SEI Investments Company 2020 Form 10-K Summary
Business context and reporting period
SEI Investments Company provides technology-enabled wealth and investment management platforms, investment processing, investment operations outsourcing, and investment management services. Its primary segments are Private Banks, Investment Advisors, Institutional Investors, Investment Managers, and Investments in New Businesses.
The filing covers the fiscal year ended December 31, 2020, with comparative results for 2019 and 2018. The company managed, advised, or administered approximately $1.2 trillion of assets at year-end, including $368.7 billion under management and $786.7 billion under administration. SEI also owned approximately 38.8% of LSV Asset Management.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1.684 billion | $1.650 billion | Up 2% |
| Income from operations | $445.9 million | $460.4 million | Down 3% |
| Operating margin | 26.5% | 27.9% | Down 1.4 percentage points |
| Net income | $447.3 million | $501.4 million | Down 11% |
| Diluted EPS | $3.00 | $3.24 | Down 7% |
| Net margin | 26.6% | 30.4% | Down 3.8 percentage points |
| Operating cash flow | $488.7 million | $545.1 million | Down 10% |
Asset management, administration, and distribution fees increased to $1.346 billion, while information processing and software servicing fees declined to $338.4 million. Average client assets under administration rose 13% to $717.7 billion, and average assets under management excluding LSV rose 5% to $242.6 billion.
- Investment Managers revenue increased 11% to $489.5 million; operating profit rose 14% to $180.5 million, with a 37% operating margin.
- Investment Advisors revenue increased 1% to $407.6 million; operating profit rose 3% to $201.7 million, with a 49% margin.
- Institutional Investors revenue declined 1% to $317.6 million; operating profit was essentially flat at $167.7 million, with a 53% margin.
- Private Banks revenue declined 3% to $455.4 million; operating profit fell 67% to $8.9 million, reducing the margin to 2%.
- Investments in New Businesses generated $14.0 million of revenue and a $38.9 million operating loss.
Cash and cash equivalents were $784.6 million at December 31, 2020, compared with $841.4 million at year-end 2019. Total assets were $2.167 billion and shareholders’ equity was $1.740 billion. Total liabilities were $427.3 million. SEI had no borrowings under its $300 million revolving credit facility and had $295.4 million available after outstanding letters of credit.
Capital allocation included $424.7 million for repurchases of approximately 8.0 million shares and $103.9 million of dividends paid. Dividends declared increased to $0.72 per share from $0.68 per share in 2019. Capital expenditures and capitalized software costs totaled approximately $78.6 million, including $24.1 million of capitalized software development costs.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher assets under administration, positive client flows in Investment Managers, and market appreciation during the recovery in the second half of 2020.
- Profitability declined because of lower LSV earnings, higher personnel and consulting costs, increased non-capitalized investment spending, and Private Banks client losses and SWP-related costs.
- SEI’s share of LSV earnings fell 23% to $117.1 million. LSV’s average assets under management declined 18% to $85.0 billion because of negative flows, lost clients, market depreciation, and underperformance of value equities.
- Private Banks operating margin fell from 6% to 2%, while Investment Managers, Investment Advisors, and Institutional Investors maintained or improved margins.
- Operating cash flow declined primarily because of lower LSV distributions and lower net income.
- SEI invested more heavily in its One SEI strategy, which is intended to modularize and broaden use of its technology and operating platforms. Management expects these investments to continue through most of 2021.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. It expects continued investment in the One SEI strategy, operational resiliency, new products, and technology platforms. The company expects to renew its revolving credit facility, scheduled to expire in June 2021, during the second quarter of 2021.
- COVID-19 caused market volatility, reduced asset-based fee revenue, shifted assets toward lower-margin liquidity products, and limited travel and promotional spending. Approximately 99% of employees worked remotely from March 2020, while operations continued.
- A May 2020 ransomware attack at third-party developer M.J. Brunner resulted in unauthorized access to certain client data. SEI stated that its network and operations were not compromised, did not expect the financial impact to be material, and was responding to inquiries from the SEC and FFIEC.
- A July 2020 storage-array failure limited transactional activity on July 1 and 2; systems were fully restored by July 6. SEI expects additional resiliency investments, but the total cost was not yet estimable.
- SEI faces significant regulatory, privacy, cybersecurity, operational, litigation, market, foreign exchange, interest-rate, and third-party vendor risks. Asset-based revenues are sensitive to market values, client flows, product performance, and fee compression.
- Pending legal matters include Stanford-related litigation and the SS&C Advent contractual dispute. The company stated that losses could not be reasonably estimated for the Stanford matters and that the expected financial impact of the Advent matter was immaterial, although outcomes remain uncertain.
- Contractual and contingent obligations totaled $65.6 million at year-end, including operating leases and maintenance agreements, contingent acquisition consideration, and other commitments.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter concerned the evaluation of costs eligible for capitalization in internal-use software, primarily enhancements to the SEI Wealth Platform.
Most important facts for investors to verify
- Whether market appreciation and asset flows continue to offset fee compression, product mix shifts, and client losses.
- The sustainability of Investment Managers’ growth and the recovery of Private Banks profitability.
- LSV’s investment performance, asset flows, distributions, and contribution to SEI earnings and operating cash flow.
- The renewal terms and covenant capacity of the $300 million revolving credit facility before its June 2021 expiration.
- The scope, remediation costs, regulatory outcomes, and potential liabilities related to the Brunner ransomware incident and the July infrastructure outage.
- The amount and timing of further One SEI and operational resiliency investments, which the filing does not quantify.
- The outcome and potential financial exposure from the Stanford and Advent legal proceedings.
- The recoverability and future amortization burden of $271.0 million in net capitalized software, including $257.7 million related to SWP.