Business Context and Reporting Period
SEI Investments Company filed its Form 10-K for the fiscal year ended December 31, 2013. SEI provides investment processing, investment management, and investment operations outsourcing solutions to financial institutions, advisors, institutional investors, investment managers, and ultra-high-net-worth families.
As of year-end, SEI managed or administered $559.2 billion of assets, including $231.9 billion under management and $327.3 billion under administration. LSV Asset Management, an unconsolidated affiliate, managed $76.2 billion. The filing is an annual report rather than a standalone fourth-quarter filing; fourth-quarter data are included in the quarterly disclosures.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $1.126 billion | $992.5 million | 13% |
| Income from operations | $248.4 million | $211.6 million | 17% |
| Operating margin | 22.1% | 21.3% | Improved |
| Net income attributable to SEI | $288.1 million | $206.8 million | 39% |
| Diluted EPS | $1.64 | $1.18 | 39% |
| Cash flow from operations | $351.2 million | $257.5 million | 36% |
| Cash and equivalents | $578.3 million | $452.2 million | 28% |
| Long-term debt, including current portion | None | None | No change |
Asset management, administration, and distribution fees increased to $831.7 million from $723.6 million. Information processing and software servicing fees increased to $261.7 million from $236.2 million, while transaction-based fees were essentially flat at $32.7 million.
Total assets were $1.439 billion and shareholders’ equity was $1.156 billion at December 31, 2013. The company had no borrowings under its $300 million revolving credit facility, which expires in February 2017, and was in compliance with its covenants.
Net cash used in investing activities was $62.4 million, primarily reflecting $39.5 million of capitalized software costs, $16.4 million of property and equipment additions, and securities purchases. Net cash used in financing activities was $162.8 million, including $206.6 million for share repurchases and $34.4 million of dividend payments.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by market appreciation, positive client cash flows, new business, higher assets under management and administration, and increased investment processing activity.
- Average assets under management excluding LSV increased 11% to $145.4 billion. Total year-end assets under management and administration increased 22% to $559.2 billion.
- Investment Advisors revenue increased 19% and operating profit increased 30%; Institutional Investors revenue increased 13% and operating profit increased 12%; Investment Managers revenue and operating profit each increased 17%.
- Private Banks revenue increased 9%, but operating profit declined 39% to $4.7 million and operating margin fell to approximately 1%, reflecting higher servicing, personnel, outsourcing, stock compensation, and Wealth Platform amortization costs.
- SEI recognized $118.1 million of equity earnings from unconsolidated affiliates, primarily LSV, compared with $98.7 million in 2012. SEI’s ownership interest in LSV declined to approximately 39.3%.
- SEI completed the sale of SEI Asset Korea and recorded a $22.1 million gain. It also recorded $43.4 million of income from a litigation settlement related to Cheyne Finance securities. These nonrecurring items materially benefited 2013 earnings.
- Stock-based compensation expense increased to $37.9 million from $15.7 million, including a $19.6 million increase caused by revised estimates of performance-based option vesting.
- The effective tax rate declined to 33.7% from 36.9%, benefiting from Pennsylvania tax-law changes and reinstatement of the research and development tax credit.
- SEI repurchased 6.789 million shares for $209.9 million in 2013, compared with 7.528 million shares for $155.3 million in 2012. Approximately $81.1 million remained authorized for repurchases at year-end.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management expects continued investment in the SEI Wealth Platform, including further technology development and operational infrastructure. Platform-related costs may increase in 2014, and management expects continued margin pressure in Private Banks and potentially greater pressure in Investment Advisors until sufficient scale is achieved.
Principal risks include sensitivity of fee revenue to capital-market levels and asset valuations; investment performance and client asset outflows; execution and impairment risk associated with the Wealth Platform; cybersecurity, systems, operational, and third-party service-provider risks; extensive regulatory examinations and changing financial-services regulation; litigation and enforcement exposure; LSV performance and distributions; foreign currency risk; and restrictions under credit-facility covenants.
SEI is defending Louisiana litigation related to Stanford Trust Company and Stanford International Bank certificates of deposit. A class was certified in one action, and the company stated that it could not reasonably estimate any potential loss. A separate shareholder derivative action alleges excessive advisory fees under Section 36(b) of the Investment Company Act; the company also stated that any potential loss could not reasonably be estimated.
The company provided an unsecured guaranty of up to $45.0 million for debt of LSV Employee Group III. As of January 31, 2014, the guaranteed principal balance was $45.0 million, although SEI reported no current payment obligation and expected the borrower to meet its obligations. The company also guaranteed an LSV Employee Group II loan with a remaining balance of $0.7 million.
The independent auditor issued an unqualified opinion and concluded that SEI maintained effective internal control over financial reporting as of December 31, 2013.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $22.1 million SEI Asset Korea gain and $43.4 million litigation settlement.
- Assess the sustainability of LSV’s $119.0 million contribution to earnings and the effect of SEI’s reduced ownership percentage.
- Monitor Private Banks profitability and the continuing cost, deployment, and scalability risks of the SEI Wealth Platform.
- Evaluate how market appreciation and net client cash flows affected reported asset growth and fee revenue.
- Review stock-based compensation assumptions, including the estimated $37.3 million of remaining unrecognized expense.
- Track the Stanford-related litigation, the Section 36(b) advisory-fee lawsuit, and the unquantified potential exposure.
- Confirm liquidity available for operations, repurchases, dividends, and investment: $578.3 million of year-end cash, $316.3 million described as free and immediately accessible as of January 31, 2014, and $300 million of undrawn revolving capacity.
- Consider the effect of the 2013 repurchase program and dividend policy on share count, capital allocation, and future EPS.