SEI Investments Company 2011 Q3 Form 10-Q Summary
Business context and reporting period
SEI Investments Company provides investment processing, fund processing, investment management and business outsourcing solutions to corporations, financial institutions, advisors and ultra-high-net-worth families. The unaudited filing covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
As of September 30, 2011, SEI managed or administered approximately $394.9 billion of client assets, including $161.5 billion under management and $233.4 billion under administration. The company operates through Private Banks, Investment Advisors, Institutional Investors, Investment Managers and Investments in New Businesses.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | Change | 9M 2011 | 9M 2010 | Change |
|---|---|---|---|---|---|---|
| Total revenues | $233.2 million | $219.5 million | 6% | $703.5 million | $669.4 million | 5% |
| Income from operations | $51.1 million | $55.1 million | (7%) | $159.7 million | $165.7 million | (4%) |
| Net income | $49.6 million | $56.7 million | (12%) | $161.8 million | $170.4 million | (5%) |
| Net income attributable to SEI | $49.2 million | $56.4 million | (13%) | $160.6 million | $169.3 million | (5%) |
| Diluted EPS | $0.27 | $0.30 | (10%) | $0.86 | $0.89 | (3%) |
| Operating margin | 21.9% | 25.1% | Down | 22.7% | 24.7% | Down |
Revenue growth was led by asset management, administration and distribution fees, which increased to $167.8 million in Q3 and $507.7 million for the first nine months. Information processing and software servicing fees were $55.7 million in Q3 and $167.5 million year to date. Transaction-based and trade execution fees were $9.7 million in Q3 and $28.3 million year to date.
Profitability was pressured by higher compensation, consulting and professional fees, data processing costs, amortization and costs associated with servicing new clients and developing the Global Wealth Platform. Equity in earnings from the 41%-owned LSV Asset Management affiliate contributed $23.9 million in Q3 and $82.4 million for the first nine months.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $428.9 million at September 30, 2011, down from $496.3 million at December 31, 2010. Restricted cash was $4.0 million.
- Total assets were $1.304 billion, compared with $1.377 billion at year-end 2010. Total equity was $1.069 billion.
- Operating cash flow was $175.5 million for the first nine months, compared with $120.8 million in the prior-year period.
- Investing activities used $15.2 million, including $30.6 million of capitalized software development costs and $10.7 million of property and equipment additions.
- Financing activities used $227.8 million, including $75.0 million of debt repayments, $154.8 million for common-stock repurchases and $22.0 million of dividends.
- Outstanding debt was $20.0 million at September 30, 2011. The company had a $300.0 million revolving credit facility expiring in July 2012, with approximately $280.0 million of gross availability subject to covenants and lender conditions.
- The company was in compliance with all debt covenants; its reported leverage ratio was 0.06 times EBITDA versus a maximum permitted ratio of 1.75 times. Management had begun the process of entering into a replacement credit facility.
- Management stated that operating cash flow, cash balances and borrowing capacity were expected to fund ongoing operations, investments, debt payments, repurchases and dividends. Cash considered free and immediately accessible for general corporate purposes was $321.2 million as of October 31, 2011.
Material changes versus the prior comparable period
- Revenue increased, but expenses grew faster: 11% in Q3 and 8% for the first nine months, versus revenue growth of 6% and 5%, respectively.
- Private Banks revenue increased 5% in Q3 but operating profit fell 82%; year-to-date operating profit declined 75%. The segment was affected by Global Wealth Platform costs, client implementation expenses and lower recurring processing fees.
- Investment Advisors revenue increased 8% in Q3 and 7% year to date, while operating profit increased 10% and 16%, respectively.
- Institutional Investors revenue increased 2% in Q3 and 5% year to date, with operating profit up 6% and 9%, respectively.
- Investment Managers revenue increased 12% in Q3 and 14% year to date, with operating profit up 9% and 12%, respectively. Margins remained approximately 35%.
- Client assets under management and administration declined 2% year over year to $394.9 billion, reflecting market declines during Q3. LSV assets under management declined 9% to $49.4 billion.
- SEI repurchased 7.884 million shares for $158.7 million during the first nine months. The remaining repurchase authorization was $48.8 million at September 30 and approximately $35.1 million at October 31.
- Stock-based compensation expense declined to $11.0 million from $16.4 million for the first nine months, partly because of unusual 2010 vesting-estimate changes and expense reversals.
Outlook, commentary, risks and unusual items
- The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued investment in Global Wealth Platform enhancements and infrastructure, with significant development and operating costs continuing.
- Capital-market performance materially affects asset-based fees, LSV earnings and client asset balances. Management noted that the sharp Q3 2011 market decline negatively affected SEI and LSV results.
- SEI recognized a $1.4 million net investment loss in Q3, compared with a $9.4 million gain in Q3 2010. For the first nine months, investment gains fell to $3.9 million from $30.4 million, principally because SIV-related gains declined to $4.1 million from $30.0 million.
- At September 30, SIV securities had a fair value of $55.6 million against a $149.9 million cost basis and were classified as Level 3 assets. Cumulative losses recognized on SIV securities and related issues were $140.7 million.
- A $1.5 million one-time fee from a Global Wealth Services client benefited Private Banks revenue in Q3.
- The effective tax rate decreased to 33.8% in Q3 and 35.3% for the first nine months, compared with 37.8% in both prior-year periods, reflecting research and development tax credits, tax planning and the Domestic Production Activities Deduction.
- SEI and subsidiaries face putative class actions relating to leveraged ETFs and several Louisiana lawsuits related to Stanford Trust Company services. The company believes it has valid defenses, but the filing states that potential losses cannot reasonably be estimated.
- Other principal risks include capital-market volatility, product development and technology execution, cybersecurity and operational failures, regulatory requirements, third-party service-provider failures, foreign exchange movements, client and market consolidation, litigation and retention of senior personnel.
Important facts for investors to verify
- Confirm the refinancing or renewal status of the $300.0 million credit facility before its July 2012 expiration.
- Monitor the valuation, cash collections and further impairment risk of the remaining $55.6 million of Level 3 SIV securities.
- Assess whether Global Wealth Platform investment and implementation costs moderate and whether Private Banks margins recover.
- Track client assets under management and administration, market-sensitive revenue and LSV earnings following the Q3 market decline.
- Review developments, class-certification issues and potential exposure in the leveraged-ETF and Louisiana litigation; no loss estimate was provided.
- Reconcile share repurchase activity, remaining authorization and cash availability with the company’s dividend and investment commitments.