SEI Investments Company — Form 10-Q Summary
Business context and reporting period
SEI provides investment processing, fund processing, investment management and outsourcing solutions to corporations, financial institutions, advisers and high-net-worth families worldwide. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010, with comparisons to the corresponding 2009 periods. Unless noted otherwise, amounts are in thousands.
At June 30, 2010, SEI administered $379.7 billion of client assets, including $148.9 billion under management and $230.8 billion under administration. The company deconsolidated LSV Asset Management and LSV Employee Group in January 2010 and now accounts for its approximately 42% LSV interest under the equity method.
Financial performance and key metrics
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Total revenue | $228,388 | $252,009 | $449,923 | $500,620 |
| Income from operations | $57,172 | $89,986 | $110,517 | $163,516 |
| Net income | $53,839 | $64,127 | $113,697 | $115,190 |
| Net income attributable to SEI | $53,478 | $41,571 | $112,898 | $75,771 |
| Diluted EPS | $0.28 | $0.22 | $0.59 | $0.40 |
| Dividends declared per share | $0.10 | $0.08 | $0.10 | $0.08 |
- Reported revenue declined 9% in the quarter and 10% year to date, primarily because LSV was no longer consolidated. On a pro forma basis excluding LSV from 2009, revenue increased 13% in the quarter and 9% year to date.
- Reported operating income declined 36% in the quarter and 32% year to date. On a comparable pro forma basis, operating income increased 14% and 19%, respectively.
- Operating margin was approximately 25% in both the quarter and six-month period, compared with approximately 36% and 33%, respectively, on the reported 2009 figures. Segment operating margins in the second quarter were 13% for Private Banks, 39% for Investment Advisors, 48% for Institutional Investors and 35% for Investment Managers.
- Net income attributable to SEI increased 29% in the quarter and 49% year to date, while diluted EPS increased 27% and 48%. Results benefited from $23,519 of LSV equity earnings in the quarter and $47,593 year to date, compared with none in the reported 2009 statements.
- Six-month revenue by continuing segment increased 19% in Investment Advisors, 25% in Institutional Investors and 16% in Investment Managers, but declined 3% in Private Banks. Investments in New Businesses generated an operating loss of $3,385 year to date.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $461,929 at June 30, 2010, compared with $590,877 at December 31, 2009. Management stated that free and immediately accessible cash was $368.5 million at July 31, 2010.
- Six-month operating cash flow was $65,689, down from $133,719 in 2009. Investing cash flow used $42,797, compared with $272,605 used in 2009, while financing cash flow used $151,840, compared with $215,371 provided in 2009.
- Cash uses included $83,000 of debt repayments, $47,643 of common-stock repurchases, $36,011 of dividends, $17,578 of capitalized software development and $14,303 of property and equipment additions.
- Long-term debt was $150,000 at June 30, 2010, under a $300,000 unsecured revolving credit facility expiring in July 2012. The company reported $150,000 of remaining facility capacity, compliance with all covenants and a leverage ratio of 0.39 times EBITDA against a 1.75-times maximum.
- Capitalized software totaled $284,834, including $283,113 related to the Global Wealth Platform. Management expects continued significant development spending on the platform.
- Total assets were $1,350,121 and shareholders’ equity attributable to SEI was $978,966 at June 30, 2010. Receivables, net, declined to $135,233 from $184,317 at year-end 2009.
Material changes, outlook and unusual items
- The LSV deconsolidation materially changed reported comparisons but did not affect net income attributable to SEI. SEI recognized $47,593 of equity earnings from LSV in the first six months, and LSV assets under management rose 19% year over year to $47.8 billion.
- Gains from structured investment vehicle securities were $3,913 in the quarter and $21,262 year to date, compared with losses of $2,260 and $16,702 in the prior-year periods. Approximately $14,446 of the year-to-date gain resulted from cash payments on previously written-down securities. SIV securities had a June 30 fair value of $102,341 and a cumulative recognized loss of $167,820 through that date.
- Management stated that the market decline evident late in the second quarter was expected to negatively affect third-quarter revenue. Private Banks revenue was also expected to reflect the full impact of previously announced client losses, while new business sales of approximately $21.6 million of annualized revenue were expected to benefit future recurring revenue.
- The effective tax rate was 37.8% for both the quarter and six months, versus 36.8% and 30.3% in 2009. The prior-year six-month rate benefited from $7,800 of discrete tax benefits.
- Stock-based compensation expense increased to $12,935 year to date from $6,791. Approximately $48,990 of unrecognized stock-based compensation remained at June 30, 2010.
- The company repurchased 1.401 million shares during the second quarter for $30.2 million and 2.421 million shares during the first six months for approximately $49.7 million. Approximately $78.7 million remained authorized at June 30, 2010.
- SEI remained guarantor of the LSV Employee Group term loan despite deconsolidation. The remaining principal was $15,694 at June 30, 2010 and $13,123 at July 31, 2010. Management stated that payment requirements were current and expected to be met.
- Material litigation includes putative class actions concerning leveraged ETFs distributed by SEI’s subsidiary SIDCO and lawsuits related to services provided to Stanford Trust Company. The proceedings were at an early stage, damages were unspecified, and the filing did not provide a clear estimate of potential loss.
- Management identified risks from capital-market conditions, client and industry consolidation, product development, technology and data security, operational failures, regulation, currency movements, tax and accounting changes, third-party service providers and personnel retention. No material change in previously disclosed risk factors was reported.
Most important facts for investors to verify
- Assess continuing-business growth using the company’s pro forma comparisons, rather than reported comparisons distorted by the LSV deconsolidation.
- Evaluate the sustainability of earnings excluding LSV equity income and SIV gains, both of which materially increased 2010 results.
- Monitor late-second-quarter market weakness, Private Banks client losses, trading volumes and assets under management for effects on third-quarter revenue.
- Review the valuation assumptions, liquidity and recovery prospects for the $102.3 million of Level 3 SIV securities.
- Verify the company’s cash availability, debt repayments, credit-facility covenants and continuing share repurchases and dividends.
- Track Global Wealth Platform spending, capitalization and future amortization, including the $283.1 million net book value reported at June 30, 2010.
- Follow the ProShares leveraged-ETF and Stanford Trust litigation, the LSV guarantee, uncertain tax positions and the ongoing Canadian tax examination.