SEI Investments Company 2011 Q2 Form 10-Q Summary
Business context and reporting period
SEI provides investment processing, fund processing, investment management and business outsourcing solutions to financial institutions, advisors, corporations and ultra-high-net-worth families. The unaudited filing covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
As of June 30, 2011, SEI managed or administered $429.8 billion in client assets, including $180.4 billion under management and $249.4 billion under administration, up 13% from $379.7 billion one year earlier.
Financial performance and key metrics
| Metric | Q2 2011 | Q2 2010 | Change |
|---|---|---|---|
| Total revenues | $237.8 million | $228.4 million | 4% |
| Income from operations | $54.0 million | $57.2 million | (6%) |
| Operating margin | 22.7% | 25.0% | Down 230 basis points |
| Net income attributable to SEI | $53.6 million | $53.5 million | Flat |
| Diluted EPS | $0.29 | $0.28 | 4% |
| Dividends declared per share | $0.12 | $0.10 | 20% |
| Metric | Six months 2011 | Six months 2010 | Change |
|---|---|---|---|
| Total revenues | $470.3 million | $449.9 million | 5% |
| Income from operations | $108.6 million | $110.5 million | (2%) |
| Operating margin | 23.1% | 24.6% | Down 150 basis points |
| Net income attributable to SEI | $111.3 million | $112.9 million | (1%) |
| Diluted EPS | $0.59 | $0.59 | Flat |
Q2 revenue growth was led by asset management, administration and distribution fees, which increased to $172.3 million from $154.8 million. Information processing and software servicing fees declined to $56.0 million from $61.3 million, while transaction-based and trade execution fees declined to $9.4 million from $12.3 million.
Equity in earnings of unconsolidated affiliate LSV Asset Management rose 26% in Q2 to $29.5 million and 23% for the six-month period to $58.5 million. LSV represented approximately 53% of six-month pretax income before considering other items, making its contribution material to reported earnings.
Six-month net cash provided by operating activities was $92.8 million, compared with $58.6 million in 2010. Investing activities provided $1.3 million, versus using $35.7 million in 2010. Financing activities used $148.2 million, including $55.0 million of debt repayment, $94.1 million for share repurchases and $22.0 million of dividends. Cash and cash equivalents declined to $442.3 million from $496.3 million at December 31, 2010.
At June 30, 2011, total assets were $1.33 billion, total liabilities were $243.7 million and total equity was $1.09 billion. Long-term debt was $40.0 million, down from $95.0 million at year-end 2010. SEI had a $300.0 million revolving credit facility expiring in July 2012, with $260.0 million of stated unused capacity at June 30, 2011, subject to covenants and other conditions. The reported leverage ratio was 0.11 times EBITDA versus a covenant maximum of 1.75 times.
Material changes versus the prior comparable period
- Revenue increased despite declines in Private Banks and transaction-based fees. Growth reflected market appreciation, new client funding and higher asset-based fees.
- Private Banks revenue declined 2% in Q2 and 1% year to date; operating profit fell 86% in Q2 and 72% year to date. The segment was affected by client mergers and acquisitions, pricing reductions, lower trading volumes, Global Wealth Platform costs and higher operating costs.
- Investment Advisors revenue increased 7% in both periods, with operating margin improving to 44% from 39%.
- Institutional Investors revenue increased 6% in both periods, with operating margin improving to 50% from 48%.
- Investment Managers revenue increased 13% in Q2 and 14% year to date, while the Q2 operating margin declined to 34% from 35% due to costs of servicing new clients.
- Expenses rose 7% in both the quarter and six-month period, exceeding revenue growth. Consulting, outsourcing and professional fees increased substantially as SEI continued developing and operating the Global Wealth Platform.
- Global Wealth Platform capitalized software development costs were $20.5 million in the first six months of 2011, versus $17.6 million in 2010. The platform had a $289.0 million net book value at June 30, 2011.
- Stock-based compensation declined to $7.5 million from $12.9 million for the first six months, reflecting the absence of the prior-year acceleration of expense for options expected to vest earlier.
- Net investment gains declined materially, primarily because SIV-related gains fell to $4.9 million from $21.3 million for the first six months. Q2 included a $1.9 million investment loss versus a $3.6 million gain in 2010.
- SEI repurchased 4.215 million shares for $95.1 million during the first six months. The filing reported $112.3 million of remaining authorization at June 30 and approximately $99.3 million at July 31, 2011.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued investment in the Global Wealth Platform, data-center infrastructure, new products and client implementations. Management stated that operating cash flow, available borrowing capacity and existing cash should fund operations, investment, debt repayment, repurchases and dividends.
- SEI held $60.1 million of Level 3 SIV securities at fair value, down from $100.6 million at December 31, 2010. The securities had $153.5 million of cost and $93.4 million of unrealized losses, and their valuation depends on models and significant unobservable assumptions.
- SEI has guaranteed certain LSV employee-group term loans. As of July 31, 2011, remaining balances were $1.3 million and $3.5 million; management reported no current payment obligation and expected the borrowers to meet their obligations.
- SIDCO faces putative class actions relating to leveraged ETFs distributed by ProShares. SEI believes it has valid defenses, but the litigation outcome is uncertain and damages are unspecified.
- SEI and its trust-company subsidiary face six Louisiana lawsuits related to alleged services involving Stanford Trust Company and Stanford International Bank certificates of deposit. The company could not reasonably estimate any potential loss.
- Unrecognized tax benefits, including interest and penalties, totaled $8.1 million at June 30, 2011. The timing and ultimate resolution of tax examinations remain uncertain.
- Key stated risks include capital-market declines, product-development and technology risks, cybersecurity and operational risks, client or market consolidation, regulatory scrutiny, litigation, foreign exchange fluctuations, accounting or tax changes and dependence on third-party providers and senior personnel.
- The 2010 cash-flow statement was revised to reclassify $7.1 million of software-related accounts payable from investing to operating activities. The company stated that the revision did not affect balance sheets, earnings or comprehensive income.
Most important facts for investors to verify
- Whether market appreciation and asset flows remain sufficient to offset pricing pressure, client losses and sensitivity to capital-market conditions.
- The sustainability and concentration of LSV’s contribution to earnings and the timing of partnership distributions.
- The valuation, cash recoveries and remaining downside exposure of Level 3 SIV securities.
- The pace and return on continued Global Wealth Platform spending, including $289.0 million of net capitalized platform assets.
- The July 2012 credit-facility expiration, refinancing requirements and covenant compliance.
- The eventual outcomes and potential financial or reputational effects of the ProShares and Louisiana litigation.
- The effect of ongoing repurchases and dividends on liquidity, share count and capital allocation.