T. Rowe Price Group, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. T. Rowe Price earns most revenue from investment advisory and related services; advisory fees depend primarily on the value and mix of assets under management (AUM). Financial statements are unaudited interim statements, reviewed by KPMG.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenues | $587.0m | $499.1m | $1,722.4m | $1,328.3m |
| Net revenues | $586.1m | $498.1m | $1,719.7m | $1,324.8m |
| Net operating income | $261.9m | $207.3m | $753.7m | $471.8m |
| Net income | $169.1m | $132.9m | $480.6m | $281.1m |
| Diluted EPS | $0.64 | $0.50 | $1.81 | $1.07 |
| Operating margin | 44.7% | 41.6% | 43.8% | 35.6% |
Q3 advisory revenue rose 20.4% to $502.5m as average AUM increased to $416.1bn; the annualized advisory fee rate eased to 47.9 basis points from 48.5. Nine-month advisory revenue rose 35.2% to $1,466.3m, with average AUM of $408.9bn and a 47.9-basis-point fee rate. The nine-month effective tax rate was approximately 37.7% (based on reported pretax income and tax provision); Q3 was 37.6%.
For the first nine months, operating cash flow was $711.5m, investing cash outflow $265.1m, and financing cash outflow $379.3m. Cash and cash equivalents ended September at $810.4m, up from $743.3m at year-end. Cash and mutual fund investments totaled approximately $1.5bn. The company reported no debt and said it does not maintain an external liquidity facility. Total assets were $3,563.3m and stockholders’ equity was $3,064.4m at September 30.
Material changes and notable items
- AUM ended the period at $439.7bn, up $48.4bn since year-end. Nine-month net inflows were $23.4bn and market appreciation and income added $25.0bn. Q3 net inflows were $8.0bn.
- Q3 operating expenses increased 11.5% to $324.2m, below the 17.7% increase in net revenues. For nine months, expenses rose 13.2% to $966.0m. Compensation, advertising, and other operating costs increased; 2009 year-to-date expenses also included $36.1m of investment impairments that did not recur in 2010.
- On January 20, 2010, the company acquired a 26% interest in India’s UTI Asset Management Company and an affiliate for $142.4m plus transaction costs. Nine-month equity earnings from UTI were $2.8m.
- The company repurchased $240.0m of its shares and paid $208.9m in dividends during the first nine months. The board approved an additional 15m-share repurchase authorization in September.
- Other investments increased to $195.5m, primarily reflecting the UTI investment. Sponsored mutual fund investments were $722.1m at period-end, with $187.4m of unrealized gains.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management estimated full-year 2010 property and equipment expenditures of about $130m, to be funded from cash, and expected Q4 advertising and promotion expense to be about $5m above the prior-year quarter.
- Money-market advisory fee waivers were $18.4m in the first nine months; management anticipated further waivers in Q4 2010 and into 2011 to maintain positive investor yields.
- Management said it decided in Q4 2010 to contribute capital to certain sponsored money market funds to offset cumulative realized losses and address potential shareholder concerns related to new SEC disclosure rules. The expected one-time pretax charge is approximately $17m; the funds had about $28bn in net assets at September 30.
- Results are exposed to market movements, AUM flows and composition, investment performance, fee levels, competition, and fund-board decisions about advisory agreements. Other identified risks include expense variability, operational or service disruptions, currency movements, and regulatory or legal changes. Management reported no material change in previously disclosed risk factors.
- Ordinary-course claims, including employment matters, were disclosed; management said a material adverse outcome was remote. The filing reported no material change in market-risk disclosures.
Important facts for investors to verify
- Whether AUM growth and net inflows persist, and how market performance affects fee revenue and the 47.9-basis-point advisory fee rate.
- The extent and duration of money-market fee waivers and the final amount and timing of the anticipated $17m fund contribution.
- Whether expense growth, including compensation and marketing, remains below revenue growth, and whether projected capital spending tracks the estimate.
- Performance and foreign-currency exposure associated with the UTI investment, along with the effect of continued share repurchases and dividends on cash and equity.