T. Rowe Price Group, Inc.
PRICE T ROWE GROUP INC (Form: 10-Q, Received: 07/25/2008 14:10:52)
 
 
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 June 30, 2008
Commission File Number: 000-32191
T. ROWE PRICE GROUP, INC.
( Exact name of registrant as specified in its charter)
     
Maryland   52-2264646
     
(State of incorporation)   (I.R.S. Employer Identification No.)
100 East Pratt Street, Baltimore, Maryland 21202
(Address, including Zip Code, of principal executive offices)
(410) 345-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
             
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The number of shares outstanding of the issuer’s common stock ($.20 par value), as of the latest practicable date, July 23, 2008, is 258,744,897 .
The exhibit index is at Item 6 on page 15.
 
 

 


 

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
                 
    12/31/2007     6/30/2008  
ASSETS
               
Cash and cash equivalents
  $ 785.1     $ 681.2  
Accounts receivable and accrued revenue
    265.3       262.1  
Investments in sponsored mutual funds
    773.0       730.5  
Debt securities held by savings bank subsidiary
    126.9       124.7  
Other investments
    102.3       90.8  
Property and equipment
    358.3       382.7  
Goodwill and other intangible assets
    668.8       668.5  
Other assets
    97.6       109.3  
 
           
Total assets
  $ 3,177.3     $ 3,049.8  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities
               
Accounts payable and accrued expenses
  $ 99.5     $ 93.2  
Accrued compensation and related costs
    81.1       157.5  
Income taxes payable
    41.7       33.9  
Dividends payable
    63.6        
Customer deposits at savings bank subsidiary
    114.3       113.0  
 
           
Total liabilities
    400.2       397.6  
 
           
 
               
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 in 2007 and 750,000,000 in 2008; issued 264,605,000 shares in 2007 and 259,723,000 shares in 2008
    52.9       51.9  
Additional capital in excess of par value
    295.8       331.9  
Retained earnings
    2,333.4       2,203.9  
Accumulated other comprehensive income
    95.0       64.5  
 
           
Total stockholders’ equity
    2,777.1       2,652.2  
 
           
 
  $ 3,177.3     $ 3,049.8  
 
           
The accompanying notes are an integral part of these statements.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per-share amounts)
                                 
    Three months ended     Six months ended  
    6/30/2007     6/30/2008     6/30/2007     6/30/2008  
Revenues
                               
Investment advisory fees
  $ 464.1     $ 495.3     $ 889.1     $ 965.4  
Administrative fees
    86.7       90.9       169.8       179.7  
Investment income of savings bank subsidiary
    1.5       1.5       3.0       3.0  
 
                       
Total revenues
    552.3       587.7       1,061.9       1,148.1  
Interest expense on savings bank deposits
    1.2       1.2       2.4       2.5  
 
                       
Net revenues
    551.1       586.5       1,059.5       1,145.6  
 
                       
 
                               
Operating expenses
                               
Compensation and related costs
    197.0       218.0       381.2       425.4  
Advertising and promotion
    21.9       20.2       53.7       56.7  
Depreciation and amortization of property and equipment
    14.0       15.6       27.7       30.6  
Occupancy and facility costs
    22.7       24.9       44.1       50.0  
Other operating expenses
    44.4       49.2       82.8       94.2  
 
                       
 
    300.0       327.9       589.5       656.9  
 
                       
 
                               
Net operating income
    251.1       258.6       470.0       488.7  
 
                               
Non-operating investment income
    11.7       7.8       23.5       22.1  
 
                       
 
                               
Income before income taxes
    262.8       266.4       493.5       510.8  
Provision for income taxes
    100.6       104.2       188.4       197.1  
 
                       
Net income
  $ 162.2     $ 162.2     $ 305.1     $ 313.7  
 
                       
 
                               
Earnings per share
                               
Basic
  $ .61     $ .62     $ 1.15     $ 1.20  
 
                       
Diluted
  $ .58     $ .60     $ 1.09     $ 1.15  
 
                       
 
                               
Dividends declared per share
  $ .17     $ .24     $ .34     $ .48  
 
                       
 
                               
Weighted average shares
                               
Outstanding
    265.4       259.6       265.5       260.7  
 
                       
Outstanding assuming dilution
    280.0       272.4       280.0       273.0  
 
                       
The accompanying notes are an integral part of these statements.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
                 
    Six months ended  
    6/30/2007     6/30/2008  
Cash flows from operating activities
               
Net income
  $ 305.1     $ 313.7  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation and amortization of property and equipment
    27.7       30.6  
Stock-based compensation expense
    36.2       39.3  
Intangible asset amortization
    0.3       0.3  
Other changes in assets and liabilities
    52.5       69.3  
 
           
Net cash provided by operating activities
    421.8       453.2  
 
           
 
               
Cash flows from investing activities
               
Investments in sponsored mutual funds
    (81.7 )     (8.5 )
Additions to property and equipment
    (58.8 )     (53.5 )
Other investing activity
    (1.5 )     18.8  
 
           
Net cash used in investing activities
    (142.0 )     (43.2 )
 
           
 
               
Cash flows from financing activities
               
Repurchases of common stock
    (99.2 )     (369.7 )
Common share issuances under stock-based compensation plans
    38.6       45.5  
Dividends paid to stockholders
    (90.3 )     (188.4 )
Change in savings bank subsidiary deposits
    (6.7 )     (1.3 )
 
           
Net cash used in financing activities
    (157.6 )     (513.9 )
 
           
 
               
Cash and cash equivalents
               
Net change during period
    122.2       (103.9 )
At beginning of year
    773.0       785.1  
 
           
At end of period
  $ 895.2     $ 681.2  
 
           
The accompanying notes are an integral part of these statements.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(shares in thousands; dollars in millions)
                                                 
                    Additional             Accumulated        
    Common             capital in             other     Total  
    shares     Common     excess of     Retained     comprehensive     stockholders’  
    outstanding     Stock     par value     Earnings     income     equity  
Balances at December 31, 2007
    264,605     $ 52.9     $ 295.8     $ 2,333.4     $ 95.0     $ 2,777.1  
Common stock-based compensation plans activity
                                               
Shares issued upon option exercises
    2,279       .4       46.7                       47.1  
Shares issued upon vesting of restricted stock units
    2       .0       (.1 )                     (.1 )
Restricted shares issued
    15       .0       .0                       .0  
Restricted shares forfeited
    (3 )     .0       .0       .0               .0  
Stock-based compensation expense
                    39.3                       39.3  
Common shares repurchased
    (7,175 )     (1.4 )     (49.9 )     (318.3 )             (369.6 )
Comprehensive income
                                               
Net income
                            313.7                  
Change in unrealized security holding gains, net of taxes (including $.5 million in the second quarter)
                                    (30.5 )        
Total comprehensive income
                                            283.2  
Dividends declared and related tax benefits
                    .1       (124.9 )             (124.8 )
 
                                   
Balances at June 30, 2008
    259,723     $ 51.9     $ 331.9     $ 2,203.9     $ 64.5     $ 2,652.2  
 
                                   
The accompanying notes are an integral part of these statements.

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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. While investors that we serve are primarily domiciled in the United States of America, investment advisory clients outside the United States account for more than 10% of our assets under management at June 30, 2008.
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 are prepared in accordance with accounting principles generally accepted in the United States and reflect all adjustments that 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 2007 Annual Report.
NOTE 2 — INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES.
Accounts receivable from our sponsored mutual funds for advisory fees and advisory-related administrative services aggregate $144.6 million at December 31, 2007, and $137.5 million at June 30, 2008.
Revenues (in millions) from advisory services provided under agreements with our sponsored mutual funds and other investment clients include:
                                 
    Three months ended     Six months ended  
    6/30/2007     6/30/2008     6/30/2007     6/30/2008  
Sponsored mutual funds in the U.S.
                               
Stock and blended asset
  $ 290.6     $ 296.8     $ 553.7     $ 579.2  
Bond and money market
    45.3       52.7       88.0       103.9  
 
                       
 
    335.9       349.5       641.7       683.1  
Other portfolios
    128.2       145.8       247.4       282.3  
 
                       
Total investment advisory fees
  $ 464.1     $ 495.3     $ 889.1     $ 965.4  
 
                       
The following table summarizes the various investment portfolios and assets under management (in billions) on which we earn advisory fees.
                                 
    Average during     Average during  
    the second quarter     the first half  
    2007     2008     2007     2008  
Sponsored mutual funds in the U.S.
                               
Stock and blended asset
  $ 191.1     $ 194.4     $ 182.9     $ 189.5  
Bond and money market
    40.9       48.2       40.0       47.4  
 
                       
 
    232.0       242.6       222.9       236.9  
Other portfolios
    138.9       157.4       134.4       152.6  
 
                       
 
  $ 370.9     $ 400.0     $ 357.3     $ 389.5  
 
                       
                 
    12/31/2007     6/30/2008  
Sponsored mutual funds in the U.S.
               
Stock and blended asset
  $ 200.6     $ 185.0  
Bond and money market
    45.4       48.3  
 
           
 
    246.0       233.3  
Other portfolios
    154.0       154.4  
 
           
 
  $ 400.0     $ 387.7  
 
           
Fees for advisory-related administrative services provided to our sponsored mutual funds during the first half of the year were $134.1 million in 2007 and $144.5 million in 2008. Fees for these services during the second quarter were $68.1 million in 2007 and $72.5 million in 2008.

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NOTE 3 – FAIR VALUE MEASUREMENTS.
The following disclosures are made in conjunction with the initial application of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, in 2008.
We value our investments in sponsored mutual funds at the quoted closing net asset values, or NAVs, per share of each mutual fund last reported as of the balance sheet date.
Our investments in marketable debt securities, including mortgage- and other asset-backed securities held by our savings bank subsidiary, are reported at fair value. These debt securities are generally traded in the over-the-counter (OTC) market. Securities with original maturities of one year or more are valued by us based on prices furnished by dealers who make markets in such securities or by an independent pricing service, which considers the yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Securities with original maturities of less than one year generally are valued at amortized cost which approximates fair value; however, if amortized cost is deemed not to reflect fair value, such securities are valued by us based on prices furnished by dealers who make markets in such securities or by an independent pricing service.
We determine the fair value of our investments using three broad levels of inputs:
Level 1 – quoted prices in active markets for identical securities.
Level 2 – observable inputs other than Level 1 quoted prices including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds, and credit risk. These inputs are based on market data obtained from independent sources.
Level 3 – unobservable inputs reflecting our own assumptions based on the best information available. We do not have any investments valued using Level 3 inputs.
These levels are not necessarily an indication of the risk or liquidity associated with the investments. The following table summarizes our investments (in millions) at June 30, 2008, that are recognized in our balance sheet using fair value measurements determined based on the differing levels of inputs.
                 
    Level 1     Level 2  
Cash equivalents
  $ 602.3          
Investments in sponsored mutual funds
    730.5          
Debt securities held by savings bank subsidiary
        $ 124.7  
Other investments in marketable equity securities
    .1        
 
           
 
  $ 1,332.9     $ 124.7  
 
           
We have not applied the provisions of SFAS No. 157 related to disclosures surrounding nonfinancial assets, such as goodwill, and nonfinancial liabilities. In February 2008, the FASB deferred the required implementation of these disclosures until 2009.
NOTE 4 – COMMON STOCK.
Authorized shares.
At our annual meeting on April 10, 2008, our stockholders approved a charter amendment increasing our authorized common shares ($.20 par value) from 500,000,000 to 750,000,000. Our board of directors had duly approved and advised the amendment at their meeting on February 14, 2008.
Unsettled liability for common shares repurchased.
Accounts payable and accrued expenses includes $8.6 million at December 31, 2007, and $8.5 million at June 30, 2008, representing the unsettled liability for common stock repurchases made on the last three business days before quarter end.
Subsequent share repurchases.
During the first eleven days of July 2008, we repurchased 1,056,000 common shares for $55.4 million.

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Stock options.
The following table summarizes the status of and changes in our stock option grants during the first half of 2008.
                 
            Weighted-
            average
            exercise
    Options   price
Outstanding at beginning of 2008
    41,030,175     $ 31.16  
Reload grants
    461,218     $ 58.35  
Other grants
    5,000     $ 59.38  
Exercised
    (3,334,029 )   $ 21.39  
Forfeited or cancelled
    (449,400 )   $ 39.89  
 
               
Outstanding at June 30, 2008
    37,712,964     $ 32.26  
 
               
Exercisable at June 30, 2008
    21,457,124     $ 25.83  
 
               
Stock awards.
The following table summarizes the status of and changes in our nonvested restricted shares and restricted stock units during the first half of 2008.
                         
                    Weighted-
            Restricted   average
    Restricted   stock   grant-date
    shares   units   fair value
Nonvested at beginning of 2008
    319,300       140,250     $ 50.23  
Granted to employees and directors
    14,900       6,600     $ 55.92  
Dividend equivalents granted to directors
          115     $ 52.87  
Vested
    (2,400 )     (7,215 )   $ 49.20  
Forfeited
    (3,000 )     (2,500 )   $ 49.67  
 
                       
Nonvested at June 30, 2008
    328,800       137,250     $ 50.52  
 
                       
Future stock-based compensation expense.
The following table presents the compensation expense (in millions) to be recognized over the separate vesting periods of the 16,255,840 nonvested options and 466,050 restricted shares and restricted stock units outstanding at June 30, 2008. Estimated future compensation expense will change to reflect future option grants, including reloads; future awards of unrestricted shares, restricted shares, and restricted stock units; changes in estimated forfeitures; and adjustments for actual forfeitures.
         
Third quarter 2008
  $ 17.4  
Fourth quarter 2008
    12.9  
2009 through 2013
    68.4  
 
     
Total
  $ 98.7  
 
     

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
T. Rowe Price Group, Inc.:
We have reviewed the condensed consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries as of June 30, 2008, the related condensed consolidated statements of income for the three- and six-month periods ended June 30, 2007 and 2008, the related condensed consolidated statements of cash flows for the six-month periods ended June 30, 2007 and 2008, and the related condensed consolidated statement of stockholders’ equity for the six-month period ended June 30, 2008. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries as of December 31, 2007, and the related consolidated statements of income, cash flows, and stockholders’ equity for the year then ended (not presented herein); and in our report dated February 6, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Baltimore, Maryland
July 24, 2008

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
GENERAL.
Our revenues and net income are derived primarily from investment advisory services provided to individual and institutional investors in our sponsored mutual funds and other managed investment portfolios. Investment advisory clients outside the United States account for more than 10% of our assets under management at June 30, 2008.
We manage a broad range of U.S. and international stock, bond, and money market mutual funds and other investment portfolios which meet the varied needs and objectives of individual and institutional investors. 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.
The aftermath of the subprime mortgage market implosion in 2007 and the continuing credit crisis have significantly affected financial markets this year. At the beginning of 2008, equities declined dramatically around the world. In the United States, economic growth remained low in the first quarter, and the downside risks in the outlook increased. The Federal Reserve responded with a substantial further easing of U.S. monetary policy that reduced the federal funds rate by 225 basis points to 2% by the end of April. The U.S. Congress and President also sought to cushion the downturn through a fiscal stimulus package that began arriving in American households in the second quarter. The collapse of a large investment bank and securities trading firm was narrowly averted late in the first quarter, and the Federal Reserve initiated a series of actions, some of them unprecedented, to increase liquidity not only among the large commercial banks but also non-bank securities dealers. Despite these aggressive actions, investor sentiment has deteriorated as the continuing weakness in housing; rising food, energy and other commodity prices; the restraining effect of writedowns on bank capital and credit availability; the decline of the U.S. dollar versus foreign currencies; and sluggish job growth have raised concerns about the U.S. economy and, in turn, economies around the world. With costs increasing, inflationary concerns in the U.S. have more recently risen, effectively constraining the Federal Reserve’s ability to ease monetary policy further, despite the increased risk of weaker economic growth. With this backdrop, early July saw further financial market declines as many major indexes fell 20% below their most recent highs in October 2007. By mid-July, lower oil prices and improving investor sentiment had produced some rebound in equity valuations.
With financial markets under considerable stress, U.S. stock indexes produced mixed results in the second quarter of 2008. The broad S&P 500 Index of large-cap companies in leading industries of the U.S. economy registered a negative 2.73% return in the second quarter while the NASDAQ Composite Index, which is heavily weighted with technology companies, was up only .61% (excluding dividends). For the first six months of 2008, these indexes were down 11.91% and 13.55%, respectively.
Stocks outside the United States also retreated in the second quarter, even though the weak U.S. dollar reduced the magnitude of losses in dollar terms. The MSCI EAFE Index, which measures the performance of mostly large-cap stocks in Europe, Australasia and the Far East, produced a negative 1.93% return while the MSCI Emerging Markets Index had a negative .80% return. For the first six months of 2008, these indexes were down 10.58% and 11.64%, respectively.
Treasury yields rose across the maturity spectrum, although the increases were larger among short-term issues. The yield on 10-year U.S. Treasuries was 3.99% at June 30, 2008, up 54 basis points from March 31, 2008, but down 5 basis points from the end of 2007. Long-term Treasury bonds suffered the largest declines, as investors grew more concerned about inflation. Municipals were flat, as issues surrounding the companies insuring some municipal bonds erased earlier gains. Higher-risk corporate bonds, which had been severely punished in the liquidity crunch earlier in 2008, showed gains. Emerging market debt performed better than high-quality bonds issued in developed countries.
In this unsettled financial environment, investors have entrusted net inflows of $17.8 billion to our management thus far in 2008, including $8.1 billion in the second quarter. Total assets under our management ended June 2008 at $387.7 billion, up 2.4% from March 31, 2008 and down 3.1% from the beginning of the year. The change (in billions) thus far in 2008 occurred as follows.
                         
    Quarter     Quarter     First half  
    ended     ended     ended  
    3/31/2008     6/30/2008     6/30/2008  
Assets under management at beginning of period
  $ 400.0     $ 378.6     $ 400.0  
 
                 
Net cash inflows
                       
Sponsored mutual funds in the U.S.
    3.7       2.4       6.1  
Other portfolios
    6.0       5.7       11.7  
 
                 
 
    9.7       8.1       17.8  
Market valuation changes and income
    (31.1 )     1.0       (30.1 )
 
                 
Change during the period
    (21.4 )     9.1       (12.3 )
 
                 
 
                       
Assets under management at end of period
  $ 378.6     $ 387.7     $ 387.7  
 
                 
Assets under management at June 30, 2008, include $305.6 billion in equity and blended asset investment portfolios and $82.1 billion in fixed income investment portfolios. The investment portfolios that we manage consist of $233.3 billion in the T. Rowe Price mutual funds distributed in the United States and $154.4 billion in other investment portfolios, including separately managed accounts, sub-advised funds, and other sponsored investment portfolios including common trust funds and mutual funds offered to investors outside the U.S. and through variable annuity life insurance plans.
We incur significant expenditures to attract new investment advisory clients and additional investments from our existing clients. These efforts involve costs that generally precede any future revenues that we may recognize from increases to our assets under management.

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RESULTS OF OPERATIONS.
Second quarter 2008 versus second quarter 2007.
Investment advisory revenues were up almost 7%, or $31.2 million, to $495.3 million in the second quarter of 2008 as average assets under our management increased $29.1 billion to $400.0 billion. The average annualized fee rate earned on our assets under management was 49.8 basis points during the second quarter of 2008, virtually unchanged from the 50.2 basis points earned in 2007. Since our assets under management of $387.7 billion at June 30 are less than the second quarter 2008 average of $400.0 billion, down or flat financial markets in the next quarter will most likely result in lower investment advisory fees in the third quarter as compared to the second quarter of 2008.
Net revenues increased 6.4%, or $35.4 million, to $586.5 million. Operating expenses were $327.9 million in the second quarter of 2008, up 9.3% or $27.9 million from the 2007 quarter. Overall, net operating income for the second quarter of 2008 increased $7.5 million, or 3.0%, to $258.6 million. Higher operating expenses in 2008 and decreases in market valuations during the first quarter of this year, which lowered our assets under management and advisory revenues, resulted in our operating margin declining to 44.1% in the second quarter of 2008 from 45.6% in the second quarter of 2007. Net income was flat for the second quarter of 2008 versus the comparable 2007 quarter. Diluted earnings per share, however, increased to $.60, up $.02 or 3.4% as our weighted average shares outstanding have decreased due to our ongoing common share repurchases over the last twelve months.
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the United States increased 4.0%, or $13.6 million, to $349.5 million. Average mutual fund assets were $242.6 billion in the second quarter of 2008, an increase of 4.6% from the average for the comparable 2007 quarter. Mutual fund assets at June 30, 2008 were $233.3 billion, up $2.8 billion or 1.2% from the end of March 2008, but down 5.2% from the beginning of the year.
Net inflows to the mutual funds were $2.4 billion during the second quarter of 2008. Our international and global stock funds had net inflows of $1.2 billion, the U.S. stock funds added $.7 billion, and the bond and money funds added $.5 billion. The Emerging Markets Stock Fund attracted $.6 billion of net inflows during the second quarter of 2008. During the 2008 quarter, net fund inflows of $1.1 billion originated in our target-date Retirement Funds, which in turn invest in other T. Rowe Price funds. The Retirement Funds had net inflows of $1.1 billion during the second quarter after the transfer of $1.2 billion to other managed investment portfolios. Income and changes in market valuations in the mutual funds increased our fund assets under management by $.4 billion during the 2008 quarter.
Investment advisory revenues earned on the other investment portfolios that we manage increased $17.6 million, or 13.7%, to $145.8 million. Average assets in these portfolios were $157.4 billion during the second quarter of 2008, up $18.5 billion or 13.3% from the second quarter of 2007. Net inflows for the 2008 quarter were $5.7 billion from U.S. and international institutional investors and third-party financial intermediaries, including the $1.2 billion transferred from the target-date Retirement Funds. Income earned in these portfolios and changes in market valuations increased assets under management by $.6 billion during the 2008 quarter.
Administrative fees increased $4.2 million to $90.9 million. The change in these revenues includes $.7 million from 12b-1 distribution fees recognized on greater assets under management in the Advisor and R classes of our sponsored mutual fund shares. The balance of the increase is primarily attributable to our mutual fund servicing activities for the mutual funds and their investors. Changes in administrative fees are generally offset by similar changes in related operating expenses that are incurred to distribute the Advisor and R class fund shares through third party financial intermediaries and to provide services to the funds and their investors.
Our largest expense, compensation and related costs, increased $21.0 million, or 10.7% versus the 2007 quarter. This increase includes $10.0 million in salaries resulting from an 8.9% increase in our average staff count and an increase of our associates’ base salaries at the beginning of the year. At June 30, 2008, we employed 5,308 associates, up 4.5% from the end of 2007, primarily to handle increased volume-related activities and other growth. The increased compensation costs also include a $3.1 million increase in our interim accrual for annual bonuses, which are based on our operating results and considers our relative and risk-adjusted investment performance, our growth in assets under management and net investor inflows, and the quality of our investor services. Lastly, the second quarter 2008 costs also include $7.9 million for higher employee benefits and employment expenses, including an increase of $1.5 million in non-cash stock-based compensation.
Advertising and promotion expenditures were down $1.7 million compared to the second quarter of 2007 and $16.3 million from the first quarter of 2008. Investor sentiment in this uncertain market environment has caused us to reduce our planned spending in this area. We now expect spending on advertising and promotion in the third and fourth quarters of 2008 will be comparable to the second and first quarters of 2008, respectively. We vary our level of spending based on market conditions and investor demand as well as our efforts to expand our investor base in the United States and abroad.
Occupancy and facility costs together with depreciation expense increased $3.8 million. We are expanding and renovating our facilities to accommodate additional associates to meet greater business demands.
Other operating expenses were up $4.8 million, or 10.8%, including $.7 million of higher distribution expenses recognized on greater assets under management sourced from financial intermediaries that distribute our Advisor and R classes of mutual fund shares. These distribution costs are offset by the equal increase in our administrative revenues recognized from the 12b-1 fees discussed above. Additionally, consulting and professional fees, information services, and other costs have risen to meet increased business demands.
Our non-operating investment income, which includes interest income as well as the recognition of investment gains and losses, decreased $3.9 million. A $6.6 million decrease in interest income due to smaller cash positions and lower interest rates was partially offset by net gains from other investments.

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The second quarter 2008 provision for income taxes as a percentage of pretax income is 39.1% in order that the provision for the first six months of 2008 be recognized at a rate a 38.6%. The second quarter and six-month provisions include $2.5 million for prior years’ estimated interest and taxes. Without these charges, our provision would have been at 38.2% in the second quarter of 2008. We have also revised our estimate of the effective tax rate for the full-year 2008 from 38.2% to 38.5% to reflect these charges.
First half 2008 versus first half 2007.
Investment advisory revenues were up 8.6%, or $76.3 million, to $965.4 million in the first half of 2008 as average assets under our management increased $32.2 billion to $389.5 billion. The average annualized fee rate earned on our assets under management was 49.8 basis points during the first half of 2008, virtually unchanged from the 50.2 basis points earned in 2007.
Net revenues increased 8.1%, or $86.1 million, to nearly $1.15 billion. Operating expenses were $656.9 million in the first six months of 2008, up 11.4% or $67.4 million from the 2007 period. Overall, net operating income for the first half of 2008 increased $18.7 million, or 4.0%, to $488.7 million. Higher operating expenses in 2008 and decreases in market valuations during the first quarter of this year, which reduced our assets under management and advisory revenues, resulted in our operating margin declining to 42.7% in the first half of 2008 from 44.4% in the comparable 2007 period. Net income increased $8.6 million, or 2.8%, to $313.7 million and diluted earnings per share increased to $1.15, up $.06, or 5.5%, including the effect of lower weighted average shares outstanding due to our common share repurchases during the last twelve months.
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the United States increased 6.5%, or $41.4 million, to $683.1 million. Average mutual fund assets were $236.9 billion in the first six months of 2008, up 6.3% from the comparable 2008 period.
Net inflows to the mutual funds were $6.1 billion during the first half of 2008. Our international and global stock funds had net inflows of $2.9 billion, our bond and money funds added $2.5 billion, and the U.S. stock funds added $.7 billion. The Emerging Markets, Equity Index 500, Africa & Middle East, and Growth stock funds each had net inflows of more than $500 million and, in the aggregate, net inflows of $3.0 billion during the first six months of 2008. Lower market valuations, net of the funds’ income, decreased our fund assets under management by $18.8 billion. During the 2008 period, net fund inflows of $3.9 billion originated in our target-date Retirement Funds.
Investment advisory revenues earned on the other investment portfolios that we manage increased $34.9 million, or 14.1%, to $282.3 million. Average assets in these portfolios were $152.6 billion during the first half of 2008, up $18.2 billion or 13.5% from the first half of 2007. Net inflows of $11.7 billion from U.S. and international institutional investors and third-party financial intermediaries virtually offset the $11.3 billion negative impact of lower market valuations on asset levels in these portfolios during the 2008 period.
Administrative fees increased $9.9 million to $179.7 million. The change in these revenues includes $1.4 million from 12b-1 distribution fees recognized on greater assets under management in the Advisor and R classes of our sponsored mutual fund shares. The balance of the increase is primarily attributable to our mutual fund servicing activities for the mutual funds and their investors.
Our largest expense, compensation and related costs, increased $44.2 million, or 11.6% versus the first half of 2007. This increase includes $20.1 million in salaries resulting from a 9.3% increase in our average staff count and an increase of our associates’ base salaries at the beginning of the year. The increased compensation costs also include a $9.8 million increase in our interim accrual for annual bonuses. Lastly, the first half 2008 costs also include $14.3 million for higher employee benefits and employment expenses, including an increase of $3.1 million in non-cash stock-based compensation.
Other operating expenses were up $11.4 million, or 13.8%, including $1.4 million of higher distribution expenses recognized on greater assets under management sourced from financial intermediaries that distribute our Advisor and R classes of mutual fund shares.
CAPITAL RESOURCES AND LIQUIDITY.
Operating activities during the first half of 2008 provided cash flows of $453.2 million, up $31.4 million from the 2007 period, including increased net income of $8.6 million and non-cash depreciation, amortization and stock-based compensation expense of $6.0 million. Increased timing differences in the cash settlements of our assets and liabilities added $16.8 million. Our interim operating cash outflows do not include bonus compensation that is accrued throughout the year before being substantially paid out in December of each year.
Net cash used in investing activities totaled $43.2 million, down $98.8 million from the 2007 period. In the first half of 2007, we invested $73.2 million more in our sponsored mutual funds than in the comparable 2008 period.
Net cash used in financing activities was $513.9 million in the first half of 2008, up $356.3 million from the 2007 period. We increased our expenditures for common stock repurchases by $270.5 million as our stepped-up repurchase efforts have continued from the first quarter of 2007 into 2008. Our cash outflows for dividends paid increased $98.1 million. During the first quarter of 2008, we changed our policy regarding the timing of dividend payments such that our quarterly dividends are now declared and paid in the same quarter. As such, our first half 2008 cash flows includes both the payout of the fourth quarter 2007 and two 2008 quarterly dividends. Additionally, we increased the quarterly dividend payment from $.17 per share made in each of the four 2007 quarters to $.24 per share beginning with the payment made in January 2008.
Our cash and cash equivalents, investments in sponsored mutual funds, and other investments in U.S. Treasury notes total nearly $1.5 billion at June 30, 2008. Given the availability of these balances, we have not had any available external source of liquidity since the second quarter of 2006 when we voluntarily terminated our $300 million bank-syndicated credit facility.
We have lowered our anticipated property and equipment expenditures for the year 2008 to about $150 million, including the build-out of our expanded operating facilities We expect to fund these capital expenditures from our cash balances.

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FORWARD-LOOKING INFORMATION.
From time to time, information or statements provided by or on behalf of T. Rowe Price, including those within this report, may contain certain forward-looking information, including information or anticipated information relating to changes in our revenues and net income, changes in the amount and composition of our assets under management, our expense levels, our estimated effective income tax rate, and our expectations regarding financial markets and other conditions. Readers are cautioned that any forward-looking information provided by or on behalf of T. Rowe Price is not a guarantee of future performance. Actual results may differ materially from those in forward-looking information because of various factors including, but not limited to, those discussed below and in Item 1A, Risk Factors, of our Form 10-K Annual Report for 2007. Further, forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events.
Our future revenues and results of operations will fluctuate primarily due to changes in the total value and composition of assets under our management. Such changes result from many factors including, among other things: cash inflows and outflows in the T. Rowe Price mutual funds and other managed investment portfolios; fluctuations in the financial markets around the world that result in appreciation or depreciation of the assets under our management; our introduction of new mutual funds and investment portfolios; and changes in retirement savings trends relative to participant-directed investments and defined contribution plans. The ability to attract and retain investors’ assets under our management is dependent on investor sentiment and confidence; the relative investment performance of the Price mutual funds and other managed investment portfolios as compared to competing offerings and market indexes; the ability to maintain our investment management and administrative fees at appropriate levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; and our level of success in implementing our strategy to expand our business. Our revenues are substantially dependent on fees earned under contracts with the Price funds and could be adversely affected if the independent directors of one or more of the Price funds terminated or significantly altered the terms of the investment management or related administrative services agreements.
Our future results are also dependent upon the level of our expenses, which are subject to fluctuation for the following or other reasons: changes in the level of our advertising expenses in response to market conditions, including our efforts to expand our investment advisory business to investors outside the United States and to further penetrate our distribution channels within the United States; variations in the level of total compensation expense due to, among other things, bonuses, stock option grants, stock awards, changes in our employee count and mix, and competitive factors; any goodwill impairment that may arise; fluctuation in foreign currency exchange rates applicable to the costs of our international operations; expenses and capital costs, such as technology assets, depreciation, amortization, and research and development, incurred to maintain and enhance our administrative and operating services infrastructure; unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; and disruptions of services, including those provided by third parties, such as facilities, communications, power, and the mutual fund transfer agent and accounting systems.
Our business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on our operations and results, including but not limited to effects on costs that we incur and effects on investor interest in mutual funds and investing in general, or in particular classes of mutual funds or other investments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change in the information provided in Item 7A of the Form 10-K Annual Report for 2007.
Item 4. Controls and Procedures.
Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2008. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures as of June 30, 2008, are effective at the reasonable assurance level to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, including this Form 10-Q quarterly report, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive and principal financial officers, has evaluated any change in our internal control over financial reporting that occurred during the second quarter of 2008, and has concluded that there was no change during the second quarter of 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Page 13


 

PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
As discussed in our Form 10-Q report for the first quarter of 2008, the purported class action (T.K. Parthasarathy, et al., including Woodbury, v. T. Rowe Price International Funds, Inc., et al.) was resolved and dismissed with prejudice, without a material adverse effect on our financial position or results of operations.
Item 1A. Risk Factors.
There has been no material change in the information provided in Item 1A of our Form 10-K Annual Report for 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)   Repurchase activity during the second quarter of 2008 conducted pursuant to the Board of Directors’ authorization of February 15, 2007, follows.
                                 
                    Total Number of     Maximum Number  
    Total Number     Average     Shares Purchased as     of Shares that May  
    of Shares     Price Paid     Part of Publicly     Yet Be Purchased  
Month   Purchased     per Share     Announced Program     Under the Program  
April
    20,200     $ 59.52       20,200       6,705,465  
May
    320,000       60.67       320,000       6,385,465  
June
    932,791       58.85       932,791       20,452,674  
 
                         
Total
    1,272,991     $ 59.32       1,272,991          
 
                         
On June 5, 2008, our Board of Directors approved a 15 million share increase in the company’s authorization to repurchase its common stock.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of our stockholders was held on April 10, 2008. The proxy statement and solicitation pertaining to this meeting were previously filed with the Commission. Shares eligible to vote were 262,591,366 at the record date of February 11, 2008. The nine nominees for the Board of Directors were elected to hold office until the next annual meeting of stockholders and until their respective successors are elected and qualify. The tabulation of votes was:
                         
Nominee   For   Against   Abstain
Edward C. Bernard
    230,474,011       6,537,820       2,159,365  
James T. Brady
    233,143,311       3,634,991       2,392,895  
J. Alfred Broaddus, Jr.
    234,784,839       2,161,263       2,225,094  
Donald B. Hebb, Jr.
    228,637,049       8,239,524       2,294,622  
James A.C. Kennedy
    230,949,351       6,096,217       2,125,628  
Brian C. Rogers
    230,511,769       6,500,717       2,158,710  
Dr. Alfred Sommer
    234,711,790       2,203,057       2,256,349  
Dwight S. Taylor
    234,813,290       2,100,445       2,257,461  
Anne Marie Whittemore
    230,994,308       5,833,095       2,343,793  
The charter amendment increasing the authorized shares of common stock from 500,000,000 to 750,000,000 was approved by a vote of 227,780,786 for; 9,246,432 against; and 2,143,978 abstentions. The appointment of KPMG LLP as the company’s independent registered public accounting firm for 2008 was ratified by a vote of 233,528,748 for; 3,573,150 against; and 2,069,298 abstentions.

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Item 5. Other Information.
On July 25, 2008, we issued a press release reporting our results of operations for the second quarter and first half of 2008. A copy of that press release is furnished herewith as Exhibit 99. The information in this Item 5 and in Exhibit 99 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.
Item 6. Exhibits.
The following exhibits required by Item 601 of Regulation S-K are furnished herewith.
3(i).1   Charter of T. Rowe Price Group, Inc., as Amended by Articles of Amendment dated April 10, 2008. (Incorporated by reference from Form 10-Q Report for the quarterly period ended March 31, 2008; Accession No. 0000950133-08-001597.)
 
3(ii)   Amended and Restated By-Laws of T. Rowe Price Group, Inc. as of December 13, 2007. (Incorporated by reference from Form 8-K Current Report as of December 13, 2007; Accession No. 0000950133-07-005002.)
 
10.03   Transfer Agency and Service Agreement as of January 1, 2008, between T. Rowe Price Services, Inc. and the T. Rowe Price Funds. (Incorporated by reference from Form 485BPOS; Accession No. 0000871839-08-000081.)
 
10.04   Agreement as of January 1, 2008, between T. Rowe Price Retirement Plan Services, Inc. and certain of the T. Rowe Price Funds. (Incorporated by reference from Form 485BPOS; Accession No. 0000871839-08-000081.)
 
15   Letter from KPMG LLP, independent registered public accounting firm, re unaudited interim financial information.
 
31(i).1   Rule 13a-14(a) Certification of Principal Executive Officer.
 
31(i).2   Rule 13a-14(a) Certification of Principal Financial Officer.
 
32   Section 1350 Certifications.
 
99   Press release issued July 25, 2008, reporting our results of operations for the second quarter and first half of 2008.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on July 25, 2008.
     
T. Rowe Price Group, Inc.
by:
  /s/ Kenneth V. Moreland
 
  Vice President and Chief Financial Officer

Page 15

Exhibit 15 Letter from KPMG LLP, independent registered public accounting firm, re unaudited interim financial information
T. Rowe Price Group, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Re: Registration Statements on Form S-8: No. 33-7012, No. 33-72568, No. 33-58749, No. 333-20333, No. 333-90967, No. 333-59714, No. 333-120882, No. 333-120883 and No. 333-142092
With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 24, 2008 related to our review of interim financial information.
Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of sections 7 and 11 of the Act.
/s/ KPMG LLP
Baltimore, Maryland
July 24, 2008

 

Exhibit 31(i).1 Rule 13a-14(a) Certification of Principal Executive Officer
I, James A. C. Kennedy, certify that:
1.   I have reviewed this Form 10-Q Quarterly Report for the quarterly period ended June 30, 2008, of T. Rowe Price Group, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
July 24, 2008
         
   
/s/ James A.C. Kennedy    
Chief Executive Officer and President   
   

 

         
Exhibit 31(i).2 Rule 13a-14(a) Certification of Principal Financial Officer
I, Kenneth V. Moreland, certify that:
1.   I have reviewed this Form 10-Q Quarterly Report for the quarterly period ended June 30, 2008, of T. Rowe Price Group, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
July 24, 2008
         
   
/s/ Kenneth V. Moreland    
Vice President and Chief Financial Officer   
   

 

         
Exhibit 32   Section 1350 Certifications
We certify, to the best of our knowledge, based upon a review of the Form 10-Q Quarterly Report for the quarterly period ended June 30, 2008, of T. Rowe Price Group, Inc., that:
(1) The Form 10-Q Quarterly Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of T. Rowe Price Group, Inc.
July 24, 2008
         
   
/s/ James A.C. Kennedy    
Chief Executive Officer and President   
   
/s/ Kenneth V. Moreland    
Vice President and Chief Financial Officer   
   
A signed original of this written statement has been provided to T. Rowe Price Group, Inc. and will be retained by T. Rowe Price Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

Exhibit 99
(T. ROWEPRICE LOGO)
T. ROWE PRICE GROUP REPORTS SECOND QUARTER 2008 RESULTS
BALTIMORE (July 25, 2008) – T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its second quarter 2008 results, including net revenues of nearly $587 million, net income of $162 million, and diluted earnings per share of $.60, an increase of 3% from $.58 per share in the comparable 2007 quarter. Net revenues were $551 million in the second quarter of 2007 when net income was also $162 million. Weighted average shares outstanding have decreased from the 2007 period due to the ongoing common share repurchase program. Over the twelve month period ended June 30, 2008, the firm has repurchased more than 4%, or 11.2 million, of its outstanding common shares.
Investment advisory revenues were up almost 7%, or $31.2 million, from the comparable 2007 quarter. Assets under management increased 2.4% from March 31, 2008, to $387.7 billion at June 30, including $233.3 billion in the T. Rowe Price mutual funds distributed in the United States and $154.4 billion in other managed investment portfolios. Net cash inflows from investors in the second quarter of 2008 totaled $8.1 billion. Changes in market valuations and portfolio income in the 2008 quarter added $1.0 billion to assets under management.
Results for the first half of 2008 include net revenues of more than $1.1 billion, net income of nearly $314 million, and diluted earnings per share of $1.15 – an increase of 5.5% from $1.09 per share in the 2007 period. Assets under management are down 3.1% from the beginning of 2008 as cash inflows from investors of $17.8 billion have been more than offset by market valuation declines of $30.1 billion during the period.
Financial Highlights
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the United States increased 4.0%, or $13.6 million, to $349.5 million in the second quarter of 2008. Average mutual fund assets were $242.6 billion in the 2008 quarter, an increase of 4.6% from the average for the comparable 2007 quarter. Mutual fund assets at June 30, 2008 were up $2.8 billion or 1.2% from the end of March 2008, but down 5.2% from the beginning of the year. Net inflows to the mutual funds were $2.4 billion during the second quarter of 2008. International and global stock funds had net inflows of $1.2 billion, the U.S. stock funds added $.7 billion, and the bond and money funds added $.5 billion. The Emerging Markets Stock Fund attracted $.6 billion of net inflows during the second quarter of 2008. Income and changes in market valuations in the mutual funds increased fund assets under management by $.4 billion during the 2008 quarter.
The target-date retirement investment portfolios, which provide investors with single, diversified portfolios that invest in specific underlying investment portfolios and automatically adjust asset allocations as investors age, continue to be a significant source of assets under management. During the 2008 quarter, net inflows of $2.3 billion originated in target-date retirement portfolios, including net inflows of $1.1 billion into the target-date funds after taking into account that $1.2 billion was moved in June from the funds to target-date investments included in other managed portfolios. Assets in target-date investment portfolios have grown from $30.7 billion at March 31, 2008, to $32.9 billion at the end of June, and now account for 8.5% of the firm’s assets under management and 13.6% of its mutual fund assets.
Investment advisory revenues earned from other managed investment portfolios, consisting of institutional separate accounts, sub-advised funds, sponsored investment funds which are offered to investors outside the U.S., and variable annuity insurance portfolios, were $145.8 million in the 2008 quarter, an increase of $17.6 million from the comparable period last year. These portfolio assets were up $6.3 billion or 4.3% from the end of March 2008. Net inflows for the 2008 quarter were $5.7 billion from U.S. and international institutional investors and third-party financial intermediaries, including the $1.2 billion from the target-date Retirement Funds. Income earned in these portfolios and changes in market valuations increased assets under management by $.6 billion during the 2008 quarter. Investors outside the United States now account for more than 10% of assets under management.
Operating expenses were $328 million in the second quarter of 2008, up $28 million from the 2007 quarter. The largest expense, compensation and related costs, increased $21 million, or nearly 11%, over the comparable 2007 quarter, primarily due to increased staff size, higher salaries, and the accrual for annual bonus expense. The firm has increased its staff to handle increased volume-related activities and other business opportunities, and at June 30, 2008, employed 5,308 associates.
Advertising and promotion expenditures vary period-to-period in response to investor interest and in the second quarter were down $1.7 million from the 2007 quarter. Investor sentiment in this uncertain market environment has caused the firm to reduce its planned spending on advertising and promotion over the balance of 2008. Spending in the third and fourth quarters of 2008 is now expected to be comparable to the second and first quarters of 2008, respectively. The firm varies its level of spending based on market conditions and investor demand as well as its efforts to expand the investor base in the United States and abroad.
The provision for income taxes as a percentage of pretax income for the first six months of 2008 is 38.6%. The second quarter and six-month provisions include $2.5 million for prior years’ estimated interest and taxes. The firm’s estimated effective tax rate for the full-year 2008 has been increased from 38.2% to 38.5% to reflect these charges.

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Management Commentary
James A.C. Kennedy, the company’s Chief Executive Officer and President, commented: “The firm’s investment advisory results relative to our peers remain strong, with at least 76% of the T. Rowe Price funds across their share classes surpassing their comparable Lipper averages on a total return basis for the three-, five-, and 10-year periods ended June 30, 2008, and 57% outperforming for the one-year period. In addition, 81 of the T. Rowe Price stock, bond and blended asset funds across their share classes, which account for more than 62% of our rated funds’ assets under management, ended the quarter with an overall rating of four or five stars from Morningstar. These four- and five-star-rated investments represent 57.0% of our rated funds and share classes, compared with 32.5% for the overall industry.
“Our second quarter performance was achieved during a tough market environment in which major U.S. stock indexes experienced marked volatility. Investor sentiment deteriorated amid sluggish economic growth, rising food and commodity prices, and the continuing fallout from the housing downturn and credit crunch. While the start of the third quarter saw further financial market declines, by mid-July lower oil prices and improving investor sentiment had produced some rebound in equity valuations.
“Looking ahead, the credit crisis, deleveraging financial institutions, and inflationary pressures continue to be a brake on the economic recovery. However, for the long-term, market turbulence such as we’ve seen this year often creates attractive buying opportunities.
“In spite of a very unsettled financial environment, we remain encouraged by our solid investment management results and the pace of net cash inflows across our distribution channels. Our strong capital position gives us the financial flexibility to weather turbulent markets and the ability to continue to invest for the future.
“Our expected capital expenditures for 2008 will be comparable to 2007 spending at approximately $150 million. We have expended $425 million so far this year to repurchase 8.2 million of our common shares, compared to share repurchases totaling $320 million for all of 2007. These expenditures are being funded from our available cash positions. We remain debt-free with substantial liquidity, including cash and investment holdings of $1.5 billion.”
In closing, Mr. Kennedy said: “We are proud of our associates for staying focused on our clients during these turbulent times. We believe our globally diversified investment and distribution expertise, and our long-term investment perspective serve our clients and fund shareholders quite well. The outlook for T. Rowe Price remains very strong.”
Other Matters
The financial results presented in this release are unaudited. The company expects that it will file its Form 10-Q Quarterly Report for the second quarter of 2008 with the U.S. Securities and Exchange Commission later today. The Form 10-Q will include more information on the company’s unaudited financial results.
Certain statements in this press release may represent “forward-looking information,” including information relating to anticipated growth in revenues, net income and earnings per share, anticipated changes in the amount and composition of assets under management, anticipated expense levels, estimated tax rates, and expectations regarding financial and other market conditions. For a discussion concerning risks and other factors that could affect future results, see the company’s Form 10-K and Form 10-Q reports.
Founded in 1937, Baltimore-based T. Rowe Price is a global investment management organization that provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The organization also offers a variety of sophisticated investment planning and guidance tools. T. Rowe Price’s disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research. More information is available at www.troweprice.com .

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per-share amounts)
                                 
    Three months ended     Six months ended  
    6/30/2007     6/30/2008     6/30/2007     6/30/2008  
Revenues
                               
Investment advisory fees
  $ 464.1     $ 495.3     $ 889.1     $ 965.4  
Administrative fees
    86.7       90.9       169.8       179.7  
Investment income of savings bank subsidiary
    1.5       1.5       3.0       3.0  
 
                       
Total revenues
    552.3       587.7       1,061.9       1,148.1  
Interest expense on savings bank deposits
    1.2       1.2       2.4       2.5  
 
                       
Net revenues
    551.1       586.5       1,059.5       1,145.6  
 
                       
 
                               
Operating expenses
                               
Compensation and related costs
    197.0       218.0       381.2       425.4  
Advertising and promotion
    21.9       20.2       53.7       56.7  
Depreciation and amortization of property and equipment
    14.0       15.6       27.7       30.6  
Occupancy and facility costs
    22.7       24.9       44.1       50.0  
Other operating expenses
    44.4       49.2       82.8       94.2  
 
                       
 
    300.0       327.9       589.5       656.9  
 
                       
 
                               
Net operating income
    251.1       258.6       470.0       488.7  
Net non-operating investment income
    11.7       7.8       23.5       22.1  
 
                       
Income before income taxes
    262.8       266.4       493.5       510.8  
Provision for income taxes
    100.6       104.2       188.4       197.1  
 
                       
Net income
    162.2       162.2       305.1       313.7  
 
                       
 
                               
Earnings per share
                               
Basic
  $ .61     $ .62     $ 1.15     $ 1.20  
 
                       
Diluted
  $ .58     $ .60     $ 1.09     $ 1.15  
 
                       
 
                               
Dividends declared per share
  $ .17     $ .24     $ .34     $ .48  
 
                       
 
                               
Weighted average shares
                               
Outstanding
    265.4       259.6       265.5       260.7  
 
                       
Outstanding assuming dilution
    280.0       272.4       280.0       273.0  
 
                       

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    Three months ended     Six months ended  
    6/30/2007     6/30/2008     6/30/2007     6/30/2008  
Investment Advisory Revenues (in millions)
                               
Sponsored mutual funds in the U.S.
                               
Stock and blended asset
  $ 290.6     $ 296.8     $ 553.7     $ 579.2  
Bond and money market
    45.3       52.7       88.0       103.9  
 
                       
 
    335.9       349.5       641.7       683.1  
Other portfolios
    128.2       145.8       247.4       282.3  
 
                       
Total investment advisory fees
  $ 464.1     $ 495.3     $ 889.1     $ 965.4  
 
                       
 
                               
Average Assets Under Management (in billions)
                               
Sponsored mutual funds in the U.S.
                               
Stock and blended asset
  $ 191.1     $ 194.4     $ 182.9     $ 189.5  
Bond and money market
    40.9       48.2       40.0       47.4  
 
                       
 
    232.0       242.6       222.9       236.9  
Other portfolios
    138.9       157.4       134.4       152.6  
 
                       
 
  $ 370.9     $ 400.0     $ 357.3     $ 389.5  
 
                       
                 
    12/31/2007     6/30/2008  
Assets Under Management (in billions)
               
Sponsored mutual funds in the U.S.
               
Stock and blended asset
  $ 200.6     $ 185.0  
Bond and money market
    45.4       48.3  
 
           
 
    246.0       233.3  
Other portfolios
    154.0       154.4  
 
           
 
  $ 400.0     $ 387.7  
 
           
 
               
Equity securities
  $ 321.6     $ 305.6  
Debt securities
    78.4       82.1  
 
           
 
  $ 400.0     $ 387.7  
 
           
                 
    Six months ended  
    6/30/2007     6/30/2008  
Condensed Consolidated Cash Flows Information (in millions)
               
Cash provided by operating activities
  $ 421.8     $ 453.2  
Cash used in investing activities, including ($53.5) for additions to property and equipment in 2008
    (142.0 )     (43.2 )
Cash used in financing activities, including common stock repurchases of ($369.7) and dividends paid of ($188.4) in 2008
    (157.6 )     (513.9 )
 
           
Net change in cash during the period
  $ 122.2     $ (103.9 )
 
           
                 
    12/31/2007     6/30/2008  
Condensed Consolidated Balance Sheet Information (in millions)
               
Cash and cash equivalents
  $ 785.1     $ 681.2  
Investments in sponsored mutual funds
    773.0       730.5  
Property and equipment
    358.3       382.7  
Goodwill and other intangible assets
    668.8       668.5  
Accounts receivable and other assets
    592.1       586.9  
 
           
Total assets
    3,177.3       3,049.8  
Total liabilities
    400.2       397.6  
 
           
Stockholders’ equity, 259.7 common shares outstanding in 2008, including net unrealized holding gains of $64.5 in 2008
  $ 2,777.1     $ 2,652.2  
 
           

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