SEI Investments Company 2015 Form 10-K Summary
Business context and reporting period
SEI Investments Company provides investment processing, investment management, and investment operations solutions to financial institutions, advisors, institutional investors, investment managers, and ultra-high-net-worth families. The filing covers the fiscal year ended December 31, 2015; the supplied “2015 Q4” period corresponds to the fourth quarter within this annual filing.
At year-end, SEI managed or administered $670.3 billion, comprising $262.5 billion of assets under management and $407.8 billion of client assets under administration. LSV Asset Management, in which SEI held an approximately 39.2% interest, managed $78.3 billion included in these amounts.
Financial performance and financial position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1,334.2 million | $1,266.0 million | +5% |
| Income from operations | $358.2 million | $352.8 million | +2% |
| Net income attributable to SEI | $331.7 million | $318.7 million | +4% |
| Diluted EPS | $1.96 | $1.85 | +6% |
| Cash dividends declared per share | $0.50 | $0.46 | +9% |
| Net cash from operating activities | $391.5 million | $374.8 million | +4% |
- Operating margin was approximately 26.9%, compared with approximately 27.9% in 2014; net margin was approximately 24.9%, compared with 25.2%.
- Asset management, administration and distribution fees increased 6% to $1,010.5 million; information processing and software servicing fees increased 2% to $290.9 million.
- Year-end cash and cash equivalents were $679.7 million, compared with $667.4 million in 2014. Total assets were $1.589 billion and shareholders’ equity was $1.290 billion.
- SEI had no borrowings under its $300.0 million revolving credit facility. The facility was scheduled to expire in February 2017 and included a maximum leverage ratio of 1.75 times EBITDA.
- Capital expenditures and capitalized software totaled $73.9 million. Software development capitalization declined to $29.4 million from $34.9 million, while amortization increased to $42.6 million from $38.7 million.
Material changes versus the prior comparable period
- Revenue growth was driven by new and existing client cash flows, higher average assets, growth in the SEI Wealth Platform, and new business in Institutional Investors and Investment Managers. Second-half market volatility and foreign currency movements partially offset growth.
- Average assets under management, excluding LSV, increased 7% to $176.5 billion; average assets under administration increased 12% to $396.6 billion.
- Investment Advisors revenue grew 8%, but operating profit declined 2% to $134.7 million and margin fell to 44% from 48%, primarily due to higher personnel, direct asset-management, and Wealth Platform costs.
- Institutional Investors operating profit increased 5% to $151.7 million with a 51% margin. Investment Managers operating profit increased 4% to $95.9 million, while margin declined to 36% from 37%.
- Private Banks operating profit increased 9% to $45.5 million and margin improved to 10% from 9%, excluding the gain on sale of subsidiary.
- SEI recorded approximately $6.1 million of write-offs for previously capitalized and purchased Wealth Platform software, including approximately $3.6 million in Private Banks and $2.4 million in Investment Advisors.
- SEI’s share of LSV earnings declined slightly to $138.4 million from $140.2 million, although distributions received from LSV increased to $141.8 million from $137.9 million.
- SEI repurchased 5.951 million shares for $289.6 million, compared with 7.888 million shares for $278.4 million in 2014. Approximately $113.1 million remained authorized for repurchases at year-end.
Guidance, outlook, risks, contingencies and unusual items
- Management did not provide formal quantitative revenue or earnings guidance. It expected continued investment in and broader deployment of the SEI Wealth Platform, including conversions of larger banks and investment advisors in 2016 and beyond.
- Management expected continued margin pressure in Private Banks and increased pressure in Investment Advisors until sufficient platform revenue and operating scale are achieved.
- Recent market volatility at the beginning of 2016 was expected to negatively affect asset-based fee revenue. A prolonged capital-market downturn could reduce assets under management, administration fees, earnings, and LSV distributions.
- SEI faces significant regulatory oversight, cybersecurity and data-protection risks, operational and technology risks, third-party service-provider dependence, foreign currency exposure, and risks from underperformance of SEI or LSV investment products.
- SEI guaranteed up to $45.0 million of LSV Employee Group III’s obligations; $21.5 million remained outstanding at year-end. Management expected the borrower to meet its obligations, but lenders could seek payment from SEI upon default.
- Material litigation included Stanford-related Louisiana claims, a shareholder derivative action alleging excessive mutual-fund fees, and a Belgian action seeking approximately $84 million from multiple defendants. The filing states that potential losses could not reasonably be estimated for these matters.
- The effective tax rate decreased to 33.7% from 34.9%, partly because of a favorable Pennsylvania tax settlement. SEI also recorded a $2.8 million pre-tax gain from contingent consideration related to the sale of SEI Asset Korea.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether market volatility and subsequent asset flows materially changed assets under management, administration, and fee revenue after December 31, 2015.
- Progress, costs, client conversions, revenue contribution, and additional write-off risk associated with the SEI Wealth Platform.
- The renewal or replacement terms of the $300 million credit facility, including covenant compliance and borrowing availability after its February 2017 expiration.
- LSV’s investment performance, assets under management, distributions, and the remaining exposure under SEI’s $45 million guaranty.
- Status, reserves, insurance coverage, and potential financial impact of the Stanford-related, excessive-fee, and Belgian legal proceedings.
- Continuation of the repurchase and dividend programs relative to operating cash flow and available liquidity.