SEI Investments Company - 2002 Annual Report (10-K) Summary
Business Context and Reporting Period
This report covers the fiscal year ended December 31, 2002. SEI Investments Company provides investment processing, fund processing, and investment management solutions to banks, trust institutions, investment advisors, and institutional investors. The company operates through five segments: Private Banking and Trust, Investment Advisors, Enterprises, Money Managers, and Investments in New Businesses. The company is headquartered in Oaks, Pennsylvania.
Key Financial Metrics
| Metric (in thousands) | 2002 | 2001 |
|---|---|---|
| Total Revenues | $620,819 | $658,013 |
| Net Income | $140,520 | $124,944 |
| Income from Operations | $209,819 | $183,186 |
| Operating Margin | 34.0% | 27.8% |
| Diluted EPS | $1.25 | $1.09 |
| Cash from Operating Activities | $175,734 | $174,379 |
| Cash and Cash Equivalents (Year End) | $165,724 | $163,685 |
| Total Assets | $464,147 | $460,916 |
| Long-Term Debt | $43,056 | $50,611 |
| Shareholders' Equity | $290,007 | $270,593 |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 6% ($37.2 million) to $620.8 million. This was primarily due to the loss of clients in the Private Banking and Trust and Enterprises segments following bank consolidations in late 2001, as well as the impact of volatile capital markets reducing asset-based fees.
- Profitability Increase: Despite lower revenues, Net Income increased 12% to $140.5 million, and Operating Income rose 15% to $209.8 million. This improvement was driven by aggressive cost containment, particularly in marketing, consulting, and incentive compensation, as well as improved productivity.
- Segment Performance:
- Private Banking and Trust: Revenues fell 10% due to client losses from bank mergers.
- Investment Advisors: Revenues declined 4% due to market devaluation, but operating income surged 28% due to cost controls.
- Money Managers: Revenues grew 26% and operating income grew 79%, driven by new business in the alternative investment market.
- Investments in New Businesses: Continued to operate at a loss ($14.7 million), though the loss narrowed compared to 2001.
- Capital Allocation: The company repurchased 5.4 million shares of common stock for $147.9 million and paid cash dividends of $12.1 million.
Outlook, Risks, and Unusual Items
- Outlook: Management remains optimistic due to recurring revenue streams and strong cash flow but acknowledges that prolonged capital market volatility and banking industry consolidation remain long-term challenges.
- Unusual Items:
- Investment Losses: A net loss on investments of $2.4 million was recorded, including a $3.9 million charge for other-than-temporary declines in market value of securities.
- Accountant Change: The company dismissed Arthur Andersen LLP in June 2002 and appointed PricewaterhouseCoopers LLP as its independent auditor.
- Risks: Key risks include exposure to capital market fluctuations (which directly impact asset-based fees), consolidation within the banking sector potentially reducing the client base, and reliance on proprietary technology systems.
Investor Verification Checklist
- Verify the extent of client attrition in the Private Banking and Trust segment due to bank consolidations and the timeline for replacement revenue.
- Assess the sustainability of the operating margin expansion (34% in 2002) given the revenue decline; determine if cost cuts were one-time or structural.
- Review the status of the "Investments in New Businesses" segment, which continues to generate significant operating losses despite revenue growth.
- Confirm the impact of the auditor change (Arthur Andersen to PwC) on the audit process and any potential restatements or adjustments.
- Monitor the company's exposure to interest rate changes, as a portion of long-term debt is variable-rate and low interest rates currently support income from money market funds.