T. Rowe Price Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company primarily earns investment advisory and related administrative fees; results depend substantially on assets under management (AUM), market levels, and asset mix. Interim financial statements are unaudited and were reviewed by KPMG.
Financial performance
| Metric | Q2 2011 | Change vs. Q2 2010 | First half 2011 | Change vs. first half 2010 |
|---|---|---|---|---|
| Net revenues | $713.7 million | +23.6% | $1,396.1 million | +23.2% |
| Investment advisory fees | $611.7 million | +24.3% | $1,200.5 million | +24.6% |
| Operating expenses | $387.1 million | +19.4% | $758.0 million | +18.1% |
| Net operating income | $326.6 million | +29.0% | $638.1 million | +29.7% |
| Operating margin | 45.8% | 43.8% prior year | 45.7% | 43.4% prior year |
| Net income | $204.7 million | +29.2% | $399.3 million | +28.2% |
| Diluted EPS | $0.76 | +28.8% | $1.49 | +27.4% |
For the first half, operating cash flow was $610.5 million, compared with $452.2 million a year earlier. Investing activities used $66.4 million and financing activities used $334.5 million. Cash and cash equivalents were $1,022.7 million at June 30, up from $813.1 million at year-end 2010. The company reported no debt and more than $1.8 billion of cash and mutual fund investments.
At June 30, total assets were $3,882.4 million, total liabilities $469.6 million, and stockholders’ equity $3,412.8 million. The company declared dividends of $0.31 per share for Q2 ($0.62 for the first half). First-half repurchases used $235.3 million of cash.
Assets under management and material changes
- AUM ended the quarter at a record $520.9 billion, up $11.0 billion from March 31 and $38.9 billion from year-end 2010. First-half net inflows were $15.6 billion; market valuation and income added $23.3 billion.
- Q2 average AUM was $514.9 billion, up $101.4 billion year over year. The average annualized advisory fee rate was 47.7 basis points, unchanged year over year and slightly below Q1’s 47.9 basis points.
- Q2 net inflows were $4.6 billion to U.S. sponsored funds and $5.2 billion to other portfolios. First-half flows were $9.0 billion and $6.6 billion, respectively.
- Expenses rose, but more slowly than revenues. Compensation costs increased 15.7% in Q2, reflecting variable compensation, higher salaries and benefits, and a larger average workforce. Other operating expenses rose 48.3%, including higher consulting, professional, travel, and distribution costs.
Outlook, commentary, and risks
- Management estimated a 2011 effective tax rate of 38.2%; Q2’s rate was 38.4%. It expected full-year 2011 property and equipment spending of about $106 million, funded from cash balances.
- Management anticipated Q3 advertising spending comparable to Q2 and said full-year 2011 advertising and promotion expense could increase about 15% from 2010. It expected money-market fee waivers could continue for the remainder of 2011; Q2 waivers were $8.3 million and first-half waivers $15.3 million.
- Management cited market volatility and concerns about slow developed-market recoveries, European sovereign debt, the U.S. debt ceiling, emerging-market inflation, and the Japanese disaster. Future results remain sensitive to financial markets, net flows, investment performance, fee levels, competition, expenses, regulation, and client retention.
- Unrealized losses on certain savings-bank debt securities were attributed generally to interest rates and market liquidity, not credit quality; management intended to hold the securities to maturity and considered impairment temporary. The company said ordinary-course claims were unlikely to have a material adverse effect.
- No material change in previously disclosed market-risk information or risk factors was reported. Management said it had no external liquidity facility because of its available financial resources.
Important facts for investors to verify
- Whether AUM growth and net inflows continue, and how market performance and fund/portfolio mix affect advisory-fee revenue and fee rates.
- Whether expense growth, especially compensation and other operating costs, remains below revenue growth and supports margins.
- Whether the estimated 38.2% tax rate, approximately $106 million capital-spending plan, and stated advertising and fee-waiver expectations are borne out.
- How share repurchases and dividends affect cash, equity, and per-share results; confirm the remaining repurchase authorization and subsequent activity.
- Monitor market, regulatory, client-retention, and investment-performance risks, as well as the savings-bank securities and other disclosed contingencies.