T. Rowe Price Group, Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports unaudited quarterly results, including fourth-quarter 2009.
Business context
T. Rowe Price earns most revenue from investment advisory fees, generally based on assets under management (AUM), and also provides related administrative services. Its results therefore depend heavily on market values, client flows, portfolio mix, and investment performance. The company reported that it was debt-free.
Financial and operating metrics
| Metric | 2009 | 2008 | Change / context |
|---|---|---|---|
| Net revenues | $1.867 billion | $2.116 billion | Down 12% |
| Investment advisory fees | $1.546 billion | $1.761 billion | Down 12% |
| Net operating income | $701.6 million | $848.5 million | Down 17% |
| Operating margin | 37.6% | 40.1% | Down 2.5 percentage points |
| Net income | $433.6 million | $490.8 million | Down 12% |
| Diluted EPS | $1.65 | $1.81 | Down 9% |
| Cash from operating activities | $535.6 million | $741.8 million | Down $206 million |
| Year-end cash and cash equivalents | $743.3 million | $619.1 million | Up $124.2 million |
| Total assets | $3.210 billion | $2.819 billion | Up |
| Stockholders’ equity | $2.882 billion | $2.489 billion | Up |
Year-end AUM rebounded to $391.3 billion from $276.3 billion in 2008, near the 2007 high of $400.0 billion. Net inflows were $22.7 billion and market gains and income added $92.7 billion. Average AUM, however, fell to $321.3 billion from $358.2 billion, weighing on annual advisory revenue. Advisory fees averaged 48.1 basis points of AUM versus 49.2 basis points in 2008.
At year-end, AUM comprised $290.4 billion in equity and blended portfolios and $100.9 billion in fixed income portfolios; $232.7 billion was in U.S.-distributed T. Rowe Price funds and $158.6 billion in other portfolios. Fourth-quarter 2009 net revenues were $542.6 million and net income was $152.5 million; diluted EPS was $0.57.
Liquidity remained substantial: cash and mutual fund investment holdings totaled $1.4 billion, and management said no external liquidity source was maintained. The balance sheet showed $328.1 million of total liabilities, including $161.3 million in savings-bank customer deposits; the company described itself as debt-free. Cash dividends declared were $1.00 per share for 2009.
Material changes versus 2008
- Revenue and operating profit declined as lower average AUM and a less favorable portfolio mix reduced advisory fees; the average annual advisory fee rate also fell.
- Operating expenses declined 8% to $1.166 billion, a $102 million reduction, but this only partly offset lower revenue. Compensation costs fell, advertising and promotion declined 30%, and the workforce was reduced by 5.5% in April 2009.
- Non-operating investment loss improved to $12.7 million from $52.3 million. Other-than-temporary impairment charges on sponsored mutual fund investments were $36.1 million, compared with $91.3 million in 2008; no mutual fund investment impairment remained at year-end.
- Operating cash flow fell, partly because of working-capital timing and lower net income. Investing activities used $166.7 million and financing activities used $244.7 million; share repurchases dropped sharply from 2008.
- Accumulated other comprehensive income recovered to $101.9 million from a $13.1 million loss, largely reflecting unrealized investment gains.
Outlook, management commentary, and risks
- Management described markets as recovering from the severe 2008–early 2009 downturn, while noting uncertainty about the strength and durability of global growth. No earnings or revenue guidance was provided.
- Management estimated 2010 advertising and promotion spending could rise by up to 30% from 2009, with about $26 million planned for the first quarter. Expected 2010 property and equipment expenditures were about $150 million. The company anticipated 2010 quarterly dividends, in aggregate, to exceed the $1.00 per share declared and paid in 2009; this was not assured.
- Money-market yields near zero led the company to reduce advisory fees to maintain fund yields at or above zero; the fee reductions continued into 2010.
- On January 20, 2010, the company completed a 26% investment in India’s UTI Asset Management Company and an affiliate for $142.4 million plus about $3.5 million in transaction costs, funded from cash. The investment is to be accounted for under the equity method.
- Key risks include market declines and AUM outflows, weaker relative investment performance, pressure on fees, termination or renegotiation of fund advisory contracts, competition and dependence on third-party distribution relationships, low interest rates affecting money-market fees, and regulatory, operational, technology, cybersecurity, personnel, litigation, and investment risks.
- Management said pending claims were ordinary-course matters and that the likelihood of a material adverse outcome was remote. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether AUM growth and net inflows continue, and whether average AUM and the fee-earning portfolio mix recover.
- Whether fee waivers for money-market funds persist and how they affect advisory revenue and margins.
- Whether expense reductions can offset revenue pressure without impairing investment performance or client service.
- The UTI investment’s subsequent financial contribution, integration or strategic benefits, and exposure to currency and market risks.
- Cash deployment plans, including capital spending, dividends, share repurchases, and the $178 million of investment funding commitments reported at December 31, 2009.
- Market sensitivity of corporate fund holdings: the filing estimated a hypothetical $207.2 million loss using funds’ lowest 2009 NAVs, before tax; this was a sensitivity estimate, not a forecast.