T. Rowe Price Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are U.S. dollars; financial statement amounts are in millions except per-share data and assets under management (AUM). The company primarily earns investment advisory and related administrative fees, which depend on AUM and market values.
Key financial metrics
- Third quarter: Total revenue was $680.2 million, up 15.9% from $587.0 million; net income was $185.5 million, up 9.7% from $169.1 million. Diluted EPS rose to $0.71 from $0.64. Net operating income was $295.2 million, up 12.7%, while operating margin declined to 43.5% from 44.7%.
- First nine months: Total revenue was $2,077.9 million, up 20.6% from $1,722.4 million; net income was $584.8 million, up 21.7% from $480.6 million. Diluted EPS was $2.20 versus $1.81. Net operating income was $933.3 million, up 23.8%, and operating margin improved to 45.0% from 43.8%.
- AUM: Ending AUM was $453.5 billion, down $67.4 billion from June 30 and $28.5 billion from year-end 2010. Third-quarter net outflows were $2.6 billion; market valuation changes and income reduced AUM by $64.8 billion. Average AUM was $490.5 billion for the quarter and $501.3 billion for the first nine months.
- Cash flow and liquidity: Nine-month operating cash flow was $940.5 million, compared with $711.5 million in 2010. Investing activities used $131.9 million and financing activities used $620.3 million. Cash and cash equivalents were $1,001.4 million at September 30, up from $813.1 million at year-end. The company reported more than $1.7 billion of cash and mutual fund investments and no debt.
- Capital returns: The company repurchased 8.5 million shares for $470.2 million during the first nine months, including 4.5 million shares for $229.0 million in Q3. Nine-month dividends paid were $239.3 million; dividends declared were $0.31 per share for Q3 and $0.93 year to date.
- Other balance-sheet items: Total assets were $3,839.6 million and total liabilities $570.0 million at September 30. Stockholders’ equity was $3,269.6 million. Accumulated other comprehensive income fell to $95.1 million from $139.1 million at year-end, primarily reflecting investment valuation losses.
Material changes and drivers
- Quarterly advisory revenue rose 15.0% to $578.0 million, supported by higher average AUM than in Q3 2010. Despite the sharp Q3 market decline, average quarterly AUM remained higher year over year.
- The average annualized advisory fee rate fell to 46.8 basis points from 47.9 basis points a year earlier, reflecting fee waivers, lower equity valuations, and a greater share of lower-fee products. Money market fee waivers were $10.7 million in Q3 and $26.0 million year to date.
- Quarterly operating expenses increased 18.5% to $384.2 million, faster than net revenue. Compensation and related costs rose 17.5%; other operating expenses rose 39.6%, including higher intermediary distribution costs and professional, travel, and business-support expenses.
- Quarterly non-operating investment income declined to $1.3 million from $8.9 million. The prior-year quarter included realized gains on mutual fund sales; Q3 2011 also included foreign currency transaction losses and unrealized losses on trading investments.
- The company recorded $4.7 million of unrealized losses on sponsored mutual fund investments at September 30; management considered them temporary. Savings-bank debt securities had $22.7 million of temporarily impaired fair value, with losses attributed generally to interest rates and market liquidity rather than credit quality.
Outlook, commentary, and risks
- Management expected Q4 2011 advisory revenue to moderate because Q3 market depreciation could reduce average AUM, the basis for advisory fees. Money market fee waivers were expected to continue through the rest of 2011 and into 2012.
- Management forecast approximately $93 million of full-year 2011 property and equipment spending, funded from cash. Q4 advertising and promotion spending was expected to be comparable to Q4 2010.
- Management described a difficult market environment, citing weak developed-market recoveries, European sovereign-debt concerns, U.S. fiscal and debt-ceiling uncertainty, emerging-market inflation, and heightened volatility. It cautioned that prolonged economic and geopolitical headwinds could continue to weigh on investors.
- Results are sensitive to market performance, AUM flows and mix, investment performance relative to competitors, fee levels, investor sentiment, expenses, and regulation. Management said the company had no external liquidity facility because of its financial resources.
- Ordinary-course claims, including employment-related claims, were disclosed; management assessed the likelihood of a material adverse outcome as remote. The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether AUM and net flows recover after Q3’s $64.8 billion market-driven decline and $2.6 billion net outflow.
- Whether advisory fee rates and money market fee waivers continue to pressure revenue growth.
- Whether expense growth, particularly compensation and intermediary distribution costs, moderates and supports margins.
- How Q4 and full-year results compare with management’s stated revenue, spending, and tax-rate expectations; the filing gives no specific earnings or revenue guidance.
- The persistence and materiality of investment valuation losses, and the company’s ongoing share repurchases and dividend commitments.