T. Rowe Price Group, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; fourth-quarter figures are also summarized below. The company provides investment management and related services, with results primarily driven by advisory fees tied to assets under management (AUM).
Key financial results
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net revenues | $2.747 billion | $2.367 billion | +16.0% |
| Net operating income | $1.227 billion | $1.037 billion | +18.4% |
| Operating margin | 44.7% | 43.8% | +0.9 percentage points |
| Net income | $773.2 million | $672.2 million | +15.0% |
| Diluted EPS | $2.92 | $2.53 | +15.4% |
| Cash from operating activities | $948.4 million | $732.8 million | +$215.6 million |
Investment advisory revenue rose 15.9% to $2.349 billion. Average AUM increased to $497.1 billion from $422.6 billion, while the average annualized advisory fee rate eased to 47.3 basis points from 48.0 basis points. The 2011 effective tax rate was 38.2%, up from 37.2%.
At year-end, AUM was $489.5 billion, up $7.5 billion for the year: $14.1 billion of net inflows was partly offset by $5.8 billion of market losses and income effects and $0.8 billion of distributions not reinvested. Stock and blended AUM was $352.4 billion; fixed-income AUM was $137.1 billion.
Fourth-quarter comparison
Fourth-quarter 2011 net revenues were $671.6 million versus $647.5 million in fourth-quarter 2010. Net income was $188.4 million versus $191.6 million; diluted EPS was $0.73 versus $0.72.
Liquidity, capital, and shareholder returns
Cash and cash equivalents were $897.9 million at year-end, and sponsored mutual fund investments were $764.5 million; management described cash and mutual fund holdings together as nearly $1.7 billion. Stockholders’ equity was $3.421 billion and total liabilities were $349.6 million, including $173.5 million of savings-bank customer deposits. The balance sheet presents no separate borrowings line. The company said it had no external liquidity source, citing available financial resources.
Operating cash flow was $948.4 million; investing activities used $165.0 million and financing activities used $698.6 million. The company repurchased $479.7 million of shares and paid $317.9 million in dividends during 2011. The declared dividend was $1.24 per share. Management planned 2012 quarterly dividends totaling more than $1.24 per share, with no assurance of future increases. Year-end commitments included $42.5 million for investment partnerships and $345 million of operating leases and other purchase commitments. Planned 2012 property and equipment spending was about $100 million.
Changes, outlook, and risks
- Revenue and earnings growth reflected higher average AUM and advisory fees; expenses rose 14.2%, slower than revenue growth. Compensation expense increased 12.7%, partly due to staff growth and higher variable compensation.
- Money-market fee waivers were $36.4 million in 2011, versus $25.1 million in 2010; management expected waivers to continue in 2012. The company estimated a 2012 effective tax rate of about 37.7% and modestly higher advertising spending.
- Markets were volatile in 2011. International equities declined, while fixed-income markets generally gained; lower market valuations reduced the company’s AUM despite net inflows. Advisory revenue and operating results remain sensitive to market levels, asset mix, investment performance, and client flows.
- Management identified competition, fund agreement renewals and fee pressure, retention of key personnel, operational and technology disruptions, cybersecurity and confidential-data risks, regulation, and international and currency exposures as material risks. The proposed Volcker Rule led the company to evaluate whether to maintain its savings bank.
- Non-operating investment income was $23.7 million, down from $33.5 million in 2010; the prior year included gains on mutual fund sales and UTI-related hedging contracts. The 2011 period included $6.4 million of earnings from the company’s 26% UTI investment. Management reported ordinary-course claims, but considered a material adverse outcome remote.
Important facts for investors to verify
- Whether net inflows and relative fund performance persist, and whether market movements change AUM and its fee-generating mix.
- The scale and duration of money-market fee waivers and their effect on advisory revenue and margins.
- 2012 delivery against management’s tax-rate, advertising, capital-spending, and dividend expectations.
- The valuation and currency exposure of the UTI investment, and the company’s exposure to sponsored-fund investments and savings-bank securities.
- Potential effects of regulation, fund contract approvals, fee pressure, and the savings-bank review on future operations.
The filing reports that the financial statements received an unqualified audit opinion and that internal control over financial reporting was effective as of December 31, 2011.