SEIC

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

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009, and the six-month period ended on that 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 24% ($77.5 million) for the quarter and 25% ($162.8 million) for the six months compared to the prior year. This was primarily driven by a 24% decline in assets under management due to capital market declines, particularly impacting the LSV and Investment Advisors segments.
• Profitability: Net income attributable to SEI decreased 10% for the quarter and 20% for the six months. Operating income from business segments dropped 30% for the quarter and 35% for the six months.
• SIV-Related Charges: The company recognized net charges of $2.3 million for the quarter and $16.7 million for the six months related to Structured Investment Vehicle (SIV) securities. Cumulative losses from SIV-related issues reached $200.0 million as of June 30, 2009.
• Debt Increase: Long-term debt increased significantly from $24.3 million (Dec 31, 2008) to $272.3 million (June 30, 2009). This increase was driven by a $254.0 million borrowing under the company's credit facility to finance the purchase of SIV securities from SEI-sponsored money market funds.
• Capital Support Agreements: The liability associated with Capital Support Agreements decreased from $173.983 million to $29.973 million as the company purchased SIV securities from funds, canceling agreements with two funds and reducing the obligation for the third.

Guidance, Outlook, and Risks

• Outlook: Management expects effective tax rates for the remainder of 2009 to remain near the 36.8% rate seen in the second quarter. The company anticipates continued investment in the Global Wealth Platform, with a potential release in Q4 2009 that may result in the expensing of approximately $15.0 million in previously capitalized costs.
• SIV Exposure: The company expects to purchase the remaining SIV security held by the SDIT PO Fund prior to the agreement's termination in November 2009. Future obligations are sensitive to credit market conditions and the fair value of the underlying collateral.
• Stock Repurchases: The company continues its stock repurchase program, having purchased 980,000 shares in the first six months of 2009. Approximately $69.0 million of authorization remains.
• Risks: Key risks include continued volatility in capital markets affecting assets under management, liquidity issues in credit markets, and the potential impact of new accounting standards (SFAS 167) on the consolidation of variable interest entities, effective Q1 2010.

Investor Verification Checklist

• SIV Liability Status: Verify the fair value of the remaining SIV security held by the SDIT PO Fund and the potential for additional charges if market conditions deteriorate before the November 2009 termination date.
• Debt Covenants: Confirm the company's leverage ratio (currently 1.36x EBITDA) remains within the 2.25x limit required through September 30, 2009, given the increased debt load.
• Asset Under Management (AUM) Trends: Monitor the trajectory of AUM, which declined 24% year-over-year, as this directly correlates to fee-based revenue.
• Global Wealth Platform Costs: Track the timing and magnitude of the anticipated $15.0 million expense related to the Q4 2009 platform release.
• Noncontrolling Interest: Review the impact of the reduced ownership stake in LSV (approx. 42%) on the allocation of net income and future earnings per share.