T. Rowe Price Group, Inc. — 2009 Q3 Form 10-Q
Business and period. The filing covers the quarter and nine months ended September 30, 2009. T. Rowe Price earns most revenue from investment advisory and related services; advisory revenue is driven largely by the value and mix of assets under management (AUM). The interim financial statements are unaudited and were reviewed by KPMG, which did not express an audit opinion.
Financial performance
| Metric | Q3 2009 | Q3 2008 | First 9 months 2009 | First 9 months 2008 |
|---|---|---|---|---|
| Total revenue | $499.1 million | $555.9 million | $1,328.3 million | $1,704.0 million |
| Net revenue | $498.1 million | $554.8 million | $1,324.8 million | $1,700.4 million |
| Net operating income | $207.3 million | $238.8 million | $471.8 million | $727.5 million |
| Operating margin | 41.6% | 43.0% | 35.6% | 42.8% |
| Net income | $132.9 million | $152.8 million | $281.1 million | $466.5 million |
| Diluted EPS | $0.50 | $0.56 | $1.07 | $1.71 |
- Q3 advisory revenue fell 10.4% to $417.3 million; administrative fees declined to $80.0 million. Average AUM was $341.2 billion, versus $376.1 billion a year earlier, and the average annualized advisory fee rate eased to 48.5 basis points from 49.3.
- For the first nine months, advisory revenue fell 24.2% to $1,084.4 million. Average AUM was $302.6 billion, versus $385.0 billion, and the average fee rate declined to 47.9 basis points from 49.7.
- Operating expenses decreased 8.0% in Q3 and 12.3% for the nine-month period. Compensation savings, cost controls and reduced advertising were partly offset by lower revenue and the limited flexibility of expenses to adjust immediately.
- Non-operating investment income was $5.2 million in Q3; for the first nine months it was a loss of $22.9 million, including $36.1 million of other-than-temporary impairments on sponsored mutual fund investments, recognized in the first half. No such impairments were recognized in Q3, and the company reported no temporary impairments in those holdings at September 30.
Cash, liquidity and financial position
- At September 30, cash and cash equivalents were $739.3 million; sponsored mutual fund investments were $666.1 million. Management described cash and mutual fund investments of approximately $1.4 billion and stated the company had no debt and no external liquidity facility.
- Total assets were $3.161 billion, total liabilities $421.3 million, and stockholders’ equity $2.740 billion. Cash increased $120.2 million from year-end 2008.
- For the first nine months, operating cash flow was $466.6 million, versus $736.4 million in 2008; investing cash outflow was $142.1 million, versus $56.4 million; financing cash outflow was $204.3 million, versus $612.4 million. Lower share repurchases were a major reason financing outflows declined.
- Capital expenditures were $103 million through September; the company estimated full-year 2009 property and equipment spending of about $168 million, funded from cash balances.
- Quarterly dividends declared were $0.25 per share, compared with $0.24; no share repurchases occurred in Q3. The remaining authorization was 12,659,110 shares.
Material changes and operating developments
- AUM reached $366.2 billion, up 32.5% from the start of 2009 and 16% from June 30. Nine-month net inflows were $15.4 billion, including $7.4 billion in Q3; market valuation changes and income added $74.5 billion over the nine months.
- Q3 fund flows included $3.5 billion of net inflows to bond funds and $0.9 billion of outflows from money market funds. The company said stock-fund flows were neutral after a transfer to other managed portfolios.
- Following workforce reductions and attrition, associate headcount was 4,762 at September 30, down 11.6% from year-end 2008. The April reduction of 288 positions produced $5.8 million of Q3 expense savings; after related administrative-fee revenue reductions, reported net savings were $4.3 million.
- Accumulated other comprehensive income was $95.8 million at September 30, compared with a $13.1 million loss at year-end 2008, reflecting investment gains net of deferred taxes.
Outlook, risks and contingencies
- Management said investor sentiment and markets had improved but uncertainty remained about the strength and stability of economic recovery. It emphasized that revenue and earnings remain sensitive to market values, AUM composition, client flows, investment performance and fee levels.
- Management estimated Q4 advertising and promotion spending would increase about $12 million from Q3. It expected the full-year 2009 effective tax rate to be similar to the nine-month rate of 37.4%.
- Key risks include market declines and outflows, competition and investment performance, changes to fund advisory agreements, expense variability, regulation, and possible impairment charges. The filing reported no material change in previously disclosed 2008 Form 10-K risk factors.
- Management considered adverse outcomes in ordinary-course claims, including employment claims, remote of having a material adverse effect. The company was negotiating to acquire a 26% interest in India’s UTI Asset Management and an affiliate; no definitive agreement was assured.
- The company planned to adopt SFAS 167 on January 1, 2010 and was evaluating its impact. Management said adoption of new impairment guidance in Q2 2009 had no material financial-statement impact.
Important facts for investors to verify
- Whether market recovery, AUM growth and net inflows persist, and how AUM mix affects advisory fee rates and margins.
- Whether cost reductions and the stated advertising and capital-spending plans develop as expected.
- Potential effects of the proposed UTI investment, which remained subject to negotiations and a definitive agreement.
- Future valuation and impairment risks in company investments, alongside the sensitivity of operating results to financial markets.
- The filing reports a review, not an audit, of these interim statements; verify subsequent filings and updates to outlook, risks and contingencies.