SEI Investments Company - Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. SEI Investments Company provides investment processing, fund processing, and investment management business outsourcing solutions globally. A significant accounting change occurred in January 2010 when the Company deconsolidated LSV Asset Management and LSV Employee Group due to new FASB guidance on Variable Interest Entities (VIEs). LSV is now accounted for using the equity method.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $221.5 million | $248.6 million |
| Net Income (Attributable to SEI) | $59.4 million | $34.2 million |
| Diluted EPS | $0.31 | $0.18 |
| Operating Cash Flow | $18.1 million | $49.6 million |
| Cash and Equivalents (End of Period) | $500.7 million | $428.1 million |
| Long-Term Debt | $200.0 million | $247.2 million |
| Effective Tax Rate | 37.9% | 20.5% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 11% year-over-year. This decline is primarily due to the deconsolidation of LSV, which contributed $40.2 million in revenue in Q1 2009. On a pro-forma basis (excluding LSV), revenues increased 6%.
- Profitability Surge: Net income attributable to SEI increased 74% to $59.4 million. This was driven by a $17.5 million net gain from investments (compared to a $14.5 million loss in 2009) and $24.1 million in equity earnings from the unconsolidated LSV affiliate.
- Investment Gains: The Company recognized $17.3 million in gains from Structured Investment Vehicle (SIV) securities in Q1 2010, reversing the $14.4 million loss recognized in Q1 2009. Approximately $10.7 million of the 2010 gain resulted from cash payments on previously written-down securities.
- Debt Reduction: The Company made a $33.0 million principal payment on its credit facility in February 2010, reducing the outstanding balance to $200.0 million.
Outlook, Risks, and Contingencies
- Guidance: Management expects cash flows from operations to increase in Q2 2010 due to an expected partnership distribution payment from LSV. The Company continues to invest in the Global Wealth Platform (GWP), capitalizing $8.4 million in Q1 2010.
- Legal Proceedings:
- ProShares ETFs: SEI subsidiary SIDCO is named in putative class actions regarding leveraged ETFs, alleging false registration statements. Cases are in early stages; SEI intends to defend vigorously.
- Stanford Trust Company: SEI and subsidiary SPTC are named in multiple lawsuits in Louisiana related to services provided to Stanford Trust Company. Some cases have been transferred to Multidistrict Litigation (MDL) in Texas.
- Risk Factors: Key risks include capital market volatility affecting asset-based fees, regulatory changes, and the performance of funds managed. The Company maintains a leverage ratio of 0.54x EBITDA, well below the 1.75x covenant limit.
Investor Verification Checklist
- LSV Deconsolidation Impact: Verify the pro-forma revenue growth of 6% to understand organic performance excluding the accounting change.
- SIV Exposure: Confirm the remaining fair value of SIV securities ($116.5 million) and the sustainability of the $17.3 million gain recognized in Q1.
- Stock Repurchases: Note the $19.5 million spent on share buybacks in Q1 2010, with approximately $108.9 million remaining under the current authorization.
- Operating Cash Flow: Investigate the 63% decline in operating cash flow ($18.1M vs $49.6M), attributed to non-cash adjustments for investment gains and higher tax payments.
- Legal Contingencies: Monitor the status of the ProShares and Stanford Trust litigation for potential future liabilities.