SEIC

SEI Investments Company - 10-Q Summary (Period Ended Sep 30, 2009)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2009, and the nine-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 six reportable segments: Private Banks, Investment Advisors, Institutional Investors, Investment Managers, Investments in New Businesses, and LSV Asset Management.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 13% ($40.2 million) for the quarter and 21% ($203.0 million) for the nine months compared to the prior year. This was primarily driven by lower asset-based fees due to depressed capital markets and negative cash flows, particularly in the Investment Advisors and LSV segments.
• Profitability Improvement: Despite revenue declines, Net Income attributable to SEI increased 53% ($18.2 million) for the quarter and remained relatively flat (-1%) for the nine months. This was largely due to a significant reduction in losses from Structured Investment Vehicle (SIV) securities and Capital Support Agreements compared to 2008.
• Debt Increase: Long-term debt increased significantly to $269.8 million (from $24.3 million at year-end 2008) due to a $254 million borrowing under the credit facility to finance the purchase of SIV securities from money market funds.
• Segment Performance: The LSV segment saw a 31% revenue decline for the nine months. The Investment Advisors segment saw a 33% revenue decline. Conversely, the Investment Managers segment saw a slight increase in operating margin.

Guidance, Outlook, and Risks

• SIV Resolution: The company purchased all remaining SIV securities held by its money market funds in September 2009, canceling the Capital Support Agreements. While this eliminated the contingent liability, the company now holds the securities at fair value, with a cumulative charge of $185.1 million recognized to date. A 1% movement in the value of these securities would impact earnings by approximately $3.2 million.
• Software Depreciation: The company recognized an additional $7.6 million in depreciation expense in Q3 2009 due to shortening the useful life of certain Global Wealth Platform components. An additional $7.6 million is expected in Q4 2009.
• Tax Rate: The effective tax rate for the nine months was 33.2%, benefiting from the realization of prior unrecognized tax benefits. Management expects the rate for the remainder of 2009 to be near the Q3 rate of 37.0%.
• Legal Proceedings: The company is a defendant in putative class action lawsuits regarding ProShares leveraged ETFs and services provided to Stanford Trust Company. No provision has been made as the outcomes are uncertain.
• Stock Repurchases: The company continues its stock repurchase program, having purchased 1.955 million shares in the first nine months of 2009. Approximately $50.5 million remained available under the program as of September 30, 2009.

Investor Verification Checklist

• SIV Exposure: Verify the current fair value of the $130.7 million in SIV securities held and the potential for further mark-to-market losses.
• Asset Flows: Monitor net cash flows and Assets Under Management (AUM) trends, as revenue is heavily dependent on AUM levels which were down 11% year-over-year.
• Software Costs: Confirm the timing and magnitude of the expected $7.6 million depreciation charge in Q4 2009 related to the Global Wealth Platform.
• Debt Covenants: Review the leverage ratio covenant (currently 0.96x EBITDA) to ensure continued compliance, especially given the increased debt load.
• Legal Outcomes: Track the status of the ProShares ETF and Stanford Trust litigation for potential future liabilities.