SEI Investments Company 2014 Form 10-K Summary
Business context and reporting period
SEI Investments Company provides investment processing, investment management, and investment operations outsourcing solutions to financial institutions, advisors, institutional investors, investment managers, and ultra-high-net-worth families. The filing covers the fiscal year ended December 31, 2014, with comparisons to 2013 and 2012.
At year-end, SEI managed or administered $625.4 billion, including $252.8 billion of assets under management and $372.6 billion of client assets under administration. LSV Asset Management, an unconsolidated affiliate, managed $82.7 billion.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $1.266 billion | $1.126 billion | Up 12% |
| Income from operations | $352.8 million | $248.4 million | Up 42% |
| Operating margin | 27.9% | 22.0% | Up approximately 590 bps |
| Net income attributable to SEI | $318.7 million | $288.1 million | Up 11% |
| Diluted earnings per share | $1.85 | $1.64 | Up 13% |
| Effective tax rate | 34.9% | 33.7% | Up 120 bps |
| Cash flow from operations | $374.8 million | $351.2 million | Up $23.6 million |
| Capitalized software development | $34.9 million | $39.5 million | Down $4.6 million |
| Cash and cash equivalents | $667.4 million | $578.3 million | Up $89.2 million |
| Long-term debt | None reported | None reported | No change |
Revenue consisted primarily of asset management, administration and distribution fees of $948.9 million, information processing and software servicing fees of $285.5 million, and transaction-based and trade execution fees of $31.6 million. Net income margin was approximately 25.2%, compared with 25.6% in 2013.
SEI had a $300.0 million revolving credit facility expiring in February 2017, with no borrowings outstanding at December 31, 2014. The company reported compliance with its covenants. Free and immediately accessible cash for general corporate purposes was $368.7 million as of January 30, 2015, excluding cash subject to subsidiary, regulatory, or foreign-reinvestment limitations.
Material changes versus the prior comparable period
- Average assets under management, excluding LSV, increased 13% to $164.9 billion; average assets under administration increased 18% to $354.3 billion.
- Ending assets under management and administration increased 12% to $625.4 billion.
- Segment revenue growth was strongest in Investment Advisors, up 18% to $283.8 million; Institutional Investors increased 10% to $284.7 million; Investment Managers increased 11% to $251.3 million; and Private Banks increased 11% to $441.5 million.
- Core segment margins generally improved. Private Banks increased to 9% from 1%, Investment Advisors to 48% from 44%, and Institutional Investors to 51% from 48%; Investment Managers remained at 37%.
- LSV’s contribution to equity earnings increased to $140.2 million from $119.0 million, while SEI’s ownership interest was approximately 39.3%.
- Stock-based compensation declined to $13.5 million from $37.9 million, following an unusual 2013 acceleration of expense recognition.
- SEI repurchased approximately 7.888 million shares for $278.4 million, compared with 6.789 million shares for $209.9 million in 2013. Approximately $102.7 million remained authorized for repurchases at year-end.
- Cash dividends declared increased to $0.46 per share from $0.42 per share. The company paid a $0.24 per-share semiannual dividend in January 2015.
Guidance, outlook, risks, contingencies, and unusual items
Management expected continued investment in and deployment of the SEI Wealth Platform, additional U.S. bank and advisor conversions, continued growth of existing platform clients, expansion of the global client base, and further development of investment operations capabilities. Management also cautioned that platform deployment could continue to pressure Private Banks margins and increase pressure on Investment Advisors margins until sufficient scale is achieved.
- A non-recurring $6.0 million professional-services fee from a single Private Banks project benefited 2014 revenue.
- SEI recorded an $11.3 million fourth-quarter impairment charge related to its investment in Gao Fu, a Chinese wealth-services firm.
- SEI recorded a $5.6 million gain from contingent consideration related to the 2013 sale of SEI Asset Korea. The 2013 period also included a $43.4 million litigation settlement and a $22.1 million initial sale gain, making year-over-year comparisons less comparable.
- SEI provided an unsecured guaranty for LSV Employee Group III obligations. Approximately $38.7 million remained outstanding as of January 30, 2015; management stated that it expected the borrower to meet its obligations.
- Material risks include sensitivity of asset-based revenue to capital-market declines, investment-performance risk, cyber and data-security threats, operational and third-party service-provider failures, regulatory changes and enforcement, litigation, currency movements, tax uncertainty, and dependence on senior management and LSV.
- Pending matters include Louisiana litigation related to Stanford Trust Company, a shareholder derivative action alleging excessive investment-advisory fees, and a Belgian claim seeking approximately $84 million against multiple defendants. SEI stated that loss estimates were not reasonably determinable for the Louisiana and shareholder litigation.
- The company’s 2014 financial statements received an unqualified audit opinion, and management and KPMG concluded that internal control over financial reporting was effective as of December 31, 2014.
Most important facts for investors to verify
- Whether future asset growth and market levels sustain asset-based revenue and margins.
- The pace, economics, client conversions, capitalized costs, and impairment exposure associated with the SEI Wealth Platform.
- The recurring versus non-recurring components of 2014 earnings, especially the $6.0 million project fee, $5.6 million sale-related gain, and $11.3 million Gao Fu impairment.
- LSV’s assets, performance, distributions, earnings contribution, ownership percentage, and the $38.7 million guaranteed obligation.
- The status and potential financial impact of the Stanford-related, shareholder-fee, and Belgian legal proceedings.
- Availability of cash held by regulated or foreign subsidiaries and compliance with the revolving credit facility’s leverage and other covenants.
- Future share repurchases, dividends, stock-option dilution, and the remaining $102.7 million repurchase authorization.