SEI Investments Company — Fiscal 2019 Form 10-K Summary
Business context and reporting period
SEI Investments Company provides technology-driven investment processing, investment operations, and investment management platforms to wealth managers, financial advisors, investment managers, institutional investors, and high-net-worth families. This Form 10-K covers the fiscal year ended December 31, 2019; the filing also provides unaudited quarterly data for 2019.
At December 31, 2019, SEI managed, advised, or administered approximately $1.0 trillion of assets, including $352.0 billion under management and $683.3 billion under administration. SEI’s 38.9%-owned affiliate, LSV Asset Management, managed $107.5 billion, included in reported assets under management.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $1.650 billion | $1.624 billion | +2% |
| Income from operations | $460.4 million | $442.0 million | +4% |
| Net income | $501.4 million | $505.9 million | -1% |
| Diluted EPS | $3.24 | $3.14 | +3% |
| Operating margin | 27.9% | 27.2% | Improved |
| Net margin | 30.4% | 31.1% | Declined |
| Operating cash flow | $545.1 million | $588.4 million | -7% |
- Asset management, administration, and distribution fees increased 3% to $1.307 billion, while information processing and software servicing fees declined 3% to $342.8 million.
- Equity in earnings of LSV declined 5% to $151.9 million. LSV’s average assets under management declined 4% to $103.1 billion because of negative cash flows, lost clients, and lower performance fees.
- The effective tax rate increased to 20.6% from 17.6%, primarily because of lower tax benefits from stock option exercises and a higher state tax rate.
- Cash and cash equivalents were $841.4 million, compared with $754.5 million at year-end 2018. Total assets were $2.151 billion and shareholders’ equity was $1.739 billion.
- SEI had no borrowings under its $300.0 million revolving credit facility. Outstanding letters of credit were $11.6 million, leaving approximately $288.4 million available as of January 31, 2020.
- Net cash used in investing activities was $78.2 million, including $34.1 million of capitalized software costs and $43.1 million of property and equipment additions.
- Net cash used in financing activities was $386.6 million, including $346.4 million of share repurchases and $100.7 million of dividends paid, partially offset by $60.9 million of proceeds from stock issuance.
- Research and development expenditures were $163.0 million, or 9.9% of revenue. The company capitalized $34.1 million of software development costs, primarily for the SEI Wealth Platform.
Material changes versus the prior comparable period
- Investment Managers was the strongest operating segment: revenue increased 11% to $440.8 million, operating profit increased 15% to $158.8 million, and operating margin improved to 36%.
- Investment Advisors generated 1% revenue growth and a 5% increase in operating profit to $195.3 million, with a 48% operating margin.
- Private Banks revenue declined 3% to $470.3 million, but operating profit increased 8% to $27.1 million as costs related to SWP maintenance, support, and migrations declined.
- Institutional Investors revenue declined 3% to $322.1 million and operating profit declined 1% to $168.1 million, reflecting defined-benefit client losses, acquisitions, plan curtailments, and fee compression.
- Investments in New Businesses generated $13.0 million of revenue but an operating loss of $16.7 million, compared with a $12.4 million loss in 2018.
- Average client assets under administration increased 14% to $635.8 billion, while total ending assets under management, advisement, and administration increased 18% to $1.041 trillion.
- SEI repurchased 6.225 million shares for $348.3 million in 2019, compared with 6.744 million shares for $404.8 million in 2018. Approximately $117.5 million remained available under the repurchase authorization at year-end.
- Operating cash flow declined primarily because of lower distributions from LSV, working-capital changes, and lower net income. LSV distributions received declined to $136.8 million from $166.9 million.
- SEI completed the migration of all Investment Advisor clients onto the SEI Wealth Platform in 2019 and stated that future emphasis would be on platform enhancements and recruiting new advisors.
Guidance, outlook, management commentary, risks, and unusual items
- Management expects capital-market conditions and client portfolio strategies to remain important drivers of asset-based revenue. Market appreciation supported 2019 results, but prolonged market declines or shifts toward lower-fee products could reduce revenue and earnings.
- Management identified opportunities to expand global wealth-management, institutional, investment-manager, and ultra-high-net-worth solutions through the One SEI strategy and modularized platforms. The filing does not provide formal 2020 revenue or earnings guidance.
- Client losses in Private Banks and Institutional Investors are expected to affect revenue and earnings through 2020. Competition, fee compression, passive investing, and contraction of the U.S. corporate defined-benefit market remain notable pressures.
- Major risks include regulatory examinations and enforcement, privacy and cybersecurity incidents, operational or third-party service failures, technology development and execution risk, foreign currency exposure, interest-rate changes, and dependence on LSV’s performance and distributions.
- Brexit created uncertainty for SEI’s U.K. and European operations. The company also noted potential effects from geopolitical events, trade relations, U.S. politics, and Middle East tensions on financial markets.
- SEI disclosed seven Louisiana lawsuits related to Stanford Trust Company. The Lillie class action was dismissed in SEI’s favor in 2019 but was on appeal at the filing date; the Ahders proceeding was dismissed in January 2020. The company stated that it could not reasonably estimate any potential loss.
- SEI agreed to settle an ERISA class action involving its Capital Accumulation Plan. Court approval was pending after the December 2019 fairness hearing, and management expected the financial impact to be immaterial.
- The company recorded $568,000 of additional contingent consideration related to the Huntington Steele acquisition during 2019. Remaining contingent consideration was $12.3 million at year-end.
- The company adopted the new lease standard in 2019, recording $44.2 million of lease right-of-use assets and net lease liabilities at adoption. The filing states that the adoption did not materially affect net income or cash flows.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter concerned capitalization of internal-use software development costs.
Most important facts for investors to verify
- Whether asset growth and market appreciation translate into sustainable organic cash inflows rather than primarily market-driven increases.
- The persistence of client losses, fee compression, and lower-fee product migration in Private Banks, Investment Advisors, and Institutional Investors.
- LSV’s assets, investment performance, performance fees, and future distribution payments, given its material contribution to SEI’s earnings and cash flow.
- Execution, capitalization, useful-life assumptions, and potential impairment risk associated with the SEI Wealth Platform and other software assets.
- Liquidity availability, credit-facility covenant compliance, headquarters expansion spending, and the company’s continued share repurchases and dividends.
- The outcome and potential exposure from the Stanford-related litigation, the ERISA settlement, regulatory examinations, and other unquantified contingencies.
- How cybersecurity, privacy, third-party infrastructure, Brexit, foreign exchange, and broader capital-market conditions affect operations and asset-based revenue.