T. Rowe Price Group, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, amounts are U.S. dollars.
Business context
T. Rowe Price earns most revenue from investment advisory fees, generally based on assets under management (AUM), with additional administrative-service revenue. Consequently, market movements, client flows, portfolio mix, investment performance and fee levels affect results. At year-end, AUM reached a record $482.0 billion: $360.6 billion in equity and blended portfolios and $121.4 billion in fixed income. U.S. mutual funds represented $282.6 billion and other portfolios $199.4 billion.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net revenues | $2,367.2 million | $1,867.4 million | +26.8% |
| Investment advisory fees | $2,026.8 million | $1,546.1 million | +31.1% |
| Net operating income | $1,036.5 million | $701.6 million | +47.7% |
| Operating margin | 43.8% | 37.6% | +6.2 percentage points |
| Net income | $672.2 million | $433.6 million | +55.0% |
| Diluted EPS | $2.53 | $1.65 | +53% |
| Cash from operating activities | $732.8 million | $535.6 million | +$197.2 million |
| Year-end AUM | $482.0 billion | $391.3 billion | +23.2% |
Fourth quarter: Net revenues were $647.5 million versus $542.6 million in Q4 2009; net income was $191.6 million versus $152.5 million; diluted EPS was $0.72 versus $0.57.
Average AUM rose to $422.6 billion from $321.3 billion. Net client inflows were $30.3 billion and market appreciation and income added $60.4 billion during 2010. The average annualized advisory fee rate was 48.0 basis points, essentially unchanged from 48.1 basis points.
At December 31, cash and cash equivalents were $813.1 million; sponsored mutual fund investments were $747.9 million. Management reported cash, cash equivalents and mutual fund holdings totaling more than $1.5 billion and said it maintained no external liquidity facility. Total assets were $3.642 billion, liabilities $345.5 million and stockholders’ equity $3.297 billion. The filing reports no conventional corporate borrowings; savings-bank customer deposits were $160.4 million.
Changes, unusual items and capital allocation
- FY2010 operating expenses increased 14.1% to $1.331 billion, slower than revenue growth. Higher compensation, advertising and other operating costs contributed.
- Non-operating investment income was $33.5 million, compared with a $12.7 million loss in 2009. The prior year included $36.1 million of impairment charges on sponsored fund investments.
- The company recorded a one-time $16.4 million contribution to certain money market funds in November 2010, charged to other operating expenses.
- Money market advisory fee waivers were $25.1 million, versus $5.7 million in 2009; management expected waivers to continue into 2011.
- The company acquired a 26% interest in UTI Asset Management Company for $142.4 million, plus transaction costs; its 2010 share of UTI earnings was $5.3 million. It also repurchased approximately 5.0 million shares for $240 million and paid $278.9 million in dividends.
- Year-end total assets increased to $3.642 billion from $3.210 billion; equity increased to $3.297 billion from $2.882 billion.
Outlook, risks and contingencies
- Management estimated 2011 advertising and promotion spending could rise about 15% from 2010, expected a 2011 effective tax rate of about 37.8%, and anticipated approximately $120 million of 2011 property and equipment expenditures.
- The company planned 2011 quarterly dividends totaling more than the $1.08 per share declared in 2010, but gave no assurance of future dividend increases or continued payments.
- Key risks include market declines or adverse changes in AUM mix, client withdrawals, weaker relative investment performance, fee pressure, competition, termination or repricing of fund advisory contracts, and reliance on third-party distribution channels and key personnel.
- Other stated risks include low interest rates and money market fee waivers, regulatory change and compliance costs, operational or technology failures, data-security incidents, investment losses and potential impairment of the UTI investment or goodwill.
- Management said the likelihood of material adverse outcomes from pending claims was remote. The company disclosed $48.2 million of commitments to investment partnerships and $365 million of operating-lease and other purchase commitments. Approximately $81 million of equity was restricted by regulations or agreements.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether record AUM and strong net inflows persist, and how market performance and portfolio mix affect fee revenue.
- Whether money market fee waivers continue in 2011 and how low rates affect fund yields, redemptions and earnings.
- Actual 2011 advertising costs, capital expenditures, effective tax rate and dividends compared with management’s estimates.
- UTI investment performance, valuation and any subsequent impairment indicators, alongside the remaining partnership commitments.
- Future expense growth, including compensation and share-based compensation, and the sustainability of the 2010 margin recovery.