T. Rowe Price Group, Inc. — 2013 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; compared with the corresponding 2012 periods. T. Rowe Price primarily earns investment advisory fees, which depend on the value and mix of assets under management (AUM). Financial statements are unaudited; KPMG conducted an interim review, not an audit.
Financial and operating performance
| Metric | Third quarter 2013 | Year-over-year change | First nine months 2013 | Year-over-year change |
|---|---|---|---|---|
| Net revenues | $884.4 million | +14.9% | $2,554.4 million | +14.3% |
| Investment advisory revenues | $768.3 million | +16.2% | $2,210.9 million | +15.5% |
| Operating expenses | $458.5 million | +11.6% | $1,357.1 million | +10.1% |
| Net operating income | $425.9 million | +18.7% | $1,197.3 million | +19.4% |
| Net income | $270.3 million | +9.3% | $760.0 million | +16.6% |
| Diluted EPS | $1.00 | +6.4% | $2.83 | +14.1% |
| Operating margin | 48.2% | 46.6% in 2012 | 46.9% | 44.9% in 2012 |
Third-quarter advisory revenue growth reflected average AUM of $636.3 billion, up $78.5 billion year over year, and a 47.9-basis-point annualized effective fee rate. Nine-month average AUM was $620.9 billion, up $78.7 billion. Period-end AUM was $647.2 billion, up from $576.8 billion at December 31, 2012. Market appreciation and income added $82.5 billion over the first nine months, while net cash flows were negative $12.1 billion. U.S. sponsored mutual funds had $6.4 billion of net inflows; other portfolios had $18.5 billion of outflows.
Third-quarter non-operating investment income was $11.6 million, down $29.8 million year over year. The 2012 quarter included $31.2 million of realized gains on sponsored fund holdings that did not recur. For the first nine months, non-operating investment income was $31.3 million, versus $53.9 million in 2012.
Cash, balance sheet, and capital
- Cash and cash equivalents were $1,693.3 million at September 30, 2013, compared with $879.1 million at year-end 2012. The company reported $3.0 billion of cash and sponsored investment holdings and no debt.
- Nine-month operating cash flow was $1,158.3 million, versus $861.0 million in 2012. Investing activities used $138.6 million; financing activities used $205.5 million.
- Total assets were $5,126.8 million and stockholders’ equity was $4,540.6 million at September 30, 2013. Total liabilities were $586.2 million.
- Dividends declared were $0.38 per share for the quarter and $1.14 for the first nine months. The company paid $297.1 million in dividends during the nine-month period and repurchased $14.1 million of stock.
Material changes, outlook, and risks
- Strong equity-market appreciation drove AUM and fee revenue growth, while operating expenses also rose. Compensation costs increased with variable compensation accruals, higher salaries, and average staff growth; technology, facility, and business-capability spending also increased.
- Money-market advisory fee waivers were $13.9 million in the quarter and $36.8 million year to date to maintain positive fund yields. Management expected waivers to continue into the fourth quarter of 2013 and 2014.
- Management expected fourth-quarter occupancy and facility costs, together with depreciation, to be about 10% above the third quarter as two campus buildings entered service. Full-year 2013 property and equipment spending was expected to be about $120 million, funded from operating resources. The company also anticipated increased investment in talent, distribution, and technology.
- The company agreed to sell its savings bank subsidiary for its closing-date net book value plus $500,000, subject to regulatory approval and customary conditions; it expected closing in the fourth quarter of 2013. At September 30, assets and liabilities held for sale were $157.2 million and $133.7 million, respectively.
- Key business risks include market-driven AUM fluctuations, client flows and investment performance, competition and fee pressure, and changes to regulation. The filing specifically discusses proposed money-market fund reforms, retirement-system changes, municipal-adviser rules, and the European AIFMD. Management said ordinary-course claims were unlikely to have a material adverse effect.
- Management stated that it does not maintain external liquidity because of its financial resources. Future results and forward-looking expectations are not guaranteed and may differ materially.
Important facts for investors to verify
- Whether AUM growth can be sustained through net client flows and investment performance, particularly given outflows from other portfolios.
- How continued money-market fee waivers and proposed regulatory reforms affect advisory revenue and fund attractiveness.
- Whether the savings-bank sale receives approval and closes on the expected terms and schedule.
- How compensation, technology, facility, and other investment spending develops relative to revenue growth and margins.
- The sustainability of the reported cash generation, dividend level, and capital returns; the filing reports no debt but does not provide forward dividend or repurchase guidance.