SEIC

SEI Investments Company - 10-Q Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2005, and the six-month period ended on the same date. SEI Investments Company is a global provider of investment processing, fund processing, and investment management business outsourcing solutions. The company operates through five segments: Private Banking and Trust, Investment Advisors, Enterprises, Money Managers, and Investments in New Businesses. As of June 30, 2005, SEI administered $312.0 billion in mutual fund and pooled assets and managed $130.7 billion in assets.

Key Financial Metrics

(All figures in thousands, except per share data)

Liquidity: The company reported net cash provided by operating activities of $66.5 million for the six months ended June 30, 2005. Total unrestricted cash and cash equivalents were $116.5 million, with an additional $200.0 million available under a credit facility.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 12% year-over-year for both the three-month and six-month periods, driven by higher asset-based fees due to capital market appreciation and new business sales in the Enterprises, Money Managers, and Investments in New Businesses segments.
• Operating Income: Income from operations decreased 3% to $50.4 million for the quarter but remained relatively flat for the six-month period ($102.0 million vs. $101.8 million). Operating margins declined from 31% to 27% (quarterly) and 30% to 27% (six-month) due to increased personnel and operational costs.
• Net Income: Net income increased 7% for the quarter and 9% for the six-month period. This growth was significantly boosted by a 65% increase in equity earnings from the unconsolidated affiliate, LSV Asset Management.
• Segment Performance:
  • Investments in New Businesses: Revenues surged 62% (quarterly) and 55% (six-month) due to new relationships in Europe and Asia.
  • Private Banking and Trust: Revenues declined 4% (quarterly) and 3% (six-month) primarily due to the loss of fund processing bank clients, partially offset by non-recurring project fees from client conversions.

Guidance, Outlook, and Risks

Management Commentary:

• Global Wealth Platform: The company continues significant investment in its Global Wealth Platform. Capitalized software development costs were $32.7 million for the six months ended June 30, 2005, compared to $14.6 million in the prior year.
• Software Write-off: A net charge of $1.5 million was recorded in the first quarter due to the write-off of capitalized costs for third-party software that failed to meet functionality requirements.
• Stock Repurchases: The company repurchased 2.4 million shares for $87.2 million during the six-month period. Approximately $28.9 million of authorization remains under the current program.
• Client Loss: Management expects the loss of a client in the Investments in New Businesses segment to negatively impact revenues in the third quarter, though the impact on operating margin is expected to be minimal.

Risks and Contingencies:

• Legal Proceedings: The company is a defendant in a class action lawsuit regarding market timing practices (PBHG Complaint) and a contract dispute with Vermeg Services S.A.R.L. regarding software performance. No provision has been made for these contingencies as the company intends to defend vigorously.
• Regulatory Environment: Extensive governmental regulation affects operations, including recent inquiries regarding marketing expense payments, leading to increased general and administrative costs.
• Market Risk: Revenues are sensitive to capital market performance and asset levels. The company holds derivative instruments to hedge price risk on seed investments, which may cause earnings volatility.

Investor Verification Checklist

• Asset Flows: Verify the sustainability of revenue growth in the "Investments in New Businesses" segment following the reported client loss expected in Q3.
• Software Capitalization: Monitor the progress and cost recovery of the Global Wealth Platform, given the recent $1.5 million write-off and high capitalization rates.
• Legal Exposure: Track developments in the PBHG market timing litigation and the Vermeg contract dispute for potential future provisions.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly regarding leverage ratios, as the company maintains a $200 million credit facility.
• LSV Affiliate Performance: Assess the contribution of LSV Asset Management to net income, which drove a significant portion of the earnings increase.