SEI Investments Company 10-Q Summary
Business context and reporting period
SEI Investments Company provides investment processing, fund processing, investment management and outsourcing solutions worldwide. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. At September 30, 2010, SEI administered $402.3 billion of client assets and managed $164.0 billion.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenues | $219.5 million | $275.9 million | $669.4 million | $776.6 million |
| Income from operations | $55.1 million | $95.3 million | $165.7 million | $258.8 million |
| Operating margin | 25.1% | 34.5% | 24.8% | 33.3% |
| Net income attributable to SEI | $56.4 million | $52.7 million | $169.3 million | $128.5 million |
| Diluted EPS | $0.30 | $0.27 | $0.89 | $0.67 |
| Net cash from operations | Not provided | Not provided | $120.8 million | $235.7 million |
- Q3 revenue declined 20%, while nine-month revenue declined 14%; the comparison was materially affected by deconsolidation of LSV.
- On a pro forma basis excluding LSV from 2009, revenue increased 2% in Q3 and 7% for the first nine months.
- Q3 net income attributable to SEI increased 7%, and nine-month earnings increased 32%, primarily because LSV earnings were presented as equity income and noncontrolling interest was substantially reduced.
- Cash and cash equivalents were $451.8 million at September 30, 2010, versus $590.9 million at December 31, 2009. Management reported $355.2 million of free and immediately accessible cash at October 31, 2010.
- Total assets were $1.354 billion and shareholders’ equity attributable to SEI was $1.006 billion at September 30, 2010.
- Long-term debt was $120.0 million, down from $247.2 million at December 31, 2009. The company had a $300.0 million revolving credit facility, was in compliance with its covenants, and reported a 0.32-times leverage ratio versus a 1.75-times limit.
- SEI repurchased approximately 4.4 million shares for $85.3 million during the first nine months and paid $36.0 million of dividends. The quarterly dividend was $0.10 per share.
Material changes versus the prior comparable period
- Effective January 1, 2010, SEI discontinued consolidating LSV Asset Management and LSV Employee Group under new variable-interest-entity guidance. SEI retains an approximately 42% LSV interest and now records its share of LSV earnings using the equity method.
- Equity in earnings of the unconsolidated affiliate was $25.2 million in Q3 and $72.8 million for nine months. LSV assets under management increased 10% year over year to $54.5 billion.
- Excluding LSV, segment performance improved in Investment Advisors, Institutional Investors and Investment Managers. Private Banks revenue declined because of client losses, lower trading volumes and lower liquidity-product fees.
- Assets under management increased 5% year over year to $164.0 billion, while total assets under management and administration increased 5% to $402.3 billion.
- Operating cash flow fell $114.9 million year over year, primarily because 2009 benefited from tax effects related to realized SIV losses and because of working-capital changes.
- Stock-based compensation expense increased to $16.4 million for nine months from $10.2 million. Q3 included a $6.3 million reversal of previously recognized costs and approximately $3.1 million of accelerated expense from revised vesting estimates.
Outlook, risks, contingencies and unusual items
- No specific quantitative revenue or earnings guidance was provided. Management expects approximately $9.6 million of stock-based compensation expense in Q4 2010 and expects operating cash flow, available borrowing capacity and cash balances to fund operations, investments, debt service, repurchases and dividends.
- SEI continues to invest in the Global Wealth Platform, capitalizing $28.1 million of software development costs during the first nine months. Management expects continued significant development spending.
- SIV securities had a fair value of $102.8 million at September 30, 2010, with a cost basis of $252.4 million and cumulative recognized losses of $159.1 million. Nine-month 2010 SIV gains were $30.0 million, including $19.4 million of cash payments and $10.2 million from increased fair value. These valuations rely substantially on models and unobservable inputs.
- SEI remained obligated as guarantor of LSV Employee Group’s term loan, which had $13.1 million outstanding at September 30 and $10.1 million at October 31. Management stated that payment requirements were current and that it expected future obligations to be met.
- Reported effective tax rates were 37.8% for both the Q3 and nine-month 2010 periods, versus 37.0% and 33.2%, respectively, in 2009. The increase was primarily related to expiration of the federal research and development tax credit and the absence of 2009 discrete tax benefits.
- Legal proceedings include putative class actions concerning leveraged ETFs distributed by SIDCO and multiple lawsuits related to services provided to Stanford Trust Company. The matters were described as being in early stages; potential damages were unspecified and outcomes could not be predicted.
- Other risks include capital-market volatility, client and industry consolidation, technology and data-security failures, operational processing errors, regulation, currency movements, third-party service-provider dependence and product-development risk.
- The company identified a nonmaterial $7.1 million cash-flow classification error in its prior six-month filing and stated that it would revise that presentation in a future filing. It had no effect on balance sheets, operations or comprehensive income.
Important facts for investors to verify
- Assess recurring operating performance excluding LSV deconsolidation, SIV gains, nonrecurring client fees, processing-error costs and stock-compensation estimate changes.
- Monitor the valuation, cash collections and further gains or losses associated with the $102.8 million SIV portfolio.
- Reconcile reported cash to freely available corporate liquidity, including restrictions on subsidiary and regulatory cash.
- Review the $120.0 million credit-facility balance, July 2012 maturity, covenant requirements and the continuing LSV Employee Group guarantee.
- Track Global Wealth Platform spending, capitalization and future amortization, including the $263.5 million net book value reported for the platform.
- Follow the leveraged-ETF and Stanford Trust litigation, including any class-certification decisions, settlements or changes in estimated exposure.
- Compare future revenue trends by segment, particularly Private Banks client attrition and growth in Institutional Investors and Investment Managers.