T. Rowe Price Group, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. T. Rowe Price is an investment manager whose revenue depends primarily on advisory fees tied to the value and composition of assets under management (AUM).
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net revenue | $3,484.2 million | $3,022.5 million | +15.3% |
| Investment advisory fees | $3,022.6 million | $2,592.0 million | +16.6% |
| Operating income | $1,637.4 million | $1,364.3 million | +20.0% |
| Operating margin | 47.0% | 45.1% | Up 1.9 percentage points |
| Net income | $1,047.7 million | $883.6 million | +18.6% |
| Diluted EPS | $3.90 | $3.36 | +16.1% |
| Cash from operating activities | $1,233.2 million | $902.8 million | +$330.4 million |
Fourth quarter: Net revenue was $929.8 million and net income was $287.7 million, versus $787.3 million and $232.0 million, respectively, in fourth-quarter 2012. Diluted EPS was $1.06, compared with $0.88.
- AUM ended the year at a record $692.4 billion, up $115.6 billion from year-end 2012. Market gains and income contributed $127.6 billion, partly offset by $12.0 billion of net cash outflows.
- Sponsored U.S. mutual funds had $10.2 billion of net inflows; other portfolios had $22.2 billion of net outflows, concentrated among several large institutional and intermediary clients.
- Operating expenses rose 11.4% to $1,846.8 million, including higher compensation, staffing, occupancy, technology and other business costs. Compensation expense increased 10.4%.
- Cash and cash equivalents were $1,398.0 million; cash and fund investment holdings totaled approximately $3.0 billion. The company reported no debt. Total assets were $5,033.1 million, liabilities $215.0 million, and stockholders’ equity $4,818.1 million.
- Regular dividends declared were $1.52 per share in 2013. The 2012 total of $2.36 included a $1.00 special dividend.
Material changes and unusual items
- Higher average AUM and a rise in the average annualized fee rate to 47.7 basis points from 47.2 basis points drove advisory revenue growth. Money-market advisory fee waivers increased to $51.2 million from $35.0 million.
- Non-operating investment income declined to $63.0 million from $70.8 million, principally because realized gains on sponsored fund holdings were $13.5 million versus $35.1 million in 2012.
- The company sold its savings bank subsidiary on December 5, 2013, for $23.6 million in proceeds and recognized a $1.5 million gain. The bank’s deposits and debt securities were no longer on the year-end balance sheet.
- Closing nine investor centers resulted in a $3.5 million lease-termination charge in the second quarter. Two new Owings Mills facilities entered service in the fourth quarter.
- Operating cash flow increased, while investing cash use rose to $437.5 million, including investment in sponsored funds and $105.8 million of property and equipment additions. Financing cash use was $276.8 million.
Outlook, risks and contingencies
- Management expected 2014 regular dividends, in total, to exceed $1.52 per share, while cautioning that future dividends are not assured. Expected 2014 capital expenditures were approximately $145 million; the company also forecast advertising and promotion spending about 5% below 2013 and an effective tax rate near 38.4%.
- Management expects continued money-market fee waivers in 2014 to help maintain positive yields. It plans increased investment in investment talent, technology and global distribution, including Italy and Germany.
- Results are sensitive to market levels, AUM mix, investment performance, client withdrawals and advisory pricing. Other stated risks include competition, loss of key personnel, low interest rates affecting money-market funds, regulatory change, operational or cyber disruption, and international and currency risks.
- Management considered the likelihood of pending ordinary-course claims having a material adverse effect to be remote. The filing discloses $40.7 million of investment partnership contribution commitments. A January 2014 headquarters lease extension added $133.0 million to future lease commitments, mostly payable after 2018.
- The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether market-driven AUM growth translates into sustained net inflows, particularly given the $22.2 billion outflow from other portfolios and concentration among large clients.
- Whether investment performance, fee rates and the mix of equity and fixed-income assets support advisory revenue and margins through changing markets.
- The future cost and duration of money-market fee waivers, and their effect on earnings if interest rates remain low.
- Execution of 2014 spending plans, capital expenditures and dividend intentions, alongside the expanded lease commitments.
- Effects of the savings-bank sale and continuing regulatory, operational, cyber and key-personnel risks.