|
|
Item 1.
|
Financial Statements.
|
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
|
|
|
|
|
|
|
|
|
|
12/31/2013
|
|
6/30/2014
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
1,398.0
|
|
|
$
|
1,704.3
|
|
Accounts receivable and accrued revenue
|
398.8
|
|
|
426.0
|
|
Investments in sponsored funds
|
1,611.9
|
|
|
1,791.7
|
|
Other investments
|
313.6
|
|
|
411.3
|
|
Property and equipment
|
572.9
|
|
|
576.2
|
|
Goodwill
|
665.7
|
|
|
665.7
|
|
Other assets
|
72.2
|
|
|
93.8
|
|
Total assets
|
$
|
5,033.1
|
|
|
$
|
5,669.0
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Liabilities
|
|
|
|
Accounts payable and accrued expenses
|
$
|
103.9
|
|
|
$
|
121.2
|
|
Accrued compensation and related costs
|
72.4
|
|
|
244.1
|
|
Income taxes payable
|
38.7
|
|
|
30.1
|
|
Total liabilities
|
215.0
|
|
|
395.4
|
|
|
|
|
|
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 750,000,000; issued 262,073,000 shares in 2013 and 263,017,000 in 2014
|
52.4
|
|
|
52.6
|
|
Additional capital in excess of par value
|
894.6
|
|
|
957.1
|
|
Retained earnings
|
3,682.8
|
|
|
4,061.0
|
|
Accumulated other comprehensive income
|
188.3
|
|
|
202.9
|
|
Total stockholders’ equity
|
4,818.1
|
|
|
5,273.6
|
|
Total liabilities and stockholders’ equity
|
$
|
5,033.1
|
|
|
$
|
5,669.0
|
|
The accompanying notes are an integral part of these statements.
Page 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2013
|
|
6/30/2014
|
|
6/30/2013
|
|
6/30/2014
|
Revenues
|
|
|
|
|
|
|
|
Investment advisory fees
|
$
|
739.7
|
|
|
$
|
855.3
|
|
|
$
|
1,442.6
|
|
|
$
|
1,681.7
|
|
Administrative fees
|
86.4
|
|
|
93.6
|
|
|
172.7
|
|
|
188.1
|
|
Distribution and servicing fees
|
28.1
|
|
|
35.4
|
|
|
54.3
|
|
|
69.1
|
|
Net revenue of savings bank subsidiary
|
.1
|
|
|
—
|
|
|
.4
|
|
|
—
|
|
Net revenues
|
854.3
|
|
|
984.3
|
|
|
1,670.0
|
|
|
1,938.9
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
Compensation and related costs
|
288.3
|
|
|
326.4
|
|
|
567.4
|
|
|
645.3
|
|
Advertising and promotion
|
19.1
|
|
|
14.6
|
|
|
44.2
|
|
|
37.2
|
|
Distribution and servicing costs
|
28.1
|
|
|
35.4
|
|
|
54.3
|
|
|
69.1
|
|
Depreciation and amortization of property and equipment
|
21.9
|
|
|
28.0
|
|
|
43.4
|
|
|
55.1
|
|
Occupancy and facility costs
|
35.1
|
|
|
36.0
|
|
|
68.1
|
|
|
71.4
|
|
Other operating expenses
|
63.0
|
|
|
70.8
|
|
|
121.2
|
|
|
138.6
|
|
Total operating expenses
|
455.5
|
|
|
511.2
|
|
|
898.6
|
|
|
1,016.7
|
|
|
|
|
|
|
|
|
|
Net operating income
|
398.8
|
|
|
473.1
|
|
|
771.4
|
|
|
922.2
|
|
|
|
|
|
|
|
|
|
Non-operating investment income
|
1.4
|
|
|
26.1
|
|
|
19.7
|
|
|
68.2
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
400.2
|
|
|
499.2
|
|
|
791.1
|
|
|
990.4
|
|
Provision for income taxes
|
152.4
|
|
|
193.4
|
|
|
301.4
|
|
|
380.3
|
|
Net income
|
$
|
247.8
|
|
|
$
|
305.8
|
|
|
$
|
489.7
|
|
|
$
|
610.1
|
|
|
|
|
|
|
|
|
|
Earnings per share on common stock
|
|
|
|
|
|
|
|
Basic
|
$
|
.95
|
|
|
$
|
1.16
|
|
|
$
|
1.89
|
|
|
$
|
2.32
|
|
Diluted
|
$
|
.92
|
|
|
$
|
1.13
|
|
|
$
|
1.83
|
|
|
$
|
2.25
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
$
|
.38
|
|
|
$
|
.44
|
|
|
$
|
.76
|
|
|
$
|
.88
|
|
The accompanying notes are an integral part of these statements.
Page 3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2013
|
|
6/30/2014
|
|
6/30/2013
|
|
6/30/2014
|
Net income
|
$
|
247.8
|
|
|
$
|
305.8
|
|
|
$
|
489.7
|
|
|
$
|
610.1
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) on available-for-sale investments
|
(6.1
|
)
|
|
37.4
|
|
|
28.2
|
|
|
59.8
|
|
Reclassification adjustments related to net gains realized on dispositions recognized in non-operating investment income, determined using average cost
|
(.1
|
)
|
|
(11.7
|
)
|
|
(11.5
|
)
|
|
(43.7
|
)
|
Total net unrealized holding gains (losses) recognized in other comprehensive income
|
(6.2
|
)
|
|
25.7
|
|
|
16.7
|
|
|
16.1
|
|
Currency translation adjustments
|
.1
|
|
|
4.8
|
|
|
(5.1
|
)
|
|
7.3
|
|
Other comprehensive income (loss) before income taxes
|
(6.1
|
)
|
|
30.5
|
|
|
11.6
|
|
|
23.4
|
|
Deferred tax benefit (income taxes)
|
2.5
|
|
|
(11.6
|
)
|
|
(5.1
|
)
|
|
(8.8
|
)
|
Total other comprehensive income (loss)
|
(3.6
|
)
|
|
18.9
|
|
|
6.5
|
|
|
14.6
|
|
Total comprehensive income
|
$
|
244.2
|
|
|
$
|
324.7
|
|
|
$
|
496.2
|
|
|
$
|
624.7
|
|
The accompanying notes are an integral part of these statements.
Page 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
6/30/2013
|
|
6/30/2014
|
Cash flows from operating activities
|
|
|
|
Net income
|
$
|
489.7
|
|
|
$
|
610.1
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
Depreciation and amortization of property and equipment
|
43.4
|
|
|
55.1
|
|
Stock-based compensation expense
|
51.6
|
|
|
61.8
|
|
Realized gains on dispositions of sponsored funds
|
(11.5
|
)
|
|
(43.7
|
)
|
Net gains recognized on other investments
|
(.8
|
)
|
|
(11.4
|
)
|
Net change in trading securities held by consolidated sponsored investment portfolios
|
(25.7
|
)
|
|
(77.2
|
)
|
Other changes in assets and liabilities
|
181.2
|
|
|
130.9
|
|
Net cash provided by operating activities
|
727.9
|
|
|
725.6
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
Investments in sponsored funds
|
(62.5
|
)
|
|
(242.0
|
)
|
Dispositions of sponsored funds
|
37.0
|
|
|
121.8
|
|
Investments in debt securities held by savings bank subsidiary
|
(16.6
|
)
|
|
—
|
|
Proceeds from debt securities held by savings bank subsidiary
|
23.7
|
|
|
—
|
|
Additions to property and equipment
|
(41.5
|
)
|
|
(59.7
|
)
|
Other investing activity
|
2.7
|
|
|
(7.9
|
)
|
Net cash used in investing activities
|
(57.2
|
)
|
|
(187.8
|
)
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
Repurchases of common stock
|
—
|
|
|
(56.9
|
)
|
Common share issuances under stock-based compensation plans
|
90.9
|
|
|
39.5
|
|
Excess tax benefits from stock-based compensation plans
|
23.0
|
|
|
17.6
|
|
Dividends
|
(197.7
|
)
|
|
(231.7
|
)
|
Change in savings bank subsidiary deposits
|
(10.1
|
)
|
|
—
|
|
Net cash used in financing activities
|
(93.9
|
)
|
|
(231.5
|
)
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
Net change during period
|
576.8
|
|
|
306.3
|
|
At beginning of year
|
879.1
|
|
|
1,398.0
|
|
At end of period
|
$
|
1,455.9
|
|
|
$
|
1,704.3
|
|
The accompanying notes are an integral part of these statements.
Page 5
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(shares in thousands; dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
outstanding
|
|
Common
stock
|
|
Additional
capital in
excess of
par value
|
|
Retained
earnings
|
|
Accumulated
other
comprehensive
income
|
|
Total
stockholders’
equity
|
Balances at December 31, 2013
|
262,073
|
|
|
$
|
52.4
|
|
|
$
|
894.6
|
|
|
$
|
3,682.8
|
|
|
$
|
188.3
|
|
|
$
|
4,818.1
|
|
Net income
|
|
|
|
|
|
|
610.1
|
|
|
|
|
610.1
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
14.6
|
|
|
14.6
|
|
Dividends
|
|
|
|
|
|
|
(231.7
|
)
|
|
|
|
(231.7
|
)
|
Common stock-based compensation plans activity
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon option exercises
|
1,393
|
|
|
.3
|
|
|
39.7
|
|
|
|
|
|
|
40.0
|
|
Restricted shares issued, net of shares withheld for taxes
|
385
|
|
|
.1
|
|
|
(.2
|
)
|
|
|
|
|
|
(.1
|
)
|
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
|
3
|
|
|
—
|
|
|
(.1
|
)
|
|
|
|
|
|
(.1
|
)
|
Forfeiture of restricted awards
|
(111
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Net tax benefits
|
|
|
|
|
17.8
|
|
|
|
|
|
|
17.8
|
|
Stock-based compensation expense
|
|
|
|
|
61.8
|
|
|
|
|
|
|
61.8
|
|
Restricted stock units issued as dividend equivalents
|
|
|
|
|
.2
|
|
|
(.2
|
)
|
|
|
|
—
|
|
Common shares repurchased
|
(726
|
)
|
|
(.2
|
)
|
|
(56.7
|
)
|
|
—
|
|
|
|
|
(56.9
|
)
|
Balances at June 30, 2014
|
263,017
|
|
|
$
|
52.6
|
|
|
$
|
957.1
|
|
|
$
|
4,061.0
|
|
|
$
|
202.9
|
|
|
$
|
5,273.6
|
|
The accompanying notes are an integral part of these statements.
Page 6
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 U.S. mutual funds and other investment portfolios, including separately managed accounts, subadvised funds, and other sponsored investment portfolios. We also provide our investment advisory clients with related administrative services, including distribution, mutual fund transfer agent, accounting, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage; and trust services.
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, which require the use of estimates 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. Actual results may vary from our estimates. Certain prior year items have been reclassified to conform to current year presentation.
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
2013
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
$221.9 million
at
December 31, 2013
, and
$234.2 million
at
June 30, 2014
.
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
|
|
6/30/2013
|
|
6/30/2014
|
|
6/30/2013
|
|
6/30/2014
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
|
Stock and blended asset
|
$
|
425.4
|
|
|
$
|
514.7
|
|
|
$
|
824.3
|
|
|
$
|
1,012.0
|
|
Bond and money market
|
94.0
|
|
|
98.7
|
|
|
185.7
|
|
|
192.2
|
|
|
519.4
|
|
|
613.4
|
|
|
1,010.0
|
|
|
1,204.2
|
|
Other investment portfolios
|
|
|
|
|
|
|
|
Stock and blended asset
|
179.6
|
|
|
202.4
|
|
|
350.7
|
|
|
399.3
|
|
Bond, money market, and stable value
|
40.7
|
|
|
39.5
|
|
|
81.9
|
|
|
78.2
|
|
|
220.3
|
|
|
241.9
|
|
|
432.6
|
|
|
477.5
|
|
Total
|
$
|
739.7
|
|
|
$
|
855.3
|
|
|
$
|
1,442.6
|
|
|
$
|
1,681.7
|
|
The following table summarizes the investment portfolios and assets under management (in billions) on which we earn advisory fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average during
|
|
Average during
|
|
the second quarter of
|
|
the first half of
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
|
Stock and blended asset
|
$
|
289.3
|
|
|
$
|
355.0
|
|
|
$
|
281.4
|
|
|
$
|
350.6
|
|
Bond and money market
|
93.2
|
|
|
100.9
|
|
|
92.3
|
|
|
98.7
|
|
|
382.5
|
|
|
455.9
|
|
|
373.7
|
|
|
449.3
|
|
Other investment portfolios
|
|
|
|
|
|
|
|
Stock and blended asset
|
178.3
|
|
|
198.6
|
|
|
174.7
|
|
|
197.5
|
|
Bond, money market, and stable value
|
64.3
|
|
|
62.7
|
|
|
64.7
|
|
|
62.4
|
|
|
242.6
|
|
|
261.3
|
|
|
239.4
|
|
|
259.9
|
|
Total
|
$
|
625.1
|
|
|
$
|
717.2
|
|
|
$
|
613.1
|
|
|
$
|
709.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
12/31/2013
|
|
6/30/2014
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
|
Stock and blended asset
|
|
|
|
|
$
|
341.7
|
|
|
$
|
367.6
|
|
Bond and money market
|
|
|
|
|
93.6
|
|
|
103.3
|
|
|
|
|
|
|
435.3
|
|
|
470.9
|
|
Other investment portfolios
|
|
|
|
|
|
|
|
Stock and blended asset
|
|
|
|
|
195.3
|
|
|
204.9
|
|
Bond, money market, and stable value
|
|
|
|
|
61.8
|
|
|
62.6
|
|
|
|
|
|
|
257.1
|
|
|
267.5
|
|
Total
|
|
|
|
|
$
|
692.4
|
|
|
$
|
738.4
|
|
Investors that we serve are primarily domiciled in the U.S.;
investment advisory clients outside the U.S.
account for
6.2%
of our
assets under management at June 30, 2014
.
The following table summarizes the other fees (in millions) earned from our sponsored U.S. mutual funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2013
|
|
6/30/2014
|
|
6/30/2013
|
|
6/30/2014
|
Administrative fees
|
$
|
66.0
|
|
|
$
|
73.7
|
|
|
$
|
133.8
|
|
|
$
|
148.6
|
|
Distribution and servicing fees
|
$
|
28.1
|
|
|
$
|
35.4
|
|
|
$
|
54.3
|
|
|
$
|
69.1
|
|
|
|
NOTE 3
|
– INVESTMENTS IN SPONSORED FUNDS - AVAILABLE-FOR-SALE.
|
We make investments in our sponsored funds for general corporate investment purposes or to provide seed capital for newly formed funds. These sponsored funds (in millions) are voting interest entities and include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
cost
|
|
Unrealized holding
|
|
Aggregate
fair value
|
|
|
gains
|
|
losses
|
|
December 31, 2013
|
|
|
|
|
|
|
|
Stock and blended asset funds
|
$
|
354.7
|
|
|
$
|
302.5
|
|
|
$
|
—
|
|
|
$
|
657.2
|
|
Bond funds
|
904.0
|
|
|
53.6
|
|
|
(2.9
|
)
|
|
954.7
|
|
Total
|
$
|
1,258.7
|
|
|
$
|
356.1
|
|
|
$
|
(2.9
|
)
|
|
$
|
1,611.9
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
Stock and blended asset funds
|
$
|
493.5
|
|
|
$
|
298.7
|
|
|
$
|
—
|
|
|
$
|
792.2
|
|
Bond funds
|
929.1
|
|
|
71.4
|
|
|
(1.0
|
)
|
|
999.5
|
|
Total
|
$
|
1,422.6
|
|
|
$
|
370.1
|
|
|
$
|
(1.0
|
)
|
|
$
|
1,791.7
|
|
The unrealized holding losses are attributable to
six
fund holdings with an aggregate fair value of
$155.9 million
at
December 31, 2013
, and
three
fund holdings with an aggregate fair value of
$76.9 million
at
June 30, 2014
. These unrealized losses are considered temporary.
|
|
NOTE 4
|
– OTHER INVESTMENTS.
|
These investments (in millions) include:
|
|
|
|
|
|
|
|
|
|
12/31/2013
|
|
6/30/2014
|
Cost method investments
|
|
|
|
10% interest in Daiwa SB Investments Ltd. (Japan)
|
$
|
6.6
|
|
|
$
|
3.0
|
|
Other investments
|
53.5
|
|
|
58.5
|
|
Equity method investments
|
|
|
|
26% interest in UTI Asset Management Company Limited (India)
|
122.6
|
|
|
134.0
|
|
Sponsored fund investments
|
104.1
|
|
|
107.4
|
|
Other investments
|
4.8
|
|
|
4.8
|
|
Investments held as trading
|
|
|
|
Sponsored fund investments
|
8.5
|
|
|
11.8
|
|
Securities held by consolidated sponsored investment portfolios
|
12.5
|
|
|
90.8
|
|
U.S. Treasury note
|
1.0
|
|
|
1.0
|
|
Total
|
$
|
313.6
|
|
|
$
|
411.3
|
|
The securities held by consolidated sponsored investment portfolios, sponsored fund investments held as trading, and the sponsored fund investments treated as equity method investments relate to investment portfolios in which we provided initial seed capital at the time of its formation. We have determined at
December 31, 2013
and
June 30, 2014
, that these investment portfolios are voting interest entities and, as a result, have consolidated those sponsored portfolios in which we own a majority of the voting interest.
|
|
NOTE 5
|
– FAIR VALUE MEASUREMENTS.
|
We determine the fair value of our investments using the following broad levels of inputs as defined by related accounting standards:
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 value any investments using Level 3 inputs.
These levels are not necessarily an indication of the risk or liquidity associated with our investments. There have been no material transfers between the levels. The following table summarizes our investments (in millions) that are recognized in our condensed consolidated balance sheets using fair value measurements determined based on the differing levels of inputs.
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
December 31, 2013
|
|
|
|
Cash equivalents
|
$
|
1,288.1
|
|
|
$
|
—
|
|
Investments in sponsored funds - available-for-sale
|
1,611.9
|
|
|
—
|
|
Investments held as trading
|
21.0
|
|
|
—
|
|
Total
|
$
|
2,921.0
|
|
|
$
|
—
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Cash equivalents
|
$
|
1,525.9
|
|
|
$
|
—
|
|
Investments in sponsored funds - available-for-sale
|
1,791.7
|
|
|
—
|
|
Investments held as trading
|
38.0
|
|
|
64.6
|
|
Total
|
$
|
3,355.6
|
|
|
$
|
64.6
|
|
|
|
NOTE 6
|
– STOCK-BASED COMPENSATION.
|
STOCK OPTIONS.
The following table summarizes the status of and changes in our stock option grants during
the first half of
2014
.
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-
average
exercise
price
|
Outstanding at beginning of year
|
31,574,958
|
|
|
$
|
52.18
|
|
Semiannual grants
|
1,740,900
|
|
|
$
|
79.89
|
|
New hire grants
|
17,500
|
|
|
$
|
81.99
|
|
Non-employee director grants
|
8,400
|
|
|
$
|
81.80
|
|
Exercised
|
(1,914,691
|
)
|
|
$
|
43.33
|
|
Forfeited
|
(397,967
|
)
|
|
$
|
60.95
|
|
Expired
|
(946
|
)
|
|
$
|
52.62
|
|
Outstanding at end of period
|
31,028,154
|
|
|
$
|
54.19
|
|
Exercisable at end of period
|
17,370,774
|
|
|
$
|
47.95
|
|
RESTRICTED SHARES AND STOCK UNITS.
The following table summarizes the status of and changes in our nonvested restricted shares and restricted stock units during
the first half of
2014
.
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
shares
|
|
Restricted
stock
units
|
|
Weighted-average
fair value
|
Nonvested at December 31, 2013
|
1,877,086
|
|
|
823,593
|
|
|
$
|
67.21
|
|
Granted to employees and non-employee directors - time-based
|
379,351
|
|
|
180,929
|
|
|
$
|
79.96
|
|
Granted to employees - performance-based
|
6,000
|
|
|
34,725
|
|
|
$
|
79.89
|
|
Vested
|
(13,897
|
)
|
|
(16,178
|
)
|
|
$
|
70.84
|
|
Forfeited
|
(110,849
|
)
|
|
(18,741
|
)
|
|
$
|
69.45
|
|
Nonvested at June 30, 2014
|
2,137,691
|
|
|
1,004,328
|
|
|
$
|
69.52
|
|
The nonvested at
June 30, 2014
, includes
49,200
performance-based restricted shares and
153,675
performance-based restricted stock units. These performance-based restricted shares and units include
31,200
restricted shares and
90,750
restricted stock units for which the performance period has lapsed and the performance threshold has been met.
FUTURE STOCK-BASED COMPENSATION EXPENSE.
The following table presents the compensation expense (in millions) to be recognized over the remaining vesting periods of the stock-based awards outstanding at
June 30, 2014
. Estimated future compensation expense will change to reflect future option grants; future awards of unrestricted shares, restricted shares, and restricted stock units; changes in estimated forfeitures; changes in the probability of performance thresholds being met; and adjustments for actual forfeitures.
|
|
|
|
|
Third quarter 2014
|
$
|
33.4
|
|
Fourth quarter 2014
|
29.7
|
|
2015
|
82.9
|
|
2016 through 2019
|
80.9
|
|
Total
|
$
|
226.9
|
|
|
|
NOTE 7
|
– EARNINGS PER SHARE CALCULATIONS.
|
The following table presents the reconciliation (in millions) of our net income to net income allocated to our common stockholders and the weighted-average shares (in millions) that are used in calculating the basic and diluted earnings per share on our common stock. Weighted-average common shares outstanding assuming dilution reflects the potential dilution, determined using the treasury stock method, that could occur if outstanding stock options were exercised and non-participating stock awards vested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2013
|
|
6/30/2014
|
|
6/30/2013
|
|
6/30/2014
|
Net income
|
$
|
247.8
|
|
|
$
|
305.8
|
|
|
$
|
489.7
|
|
|
$
|
610.1
|
|
Less: net income allocated to outstanding restricted stock and stock unit holders
|
(2.0
|
)
|
|
(3.4
|
)
|
|
(3.8
|
)
|
|
(6.7
|
)
|
Net income allocated to common stockholders
|
$
|
245.8
|
|
|
$
|
302.4
|
|
|
$
|
485.9
|
|
|
$
|
603.4
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
|
|
|
|
|
Outstanding
|
258.2
|
|
|
260.7
|
|
|
257.5
|
|
|
260.5
|
|
Outstanding assuming dilution
|
266.2
|
|
|
268.7
|
|
|
265.6
|
|
|
268.7
|
|
The following table shows the weighted-average outstanding stock options (in millions) that are excluded from the calculation of diluted earnings per common share as the inclusion of such shares would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2013
|
|
6/30/2014
|
|
6/30/2013
|
|
6/30/2014
|
Weighted-average outstanding stock options excluded
|
2.4
|
|
|
3.8
|
|
|
3.0
|
|
|
3.5
|
|
NOTE 8 - OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
The following table presents the impact of the components (in millions) of other comprehensive income (loss) on deferred tax benefits (income taxes).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2013
|
|
6/30/2014
|
|
6/30/2013
|
|
6/30/2014
|
Deferred tax benefit (income taxes) on:
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses)
|
$
|
2.4
|
|
|
$
|
(14.6
|
)
|
|
$
|
(11.4
|
)
|
|
$
|
(23.3
|
)
|
Reclassification adjustment recognized in the provision for income taxes related to net gains realized on dispositions
|
.1
|
|
|
4.6
|
|
|
4.5
|
|
|
17.0
|
|
Deferred tax benefit (income taxes) on net unrealized holding gains or losses
|
2.5
|
|
|
(10.0
|
)
|
|
(6.9
|
)
|
|
(6.3
|
)
|
Deferred tax benefit (income taxes) on currency translation adjustments
|
—
|
|
|
(1.6
|
)
|
|
1.8
|
|
|
(2.5
|
)
|
Total net deferred tax benefit (income taxes)
|
$
|
2.5
|
|
|
$
|
(11.6
|
)
|
|
$
|
(5.1
|
)
|
|
$
|
(8.8
|
)
|
The changes (in millions) in each component of accumulated other comprehensive income, including reclassification adjustments for
the first half of
2014
are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains
|
|
|
|
|
|
Investments in sponsored funds
|
|
Equity share of UTI’s net unrealized holding gains
|
|
Total net unrealized holding gains
|
|
Currency translation adjustments
|
|
Total
|
Balances at December 31, 2013
|
$
|
215.9
|
|
|
$
|
.4
|
|
|
$
|
216.3
|
|
|
$
|
(28.0
|
)
|
|
$
|
188.3
|
|
Other comprehensive income before reclassifications and income taxes
|
59.6
|
|
|
.2
|
|
|
59.8
|
|
|
7.3
|
|
|
67.1
|
|
Reclassification adjustments related to net gains realized on dispositions recognized in non-operating investment income, determined using average cost
|
(43.7
|
)
|
|
—
|
|
|
(43.7
|
)
|
|
—
|
|
|
(43.7
|
)
|
|
15.9
|
|
|
.2
|
|
|
16.1
|
|
|
7.3
|
|
|
23.4
|
|
Deferred income taxes
|
(6.2
|
)
|
|
(.1
|
)
|
|
(6.3
|
)
|
|
(2.5
|
)
|
|
(8.8
|
)
|
Other comprehensive income
|
9.7
|
|
|
.1
|
|
|
9.8
|
|
|
4.8
|
|
|
14.6
|
|
Balances at June 30, 2014
|
$
|
225.6
|
|
|
$
|
.5
|
|
|
$
|
226.1
|
|
|
$
|
(23.2
|
)
|
|
$
|
202.9
|
|
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 (“the Company”) as of
June 30, 2014
, the related condensed consolidated statements of income and comprehensive income for the
three- and six-
month periods ended
June 30, 2014
and
2013
, the related condensed consolidated statements of cash flows for the
six
-month periods ended
June 30, 2014
and
2013
, and the related condensed consolidated statement of stockholders’ equity for the
six
-month period ended
June 30, 2014
. 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, 2013
, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated
February 4, 2014
, 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, 2013
, 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, 2014
|
|
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 U.S. mutual funds and other investment portfolios. The other investment portfolios include separately managed accounts, subadvised funds, and other sponsored investment portfolios including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans. Investment advisory clients domiciled outside the U.S. account for
6.2%
of our assets under management at
June 30, 2014
.
We manage a broad range of U.S., international and global 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 affect our revenues and results of operations.
We remain debt-free with substantial liquidity and resources that allow us to take advantage of attractive growth opportunities, invest in key capabilities, including investment professionals, technologies, and new fund offerings; and, most importantly, provide our clients with strong investment management expertise and service both now and in the future. In the coming quarters, we expect to increase funding for long-term initiatives to sustain and deepen our investment talent, expand our capabilities through enhanced technology, and broaden our distribution reach globally.
BACKGROUND.
U.S. equities advanced in the second quarter of 2014, adding to first-quarter gains and lifting large-cap indexes to new all-time highs in June. Shares climbed amid signs that the U.S. economy was recovering from a weather-driven contraction in the first quarter and hopes that new stimulus measures in Europe would boost eurozone economies. Investors were undeterred by the Federal Reserve’s continued tapering of its asset purchases nor by rising oil prices late in the quarter in response to a sharp increase in sectarian violence in Iraq.
Developed non-U.S. stock markets generated good returns but narrowly lagged large-cap U.S. shares during the quarter. Equities in Asia outperformed European stocks. Emerging markets stocks outperformed shares in developed markets as the improving U.S. economy, stimulus measures in Europe, and signs of stabilization in China lifted confidence in the global economic outlook.
Returns of several major equity market indexes for the
three- and six-month periods ended June 30,
2014
, are as follows:
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
Index
|
|
6/30/2014
|
|
6/30/2014
|
S&P 500 Index
|
|
5.2%
|
|
7.1%
|
NASDAQ Composite Index
(1)
|
|
5.0%
|
|
5.5%
|
Russell 2000 Index
|
|
2.1%
|
|
3.2%
|
MSCI EAFE (Europe, Australasia, and Far East) Index
|
|
4.3%
|
|
5.1%
|
MSCI Emerging Markets Index
|
|
6.7%
|
|
6.3%
|
(1)
returns exclude dividends
Global bonds produced positive returns in the second quarter. In the U.S., long-term Treasury and corporate securities performed best among investment-grade issues. Intermediate-term and long-term U.S. Treasuries continued to rally, driving their yields lower. The yield on the benchmark 10-year Treasury note fell from 2.7% at March 31, 2014, to
2.5%
at the end of June 2014. Municipal bonds also generated strong performance as a combination of light new issuance, steady demand, and declining yields contributed to returns. High yield securities did well, as investors continued to favor bonds with relatively attractive yields in a low interest rate environment.
Bonds in developed non-U.S. markets produced good returns in dollar terms. Emerging markets debt outperformed developed-market issues amid investor demand for higher-yielding assets. Dollar-denominated sovereign issues generally outperformed local-currency bonds as U.S. dollar strength reduced local bond returns in dollar terms.
Returns for several major bond market indexes for the
three- and six-month periods ended June 30,
2014
, are as follows:
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
Index
|
|
6/30/2014
|
|
6/30/2014
|
Barclays U.S. Aggregate Bond Index
|
|
2.0%
|
|
3.9%
|
Credit Suisse High Yield Index
|
|
2.4%
|
|
5.6%
|
Barclays Municipal Bond Index
|
|
2.6%
|
|
6.0%
|
Barclays Global Aggregate Ex-U.S. Dollar Bond Index
|
|
2.7%
|
|
5.6%
|
JPMorgan Emerging Markets Bond Index Plus
|
|
5.8%
|
|
9.5%
|
ASSETS UNDER MANAGEMENT.
Assets under management (in billions) as of
December 31, 2013
and
June 30, 2014
, are presented by investment portfolio and investment objective in the following table.
|
|
|
|
|
|
|
|
|
|
As of
|
|
12/31/2013
|
|
6/30/2014
|
Sponsored U.S. mutual funds
|
$
|
435.3
|
|
|
$
|
470.9
|
|
Other investment portfolios
|
257.1
|
|
|
267.5
|
|
Total
|
$
|
692.4
|
|
|
$
|
738.4
|
|
|
|
|
|
|
As of
|
|
12/31/2013
|
|
6/30/2014
|
Stock and blended asset portfolios
|
$
|
537.0
|
|
|
$
|
572.5
|
|
Fixed income portfolios
|
155.4
|
|
|
165.9
|
|
Total
|
$
|
692.4
|
|
|
$
|
738.4
|
|
The following table details the changes in our assets under management (in billions) during the first
six
months of
2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended 3/31/2014
|
|
Quarter ended 6/30/2014
|
|
First six months ended 6/30/2014
|
Assets under management at beginning of period
|
$
|
692.4
|
|
|
$
|
711.4
|
|
|
$
|
692.4
|
|
Net cash flows
|
|
|
|
|
|
Sponsored U.S. mutual funds
|
8.4
|
|
|
3.6
|
|
|
12.0
|
|
Other investment portfolios
|
.4
|
|
|
(3.8
|
)
|
|
(3.4
|
)
|
|
8.8
|
|
|
(.2
|
)
|
|
8.6
|
|
Market valuation changes and income
|
10.2
|
|
|
27.2
|
|
|
37.4
|
|
Change during the period
|
19.0
|
|
|
27.0
|
|
|
46.0
|
|
Assets under management at end of period
|
$
|
711.4
|
|
|
$
|
738.4
|
|
|
$
|
738.4
|
|
Total cash flows for the three- and
six
- month periods ended
June 30, 2014
, include
$5.2 billion
and
$11.2 billion
, respectively, in net cash inflows sourced from our target-date retirement portfolios. The target-date retirement portfolios in turn invest in a broadly diversified portfolio of other Price funds or Price collective investment trusts, and automatically rebalance to maintain their specific asset allocation weightings. Assets under management in these retirement portfolios at
June 30, 2014
, totaled
$140.6 billion
, including
$120.9 billion
in target-date retirement funds and
$19.7 billion
in target-date retirement trusts.
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 might recognize from additions to our assets under management.
RESULTS OF OPERATIONS.
Second
quarter of
2014
versus
second
quarter of
2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
6/30/2014
|
|
6/30/2013
|
|
Dollar Change
|
|
Percent Change
|
(in millions, except per-share data)
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
855.3
|
|
|
$
|
739.7
|
|
|
$
|
115.6
|
|
|
15.6
|
%
|
Net revenues
|
|
$
|
984.3
|
|
|
$
|
854.3
|
|
|
$
|
130.0
|
|
|
15.2
|
%
|
Operating expenses
|
|
$
|
511.2
|
|
|
$
|
455.5
|
|
|
$
|
55.7
|
|
|
12.2
|
%
|
Net operating income
|
|
$
|
473.1
|
|
|
$
|
398.8
|
|
|
$
|
74.3
|
|
|
18.6
|
%
|
Non-operating investment income
|
|
$
|
26.1
|
|
|
$
|
1.4
|
|
|
$
|
24.7
|
|
|
1,764.3
|
%
|
Net income
|
|
$
|
305.8
|
|
|
$
|
247.8
|
|
|
$
|
58.0
|
|
|
23.4
|
%
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.13
|
|
|
$
|
.92
|
|
|
$
|
.21
|
|
|
22.8
|
%
|
Investment advisory revenues earned in the
second
quarter of
2014
are up over the comparable
2013
quarter as average assets under our management
increased
$92.1 billion
to
$717.2 billion
. In addition, the average annualized effective fee rate earned on our assets under management during the
second
quarter of
2014
was
47.8 basis points
compared with the
47.5 basis points
earned during the
second
quarter of
2013
and 47.7 basis points earned during the full year 2013. The increase in our annualized effective fee rate earned during the
second
quarter of 2014 from the
2013
quarter is due primarily to asset growth in higher than average fee rate strategies. We voluntarily waived
$15.0 million
in money market related fees, including advisory fees and fund expenses, in the
second
quarter of
2014
, in order to maintain a positive yield for fund investors. The fee waivers in the
second
quarter of
2014
were up
$3.1 million
from the comparable
2013
quarter and represent about
2%
of total investment advisory revenues earned during the
second
quarter of
2014
. Fees were waived from each of our money market mutual funds and trusts, which have combined net assets of
$16.5 billion
at
June 30, 2014
. We expect that these fee waivers will continue for the remainder of
2014
.
Greater average assets under management and the higher annualized fee rate have increased our investment advisory revenues and helped lift our operating margin in the
second
quarter of
2014
to
48.1%
compared to
46.7%
in the
2013
period.
Net revenues
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. were
$613.4 million
,
an increase
of
$94.0 million
, or
18.1%
, on higher average assets under management. Average mutual fund assets under management in the
second
quarter of
2014
were
$455.9 billion
,
an increase
of
19.2%
from the average in the
second
quarter of
2013
.
Mutual fund assets increased
$20.5 billion
during the
second
quarter of
2014
and ended the quarter at
$470.9 billion
. Investors added net inflows of
$3.6 billion
, including
$3.3 billion
into our bond funds and
$.6 billion
into the stock and blended asset funds. The money market funds had net outflows of
$.3 billion
. These cash flow amounts for the
second
quarter of
2014
include
$4.3 billion
that originated in our target-date retirement funds. Market appreciation and income added
$16.9 billion
to mutual fund assets during the
second
quarter of
2014
.
Investment advisory revenues earned in the
second
quarter of
2014
from the other investment portfolios were
$241.9 million
, an increase of
$21.6 million
from the comparable
2013
quarter. Average assets under management in these portfolios in the
second
quarter of
2014
were
$261.3 billion
,
an increase
of
$18.7 billion
, or
7.7%
, from the average in the
second
quarter of
2013
. Assets under management in these portfolios increased
$6.5 billion
during the
second
quarter of
2014
to
$267.5 billion
at
June 30, 2014
, as higher market valuations and income of
$10.3 billion
were offset in part by net cash
outflows
of
$3.8 billion
. These net cash outflows came from both fixed income and equity mandates and were concentrated among a small number of institutional investors and subadvisory clients.
Administrative fee revenues
increased
$7.2 million
to
$93.6 million
in the
second
quarter of
2014
. The
increase
is primarily attributable to increased costs incurred to provide transfer agent servicing activities to the mutual funds and their investors.
Changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their investors.
Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor, R, and variable annuity II class shares of our sponsored funds and portfolios
increased
$7.3 million
from the
second
quarter of
2013
on greater average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs in the condensed consolidated statements of income.
Operating expenses
Compensation and related costs were
$326.4 million
in the
second
quarter of
2014
,
an increase
of
$38.1 million
, or
13.2%
, compared to the
second
quarter of
2013
. The largest part of the change is attributable to
$13.3 million
in higher base salaries and related benefits, which results from a modest increase in salaries at the beginning of
2014
combined with a
5.4%
increase in our average staff size from the
second
quarter of
2013
, and a
$10.4 million
increase
in the interim accrual for our annual variable compensation programs. The balance of the change from the
2013
quarter is attributable to an increase in temporary personnel to support our continued investment in our capabilities, an increase in non-cash stock-based compensation expense, and higher other employee-related costs. At
June 30, 2014
, we employed
5,749
associates.
Advertising and promotion costs were
$14.6 million
in the
second
quarter of
2014
, a
decrease
of
$4.5 million
from the comparable
2013
period. The decrease in cost is primarily a result of repurposing this spending to other distribution activities. We expect total advertising and promotion costs for
2014
to be 5%-
10%
lower than such costs in
2013
.
Occupancy and facility costs, together with depreciation and amortization expense, were
$64.0 million
in the
second
quarter of
2014
,
up
$7.0 million
compared to the
second
quarter of
2013
. Nearly half of the increase is attributable to the opening of two new buildings at our Owings Mills, Maryland campus in the fourth quarter of 2013. The increase also includes the added costs to renovate certain existing facilities, as well as update and enhance technology capabilities, including related maintenance programs. These increases were offset by the non-recurrence of $2.8 million in costs incurred in the 2013 quarter to terminate certain facility leases.
Other operating expenses in the
second
quarter of
2014
were up
$7.8 million
from the comparable
2013
quarter, due to increased business demands and our continued investment in our operating capabilities. These costs include those related to our defined contribution recordkeeping business, information and third-party service costs, travel costs, and consulting and professional fees.
Non-operating investment income
Net non-operating investment income in the
second
quarter of
2014
of
$26.1 million
increased
$24.7 million
from the
2013
quarter, including $11.6 million in gains realized from the sale of certain sponsored fund investments in the
2014
period. The balance of the increase is primarily a result of higher investment gains recognized on our other investment portfolios and higher dividends earned on our sponsored investment portfolios.
Provision for income taxes
The effective tax rate for the
second
quarter of
2014
was
38.7%
, and we currently estimate that our effective tax rate for the full-year
2014
will be about
38.5%
. Our effective income tax rate reflects the relative contribution of pre-tax income generated by our non-U.S. subsidiaries that are subject to tax rates that are lower than our U.S. rates. Changes in the relative contribution of pre-tax income from U.S. and non-U.S. sources or changes in tax rates in the U.S. or relevant non-U.S. jurisdictions may affect our effective income tax rate and overall net income in the future.
First
half
of
2014
versus first
half
of
2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
6/30/2014
|
|
6/30/2013
|
|
Dollar Change
|
|
Percent Change
|
(in millions, except per-share data)
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
1,681.7
|
|
|
$
|
1,442.6
|
|
|
$
|
239.1
|
|
|
16.6
|
%
|
Net revenues
|
|
$
|
1,938.9
|
|
|
$
|
1,670.0
|
|
|
$
|
268.9
|
|
|
16.1
|
%
|
Operating expenses
|
|
$
|
1,016.7
|
|
|
$
|
898.6
|
|
|
$
|
118.1
|
|
|
13.1
|
%
|
Net operating income
|
|
$
|
922.2
|
|
|
$
|
771.4
|
|
|
$
|
150.8
|
|
|
19.5
|
%
|
Non-operating investment income
|
|
$
|
68.2
|
|
|
$
|
19.7
|
|
|
$
|
48.5
|
|
|
246.2
|
%
|
Net income
|
|
$
|
610.1
|
|
|
$
|
489.7
|
|
|
$
|
120.4
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
2.25
|
|
|
$
|
1.83
|
|
|
$
|
.42
|
|
|
23.0
|
%
|
Investment advisory revenues were
up
16.6%
, or
$239.1 million
, to about
$1.7 billion
in the first
half
of
2014
, as average assets under our management
increased
$96.1 billion
to
$709.2 billion
. The average annualized fee rate earned on our assets under management was
47.8 basis points
in the first
half
of
2014
, up from the 47.4 basis points earned in the first
half
of
2013
. We waived
$29.3 million
in money market related fees, including advisory fees and fund expenses, in the first
half
of
2014
,
an increase
of
$6.4 million
from the
$22.9 million
waived in the
2013
period. The fee waivers in the first
half
of
2014
represent about
2%
of our total investment advisory revenues earned during the same period.
Our operating margin in the first
half
of
2014
was
47.6%
compared to
46.2%
in the
2013
period. Non-operating investment income for the first
half
of
2014
includes higher gains of $32.2 million realized from the sale of certain of our sponsored fund holdings. The proceeds were used to provide additional seed capital to other sponsored funds in support of our distribution efforts outside the U.S.
Net revenues
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S.
increased
19.2%
, or
$194.2 million
, to
$1.2 billion
, on higher average mutual fund assets. Average mutual fund assets in the first
half
of
2014
were
$449.3 billion
, an
increase
of
20.2%
from the average for the comparable
2013
period.
Mutual fund assets were
$470.9 billion
at
June 30, 2014
, an increase of
$35.6 billion
from
$435.3 billion
at the end of
2013
. Investors added net cash
inflows
during the first
half
of
2014
of
$12.0 billion
, including
$6.0 billion
into our bond funds,
$5.9 billion
into our stock and blended asset funds, and
$.1 billion
into our money market funds. These cash flow amounts for the first
half
of
2014
include
$8.7 billion
that originated in our target-date retirement funds. Higher market appreciation and income in the first
half
of
2014
increased our mutual fund assets under management by
$23.6 billion
.
Investment advisory revenues earned on the other investment portfolios for the first
half
of
2014
were
$477.5 million
,
an increase
of
$44.9 million
, or
10.4%
, from the
$432.6 million
earned in the comparable
2013
period. Average assets in these portfolios were
$259.9 billion
during the first
half
of
2014
,
up
$20.5 billion
from the comparable
2013
period. Assets under management in our other investments portfolios were
$267.5 billion
at
June 30, 2014
, an increase of
$10.4 billion
from the end of
2013
. Market appreciation and income of
$13.8 billion
was offset in part by net
outflows
of
$3.4 billion
during the first
half
of
2014
.
Administrative fee revenues
increase
d
$15.4 million
to
$188.1 million
in the first
half
of
2014
. The
increase
is primarily attributable to the increased costs incurred to provide transfer agent servicing activities to the mutual funds and their investors. As noted above, changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their investors.
Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor, R, and variable annuity II class shares of our sponsored portfolios were
$69.1 million
in the first
half
of
2014
,
an increase
of
$14.8 million
from the comparable
2013
period on greater average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs in the condensed consolidated income statements.
Operating expenses
Compensation and related costs were
$645.3 million
in the first
half
of
2014
,
an increase
of
$77.9 million
, or
13.7%
, compared to the
2013
period. The largest part of the
increase
is attributable to a
$25.9 million
increase
in salaries and related benefits and a
$24.6 million
increase
in our interim accrual for our annual variable compensation program. Our average staff size has increased
5.2%
from the first
half
of
2013
. Higher temporary staff expenses, non-cash stock-based compensation expense, and other employee costs account for the remainder of the increase in compensation and related costs in the
2014
period.
Advertising and promotion costs were
$37.2 million
in the first
half
of
2014
, a
decrease
of
$7.0 million
from the comparable
2013
period. The decrease in cost is primarily a result of repurposing this spending to other distribution activities.
Occupancy and facility costs, together with depreciation expense,
increased
$15.0 million
, or
13.5%
, compared to the first
half
of
2013
. Nearly half of the increase is attributable to the opening of two new buildings at our Owings Mills, Maryland campus in the fourth quarter of 2013. The increase also includes the added costs to renovate certain existing facilities, as well as update and enhance technology capabilities, including related maintenance programs. These increases were offset by the non-recurrence of $3.5 million in costs incurred in the first
half
of
2013
to terminate certain facility leases.
Other operating expenses were
$138.6 million
in the first
half
of
2014
,
an increase
of
$17.4 million
from the comparable
2013
period as increased business demands and our continued investment in capabilities have increased costs. These costs include costs related to our defined contribution recordkeeping business, information and third-party service costs, consulting and professional fees, and travel costs.
Non-operating investment income
Our non-operating investment income, which includes the recognition of investment gains and losses, was
up
$48.5 million
from the first
half
of
2013
. The increase is primarily due to the
2014
results including
$43.7 million
in gains realized on the sale of certain sponsored fund holdings compared with
$11.5 million
in gains realized in the comparable
2013
period. The balance of the increase is primarily a result of higher earnings recognized on our equity method investments, higher dividends earned on our sponsored investment portfolios and smaller unrealized market losses recorded on the securities held by our consolidated sponsored portfolios.
CAPITAL RESOURCES AND LIQUIDITY.
Operating activities during the first
half
of
2014
provided cash flows of
$725.6 million
,
down
$2.3 million
from the
2013
period. The first
half
of
2014
includes
$77.2 million
in cash outflows compared with
$25.7 million
in the 2013 period used to seed new sponsored investment portfolios that we are consolidating and treating their underlying investment holdings as trading securities. Our cash provided by operating activities in the first
half
of
2014
was also adjusted for
$32.2 million
in higher gains realized from the sale of certain available-for-sale sponsored fund investments as the related proceeds are reflected as an investing activity in our condensed consolidated statements of cash flows. Timing differences on the cash settlement of our assets and liabilities decreased our operating cash flows by
$50.3 million
compared to the first
six
months of
2013
. These decreases in operating cash flows are offset by a
$120.4 million
increase in net income and a
$21.9 million
increase in our non-cash expenses. Our interim operating cash flows do not include the cash impact of variable compensation that is accrued throughout the year before being substantially paid out in December.
Net cash used in investing activities totaled
$187.8 million
in the first
half
of
2014
,
an increase
of
$130.6 million
from the comparable
2013
period, including
$94.7 million
more in net investments made into our sponsored funds. We increased our property and equipment additions and other net investing activity by
$18.2 million
and
$10.6 million
, respectively, during the first
half
of
2014
compared to the
2013
period. The first
six
months of
2013
also included
$7.1 million
in net cash proceeds received from the debt securities held by our savings bank subsidiary, an entity that was sold in the fourth quarter of
2013
.
Net cash used in financing activities was
$231.5 million
in the first
half
of
2014
,
up
$137.6 million
from the comparable
2013
period, including
$56.9 million
in cash used to repurchase
726,000
shares of our common stock and a
$34.0 million
increase in dividends paid during the
2014
period. The increase in dividends paid in the first
half
of
2014
is primarily due to the 16% increase in our quarterly per-share dividend. The remaining increase in net cash used in financing activities is primarily due to a
$51.4 million
decrease in proceeds received from option exercises, as the number of options exercised during the first
half
of
2014
declined by about 1.7 million compared to the
2013
period.
Our cash and sponsored investment holdings at
June 30, 2014
were
$3.5 billion
, and we have no debt. We anticipate property and equipment expenditures for the full year
2014
to be about
$150 million
and expect to fund them from our operating resources. We generally repurchase shares of our common stock over time to offset the dilution created by our equity-based compensation plans. Given the availability of our financial resources, we do not maintain an available external source of liquidity.
NEW ACCOUNTING STANDARDS.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 - Revenue from Contracts with Customers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that will be applied to determine the measurement of revenue and timing of when it is recognized. We are required to adopt the new standard on January 1, 2017. We are currently evaluating the impact this standard will have on our financial position and results of operations.
We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our condensed consolidated statements, including that which we have not yet adopted. We do not believe that any such guidance has or will have a material effect on our financial position or results of operations.
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: our revenues, net income and earnings per share on common stock; 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, future transactions, dividends, investments, capital expenditures, 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
2013
. 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 U.S. mutual funds and other managed investment portfolios; fluctuations in global financial markets 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 T. Rowe Price U.S. 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. Non-operating investment income will also fluctuate primarily due to the size of our investments, changes in their market valuations, and any other-than-temporary impairments that may arise, or in the case of our equity method investments, our proportionate share of the investee’s net income.
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 U.S. and to further penetrate our distribution channels within the U.S.; variations in the level of total compensation expense due to, among other things, bonuses, stock option grants and other equity grants, other incentive awards, changes in our employee count and mix, and competitive factors; any goodwill or other asset impairment that may arise; fluctuation in foreign currency exchange rates applicable to our investment in and 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.