Business Context and Reporting Period
Company: T. Rowe Price Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: The Company derives revenues primarily from investment advisory services provided to individual and institutional investors in sponsored mutual funds and other portfolios. It also provides administrative services, including transfer agent, accounting, and recordkeeping services. As of September 30, 2008, 10% of assets under management (AUM) were domiciled outside the United States.
Key Financial Metrics
| Metric (in millions) | Three Months Ended 9/30/2008 | Nine Months Ended 9/30/2008 |
|---|---|---|
| Net Revenues | $554.8 | $1,700.4 |
| Net Operating Income | $238.8 | $727.5 |
| Net Income | $152.8 | $466.5 |
| Diluted Earnings Per Share | $0.56 | $1.71 |
| Operating Margin | 43.0% | 42.8% |
| Cash and Cash Equivalents | $852.7 | $852.7 |
| Total Assets | $3,122.5 | $3,122.5 |
| Total Liabilities | $466.0 | $466.0 |
| Stockholders' Equity | $2,656.5 | $2,656.5 |
Assets Under Management (AUM): $345.0 billion as of September 30, 2008 (down 11% from June 30, 2008).
Debt: The Company reported no debt as of September 30, 2008.
Material Changes vs. Prior Period
- Revenue: Net revenues for the three months ended September 30, 2008, decreased 3% ($16.2 million) compared to the same period in 2007, driven by a 3.7% decline in investment advisory fees due to lower average AUM. For the nine-month period, net revenues increased 4.3% ($69.9 million) due to higher average AUM despite market volatility.
- Profitability: Net income for the quarter decreased 12.6% ($22.0 million) to $152.8 million. For the nine-month period, net income decreased 3% ($13.4 million) to $466.5 million.
- Expenses: Operating expenses increased 3% ($8.8 million) for the quarter and 8.5% ($76.2 million) for the nine-month period. Compensation and related costs rose due to increased staff count (up 5.6% year-over-year) and base salary increases, partially offset by a reduction in interim bonus accruals.
- Investment Income: Non-operating investment income decreased significantly in the quarter ($12.2 million decline) due to lower interest rates and foreign currency losses.
- Stock Repurchases: The Company repurchased $459.5 million of common stock in the first nine months of 2008, compared to $256.0 million in the same period of 2007.
Outlook, Risks, and Management Commentary
Market Environment: Management highlighted extreme volatility in financial markets during the second half of 2008, citing the subprime mortgage crisis, credit crunch, and significant declines in global equity markets. The S&P 500 fell 8.4% in the third quarter.
Guidance and Expectations:
- Management expects prolonged stress on financial markets and lower equity valuations to result in lower average AUM and investment advisory fees in subsequent quarters.
- Advertising and promotion spending for the fourth quarter of 2008 is expected to be approximately $35 million, reflecting reduced investor sentiment.
- Dividends declared per share increased to $0.24 for the quarter ended September 30, 2008, up from $0.17 in the prior year quarter.
Risks and Contingencies:
- Investment Impairments: The Company holds investments in sponsored mutual funds with a net unrealized loss of $0.2 million as of September 30, 2008. Seven fund holdings with aggregate unrealized losses of $36.0 million have experienced temporary impairments continuously since June 30, 2008. Management noted the possibility that these could be classified as "other-than-temporary" impairments in future quarters, which would result in a charge to non-operating income.
- Market Risk: Revenues are highly sensitive to the value and composition of AUM. Continued market declines directly impact advisory fees and investment income.
Investor Verification Checklist
- Impairment Status: Verify the status of the seven fund holdings with $36.0 million in unrealized losses to determine if they will be classified as other-than-temporary impairments in the fourth quarter.
- AUM Trends: Monitor net cash flows versus market valuation changes, as market declines significantly offset net inflows ($19.5 billion YTD inflows vs. $74.5 billion market decline).
- Compensation Accruals: Review the timing of bonus payments, as significant accruals are made throughout the year and paid in December, impacting cash flow timing.
- Share Count: Confirm the impact of ongoing share repurchases ($75.0 million in October 2008 alone) on future earnings per share.
- Fee Rates: Track the average annualized fee rate, which declined to 49.3 basis points in Q3 2008 due to a shift toward lower-fee bond and money market assets.