SEI Investments Company 2010 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2010, filed February 24, 2011. SEI provides investment processing, fund processing, investment management, and wealth-management outsourcing solutions. At year-end, SEI managed or administered $416.0 billion, including $172.3 billion under management and $243.7 billion under administration.
SEI deconsolidated LSV Asset Management and LSV Employee Group in January 2010 under revised variable-interest-entity guidance. SEI retained an approximately 42% interest in LSV and accounts for it under the equity method.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $900.8 million | $1,060.5 million | Down 15% |
| Income from operations | $217.5 million | $363.7 million | Down 40% |
| Income before taxes | $369.8 million | $362.3 million | Up 2% |
| Net income attributable to SEI | $231.7 million | $174.3 million | Up 33% |
| Diluted EPS | $1.22 | $0.91 | Up 34% |
| Operating margin | Approximately 24% | Approximately 34% | Down approximately 10 points |
| Effective tax rate | 37.0% | 33.9% | Up 3.1 points |
- Revenue mix included $628.5 million of asset-management, administration and distribution fees, $231.5 million of information-processing and software-servicing fees, and $40.8 million of transaction-based and trade-execution fees.
- Net cash provided by operating activities was $229.3 million, compared with $345.5 million in 2009. Net cash used in investing activities was $41.5 million; net cash used in financing activities was $282.4 million.
- Cash and cash equivalents totaled $496.3 million at December 31, 2010, compared with $590.9 million at December 31, 2009. Management stated that $335.0 million was free and immediately accessible for general corporate purposes as of January 31, 2011.
- Long-term debt was $95.0 million, down from $253.6 million including the current portion in 2009. The company had a $300.0 million unsecured revolving credit facility expiring in July 2012 and reported a 0.24x leverage ratio versus a 1.75x covenant limit.
- Shareholders’ equity attributable to SEI was $1.04 billion, compared with $909.7 million in 2009. Total assets were $1.38 billion.
- SEI repurchased approximately 5.8 million shares for $121.0 million in 2010 and paid $54.6 million in cash dividends. The remaining repurchase authorization was approximately $101.7 million as of January 31, 2011.
Material changes versus the prior comparable period
- Reported revenue declined primarily because LSV was no longer consolidated. On a pro forma basis excluding LSV from 2009, 2010 revenue increased 6% and operating income increased 14%.
- Assets under management and administration increased 6% to $416.0 billion, supported by improved capital markets and new business activity. Excluding LSV, assets increased 5% to $356.0 billion.
- LSV contributed $99.5 million of equity-method earnings in 2010, up 32% from $75.4 million in 2009. LSV assets under management increased 14% to $60.1 billion.
- Private Banks revenue declined 4% and operating margin fell to 10% from 14%, reflecting lost bank clients, fee concessions, lower trading volumes, and Global Wealth Platform development and operating costs.
- Investment Advisors revenue increased 10% and operating margin improved to 40% from 34%. Institutional Investors revenue increased 16% and margin improved to 48% from 44%. Investment Managers revenue increased 15% and margin improved to 35% from 33%.
- Transaction-based and trade-execution revenue declined 27% because of lower capital-markets trading volumes.
- Stock-based compensation expense increased to $26.8 million from $14.5 million because management accelerated recognition after revising expected vesting estimates.
Guidance, outlook, risks and unusual items
- Management expected 2011 capitalized Global Wealth Platform development spending to remain relatively consistent with 2010 levels. Non-capitalized development and operating costs were expected to increase, pressuring Private Banks and Investment Advisors margins.
- Management expected 2011 stock-based compensation expense of approximately $3.6 million per quarter based on then-current estimates.
- SEI recognized $44.2 million of gains from structured investment vehicle securities in 2010, including approximately $27.5 million from cash payments on previously written-down securities. The remaining SIV security at year-end had a fair value of $100.6 million and was valued using significant unobservable inputs.
- SEI sold the Stanfield Victoria SIV note in January 2011 for a minimal gain, leaving the Gryphon notes as the remaining SIV security disclosed at that time.
- Principal risks include sensitivity to capital-market valuations and client asset flows, poor investment-product performance, client consolidation, regulatory changes, technology outages, cybersecurity, operational errors, reliance on third-party providers, currency movements, tax examinations, and loss of senior personnel.
- Pending litigation included putative class actions involving leveraged ETFs distributed by SEI’s subsidiary SIDCO and multiple Louisiana lawsuits relating to services provided to Stanford Trust Company. The company stated that outcomes were uncertain, damages were unspecified, and it intended to defend the claims vigorously.
- Contractual commitments totaled $152.1 million at year-end, including $96.4 million related to the line of credit, $55.0 million of operating leases and maintenance agreements, and $0.8 million of other commitments.
- PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2010.
Most important facts for investors to verify
- Separate the underlying operating trend from the reported decline caused by LSV deconsolidation; review the pro forma comparisons.
- Assess the sustainability of 2010 earnings, particularly the $99.5 million LSV equity contribution and $44.2 million of SIV-related gains.
- Monitor Private Banks profitability and the timing, cost, and U.S. deployment of the Global Wealth Platform.
- Verify cash accessibility, credit-facility maturity and covenants, debt repayment requirements, and the continuing LSV Employee Group guarantee.
- Review the valuation assumptions and remaining exposure associated with the $100.6 million Level 3 SIV asset.
- Track the ETF and Stanford-related litigation, regulatory developments, and any related reserves or settlements.