|
|
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, open-ended investment products 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 about
5%
of our assets under management at
September 30, 2017
.
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 incur significant expenditures to develop new products and services, and improve and expand our capabilities and distribution channels in order 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.
We remain debt-free with ample liquidity and resources that allow us to take advantage of attractive growth opportunities; invest in key capabilities, including investment professionals, technologies, and new product offerings; and, most importantly, provide our clients with strong investment management expertise and service both now and in the future. We expect to continue our investment in 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 to sustain our current pace of spending on a series of key strategic priorities to address evolving client needs and to grow and further diversify our business. Based on these planned initiatives, we currently expect
non-GAAP operating expenses will grow about 11% in 2017 versus 2016. This increase from previous guidance of about 10% results primarily from certain expenses, such as variable compensation, that have increased as a result of stronger than anticipated market performance.
BACKGROUND.
U.S. stocks continued to rise in the third quarter of 2017, with most major indexes finishing the period at or near record highs. Equities were lifted by favorable economic data and solid second-quarter corporate earnings reports. Investors were also encouraged that Congressional Republicans were making progress in developing a plan to reform the tax code and reduce corporate and individual tax rates. While market volatility remained generally low, stocks occasionally suffered sharp but brief pullbacks in response to rising geo-political tensions.
Developed non-U.S. equity markets outperformed large-cap U.S. shares, helped by a weaker dollar versus the euro and pound sterling, which lifted eurozone and UK returns in dollar terms. Major European markets rose, lifted in part by the region’s ongoing economic recovery. UK shares returned just over 5% in dollar terms, as the pound strengthened amid expectations that the Bank of England would soon raise short-term interest rates in response to rising inflation. Markets in Asia produced more moderate gains. Japanese shares returned slightly more than 4% in dollar terms, as the yen edged lower versus the greenback.
Emerging markets equities outperformed developed markets in dollar terms, helped by global economic growth and strengthening in some non-U.S. currencies. All broad emerging regions produced gains.
Returns of several major equity market indexes for the
three- and nine-month periods ended September 30,
2017
, are as follows:
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
Index
|
|
9/30/2017
|
|
9/30/2017
|
S&P 500 Index
|
|
4.5%
|
|
14.2%
|
NASDAQ Composite Index
(1)
|
|
5.8%
|
|
20.7%
|
Russell 2000 Index
|
|
5.7%
|
|
10.9%
|
MSCI EAFE (Europe, Australasia, and Far East) Index
|
|
5.5%
|
|
20.5%
|
MSCI Emerging Markets Index
|
|
8.0%
|
|
28.1%
|
(1)
returns exclude dividends
Global bond returns in the third quarter were broadly positive. In the U.S., longer-term Treasury yields declined for most of the quarter, but yields rebounded in September as President Trump and Congress agreed to fund the federal government and push back the debt ceiling for three months. The Federal Reserve did not raise short-term interest rates in the quarter but did announce, as expected, that it would begin to reduce the size of its balance sheet starting in October. The 10-year Treasury note yield started and ended the quarter around 2.3%. Among high-quality taxable bonds, longer-term corporate bonds did best. Municipal bonds outperformed taxable securities, helped by steady demand and limited new issuance. High yield issues outpaced higher-quality debt.
Bonds in developed non-U.S. markets outperformed domestic bonds, as a weaker dollar versus the pound and the euro lifted European bond returns in dollar terms. In the UK, bond yields fell through early September, but yields spiked toward the end of the quarter as the Bank of England cautioned that “some withdrawal of monetary stimulus” was likely in the next few months. In the eurozone, German bond yields followed a similar pattern, declining for much of the quarter but rising in the latter part of September. In Asia, the Bank of Japan, which continues to target a 10-year government bond yield of 0%, offered in early July to purchase an unlimited quantity of bonds to keep yields from rising. Emerging markets bonds produced good returns, with local currency bonds faring better than dollar-denominated issues.
Returns for several major bond market indexes for the
three- and nine-month periods ended September 30,
2017
, are as follows:
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
Index
|
|
9/30/2017
|
|
9/30/2017
|
Bloomberg Barclays U.S. Aggregate Bond Index
|
|
.9%
|
|
3.1%
|
JPMorgan Global High Yield Index
|
|
2.2%
|
|
7.4%
|
Bloomberg Barclays Municipal Bond Index
|
|
1.1%
|
|
4.7%
|
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index
|
|
2.5%
|
|
8.7%
|
JPMorgan Emerging Markets Bond Index Plus
|
|
2.2%
|
|
8.6%
|
ASSETS UNDER MANAGEMENT.
Assets under management ended the
third
quarter of
2017
at
$947.9 billion
,
an increase
of
$44.3 billion
from
June 30, 2017
and
$137.1 billion
from
December 31, 2016
. We had net cash inflows of
$5.9 billion
in the
third
quarter of 2017 and
$10.3 billion
for the first
nine months
of
2017
. The following table presents our assets under management (in billions) at
December 31, 2016
, and
September 30, 2017
, by investment portfolio and asset class.
|
|
|
|
|
|
|
|
|
|
As of
|
|
12/31/2016
|
|
9/30/2017
|
Sponsored U.S. mutual funds
|
$
|
514.2
|
|
|
$
|
585.3
|
|
Other investment portfolios
|
296.6
|
|
|
362.6
|
|
Total assets under management
|
$
|
810.8
|
|
|
$
|
947.9
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
12/31/2016
|
|
9/30/2017
|
Equity
|
$
|
450.6
|
|
|
$
|
537.2
|
|
Fixed income
|
121.2
|
|
|
130.9
|
|
Asset allocation
|
239.0
|
|
|
279.8
|
|
Total assets under management
|
$
|
810.8
|
|
|
$
|
947.9
|
|
Our target date retirement portfolios, which 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, are included in the asset allocation line above. These portfolios continue to be a significant part of our assets under management. Assets in these portfolios at
September 30, 2017
, totaled
$223.3 billion
, including
$166.0 billion
in target date retirement funds and
$57.3 billion
in target date retirement trusts.
The following table details the changes in our assets under management (in billions) during the
three- and nine-month periods ended September 30,
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended 9/30/2017
|
|
Nine months ended 9/30/2017
|
|
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
|
$
|
566.5
|
|
|
$
|
337.1
|
|
|
$
|
903.6
|
|
|
$
|
514.2
|
|
|
$
|
296.6
|
|
|
$
|
810.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows before client transfers
|
3.0
|
|
|
2.9
|
|
|
5.9
|
|
|
7.4
|
|
|
2.9
|
|
|
10.3
|
|
Client transfers from mutual funds to other portfolios
|
(8.1
|
)
|
|
8.1
|
|
|
—
|
|
|
(16.0
|
)
|
|
16.0
|
|
|
—
|
|
Net cash flows after client transfers
|
(5.1
|
)
|
|
11.0
|
|
|
5.9
|
|
|
(8.6
|
)
|
|
18.9
|
|
|
10.3
|
|
Net market appreciation and income
|
23.9
|
|
|
14.5
|
|
|
38.4
|
|
|
79.7
|
|
|
47.1
|
|
|
126.8
|
|
Change during the period
|
18.8
|
|
|
25.5
|
|
|
44.3
|
|
|
71.1
|
|
|
66.0
|
|
|
137.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management at September 30, 2017
|
$
|
585.3
|
|
|
$
|
362.6
|
|
|
$
|
947.9
|
|
|
$
|
585.3
|
|
|
$
|
362.6
|
|
|
$
|
947.9
|
|
The client transfers from mutual funds to other investment portfolios noted in the table above were primarily transfers from the target date retirement funds to target date retirement trusts.
Net cash flows (in billions) during the
three- and nine-month periods ended September 30,
2017
, include the following:
|
|
|
|
|
|
|
|
|
|
Three months ended 9/30/2017
|
|
Nine months ended 9/30/2017
|
Sponsored U.S. mutual funds
|
|
|
|
Stock and blended asset funds
|
$
|
(6.3
|
)
|
|
$
|
(14.9
|
)
|
Bond funds
|
(.4
|
)
|
|
4.3
|
|
Money market funds
|
1.6
|
|
|
2.0
|
|
|
(5.1
|
)
|
|
(8.6
|
)
|
Other investment portfolios
|
|
|
|
Stock and blended assets
|
5.7
|
|
|
9.0
|
|
Fixed income, money market, and stable value
|
5.3
|
|
|
9.9
|
|
|
11.0
|
|
|
18.9
|
|
Total net cash flows after client transfers
|
$
|
5.9
|
|
|
$
|
10.3
|
|
|
|
|
|
Stock and blended asset
|
$
|
(.6
|
)
|
|
$
|
(5.9
|
)
|
Bond, money market, and stable value
|
6.5
|
|
|
16.2
|
|
Total net cash flows
|
$
|
5.9
|
|
|
$
|
10.3
|
|
Net cash inflows into our target date retirement portfolios were
$1.0 billion
in the
third
quarter of
2017
and
$6.4 billion
in the first nine months of 2017. The components of net cash flows, by vehicle and asset class, shown above are affected by the mutual fund to trust transfers and the net cash flows by assets class are affected by the equity and fixed income portfolio rebalancing done to align allocations within the target date portfolios.
RESULTS OF OPERATIONS.
The table below presents financial results on a U.S. GAAP basis as well as a non-GAAP basis that adjusts for the impact of the Dell appraisal rights matter, the firm's consolidated sponsored investment portfolios, the supplemental savings plan, and other non-operating income. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
(in millions, except per-share data)
|
9/30/2016
|
|
9/30/2017
|
|
Dollar
change
|
|
Percentage change
|
|
|
|
|
|
|
|
|
U.S. GAAP basis
|
|
|
|
|
|
|
|
Investment advisory fees
|
$
|
970.5
|
|
|
$
|
1,096.7
|
|
|
$
|
126.2
|
|
|
13.0
|
%
|
Net revenues
|
$
|
1,092.9
|
|
|
$
|
1,221.7
|
|
|
$
|
128.8
|
|
|
11.8
|
%
|
Operating expenses
|
$
|
617.2
|
|
|
$
|
673.2
|
|
|
$
|
56.0
|
|
|
9.1
|
%
|
Net operating income
|
$
|
475.7
|
|
|
$
|
548.5
|
|
|
$
|
72.8
|
|
|
15.3
|
%
|
Non-operating income
|
$
|
88.3
|
|
|
$
|
67.3
|
|
|
$
|
(21.0
|
)
|
|
(23.8
|
)%
|
Net income attributable to T. Rowe Price Group
|
$
|
327.8
|
|
|
$
|
390.9
|
|
|
$
|
63.1
|
|
|
19.2
|
%
|
Diluted earnings per share on common stock of T. Rowe Price Group
|
$
|
1.28
|
|
|
$
|
1.56
|
|
|
$
|
.28
|
|
|
21.9
|
%
|
Weighted average common shares outstanding assuming dilution
|
250.1
|
|
|
244.4
|
|
|
(5.7
|
)
|
|
(2.3
|
)%
|
|
|
|
|
|
|
|
|
Adjusted non-GAAP basis
(1)
|
|
|
|
|
|
|
|
Operating expenses
|
$
|
615.6
|
|
|
$
|
665.7
|
|
|
$
|
50.1
|
|
|
8.1
|
%
|
Net income attributable to T. Rowe Price Group
|
$
|
299.9
|
|
|
$
|
362.1
|
|
|
$
|
62.2
|
|
|
20.7
|
%
|
Diluted earnings per share on common stock of T. Rowe Price Group
|
$
|
1.17
|
|
|
$
|
1.45
|
|
|
$
|
.28
|
|
|
23.9
|
%
|
|
|
|
|
|
|
|
|
Assets under management (in billions)
|
|
|
|
|
|
|
|
Average assets under management
|
$
|
803.6
|
|
|
$
|
927.4
|
|
|
$
|
123.8
|
|
|
15.4
|
%
|
Ending assets under management
|
$
|
812.9
|
|
|
$
|
947.9
|
|
|
$
|
135.0
|
|
|
16.6
|
%
|
(1)
See the reconciliation to the comparable U.S. GAAP measures at the end of the results of operations sections of this management discussion and analysis.
Investment advisory fees earned in the
third
quarter of
2017
increased over the comparable
2016
quarter as average assets under our management
increase
d
$123.8 billion
, or
15.4%
, to
$927.4 billion
. Recent increases in money market fund yields have resulted in no fee waivers for those portfolios in the
third
quarter of 2017. Comparably, we waived
$2.1 million
in advisory fees from certain of our money market mutual funds in the
third
quarter of
2016
.
The average annualized effective fee rate earned on our assets under management during the
third
quarter of
2017
was
46.9 basis points
, compared with
48.0 basis points
earned during the
third
quarter of
2016
. Our effective fee rate has declined in part due to fee reductions we made to certain mutual funds and other portfolios since the mid-2016 coupled with higher market valuations that have resulted in a greater proportion of incremental assets under management earning lower fee rates. The impact of the fee reductions was offset in part by higher equity valuations, which resulted in a greater percentage of our assets under management being attributable to higher fee equity portfolios. We regularly assess the competitiveness of our investment advisory fees and will continue to make adjustments as deemed appropriate.
Our operating margin in the
third
quarter of
2017
was
44.9%
, compared to
43.5%
earned in the
2016
quarter, as higher market returns and net new cash flows have driven our net revenues to pace faster than operating expenses.
Net revenues
Investment advisory revenues earned in the
third
quarter of
2017
from the T. Rowe Price mutual funds distributed in the U.S. were
$783.9 million
,
an increase
of
$80.4 million
, or
11.4%
, from the comparable
2016
quarter. Average mutual fund assets under management in the
third
quarter of
2017
were
$576.1 billion
, an
increase
of
12.7%
from the average in the
third
quarter of
2016
.
Investment advisory revenues earned in the
third
quarter of
2017
from the other investment portfolios were
$312.8 million
,
an increase
of
$45.8 million
, or
17.2%
, from the comparable
2016
quarter. Average assets under management for these portfolios in the
third
quarter of
2017
were
$351.3 billion
, an
increase
of
20.2%
from the average in the
third
quarter of
2016
.
The
third
quarter of 2016 and
2017
include the elimination of
$2.2 million
and
$1.4 million
, respectively, in advisory and administrative fees earned from our consolidated sponsored investment portfolios. The related management fee expense was also eliminated from operating expenses.
Operating expenses
Compensation and related costs were
$417.4 million
in the
third
quarter of
2017
,
an increase
of
$31.2 million
, or
8.1%
, compared to the
third
quarter of
2016
. Our base salaries and related benefits have increased
$30.9 million
from the
third
quarter of
2016
primarily as a result of a
7.0%
increase in our average staff size and modest increases in base salaries at the beginning of
2017
. Our interim accrual for annual variable compensation increased
$8.9 million
from the
2016
quarter. Our interim accrual for annual variable compensation program is recognized ratably over the year using the ratio of recognized quarterly net revenues to forecasted annual net revenues. Higher market valuations on a larger supplemental savings plan liability resulted in
$3.4 million
in additional compensation expense in the
third
quarter of
2017
compared with the
2016
period. We began economically hedging the exposure to these market movements in the
third
quarter of
2017
and show the effectiveness of these hedges in our non-GAAP measures’ reconciliation at the end of the management discussion and analysis. These higher compensation costs were offset, in part, by a $
7.3 million
increase in labor capitalization related to internally developed software as we continue to invest in technology capabilities. We also had a
$5.9 million
decrease
in non-cash stock based compensation expenses as the timing of our annual grant shifted in 2017 from twice a year to a single grant in December. We employed
6,796
associates at
September 30, 2017
, an increase of 467 associates from the
6,329
associates employed at December 31, 2016.
Occupancy and facility costs, together with depreciation expense, were
$84.0 million
in the
third
quarter of
2017
, an
increase
of
$4.7 million
, or
5.9%
, compared to the
third
quarter of
2016
. The increase is primarily attributable to costs to update and enhance technology capabilities, including related maintenance programs.
Other operating expenses in the
third
quarter of
2017
were up
$20.1 million
from the comparable
2016
quarter. Nearly half of the increase is attributable to professional fees incurred to support the firm’s continued investment in its operating capabilities. The remainder of the change from the
third
quarter of
2016
results primarily from increases in other operating costs to meet the growing operational and regulatory business demands. These costs include those related to our defined contribution recordkeeping business, third-party service costs, market information services, and other general and administrative costs.
Non-operating income
Net non-operating income in the
third
quarter of
2017
was
$67.3 million
, a decrease of
$21.0 million
from the
2016
quarter. The following table details the components of non-operating income (in millions) during the
third
quarter of
2016
and
2017
and the related dollar change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
9/30/2016
|
|
9/30/2017
|
|
Dollar change
|
|
|
|
|
|
|
Net gains realized on dispositions of available-for-sale investments
|
$
|
—
|
|
|
$
|
.1
|
|
|
$
|
.1
|
|
Ordinary dividend distributions from sponsored fund investments
|
1.7
|
|
|
5.3
|
|
|
3.6
|
|
Net gains recognized on deconsolidation of sponsored fund investments
|
1.1
|
|
|
.1
|
|
|
(1.0
|
)
|
Unrealized gains on sponsored investment portfolios used to hedge the supplemental savings plan liability
|
—
|
|
|
6.1
|
|
|
6.1
|
|
Unrealized gains on sponsored equity method and other trading investments
|
9.0
|
|
|
7.3
|
|
|
(1.7
|
)
|
Net investment income on sponsored fund investments not consolidated
|
11.8
|
|
|
18.9
|
|
|
7.1
|
|
Other investment income
|
2.7
|
|
|
10.0
|
|
|
7.3
|
|
Total earned from investments
|
14.5
|
|
|
28.9
|
|
|
14.4
|
|
Net investment income of consolidated sponsored investment portfolios
|
73.8
|
|
|
37.5
|
|
|
(36.3
|
)
|
Other non-operating income, including net foreign currency gains
|
—
|
|
|
.9
|
|
|
.9
|
|
Non-operating income
|
$
|
88.3
|
|
|
$
|
67.3
|
|
|
$
|
(21.0
|
)
|
The
$36.3 million
decrease from the 2016 quarter in net investment income of consolidated sponsored investment portfolios for the three months ended September 30, 2017, was primarily a result of net investment income recognized in the 2016 quarter on a fund that was deconsolidated in the fourth quarter of 2016.
The impact (in millions) of consolidating certain sponsored investment portfolios on the individual lines of our condensed consolidated statements of income is as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
9/30/2016
|
|
9/30/2017
|
Operating expenses reflected in net operating income
|
$
|
(3.8
|
)
|
|
$
|
(3.2
|
)
|
Net investment income reflected in non-operating income
|
73.8
|
|
|
37.5
|
|
Impact on income before taxes
|
$
|
70.0
|
|
|
$
|
34.3
|
|
|
|
|
|
Net income attributable to T. Rowe Price Group’s interest in the consolidated sponsored investment portfolios
|
$
|
35.1
|
|
|
$
|
21.0
|
|
Net income attributable to redeemable non-controlling interests (unrelated third party investors)
|
34.9
|
|
|
13.3
|
|
Impact on income before taxes
|
$
|
70.0
|
|
|
$
|
34.3
|
|
Provision for income taxes
The effective tax rate for the
third
quarter of
2017
was
34.4%
, compared with the full-year 2017 rate of 37.4% we expected at the end of the second quarter of
2017
.
The number of stock option exercises and the related tax benefits recognized were higher than originally expected.
We currently estimate our effective tax rate for the full-year
2017
will be
35.9%
. The following table provides the components of our effective income tax rate for the
third
quarter of
2017
and our current estimate for the full-year 2017.
|
|
|
|
|
|
|
|
Three months ended 9/30/2017
|
|
Full-year
2017
Estimate
|
Statutory U.S. federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes for current year, net of federal income tax benefits
|
4.0
|
|
|
4.0
|
|
Net income attributable to redeemable non-controlling interests
|
(.8
|
)
|
|
(.8
|
)
|
Net excess tax benefits from stock-based compensation plans activity
|
(3.6
|
)
|
|
(2.1
|
)
|
Other items
|
(.2
|
)
|
|
(.2
|
)
|
Effective income tax rate
|
34.4
|
%
|
|
35.9
|
%
|
We expect there to be continued volatility in our effective tax rate in future periods as the net excess tax benefits from stock-based compensation recognized in our tax provision are impacted by market fluctuations in our stock price and the timing of when option holders exercise their awards. Our effective tax rate will also be impacted by changes in our consolidated sponsored investment portfolios that are driven by the market and changes affecting net income attributable to non-controlling interests. Our effective income tax rate also reflects the relative contribution of pre-tax income generated by our foreign subsidiaries that are subject to tax rates lower than our U.S. rates. Changes in the relative contribution of pre-tax income from U.S. and foreign sources or changes in tax rates in relevant jurisdictions may affect our effective income tax rate and overall net income in the future.
First
nine months
of
2016
versus first
nine months
of
2017
.
The table below presents financial results on a U.S. GAAP basis as well as a non-GAAP basis that adjusts for the impact of the Dell appraisal rights matter, the firm's consolidated sponsored investment portfolios, the supplemental savings plan, and other non-operating income. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
(in millions, except per-share data)
|
9/30/2016
|
|
9/30/2017
|
|
Dollar
change
|
|
Percentage change
|
|
|
|
|
|
|
|
|
U.S. GAAP basis
|
|
|
|
|
|
|
|
Investment advisory fees
|
$
|
2,761.9
|
|
|
$
|
3,131.7
|
|
|
$
|
369.8
|
|
|
13.4
|
%
|
Net revenues
|
$
|
3,131.7
|
|
|
$
|
3,506.9
|
|
|
$
|
375.2
|
|
|
12.0
|
%
|
Operating expenses
|
$
|
1,961.6
|
|
|
$
|
1,929.1
|
|
|
$
|
(32.5
|
)
|
|
(1.7
|
)%
|
Net operating income
|
$
|
1,170.1
|
|
|
$
|
1,577.8
|
|
|
$
|
407.7
|
|
|
34.8
|
%
|
Non-operating income
|
$
|
214.9
|
|
|
$
|
294.3
|
|
|
$
|
79.4
|
|
|
36.9
|
%
|
Net income attributable to T. Rowe Price Group
|
$
|
835.2
|
|
|
$
|
1,150.7
|
|
|
$
|
315.5
|
|
|
37.8
|
%
|
Diluted earnings per share on common stock of T. Rowe Price Group
|
$
|
3.25
|
|
|
$
|
4.60
|
|
|
$
|
1.35
|
|
|
41.5
|
%
|
Weighted average common shares outstanding assuming dilution
|
251.5
|
|
|
244.3
|
|
|
(7.2
|
)
|
|
(2.9
|
)%
|
|
|
|
|
|
|
|
|
Adjusted non-GAAP basis
(1)
|
|
|
|
|
|
|
|
Operating expenses
|
$
|
1,790.8
|
|
|
$
|
1,968.1
|
|
|
$
|
177.3
|
|
|
9.9
|
%
|
Net income attributable to T. Rowe Price Group
|
$
|
845.7
|
|
|
$
|
977.2
|
|
|
$
|
131.5
|
|
|
15.5
|
%
|
Diluted earnings per share on common stock of T. Rowe Price Group
|
$
|
3.29
|
|
|
$
|
3.91
|
|
|
.62
|
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
Assets under management (in billions)
|
|
|
|
|
|
|
|
Average assets under management
|
$
|
768.3
|
|
|
$
|
886.3
|
|
|
$
|
118.0
|
|
|
15.4
|
%
|
Ending assets under management
|
$
|
812.9
|
|
|
$
|
947.9
|
|
|
$
|
135.0
|
|
|
16.6
|
%
|
(1)
See the reconciliation to the comparable U.S. GAAP measures at the end of the results of operations sections of this management discussion and analysis.
Investment advisory revenues earned in the first
nine months
of
2017
increased
13.4%
over the comparable
2016
period as average assets under our management
increase
d
$118.0 billion
, or
15.4%
, to
$886.3 billion
. We waived no money market fees in the first
nine months
of
2017
, compared to
$9.4 million
in the
2016
period. The average annualized fee rate earned on our assets under management was
47.2 basis points
in the first
nine months
of
2017
, compared with
48.0 basis points
earned in the first
nine months
of
2016
. Our effective fee rate has declined in part due to fee reductions we made to certain mutual funds and other portfolios since the end of 2015. The impact of the fee reductions was offset in part by higher equity valuations, which resulted in a greater percentage of our assets under management being attributable to higher fee equity portfolios, and the elimination of money market fee waivers in 2017.
Our operating results for the first nine-months of 2016 include a nonrecurring operating charge of $166.2 million related to our decision to compensate certain clients in regard to the Dell appraisal rights matter. During the first nine months of 2017, we recognized insurance recoveries totaling $50 million from claims filed in 2016 related to this matter. A quarterly summary of the financial impact of the Dell matter on our pre-tax operating expenses and pre-tax operating cash flows (in millions) since the matter arose is as follows:
|
|
|
|
|
|
|
|
|
Three months ended
|
Pre-tax operating expense
|
|
Pre-tax operating cash flow
|
June 30, 2016
|
$
|
166.2
|
|
|
$
|
(164.0
|
)
|
September 30, 2016
|
—
|
|
|
(.9
|
)
|
December 31, 2016
|
(100.0
|
)
|
|
(1.3
|
)
|
Total - 2016
|
66.2
|
|
|
(166.2
|
)
|
March 31, 2017
|
(50.0
|
)
|
|
140.0
|
|
June 30, 2017
|
—
|
|
|
10.0
|
|
Total impact from Dell appraisal rights matter
|
$
|
16.2
|
|
|
$
|
(16.2
|
)
|
Our operating margin in the first
nine months
of
2017
was
45.0%
, compared to
37.4%
in the
2016
period. Excluding the impact of the Dell matter, our operating margin was 43.6% in the first nine months of 2017, and 42.7% for the comparable 2016 period.
Net revenues
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. increased
12.4%
, or
$249.3 million
, to
$2.3 billion
. Average mutual fund assets in the first
nine months
of
2017
were
$557.8 billion
, an
increase
of
13.9%
from the average for the comparable
2016
period. The increase in advisory revenues was also due in part to the reduction in money market fee waivers made in the first
nine months
of
2017
compared with the
2016
period.
Investment advisory revenues earned on the other investment portfolios for the first
nine months
of
2017
were
$877.7 million
,
an increase
of
$120.5 million
, or
15.9%
, from the
$757.2 million
earned in the comparable
2016
period. Average assets in these portfolios were
$328.5 billion
during the first
nine months
of
2017
,
up
17.9%
from the comparable
2016
period.
The results for the first
nine months
of
2017
include the elimination of
$3.2 million
in advisory and administrative fees against the related management fee expense recorded by our consolidated sponsored investment portfolios, a decrease of
$2.1 million
from the
$5.3 million
eliminated during the comparable 2016 period.
Operating expenses
Compensation and related costs were
$1,218.6 million
in the first
nine months
of
2017
,
an increase
of
$106.2 million
, or
9.5%
, compared to the
2016
period. The largest part of the
increase
is attributable to a
$78.5 million
increase
in base salaries and related benefits which resulted from an increase of
6.1%
in average headcount from the
2016
period combined with a modest increase in salaries at the beginning of
2017
. The increase in average headcount also drove higher recruiting costs in the 2017 year-to-date period. The interim accrual for our annual variable compensation in the
2017
period rose
$37.0 million
over the interim accrual in the
2016
period. Higher market valuations on a larger supplemental savings plan liability resulted in $
14.5 million
in additional compensation expense in the first
nine months
of
2017
compared with the
2016
period. The increases in these compensation and related expenses were offset in part by an increase of
$25.8 million
in the level of labor capitalized in
2017
compared with the
2016
period and lower non-cash stock based compensation expense as we shifted our annual grant from twice a year to a single grant in December and experienced an increase in forfeitures over the prior comparable period.
Advertising and promotion costs were
$58.2 million
in the first
nine months
of
2017
,
an increase
of
$5.5 million
, or
10.4%
, compared to the
2016
period. We currently expect advertising and promotion costs for
2017
will be up to 10% higher than the
2016
year as we execute on a number of our strategic initiatives.
Occupancy and facility costs, together with depreciation expense,
increased
$20.6 million
, or
9.1%
, compared to the first
nine months
of
2016
. The increase is attributable to higher facilities costs as well as the added costs to update and enhance technology capabilities, including related maintenance programs.
Other operating expenses were
$345.2 million
in the first
nine months
of
2017
,
an increase
of
$48.6 million
from the comparable
2016
period. About half of the increase is attributable to professional fees incurred to support the firm’s continued investment in its operating capabilities. The remainder of the change from the first
nine months
of
2016
is a result of increases in other operating costs to meet the growing operational and regulatory business demands. These costs include those related to our defined contribution recordkeeping business, travel costs, third-party service costs, and other general and administrative costs.
Non-operating income
Net non-operating investment activity during the first
nine months
of
2017
resulted in income of
$294.3 million
, an increase of
$79.4 million
from the
2016
period. The following table details the components of non-operating income (in millions) during the first
nine months
of
2016
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
9/30/2016
|
|
9/30/2017
|
|
Dollar change
|
Net gains realized on dispositions of available-for-sale investments
|
$
|
52.3
|
|
|
$
|
78.0
|
|
|
$
|
25.7
|
|
Ordinary dividend distributions from sponsored fund investments
|
5.0
|
|
|
11.2
|
|
|
6.2
|
|
Net gain recognized on deconsolidation of sponsored fund investments
|
1.1
|
|
|
.1
|
|
|
(1.0
|
)
|
Gains reclassified from accumulated other comprehensive income upon transfer of an available-for-sale sponsored investment portfolio to sponsored investment portfolios held as trading
|
—
|
|
|
23.6
|
|
|
23.6
|
|
Unrealized gains on sponsored investment portfolios used to hedge the supplemental savings plan liability
|
—
|
|
|
6.1
|
|
|
6.1
|
|
Unrealized gains on sponsored equity method and other trading investments
|
21.8
|
|
|
26.0
|
|
|
4.2
|
|
Net investment income on sponsored fund investments not consolidated
|
80.2
|
|
|
145.0
|
|
|
64.8
|
|
Other investment income
|
10.9
|
|
|
20.1
|
|
|
9.2
|
|
Total earned from investments
|
91.1
|
|
|
165.1
|
|
|
74.0
|
|
Net investment income of consolidated sponsored investment portfolios
|
124.0
|
|
|
125.8
|
|
|
1.8
|
|
Other non-operating expenses, including net foreign currency gains
|
(.2
|
)
|
|
3.4
|
|
|
3.6
|
|
Non-operating income
|
$
|
214.9
|
|
|
$
|
294.3
|
|
|
$
|
79.4
|
|
During the first
nine months
of
2017
, non-operating income includes $30.8 million in gains realized from the disposition of certain available-for-sale investments and $23.6 million in unrealized gains recognized on sponsored trading investments that result from our decision to economically hedge the market exposure associated with our supplemental savings plan liability. In order to fund the hedge portfolio, we used the proceeds from the sale of certain available-for-sale sponsored investment holdings as well as designated a sponsored fund that was held as available-for-sale. The designation of the sponsored fund as an economic hedge transferred its accounting classification from an available-for-sale security to a trading security and resulted in the reclassification of the investment's unrealized holding gain at the date of designation to the income statement from the balance sheet where it was previously recognized.
The impact (in millions) of consolidating certain sponsored investment portfolios on the individual lines of our condensed consolidated statements of income for the first
nine months
of 2016 and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
9/30/2016
|
|
9/30/2017
|
Operating expenses reflected in net operating income
|
$
|
(9.9
|
)
|
|
$
|
(8.5
|
)
|
Net investment income reflected in non-operating income
|
124.0
|
|
|
125.8
|
|
Impact on income before taxes
|
$
|
114.1
|
|
|
$
|
117.3
|
|
|
|
|
|
Net income attributable to T. Rowe Price Group’s interest in the consolidated sponsored investment portfolios
|
$
|
62.1
|
|
|
$
|
73.4
|
|
Net income attributable to redeemable non-controlling interests (unrelated third party investors)
|
52.0
|
|
|
43.9
|
|
Impact on income before taxes
|
$
|
114.1
|
|
|
$
|
117.3
|
|
Non-GAAP information and reconciliation
We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing current results with prior period results, and to enable more appropriate comparison with industry peers. However, non-GAAP financial measures should not be considered a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies. The following schedule reconciles (in millions, except for per-share amounts) U.S. GAAP financial measures to non-GAAP measures for the
three- and nine-month periods ended September 30,
2016
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
9/30/2016
|
|
9/30/2017
|
|
9/30/2016
|
|
9/30/2017
|
Operating expenses, GAAP basis
|
$
|
617.2
|
|
|
$
|
673.2
|
|
|
$
|
1,961.6
|
|
|
$
|
1,929.1
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
Expenses of consolidated sponsored investment portfolios, net of elimination of its related management fee
(1)
|
(1.6
|
)
|
|
(1.8
|
)
|
|
(4.6
|
)
|
|
(5.3
|
)
|
Compensation expense related to market valuation changes in supplemental savings plan liability
(2)
|
|
|
(5.7
|
)
|
|
|
|
(5.7
|
)
|
Insurance recoveries (nonrecurring charge) related to Dell appraisal rights matter
(4)
|
—
|
|
|
—
|
|
|
(166.2
|
)
|
|
50.0
|
|
Adjusted operating expenses
|
$
|
615.6
|
|
|
$
|
665.7
|
|
|
$
|
1,790.8
|
|
|
$
|
1,968.1
|
|
|
|
|
|
|
|
|
|
Net income attributable to T. Rowe Price Group, GAAP basis
|
$
|
327.8
|
|
|
$
|
390.9
|
|
|
$
|
835.2
|
|
|
$
|
1,150.7
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
Net income of consolidated sponsored investment portfolios, net of redeemable non-controlling interests
(1)
|
(35.1
|
)
|
|
(21.0
|
)
|
|
(62.1
|
)
|
|
(73.4
|
)
|
Non-operating income of investments designated as an economic hedge of supplemental savings plan liability less related compensation expense
(2)
|
|
|
(.4
|
)
|
|
|
|
(.4
|
)
|
Non-operating income, excluding impacts of consolidated sponsored investment portfolios and investments designated as an economic hedge of supplemental savings plan liability
(3)
|
(14.5
|
)
|
|
(23.7
|
)
|
|
(90.9
|
)
|
|
(162.4
|
)
|
Nonrecurring charge (insurance recoveries) related to Dell appraisal rights matter
(4)
|
—
|
|
|
—
|
|
|
166.2
|
|
|
(50.0
|
)
|
Income tax impacts of non-GAAP adjustments
(5)
|
21.7
|
|
|
16.3
|
|
|
(2.7
|
)
|
|
112.7
|
|
Adjusted net income attributable to T. Rowe Price Group
|
$
|
299.9
|
|
|
$
|
362.1
|
|
|
$
|
845.7
|
|
|
$
|
977.2
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share, GAAP basis
|
$
|
1.28
|
|
|
$
|
1.56
|
|
|
$
|
3.25
|
|
|
$
|
4.60
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
Consolidated sponsored investment portfolios
(1)
|
(.07
|
)
|
|
(.05
|
)
|
|
(.13
|
)
|
|
(.18
|
)
|
Non-operating income, excluding impacts of consolidated sponsored investment portfolios and investments designated as an economic hedge of supplemental savings plan liability
(3)
|
(.04
|
)
|
|
(.06
|
)
|
|
(.22
|
)
|
|
(.39
|
)
|
Nonrecurring charge (insurance recoveries) related to Dell appraisal rights matter
(4)
|
—
|
|
|
—
|
|
|
.39
|
|
|
(.12
|
)
|
Adjusted diluted earnings per common share
(6)
|
$
|
1.17
|
|
|
$
|
1.45
|
|
|
$
|
3.29
|
|
|
$
|
3.91
|
|
(1)
We implemented new consolidation accounting guidance on January 1, 2016, that resulted in a larger number of our sponsored investment portfolios, that we provide seed capital to at formation, to be consolidated in our financial statements as we were deemed to have a controlling financial interest. The non-GAAP adjustments add back the management fees we earn from the consolidated sponsored investment portfolios and remove the investment income and operating expenses of these portfolios that have been included in our U.S. GAAP condensed consolidated statements of income. We believe the consolidated sponsored investment portfolios may impact the reader's ability to understand our core operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
9/30/2016
|
|
9/30/2017
|
|
9/30/2016
|
|
9/30/2017
|
Net investment income of consolidated sponsored portfolios
|
$
|
73.8
|
|
|
$
|
37.5
|
|
|
$
|
124.0
|
|
|
$
|
125.8
|
|
Operating expenses of consolidated sponsored portfolios
|
(3.8
|
)
|
|
(3.2
|
)
|
|
(9.9
|
)
|
|
(8.5
|
)
|
Net income of consolidated sponsored portfolios
|
70.0
|
|
|
34.3
|
|
|
114.1
|
|
|
117.3
|
|
Less: net income attributable to redeemable non-controlling interests
|
34.9
|
|
|
13.3
|
|
|
52.0
|
|
|
43.9
|
|
T. Rowe Price's portion of net income
|
$
|
35.1
|
|
|
$
|
21.0
|
|
|
$
|
62.1
|
|
|
$
|
73.4
|
|
(2)
This non-GAAP adjustment removes the impact of market movements on the supplemental savings plan liability and related investments designated as economic hedges of the liability beginning July 1, 2017. Amounts deferred under the supplemental savings plan are adjusted for appreciation (depreciation) of hypothetical investments chosen by the employee. Since we economically hedged the exposure to these market movements, we believe it is useful to offset the non-operating investment income earned on the hedges against the related compensation expense to increase comparability period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
9/30/2016
|
|
9/30/2017
|
|
9/30/2016
|
|
9/30/2017
|
Non-operating income of investments designated as an economic hedge of supplemental savings plan liability
|
$
|
—
|
|
|
$
|
6.1
|
|
|
$
|
—
|
|
|
$
|
6.1
|
|
Compensation expense from market valuation changes in supplemental savings plan liability
|
—
|
|
|
(5.7
|
)
|
|
—
|
|
|
(5.7
|
)
|
Non-operating income of investments designated as an economic hedge of supplemental savings plan liability less compensation expense
|
$
|
—
|
|
|
$
|
.4
|
|
|
$
|
—
|
|
|
$
|
.4
|
|
(3)
This non-GAAP adjustment removes the non-operating income that remains after backing out the portion related to the consolidated sponsored investment portfolios and investments designated as an economic hedge of our supplemental savings plan liability. We believe excluding non-operating income helps the reader's ability to understand the firm’s core operating results and increases comparability to prior years. Additionally, we do not emphasize the impact of non-operating income when managing our firm and evaluating our performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
9/30/2016
|
|
9/30/2017
|
|
9/30/2016
|
|
9/30/2017
|
Total non-operating income
|
$
|
88.3
|
|
|
$
|
67.3
|
|
|
$
|
214.9
|
|
|
$
|
294.3
|
|
Less: net investment income of consolidated sponsored portfolios
|
73.8
|
|
|
37.5
|
|
|
124.0
|
|
|
125.8
|
|
Less: non-operating income from investments designated as an economic hedge of supplemental savings plan liability
|
—
|
|
|
6.1
|
|
|
—
|
|
|
6.1
|
|
Total other non-operating income
|
$
|
14.5
|
|
|
$
|
23.7
|
|
|
$
|
90.9
|
|
|
$
|
162.4
|
|
(4)
In the second quarter of 2016, we recognized a nonrecurring charge of $166.2 million related to our decision to compensate certain clients in regard to the Dell appraisal rights matter. In the first quarter of 2017, we recognized insurance recoveries of $50 million as a reduction in operating expenses from claims that were filed in relation to the matter. We believe it is useful to readers of our consolidated statements of income to adjust for these charges and non-recurring insurance recoveries in arriving at adjusted operating expenses and net income attributable to T. Rowe Price Group, Inc. and diluted earnings per share, as this will aid with comparability to prior periods and analyzing our core business results.
(5
)
These were calculated using the effective tax rate applicable to the related items.
(6)
This non-GAAP measure was calculated by applying the two-class method to adjusted net income attributable to T. Rowe Price Group, Inc. divided by the weighted-average common shares outstanding assuming dilution.
CAPITAL RESOURCES AND LIQUIDITY.
We increased our quarterly recurring dividend per share in March 2017 by
5.6%
to
$.57
per share. Additionally, we expended
$456.7 million
to repurchase
6.6 million
shares, or
2.7%
, of our outstanding common stock in
the first nine months of
2017
. These dividends and repurchases were expended using existing cash balances and cash generated from operations. We will generally repurchase our common stock over time to offset the dilution created by our equity-based compensation plans.
Since the end of
2014
, we have returned
$4.1 billion
to stockholders through stock repurchases, our regular quarterly dividends, and a special dividend in 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Recurring dividend
|
|
Special dividend
|
|
Stock repurchases
|
|
Total cash returned to stockholders
|
2015
|
$
|
534.5
|
|
|
$
|
524.5
|
|
|
$
|
987.8
|
|
|
$
|
2,046.8
|
|
2016
|
541.2
|
|
|
—
|
|
|
676.9
|
|
|
1,218.1
|
|
Nine months ended 9/30/2017
|
420.3
|
|
|
—
|
|
|
456.7
|
|
|
877.0
|
|
Total
|
$
|
1,496.0
|
|
|
$
|
524.5
|
|
|
$
|
2,121.4
|
|
|
$
|
4,141.9
|
|
We remain debt-free with ample liquidity, including cash and sponsored investment portfolio holdings (in millions) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2016
|
|
9/30/2017
|
Cash and cash equivalents
|
|
$
|
1,204.9
|
|
|
$
|
1,869.4
|
|
Discretionary investments in sponsored investment portfolios
|
|
700.6
|
|
|
867.2
|
|
Total discretionary investments
|
|
1,905.5
|
|
|
2,736.6
|
|
Redeemable seed capital investments in sponsored investment portfolios
|
|
1,263.8
|
|
|
1,150.3
|
|
Investments in sponsored investment portfolios used to hedge the supplemental savings plan liability
|
|
—
|
|
|
178.4
|
|
Total cash and sponsored investment portfolio holdings
|
|
$
|
3,169.3
|
|
|
$
|
4,065.3
|
|
The cash and discretionary sponsored investment holdings held by our subsidiaries outside the U.S. is
$394.4 million
at
September 30, 2017
.
The following table details (in millions) the line items of the condensed consolidated balance sheet as of
September 30, 2017
, where our cash and sponsored portfolio investment holdings are presented as well as the amount of other investments that make up the remainder of the investments line. The investment presentation on the balance sheet is based on the type of investment, as well as how we account for the item.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Held by T. Rowe Price Group
|
|
|
|
|
|
Cash and discretionary investments in sponsored portfolios
|
|
Redeemable Seed capital investments in sponsored portfolios
|
|
Investments in sponsored investment portfolios to hedge supplemental savings plan liability
|
|
Investment in UTI and other investments
|
|
Total
|
|
Redeemable non-controlling interest
|
|
As reported on consolidated balance sheet 9/30/2017
|
Cash and cash equivalents
|
$
|
1,869.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,869.4
|
|
|
$
|
—
|
|
|
$
|
1,869.4
|
|
Investments
|
713.3
|
|
|
229.7
|
|
|
178.4
|
|
|
237.9
|
|
|
1,359.3
|
|
|
—
|
|
|
1,359.3
|
|
Net assets of consolidated sponsored investment portfolios
|
153.9
|
|
|
920.6
|
|
|
—
|
|
|
—
|
|
|
1,074.5
|
|
|
953.8
|
|
|
2,028.3
|
|
|
$
|
2,736.6
|
|
|
$
|
1,150.3
|
|
|
$
|
178.4
|
|
|
$
|
237.9
|
|
|
$
|
4,303.2
|
|
|
$
|
953.8
|
|
|
$
|
5,257.0
|
|
Our condensed consolidated balance sheet reflects the cash and cash equivalents, investments, other assets and liabilities of those sponsored portfolios we consolidate, as well as redeemable non-controlling interests for the portion of these sponsored portfolios that are held by unrelated third party investors. 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 was used as initial seed capital and is recategorized as discretionary when it is determined by management that the seed capital is no longer needed. We assess the discretionary investment portfolio and seek to liquidate our interest, if decided, in a way as to not impact the portfolio and ultimately, the unrelated third party investors.
We anticipate property and equipment expenditures for the full-year
2017
to be up to
$200 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 additional liquidity.
The following table summarizes the cash flows (in millions) for the
nine
months ended
September 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 statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
September 30, 2016
|
|
September 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
|
$
|
835.2
|
|
|
$
|
114.1
|
|
|
$
|
(62.1
|
)
|
|
$
|
887.2
|
|
|
$
|
1,150.7
|
|
|
$
|
117.3
|
|
|
$
|
(73.4
|
)
|
|
$
|
1,194.6
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
100.0
|
|
|
—
|
|
|
—
|
|
|
100.0
|
|
|
106.9
|
|
|
—
|
|
|
—
|
|
|
106.9
|
|
Stock-based compensation expense
|
117.9
|
|
|
—
|
|
|
—
|
|
|
117.9
|
|
|
110.6
|
|
|
—
|
|
|
—
|
|
|
110.6
|
|
Realized gains on dispositions of available-for-sale sponsored investment portfolios
|
(52.3
|
)
|
|
—
|
|
|
—
|
|
|
(52.3
|
)
|
|
(78.0
|
)
|
|
—
|
|
|
—
|
|
|
(78.0
|
)
|
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
|
(90.2
|
)
|
|
—
|
|
|
62.1
|
|
|
(28.1
|
)
|
|
(113.8
|
)
|
|
—
|
|
|
73.4
|
|
|
(40.4
|
)
|
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
|
—
|
|
|
(1,084.1
|
)
|
|
—
|
|
|
(1,084.1
|
)
|
|
—
|
|
|
(1,210.5
|
)
|
|
—
|
|
|
(1,210.5
|
)
|
Other changes in assets and liabilities
|
324.7
|
|
|
6.9
|
|
|
(4.0
|
)
|
|
327.6
|
|
|
438.6
|
|
|
(12.9
|
)
|
|
(3.5
|
)
|
|
422.2
|
|
Net cash provided by (used in) operating activities
|
1,235.3
|
|
|
(963.1
|
)
|
|
(4.0
|
)
|
|
268.2
|
|
|
1,462.4
|
|
|
(1,106.1
|
)
|
|
(3.5
|
)
|
|
352.8
|
|
Net cash provided by (used in) investing activities
|
(163.1
|
)
|
|
54.3
|
|
|
219.1
|
|
|
110.3
|
|
|
(63.2
|
)
|
|
(46.0
|
)
|
|
184.6
|
|
|
75.4
|
|
Net cash provided by (used in) financing activities
|
(843.5
|
)
|
|
1,013.3
|
|
|
(215.1
|
)
|
|
(45.3
|
)
|
|
(734.7
|
)
|
|
1,186.4
|
|
|
(181.1
|
)
|
|
270.6
|
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios
|
—
|
|
|
(18.2
|
)
|
|
—
|
|
|
(18.2
|
)
|
|
—
|
|
|
6.9
|
|
|
—
|
|
|
6.9
|
|
Net change in cash and cash equivalents during period
|
228.7
|
|
|
86.3
|
|
|
—
|
|
|
315.0
|
|
|
664.5
|
|
|
41.2
|
|
|
—
|
|
|
705.7
|
|
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
|
$
|
1,401.0
|
|
|
$
|
86.3
|
|
|
$
|
—
|
|
|
$
|
1,487.3
|
|
|
$
|
1,869.4
|
|
|
$
|
106.8
|
|
|
$
|
—
|
|
|
$
|
1,976.2
|
|
Operating activities attributable to T. Rowe Price Group during the first
nine months
of
2017
provided cash flows of
$1,462.4 million
,
an increase
of
$227.1 million
from the
2016
period. The increase is largely attributable to the timing differences of cash flows related to the Dell appraisal rights matter as we paid $164.9 million to certain T. Rowe Price clients in the first nine months of 2016 and received related insurance recoveries of $150.0 million in the first nine-months of 2017. This change in cash flows from the Dell appraisal rights matter was offset by cash outflows in the 2017 period for new investments made into sponsored investment portfolios held as trading in order to economically hedge our supplemental savings plan liability. 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 T. Rowe Price Group was offset in part 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 T. Rowe Price Group totaled
$63.2 million
in the first
nine months
of
2017
,
an increase
of
$99.9 million
from the comparable 2016 period. During the first
nine months
of
2017
, we realized $
188.9 million
more net proceeds from the purchases and sales of our available-for-sale investments compared with the 2016 period. Additionally, the amount of seed capital investments we provided in the first
nine months
of
2017
decreased by
$34.5 million
compared with the
2016
period. Since we consolidate these sponsored investment portfolios, our investment was eliminated in preparing our consolidated condensed statement of cash flow. These net increases in investing cash flows were offset by an $82.8 million decrease in proceeds from the sales of equity method investments and a $16.6 million increase in property and equipment expenditures during the first nine months of
2017
compared with the
2016
period. The cash flow attributable to consolidated sponsored investment portfolios of
$46.0 million
represents the aggregate net cash removed from our balance sheet from consolidating and deconsolidating portfolios during the first
nine months
of
2017
. During the
2016
period the equivalent cash flow activity added
$54.3 million
to our balance sheet.
Net cash used in financing activities attributable to T. Rowe Price Group were
$734.7 million
in the first
nine months
of
2017
compared with
$843.5 million
in the
2016
period. The decrease in cash used in financing activities is related in part to a reduction of
$69.0 million
for common stock repurchases as the higher stock price led to fewer shares being repurchased in the
2017
period. Additionally, the higher stock price in
2017
led to a larger number of stock option exercises resulting in a
$54.0 million
increase in related cash proceeds compared with the
2016
period. The remaining change in reported cash flows from financing activities is primarily attributable to a $207.2 million increase in net subscriptions received from redeemable non-controlling interest holders of our consolidated sponsored investment portfolios during the first
nine months
of
2017
compared to the
2016
period.
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.
There have been no material changes in the critical accounting policies previously identified in our
2016
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 has issued five related accounting standard updates clarifying several aspects of ASU 2014-09, including technical corrections and improvements. The overall objective of the new standards 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 will adopt the new standard on its effective date, January 1, 2018, though we have not yet selected whether we will adopt using the retrospective approach with adjustments to each prior period or the retrospective method with the cumulative effect of initial application recognized at the date of initial application. Our implementation efforts include a detailed review of revenue contracts within the scope of the guidance and evaluation of the impact on the Company's revenue recognition policies. While we are continuing to assess all potential impacts these standards will have on our financial position and results of operations, our initial conclusions indicate that these standards will not materially change the timing of revenue recognition. However, the presentation of about $60 million in certain revenue related costs will change from being reported net against related-revenues to being reported in operating expenses. We continue to evaluate the impact of the guidance on disclosures.
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 after January 1, 2018, will be recognized in our consolidated income statement rather than 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.
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 of 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 and strategic initiatives, 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
2016
. 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.; the pace and level of our planned increase in spending to support key strategic priorities; variations in the level of total compensation expense due to, among other things, bonuses, restricted stock units and other equity grants, other incentive awards, fluctuations in our supplemental savings plan liability due to changes in market valuations, 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.