SEI Investments Company: FY2012 Form 10-K Summary
Business context and reporting period
SEI Investments Company provides investment processing, investment management, and investment operations outsourcing solutions to financial institutions, advisors, corporations, institutional investors, and ultra-high-net-worth families. The filing covers the fiscal year ended December 31, 2012; fourth-quarter results are included in the annual filing but are not a standalone quarterly filing.
At year-end, SEI managed or administered approximately $458.4 billion, comprising $201.5 billion in assets under management and $256.9 billion in client assets under administration. SEI served approximately 6,600 clients and had 2,579 employees at January 31, 2013.
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $992.5 million | $929.7 million | 7% |
| Income from operations | $211.6 million | $204.1 million | 4% |
| Operating margin | 21.3% | 21.9% | Down approximately 60 bps |
| Net income attributable to SEI | $206.8 million | $205.0 million | 1% |
| Diluted EPS | $1.18 | $1.11 | 6% |
| Net cash from operating activities | $257.5 million | $257.0 million | Flat |
Net income was $208.0 million, including $1.2 million attributable to noncontrolling interests. The effective tax rate increased to 36.9% from 35.2%, primarily due to taxes accrued on undistributed SEI Asset Korea earnings and the absence of the 2011 domestic production activities deduction benefit.
Asset management, administration, and distribution fees increased to $723.6 million from $669.8 million. Information processing and software servicing fees increased to $236.2 million, while transaction-based and trade execution fees declined to $32.7 million.
Segment operating margins were 2% for Private Banks, 41% for Investment Advisors, 49% for Institutional Investors, and 34% for Investment Managers. Investments in New Businesses generated an operating loss of $11.3 million. Private Banks revenue grew 5%, but its operating profit declined 11% because of Global Wealth Platform costs, amortization, and client-servicing expenses.
Cash and cash equivalents were $452.2 million at December 31, 2012, compared with $421.0 million a year earlier. Total assets were $1.31 billion and SEI shareholders’ equity was $1.04 billion. The company had no borrowings outstanding under its credit facilities and had a fully available $300 million revolving credit facility expiring in February 2017, subject to covenants.
Material changes versus the prior comparable period
- Revenue increased 7%, driven primarily by market appreciation, positive client cash flows, new business, and growth in Institutional Investors and Investment Managers.
- Average assets under management excluding LSV increased 12% to $130.5 billion; total ending assets under management and administration increased 14% to $458.4 billion.
- SEI’s share of LSV earnings declined to approximately $100.0 million from $105.8 million. SEI’s ownership declined from approximately 41.2% to 39.8% during 2012.
- Compensation expense increased materially, including higher sales and incentive compensation. Stock-based compensation expense increased to $15.7 million from $14.1 million.
- Amortization increased to $33.3 million from $27.3 million, including a $2.7 million charge for discontinued Global Wealth Platform functionality.
- SEI recognized $14.1 million of net investment gains, including $13.2 million from structured investment vehicle securities, and sold its remaining SIV security in November 2012. No SIV securities remained at year-end.
- SEI repurchased 7.528 million shares for $155.3 million and declared $0.63 per share of dividends, including a $0.32 special dividend. The remaining repurchase authorization was approximately $91.0 million at year-end.
- SEI entered into an agreement to sell SEI Asset Korea. The company accrued $4.8 million of U.S. deferred taxes on its undistributed earnings and expected a potential after-tax gain of approximately $8.9 million to $20.6 million, subject to regulatory approval and transaction conditions.
Guidance, outlook, risks, contingencies, and unusual items
Management expected the 2013 effective tax rate to be approximately 35% to 36%, with the first-quarter rate expected to be lower than later quarters. The filing does not provide formal revenue or earnings guidance.
Management expected Global Wealth Platform costs, including amortization and operating infrastructure spending, to increase in 2013. The platform remained in an early deployment stage, and management anticipated continued pressure on Private Banks margins and modest pressure on Investment Advisors margins until greater operating scale was achieved.
- Results are sensitive to securities prices, capital flows, asset valuations, investment performance, and the performance of LSV because a significant portion of revenue and earnings is asset-based.
- Key operating risks include technology failures, cybersecurity and data security incidents, operational errors, third-party service-provider failures, product-development execution, and dependence on senior management.
- SEI faces extensive and evolving financial-services regulation. Regulatory examinations, investigations, enforcement actions, remediation, fines, litigation, and compliance costs could materially affect results or liquidity.
- The revolving credit facility includes leverage and other covenants. Defaults could restrict borrowing, dividends, and share repurchases, although the company reported compliance and no current borrowing limitation.
- SEI guaranteed up to $45.0 million of LSV Employee Group III debt. The filing states that SEI had no current payment obligation and expected the borrower to meet its obligations.
- Legal proceedings include claims involving leveraged ETFs and multiple Louisiana lawsuits related to Stanford Trust Company and Stanford International Bank certificates of deposit. A Louisiana class was certified in December 2012, and the company stated that loss could not reasonably be estimated.
- The filing reports effective disclosure controls and effective internal control over financial reporting, with no material changes in controls during the fourth quarter.
Most important facts for investors to verify
- Whether growth in assets under management and administration, client cash flows, and market performance continues to support asset-based revenue.
- Whether Global Wealth Platform implementation costs decline as scale improves, or instead cause further margin pressure, amortization, or impairment charges.
- The final timing and economics of the SEI Asset Korea sale, including the realized after-tax gain and cash distribution.
- LSV’s operating performance, distributions, ownership percentage, and continuing contribution to SEI earnings.
- The status and potential financial exposure of the Louisiana Stanford-related litigation and leveraged ETF appeal.
- Compliance with credit-facility covenants and the availability of cash held by regulated or foreign subsidiaries.
- The sustainability of share repurchases and dividends relative to operating cash flow, investment needs, and regulatory capital requirements.