What drove the increase in T. Rowe Price's 2004 earnings?

Net income rose to $337.3 million from $227.5 million, mainly because investment advisory fees grew to $1.03 billion from $777.5 million. The growth came from higher average assets under management, which reached $206.9 billion on average in 2004 compared with $159.9 billion in 2003. Net operating income increased 44%, and the filing attributes the rise to these higher advisory revenues.

How much of the asset growth came from market performance versus new investor money?

Of the $45 billion increase in assets under management, improving market valuations and income added $24.5 billion, and net investor inflows added a record $20.7 billion. Within the inflows, about $12.7 billion went into U.S. mutual funds and $8.0 billion into other portfolios.

Does the company carry debt, and how strong is its balance sheet?

No. The filing reports zero debt at December 31, 2004, down from $312 million in 2000. Stockholders' equity increased to $1.697 billion, and cash and cash equivalents reached $499.8 million. The company also had an undrawn, committed $300 million credit facility.

What are the main risks to future revenues?

Revenues depend largely on assets under management, so market declines directly reduce advisory revenues and net income. Revenues are also substantially dependent on contracts with the Price funds, which can be terminated by either party after 60 days' notice, and the filing notes that termination of one or more of these agreements could have a material adverse effect.

What expense increases are expected in 2005?

Management expects advertising and promotion expenditures for 2005 to be 10% to 15% higher than in 2004. Starting in the third quarter of 2005, the company must also expense stock options under the revised FASB Statement No. 123, with the 2005 amount estimated at about $25.8 million for the first half and $23.7 million for the second half in compensation expense.

TROW 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2005. Cited figures are marked; the original filing is the authoritative source.

Rowe Price Group, Inc. reported record results for fiscal 2004. Assets under management ended the year at a record $235.2 billion^a, up more than $45 billion during the year, driven by $24.5 billion of market appreciation and income and a record $20.7 billion of net investor inflows. Of the inflows, nearly $12.7 billion went into U.S. mutual funds and $8.0 billion into other portfolios.

Net operating income rose $160 million to $525 million^b, and net income increased to $337 million from $227.5 million in 2003, with diluted earnings per share of $2.51 versus $1.77. Net revenues reached $1.277 billion. Investment advisory fees rose 32% to $1.03 billion, and compensation costs increased 20%.

The balance sheet strengthened, with stockholders' equity rising to $1.697 billion^c from $1.329 billion and cash and cash equivalents reaching $499.8 million. The company carries no debt, and goodwill of $666 million is tied to its single investment advisory business. Management stated that the goodwill fair value test in 2004 showed no impairment.

The company also raised its quarterly dividend to $.23 per share in December 2004 and expects to maintain that rate for the first three quarters of 2005. Management expects 2005 advertising and promotion spending to be 10%^d to 15% higher than 2004, and it anticipates that stock option expensing under the revised FASB Statement No. 123 will begin in the third quarter of 2005. Key risks disclosed include the company's dependence on Price fund advisory agreements, which can be terminated by either party after 60 days' notice, and the potential effect of market declines on revenues.

The filing also discloses a pending purported class action related to market timing in the T. Rowe Price International Stock Fund, and management considers an adverse outcome unlikely to be material.

02—Key points

Key Highlights

Assets under management reached a record $235.2 billion at December 31, 2004, up more than $45 billion during the year.
Record net investor inflows of $20.7 billion in 2004, including nearly $12.7 billion into U.S. mutual funds, exceeding the prior U.S. mutual fund record of $8.6 billion set in 1996.
Net income rose to $337.3 million ($2.51 diluted EPS) from $227.5 million ($1.77 diluted EPS) in 2003.
Net operating income increased $160 million to $525 million, and net revenues rose to $1.277 billion from $995.6 million.
Investment advisory fees increased to $1.03 billion from $777.5 million, with the change driven mainly by higher average assets under management.
The company has no debt, stockholders' equity grew to $1.697 billion, and the quarterly dividend was raised to $.23 per share in December 2004.
Management flagged a pending market-timing class action involving the T. Rowe Price International Stock Fund and considers an adverse outcome unlikely to be material.

03—Questions

Frequently Asked Questions

What drove the increase in T. Rowe Price's 2004 earnings?
Net income rose to $337.3 million from $227.5 million, mainly because investment advisory fees grew to $1.03 billion from $777.5 million. The growth came from higher average assets under management, which reached $206.9 billion on average in 2004 compared with $159.9 billion in 2003. Net operating income increased 44%, and the filing attributes the rise to these higher advisory revenues.
How much of the asset growth came from market performance versus new investor money?
Of the $45 billion increase in assets under management, improving market valuations and income added $24.5 billion, and net investor inflows added a record $20.7 billion. Within the inflows, about $12.7 billion went into U.S. mutual funds and $8.0 billion into other portfolios.
Does the company carry debt, and how strong is its balance sheet?
No. The filing reports zero debt at December 31, 2004, down from $312 million in 2000. Stockholders' equity increased to $1.697 billion, and cash and cash equivalents reached $499.8 million. The company also had an undrawn, committed $300 million credit facility.
What are the main risks to future revenues?
Revenues depend largely on assets under management, so market declines directly reduce advisory revenues and net income. Revenues are also substantially dependent on contracts with the Price funds, which can be terminated by either party after 60 days' notice, and the filing notes that termination of one or more of these agreements could have a material adverse effect.
What expense increases are expected in 2005?
Management expects advertising and promotion expenditures for 2005 to be 10% to 15% higher than in 2004. Starting in the third quarter of 2005, the company must also expense stock options under the revised FASB Statement No. 123, with the 2005 amount estimated at about $25.8 million for the first half and $23.7 million for the second half in compensation expense.

04—Continue

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