SEIC

SEI Investments Company - Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. SEI Investments Company is a global provider of investment processing, fund processing, and investment management business outsourcing solutions. The company serves corporations, financial institutions, financial advisors, and ultra-high-net-worth families. As of March 31, 2009, SEI administered $354.4 billion in mutual fund and pooled assets and managed $122.7 billion in assets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 26% primarily due to a 35% drop in asset management fees caused by severe capital market downturns and a 48% decline in assets under management (AUM) at the LSV segment.
• SIV-Related Charges: The company recorded a net charge of $14.4 million related to Structured Investment Vehicle (SIV) issues. This included a $130.5 million unrealized loss on the purchase of Gryphon notes, partially offset by a $116.0 million reduction in the required capital contribution under Capital Support Agreements.
• Debt Increase: Long-term debt increased significantly as the company borrowed $195.0 million under its credit facility to finance the purchase of SIV securities from its money market funds.
• Cost Reductions: Operating expenses decreased 19% due to lower direct costs from reduced revenues and a workforce reduction in February 2009, which incurred one-time termination costs of approximately $6.3 million.
• Tax Rate: The effective tax rate dropped to 20.5% from 37.1% due to the resolution of federal and state income tax audits, resulting in a $7.5 million benefit.

Guidance, Outlook, and Risks

• LSV Deconsolidation: Effective April 1, 2009, SEI expects to deconsolidate LSV Asset Management and account for its interest (reduced to ~42%) under the equity method of accounting following an employee equity grant.
• SIV Resolution: Management intends to purchase the remaining SIV securities held by its money market funds over the next several months. They anticipate incurring further losses of approximately $7.0 million on these remaining purchases.
• Liquidity: As of April 29, 2009, $36.0 million of the $300.0 million credit facility remains unrestricted. The company's leverage ratio was 1.24 times EBITDA, well within covenant limits.
• Stock Repurchases: The company continued its buyback program, purchasing 527,000 shares for $5.9 million in Q1 2009. Approximately $76.6 million of authorization remains.
• Risks: Key risks include continued volatility in capital markets affecting AUM, liquidity issues in credit markets, and the potential for further losses on SIV securities. The company also faces regulatory scrutiny regarding market timing practices in a pending class action lawsuit.

Investor Verification Checklist

• SIV Exposure: Verify the remaining par value of SIV securities held by SEI-sponsored funds and the potential for additional mark-to-market losses.
• LSV Accounting Change: Confirm the impact of deconsolidating LSV on future revenue recognition and earnings volatility.
• Credit Facility Covenants: Monitor the leverage ratio covenant (currently 1.24x) against future EBITDA, especially given the increased debt load from SIV purchases.
• Stock-Based Compensation: Review the volatility in stock-based compensation expense due to performance-based vesting targets tied to EPS.
• Legal Proceedings: Track the status of the "PBHG Complaint" class action regarding market timing practices.