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
2017
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
2016
Annual Report.
NEW ACCOUNTING GUIDANCE
We early adopted Accounting Standards Update No. 2016-09 — Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting on July 1, 2016, which changed the accounting for certain aspects of stock-based compensation awards, including the accounting for income taxes upon settlement of awards, the classification of cash flows associated with awards, the accounting for award forfeitures, and the treatment of hypothetical tax benefits when calculating weighted-average shares outstanding assuming dilution. The guidance required adjustments to be reflected as of January 1, 2016, so we recognized adjustments related to the first and second quarter of 2016 in our condensed consolidated financial statement results for the nine months ended September 30, 2016. As such, we have revised the
three- and six-
months ended
June 30, 2016
financial statements reported in these statements to reflect the impact of the new guidance.
For the three and six months ended June 30, 2016, the recognition of net tax benefits on exercised options and vested restricted stock relative to the stock-based compensation expense reduced our previously reported income tax provisions by
$8 million
and
$16.9 million
, respectively. The impact (in millions) on our condensed consolidated statement of income and earnings per share on common stock data
three- and six-
months is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended 6/30/2016
|
|
Six months ended 6/30/2016
|
|
As previously reported
|
|
As reported herein
|
|
As previously reported
|
|
As reported herein
|
Income before income taxes
|
$
|
325.0
|
|
|
$
|
325.0
|
|
|
$
|
821.0
|
|
|
$
|
821.0
|
|
Provision for income taxes
|
121.8
|
|
|
113.8
|
|
|
313.4
|
|
|
296.5
|
|
Net income
|
203.2
|
|
|
211.2
|
|
|
507.6
|
|
|
524.5
|
|
Less: net income attributable to redeemable non-controlling interests
|
7.9
|
|
|
7.9
|
|
|
17.1
|
|
|
17.1
|
|
Net income attributable to T. Rowe Price Group
|
$
|
195.3
|
|
|
$
|
203.3
|
|
|
$
|
490.5
|
|
|
$
|
507.4
|
|
Less: net income allocated to outstanding restricted stock and stock unit holders
|
3.8
|
|
|
4.0
|
|
|
9.4
|
|
|
9.8
|
|
Net income allocated to common stockholders
|
$
|
191.5
|
|
|
$
|
199.3
|
|
|
$
|
481.1
|
|
|
$
|
497.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share on common stock of T. Rowe Price Group
|
|
|
|
|
|
|
|
Basic
|
$
|
.78
|
|
|
$
|
.81
|
|
|
$
|
1.95
|
|
|
$
|
2.02
|
|
Diluted
|
$
|
.76
|
|
|
$
|
.79
|
|
|
$
|
1.91
|
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
|
|
|
|
|
Outstanding
|
246.9
|
|
|
246.9
|
|
|
246.8
|
|
|
246.8
|
|
Outstanding assuming dilution
|
252.1
|
|
|
252.6
|
|
|
251.8
|
|
|
252.2
|
|
The impact (in millions) of reporting excess tax benefits from stock-based compensation as an operating activity rather than a financing activity in the consolidated statements of cash flows for the six months ended
June 30, 2016
, follows:
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
As reported herein
|
Net cash provided by operating activities
|
$
|
(31.5
|
)
|
|
$
|
(14.2
|
)
|
Net cash (used in) provided by financing activities
|
$
|
101.1
|
|
|
$
|
83.8
|
|
|
|
NOTE 2
|
– INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES.
|
Accounts receivable from our sponsored investment portfolios, including our U.S. mutual funds, for advisory fees and advisory-related administrative services aggregate
$303.1 million
at
December 31, 2016
, and
$320.7 million
at
June 30, 2017
.
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
|
|
6/30/2016
|
|
6/30/2017
|
6/30/2016
|
|
6/30/2017
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
Stock and blended asset
|
$
|
551.1
|
|
|
$
|
628.6
|
|
$
|
1,070.6
|
|
|
$
|
1,222.7
|
|
Bond and money market
|
118.0
|
|
|
125.7
|
|
230.6
|
|
|
247.4
|
|
|
669.1
|
|
|
754.3
|
|
1,301.2
|
|
|
1,470.1
|
|
Other investment portfolios
|
|
|
|
|
|
|
Stock and blended asset
|
210.3
|
|
|
240.3
|
|
408.2
|
|
|
468.2
|
|
Bond, money market, and stable value
|
41.2
|
|
|
49.3
|
|
82.0
|
|
|
96.7
|
|
|
251.5
|
|
|
289.6
|
|
490.2
|
|
|
564.9
|
|
Total
|
$
|
920.6
|
|
|
$
|
1,043.9
|
|
$
|
1,791.4
|
|
|
$
|
2,035.0
|
|
Other investment portfolios include advisory revenues of
$94.0 million
and
$108.6 million
for the three months ended
June 30, 2016
and
2017
, respectively, that were earned from other sponsored investment portfolios. Fees earned during the
six
months ended
June 30, 2016
and
2017
, total
$182.2 million
and
$214.7 million
respectively.
We voluntarily waived
$3.3 million
and
$7.3 million
in money market related fees, including advisory fees and fund expenses, during the three and
six
months ended
June 30, 2016
respectively, in order to maintain a positive yield for investors. We did not waive any money market related fees during
2017
.
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
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
|
Stock and blended asset
|
$
|
383.6
|
|
|
$
|
440.1
|
|
|
$
|
372.4
|
|
|
$
|
430.6
|
|
Bond and money market
|
108.5
|
|
|
120.1
|
|
|
106.4
|
|
|
117.8
|
|
|
492.1
|
|
|
560.2
|
|
|
478.8
|
|
|
548.4
|
|
Other investment portfolios
|
|
|
|
|
|
|
|
Stock and blended asset
|
209.9
|
|
|
244.7
|
|
|
203.2
|
|
|
238.0
|
|
Bond, money market, and stable value
|
70.7
|
|
|
81.0
|
|
|
68.4
|
|
|
79.2
|
|
|
280.6
|
|
|
325.7
|
|
|
271.6
|
|
|
317.2
|
|
Total
|
$
|
772.7
|
|
|
$
|
885.9
|
|
|
$
|
750.4
|
|
|
$
|
865.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
12/31/2016
|
|
6/30/2017
|
Sponsored U.S. mutual funds
|
|
|
|
|
|
|
|
Stock and blended asset
|
|
|
|
|
$
|
401.3
|
|
|
$
|
445.5
|
|
Bond and money market
|
|
|
|
|
112.9
|
|
|
121.0
|
|
|
|
|
|
|
514.2
|
|
|
566.5
|
|
Other investment portfolios
|
|
|
|
|
|
|
|
Stock and blended asset
|
|
|
|
|
220.8
|
|
|
254.0
|
|
Bond, money market, and stable value
|
|
|
|
|
75.8
|
|
|
83.1
|
|
|
|
|
|
|
296.6
|
|
|
337.1
|
|
Total
|
|
|
|
|
$
|
810.8
|
|
|
$
|
903.6
|
|
Investors that we serve are primarily domiciled in the U.S.;
investment advisory clients outside the U.S.
account for
4.7%
and
4.9%
of our
assets under management at December 31, 2016
, and
June 30, 2017
, respectively.
The following table summarizes other fees (in millions) we earn from our sponsored U.S. mutual funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2016
|
|
6/30/2017
|
|
6/30/2016
|
|
6/30/2017
|
Administrative fees
|
$
|
69.7
|
|
|
$
|
71.9
|
|
|
$
|
142.0
|
|
|
$
|
141.4
|
|
Distribution and servicing fees
|
$
|
35.6
|
|
|
$
|
36.4
|
|
|
$
|
69.5
|
|
|
$
|
71.6
|
|
NOTE 3 - INVESTMENTS.
The carrying values of investments (in millions) we do not consolidate are as follows:
|
|
|
|
|
|
|
|
|
|
12/31/2016
|
|
6/30/2017
|
Available-for-sale sponsored investment portfolios
|
$
|
709.0
|
|
|
$
|
524.4
|
|
Equity method investments
|
|
|
|
Sponsored investment portfolios
|
252.3
|
|
|
317.8
|
|
26% interest in UTI Asset Management Company Limited (India)
|
140.9
|
|
|
151.4
|
|
Investment partnerships
|
5.3
|
|
|
5.1
|
|
Sponsored investment portfolios held as trading
|
75.4
|
|
|
256.9
|
|
Cost method investments
|
73.6
|
|
|
77.1
|
|
U.S. Treasury note
|
1.0
|
|
|
1.0
|
|
Total
|
$
|
1,257.5
|
|
|
$
|
1,333.7
|
|
During the first
six
months of
2016
and
2017
, certain sponsored investment portfolios in which we provided initial seed capital at the time of formation were deconsolidated, as we no longer had a controlling interest. Additionally, during the first
six
months of
2016
and
2017
, certain sponsored investment portfolios that were being accounted for as equity method investments were consolidated, as we regained a controlling interest. The net impact of these changes on our condensed consolidated balance sheets and income statements as of the dates the portfolios were deconsolidated or reconsolidated is detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
6/30/2016
|
|
6/30/2017
|
|
6/30/2016
|
|
6/30/2017
|
Net decrease in assets of consolidated sponsored investment portfolios
|
$
|
(24.4
|
)
|
|
$
|
(38.1
|
)
|
|
$
|
(363.2
|
)
|
|
$
|
(1,074.0
|
)
|
Net decrease in liabilities of consolidated sponsored investment portfolios
|
$
|
(1.3
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(133.6
|
)
|
Net decrease in redeemable non-controlling interests
|
$
|
(8.7
|
)
|
|
$
|
(19.5
|
)
|
|
$
|
(161.3
|
)
|
|
$
|
(787.2
|
)
|
|
|
|
|
|
|
|
|
Gain (loss) recognized upon deconsolidation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We did not recognize any additional gain or loss in our consolidated statements of income upon deconsolidation as the sponsored investment portfolios’ functional currencies were U.S. dollars and were carried at fair value. Depending on our ownership interest, we are now reporting our residual interests in these 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, 2016
|
|
|
|
|
|
|
|
Stock and blended asset funds
|
$
|
162.9
|
|
|
$
|
88.0
|
|
|
$
|
(1.9
|
)
|
|
$
|
249.0
|
|
Bond funds
|
463.3
|
|
|
1.7
|
|
|
(5.0
|
)
|
|
460.0
|
|
Total
|
$
|
626.2
|
|
|
$
|
89.7
|
|
|
$
|
(6.9
|
)
|
|
$
|
709.0
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
Stock and blended asset funds
|
$
|
106.0
|
|
|
$
|
12.0
|
|
|
$
|
—
|
|
|
$
|
118.0
|
|
Bond funds
|
405.6
|
|
|
3.8
|
|
|
(3.0
|
)
|
|
406.4
|
|
Total
|
$
|
511.6
|
|
|
$
|
15.8
|
|
|
$
|
(3.0
|
)
|
|
$
|
524.4
|
|
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, 2016
|
|
|
|
|
|
Less than 12 months
|
8
|
|
|
$
|
(4.2
|
)
|
|
$
|
328.1
|
|
12 months or more
|
2
|
|
|
(2.7
|
)
|
|
169.5
|
|
Total
|
10
|
|
|
$
|
(6.9
|
)
|
|
$
|
497.6
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
Less than 12 months
|
3
|
|
|
$
|
(.8
|
)
|
|
$
|
24.5
|
|
12 months or more
|
1
|
|
|
(2.2
|
)
|
|
168.3
|
|
Total
|
4
|
|
|
$
|
(3.0
|
)
|
|
$
|
192.8
|
|
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, 2016
and
June 30, 2017
.
VARIABLE INTEREST ENTITIES.
Our investments at
December 31, 2016
and
June 30, 2017
, include interests in variable interest entities that we do not consolidate as we are not deemed the primary beneficiary. Our maximum risk of loss (in millions) related to our involvement with these entities is as follows:
|
|
|
|
|
|
|
|
|
|
12/31/2016
|
|
|
6/30/2017
|
|
Investment carrying values
|
$
|
149.2
|
|
|
$
|
116.4
|
|
Unfunded capital commitments
|
46.4
|
|
|
45.7
|
|
Uncollected investment advisory and administrative fees
|
5.9
|
|
|
5.8
|
|
|
$
|
201.5
|
|
|
$
|
167.9
|
|
The unfunded capital commitments totaling
$45.7 million
relate primarily to investment partnerships in which we have an existing investment. In addition to such amounts, a percentage of prior distributions may be called under certain circumstances.
|
|
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.
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
|
|
Level 2
|
December 31, 2016
|
|
|
|
Cash equivalents
|
$
|
1,052.3
|
|
|
$
|
—
|
|
Available-for-sale sponsored investment portfolios
|
709.0
|
|
|
—
|
|
Sponsored investment portfolios held as trading
|
60.3
|
|
|
15.1
|
|
Total
|
$
|
1,821.6
|
|
|
$
|
15.1
|
|
|
|
|
|
June 30, 2017
|
|
|
|
Cash equivalents
|
$
|
1,323.8
|
|
|
$
|
—
|
|
Available-for-sale sponsored investment portfolios
|
524.4
|
|
|
—
|
|
Sponsored investment portfolios held as trading
|
239.3
|
|
|
17.6
|
|
Total
|
$
|
2,087.5
|
|
|
$
|
17.6
|
|
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 U.S. are considered variable interest entities.
The following table details the net assets of the consolidated sponsored investment portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
June 30, 2017
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
Cash and cash equivalents
(1)
|
$
|
10.3
|
|
|
$
|
55.3
|
|
|
$
|
65.6
|
|
|
$
|
6.6
|
|
|
$
|
67.1
|
|
|
$
|
73.7
|
|
Investments
(2)
|
219.3
|
|
|
1,340.6
|
|
|
1,559.9
|
|
|
179.8
|
|
|
1,325.6
|
|
|
1,505.4
|
|
Other assets
|
4.8
|
|
|
50.2
|
|
|
55.0
|
|
|
5.0
|
|
|
19.9
|
|
|
24.9
|
|
Total assets
|
234.4
|
|
|
1,446.1
|
|
|
1,680.5
|
|
|
191.4
|
|
|
1,412.6
|
|
|
1,604.0
|
|
Liabilities
|
8.8
|
|
|
56.8
|
|
|
65.6
|
|
|
11.2
|
|
|
44.2
|
|
|
55.4
|
|
Net assets
|
$
|
225.6
|
|
|
$
|
1,389.3
|
|
|
$
|
1,614.9
|
|
|
$
|
180.2
|
|
|
$
|
1,368.4
|
|
|
$
|
1,548.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to redeemable non-controlling interests
|
$
|
69.5
|
|
|
$
|
617.7
|
|
|
$
|
687.2
|
|
|
$
|
50.1
|
|
|
$
|
577.5
|
|
|
$
|
627.6
|
|
Attributable to T. Rowe Price Group
|
156.1
|
|
|
771.6
|
|
|
927.7
|
|
|
130.1
|
|
|
790.9
|
|
|
921.0
|
|
|
$
|
225.6
|
|
|
$
|
1,389.3
|
|
|
$
|
1,614.9
|
|
|
$
|
180.2
|
|
|
$
|
1,368.4
|
|
|
$
|
1,548.6
|
|
(1)
Cash and cash equivalents includes
$8.8 million
and
$5.9 million
at
December 31, 2016
and
June 30, 2017
, respectively, of investments in sponsored money market mutual funds.
(2)
Investments includes
$4.2 million
and
$9.0 million
at
December 31, 2016
and
June 30, 2017
, respectively, of investments in sponsored portfolios.
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
and
2017
, are reflected in our condensed consolidated statements of income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
6/30/2016
|
|
6/30/2017
|
|
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
|
)
|
|
$
|
(.2
|
)
|
|
$
|
(2.5
|
)
|
|
$
|
(2.7
|
)
|
Net investment income reflected in non-operating income
|
5.8
|
|
|
20.6
|
|
|
26.4
|
|
|
4.8
|
|
|
34.6
|
|
|
39.4
|
|
Impact on income before taxes
|
$
|
5.5
|
|
|
$
|
17.4
|
|
|
$
|
22.9
|
|
|
$
|
4.6
|
|
|
$
|
32.1
|
|
|
$
|
36.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to T. Rowe Price Group
|
$
|
3.9
|
|
|
$
|
11.1
|
|
|
$
|
15.0
|
|
|
$
|
3.4
|
|
|
$
|
17.2
|
|
|
$
|
20.6
|
|
Net income attributable to redeemable non-controlling interests
|
1.6
|
|
|
6.3
|
|
|
7.9
|
|
|
1.2
|
|
|
14.9
|
|
|
16.1
|
|
|
$
|
5.5
|
|
|
$
|
17.4
|
|
|
$
|
22.9
|
|
|
$
|
4.6
|
|
|
$
|
32.1
|
|
|
$
|
36.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
6/30/2016
|
|
6/30/2017
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
Operating expenses reflected in net operating income
|
$
|
(.8
|
)
|
|
$
|
(5.3
|
)
|
|
$
|
(6.1
|
)
|
|
$
|
(.5
|
)
|
|
$
|
(4.8
|
)
|
|
$
|
(5.3
|
)
|
Net investment income reflected in non-operating income
|
12.1
|
|
|
38.1
|
|
|
50.2
|
|
|
10.1
|
|
|
78.2
|
|
|
88.3
|
|
Impact on income before taxes
|
$
|
11.3
|
|
|
$
|
32.8
|
|
|
$
|
44.1
|
|
|
$
|
9.6
|
|
|
$
|
73.4
|
|
|
$
|
83.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to T. Rowe Price Group
|
$
|
7.7
|
|
|
$
|
19.3
|
|
|
$
|
27.0
|
|
|
$
|
7.3
|
|
|
$
|
45.1
|
|
|
$
|
52.4
|
|
Net income attributable to redeemable non-controlling interests
|
3.6
|
|
|
13.5
|
|
|
17.1
|
|
|
2.3
|
|
|
28.3
|
|
|
30.6
|
|
|
$
|
11.3
|
|
|
$
|
32.8
|
|
|
$
|
44.1
|
|
|
$
|
9.6
|
|
|
$
|
73.4
|
|
|
$
|
83.0
|
|
The operating expenses of these consolidated portfolios are reflected in other operating expenses. In preparing our condensed consolidated financial statements, we eliminated operating expenses of
$1.8 million
and
$1.0 million
for the
three months ended
June 30, 2016
and
2017
, respectively, against the investment advisory and administrative fees earned from these portfolios. Operating expenses eliminated for the
six
months ended
June 30, 2016
and
2017
, were
$3.1 million
and
$1.8 million
, respectively. 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 statements of cash flows (in millions) for the
six months ended
June 30, 2016
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
June 30, 2016
|
|
June 30, 2017
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
|
Voting
interest entities
|
|
Variable interest entities
|
|
Total
|
Net cash (used in) provided by operating activities
|
$
|
(40.9
|
)
|
|
$
|
(632.4
|
)
|
|
$
|
(673.3
|
)
|
|
$
|
(6.4
|
)
|
|
$
|
(727.8
|
)
|
|
$
|
(734.2
|
)
|
Net cash provided by investing activities
|
25.4
|
|
|
42.9
|
|
|
68.3
|
|
|
(6.2
|
)
|
|
(39.7
|
)
|
|
(45.9
|
)
|
Net cash provided by financing activities
|
27.6
|
|
|
706.1
|
|
|
733.7
|
|
|
8.9
|
|
|
775.5
|
|
|
784.4
|
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios
|
—
|
|
|
(21.3
|
)
|
|
(21.3
|
)
|
|
—
|
|
|
3.8
|
|
|
3.8
|
|
Net change in cash and cash equivalents during period
|
12.1
|
|
|
95.3
|
|
|
107.4
|
|
|
(3.7
|
)
|
|
11.8
|
|
|
8.1
|
|
Cash and cash equivalents at beginning of year
|
—
|
|
|
—
|
|
|
—
|
|
|
10.3
|
|
|
55.3
|
|
|
65.6
|
|
Cash and cash equivalents at end of period
|
$
|
12.1
|
|
|
$
|
95.3
|
|
|
$
|
107.4
|
|
|
$
|
6.6
|
|
|
$
|
67.1
|
|
|
$
|
73.7
|
|
The net cash provided by financing activities during
the first half of
2016
and
2017
includes
193.7 million
and
$66.7 million
, respectively, 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. The value of investments using Level 3 inputs is insignificant.
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, 2016
|
|
|
|
Assets
|
|
|
|
Cash equivalents
|
$
|
8.8
|
|
|
$
|
.8
|
|
Equity securities
|
281.8
|
|
|
325.3
|
|
Fixed income securities
|
—
|
|
|
918.1
|
|
Other investments
|
.4
|
|
|
34.3
|
|
|
$
|
291.0
|
|
|
$
|
1,278.5
|
|
|
|
|
|
Liabilities
|
$
|
(.6
|
)
|
|
$
|
(13.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
June 30, 2017
|
|
|
|
Assets
|
|
|
|
Cash equivalents
|
$
|
6.2
|
|
|
$
|
.3
|
|
Equity securities
|
406.0
|
|
|
356.2
|
|
Fixed income securities
|
—
|
|
|
731.9
|
|
Other investments
|
.3
|
|
|
11.0
|
|
|
$
|
412.5
|
|
|
$
|
1,099.4
|
|
|
|
|
|
Liabilities
|
$
|
(.2
|
)
|
|
$
|
(12.0
|
)
|
NOTE 6 – STOCKHOLDERS’ EQUITY.
Regular cash dividends declared per share during the first
six
months of
2016
and
2017
were
$1.08
and
$1.14
, respectively.
At
June 30, 2017
, a liability of
$.1 million
is included in accounts payable and accrued expenses for common stock repurchases that settled by July 5, 2017.
|
|
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
2017
.
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-
average
exercise
price
|
Outstanding at December 31, 2016
|
24,364,322
|
|
|
$
|
61.90
|
|
Exercised
|
(2,676,181
|
)
|
|
$
|
48.73
|
|
Forfeited
|
(29,237
|
)
|
|
$
|
73.88
|
|
Expired
|
(39,631
|
)
|
|
$
|
76.06
|
|
Outstanding at June 30, 2017
|
21,619,273
|
|
|
$
|
63.49
|
|
Exercisable at June 30, 2017
|
14,847,765
|
|
|
$
|
58.67
|
|
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
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
shares
|
|
Restricted
stock
units
|
|
Weighted-average
fair value
|
Nonvested at December 31, 2016
|
931,508
|
|
|
4,634,461
|
|
|
$
|
72.19
|
|
Time-based grants
|
17,022
|
|
|
72,547
|
|
|
$
|
68.94
|
|
Vested
|
(9,018
|
)
|
|
(20,379
|
)
|
|
$
|
73.72
|
|
Forfeited
|
(4,406
|
)
|
|
(27,556
|
)
|
|
$
|
72.83
|
|
Nonvested at June 30, 2017
|
935,106
|
|
|
4,659,073
|
|
|
$
|
72.13
|
|
Nonvested at
June 30, 2017
, includes
14,400
performance-based restricted shares and
401,138
performance-based restricted stock units. These performance-based restricted shares and units include
14,400
restricted shares and
342,049
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, 2017
. Estimated future compensation expense will change to reflect future awards of restricted stock awards and units, future option grants, changes in the probability of performance thresholds being met, and adjustments for actual forfeitures.
|
|
|
|
|
Third quarter 2017
|
$
|
38.4
|
|
Fourth quarter 2017
|
34.4
|
|
2018
|
86.6
|
|
2019 through 2022
|
73.4
|
|
Total
|
$
|
232.8
|
|
|
|
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
|
|
6/30/2016
|
|
6/30/2017
|
|
6/30/2016
|
|
6/30/2017
|
Net income attributable to T. Rowe Price Group
|
$
|
203.3
|
|
|
$
|
373.9
|
|
|
$
|
507.4
|
|
|
$
|
759.8
|
|
Less: net income allocated to outstanding restricted stock and stock unit holders
|
4.0
|
|
|
8.5
|
|
|
9.8
|
|
|
17.2
|
|
Net income allocated to common stockholders
|
$
|
199.3
|
|
|
$
|
365.4
|
|
|
$
|
497.6
|
|
|
$
|
742.6
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
|
|
|
|
|
|
|
|
Outstanding
|
246.9
|
|
|
239.8
|
|
|
246.8
|
|
|
240.9
|
|
Outstanding assuming dilution
|
252.6
|
|
|
243.0
|
|
|
252.2
|
|
|
244.2
|
|
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
|
|
6/30/2016
|
|
6/30/2017
|
|
6/30/2016
|
|
6/30/2017
|
Weighted-average outstanding stock options excluded
|
8.7
|
|
|
8.5
|
|
|
9.7
|
|
|
9.0
|
|
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
|
|
6/30/2016
|
|
6/30/2017
|
|
6/30/2016
|
|
6/30/2017
|
Net deferred tax benefits (income taxes) on:
|
|
|
|
|
|
|
|
Net unrealized holding gains or losses
|
$
|
(2.1
|
)
|
|
$
|
(5.4
|
)
|
|
$
|
0.4
|
|
|
$
|
(12.5
|
)
|
Reclassification adjustments recognized in the provision for income taxes:
|
|
|
|
|
|
|
|
Net gains realized on dispositions
|
—
|
|
|
11.9
|
|
|
20.6
|
|
|
30.5
|
|
Net gains recognized upon transfer to trading
investments
|
—
|
|
|
9.2
|
|
|
—
|
|
|
9.2
|
|
Net deferred tax benefits (income taxes) on net unrealized holding gains or losses
|
(2.1
|
)
|
|
15.7
|
|
|
21.0
|
|
|
27.2
|
|
Total deferred tax benefits (income taxes) on currency translation adjustments
|
3.9
|
|
|
(11.1
|
)
|
|
(2.8
|
)
|
|
(11.9
|
)
|
Total net deferred tax benefits
|
$
|
1.8
|
|
|
$
|
4.6
|
|
|
$
|
18.2
|
|
|
$
|
15.3
|
|
The changes (in millions) in each component of accumulated other comprehensive income (loss), including reclassification adjustments for
the first half of
2017
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, 2016
|
$
|
52.2
|
|
|
$
|
(32.3
|
)
|
|
$
|
(8.4
|
)
|
|
$
|
(40.7
|
)
|
|
$
|
11.5
|
|
Other comprehensive income before reclassifications and income taxes
|
32.2
|
|
|
3.5
|
|
|
27.4
|
|
|
30.9
|
|
|
63.1
|
|
Reclassification adjustments recognized in non-operating income
|
(101.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(101.5
|
)
|
|
(69.3
|
)
|
|
3.5
|
|
|
27.4
|
|
|
30.9
|
|
|
(38.4
|
)
|
Net deferred tax benefits (income taxes)
|
27.2
|
|
|
(1.2
|
)
|
|
(10.7
|
)
|
|
(11.9
|
)
|
|
15.3
|
|
Other comprehensive income (loss)
|
(42.1
|
)
|
|
2.3
|
|
|
16.7
|
|
|
19.0
|
|
|
(23.1
|
)
|
Balances at June 30, 2017
|
$
|
10.1
|
|
|
$
|
(30.0
|
)
|
|
$
|
8.3
|
|
|
$
|
(21.7
|
)
|
|
$
|
(11.6
|
)
|
NOTE 10 - DELL APPRAISAL RIGHTS MATTER.
In 2016, we paid
$166.2 million
to compensate certain T. Rowe Price mutual funds, trusts, separately managed accounts, and subadvised clients (collectively, Clients) for 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.
On December 30, 2016, we signed a settlement agreement with our insurance carrier for insurance proceeds totaling
$100.0 million
related to this matter. We recognized the proceeds as a reduction to the
$166.2 million
nonrecurring charge that we recognized in the second quarter of 2016 and as a receivable in other assets at December 31, 2016. We received the insurance proceeds on January 24, 2017. In the first quarter of 2017, we recognized a reduction in operating expenses from insurance recoveries from other insurance carriers totaling an additional
$50 million
, of which
$40 million
was paid during the first quarter and the remaining
$10 million
was paid during the second quarter.
NOTE 11 - COMMITMENTS AND CONTINGENCIES.
On February 14, 2017, T. Rowe Price Group, Inc., T. Rowe Price Associates, Inc., T. Rowe Price Trust Company, current and former members of the management committee, and trustees of the T. Rowe Price U.S. Retirement Program were named as defendants in a lawsuit filed in the United States District Court for the District of Maryland. The plaintiff is a former employee who alleges breaches of ERISA’s fiduciary duty and prohibited transaction provisions on behalf of a class of all participants and beneficiaries of the T. Rowe Price 401(k) Plan from February 14, 2011, to the time of judgment. The plaintiff is seeking certification of the complaint as a class action. T. Rowe Price believes the claims are without merit and intends to vigorously defend the action. This matter is in the early stages of litigation and we cannot predict the eventual outcome or whether it will have a material negative impact on our financial results, or estimate the possible loss or range of loss that may arise from any negative outcome.
On April 27, 2016, certain shareholders in the T. Rowe Price Blue Chip Growth Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe Price Equity Income Fund, T. Rowe Price Growth Stock Fund, T. Rowe Price International Stock Fund, T. Rowe Price High Yield Fund, T. Rowe Price New Income Fund and T. Rowe Price Small Cap Stock Fund (the “Funds”) filed a Section 36(b) complaint under the caption Zoidis v. T. Rowe Price Assoc., Inc., against T. Rowe Price Associates, Inc. (“T. Rowe Price”) in the United States District Court for the Northern District of California. The complaint alleges that the management fees for the identified funds are excessive because T. Rowe Price charges lower advisory fees to subadvised clients with funds in the same strategy. The complaint seeks to recover the allegedly excessive advisory fees received by T. Rowe Price in the year preceding the start of the lawsuit, along with investments’ returns and profits. In the alternative, the complaint seeks the rescission of each fund’s investment management agreement and restitution of any allegedly excessive management fees. T. Rowe Price believes the claims are without merit and intends to vigorously defend the action. This matter is in the early stages of litigation and we cannot predict the eventual outcome or whether it will have a material negative impact on our financial results, or estimate the possible loss or range of loss that may arise from any negative outcome.
In addition to the matters discussed above, various claims against us arise in the ordinary course of business, including employment-related claims. In the opinion of management, after consultation with counsel, the likelihood of an adverse determination in one or more of these pending ordinary course of business claims that would have a material adverse effect on our financial position or results of operations is remote.
NOTE 12 - SUPPLEMENTARY CONSOLIDATING CASH FLOW STATEMENT.
The following tables summarize the cash flows (in millions) for the
six
months ended
June 30, 2016
and
2017
, that are attributable to T. Rowe Price Group, our consolidated sponsored investment portfolios and the related eliminations required in preparing the statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
6/30/2016
|
|
6/30/2017
|
|
Cash flow attributable to T. Rowe Price Group
|
|
Cash flow attributable to consolidated sponsored investment portfolios
|
|
Eliminations
|
|
As reported
|
|
Cash flow attributable to T. Rowe Price Group
|
|
Cash flow attributable to consolidated sponsored investment portfolios
|
|
Eliminations
|
|
As reported
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
507.4
|
|
|
$
|
44.1
|
|
|
$
|
(27.0
|
)
|
|
$
|
524.5
|
|
|
$
|
759.8
|
|
|
$
|
83.0
|
|
|
$
|
(52.4
|
)
|
|
$
|
790.4
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
66.0
|
|
|
—
|
|
|
—
|
|
|
66.0
|
|
|
71.9
|
|
|
—
|
|
|
—
|
|
|
71.9
|
|
Stock-based compensation expense
|
75.6
|
|
|
—
|
|
|
—
|
|
|
75.6
|
|
|
74.2
|
|
|
—
|
|
|
—
|
|
|
74.2
|
|
Realized gains on dispositions of available-for-sale sponsored investment portfolios
|
(52.3
|
)
|
|
—
|
|
|
—
|
|
|
(52.3
|
)
|
|
(77.9
|
)
|
|
—
|
|
|
—
|
|
|
(77.9
|
)
|
Gains recognized upon transfer of an available-for-sale sponsored investment portfolio to sponsored investment portfolios held as trading
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23.6
|
)
|
|
—
|
|
|
—
|
|
|
(23.6
|
)
|
Net gains recognized on investments
|
(43.9
|
)
|
|
—
|
|
|
27.0
|
|
|
(16.9
|
)
|
|
(76.3
|
)
|
|
—
|
|
|
52.4
|
|
|
(23.9
|
)
|
Investments in sponsored investment portfolios held as trading to economically hedge supplemental savings plan liability
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(129.0
|
)
|
|
—
|
|
|
—
|
|
|
(129.0
|
)
|
Net change in trading securities held by consolidated sponsored investment portfolios
|
—
|
|
|
(717.2
|
)
|
|
—
|
|
|
(717.2
|
)
|
|
—
|
|
|
(802.0
|
)
|
|
—
|
|
|
(802.0
|
)
|
Other changes in assets and liabilities
|
109.4
|
|
|
(.2
|
)
|
|
(3.1
|
)
|
|
106.1
|
|
|
277.0
|
|
|
(15.2
|
)
|
|
(2.7
|
)
|
|
259.1
|
|
Net cash (used in) provided by operating activities
|
662.2
|
|
|
(673.3
|
)
|
|
(3.1
|
)
|
|
(14.2
|
)
|
|
876.1
|
|
|
(734.2
|
)
|
|
(2.7
|
)
|
|
139.2
|
|
Net cash provided by investing activities
|
(103.1
|
)
|
|
68.3
|
|
|
196.8
|
|
|
162.0
|
|
|
114.1
|
|
|
(45.9
|
)
|
|
69.4
|
|
|
137.6
|
|
Net cash provided by financing activities
|
(456.2
|
)
|
|
733.7
|
|
|
(193.7
|
)
|
|
83.8
|
|
|
(652.9
|
)
|
|
784.4
|
|
|
(66.7
|
)
|
|
64.8
|
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios
|
—
|
|
|
(21.3
|
)
|
|
—
|
|
|
(21.3
|
)
|
|
—
|
|
|
3.8
|
|
|
—
|
|
|
3.8
|
|
Net change in cash and cash equivalents during period
|
102.9
|
|
|
107.4
|
|
|
—
|
|
|
210.3
|
|
|
337.3
|
|
|
8.1
|
|
|
—
|
|
|
345.4
|
|
Cash and cash equivalents at beginning of year
|
1,172.3
|
|
|
—
|
|
|
—
|
|
|
1,172.3
|
|
|
1,204.9
|
|
|
65.6
|
|
|
—
|
|
|
1,270.5
|
|
Cash and cash equivalents at end of period
|
$
|
1,275.2
|
|
|
$
|
107.4
|
|
|
$
|
—
|
|
|
$
|
1,382.6
|
|
|
$
|
1,542.2
|
|
|
$
|
73.7
|
|
|
$
|
—
|
|
|
$
|
1,615.9
|
|