SEI Investments Company: FY2018 Form 10-K Summary
Business context and reporting period
SEI Investments Company provides investment processing, investment management and investment operations platforms to financial institutions, advisors, institutional investors, investment managers and ultra-high-net-worth families. The filing covers the fiscal year ended December 31, 2018; fourth-quarter data is included for comparison. SEI managed, advised or administered $883.9 billion of assets at year-end, including $307.3 billion under management and $572.5 billion under administration. LSV Asset Management, in which SEI held a 38.9% interest, managed $96.1 billion.
Financial performance and key metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1,624.2 million | $1,526.6 million | 6% |
| Income from operations | $442.0 million | $396.9 million | 11% |
| Operating margin | 27.2% | 26.0% | Improved |
| Net income | $505.9 million | $404.4 million | 25% |
| Diluted EPS | $3.14 | $2.49 | 26% |
| Net margin | 31.1% | 26.5% | Improved |
| Operating cash flow | $588.4 million | $459.9 million | 28% |
| Cash and cash equivalents | $754.5 million | $744.2 million | 1% |
| Total assets | $2,011.7 million including restricted cash | $1,856.9 million including restricted cash | Not directly presented on this basis |
| Total shareholders’ equity | $1,593.1 million | $1,476.8 million | 8% |
The balance sheet reported total assets of $1,971.7 million and total liabilities of $378.5 million at December 31, 2018. SEI had no borrowings under its revolving credit facility, with $286.2 million available after outstanding letters of credit. The facility expires in June 2021 and includes a maximum leverage ratio of 1.75 times EBITDA.
Asset management, administration and distribution fees increased to $1,270.2 million from $1,184.2 million, while information processing and software servicing fees increased to $354.0 million from $342.4 million. Average assets under management, excluding LSV, increased 6% to $226.6 billion, and average assets under administration increased 12% to $555.6 billion.
Segment operating margins were 5% for Private Banks, 47% for Investment Advisors, 51% for Institutional Investors and 35% for Investment Managers. Investments in New Businesses generated a $12.4 million operating loss.
Fourth-quarter 2018
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Revenue | $405.1 million | $408.2 million |
| Income before taxes | $143.6 million | $152.5 million |
| Net income | $116.0 million | $122.1 million |
| Diluted EPS | $0.73 | $0.75 |
| Effective tax rate | 19.2% | 19.9% |
Material changes versus the prior comparable period
- Annual revenue growth was driven primarily by market appreciation, positive client cash flows and higher administration activity, particularly in Investment Managers.
- Fourth-quarter market volatility and negative cash flows reduced asset-based revenues and shifted some assets toward lower-margin liquidity products.
- Net income benefited substantially from the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act; the effective tax rate fell to 17.6% from 27.4%.
- SEI adopted ASC 606 using the modified retrospective method, recording a $14.4 million cumulative increase to retained earnings. The adoption reduced 2018 revenue and expenses by $16.7 million for soft-dollar arrangements without affecting net income and resulted in $24.0 million of deferred contract costs at year-end.
- SEI repurchased 6.744 million shares for $404.8 million, compared with 4.403 million shares for $248.1 million in 2017. Dividends declared increased to $0.63 per share from $0.58.
- SEI acquired Huntington Steele for total consideration of $17.9 million, including $5.8 million of cash and $12.1 million of contingent consideration. The 2017 Archway acquisition contributed to Investment Managers revenue and expenses in 2018.
- Capitalized software spending declined to $44.2 million from $61.0 million, including $43.4 million for the SEI Wealth Platform. The net book value of SWP was $288.7 million at year-end.
Cash flow, liquidity and capital allocation
- Operating cash flow was $588.4 million. Investing cash outflow was $123.4 million, including $44.2 million of capitalized software and $29.1 million of property and equipment additions.
- Financing cash outflow was $443.7 million, primarily reflecting $407.4 million of share repurchases and $94.3 million of dividends, partly offset by $88.0 million of proceeds from stock issuance.
- Free and immediately accessible cash for general corporate purposes was $249.0 million as of January 31, 2019; cash held by subsidiaries may be restricted by operating or regulatory requirements.
- Planned headquarters expansion spending was approximately $33.0 million in 2019 and $14.0 million in 2020.
Guidance, outlook, commentary and risks
The filing does not provide formal financial guidance. Management expects continued investment in platform development, targeting approximately 8% to 10% of annual revenue, and expects to complete migration of Investment Advisor clients to SWP in 2019. Management also expects revenue effects from certain Private Banks client losses to occur during 2019 and into 2020.
- Capital-market declines, volatility, poor investment performance or flows into lower-margin products could reduce assets, fees, revenue and earnings.
- Client decisions to internalize services or move to other providers may pressure Private Banks revenue in 2019 and 2020.
- SWP development and large-scale implementation remain material execution risks, with potential financial losses if delivery is delayed or costs exceed expectations.
- Approximately 10% of 2018 revenue was generated in the United Kingdom and approximately 7% of the workforce was located there. Brexit-related changes, including a possible no-deal departure, could affect clients, regulation and revenue.
- Cybersecurity, operational outages, third-party service-provider failures and data breaches could create financial, regulatory and reputational losses.
- Regulatory examinations, litigation and changing financial-services requirements could increase costs or restrict operations. The Stanford Trust litigation and SEI Capital Accumulation Plan litigation have unspecified potential damages that management states cannot reasonably estimate.
- LSV contributed $159.8 million of equity-method earnings and $166.9 million of distributions in 2018; weaker LSV performance or asset levels could materially affect SEI earnings and cash flow.
Most important facts for investors to verify
- Whether market conditions and client flows support continued growth in assets under management and administration.
- The timing and financial impact of announced Private Banks client departures and any further client attrition.
- SWP implementation progress, capitalized software balances, amortization requirements and impairment risk.
- The sustainability of the 2018 effective tax rate, which benefited from the Tax Cuts and Jobs Act and stock-option tax benefits.
- The amount and timing of any losses, settlements or remediation costs related to pending litigation and regulatory matters.
- Availability of subsidiary cash, compliance with credit-facility covenants and the effect of continued share repurchases and dividends on liquidity.
- LSV assets, performance, distributions and contribution to SEI’s consolidated earnings.