TROW

Business Context and Reporting Period

Company: T. Rowe Price Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003.
Business Overview: The company derives revenues primarily from investment advisory and administrative services provided to individual and institutional investors in sponsored mutual funds and other portfolios. Revenues are heavily dependent on the value and composition of assets under management (AUM).

Key Financial Metrics

Note: Operating margins are not explicitly stated as a percentage in the text, but Net Operating Income for the nine months ended 9/30/03 was $254,790 thousand.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 16.6% ($36.7 million) for the quarter and 1.5% ($10.6 million) for the nine-month period compared to the prior year. This was driven by higher average assets under management due to market appreciation and net investor inflows.
• Profitability: Net income surged 53% ($23.1 million) for the quarter and rose 7.3% ($10.8 million) for the nine-month period. Diluted EPS increased from $0.34 to $0.51 for the quarter and from $1.15 to $1.25 for the nine-month period.
• Expense Management: Operating expenses increased only 2.8% for the quarter and less than 1% for the nine-month period. Advertising and promotion costs decreased significantly due to uncertain market conditions in prior periods, though management expects a doubling of this expense in Q4 2003.
• Debt Reduction: The company repaid its remaining dollar-denominated debt ($5 million) in July 2003 and reduced yen-denominated debt. Total debt on the balance sheet dropped from $55,899 thousand (12/31/02) to $12,996 thousand (9/30/03).
• Assets Under Management: AUM grew to $168.9 billion, up $19.7 billion year-to-date due to market appreciation ($12.2 billion) and net inflows ($8.7 billion).

Guidance, Outlook, and Risks

• Outlook: Management expects advertising and promotion expenses to be up to double the third-quarter level in the fourth quarter of 2003. The company anticipates retiring the remaining yen-denominated debt ($13 million) in November 2003.
• Accounting Changes: The company evaluated FASB Interpretation No. 46 regarding Variable Interest Entities (VIEs). It determined it is not the primary beneficiary of two collateralized bond obligations (CBOs) and will not consolidate them. Maximum exposure to future losses on these CBOs is $6.9 million.
• Risks: Future results are sensitive to financial market fluctuations, investor sentiment, and cash flows. The company faces regulatory risks and potential changes in legal or tax requirements. There is also exposure to foreign currency exchange rates regarding international operations and yen-denominated debt.
• Legal Proceedings: A class action lawsuit was filed on September 16, 2003, alleging improper value adjustments to foreign securities benefiting market timers. Management considers the complaint without merit and intends to defend vigorously.

Investor Verification Checklist

• Q4 Advertising Spend: Verify the actual increase in advertising and promotion expenses in Q4 2003 as predicted by management.
• Debt Retirement: Confirm the retirement of the remaining $13 million yen-denominated debt in November 2003.
• Legal Outcome: Monitor the status of the T.K. Parthasarthy class action lawsuit regarding market timing and foreign security valuations.
• Pro Forma EPS: Review the pro forma earnings per share ($1.13 basic, $1.09 diluted for nine months) which accounts for stock-based compensation under the fair value method, compared to reported figures.
• Market Sensitivity: Assess the impact of potential market downturns on AUM and subsequent fee revenue, given the heavy reliance on asset values.