T. Rowe Price Group, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods unless stated otherwise. The company primarily earns investment advisory and related administrative fees, which depend on assets under management (AUM) and market valuations. Financial statements are unaudited; KPMG performed an interim review, not an audit.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Total revenue | $578.3 million | $443.5 million | $1,135.4 million | $829.2 million |
| Net revenue | $577.4 million | $442.2 million | $1,133.6 million | $826.7 million |
| Operating expenses | $324.3 million | $288.3 million | $641.8 million | $562.2 million |
| Net operating income | $253.1 million | $153.9 million | $491.8 million | $264.5 million |
| Operating margin | 43.8% | 34.8% | 43.4% | 32.0% |
| Net income | $158.5 million | $100.0 million | $311.5 million | $148.2 million |
| Diluted EPS | $0.59 | $0.38 | $1.17 | $0.57 |
- Q2 investment advisory fees rose 36.6% to $492.0 million; average AUM increased to $413.5 billion from $301.4 billion. The annualized advisory fee rate was 47.7 basis points, slightly below 47.9 basis points a year earlier.
- For the first half, advisory fees increased 44.5% to $963.8 million. The average fee rate was 48.0 basis points versus 47.5 basis points in the prior-year period.
- Q2 compensation and related costs were $215.1 million; advertising and promotion was $20.1 million. The company attributed compensation growth mainly to variable compensation and higher advertising to improved investor sentiment.
Assets, liquidity and cash flow
- AUM ended June at $391.1 billion, nearly unchanged from $391.3 billion at year-end 2009 but down 6.7% from $419.0 billion at March 31. First-half net inflows of $15.4 billion were offset by $15.6 billion of market depreciation, net of income. Q2 net inflows were $5.1 billion, while market depreciation, net of income, was $33.0 billion.
- Q2 ending AUM included $280.6 billion in stock and blended portfolios and $110.5 billion in fixed-income portfolios. U.S. mutual fund AUM was $233.5 billion; other portfolios were $157.6 billion.
- First-half operating cash flow was $452.2 million, compared with $269.8 million in 2009. Investing activities used $223.0 million, principally including the UTI investment; financing activities used $237.4 million, including dividends and share repurchases. Cash and cash equivalents ended June at $735.1 million.
- The company reported $1.4 billion in cash and mutual fund investments and no debt. Total assets were $3.403 billion, total liabilities $443.7 million, and stockholders’ equity $2.959 billion at June 30. Management said it had substantial liquidity and did not maintain an external liquidity source.
- First-half dividends were $139.8 million; 3.6 million shares were repurchased for $175.1 million. Of the repurchase amount, $20.6 million remained unsettled at June 30.
Material changes and unusual items
- Quarterly earnings growth reflected higher average AUM and advisory revenue, following the recovery in markets over the prior twelve months. However, equity markets fell sharply in Q2: the S&P 500 declined 11.4% and the NASDAQ Composite 12.0%.
- On January 20, 2010, the company acquired a 26% equity interest in UTI Asset Management Company and an affiliate for $142.4 million plus transaction costs. The investment was carried at $151.0 million at June 30; the company recognized $1.0 million of its share of UTI earnings in Q2 and the first half. Currency hedging related to the purchase contributed $2.2 million of first-half non-operating investment income.
- First-half non-operating investment income was $9.2 million, compared with a $28.1 million loss in 2009. The prior-year period included $36.1 million of other-than-temporary impairments on sponsored mutual fund investments.
- The company voluntarily waived $6.4 million of money market advisory fees in Q2 and $13.2 million in the first half to maintain positive yields for investors.
- Accumulated other comprehensive income declined to $83.3 million from $101.9 million at year-end, primarily reflecting unrealized investment losses, partly offset by currency translation gains.
Outlook, risks and contingencies
- Management anticipated that money market fee waivers could continue for the remainder of 2010. It estimated a full-year 2010 effective tax rate of 38.0% and expected full-year property and equipment expenditures of about $150 million, funded from cash balances.
- Management said Q3 advertising spending was expected to be in line with Q2 and full-year 2010 advertising could increase up to 30% from 2009. Spending remains subject to market conditions and investor demand.
- Results are sensitive to financial-market movements, AUM composition and flows, investment performance, investor confidence, fee levels, competition, and expenses. The company also cited regulatory, legal, accounting and tax changes, as well as operational and service-disruption risks. These forward-looking expectations are not guarantees.
- Management stated that the likelihood of pending ordinary-course claims having a material adverse effect was remote. The filing reported no material change in previously disclosed risk factors or market-risk information.
Important facts for investors to verify
- Whether AUM and net flows recover or further market declines pressure fee revenue, given the sharp Q2 reduction in market values.
- The continuation and financial impact of money market fee waivers, and the realized advisory fee rate as asset mix changes.
- Performance and carrying value of the UTI investment, including foreign-currency exposure and subsequent results.
- Execution of the stated 2010 tax, advertising and capital-spending expectations, and the effect of compensation and other cost growth on margins.
- Subsequent share repurchases, dividends, and any material developments in claims, regulation or other disclosed risks.