SEI Investments Company - 10-Q Summary (Period Ended June 30, 2007)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, 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 serves corporations, financial institutions, financial advisors, and affluent families. Effective January 1, 2007, the company reorganized and renamed three business segments: "Private Banking & Trust" to "Private Banks," "Enterprises" to "Institutional Investors," and "Money Managers" to "Investment Managers."
Key Financial Metrics
Revenue and Profit (Six Months Ended June 30, 2007):
- Total Revenues: $665.98 million (up 18% from $562.15 million in 2006).
- Net Income: $132.88 million (up 18% from $112.82 million in 2006).
- Diluted Earnings Per Share (EPS): $0.65 (up from $0.56 in 2006).
- Income from Operations: $292.85 million (up 25% from $235.01 million in 2006).
- Effective Tax Rate: 37.6% (compared to 34.4% in the prior year period).
Liquidity and Balance Sheet (As of June 30, 2007):
- Cash and Cash Equivalents: $246.29 million.
- Total Assets: $1.12 billion.
- Total Liabilities: $433.76 million (excluding minority interest and equity).
- Long-Term Debt: $57.82 million (plus $9.80 million current portion).
- Shareholders' Equity: $685.01 million.
Cash Flow (Six Months Ended June 30, 2007):
- Operating Cash Flow: $133.45 million (down from $166.04 million in 2006).
- Investing Cash Flow: $(54.62) million (primarily due to capitalized software and property additions).
- Financing Cash Flow: $(119.49) million (driven by stock repurchases and dividends).
Material Changes vs. Prior Period
- Revenue Growth: Driven primarily by higher asset-based fees due to capital market appreciation and new business sales in Institutional Investors and Investment Managers segments. Assets under management and administration grew 22% to $406.7 billion.
- Segment Performance:
- Investment Advisors: Operating income increased 32% (Q3) and 21% (YTD), aided by the absence of a $3.4 million software write-off that occurred in the prior year.
- Private Banks: Operating income declined 13% (Q3) and 15% (YTD) due to increased direct expenses and infrastructure buildout costs for the Global Wealth Platform.
- LSV Asset Management: Operating income increased 32% (Q3) and 28% (YTD) due to asset appreciation.
- Software Capitalization: The company capitalized $35.66 million in software development costs for the Global Wealth Platform in the first half of 2007. The platform was placed into service in July 2007, with $199.55 million in total costs to be amortized over 15 years starting in Q3 2007.
- Stock Repurchases: The company repurchased 4.17 million shares for $124.69 million during the six-month period. Total repurchases since the program's inception reached 246 million shares at a cost of $1.24 billion.
- Stock Split: A two-for-one stock split was effected on June 21, 2007.
Guidance, Outlook, and Risks
Management Commentary: Management attributes revenue growth to favorable capital market conditions and new business sales. However, operating margins were negatively affected by increased spending on infrastructure and personnel to support new strategies. The company expects to continue incurring significant development costs for the Global Wealth Platform.
Risks and Contingencies:
- Legal Proceedings: SIDCO is a defendant in a putative class action lawsuit ("Stephen Carey v. Pilgrim Baxter & Associates") regarding market timing practices in PBHG mutual funds. Plaintiffs submitted a proposed order to dismiss SIDCO in 2006, but the court has not yet acted. No provision has been made for this liability.
- Regulatory Environment: The company is subject to extensive regulation by the SEC, banking authorities, and foreign regulators. Recent regulatory inquiries regarding marketing and distribution expense payments could impact operations.
- Market Risk: Revenues are sensitive to capital market performance. The company holds derivative instruments to hedge price risk associated with seed investments in new funds, which can cause earnings volatility.
- Tax Rate: The effective tax rate increased to 37.6% in the first half of 2007, primarily due to an increase in the effective state tax rate.
Investor Verification Checklist
- Verify the impact of the Global Wealth Platform amortization beginning in Q3 2007 on future operating margins.
- Monitor the status of the PBHG market timing litigation and any potential financial exposure.
- Assess the sustainability of revenue growth given the dependency on capital market appreciation for asset-based fees.
- Review the stock repurchase program remaining authorization ($87.3 million as of July 31, 2007) and its impact on share count.
- Confirm the effective tax rate trends, as the increase to 37.6% was driven by state tax changes.