on sale of subsidiary                -                   -            N/M                22,112               -           N/M
Other income                         43,429                   -            N/M                43,429               -           N/M
Income before income taxes          129,387              78,501             65  %            240,349         158,451            52  %
Income taxes                         45,893              28,762             60  %             84,585          58,477            45  %
Net income                           83,494              49,739             68  %            155,764          99,974            56  %
Less: Net income attributable
to noncontrolling interest                -                (184 )         (100 )%               (350 )          (454 )         (23 )%
Net income attributable to
SEI Investments Co.           $      83,494       $      49,555             68  %            155,414       $  99,520            56  %
Diluted earnings per common
share                         $        0.47       $        0.28             68  %      $        0.88       $    0.56            57  %

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In our opinion, the following items had a significant impact on our financial results for the three and six months ended June 30, 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 17.6 billion, or 14 percent, to $143.0 billion in the first six months of 2013 as compared to $125.4 billion during the first six months of 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 Information processing and software servicing 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.

We recorded income of $43.4 million, or $.16 diluted earnings per share, during the second quarter 2013 from a cash settlement payment received pertaining to litigation related to the purchase of securities of Cheyne Finance LLC, a structured investment vehicle (SIV) security (See Note 14 to the Consolidated Financial Statements for more information).

Our proportionate share in the earnings of LSV was $55.6 million in the first six months of 2013 as compared to $50.0 million in the first six months of 2012, an increase of 11 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 interest from approximately 39.8 percent to approximately 39.3 percent during the second quarter 2013. The reduction in our ownership interest is described in greater detail under the caption "Equity in earnings of unconsolidated affiliates" later in this discussion.

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.

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).

Stock-based compensation expense increased by $6.9 million during the first six months of 2013 as compared to the first six months of 2012 due to a change in our estimate of the timing of when stock option vesting targets will be achieved. The change in our estimate resulted from the positive earnings impacts from the previously mentioned cash payment for the litigation settlement and the sale of SEI AK during 2013.

We capitalized $22.2 million in the first six months of 2013 for significant enhancements and new functionality for the SEI Wealth Platform as compared to $18.2 million in the first six months of 2012. Included in the amount for 2013 is a one-time contractual payment of $8.8 million to exercise a conversion option in lieu of periodic fee payments pertaining to a software license for the SEI Wealth Platform. Amortization expense related to capitalized software increased to $16.6 million during the first six months of 2013 as compared to $14.5 million during the first six months of 2012 due to continued releases of the platform.

Our effective tax rate during the first six months of 2013 was 35.2 percent as compared to 36.9 percent in the first six months of 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 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 2,993,000 shares at an average price of approximately $28.95 per share in the six month period.

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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 June 30,
                                                            2013          2012        Percent Change
Private Banks:
Equity and fixed income programs (A)                     $  12,876     $  16,848           (24 )%
Collective trust fund programs                                  10           335           (97 )%
Liquidity funds                                              5,048         5,063             -  %
Total assets under management                            $  17,934     $  22,246           (19 )%
Client proprietary assets under administration              13,122        10,719            22  %
Total assets                                             $  31,056     $  32,965            (6 )%
Investment Advisors:
Equity and fixed income programs                            34,447        29,153            18  %
Collective trust fund programs                                  14           705           (98 )%
Liquidity funds                                              2,145         1,880            14  %
Total assets under management                            $  36,606     $  31,738            15  %
Institutional Investors:
Equity and fixed income programs                            61,927        55,548            11  %
Collective trust fund programs                                 106           415           (74 )%
Liquidity funds                                              2,901         2,958            (2 )%
Total assets under management                            $  64,934     $  58,921            10  %
Investment Managers:
Equity and fixed income programs                                75            61            23  %
Collective trust fund programs                              18,197        13,004            40  %
Liquidity funds                                                542           226           140  %
Total assets under management                            $  18,814     $  13,291            42  %
Client proprietary assets under administration             289,807       231,549            25  %
Total assets                                             $ 308,621     $ 244,840            26  %
Investments in New Businesses:
Equity and fixed income programs                               572           551             4  %
Liquidity funds                                                 29            30            (3 )%
Total assets under management                            $     601     $     581             3  %
LSV:
Equity and fixed income programs                         $  65,417     $  54,922            19  %
Total:
Equity and fixed income programs (A)                       175,314       157,083            12  %
Collective trust fund programs                              18,327        14,459            27  %
Liquidity funds                                             10,665        10,157             5  %
Total assets under management                            $ 204,306     $ 181,699            12  %
Client proprietary assets under administration             302,929       242,268            25  %
Total assets under management and administration         $ 507,235     $ 423,967            20  %

(A) Equity and fixed income programs in the Private Banks segment in 2012 includes $6.3 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 June 30,                          Six Months Ended June 30,
                                       2013             2012        Percent Change          2013            2012        Percent Change
Private Banks:
Equity and fixed income programs
(A)                              $        12,959     $  16,794           (23 )%       $       16,078     $  16,955            (5 )%
Collective trust fund programs                10           396           (97 )%                   11           416           (97 )%
Liquidity funds                            5,093         5,115             -  %                5,325         5,348             -  %
Total assets under management    $        18,062     $  22,305           (19 )%       $       21,414     $  22,719            (6 )%
Client proprietary assets under
administration                            13,183        10,631            24  %               13,022        10,421            25  %
Total assets                     $        31,245     $  32,936            (5 )%       $       34,436     $  33,140             4  %
Investment Advisors:
Equity and fixed income programs          34,831        29,103            20  %               34,010        28,765            18  %
Collective trust fund programs                14           984           (99 )%                   14         1,111           (99 )%
Liquidity funds                            2,028         1,806            12  %                2,057         1,911             8  %
Total assets under management    $        36,873     $  31,893            16  %       $       36,081     $  31,787            14  %
Institutional Investors:
Equity and fixed income programs          63,466        54,998            15  %               63,554        53,634            18  %
Collective trust fund programs               105           418           (75 )%                  103           423           (76 )%
Liquidity funds                            2,975         3,147            (5 )%                2,968         3,456           (14 )%
Total assets under management    $        66,546     $  58,563            14  %       $       66,625     $  57,513            16  %
Investment Managers:
Equity and fixed income programs              75            63            19  %                   72            61            18  %
Collective trust fund programs            18,205        12,991            40  %               17,667        12,487            41  %
Liquidity funds                              500           235           113  %                  506           212           139  %
Total assets under management    $        18,780     $  13,289            41  %       $       18,245     $  12,760            43  %
Client proprietary assets under
administration                           286,018       229,873            24  %              274,536       227,210            21  %
Total assets                     $       304,798     $ 243,162            25  %       $      292,781     $ 239,970            22  %
Investments in New Businesses:
Equity and fixed income programs             567           550             3  %                  555           550             1  %
Liquidity funds                               34            33             3  %                   36            36             -  %
Total assets under management    $           601     $     583             3  %       $          591     $     586             1  %
LSV:
Equity and fixed income programs $        66,781     $  55,994            19  %       $       65,389     $  57,597            14  %
Total:
Equity and fixed income programs
(A)                                      178,679       157,502            13  %              179,658       157,562            14  %
Collective trust fund programs            18,334        14,789            24  %               17,795        14,437            23  %
Liquidity funds                           10,630        10,336             3  %               10,892        10,963            (1 )%
Total assets under management    $       207,643     $ 182,627            14  %       $      208,345     $ 182,962            14  %
Client proprietary assets under
administration                           299,201       240,504            24  %              287,558       237,631            21  %
Total assets under management
and administration               $       506,844     $ 423,131            20  %       $      495,903     $ 420,593            18  %

(A) Equity and fixed income programs in the Private Banks segment includes $6.4 billion and $6.6 billion in assets for the three and six months ended June 30, 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 and six months ended June 30, 2013 compared to the three and six months
ended June 30, 2012 were as follows:
                                  Three Months Ended June 30,       Percent       Six Months Ended June 30,      Percent
                                     2013               2012         Change          2013             2012        Change
Private Banks:
Revenues                       $     95,142        $     88,303         8  %   $    193,888        $ 176,291        10  %
Expenses                             97,755              84,886        15  %        194,053          172,403        13  %
Operating (Loss) Profit        $     (2,613 )      $      3,417      (176 )%   $       (165 )      $   3,888      (104 )%
Gain on sale of subsidiary                -                   -       N/M            22,112                -       N/M
Total (Loss) Profit            $     (2,613 )      $      3,417       N/M      $     21,947        $   3,888       N/M
Operating Margin (A)                     (3 )%                4 %                         -  %             2 %
Investment Advisors:
Revenues                       $     59,284        $     49,375        20  %   $    114,475        $  98,843        16  %
Expenses                             32,898              29,025        13  %         64,523           58,326        11  %
Operating Profit               $     26,386        $     20,350        30  %   $     49,952        $  40,517        23  %
Operating Margin                         45  %               41 %                        44  %            41 %
Institutional Investors:
Revenues                       $     63,684        $     55,895        14  %   $    126,846        $ 109,212        16  %
Expenses                             33,028              28,740        15  %         64,537           56,840        14  %
Operating Profit               $     30,656        $     27,155        13  %   $     62,309        $  52,372        19  %
Operating Margin                         48  %               49 %                        49  %            48 %
Investment Managers:
Revenues                       $     55,456        $     46,713        19  %   $    109,276        $  92,924        18  %
Expenses                             36,507              30,163        21  %         71,669           60,589        18  %
Operating Profit               $     18,949        $     16,550        14  %   $     37,607        $  32,335        16  %
Operating Margin                         34  %               35 %                        34  %            35 %
Investments in New Businesses:
Revenues                       $      1,008        $        951         6  %   $      1,968        $   1,865         6  %
Expenses                              3,890               3,684         6  %          7,628            7,382         3  %
Operating Loss                 $     (2,882 )      $     (2,733 )     N/M      $     (5,660 )      $  (5,517 )     N/M

(A) Percentage for the six months ended June 30, 2013 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 June 30,      Percent      Six Months Ended June 30,       Percent
                                   2013            2012        Change           2013            2012        Change
Revenues:
Information processing and
software servicing fees      $       62,271     $  56,785        10 %     $      126,338     $ 112,537        12 %
Asset management,
administration &
distribution fees                    25,863        25,071         3 %             52,870        50,180         5 %
Transaction-based and trade
execution fees                        7,008         6,447         9 %             14,680        13,574         8 %
Total revenues               $       95,142     $  88,303         8 %     $      193,888     $ 176,291        10 %

Revenues increased $6.8 million, or eight percent, in the three month period and increased $17.6 million, or ten percent, in the six month period ended June 30, 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; and

Increased investment management fees from existing international clients due to higher average assets under management from improved capital markets during 2012 and in the first six months of 2013, net of the decrease in assets under management from the sale of SEI AK in the first quarter 2013; 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 income decreased by $6.0 million in the three month period and decreased by $4.1 million in the six month period and was primarily affected by:
Increased direct expenses associated with increased investment management fees from existing international clients, mainly distribution fees;

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

Increased stock-based compensation costs of $2.2 million primarily due to the change in management's estimate of the timing of the achievement of stock option vesting targets; and

Increased amortization expense relating to the SEI Wealth Platform; partially offset by

An increase in revenues.

Investment Advisors
Revenues increased $9.9 million, or 20 percent, in the three month period and increased by $15.6 million, or 16 percent, in the six month period ended June 30, 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 the first six months of 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 45 percent compared to 41 percent in the three month period and increased to 44 percent compared to 41 percent in the six month period. Operating income increased by $6.0 million, or 30 percent, in the three month period and increased by $9.4 million, or 23 percent, in the six month 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;

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

Increased stock-based compensation costs of $1.4 million primarily due to the change in management's estimate of the timing of the achievement of stock option vesting targets.

Institutional Investors
Revenues increased $7.8 million, or 14 percent, in the three month period and increased by $17.6 million, or 16 percent, in the six month period ended June 30, 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 during 2012 and the first six months of 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 decreased to 48 percent compared to 49 percent in the three month period and increased to 49 percent compared to 48 percent in the six month period. Operating income increased $3.5 million, or 13 percent, in the three month period and increased $9.9 million, or 19 percent in the six month period and was primarily affected by:
An increase in revenues; partially offset by

Increased personnel costs, mainly salary and incentive compensation;

Increased direct expenses associated with higher investment management fees; and

Increased stock-based compensation costs of $1.4 million primarily due to the change in management's estimate of the timing of the achievement of stock option vesting targets.

Investment Managers
Revenues increased $8.7 million, or 19 percent, in the three month period and increased by $16.4 million, or 18 percent, in the six month period ended . . .

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