SEI Investments Company 2011 Form 10-K Summary
Business context and reporting period
SEI provides investment processing, investment management, and investment operations outsourcing solutions to banks, investment advisers, institutional investors, investment managers, and ultra-high-net-worth families. This Form 10-K covers the fiscal year ended December 31, 2011; fourth-quarter information is presented where disclosed. The filing was dated February 27, 2012.
- Assets managed or administered at year-end totaled $403.6 billion, including $172.0 billion under management and $231.6 billion under administration.
- SEI’s five reportable segments were Private Banks, Investment Advisors, Institutional Investors, Investment Managers, and Investments in New Businesses.
- SEI owned approximately 41% of LSV Asset Management and accounted for it under the equity method after deconsolidating LSV beginning in 2010.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $929.7 million | $900.8 million | Up 3% |
| Income from operations | $204.1 million | $217.5 million | Down 6% |
| Operating margin | Approximately 21.9% | Approximately 24.1% | Down approximately 2.2 points |
| Net income attributable to SEI | $205.0 million | $231.7 million | Down 12% |
| Diluted EPS | $1.11 | $1.22 | Down 9% |
| Effective tax rate | 35.2% | 37.0% | Down 1.8 points |
| Cash flow from operations | $257.0 million | $229.3 million | Up $27.6 million |
| Cash and cash equivalents | $421.0 million | $496.3 million | Down $75.3 million |
| Long-term debt | $0 | $95.0 million | Fully repaid |
| SEI shareholders’ equity | $1.025 billion | $1.042 billion | Down 2% |
Revenue consisted primarily of asset management, administration and distribution fees of $669.8 million, information processing and software servicing fees of $222.4 million, and transaction-based and trade execution fees of $37.5 million.
Fourth-quarter 2011 revenue was $226.2 million, compared with $231.4 million in fourth-quarter 2010. Fourth-quarter net income attributable to SEI was $44.4 million, compared with $62.4 million, and diluted EPS was $0.25, compared with $0.33.
- Segment operating margins in 2011 were 3% for Private Banks, 42% for Investment Advisors, 49% for Institutional Investors, and 35% for Investment Managers. Investments in New Businesses reported a $7.7 million operating loss.
- Average assets under management, excluding LSV, increased 9% to $117.0 billion. However, year-end consolidated assets under management and administration declined 3% to $403.6 billion, primarily reflecting lower administered assets and lower LSV ending assets.
- Research and development expenditures were $118.6 million, including $41.0 million capitalized for technology development. Capitalized software totaled $309.1 million at year-end.
- SEI repurchased 11.1 million shares for $211.2 million in 2011, compared with 5.8 million shares for $121.0 million in 2010. Approximately $95.8 million remained available under the repurchase authorization as of January 31, 2012.
- Dividends declared increased to $0.27 per share from $0.20 per share. A $0.15 per-share dividend declared in December 2011 was paid in January 2012.
Material changes versus the prior comparable period
- Revenue growth was modest, but higher operating costs caused operating income to decline. Total expenses increased 6% to $725.7 million, faster than revenue.
- Private Banks operating profit fell 76% to $8.8 million, and its margin fell to 3% from 10%, primarily due to Global Wealth Platform development, amortization, and client-servicing costs, along with pricing concessions and lower transaction volumes.
- Investment Advisors operating profit increased 9% to $79.3 million, while Institutional Investors increased 4% to $103.4 million. Investment Managers operating profit increased 9% to $62.0 million.
- Equity in earnings from LSV increased 6% to $105.8 million. LSV’s average assets under management increased 10% to $58.5 billion, although ending assets declined 11% to $53.7 billion.
- Net investment gains declined sharply to $3.4 million from $48.5 million, largely because SIV-related gains fell to $3.4 million from $44.2 million.
- Stock-based compensation declined to $14.1 million from $26.8 million, following unusually high 2010 expense recognition related to revised vesting estimates.
- SEI made $95.0 million of debt principal payments in 2011, including a final $20.0 million payment in December, eliminating borrowings under the existing credit facility.
- The 2011 results are not fully comparable with 2009 because LSV was deconsolidated beginning in 2010.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected the effective tax rate to be approximately 36% to 37% in 2012, assuming the research and development tax credit could be utilized.
- SEI expected continued investment in the Global Wealth Platform, including expanded functionality and U.S. implementation. Management stated that related non-capitalized operating costs could remain at or increase from 2011 levels.
- Management expected continued pressure on Private Banks operating margins in 2012 and did not expect profitability gains in that segment during 2012 because new clients would fund assets over time.
- Capital-market volatility, asset values, investment flows, fund performance, and extended client sales cycles could materially affect revenue and earnings because a majority of revenue is asset-based.
- Key operating risks include regulatory change and enforcement, litigation, cybersecurity and data security, system interruptions, operational errors, third-party service-provider failures, product-development risk, client consolidation, currency movements, tax examinations, and dependence on senior management.
- SEI reported $52.6 million of Level 3 trading securities at year-end, primarily the remaining SIV security. SIV securities generated a $3.4 million 2011 gain, including $10.6 million of cash payments offset by a $7.2 million fair-value loss.
- SEI disclosed leveraged ETF litigation involving SIDCO and multiple Louisiana lawsuits involving SEI and SPTC related to Stanford Trust Company. The company stated that it had valid defenses, but could not reasonably estimate any potential loss.
- SEI replaced its credit facility in February 2012 with a five-year, $300 million senior unsecured revolving facility expiring in February 2017. No borrowings were outstanding under the new facility at the time of disclosure.
- Contractual obligations totaled approximately $54.9 million, primarily operating leases and maintenance agreements. The company also disclosed $9.4 million of unrecognized tax benefits, including $1.8 million expected to be recognized within twelve months.
- PricewaterhouseCoopers issued an unqualified opinion on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2011.
Most important facts for investors to verify
- Whether Global Wealth Platform investment and servicing costs translate into recurring revenue growth and improved Private Banks profitability.
- The sensitivity of asset-based revenue and LSV earnings to market levels, client flows, fund performance, and volatility.
- The valuation, cash collections, and remaining exposure associated with the Level 3 SIV security.
- The potential financial and reputational impact of the leveraged ETF and Stanford-related litigation, for which no loss estimate was provided.
- The sustainability of substantial share repurchases and dividends alongside continued technology investment.
- The terms, covenant headroom, and availability of the February 2012 revolving credit facility.
- The comparability of future results with prior periods given the 2010 LSV deconsolidation and changes in segment client definitions.