UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: SEPTEMBER 30, 2003.
Commission file number: 000-32191.
Exact name of registrant as specified in its charter:
T. ROWE PRICE GROUP, INC.
State of incorporation: MARYLAND.
I.R.S. Employer Identification No.: 52-2264646.
Address and Zip Code of principal executive offices: 100 EAST PRATT STREET, BALTIMORE, MARYLAND 21202.
Registrant’s telephone number, including area code: (410) 345-2000.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X]. No [ ].
Indicate the number of shares outstanding of the issuer’s common stock ($.20 par value), as of the latest practicable date. 124,520,582 SHARES AT OCTOBER 23, 2003.
Exhibit index is at Item 6(a) on page 14.
Page 1
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| 12/31/2002 | 09/30/2003 | |||||||||
ASSETS |
||||||||||
Cash and cash equivalents |
$ | 111,418 | $ | 226,506 | ||||||
Accounts receivable |
96,787 | 114,648 | ||||||||
Investments in sponsored mutual funds |
123,172 | 139,020 | ||||||||
Debt securities held by savings bank subsidiary |
92,908 | 104,875 | ||||||||
Property and equipment |
215,590 | 202,057 | ||||||||
Goodwill |
665,692 | 665,692 | ||||||||
Other assets |
64,866 | 59,641 | ||||||||
| $ | 1,370,433 | $ | 1,512,439 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Liabilities |
||||||||||
Accounts payable and accrued expenses |
$ | 43,902 | $ | 35,173 | ||||||
Accrued compensation and related costs |
34,640 | 82,912 | ||||||||
Dividends payable |
20,860 | 21,166 | ||||||||
Customer deposits at savings bank subsidiary |
81,292 | 95,057 | ||||||||
Debt and accrued interest |
55,899 | 12,996 | ||||||||
Total liabilities |
236,593 | 247,304 | ||||||||
Commitments and contingent liabilities |
||||||||||
Stockholders’ equity |
||||||||||
Preferred stock, undesignated, $.20 par value -
authorized and unissued 20,000,000 shares |
— | — | ||||||||
Common stock, $.20 par value — authorized
500,000,000 shares; issued 122,648,696 shares
in 2002 and 124,417,641 shares in 2003 |
24,530 | 24,884 | ||||||||
Additional capital in excess of par value |
80,744 | 120,857 | ||||||||
Retained earnings |
1,019,925 | 1,098,991 | ||||||||
Accumulated other comprehensive income |
8,641 | 20,403 | ||||||||
Total stockholders’ equity |
1,133,840 | 1,265,135 | ||||||||
| $ | 1,370,433 | $ | 1,512,439 | |||||||
See the accompanying notes to the condensed consolidated financial statements.
Page 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share amounts)
| Three months | Nine months | |||||||||||||||||
| ended | ended | |||||||||||||||||
| 09/30/02 | 09/30/03 | 09/30/02 | 09/30/03 | |||||||||||||||
Revenues |
||||||||||||||||||
Investment advisory fees |
$ | 168,622 | $ | 205,176 | $ | 546,873 | $ | 553,461 | ||||||||||
Administrative fees and other
income |
52,725 | 52,947 | 156,481 | 160,525 | ||||||||||||||
Investment income of savings
bank subsidiary |
989 | 977 | 2,042 | 2,908 | ||||||||||||||
Total revenues |
222,336 | 259,100 | 705,396 | 716,894 | ||||||||||||||
Interest expense on savings bank
deposits |
760 | 832 | 1,532 | 2,446 | ||||||||||||||
Net revenues |
221,576 | 258,268 | 703,864 | 714,448 | ||||||||||||||
Operating expenses |
||||||||||||||||||
Compensation and related costs |
88,620 | 97,441 | 273,700 | 283,931 | ||||||||||||||
Advertising and promotion |
10,766 | 9,885 | 42,113 | 38,622 | ||||||||||||||
Depreciation and amortization of
property and equipment |
12,712 | 11,287 | 38,454 | 34,843 | ||||||||||||||
Occupancy and facility costs |
15,154 | 15,285 | 46,000 | 46,791 | ||||||||||||||
Other operating expenses |
21,377 | 18,840 | 55,566 | 55,471 | ||||||||||||||
| 148,629 | 152,738 | 455,833 | 459,658 | |||||||||||||||
Net operating income |
72,947 | 105,530 | 248,031 | 254,790 | ||||||||||||||
Other investment income (loss) |
(2,040 | ) | 588 | (6,828 | ) | 791 | ||||||||||||
Other interest expense |
577 | 332 | 2,075 | 1,312 | ||||||||||||||
Net non-operating income (loss) |
(2,617 | ) | 256 | (8,903 | ) | (521 | ) | |||||||||||
Income before income taxes |
70,330 | 105,786 | 239,128 | 254,269 | ||||||||||||||
Provision for income taxes |
27,120 | 39,495 | 91,040 | 95,429 | ||||||||||||||
Net income |
$ | 43,210 | $ | 66,291 | $ | 148,088 | $ | 158,840 | ||||||||||
Earnings per share |
||||||||||||||||||
Basic |
$ | .35 | $ | .53 | $ | 1.20 | $ | 1.29 | ||||||||||
Diluted |
$ | .34 | $ | .51 | $ | 1.15 | $ | 1.25 | ||||||||||
Dividends declared per share |
$ | .16 | $ | .17 | $ | .48 | $ | .51 | ||||||||||
Weighted average shares -
Outstanding |
122,396 | 124,013 | 123,017 | 122,993 | ||||||||||||||
Assuming dilution |
126,051 | 130,072 | 128,291 | 127,495 | ||||||||||||||
See the accompanying notes to the condensed consolidated financial statements.
Page 3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine months ended | ||||||||||
| 09/30/02 | 09/30/03 | |||||||||
Cash flows from operating activities |
||||||||||
Net income |
$ | 148,088 | $ | 158,840 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities |
||||||||||
Depreciation and amortization of property
and equipment |
38,454 | 34,843 | ||||||||
Other changes in assets and liabilities |
69,428 | 42,340 | ||||||||
Net cash provided by operating activities |
255,970 | 236,023 | ||||||||
Cash flows from investing activities |
||||||||||
Investments in sponsored mutual funds |
(11,883 | ) | (7,037 | ) | ||||||
Dispositions of sponsored mutual funds |
— | 10,203 | ||||||||
Investments in debt securities by savings
bank subsidiary |
(66,113 | ) | (66,796 | ) | ||||||
Dispositions of investments in debt securities
held by savings bank subsidiary |
11,252 | 53,054 | ||||||||
Additions to property and equipment |
(19,519 | ) | (21,631 | ) | ||||||
Net distributions from other investments |
1,582 | 2,989 | ||||||||
Net cash used in investing activities |
(84,681 | ) | (29,218 | ) | ||||||
Cash flows from financing activities |
||||||||||
Repurchases of common shares |
(91,916 | ) | (19,962 | ) | ||||||
Stock options exercised |
21,872 | 20,532 | ||||||||
Debt principal repaid |
(48,366 | ) | (43,531 | ) | ||||||
Dividends paid to stockholders |
(59,129 | ) | (62,521 | ) | ||||||
Savings bank subsidiary deposits |
49,925 | 13,765 | ||||||||
Net cash used in financing activities |
(127,614 | ) | (91,717 | ) | ||||||
Cash and cash equivalents |
||||||||||
Net increase during period |
43,675 | 115,088 | ||||||||
At beginning of year |
79,741 | 111,418 | ||||||||
At end of period |
$ | 123,416 | $ | 226,506 | ||||||
See the accompanying notes to the condensed consolidated financial statements.
Page 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
| Additional | Accumulated | ||||||||||||||||||||
| capital in | other | Total | |||||||||||||||||||
| Common | excess of | Retained | comprehensive | stockholders' | |||||||||||||||||
| stock | par value | earnings | income | equity | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
Balance at December 31, |
|||||||||||||||||||||
2002, 122,648,696 common
shares |
$ | 24,530 | $ | 80,744 | $ | 1,019,925 | $ | 8,641 | $ | 1,133,840 | |||||||||||
Comprehensive
income |
|||||||||||||||||||||
Net
income |
158,840 | ||||||||||||||||||||
Change in unrealized
security holding gains,
net of taxes, including
$2,299 in the third
quarter |
11,762 | ||||||||||||||||||||
Total comprehensive
income |
170,602 | ||||||||||||||||||||
2,555,945 common shares
issued under stock-based compensation plans |
511 | 42,971 | 43,482 | ||||||||||||||||||
787,000 common shares
repurchased |
(157 | ) | (2,858 | ) | (16,947 | ) | (19,962 | ) | |||||||||||||
Dividends declared |
(62,827 | ) | (62,827 | ) | |||||||||||||||||
Balance at September 30,
2003, 124,417,641 common
shares |
$ | 24,884 | $ | 120,857 | $ | 1,098,991 | $ | 20,403 | $ | 1,265,135 | |||||||||||
See the accompanying notes to the condensed consolidated financial statements.
Page 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — THE COMPANY AND BASIS OF PREPARATION.
T. Rowe Price Group derives its consolidated revenues and net income primarily from investment advisory services that its subsidiaries provide to individual and institutional investors in the sponsored T. Rowe Price mutual funds and other investment portfolios. We also provide our investment advisory clients with related administrative services, including mutual fund transfer agent, accounting and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; discount brokerage; and trust services. The investors that we serve are primarily domiciled in the United States of America.
Investment advisory revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and results of operations.
These unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of our results for the interim periods presented. All such adjustments are of a normal recurring nature.
The unaudited interim financial information contained in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our 2002 Annual Report. Certain 2002 financial information presented herein has been reclassified to conform to the presentation in our 2002 Annual Report.
STOCK OPTION GRANTS.
Our stock-based compensation plans are accounted for using the intrinsic value based method. The exercise price of each option granted is equivalent to the market price of the common stock at the date of grant. Accordingly, no compensation expense related to stock option grants has been recognized in the consolidated statements of income.
Accounting principles require us to illustrate the effect on net income (in thousands) and earnings per share as if the fair value based method of accounting had been applied to our stock option grants after 1994.
| Three months ended | Nine months ended | ||||||||||||||||
| 09/30/02 | 09/30/03 | 09/30/02 | 09/30/03 | ||||||||||||||
Net income, as reported |
$ | 43,210 | $ | 66,291 | $ | 148,088 | $ | 158,840 | |||||||||
Additional stock-option based
compensation expense estimated
using the fair value based method |
(11,775 | ) | (9,104 | ) | (28,858 | ) | (28,551 | ) | |||||||||
Related income tax benefits |
3,571 | 2,851 | 8,857 | 8,641 | |||||||||||||
Pro forma net income |
$ | 35,006 | $ | 60,038 | $ | 128,087 | $ | 138,930 | |||||||||
Earnings per share |
|||||||||||||||||
Basic — as reported |
$ | .35 | $ | .53 | $ | 1.20 | $ | 1.29 | |||||||||
Basic — pro forma |
$ | .29 | $ | .48 | $ | 1.05 | $ | 1.13 | |||||||||
Diluted — as reported |
$ | .34 | $ | .51 | $ | 1.15 | $ | 1.25 | |||||||||
Diluted — pro forma |
$ | .28 | $ | .46 | $ | 1.00 | $ | 1.09 | |||||||||
Page 6
It is important to note that the recognition of stock option grants using the fair value based method results in an increase to additional capital in excess of par value; accordingly, total stockholders’ equity is not diminished if the fair value method is used to recognize stock option-based compensation.
NOTE 2 — DEBT.
On July 17, 2003, we repaid our remaining dollar-denominated debt balance of $5 million.
On April 2, 2003, we reduced our yen-denominated debt by 180,950,000 yen ($1.5 million). We expect to retire the remaining balance of 1,447,600,000 yen ($13.0 million at September 30, 2003) in November 2003.
NOTE 3 — INFORMATION ABOUT REVENUES AND SERVICES.
Revenues (in thousands) from advisory services provided under agreements with sponsored U.S. mutual funds and other investment clients for the nine months ended September 30 include:
| 2002 | 2003 | ||||||||
Sponsored U.S. mutual funds |
|||||||||
Stock |
$ | 318,595 | $ | 306,255 | |||||
Bond and money market |
78,824 | 91,763 | |||||||
| 397,419 | 398,018 | ||||||||
Other portfolios |
149,454 | 155,443 | |||||||
Total investment advisory fees |
$ | 546,873 | $ | 553,461 | |||||
The following table summarizes the various investment portfolios and assets under management (in billions) on which advisory fees are earned.
| Average during | |||||||||||||||||
| first 9 months | |||||||||||||||||