|
|
Item 1.
|
Financial Statements.
|
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2015
|
|
6/30/2016
|
ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,172.3
|
|
|
$
|
1,275.2
|
|
Accounts receivable and accrued revenue
|
|
446.0
|
|
|
427.4
|
|
Investments
|
|
1,961.2
|
|
|
1,122.2
|
|
Assets of consolidated sponsored investment portfolios ($0 and $1,894.0 million, respectively, related to variable interest entities)
|
|
57.7
|
|
|
2,143.2
|
|
Property and equipment, net
|
|
607.1
|
|
|
620.8
|
|
Goodwill
|
|
665.7
|
|
|
665.7
|
|
Other assets
|
|
196.9
|
|
|
327.2
|
|
Total assets
|
|
$
|
5,106.9
|
|
|
$
|
6,581.7
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
170.6
|
|
|
$
|
180.6
|
|
Liabilities of consolidated sponsored investment portfolios ($0 and $63.2 million, respectively, related to variable interest entities)
|
|
—
|
|
|
77.9
|
|
Accrued compensation and related costs
|
|
153.1
|
|
|
343.0
|
|
Income taxes payable
|
|
21.2
|
|
|
8.9
|
|
Total liabilities
|
|
344.9
|
|
|
610.4
|
|
|
|
|
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interests
|
|
—
|
|
|
1,110.4
|
|
|
|
|
|
|
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 250,469,000 shares at December 31, 2015, and 248,502,000 at June 30, 2016
|
|
50.1
|
|
|
49.7
|
|
Additional capital in excess of par value
|
|
654.6
|
|
|
703.7
|
|
Retained earnings
|
|
3,970.7
|
|
|
4,081.2
|
|
Accumulated other comprehensive income
|
|
86.6
|
|
|
26.3
|
|
Total stockholders’ equity
|
|
4,762.0
|
|
|
4,860.9
|
|
Total liabilities, redeemable non-controlling interests, and stockholders’ equity
|
|
$
|
5,106.9
|
|
|
$
|
6,581.7
|
|
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
|
|
6/30/2015
|
|
6/30/2016
|
|
6/30/2015
|
|
6/30/2016
|
Revenues
|
|
|
|
|
|
|
|
Investment advisory fees
|
$
|
942.2
|
|
|
$
|
920.6
|
|
|
$
|
1,838.7
|
|
|
$
|
1,791.4
|
|
Administrative fees
|
91.6
|
|
|
88.5
|
|
|
184.6
|
|
|
177.9
|
|
Distribution and servicing fees
|
38.6
|
|
|
35.6
|
|
|
76.1
|
|
|
69.5
|
|
Net revenues
|
1,072.4
|
|
|
1,044.7
|
|
|
2,099.4
|
|
|
2,038.8
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
Compensation and related costs
|
360.9
|
|
|
371.0
|
|
|
707.4
|
|
|
726.2
|
|
Advertising and promotion
|
14.2
|
|
|
14.9
|
|
|
39.5
|
|
|
38.0
|
|
Distribution and servicing costs
|
38.6
|
|
|
35.6
|
|
|
76.1
|
|
|
69.5
|
|
Depreciation and amortization of property and equipment
|
32.2
|
|
|
33.8
|
|
|
61.3
|
|
|
66.0
|
|
Occupancy and facility costs
|
39.9
|
|
|
40.8
|
|
|
78.2
|
|
|
82.2
|
|
Other operating expenses
|
78.8
|
|
|
98.9
|
|
|
151.3
|
|
|
196.3
|
|
Nonrecurring charge related to Dell appraisal rights matter
|
—
|
|
|
166.2
|
|
|
—
|
|
|
166.2
|
|
Total operating expenses
|
564.6
|
|
|
761.2
|
|
|
1,113.8
|
|
|
1,344.4
|
|
|
|
|
|
|
|
|
|
Net operating income
|
507.8
|
|
|
283.5
|
|
|
985.6
|
|
|
694.4
|
|
|
|
|
|
|
|
|
|
Non-operating income
|
|
|
|
|
|
|
|
Net investment income on investments
|
34.1
|
|
|
15.3
|
|
|
60.0
|
|
|
76.6
|
|
Net investment income on consolidated sponsored investment portfolios
|
(1.3
|
)
|
|
26.4
|
|
|
.7
|
|
|
50.2
|
|
Other income (expenses)
|
.2
|
|
|
(.2
|
)
|
|
(.9
|
)
|
|
(.2
|
)
|
Total non-operating income
|
33.0
|
|
|
41.5
|
|
|
59.8
|
|
|
126.6
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
540.8
|
|
|
325.0
|
|
|
1,045.4
|
|
|
821.0
|
|
Provision for income taxes
|
207.6
|
|
|
121.8
|
|
|
402.7
|
|
|
313.4
|
|
Net income
|
$
|
333.2
|
|
|
$
|
203.2
|
|
|
$
|
642.7
|
|
|
$
|
507.6
|
|
Less: net income attributable to redeemable non-controlling interests
|
—
|
|
|
7.9
|
|
|
—
|
|
|
17.1
|
|
Net income attributable to T. Rowe Price Group
|
$
|
333.2
|
|
|
$
|
195.3
|
|
|
642.7
|
|
|
490.5
|
|
|
|
|
|
|
|
|
|
Earnings per share on common stock of T. Rowe Price Group
|
|
|
|
|
|
|
|
Basic
|
$
|
1.28
|
|
|
$
|
.78
|
|
|
$
|
2.45
|
|
|
$
|
1.95
|
|
Diluted
|
$
|
1.24
|
|
|
$
|
.76
|
|
|
$
|
2.39
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
$
|
.52
|
|
|
$
|
.54
|
|
|
$
|
3.04
|
|
|
$
|
1.08
|
|
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
|
|
6/30/2015
|
|
6/30/2016
|
|
6/30/2015
|
|
6/30/2016
|
Net income
|
$
|
333.2
|
|
|
$
|
203.2
|
|
|
$
|
642.7
|
|
|
$
|
507.6
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) on available-for-sale investments
|
5.1
|
|
|
5.4
|
|
|
22.1
|
|
|
(.9
|
)
|
Reclassification adjustments recognized in non-operating income:
|
|
|
|
|
|
|
|
Net gains realized on dispositions determined using average cost
|
(22.7
|
)
|
|
—
|
|
|
(39.3
|
)
|
|
(52.3
|
)
|
Total net unrealized holding gains (losses) recognized in other comprehensive income
|
(17.6
|
)
|
|
5.4
|
|
|
(17.2
|
)
|
|
(53.2
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
Consolidated sponsored investment portfolios - variable interest entities
|
—
|
|
|
(26.9
|
)
|
|
—
|
|
|
14.0
|
|
Equity method investments
|
(1.9
|
)
|
|
—
|
|
|
(4.1
|
)
|
|
(.8
|
)
|
Total currency translation adjustments
|
(1.9
|
)
|
|
(26.9
|
)
|
|
(4.1
|
)
|
|
13.2
|
|
Other comprehensive loss before income taxes
|
(19.5
|
)
|
|
(21.5
|
)
|
|
(21.3
|
)
|
|
(40.0
|
)
|
Net deferred tax benefits
|
7.1
|
|
|
1.8
|
|
|
10.7
|
|
|
18.2
|
|
Total other comprehensive loss
|
(12.4
|
)
|
|
(19.7
|
)
|
|
(10.6
|
)
|
|
(21.8
|
)
|
Total comprehensive income
|
320.8
|
|
|
183.5
|
|
|
$
|
632.1
|
|
|
$
|
485.8
|
|
Less: comprehensive income (loss) attributable to redeemable non-controlling interests
|
—
|
|
|
(9.0
|
)
|
|
—
|
|
|
$
|
23.1
|
|
Comprehensive income attributable to T. Rowe Price Group
|
$
|
320.8
|
|
|
$
|
192.5
|
|
|
$
|
632.1
|
|
|
$
|
462.7
|
|
The accompanying notes are an integral part of these statements.
Page 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (See Note 11)
(in millions)
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
6/30/2015
|
|
6/30/2016
|
Cash flows from operating activities
|
|
|
|
Net income
|
$
|
642.7
|
|
|
$
|
507.6
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
Depreciation and amortization of property and equipment
|
61.3
|
|
|
66.0
|
|
Stock-based compensation expense
|
66.6
|
|
|
75.6
|
|
Realized gains on dispositions of available-for-sale sponsored investment portfolios
|
(39.3
|
)
|
|
(52.3
|
)
|
Net gains recognized on investments
|
(5.8
|
)
|
|
(16.9
|
)
|
Net change in trading securities held by consolidated sponsored investment portfolios
|
(5.4
|
)
|
|
(717.2
|
)
|
Other changes in assets and liabilities
|
166.6
|
|
|
105.7
|
|
Net cash provided by (used in) operating activities
|
886.7
|
|
|
(31.5
|
)
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
Purchases of available-for-sale sponsored fund investments
|
(146.4
|
)
|
|
—
|
|
Dispositions of available-for-sale sponsored fund investments
|
195.6
|
|
|
89.2
|
|
Net cash of sponsored investment portfolios on consolidation (deconsolidation)
|
—
|
|
|
68.3
|
|
Additions to property and equipment
|
(79.9
|
)
|
|
(79.2
|
)
|
Other investing activity
|
(3.2
|
)
|
|
83.7
|
|
Net cash provided by (used in) investing activities
|
(33.9
|
)
|
|
162.0
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
Repurchases of common stock
|
(353.8
|
)
|
|
(244.0
|
)
|
Common share issuances under stock-based compensation plans
|
42.0
|
|
|
59.4
|
|
Excess tax benefits from stock-based compensation plans
|
16.6
|
|
|
17.3
|
|
Dividends paid to common stockholders of T. Rowe Price Group
|
(794.5
|
)
|
|
(271.6
|
)
|
Net subscriptions received from redeemable non-controlling interest holders
|
—
|
|
|
540.0
|
|
Net cash provided by (used in) financing activities
|
(1,089.7
|
)
|
|
101.1
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios
|
—
|
|
|
(21.3
|
)
|
|
|
|
|
Net change in cash and cash equivalents during period
|
(236.9
|
)
|
|
210.3
|
|
Cash and cash equivalents at beginning of year
|
1,506.1
|
|
|
1,172.3
|
|
Cash and cash equivalents at end of period, including $107.4 million held by consolidated sponsored investment portfolios at June 30, 2016
|
$
|
1,269.2
|
|
|
$
|
1,382.6
|
|
|
|
|
|
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
|
|
Redeemable non-controlling interests
|
Balances at December 31, 2015
|
250,469
|
|
|
$
|
50.1
|
|
|
$
|
654.6
|
|
|
$
|
3,970.7
|
|
|
$
|
86.6
|
|
|
$
|
4,762.0
|
|
|
$
|
—
|
|
Reclassification of sponsored investment portfolios upon adoption of new accounting guidance on January 1, 2016
|
|
|
|
|
|
|
32.5
|
|
|
(32.5
|
)
|
|
—
|
|
|
672.7
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
490.5
|
|
|
—
|
|
|
490.5
|
|
|
17.1
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27.8
|
)
|
|
(27.8
|
)
|
|
6.0
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
(271.8
|
)
|
|
—
|
|
|
(271.8
|
)
|
|
|
Common stock-based compensation plans activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon option exercises
|
1,657
|
|
|
.3
|
|
|
59.6
|
|
|
—
|
|
|
—
|
|
|
59.9
|
|
|
—
|
|
Restricted shares issued, net of shares withheld for taxes
|
1
|
|
|
—
|
|
|
(.1
|
)
|
|
—
|
|
|
—
|
|
|
(.1
|
)
|
|
—
|
|
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
|
17
|
|
|
—
|
|
|
(.2
|
)
|
|
—
|
|
|
—
|
|
|
(.2
|
)
|
|
—
|
|
Forfeiture of restricted awards
|
(32
|
)
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net tax benefits
|
—
|
|
|
—
|
|
|
16.8
|
|
|
—
|
|
|
—
|
|
|
16.8
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
75.6
|
|
|
—
|
|
|
—
|
|
|
75.6
|
|
|
—
|
|
Common shares repurchased
|
(3,610
|
)
|
|
(.7
|
)
|
|
(102.6
|
)
|
|
(140.7
|
)
|
|
—
|
|
|
(244.0
|
)
|
|
—
|
|
Net subscriptions into sponsored investment portfolios
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
575.9
|
|
Net deconsolidations of sponsored investment portfolios
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(161.3
|
)
|
Balances at June 30, 2016
|
248,502
|
|
|
$
|
49.7
|
|
|
$
|
703.7
|
|
|
$
|
4,081.2
|
|
|
$
|
26.3
|
|
|
$
|
4,860.9
|
|
|
$
|
1,110.4
|
|
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 (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 amounts have been reclassified to conform to the 2016 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
2015
Annual Report.
NEW ACCOUNTING GUIDANCE.
We implemented Accounting Standards Update No. 2015-02 - Consolidation (Topic 810): Amendments to the Consolidation Analysis on January 1, 2016, which did not require the restatement of prior year periods. In connection with the adoption of this guidance, we reevaluated all of our investments for consolidation, including our investments in sponsored investment portfolios. The adoption of the guidance resulted in sponsored investment products regulated outside the U.S. previously accounted for as voting interest entities (VOE) to be evaluated as variable interest entities (VIE) and led to the consolidation of an additional
24
portfolios that were previously accounted for as available-for-sale securities. The adoption also resulted in the consolidation of an additional
eight
U.S. sponsored investment portfolios that were previously accounted for as available-for sale-securities. The impact to the condensed consolidated balance sheet upon adoption was the consolidation of
$1.6 billion
of assets,
$21.3 million
of liabilities, and
$672.7 million
of non-controlling interests. We also reclassified
$32.5 million
in accumulated comprehensive income to retained earnings. The consolidation guidance provides a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. Additional disclosures relating to consolidated voting interest entities and variable interest entities, and the impact the new accounting guidance has had on the quarter and year to date period are included in Note 5.
CONSOLIDATION.
Our condensed consolidated financial statements include the accounts of all subsidiaries and sponsored investment portfolios in which we have a controlling interest. We are generally deemed to have a controlling interest when we own the majority of the voting interest of an entity or are deemed to be the primary beneficiary of a VIE. We perform an analysis of our investments to determine if the investment entity is a VOE or VIE. Our analysis involves judgment and considers several factors, including an entity’s legal organization, capital structure, the rights of the equity investment holders, our ownership interest in the entity, and our contractual involvement with the entity. We continually review and reconsider our VIE or VOE conclusions upon the occurrence of certain events, such as changes to our ownership interest, changes to an entity’s legal structure, or amendments to governing documents. All material accounts and transactions between consolidated entities are eliminated in consolidation.
Upon consolidation of sponsored investment portfolios, the Company retains the specialized investment company accounting principles of the underlying funds. All of the underlying investments held by these portfolios are carried at fair value with corresponding changes in the investments’ fair values reflected in non-operating income (expense) on the condensed consolidated statements of income.
Variable interest entities
VIEs are entities that, by design (i
)
lack sufficient equity to permit the entity to finance its activities independently, or (ii) have equity holders that do not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, the obligation to absorb the entity’s losses, or the rights to receive the entity’s residual returns. We consolidate a VIE when we are the primary beneficiary, which is the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the VIE that could potentially be significant. Our Luxembourg-based SICAV (Société d'Investissement à Capital Variable) funds and other sponsored investment portfolios regulated outside the U.S. are determined to be VIEs.
Along with VIEs that we consolidate, we also hold variable interests in other VIEs, including several investment partnerships, that are not consolidated because we are not the primary beneficiary.
Redeemable non-controlling interests
We recognize redeemable non-controlling interests for the portion of the net assets of our consolidated sponsored investment portfolios held by unrelated third party investors as their interest is convertible to cash and other assets at their option. As such, we reflect redeemable non-controlling interests as temporary equity in our condensed consolidated balance sheet.
|
|
NOTE 2
|
– INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES.
|
Accounts receivable from our sponsored U.S. mutual funds for advisory fees and advisory-related administrative services aggregate
$252.8 million
at
December 31, 2015
, and
$246.7 million
at
June 30, 2016
.
Revenues (in millions) from advisory services provided under agreements with our sponsored U.S. mutual funds and other investment clients include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2015
|
|
6/30/2016
|
|
6/30/2015
|
|
6/30/2016
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
|
Stock and blended asset
|
$
|
575.5
|
|
|
$
|
551.1
|
|
|
$
|
1,118.7
|
|
|
$
|
1,070.6
|
|
Bond and money market
|
107.5
|
|
|
118.0
|
|
|
210.2
|
|
|
230.6
|
|
|
683.0
|
|
|
669.1
|
|
|
1,328.9
|
|
|
1,301.2
|
|
Other investment portfolios
|
|
|
|
|
|
|
|
Stock and blended asset
|
220.0
|
|
|
210.3
|
|
|
433.0
|
|
|
408.2
|
|
Bond, money market, and stable value
|
39.2
|
|
|
41.2
|
|
|
76.8
|
|
|
82.0
|
|
|
259.2
|
|
|
251.5
|
|
|
509.8
|
|
|
490.2
|
|
Total
|
$
|
942.2
|
|
|
$
|
920.6
|
|
|
$
|
1,838.7
|
|
|
$
|
1,791.4
|
|
We voluntarily waived
$12.5 million
and
$3.3 million
in money market related fees, including advisory fees and fund expenses, in the
second
quarter of
2015
and
2016
, respectively, in order to maintain a positive yield for fund investors. Fees waived during the
six months ended
June 30, 2015
and
2016
total
$26.2 million
and
$7.3 million
respectively.
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
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
|
Stock and blended asset
|
$
|
398.9
|
|
|
$
|
383.6
|
|
|
$
|
390.2
|
|
|
$
|
372.4
|
|
Bond and money market
|
107.3
|
|
|
108.5
|
|
|
106.5
|
|
|
106.4
|
|
|
506.2
|
|
|
492.1
|
|
|
496.7
|
|
|
478.8
|
|
Other investment portfolios
|
|
|
|
|
|
|
|
Stock and blended asset
|
214.2
|
|
|
209.9
|
|
|
211.9
|
|
|
203.2
|
|
Bond, money market, and stable value
|
63.2
|
|
|
70.7
|
|
|
62.8
|
|
|
68.4
|
|
|
277.4
|
|
|
280.6
|
|
|
274.7
|
|
|
271.6
|
|
Total
|
$
|
783.6
|
|
|
$
|
772.7
|
|
|
$
|
771.4
|
|
|
$
|
750.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
12/31/2015
|
|
6/30/2016
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
|
Stock and blended asset
|
|
|
|
|
$
|
383.0
|
|
|
$
|
384.8
|
|
Bond and money market
|
|
|
|
|
104.1
|
|
|
109.6
|
|
|
|
|
|
|
487.1
|
|
|
494.4
|
|
Other investment portfolios
|
|
|
|
|
|
|
|
Stock and blended asset
|
|
|
|
|
209.8
|
|
|
209.8
|
|
Bond, money market, and stable value
|
|
|
|
|
66.2
|
|
|
72.4
|
|
|
|
|
|
|
276.0
|
|
|
282.2
|
|
Total
|
|
|
|
|
$
|
763.1
|
|
|
$
|
776.6
|
|
Investors that we serve are primarily domiciled in the U.S.;
investment advisory clients outside the U.S.
account for
4.9%
and
4.8%
of our
assets under management at December 31, 2015
, and
June 30, 2016
, respectively.
The following table summarizes the other fees (in millions) earned from our sponsored U.S. mutual funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2015
|
|
6/30/2016
|
|
6/30/2015
|
|
6/30/2016
|
Administrative fees
|
$
|
74.6
|
|
|
$
|
69.7
|
|
|
$
|
150.6
|
|
|
$
|
142.0
|
|
Distribution and servicing fees
|
$
|
38.6
|
|
|
$
|
35.6
|
|
|
$
|
76.1
|
|
|
$
|
69.5
|
|
NOTE 3 - INVESTMENTS.
The carrying value of investments (in millions) we do not consolidate are as follows:
|
|
|
|
|
|
|
|
|
|
12/31/2015
|
|
6/30/2016
|
Available-for-sale sponsored investment portfolios
|
$
|
1,612.3
|
|
|
$
|
579.1
|
|
Equity method investments
|
|
|
|
Sponsored investment portfolios
|
113.7
|
|
|
296.1
|
|
26% interest in UTI Asset Management Company Limited (India)
|
132.8
|
|
|
137.3
|
|
Investment partnerships
|
6.2
|
|
|
5.6
|
|
Trading investments
|
|
|
|
Sponsored investment portfolios
|
25.8
|
|
|
28.9
|
|
Other
|
—
|
|
|
4.2
|
|
Cost method investments
|
69.4
|
|
|
70.0
|
|
U.S. Treasury note
|
1.0
|
|
|
1.0
|
|
Total
|
$
|
1,961.2
|
|
|
$
|
1,122.2
|
|
In connection with the adoption of the new consolidation accounting guidance on January 1, 2016, we reevaluated all of our investments for consolidation, including our investments in sponsored investment portfolios. We determined that our interests in a number of our available-for-sale holdings held at December 31, 2015, were deemed controlling interests under the new accounting standard and resulted in these sponsored investment portfolios being consolidated on January 1, 2016.
During the first
six
months of 2016, certain sponsored investment portfolios were deconsolidated, in which we provided initial seed capital at the time of formation, as we no longer had a controlling interest. Additionally, a sponsored investment portfolio that was being accounted for as an equity method investment was consolidated as we regained a controlling interest. The net impact on our condensed consolidated balance sheet was a net reduction of portfolio assets of
$363.2 million
, liabilities of
$2.2 million
and redeemable non-controlling interests of
$161.3 million
, which were the carrying values on the deconsolidation and consolidation dates. Since our consolidated investment portfolios are carried at fair value, and the investment portfolio's functional currency was U.S. dollars, we did not recognize any gain or loss in our consolidated statement of income upon deconsolidation. Depending on our ownership interest, we are now reporting our residual interests in deconsolidated sponsored investment portfolios as either equity method or available-for-sale investments.
AVAILABLE-FOR-SALE SPONSORED INVESTMENT PORTFOLIOS.
The available-for-sale sponsored investment portfolios (in millions) include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate cost
|
|
Unrealized holding
|
|
Aggregate
fair value
|
|
|
gains
|
|
losses
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Stock and blended asset funds
|
$
|
428.6
|
|
|
$
|
180.3
|
|
|
$
|
(9.1
|
)
|
|
$
|
599.8
|
|
Bond funds
|
990.5
|
|
|
39.1
|
|
|
(17.1
|
)
|
|
1,012.5
|
|
Total
|
$
|
1,419.1
|
|
|
$
|
219.4
|
|
|
$
|
(26.2
|
)
|
|
$
|
1,612.3
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
Stock and blended asset funds
|
$
|
108.0
|
|
|
$
|
87.0
|
|
|
$
|
(.1
|
)
|
|
$
|
194.9
|
|
Bond funds
|
380.3
|
|
|
5.3
|
|
|
(1.4
|
)
|
|
384.2
|
|
Total
|
$
|
488.3
|
|
|
$
|
92.3
|
|
|
$
|
(1.5
|
)
|
|
$
|
579.1
|
|
The following table details the number of holdings, the unrealized holding losses, and the aggregate fair value of available-for-sale sponsored investment portfolios with unrealized losses categorized by the length of time they have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of holdings
|
|
Unrealized
holding losses
|
|
Aggregate
fair value
|
December 31, 2015
|
|
|
|
|
|
Less than 12 months
|
18
|
|
$
|
(15.8
|
)
|
|
$
|
419.6
|
|
12 months or more
|
4
|
|
|
(10.4
|
)
|
|
298.6
|
|
Total
|
22
|
|
$
|
(26.2
|
)
|
|
$
|
718.2
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
Less than 12 months
|
5
|
|
$
|
(.1
|
)
|
|
$
|
1.7
|
|
12 months or more
|
1
|
|
|
(1.4
|
)
|
|
169.3
|
|
Total
|
6
|
|
$
|
(1.5
|
)
|
|
$
|
171.0
|
|
In addition to the duration of the impairments, we reviewed the severity of the impairment as well as our intent and ability to hold the investments for a period of time sufficient for an anticipated recovery in fair value. Accordingly, impairment of these investment holdings is considered temporary at
December 31, 2015
, and
June 30, 2016
.
VARIABLE INTEREST ENTITIES.
Our investments at
June 30, 2016
, include
$83.6 million
of investments in variable interest entities that we do not consolidate as we are not deemed the primary beneficiary. Our maximum risk of loss related to our involvement with these entities at
June 30, 2016
, is
$140.7 million
, which includes our carrying value, any unfunded capital commitments, and uncollected investment advisory and administrative fees.
|
|
NOTE 4
|
– FAIR VALUE MEASUREMENTS.
|
We determine the fair value of our cash equivalents and certain 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. We do not value any investments using Level 2 inputs.
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 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
|
December 31, 2015
|
|
Cash equivalents
|
$
|
997.5
|
|
Available-for-sale sponsored investment portfolios
|
1,612.3
|
|
Sponsored investment portfolios held as trading
|
25.8
|
|
Total
|
$
|
2,635.6
|
|
|
|
June 30, 2016
|
|
Cash equivalents
|
$
|
1,085.5
|
|
Available-for-sale sponsored investment portfolios
|
579.1
|
|
Sponsored investment portfolios held as trading
|
28.9
|
|
Other trading investments
|
4.2
|
|
Total
|
$
|
1,697.7
|
|
The table above excludes investments held by consolidated sponsored investment portfolios which are presented separately on our condensed consolidated balance sheets and are detailed in Note 5.
NOTE 5 - CONSOLIDATED SPONSORED INVESTMENT PORTFOLIOS.
The sponsored investment portfolios that we consolidate in our condensed consolidated financial statements are generally those products we provided initial seed capital at the time of their formation and have a controlling interest. Our U.S. sponsored investment portfolios are considered voting interest entities while those regulated outside the United States are considered variable interest entities.
The following table details the net assets of consolidated sponsored investment portfolios at
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
Cash and cash equivalents
|
$
|
12.1
|
|
|
$
|
95.3
|
|
|
$
|
107.4
|
|
Investments
|
221.5
|
|
|
1,716.0
|
|
|
1,937.5
|
|
Other assets
|
15.6
|
|
|
82.7
|
|
|
98.3
|
|
Total assets
|
249.2
|
|
|
1,894.0
|
|
|
2,143.2
|
|
Liabilities
|
14.7
|
|
|
63.2
|
|
|
77.9
|
|
Net assets
|
$
|
234.5
|
|
|
$
|
1,830.8
|
|
|
$
|
2,065.3
|
|
|
|
|
|
|
|
Attributable to redeemable non-controlling interests
|
$
|
73.3
|
|
|
$
|
1,037.1
|
|
|
$
|
1,110.4
|
|
Attributable to T. Rowe Price Group
|
161.2
|
|
|
793.7
|
|
|
954.9
|
|
|
$
|
234.5
|
|
|
$
|
1,830.8
|
|
|
$
|
2,065.3
|
|
Although we can redeem our net interest in these sponsored investment portfolios at any time, we cannot directly access or sell the assets held by the portfolios to obtain cash for general operations. Additionally, the assets of these investment portfolios are not available to our general creditors.
Since third party investors in these investment funds have no recourse to our credit, our overall risk related to the net assets of consolidated sponsored investment portfolios is limited to valuation changes associated with our net interest. We, however, are required to recognize the valuation changes associated with all underlying investments held by these portfolios in our condensed consolidated statements of income, and disclose the portion attributable to third party investors as net income attributable to redeemable non-controlling interests.
The operating results (in millions) of the consolidated sponsored investment portfolios for the
three- and six-
months ended
June 30, 2016
, are reflected in our condensed consolidated statement of income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended 6/30/2016
|
|
Six months ended 6/30/2016
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
Operating expenses reflected in net operating income
|
$
|
(.3
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(3.5
|
)
|
|
$
|
(.8
|
)
|
|
$
|
(5.3
|
)
|
|
$
|
(6.1
|
)
|
Net investment income reflected in non-operating income
|
5.8
|
|
|
20.6
|
|
|
26.4
|
|
|
12.1
|
|
|
38.1
|
|
|
50.2
|
|
Impact on income before taxes
|
$
|
5.5
|
|
|
$
|
17.4
|
|
|
$
|
22.9
|
|
|
$
|
11.3
|
|
|
$
|
32.8
|
|
|
$
|
44.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to T. Rowe Price Group
|
3.9
|
|
|
11.1
|
|
|
15.0
|
|
|
7.7
|
|
|
19.3
|
|
|
27.0
|
|
Attributable to redeemable non-controlling interests
|
$
|
1.6
|
|
|
$
|
6.3
|
|
|
$
|
7.9
|
|
|
$
|
3.6
|
|
|
$
|
13.5
|
|
|
$
|
17.1
|
|
|
$
|
5.5
|
|
|
$
|
17.4
|
|
|
$
|
22.9
|
|
|
$
|
11.3
|
|
|
$
|
32.8
|
|
|
$
|
44.1
|
|
The operating expenses of these consolidated portfolios are reflected in other operating expenses. For the
three- and six-
months ended
June 30, 2016
, we eliminated
$1.8 million
and
$3.1 million
, respectively, of these expenses against our investment advisory and administrative fees earned in preparing our condensed consolidated financial statements. The net investment income reflected in non-operating income includes dividend and interest income, and realized and unrealized gains and losses on the underlying securities held by the consolidated sponsored investment portfolios.
The table below details the impact of these consolidated investment portfolios on the individual lines of our condensed consolidated statement of cash flows (in millions) for the
six months ended
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended 6/30/2016
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
Net cash provided by (used in) operating activities
|
$
|
(40.9
|
)
|
|
$
|
(632.4
|
)
|
|
$
|
(673.3
|
)
|
Net cash provided by (used in) investing activities
|
25.4
|
|
|
42.9
|
|
|
68.3
|
|
Net cash provided by (used in) financing activities
|
27.6
|
|
|
706.1
|
|
|
733.7
|
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios
|
—
|
|
|
(21.3
|
)
|
|
(21.3
|
)
|
Net change in cash and cash equivalents during period
|
12.1
|
|
|
95.3
|
|
|
107.4
|
|
Cash and cash equivalents at beginning of year
|
—
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents at end of period
|
$
|
12.1
|
|
|
$
|
95.3
|
|
|
$
|
107.4
|
|
The net cash provided by (used in) financing activities during
the first half of
2016
includes
$193.7 million
of net subscriptions we made into the consolidated sponsored investment portfolios, net of dividends received. These cash flows were eliminated in consolidation.
FAIR VALUE MEASUREMENTS.
We determine the fair value of investments held by consolidated sponsored investment portfolios 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 these investment holdings. There have been no material transfers between the levels. The following table summarizes the investment holdings held by our consolidated sponsored investment portfolios (in millions) using fair value measurements determined based on the differing levels of inputs.
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
December 31, 2015
|
|
|
|
Assets
|
|
|
|
Equity securities
|
$
|
2.8
|
|
|
$
|
11.2
|
|
Fixed income securities
|
—
|
|
|
43.0
|
|
Other investments
|
.7
|
|
|
—
|
|
|
$
|
3.5
|
|
|
$
|
54.2
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Assets
|
|
|
|
Cash equivalents
|
$
|
10.8
|
|
|
$
|
1.1
|
|
Equity securities
|
213.4
|
|
|
326.6
|
|
Fixed income securities
|
—
|
|
|
1,370.6
|
|
Other investments
|
.3
|
|
|
26.6
|
|
|
$
|
224.5
|
|
|
$
|
1,724.9
|
|
|
|
|
|
Liabilities
|
$
|
3.3
|
|
|
$
|
21.1
|
|
NOTE 6 – STOCKHOLDERS’ EQUITY.
DIVIDENDS.
Regular cash dividends declared per share during the first
six
months of
2015
and
2016
were
$1.04
and
$1.08
, respectively. A
$2.00
per share special dividend was also declared and paid in the first
six
months of 2015.
|
|
NOTE 7
|
– STOCK-BASED COMPENSATION.
|
STOCK OPTIONS.
The following table summarizes the status of and changes in our stock options during
the first half of
2016
.
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-
average
exercise
price
|
Outstanding at December 31, 2015
|
30,818,229
|
|
|
$
|
59.24
|
|
Non-employee director grants
|
13,050
|
|
|
$
|
75.29
|
|
Exercised
|
(2,254,311
|
)
|
|
$
|
46.27
|
|
Forfeited
|
(259,173
|
)
|
|
$
|
71.55
|
|
Expired
|
(16,107
|
)
|
|
$
|
77.65
|
|
Outstanding at June 30, 2016
|
28,301,688
|
|
|
$
|
60.16
|
|
Exercisable at June 30, 2016
|
17,625,997
|
|
|
$
|
53.02
|
|
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
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
shares
|
|
Restricted
stock
units
|
|
Weighted-average
fair value
|
Nonvested at December 31, 2015
|
1,470,827
|
|
|
2,216,431
|
|
|
$
|
74.66
|
|
Time-based grants
|
2,600
|
|
|
1,498,275
|
|
|
$
|
70.33
|
|
Performance-based grants
|
—
|
|
|
200,223
|
|
|
$
|
70.26
|
|
Vested
|
(17,460
|
)
|
|
(16,276
|
)
|
|
$
|
77.09
|
|
Forfeited
|
(31,547
|
)
|
|
(47,491
|
)
|
|
$
|
74.78
|
|
Nonvested at June 30, 2016
|
1,424,420
|
|
|
3,851,162
|
|
|
$
|
73.24
|
|
The nonvested at
June 30, 2016
, includes
21,600
performance-based restricted shares and
394,834
performance-based restricted stock units. These performance-based restricted shares and units include
21,600
restricted shares and
134,385
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, 2016
. Estimated future compensation expense will change to reflect future option grants; future awards of unrestricted 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 2016
|
39.3
|
|
Fourth quarter 2016
|
35.6
|
|
2017
|
102.5
|
|
2018 through 2021
|
101.6
|
|
Total
|
$
|
279.0
|
|
|
|
NOTE 8
|
– EARNINGS PER SHARE CALCULATIONS.
|
The following table presents the reconciliation (in millions) of net income attributable to T. Rowe Price Group 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 reflect 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
|
|
6/30/2015
|
|
6/30/2016
|
|
6/30/2015
|
|
6/30/2016
|
Net income attributable to T. Rowe Price Group
|
$
|
333.2
|
|
|
$
|
195.3
|
|
|
$
|
642.7
|
|
|
$
|
490.5
|
|
Less: net income allocated to outstanding restricted stock and stock unit holders
|
4.1
|
|
|
3.8
|
|
|
9.8
|
|
|
9.4
|
|
Net income allocated to common stockholders
|
$
|
329.1
|
|
|
$
|
191.5
|
|
|
$
|
632.9
|
|
|
$
|
481.1
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
|
|
|
|
|
Outstanding
|
257.7
|
|
|
246.9
|
|
|
258.2
|
|
|
246.8
|
|
Outstanding assuming dilution
|
264.6
|
|
|
252.1
|
|
|
265.1
|
|
|
251.8
|
|
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
|
|
6/30/2015
|
|
6/30/2016
|
|
6/30/2015
|
|
6/30/2016
|
Weighted-average outstanding stock options excluded
|
5.7
|
|
|
7.7
|
|
|
5.1
|
|
|
9.2
|
|
NOTE 9 - OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
The following table presents the impact of the components (in millions) of other comprehensive income or loss on deferred tax benefits (income taxes).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2015
|
|
6/30/2016
|
|
6/30/2015
|
|
6/30/2016
|
Net deferred tax benefits on:
|
|
|
|
|
|
|
|
Net unrealized holding gains or losses
|
$
|
(2.4
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
.4
|
|
Reclassification adjustments recognized in the provision for income taxes:
|
|
|
|
|
|
|
|
Net gains realized on dispositions
|
8.8
|
|
|
—
|
|
|
14.7
|
|
|
20.6
|
|
Net deferred tax benefits on net unrealized holding gains or losses
|
6.4
|
|
|
(2.1
|
)
|
|
9.2
|
|
|
21.0
|
|
Total deferred tax benefits (income taxes) on currency translation adjustments
|
.7
|
|
|
3.9
|
|
|
1.5
|
|
|
(2.8
|
)
|
Total net deferred tax benefits
|
$
|
7.1
|
|
|
$
|
1.8
|
|
|
$
|
10.7
|
|
|
$
|
18.2
|
|
The changes (in millions) in each component of accumulated other comprehensive income, including reclassification adjustments for
the first half of
2016
are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
Net unrealized holding gains
|
|
Equity method investments
|
|
Consolidated sponsored investment portfolios - variable interest entities
|
|
Total currency translation adjustments
|
|
Total
|
Balances at December 31, 2015
|
$
|
120.3
|
|
|
$
|
(30.9
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(33.7
|
)
|
|
$
|
86.6
|
|
Reclassification of accumulated other comprehensive income to retained earnings upon adoption of the new consolidation accounting guidance
|
(32.0
|
)
|
|
(.5
|
)
|
|
—
|
|
|
(.5
|
)
|
|
(32.5
|
)
|
Balance at January 1, 2016
|
88.3
|
|
|
(31.4
|
)
|
|
(2.8
|
)
|
|
(34.2
|
)
|
|
54.1
|
|
Other comprehensive income (loss) before reclassifications and income taxes
|
(.9
|
)
|
|
(.8
|
)
|
|
8.0
|
|
|
7.2
|
|
|
6.3
|
|
Reclassification adjustments recognized in non-operating income
|
(52.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(52.3
|
)
|
|
(53.2
|
)
|
|
(.8
|
)
|
|
8.0
|
|
|
7.2
|
|
|
(46.0
|
)
|
Net deferred tax benefits
|
21.0
|
|
|
.3
|
|
|
(3.1
|
)
|
|
(2.8
|
)
|
|
18.2
|
|
Other comprehensive income (loss)
|
(32.2
|
)
|
|
(.5
|
)
|
|
4.9
|
|
|
4.4
|
|
|
(27.8
|
)
|
Balances at June 30, 2016
|
$
|
56.1
|
|
|
$
|
(31.9
|
)
|
|
$
|
2.1
|
|
|
$
|
(29.8
|
)
|
|
$
|
26.3
|
|
NOTE 10 - DELL APPRAISAL RIGHTS MATTER.
During the second quarter of 2016, we recognized a nonrecurring operating charge of
$166.2 million
to compensate certain T. Rowe Price mutual funds, trusts, separately managed accounts, and subadvised clients (collectively, “Clients”) for the difference in valuation plus statutory interest, resulting from the denial of their appraisal rights by the Delaware Chancery Court (Court) in connection with the 2013 leveraged buyout of Dell, Inc. (Dell).
The Court ruled on May 11, 2016, that the Clients could not pursue an appraisal of any shares they held that were voted in favor of the Dell merger. The appraisal statute governing the transaction required the record holder to vote against or abstain from voting on the transaction in order to assert appraisal rights. After previously voting against prior transaction proposals, the voting instructions submitted on behalf of the Clients in connection with voting on the final proposed transaction were incorrectly submitted in favor of the transaction.
On May 31, 2016, the Court determined that the fair value of Dell at the time of the merger was
$17.62
per share, as opposed to the
$13.75
price offered in the transaction. As a result, any shareholder perfecting appraisal rights is entitled to a payment at
$17.62
per share plus statutory interest from the date the Dell transaction closed. The compensation to Clients was intended to make them whole for the voting discrepancy that resulted in the denial of their appraisal rights.
NOTE 11 - SUPPLEMENTARY CONSOLIDATING CASH FLOW STATEMENT.
The following table summarizes the cash flows (in millions) that are attributable to Price Group and our consolidated sponsored investment portfolios for the
six
months ended
June 30, 2016
. The table also reflects the eliminations required in preparing our condensed consolidated statement of cash flow for the
six
months ended
June 30, 2016
and a condensed consolidated statement of cash flow for the six months ended June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For six months ended 6/30/2016
|
|
As reported for the six months ended 6/30/2015
|
|
Cash flow attributable to Price Group
|
|
Cash flow attributable to consolidated sponsored investment portfolios
|
|
Eliminations
|
|
As reported on statement of cash flows
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
642.7
|
|
|
$
|
490.5
|
|
|
$
|
44.1
|
|
|
$
|
(27.0
|
)
|
|
$
|
507.6
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
61.3
|
|
|
66.0
|
|
|
—
|
|
|
—
|
|
|
66.0
|
|
Stock-based compensation expense
|
66.6
|
|
|
75.6
|
|
|
—
|
|
|
—
|
|
|
75.6
|
|
Realized gains on dispositions of available-for-sale sponsored investment portfolios
|
(39.3
|
)
|
|
(52.3
|
)
|
|
—
|
|
|
—
|
|
|
(52.3
|
)
|
Net gains recognized on investments
|
(5.8
|
)
|
|
(43.9
|
)
|
|
—
|
|
|
27.0
|
|
|
(16.9
|
)
|
Net change in trading securities held by consolidated sponsored investment portfolios
|
(5.4
|
)
|
|
—
|
|
|
(717.2
|
)
|
|
—
|
|
|
(717.2
|
)
|
Other changes in assets and liabilities
|
166.6
|
|
|
109.0
|
|
|
(0.2
|
)
|
|
(3.1
|
)
|
|
105.7
|
|
Net cash provided by (used in) operating activities
|
886.7
|
|
|
644.9
|
|
|
(673.3
|
)
|
|
(3.1
|
)
|
|
(31.5
|
)
|
Net cash provided by (used in) investing activities
|
(33.9
|
)
|
|
(103.1
|
)
|
|
68.3
|
|
|
196.8
|
|
|
162.0
|
|
Net cash provided by (used in) financing activities
|
(1,089.7
|
)
|
|
(438.9
|
)
|
|
733.7
|
|
|
(193.7
|
)
|
|
101.1
|
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios
|
—
|
|
|
—
|
|
|
(21.3
|
)
|
|
—
|
|
|
(21.3
|
)
|
Net change in cash and cash equivalents during period
|
(236.9
|
)
|
|
102.9
|
|
|
107.4
|
|
|
—
|
|
|
210.3
|
|
Cash and cash equivalents at beginning of year
|
1,506.1
|
|
|
1,172.3
|
|
|
—
|
|
|
—
|
|
|
1,172.3
|
|
Cash and cash equivalents at end of period
|
$
|
1,269.2
|
|
|
$
|
1,275.2
|
|
|
$
|
107.4
|
|
|
$
|
—
|
|
|
$
|
1,382.6
|
|
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, 2016
, the related condensed consolidated statements of income and comprehensive income for the
three- and six-
month periods ended
June 30, 2016
and
2015
, the related condensed consolidated statements of cash flows for the
six
-month periods ended
June 30, 2016
and
2015
, and the related condensed consolidated statement of stockholders’ equity for the
six
-month period ended
June 30, 2016
. 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, 2015
, 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 5, 2016
, 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, 2015
, 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 26, 2016
|
|
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 in the U.S. Investment advisory clients domiciled outside the U.S. account for nearly
5%
of our assets under management at
June 30, 2016
.
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. We expect to increase our pace of spending in existing and new long-term initiatives to sustain and deepen our investment talent, add investment capabilities both in terms of new strategies and new investment vehicles, expand capabilities through enhanced technology, and broaden our distribution reach globally. We expect that our spending to support these initiatives will cause our operating expense growth in 2017 to exceed operating expense growth experienced in 2016.
BACKGROUND.
Most major U.S. stock indexes rose in the second quarter of 2016. Although economic growth has been sluggish and corporate profits have been declining for several quarters, domestic equities advanced steadily with help from recent central bank actions in the eurozone and Japan, and reduced expectations for Federal Reserve interest rate increases in 2016. Rebounding oil prices benefited energy companies in particular. Near the end of June, global equities briefly plunged in response to a referendum in which U.K. citizens voted in favor of leaving the European Union. As the quarter ended, world markets rallied amid hopes for new stimulus measures from central banks in the U.K. and elsewhere.
Stocks in developed non-U.S. markets underperformed U.S. shares, as the dollar strengthened versus many other currencies. In Europe, bank stocks were among the hardest hit after the U.K. referendum. The U.K. equities market fell less than 1% in dollar terms, as the British pound sterling dropped 7% versus the U.S. dollar. Eurozone markets also declined, as the euro dropped 2.5% versus the U.S. dollar. Developed Asian markets rose slightly; Japanese stocks rose 1% in dollar terms, helped by the yen’s nearly 10% gain versus the dollar. In the emerging markets universe, the Latin American region performed best in dollar terms. Asian markets were mostly higher, but most emerging European markets fell.
Returns of several major equity market indexes for the
three- and six-month periods ended June 30,
2016
, are as follows:
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
Index
|
|
6/30/2016
|
|
6/30/2016
|
S&P 500 Index
|
|
2.5%
|
|
3.8%
|
NASDAQ Composite Index
(1)
|
|
(.6)%
|
|
(3.3)%
|
Russell 2000 Index
|
|
3.8%
|
|
2.2%
|
MSCI EAFE (Europe, Australasia, and Far East) Index
|
|
(1.2)%
|
|
(4.0)%
|
MSCI Emerging Markets Index
|
|
.8%
|
|
6.6%
|
(1)
returns exclude dividends
Global bond returns in the second quarter of 2016 were generally strong in dollar terms. In the U.S., the Fed refrained from raising short-term interest rates. Longer-term Treasury yields declined and bond prices rose; the 10-year Treasury yield slid from 1.8% to 1.5%, helped by a late-quarter flight to safety. Nevertheless, U.S. Treasury yields remain higher than sovereign debt yields in many developed countries. In the domestic investment-grade universe, long-term Treasuries and corporate bonds did best. Other segments lagged with more modest gains. Tax-free bonds fared slightly better than the taxable bond market.
High yield corporate bonds surpassed high-quality securities, as credit spreads narrowed and energy, metals and mining issues rallied with commodity prices.
Despite a stronger dollar versus most major currencies, government bonds in developed non-U.S. markets produced good returns in dollar terms, as global slowdown concerns, falling inflation expectations, and hopes for more central bank stimulus fueled a rally. Emerging markets bonds appreciated, with dollar-denominated issues faring better than local currency bonds, whose returns were hurt by weaker currencies versus the U.S. dollar.
Returns for several major bond market indexes for the
three- and six-month periods ended June 30,
2016
, are as follows:
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
Index
|
|
6/30/2016
|
|
6/30/2016
|
Barclays U.S. Aggregate Bond Index
|
|
2.2%
|
|
5.3%
|
JPMorgan Global High Yield Index
|
|
6.0%
|
|
9.5%
|
Barclays Municipal Bond Index
|
|
2.6%
|
|
4.3%
|
Barclays Global Aggregate Ex-U.S. Dollar Bond Index
|
|
3.4%
|
|
11.9%
|
JPMorgan Emerging Markets Bond Index Plus
|
|
6.0%
|
|
12.3%
|
ASSETS UNDER MANAGEMENT.
Assets under management ended the
second
quarter of
2016
at
$776.6 billion
,
an increase
of
$12.0 billion
from
March 31, 2016
. The following table presents our assets under management (in billions) at
December 31, 2015
, and
June 30, 2016
, by investment portfolio and investment objective.
|
|
|
|
|
|
|
|
|
|
As of
|
|
12/31/2015
|
|
6/30/2016
|
Sponsored U.S. mutual funds
|
$
|
487.1
|
|
|
$
|
494.4
|
|
Other investment portfolios
|
276.0
|
|
|
282.2
|
|
Total assets under management
|
$
|
763.1
|
|
|
$
|
776.6
|
|
|
|
|
|
|
As of
|
|
12/31/2015
|
|
6/30/2016
|
Stock and blended asset portfolios
|
$
|
592.8
|
|
|
$
|
594.6
|
|
Fixed income portfolios
|
170.3
|
|
|
182.0
|
|
Total assets under management
|
$
|
763.1
|
|
|
$
|
776.6
|
|
The following table details the changes in our assets under management (in billions) during the
three- and six-month periods ended June 30,
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended 6/30/2016
|
Six months ended 6/30/2016
|
|
Sponsored U.S. mutual funds
|
|
Other investment portfolios
|
|
Total
|
Sponsored U.S. mutual funds
|
|
Other investment portfolios
|
|
Total
|
Assets under management at beginning of period
|
$
|
486.7
|
|
|
$
|
277.9
|
|
|
$
|
764.6
|
|
$
|
487.1
|
|
|
$
|
276.0
|
|
|
$
|
763.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows before client transfers
|
(1.6
|
)
|
|
(1.1
|
)
|
|
(2.7
|
)
|
3.4
|
|
|
(1.0
|
)
|
|
2.4
|
|
Client transfers from mutual funds to other portfolios
|
(.5
|
)
|
|
.5
|
|
|
—
|
|
(3.8
|
)
|
|
3.8
|
|
|
—
|
|
Net cash flows after client transfers
|
(2.1
|
)
|
|
(.6
|
)
|
|
(2.7
|
)
|
(.4
|
)
|
|
2.8
|
|
|
2.4
|
|
Net market appreciation and income
|
9.8
|
|
|
4.9
|
|
|
14.7
|
|
7.7
|
|
|
3.4
|
|
|
11.1
|
|
Change during the period
|
7.7
|
|
|
4.3
|
|
|
12.0
|
|
7.3
|
|
|
6.2
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management at June 30, 2016
|
$
|
494.4
|
|
|
$
|
282.2
|
|
|
$
|
776.6
|
|
$
|
494.4
|
|
|
$
|
282.2
|
|
|
$
|
776.6
|
|
The client transfers from mutual funds to other investment portfolios noted in the table above were primarily transfers from mutual funds to collective investment trusts, including our retirement date trusts.
The net cash flows after client transfers (in billions) during the
three- and six-month periods ended June 30,
2016
, include the following:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended 6/30/2016
|
|
Six months ended 6/30/2016
|
Sponsored U.S. mutual funds
|
|
|
|
|
Stock and blended asset funds
|
|
$
|
(2.9
|
)
|
|
$
|
(1.1
|
)
|
Bond funds
|
|
1.3
|
|
|
.9
|
|
Money market funds
|
|
(.5
|
)
|
|
(.2
|
)
|
|
|
(2.1
|
)
|
|
(.4
|
)
|
Other investment portfolios
|
|
|
|
|
Stock and blended assets
|
|
(2.7
|
)
|
|
(.4
|
)
|
Fixed income, money market, and stable value
|
|
2.1
|
|
|
3.2
|
|
|
|
(.6
|
)
|
|
2.8
|
|
Total net cash flows after client transfers
|
|
$
|
(2.7
|
)
|
|
$
|
2.4
|
|
Our target-date retirement portfolios invest in a broadly diversified portfolio of other T. Rowe Price funds or T. Rowe Price collective investment trusts, and automatically rebalance to maintain their specific asset allocation weightings. Total net cash flows for the three and
six
-month period ended
June 30, 2016
, include
$2.1 billion
and
$6.3 billion
, respectively, that originated in our target-date retirement portfolios. Assets under management in these portfolios at
June 30, 2016
, totaled
$177.9 billion
, including
$142.4 billion
in target-date retirement funds and
$35.5 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 often involve costs that precede any future revenues that we may recognize from an increase to our assets under management.
RESULTS OF OPERATIONS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
6/30/2015
|
|
6/30/2016
|
|
Dollar change
|
|
Percentage change
|
(in millions, except per-share data)
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
942.2
|
|
|
$
|
920.6
|
|
|
$
|
(21.6
|
)
|
|
(2.3
|
)%
|
Net revenues
|
|
$
|
1,072.4
|
|
|
$
|
1,044.7
|
|
|
$
|
(27.7
|
)
|
|
(2.6
|
)%
|
Operating expenses
|
|
$
|
564.6
|
|
|
$
|
761.2
|
|
|
$
|
196.6
|
|
|
34.8
|
%
|
Net operating income
|
|
$
|
507.8
|
|
|
$
|
283.5
|
|
|
$
|
(224.3
|
)
|
|
(44.2
|
)%
|
Non-operating income
|
|
$
|
33.0
|
|
|
$
|
41.5
|
|
|
$
|
8.5
|
|
|
25.8
|
%
|
Net income attributable to T. Rowe Price Group
|
|
$
|
333.2
|
|
|
$
|
195.3
|
|
|
$
|
(137.9
|
)
|
|
(41.4
|
)%
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share on common stock of T. Rowe Price Group
|
|
$
|
1.24
|
|
|
$
|
.76
|
|
|
$
|
(.48
|
)
|
|
(38.7
|
)%
|
|
|
|
|
|
|
|
|
|
Average assets under management (in billions)
|
|
$
|
783.6
|
|
|
$
|
772.7
|
|
|
$
|
(10.9
|
)
|
|
(1.4
|
)%
|
Investment advisory fees earned in the
second
quarter of
2016
decreased over the comparable
2015
quarter as average assets under our management
decrease
d
$10.9 billion
, or
1.4%
, to
$772.7 billion
. The average annualized effective fee rate earned on our assets under management during the
second
quarter of
2016
was
47.9 basis points
compared with
48.2 basis points
earned during the
second
quarter of
2015
. We voluntarily waived a portion of our money market advisory fees and fund expenses in the
second
quarter of
2016
in order to maintain a positive yield for fund investors. These fees were waived from certain of our money market mutual funds and trusts and totaled
$3.3 million
, or less than 1% of total investment advisory fees earned during the
second
quarter of
2016
, as compared to
$12.5 million
in the comparable
2015
quarter. Combined net assets at
June 30, 2016
, of the funds and trusts in which we waived fees in the second quarter of 2016 was
$15.4 billion
. We expect that these fee waivers will continue for the remainder of
2016
.
During the
second
quarter of
2016
, we recognized a nonrecurring operating charge of $166.2 million, which reduced net income by $100.7 million or $.39 in diluted earnings per common share, related to our decision to compensate certain clients in regard to the Dell appraisal rights matter.
Our operating margin in the
second
quarter of
2016
was
27.1%
, compared to
47.4%
in the
2015
quarter, as the nonrecurring operating charge related to the Dell appraisal rights matter recognized in the
second
quarter of
2016
reduced our operating margin by nearly 16%. The additional decline in our operating margin from the
second
quarter of
2015
is attributable to our continued investments to broaden and deepen our investment management, distribution, and service capabilities around the world despite the impact recent market volatility has had on our net revenues.
The
second
quarter of
2016
results were impacted by greater non-operating income resulting from the implementation of new accounting guidance on January 1, 2016, which required us to consolidate certain sponsored investment portfolios in which we are deemed to have a controlling interest. The consolidation of these portfolios results in the recognition in our consolidated statements of income each portfolio's investment income and operating expenses, including the portion attributable to redeemable non-controlling interests. The portion attributable to redeemable non-controlling interests is removed from our net income to arrive at net income attributable to T. Rowe Price Group, which is used in our calculation of earnings per share. For the
second
quarter of
2016
, the impact (in millions) of consolidating these sponsored investment portfolios on the individual lines of the our condensed consolidated statements of income is as follows:
|
|
|
|
|
Operating expenses reflected in net operating income
|
$
|
(3.5
|
)
|
Net investment income reflected in non-operating income
|
26.4
|
|
Impact on income before taxes
|
$
|
22.9
|
|
|
|
Attributable to the firm's interest in the consolidated sponsored investment portfolios
|
$
|
15.0
|
|
Attributable to redeemable non-controlling interests (unrelated third party investors)
|
7.9
|
|
|
$
|
22.9
|
|
Net revenues
Investment advisory revenues earned in the
second
quarter of
2016
from the T. Rowe Price mutual funds distributed in the U.S. were
$669.1 million
,
a decrease
of
$13.9 million
, or
2.0%
, from the comparable
2015
quarter. Average mutual fund assets under management in the
second
quarter of
2016
were
$492.1 billion
, a
decrease
of
2.8%
from the average in the
second
quarter of
2015
. The decline in advisory revenues from lower average mutual fund assets under management was muted to some degree by the reduction in money market fee waivers made in the
second
quarter of
2016
compared with the
2015
quarter.
Investment advisory revenues earned in the
second
quarter of
2016
from the other investment portfolios were
$251.5 million
,
a decrease
of
$7.7 million
, or
3.0%
, from the comparable
2015
quarter. Average assets under management in the
second
quarter of
2016
were
$280.6 billion
, a
decrease
of
1.2%
from the average in the
second
quarter of
2015
.
Administrative fee revenues
decrease
d
$3.1 million
to
$88.5 million
in the
second
quarter of
2016
. The decrease is primarily resulted from the shift to BNY Mellon of fund accounting and portfolio recordkeeping operations that prior to August 2015 were provided to our sponsored U.S. mutual funds. 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.
Operating expenses
Compensation and related costs were
$371.0 million
in the
second
quarter of
2016
,
an increase
of
$10.1 million
, or
2.8%
, compared to the
second
quarter of
2015
. The largest part of the change is attributable to a
$12.3 million
increase in base salaries and related benefits which results from a modest increase in salaries at the beginning of
2016
combined with a
2.6%
increase in our average staff size from the
second
quarter of
2015
. Our stock-based compensation expense and interim accrual for our annual variable compensation programs have also increased
$3.2 million
and
$2.5 million
, respectively, in the
second
quarter of
2016
. Our interim accrual for annual variable compensation program is recognized ratably over the year using the ratio of recognized quarterly net operating income to forecasted annual net operating income. The increase in compensation and related costs and our average staff size from the 2015 quarter were also muted by lower compensation costs resulting from shifting 210 associates in August 2015 for the aforementioned transition of accounting and recordkeeping operations. BNY Mellon's fees for such services are now reflected in other operating expenses. We employed
6,213
associates at
June 30, 2016
.
Advertising and promotion costs were
$14.9 million
in the
second
quarter of
2016
, compared with
$14.2 million
in the comparable
2015
period. We currently expect advertising and promotion costs for the full-year 2016 to be comparable to
2015
levels.
Other operating expenses in the
second
quarter of
2016
were up
$20.1 million
from the comparable
2015
quarter. More than half of the increase is attributable to costs now being paid to BNY Mellon for the performance of certain administrative services as well as implementation services related to the firm's transition to their technology platform. The remainder of the increase in costs is due to higher business demands and the firm's continued investment in its operating capabilities.
Non-operating income
Net non-operating income in the
second
quarter of
2016
was
$41.5 million
, an increase of
$8.5 million
from the
2015
quarter. The following table details the components of non-operating income (in millions) during the
second
quarter of
2015
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
6/30/2015
|
|
6/30/2016
|
|
Dollar change
|
|
|
|
|
|
|
|
Net gains realized on dispositions of available-for-sale investments
|
|
$
|
22.7
|
|
|
$
|
—
|
|
|
$
|
(22.7
|
)
|
Ordinary and capital gain dividends on sponsored fund investments
|
|
3.9
|
|
|
1.8
|
|
|
(2.1
|
)
|
Investment gains on sponsored equity method and trading investments
|
|
.5
|
|
|
7.5
|
|
|
7.0
|
|
Net investment income on sponsored fund investments not consolidated
|
|
27.1
|
|
|
9.3
|
|
|
(17.8
|
)
|
Other investment income
|
|
5.6
|
|
|
6.0
|
|
|
.4
|
|
Total investment income on investments
|
|
32.7
|
|
|
15.3
|
|
|
(17.4
|
)
|
Net investment income on consolidated sponsored investment portfolios
|
|
.1
|
|
|
26.4
|
|
|
26.3
|
|
Other non-operating expense
|
|
.2
|
|
|
(.2
|
)
|
|
(.4
|
)
|
Non-operating income
|
|
$
|
33.0
|
|
|
$
|
41.5
|
|
|
$
|
8.5
|
|
We sold certain available-for-sale holdings during the second quarter of 2015 and used the proceeds to provide seed capital to new and existing sponsored products in support of our distribution efforts outside the United States. The investment income on consolidated sponsored investment portfolios represents each portfolio’s total investment income, including the portion that is attributable to unrelated third party investors. The investment income on consolidated sponsored investment portfolios has increased in the second quarter of 2016 as the number of portfolios we consolidated, as discussed above, increased significantly upon the adoption of the new consolidation accounting guidance. See Note 1, The Company and Basis of Preparation, in the condensed consolidated financial statements contained in Part I, Item 1 of this filing.
Provision for income taxes
The effective tax rate for the
second
quarter of
2016
was
37.5%
, as we currently estimate the effective tax rate for the full year
2016
will be
38.3%
compared with our estimate at the end of the first quarter of 2016 of 38.7%. The decrease in the estimated effective tax rate for 2016 is largely attributable to a higher forecasted mix of pre-tax income in lower tax jurisdictions. 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. subsidiaries 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
2015
versus first
half
of
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
6/30/2015
|
|
6/30/2016
|
|
Dollar change
|
|
Percent change
|
(in millions, except per-share data)
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
1,838.7
|
|
|
$
|
1,791.4
|
|
|
$
|
(47.3
|
)
|
|
(2.6
|
)%
|
Net revenues
|
|
$
|
2,099.4
|
|
|
$
|
2,038.8
|
|
|
$
|
(60.6
|
)
|
|
(2.9
|
)%
|
Operating expenses
|
|
$
|
1,113.8
|
|
|
$
|
1,344.4
|
|
|
$
|
230.6
|
|
|
20.7
|
%
|
Net operating income
|
|
$
|
985.6
|
|
|
$
|
694.4
|
|
|
$
|
(291.2
|
)
|
|
(29.5
|
)%
|
Non-operating income
|
|
$
|
59.8
|
|
|
$
|
126.6
|
|
|
$
|
66.8
|
|
|
111.7
|
%
|
Net income attributable to T. Rowe Price Group
|
|
$
|
642.7
|
|
|
$
|
490.5
|
|
|
$
|
(152.2
|
)
|
|
(23.7
|
)%
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share on common stock of T. Rowe Price Group
|
|
$
|
2.39
|
|
|
$
|
1.91
|
|
|
$
|
(.48
|
)
|
|
(20.1
|
)%
|
|
|
|
|
|
|
|
|
|
Average assets under management (in billions)
|
|
$
|
771.4
|
|
|
$
|
750.4
|
|
|
$
|
(21.0
|
)
|
|
(2.7
|
)%
|
Investment advisory revenues earned in the first
half
of
2016
decreased over the comparable
2015
period, as average assets under our management
decrease
d
$21.0 billion
, or
2.7%
, to
$750.4 billion
. The average annualized fee rate earned on our assets under management was
48.0 basis points
in the first
half
of
2016
, virtually unchanged from the
48.1 basis points
earned in the first
half
of
2015
. We waived
$7.3 million
in money market related fees, including advisory fees and fund expenses, in the first
half
of
2016
,
a decrease
of
$18.9 million
from the
$26.2 million
waived in the
2015
period. The fee waivers in the first
half
of
2016
represent less than 1% of total investment advisory revenues earned during the same period.
During the first
half
of
2016
, we recognized a nonrecurring operating charge of $166.2 million, which reduced net income by $100.7 million or $.39 in diluted earnings per common share, related to our decision to compensate certain clients in regard to the Dell appraisal rights matter.
Our operating margin in the first
half
of
2016
was
34.1%
, compared to
46.9%
in the
2015
period, as the nonrecurring operating charge related to the Dell appraisal rights matter recognized in the
2016
period reduced our operating margin by about 8%. The additional decline in our operating margin from the first half of 2015 is a result of the investments we have been making to broaden and deepen our investment management, distribution, and service capabilities around the world.
The first
half
of
2016
results were also impacted by greater non-operating income resulting from higher realized gains on investments and implementing new accounting guidance on January 1, 2016, as discussed earlier in the Results of Operations, which resulted in the consolidation of an increased number of sponsored investment portfolios. When aggregated, these items added $.09 in diluted earnings per common share in the first
half
of
2016
when compared to the prior year period.
For
the first half of
2016
, the impact (in millions) of our consolidated sponsored investment portfolios on the individual lines of the firm's income statement is as follows:
|
|
|
|
|
Operating expenses reflected in net operating income
|
$
|
(6.1
|
)
|
Net investment income reflected in non-operating income
|
50.2
|
|
Impact on income before taxes
|
$
|
44.1
|
|
|
|
Attributable to the firm's interest in the consolidated sponsored investment portfolios
|
$
|
27.0
|
|
Attributable to redeemable non-controlling interests (unrelated third party investors)
|
17.1
|
|
|
$
|
44.1
|
|
Net revenues
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. decreased
2.1%
, or
$27.7 million
, to
$1.3 billion
, on lower average mutual fund assets. Average mutual fund assets in the first
half
of
2016
were
$478.8 billion
, a
decrease
of
3.6%
from the average for the comparable
2015
period. The decline in advisory revenues from lower average mutual fund assets under management was muted some by the reduction in money market fee waivers made in the
second
quarter of
2016
compared with the
2015
quarter.
Investment advisory revenues earned on the other investment portfolios for the first
half
of
2016
were
$490.2 million
,
a decrease
of
$19.6 million
, or
3.8%
, from the
$509.8 million
earned in the comparable
2015
period. Average assets in these portfolios were
$271.6 billion
during the first
half
of
2016
,
down
1.1%
from the comparable
2015
period.
Administrative fee revenues
decrease
d
$6.7 million
to
$177.9 million
in the first
half
of
2016
. The decrease is primarily from the shift to BNY Mellon of fund accounting and portfolio recordkeeping operations that, prior to August 2015, were provided to our sponsored U.S. mutual funds.
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
$69.5 million
in the first
half
of
2016
,
a decrease
of
$6.6 million
from the comparable
2015
period on lower 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
$726.2 million
in the first
half
of
2016
,
an increase
of
$18.8 million
, or
2.7%
, compared to the
2015
period. The largest part of the
increase
is attributable to a
$24.3 million
increase
in salaries and related benefits which resulted from a modest increase in salaries at the beginning of
2016
combined with an increase of
2.6%
in average head count from the
2015
period. Higher non-cash stock-based compensation expense of $9.0 million was offset in part by an increase in the level of labor capitalized in
2016
compared with the
2015
period. Our interim accrual in the first half of 2016 for our annual variable compensation program was in line with the
2015
period. As discussed earlier in this Results of Operations, the overall increase in compensation and related costs and our average staff size from the first half of 2015 were muted by lower compensation costs resulting from shifting 210 associates in August 2015 for the aforementioned transition of operations. BNY Mellon's fees for such services are now reflected in other operating expenses.
Occupancy and facility costs, together with depreciation expense,
increased
$8.7 million
, or
6.2%
, compared to the first
half
of
2015
. The increase is primarily attributable to the added costs to update and enhance technology capabilities, including related maintenance programs.
Other operating expenses were
$196.3 million
in the first
half
of
2016
,
an increase
of
$45.0 million
from the comparable
2015
period. About half of this increase is attributable to costs being paid to BNY Mellon since August 2015 for the performance of certain administrative services. The increase also includes
$3.0 million
in operating expenses, net of investment advisory fees paid to us, of those sponsored investment portfolios that we began consolidating at the beginning of 2016. The remaining balance of the change is due to increased business demands and our continued investment in capabilities.
Non-operating income
Net non-operating investment activity during the first
half
of
2016
resulted in income of
$126.6 million
compared with
$59.8 million
in the
2015
period. The following table details the components of non-operating income (in millions) during the first
half
of
2015
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
6/30/2015
|
|
6/30/2016
|
|
Dollar change
|
|
|
|
|
|
|
|
Net gains realized on dispositions of available-for-sale investments
|
|
$
|
39.3
|
|
|
$
|
52.3
|
|
|
$
|
13.0
|
|
Ordinary and capital gain dividends on sponsored fund investments
|
|
7.3
|
|
|
3.3
|
|
|
(4.0
|
)
|
Investment gains on sponsored equity method and trading investments
|
|
3.2
|
|
|
12.8
|
|
|
9.6
|
|
Net investment income on sponsored fund investments not consolidated
|
|
49.8
|
|
|
68.4
|
|
|
18.6
|
|
Other investment income
|
|
8.5
|
|
|
8.2
|
|
|
(.3
|
)
|
Total investment income on investments
|
|
58.3
|
|
|
76.6
|
|
|
(18.3
|
)
|
Net investment income on consolidated sponsored investment portfolios
|
|
2.4
|
|
|
50.2
|
|
|
47.8
|
|
Other non-operating expense
|
|
(.9
|
)
|
|
(.2
|
)
|
|
.7
|
|
Non-operating income
|
|
$
|
59.8
|
|
|
$
|
126.6
|
|
|
$
|
66.8
|
|
CAPITAL RESOURCES AND LIQUIDITY.
We remain debt-free with ample liquidity, including cash and discretionary sponsored portfolio investment holdings of
$2.1 billion
at
June 30, 2016
. We also have seed capital investments in sponsored investment portfolios of
$1.0 billion
, of which nearly all are interests in sponsored investment portfolios that we consolidate in our financial statements and are discussed in more detail below. We expended
$244.0 million
to repurchase
3.6 million
shares of our common stock in the first
half
of 2016, and will generally repurchase our common stock over time to offset the dilution created by our equity-based compensation plans. We anticipate property and equipment expenditures for the full year
2016
to be up to
$180 million
, of which about two-thirds is planned for technology initiatives. Given the availability of our financial resources, we expect to fund our anticipated capital expenditures with operating resources, and do not maintain an available external source of liquidity.
On January 1, 2016, we implemented new consolidation accounting guidance that resulted in the consolidation of sponsored investment portfolios in which we have a controlling interest in our financial statements. Our condensed consolidated balance sheet now reflects the cash and cash equivalents, investments, other assets and liabilities of the sponsored portfolios as well as redeemable non-controlling interests for the portion of the sponsored portfolios that are held by unrelated third party investors. At
June 30, 2016
, the net assets of our consolidated sponsored investment portfolios included in our condensed consolidated balance sheet totaled
$2.1 billion
, of which Price Group’s interest was nearly
$1.0 billion
and the interests held by unrelated third party investors was
$1.1 billion
.
Although we can redeem our net interest in these sponsored investment portfolios at any time, we cannot directly access or sell the assets held by the portfolios to obtain cash for general operations. Additionally, the assets of these investment portfolios are not available to our general creditors. Our interest in these sponsored investment portfolios represents seed capital that is redeemable, although we generally expect to be invested for several years until unrelated third party investors substantially reduce our relative ownership percentage.
The following table summarizes the cash flows (in millions) for the
six
months ended
June 30, 2016
, that are attributable to Price Group and our consolidated sponsored investment portfolios. The table also reflects the eliminations required in preparing our condensed consolidated statement of cash flow for the
six
months ended
June 30, 2016
and our condensed consolidated statement of cash flow for the six months ended June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For six months ended 6/30/2016
|
|
As reported for the six months ended 6/30/2015
|
|
Cash flow attributable to Price Group
|
|
Cash flow attributable to consolidated sponsored investment portfolios
|
|
Eliminations
|
|
As reported on statement of cash flows
|
Net cash provided by (used in) operating activities
|
$
|
886.7
|
|
|
$
|
644.9
|
|
|
$
|
(673.3
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
(31.5
|
)
|
Net cash provided by (used in) investing activities
|
(33.9
|
)
|
|
(103.1
|
)
|
|
68.3
|
|
|
196.8
|
|
|
162.0
|
|
Net cash provided by (used in) financing activities
|
(1,089.7
|
)
|
|
(438.9
|
)
|
|
733.7
|
|
|
(193.7
|
)
|
|
101.1
|
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios
|
—
|
|
|
—
|
|
|
(21.3
|
)
|
|
—
|
|
|
(21.3
|
)
|
Net change in cash and cash equivalents during period
|
(236.9
|
)
|
|
102.9
|
|
|
107.4
|
|
|
—
|
|
|
210.3
|
|
Cash and cash equivalents at beginning of year
|
1,506.1
|
|
|
1,172.3
|
|
|
—
|
|
|
—
|
|
|
1,172.3
|
|
Cash and cash equivalents at end of period
|
$
|
1,269.2
|
|
|
$
|
1,275.2
|
|
|
$
|
107.4
|
|
|
$
|
—
|
|
|
$
|
1,382.6
|
|
Operating activities attributable to Price Group during the first
half
of
2016
provided cash flows of
$644.9 million
, a decrease of $241.8 million from the
2015
period. More than half of the decline is related to our decision in the first
half
of
2016
to compensate certain clients $166.2 million in regard to the Dell appraisal rights matter, of which $164.4 million was settled in June 2016. Net income attributable to Price Group for the first
half
of
2016
, excluding the $100.7 million related to the Dell appraisal matter, declined $51.5 million from the comparable
2015
period. The remaining decline is primarily attributable to timing differences in the cash settlement of our assets and liabilities compared to the first six months of
2016
. 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. The net cash provided by operating activities attributable to Price Group were more than offset by the net change in trading securities held in our consolidated sponsored investments underlying investment portfolios.
Net cash used in investing activities that are attributable to Price Group totaled
$103.1 million
in the first
half
of
2016
. During the first half of 2016, we provided $196.8 million in seed capital to new and existing sponsored investment portfolios. Since we consolidate these sponsored investment portfolios, the seed capital that we provided was eliminated in consolidation. We utilized a portion of the $174.2 million in proceeds from the sale of certain available-for-sale investments and equity method investments in the first half of 2016 to fund these seed capital investments. Additionally, our net property and equipment additions were
$79.2 million
in the first
half
of
2016
compared to
$79.9 million
in the
2015
period. Net cash of our consolidated sponsored investment portfolios that we consolidated or deconsolidated added net cash of $68.3 million during the first
half
of
2016
.
Net cash used in financing activities attributable to Price Group were
$438.9 million
in the first
half
of
2016
compared with
$1,089.7 million
in the
2015
period. The decline in cash used in financing activities is largely related to the $2.00 per share, or $524 million, special dividend we paid in April 2015. We also expended
$109.8 million
less in common stock purchases in the first
half
of
2016
compared to the 2015 period. The cash proceeds received from stock options exercises were higher in the first
half
of
2016
by
$17.4 million
compared with the
2015
period. The net cash used in financing activities attributable to Price Group was more than offset by $540.0 million in cash provided by consolidated sponsored investment portfolios from the net subscriptions received from redeemable non-controlling interest holders.
Since the end of 2013, we have returned $3.4 billion to stockholders through stock repurchases, our regular quarterly dividends, and one special dividend.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Recurring dividend
|
|
Special dividend
|
|
Stock repurchases
|
|
Total cash returned to stockholders
|
2014
|
462.1
|
|
|
—
|
|
|
415.5
|
|
|
877.6
|
|
2015
|
534.5
|
|
|
524.5
|
|
|
987.8
|
|
|
2,046.8
|
|
Six months ended 6/30/2016
|
271.8
|
|
|
|
|
|
244.0
|
|
|
515.8
|
|
Total
|
$
|
1,268.4
|
|
|
$
|
524.5
|
|
|
$
|
1,647.3
|
|
|
$
|
3,440.2
|
|
CRITICAL ACCOUNTING POLICIES.
The preparation of financial statements often requires the selection of specific accounting methods and policies from among several acceptable alternatives. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in our consolidated balance sheets, the revenues and expenses in our consolidated statements of income, and the information that is contained in our significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that we include currently in our consolidated financial statements, significant accounting policies, and notes. Given the impact the implementation of Accounting Standards Update No. 2015-02 - Consolidation (Topic 810): Amendments to the Consolidation Analysis on January 1, 2016, has had on our consolidated financial statements, we now consider our consolidation policy one of the policies that are most critical to the preparation and understanding of our consolidated financial statements. Our consolidation policy is included in Note 1-The Company and Basis for Preparation, in the condensed consolidated financial statements contained in Part I, Item 1 of this filing. There have been no other material changes in the critical accounting policies previously identified in our 2015 Annual Report on Form 10-K.
NEW ACCOUNTING STANDARDS.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 — Revenue from Contracts with Customers and subsequently have issued four related accounting standard updates clarifying several aspect of the ASU 2014-09. The overall objective of the new standard updates 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 would be required to adopt the new standard on January 1, 2018. We are currently evaluating the impact these standards will have on our financial position and results of operations.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 — Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The new guidance will require the change in fair value of equity investments with readily determinable fair values to be recognized through the income statements. We are currently evaluating the full impact of the standard, however, upon adoption the change in the fair value of our available-for-sale investments will be recognized in our consolidated income statement instead of our consolidated statement of comprehensive income.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02—Leases (Topic 842). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this standard will have on our financial position and results of operations.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Early adoption is permitted. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the full impact of the standard, however, upon adoption, any excess tax benefits that arise upon settlement of an award will be recognized in our provision for income taxes instead of additional capital in excess of par value within our consolidated statement of stockholders’ equity. As such, this change will create volatility in our effective tax rate and net income, as the excess tax benefit will be driven, in part, by our common stock price.
We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our condensed consolidated statements, including those 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, stock repurchases, 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
2015
. 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 (Price 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 products, including mutual funds and investment portfolios, and services; 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 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 income will also fluctuate as a result of the consolidation of certain of our investment portfolios as well as 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 investees 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 fund accounting and other recordkeeping services, 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.