Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
Commission File Number: 000-32191
______________________________________
T. ROWE PRICE GROUP, INC.
(Exact name of registrant as specified in its charter)
|
| | |
Maryland | | 52-2264646 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
100 East Pratt Street, Baltimore, Maryland 21202
(Address, including Zip Code, of principal executive offices)
(410) 345-2000
(Registrant’s telephone number, including area code)
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | |
Large accelerated filer x | | Accelerated filer ¨ |
Non-accelerated filer ¨ (do not check if smaller reporting company) | | Smaller reporting company ¨ |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The number of shares outstanding of the issuer’s common stock ($.20 par value), as of the latest practicable date, April 21, 2017, is 241,268,309.
The exhibit index is at Item 6 on page 34.
PART I – FINANCIAL INFORMATION
| |
Item 1. | Financial Statements. |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
|
| | | | | | | | |
| | 12/31/2016 | | 3/31/2017 |
ASSETS | | | | |
Cash and cash equivalents | | $ | 1,204.9 |
| | $ | 1,580.8 |
|
Accounts receivable and accrued revenue | | 455.1 |
| | 482.5 |
|
Investments | | 1,257.5 |
| | 1,299.5 |
|
Assets of consolidated sponsored investment portfolios ($1,446.1 million at December 31, 2016 and $1,167.0 million at March 31, 2017, related to variable interest entities) | | 1,680.5 |
| | 1,347.6 |
|
Property and equipment, net | | 615.1 |
| | 625.2 |
|
Goodwill | | 665.7 |
| | 665.7 |
|
Other assets | | 346.2 |
| | 274.3 |
|
Total assets | | $ | 6,225.0 |
| | $ | 6,275.6 |
|
| | | | |
LIABILITIES | | | | |
Accounts payable and accrued expenses | | $ | 180.8 |
| | $ | 185.8 |
|
Liabilities of consolidated sponsored investment portfolios ($56.8 million at December 31, 2016, and $26.2 million at March 31, 2017, related to variable interest entities) | | 65.6 |
| | 36.9 |
|
Accrued compensation and related costs | | 92.6 |
| | 165.0 |
|
Supplemental savings plan liability | | 150.9 |
| | 167.2 |
|
Income taxes payable | | 39.3 |
| | 261.4 |
|
Total liabilities | | 529.2 |
| | 816.3 |
|
| | | | |
Commitments and contingent liabilities | |
| |
|
| | | | |
Redeemable non-controlling interests | | 687.2 |
| | 459.1 |
|
| | | | |
STOCKHOLDERS’ EQUITY | | | | |
Preferred stock, undesignated, $.20 par value – authorized and unissued 20,000,000 shares | | — |
| | — |
|
Common stock, $.20 par value—authorized 750,000,000; issued 244,784,000 shares at December 31, 2016, and 241,260,000 at March 31, 2017 | | 49.0 |
| | 48.3 |
|
Additional capital in excess of par value | | 654.5 |
| | 654.6 |
|
Retained earnings | | 4,293.6 |
| | 4,302.7 |
|
Accumulated other comprehensive income (loss) | | 11.5 |
| | (5.4 | ) |
Total permanent stockholders’ equity | | 5,008.6 |
| | 5,000.2 |
|
Total liabilities, redeemable non-controlling interests, and permanent stockholders’ equity | | $ | 6,225.0 |
| | $ | 6,275.6 |
|
The accompanying notes are an integral part of these statements.
Page 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per-share amounts)
|
| | | | | | | |
| Three months ended |
| 3/31/2016 | | 3/31/2017 |
Revenues | | | |
Investment advisory fees | $ | 870.8 |
| | $ | 991.1 |
|
Administrative fees | 89.4 |
| | 87.3 |
|
Distribution and servicing fees | 33.9 |
| | 35.2 |
|
Net revenues | 994.1 |
| | 1,113.6 |
|
| | | |
Operating expenses | | | |
Compensation and related costs | 355.2 |
| | 397.4 |
|
Advertising and promotion | 23.1 |
| | 25.6 |
|
Distribution and servicing costs | 33.9 |
| | 35.2 |
|
Depreciation and amortization of property and equipment | 32.2 |
| | 35.6 |
|
Occupancy and facility costs | 41.4 |
| | 45.4 |
|
Other operating expenses | 97.4 |
| | 102.7 |
|
Insurance recovery related to Dell appraisal rights matter | — |
| | (50.0 | ) |
Total operating expenses | 583.2 |
| | 591.9 |
|
| | | |
Net operating income | 410.9 |
| | 521.7 |
|
| | | |
Non-operating income | | | |
Net investment income on investments | 61.3 |
| | 64.8 |
|
Net investment income on consolidated sponsored investment portfolios | 23.8 |
| | 48.9 |
|
Other income | — |
| | 1.3 |
|
Total non-operating income | 85.1 |
| | 115.0 |
|
| | | |
Income before income taxes | 496.0 |
| | 636.7 |
|
Provision for income taxes | 182.7 |
| | 236.3 |
|
Net income | 313.3 |
| | 400.4 |
|
Less: net income attributable to redeemable non-controlling interests | 9.2 |
| | 14.5 |
|
Net income attributable to T. Rowe Price Group | $ | 304.1 |
| | $ | 385.9 |
|
| | | |
Earnings per share on common stock of T. Rowe Price Group | | | |
Basic | $ | 1.21 |
| | $ | 1.56 |
|
Diluted | $ | 1.18 |
| | $ | 1.54 |
|
| | | |
Dividends declared per share | $ | .54 |
| | $ | .57 |
|
The accompanying notes are an integral part of these statements.
Page 3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
| | | | | | | |
| Three months ended |
| 3/31/2016 | | 3/31/2017 |
Net income | $ | 313.3 |
| | $ | 400.4 |
|
Other comprehensive income (loss) | | | |
Net unrealized holding gains (losses) on available-for-sale investments | (6.3 | ) | | 18.3 |
|
Reclassification adjustments recognized in non-operating income: | | | |
Net gains realized on dispositions determined using average cost | (52.3 | ) | | (47.6 | ) |
Total net unrealized holding losses recognized in other comprehensive income | (58.6 | ) | | (29.3 | ) |
| | | |
Currency translation adjustments | | | |
Consolidated sponsored investment portfolios - variable interest entities | 40.9 |
| | 7.0 |
|
Equity method investments | (.8 | ) | | (3.2 | ) |
Total currency translation adjustments | 40.1 |
| | 3.8 |
|
| | | |
Other comprehensive loss before income taxes | (18.5 | ) | | (25.5 | ) |
Net deferred tax benefits | 16.4 |
| | 10.7 |
|
Total other comprehensive loss | (2.1 | ) | | (14.8 | ) |
| | | |
Total comprehensive income | 311.2 |
| | 385.6 |
|
Less: comprehensive income attributable to redeemable non-controlling interests | 32.1 |
| | 16.6 |
|
Comprehensive income attributable to T. Rowe Price Group | $ | 279.1 |
| | $ | 369.0 |
|
The accompanying notes are an integral part of these statements.
Page 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(1)
(in millions)
|
| | | | | | | |
| Three months ended |
| 3/31/2016 | | 3/31/2017 |
Cash flows from operating activities | | | |
Net income | $ | 313.3 |
| | $ | 400.4 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | |
Depreciation and amortization of property and equipment | 32.2 |
| | 35.6 |
|
Stock-based compensation expense | 36.8 |
| | 36.8 |
|
Realized gains on dispositions of available-for-sale sponsored investment portfolios | (52.3 | ) | | (47.6 | ) |
Net gains recognized on other investments | (6.9 | ) | | (14.4 | ) |
Net change in trading securities held by consolidated sponsored investment portfolios | (458.7 | ) | | (566.3 | ) |
Other changes in assets and liabilities | 208.1 |
| | 344.0 |
|
Net cash provided by operating activities | 72.5 |
| | 188.5 |
|
| | | |
Cash flows from investing activities | | | |
Purchases of available-for-sale sponsored investment portfolios | (2.3 | ) | | (.2 | ) |
Dispositions of available-for-sale sponsored investment portfolios | 176.2 |
| | 123.3 |
|
Net cash of sponsored investment portfolios on consolidation (deconsolidation) | 69.1 |
| | (46.5 | ) |
Additions to property and equipment | (35.2 | ) | | (46.9 | ) |
Other investing activity | — |
| | (.3 | ) |
Net cash provided by investing activities | 207.8 |
| | 29.4 |
|
| | | |
Cash flows from financing activities | | | |
Repurchases of common stock | (206.7 | ) | | (306.1 | ) |
Common share issuances under stock-based compensation plans | 21.0 |
| | 41.9 |
|
Dividends paid to common stockholders of T. Rowe Price Group | (135.9 | ) | | (140.9 | ) |
Net subscriptions received from redeemable non-controlling interest holders | 270.8 |
| | 551.1 |
|
Net cash (used in) provided by financing activities | (50.8 | ) | | 146.0 |
|
| | | |
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios | (1.4 | ) | | (3.4 | ) |
| | | |
Net change in cash and cash equivalents during period | 228.1 |
| | 360.5 |
|
Cash and cash equivalents at beginning of year | 1,172.3 |
| | 1,270.5 |
|
Cash and cash equivalents at end of period, including $77.5 million at March 31, 2016 and $50.2 million at March 31, 2017 held by consolidated sponsored investment portfolios | $ | 1,400.4 |
| | $ | 1,631.0 |
|
(1) See note 11 for a supplementary consolidating cash flow schedule.
The accompanying notes are an integral part of these statements.
Page 5
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(shares in thousands; dollars in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common shares outstanding | | Common stock | | Additional capital in excess of par value | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total stockholders’ equity | | Redeemable non-controlling interests |
Balances at December 31, 2016 | 244,784 |
| | $ | 49.0 |
| | $ | 654.5 |
| | $ | 4,293.6 |
| | $ | 11.5 |
| | $ | 5,008.6 |
| | $ | 687.2 |
|
Net income | — |
| | — |
| | — |
| | 385.9 |
| | — |
| | 385.9 |
| | 14.5 |
|
Other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | (16.9 | ) | | (16.9 | ) | | 2.1 |
|
Dividends declared | — |
| | — |
| | — |
| | (140.4 | ) | | — |
| | (140.4 | ) | | |
Common stock-based compensation plans activity | | | | | | | | | | | | | |
Shares issued upon option exercises | 1,099 |
| | .2 |
| | 42.5 |
| | — |
| | — |
| | 42.7 |
| | — |
|
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes | 3 |
| | — |
| | (.2 | ) | | — |
| | — |
| | (.2 | ) | | — |
|
Forfeiture of restricted awards | (4 | ) | | — |
| |
|
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | 36.8 |
| | — |
| | — |
| | 36.8 |
| | — |
|
Restricted stock units issued as dividend equivalents | — |
| | — |
| | .1 |
| | (.1 | ) | | — |
| | — |
| | |
Common shares repurchased | (4,622 | ) | | (.9 | ) | | (79.1 | ) | | (236.3 | ) | | — |
| | (316.3 | ) | | — |
|
Net subscriptions into sponsored investment portfolios | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 523.0 |
|
Net deconsolidations of sponsored investment portfolios | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (767.7 | ) |
Balances at March 31, 2017 | 241,260 |
| | $ | 48.3 |
| | $ | 654.6 |
| | $ | 4,302.7 |
| | $ | (5.4 | ) | | $ | 5,000.2 |
| | $ | 459.1 |
|
The accompanying notes are an integral part of these statements.
Page 6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| |
NOTE 1 | – THE COMPANY AND BASIS OF PREPARATION. |
T. Rowe Price Group (Price Group) derives its consolidated revenues and net income primarily from investment advisory services that its subsidiaries provide to individual and institutional investors in the sponsored T. Rowe Price U.S. mutual funds and other investment portfolios, including separately managed accounts, subadvised funds, and other sponsored investment portfolios. We also provide our investment advisory clients with related administrative services, including distribution, mutual fund transfer agent, accounting, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage; and trust services.
Investment advisory revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and results of operations.
These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates and reflect all adjustments that are, in the opinion of management, necessary to a fair statement of our results for the interim periods presented. All such adjustments are of a normal recurring nature. Actual results may vary from our estimates. Certain prior year amounts have been reclassified to conform to the 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 first quarter of 2016 financial statements reported in these statements to reflect the impact of the new guidance.
In the first quarter of 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 provision by $8.9 million. The impact (in millions) on our condensed consolidated statement of income and earnings per share on common stock data for the three months ended March 31, 2016, is as follows:
|
| | | | | | | |
| As previously reported | | As reported |
Income before income taxes | $ | 496.0 |
| | $ | 496.0 |
|
Provision for income taxes | 191.6 |
| | 182.7 |
|
Net income | 304.4 |
| | 313.3 |
|
Less: net income attributable to redeemable non-controlling interests | 9.2 |
| | 9.2 |
|
Net income attributable to T. Rowe Price Group | $ | 295.2 |
| | $ | 304.1 |
|
Less: net income allocated to outstanding restricted stock and stock unit holders | 5.6 |
| | 5.8 |
|
Net income allocated to common stockholders | $ | 289.6 |
| | $ | 298.3 |
|
| | | |
Earnings per share on common stock of T. Rowe Price Group | | | |
Basic | $ | 1.17 |
| | $ | 1.21 |
|
Diluted | $ | 1.15 |
| | $ | 1.18 |
|
| | | |
|
| | | | | | | |
Weighted-average common shares | | | |
Outstanding | 246.7 |
| | 246.7 |
|
Outstanding assuming dilution | 251.5 |
| | 251.9 |
|
The impact (in millions) of reporting excess tax benefits from stock-based compensation as operating activities rather than financing activities in the consolidated statements of cash flows for the three months ended March 31, 2016, follows:
|
| | | | | | | |
| As previously reported | | As reported |
Net cash provided by operating activities | $ | 63.6 |
| | $ | 72.5 |
|
Net cash (used in) provided by financing activities | $ | (41.9 | ) | | $ | (50.8 | ) |
| |
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 $318.6 million at March 31, 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 |
| 3/31/2016 | | 3/31/2017 |
Sponsored U.S. mutual funds | | | |
Stock and blended asset | $ | 519.5 |
| | $ | 594.1 |
|
Bond and money market | 112.6 |
| | 121.7 |
|
| 632.1 |
| | 715.8 |
|
Other investment portfolios | | | |
Stock and blended asset | 197.9 |
| | 227.9 |
|
Bond, money market, and stable value | 40.8 |
| | 47.4 |
|
| 238.7 |
| | 275.3 |
|
Total | $ | 870.8 |
| | $ | 991.1 |
|
Other investment portfolios include advisory revenues earned from other sponsored investment portfolios of $88.2 million and $106.1 million for the three months ended March 31, 2016 and 2017, respectively.
We voluntarily waived $4.0 million in money market related fees, including advisory fees and fund expenses, in the first quarter of 2016 in order to maintain a positive yield for investors. We did not waive any money market related fees during the first quarter of 2017.
The following table summarizes the investment portfolios and assets under management (in billions) on which we earn advisory fees.
|
| | | | | | | | | | | | | | | |
| Average during | | | | |
| the first quarter of | | As of |
| 2016 | | 2017 | | 12/31/2016 | | 3/31/2017 |
Sponsored U.S. mutual funds | | | | | | | |
Stock and blended asset | $ | 361.3 |
| | $ | 421.0 |
| | $ | 401.3 |
| | $ | 430.8 |
|
Bond and money market | 104.3 |
| | 115.5 |
| | 112.9 |
| | 117.5 |
|
| 465.6 |
| | 536.5 |
| | 514.2 |
| | 548.3 |
|
Other investment portfolios | | | | | | | |
Stock and blended asset | 196.3 |
| | 231.6 |
| | 220.8 |
| | 235.1 |
|
Bond, money market, and stable value | 66.2 |
| | 77.3 |
| | 75.8 |
| | 78.2 |
|
| 262.5 |
| | 308.9 |
| | 296.6 |
| | 313.3 |
|
Total | $ | 728.1 |
| | $ | 845.4 |
| | $ | 810.8 |
| | $ | 861.6 |
|
Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for 4.7% and 4.8% of our assets under management at December 31, 2016, and March 31, 2017, respectively.
The following table summarizes other fees (in millions) we earn from our sponsored U.S. mutual funds. |
| | | | | | | |
| Three months ended |
| 3/31/2016 | | 3/31/2017 |
Administrative fees | $ | 72.3 |
| | $ | 69.5 |
|
Distribution and servicing fees | $ | 33.9 |
| | $ | 35.2 |
|
NOTE 3 - INVESTMENTS.
The carrying values of investments (in millions) we do not consolidate are as follows:
|
| | | | | | | |
| 12/31/2016 | | 3/31/2017 |
Available-for-sale sponsored investment portfolios | $ | 709.0 |
| | $ | 706.3 |
|
Equity method investments | | | |
Sponsored investment portfolios | 252.3 |
| | 290.3 |
|
26% interest in UTI Asset Management Company Limited (India) | 140.9 |
| | 142.3 |
|
Investment partnerships | 5.3 |
| | 5.1 |
|
Sponsored investment portfolios held as trading | 75.4 |
| | 81.1 |
|
Cost method investments | 73.6 |
| | 73.4 |
|
U.S. Treasury note | 1.0 |
| | 1.0 |
|
Total | $ | 1,257.5 |
| | $ | 1,299.5 |
|
During the first three 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 2017 a sponsored investment portfolio that was being accounted for as an equity method investment was consolidated, as we regained a controlling interest. The net impact 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 |
| 3/31/2016 | | 3/31/2017 |
Net decrease in assets of consolidated sponsored investment portfolios | $ | (338.8 | ) | | $ | (1,035.9 | ) |
Net decrease in liabilities of consolidated sponsored investment portfolios | $ | (.9 | ) | | $ | (133.2 | ) |
Net decrease in redeemable non-controlling interests | $ | (152.6 | ) | | $ | (767.7 | ) |
| | | |
Gain (loss) recognized upon deconsolidation | $ | — |
| | $ | — |
|
We did not recognize any additional gain or loss in our consolidated statement 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 |
|
| | | | | | | |
March 31, 2017 | | | | | | | |
Stock and blended asset funds | $ | 131.3 |
| | $ | 54.7 |
| | $ | — |
| | $ | 186.0 |
|
Bond funds | 521.8 |
| | 2.5 |
| | (4.0 | ) | | 520.3 |
|
Total | $ | 653.1 |
| | $ | 57.2 |
| | $ | (4.0 | ) | | $ | 706.3 |
|
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 |
|
| | | | | |
March 31, 2017 | | | | | |
Less than 12 months | 5 | | $ | (1.8 | ) | | $ | 140.0 |
|
12 months or more | 2 |
| | (2.2 | ) | | 170.0 |
|
Total | 7 | | $ | (4.0 | ) | | $ | 310.0 |
|
In addition to the duration of the impairments, we reviewed the severity of the impairment as well as our intent and ability to hold the investments for a period of time sufficient for an anticipated recovery in fair value. Accordingly, impairment of these investment holdings is considered temporary at December 31, 2016 and March 31, 2017.
VARIABLE INTEREST ENTITIES.
Our investments at December 31, 2016 and March 31, 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 | | 3/31/2017 |
Investment carrying values | $ | 149.2 |
| | $ | 208.3 |
|
Unfunded capital commitments | 46.4 |
| | 51.1 |
|
Uncollected investment advisory and administrative fees | 5.9 |
| | 6.4 |
|
| $ | 201.5 |
| | $ | 265.8 |
|
The unfunded capital commitments totaling $51.1 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 |
|
| | | |
March 31, 2017 | | | |
Cash equivalents | $ | 1,408.8 |
| | $ | — |
|
Available-for-sale sponsored investment portfolios | 706.3 |
| | — |
|
Sponsored investment portfolios held as trading | 64.2 |
| | 16.9 |
|
Total | $ | 2,179.3 |
| | $ | 16.9 |
|
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 | | March 31, 2017 |
| Voting interest entities | | Variable interest entities | | Total | | Voting interest entities | | Variable interest entities | | Total |
Cash and cash equivalents | $ | 10.3 |
| | $ | 55.3 |
| | $ | 65.6 |
| | $ | 6.7 |
| | $ | 43.5 |
| | $ | 50.2 |
|
Investments | 219.3 |
| | 1,340.6 |
| | 1,559.9 |
| | 167.8 |
| | 1,106.5 |
| | 1,274.3 |
|
Other assets | 4.8 |
| | 50.2 |
| | 55.0 |
| | 6.1 |
| | 17.0 |
| | 23.1 |
|
Total assets | 234.4 |
| | 1,446.1 |
| | 1,680.5 |
| | 180.6 |
| | 1,167.0 |
| | 1,347.6 |
|
Liabilities | 8.8 |
| | 56.8 |
| | 65.6 |
| | 10.7 |
| | 26.2 |
| | 36.9 |
|
Net assets | $ | 225.6 |
| | $ | 1,389.3 |
| | $ | 1,614.9 |
| | $ | 169.9 |
| | $ | 1,140.8 |
| | $ | 1,310.7 |
|
| | | | | | | | | | | |
Attributable to redeemable non-controlling interests | $ | 69.5 |
| | $ | 617.7 |
| | $ | 687.2 |
| | $ | 43.3 |
| | $ | 415.8 |
| | $ | 459.1 |
|
Attributable to T. Rowe Price Group | 156.1 |
| | 771.6 |
| | 927.7 |
| | 126.6 |
| | 725.0 |
| | 851.6 |
|
| $ | 225.6 |
| | $ | 1,389.3 |
| | $ | 1,614.9 |
| | $ | 169.9 |
| | $ | 1,140.8 |
| | $ | 1,310.7 |
|
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 months ended March 31, 2016 and 2017, are reflected in our condensed consolidated statements of income as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended |
| 3/31/2016 | | 3/31/2017 |
| Voting interest entities | | Variable interest entities | | Total | | Voting interest entities | | Variable interest entities | | Total |
Operating expenses reflected in net operating income | $ | (.5 | ) | | $ | (2.1 | ) | | $ | (2.6 | ) | | $ | (.3 | ) | | $ | (2.3 | ) | | $ | (2.6 | ) |
Net investment income reflected in non-operating income | 6.3 |
| | 17.5 |
| | 23.8 |
| | 5.3 |
| | 43.6 |
| | 48.9 |
|
Impact on income before taxes | $ | 5.8 |
| | $ | 15.4 |
| | $ | 21.2 |
| | $ | 5.0 |
| | $ | 41.3 |
| | $ | 46.3 |
|
| | | | | | | | | | | |
Net income attributable to T. Rowe Price Group | $ | 3.8 |
| | $ | 8.2 |
| | $ | 12.0 |
| | $ | 3.9 |
| | $ | 27.9 |
| | $ | 31.8 |
|
Net income attributable to redeemable non-controlling interests | 2.0 |
| | 7.2 |
| | 9.2 |
| | 1.1 |
| | 13.4 |
| | 14.5 |
|
| $ | 5.8 |
| | $ | 15.4 |
| | $ | 21.2 |
| | $ | 5.0 |
| | $ | 41.3 |
| | $ | 46.3 |
|
The operating expenses of these consolidated portfolios are reflected in other operating expenses. For the three months ended March 31, 2016 and 2017, we eliminated $1.3 million and $.8 million, respectively, of these expenses against our investment advisory and administrative fees earned in preparing our condensed consolidated financial statements. The net investment income reflected in non-operating income includes dividend and interest income and realized and unrealized gains and losses on the underlying securities held by the consolidated sponsored investment portfolios.
The table below details the impact of these consolidated investment portfolios on the individual lines of our condensed consolidated statements of cash flows (in millions) for the three months ended March 31, 2016 and 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended |
| March 31, 2016 | | March 31, 2017 |
| Voting interest entities | | Variable interest entities | | Total | | Voting interest entities | | Variable interest entities | | Total |
Net cash provided by operating activities | $ | (9.4 | ) | | $ | (424.1 | ) | | $ | (433.5 | ) | | $ | (.6 | ) | | $ | (538.2 | ) | | $ | (538.8 | ) |
Net cash provided by investing activities | 26.3 |
| | 42.8 |
| | 69.1 |
| | (6.2 | ) | | (40.3 | ) | | (46.5 | ) |
Net cash (used in) provided by financing activities | (7.8 | ) | | 451.1 |
| | 443.3 |
| | 3.2 |
| | 570.1 |
| | 573.3 |
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios | — |
| | (1.4 | ) | | (1.4 | ) | | — |
| | (3.4 | ) | | (3.4 | ) |
Net change in cash and cash equivalents during period | 9.1 |
| | 68.4 |
| | 77.5 |
| | (3.6 | ) | | (11.8 | ) | | (15.4 | ) |
Cash and cash equivalents at beginning of year | — |
| | — |
| | — |
| | 10.3 |
| | 55.3 |
| | 65.6 |
|
Cash and cash equivalents at end of period | $ | 9.1 |
| | $ | 68.4 |
| | $ | 77.5 |
| | $ | 6.7 |
| | $ | 43.5 |
| | $ | 50.2 |
|
The net cash provided by (used in) financing activities during the first quarter of 2016 and 2017 includes 172.5 million and $22.2 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. We do not value any
investments using Level 3 inputs.
These levels are not necessarily an indication of the risk or liquidity associated with these investment holdings. There have been no material transfers between the levels. The following table summarizes the investment holdings held by our consolidated sponsored investment portfolios (in millions) using fair value measurements determined based on the differing levels of inputs. |
| | | | | | | |
| Level 1 | | Level 2 |
December 31, 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 |
| | | |
March 31, 2017 | | | |
Assets | | | |
Cash equivalents | $ | 5.7 |
| | $ | 1.0 |
|
Equity securities | 293.3 |
| | 318.0 |
|
Fixed income securities | — |
| | 651.9 |
|
Other investments | .2 |
| | 10.9 |
|
| $ | 299.2 |
| | $ | 981.8 |
|
| | | |
Liabilities | $ | (.3 | ) | | $ | (7.6 | ) |
NOTE 6 – STOCKHOLDERS’ EQUITY.
Regular cash dividends declared per share during the first three months of 2016 and 2017 were $.54 and $.57, respectively.
At March 31, 2017, a liability of $10.2 million is included in accounts payable and accrued expenses for common stock repurchases that settled by April 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 quarter of 2017.
|
| | | | | | |
| Options | | Weighted- average exercise price |
Outstanding at December 31, 2016 | 24,364,322 |
| | $ | 61.90 |
|
Exercised | (1,552,287 | ) | | $ | 49.11 |
|
Forfeited | (13,765 | ) | | $ | 74.51 |
|
Expired | (32,437 | ) | | $ | 75.84 |
|
Outstanding at March 31, 2017 | 22,765,833 |
| | $ | 62.75 |
|
Exercisable at March 31, 2017 | 15,947,980 |
| | $ | 57.92 |
|
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 quarter 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 | — |
| | 39,558 |
| | $ | 66.77 |
|
Vested | (1,420 | ) | | (5,650 | ) | | $ | 78.67 |
|
Forfeited | (3,626 | ) | | (15,449 | ) | | $ | 72.92 |
|
Nonvested at March 31, 2017 | 926,462 |
| | 4,652,920 |
| | $ | 72.14 |
|
Nonvested at March 31, 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 March 31, 2017. Estimated future compensation expense will change to reflect future option grants, future awards of unrestricted shares and restricted stock units, changes in the probability of performance thresholds being met, and adjustments for actual forfeitures.
|
| | | |
Second quarter 2017 | $ | 37.6 |
|
Third quarter 2017 | 37.8 |
|
Fourth quarter 2017 | 33.8 |
|
2018 | 85.7 |
|
2019 through 2022 | 72.9 |
|
Total | $ | 267.8 |
|
| |
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 |
| 3/31/2016 | | 3/31/2017 |
Net income attributable to T. Rowe Price Group | $ | 304.1 |
| | $ | 385.9 |
|
Less: net income allocated to outstanding restricted stock and stock unit holders | 5.8 |
| | 8.7 |
|
Net income allocated to common stockholders | $ | 298.3 |
| | $ | 377.2 |
|
| | | |
Weighted-average common shares | | | |
Outstanding | 246.7 |
| | 242.1 |
|
Outstanding assuming dilution | 251.9 |
| | 245.5 |
|
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 |
| 3/31/2016 | | 3/31/2017 |
Weighted-average outstanding stock options excluded | 10.8 |
| | 9.5 |
|
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 |
| 3/31/2016 | | 3/31/2017 |
Net deferred tax benefits (income taxes) on: | | | |
Net unrealized holding gains or losses | $ | 2.5 |
| | $ | (7.1 | ) |
Reclassification adjustments recognized in the provision for income taxes: | | | |
Net gains realized on dispositions | 20.6 |
| | 18.6 |
|
Net deferred tax benefits on net unrealized holding gains or losses | 23.1 |
| | 11.5 |
|
Total deferred income taxes on currency translation adjustments | (6.7 | ) | | (.8 | ) |
Total net deferred tax benefits (income taxes) | $ | 16.4 |
| | $ | 10.7 |
|
The changes (in millions) in each component of accumulated other comprehensive income, including reclassification adjustments for the first quarter 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 (loss) before reclassifications and income taxes | 18.3 |
| | (3.2 | ) | | 4.9 |
| | 1.7 |
| | 20.0 |
|
Reclassification adjustments recognized in non-operating income | (47.6 | ) | | — |
| | — |
| | — |
| | (47.6 | ) |
| (29.3 | ) | | (3.2 | ) | | 4.9 |
| | 1.7 |
| | (27.6 | ) |
Net deferred tax benefits (income taxes) | 11.5 |
| | 1.1 |
| | (1.9 | ) | | (.8 | ) | | 10.7 |
|
Other comprehensive income (loss) | (17.8 | ) | | (2.1 | ) | | 3.0 |
| | .9 |
| | (16.9 | ) |
Balances at March 31, 2017 | $ | 34.4 |
| | $ | (34.4 | ) | | $ | (5.4 | ) | | $ | (39.8 | ) | | $ | (5.4 | ) |
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 quarter and $10 million is recorded as a receivable in other assets at March 31, 2017.
NOTE 11 - SUPPLEMENTARY CONSOLIDATING CASH FLOW STATEMENT.
The following tables summarize the cash flows (in millions) for the three months ended March 31, 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended |
| March 31, 2016 | | March 31, 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 | $ | 304.1 |
| | $ | 21.2 |
| | $ | (12.0 | ) | | $ | 313.3 |
| | $ | 385.9 |
| | $ | 46.3 |
| | $ | (31.8 | ) | | $ | 400.4 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | | | | | | | | | | | | | |
Depreciation and amortization of property and equipment | 32.2 |
| | — |
| | — |
| | 32.2 |
| | 35.6 |
| | — |
| | — |
| | 35.6 |
|
Stock-based compensation expense | 36.8 |
| | — |
| | — |
| | 36.8 |
| | 36.8 |
| | — |
| | — |
| | 36.8 |
|
Realized gains on dispositions of available-for-sale sponsored investment portfolios | (52.3 | ) | | — |
| | — |
| | (52.3 | ) | | (47.6 | ) | | — |
| | — |
| | (47.6 | ) |
Net gains recognized on investments | (18.9 | ) | | — |
| | 12.0 |
| | (6.9 | ) | | (46.2 | ) | | — |
| | 31.8 |
| | (14.4 | ) |
Net change in trading securities held by consolidated sponsored investment portfolios | — |
| | (458.7 | ) | | — |
| | (458.7 | ) | | — |
| | (566.3 | ) | | — |
| | (566.3 | ) |
Other changes in assets and liabilities | 205.5 |
| | 4.0 |
| | (1.4 | ) | | 208.1 |
| | 363.6 |
| | (18.8 | ) | | (.8 | ) | | 344.0 |
|
Net cash provided by operating activities | 507.4 |
| | (433.5 | ) | | (1.4 | ) | | 72.5 |
| | 728.1 |
| | (538.8 | ) | | (.8 | ) | | 188.5 |
|
Net cash provided by investing activities | (35.2 | ) | | 69.1 |
| | 173.9 |
| | 207.8 |
| | 52.9 |
| | (46.5 | ) | | 23.0 |
| | 29.4 |
|
Net cash (used in) provided by financing activities | (321.6 | ) | | 443.3 |
| | (172.5 | ) | | (50.8 | ) | | (405.1 | ) | | 573.3 |
| | (22.2 | ) | | 146.0 |
|
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios | — |
| | (1.4 | ) | | — |
| | (1.4 | ) | | — |
| | (3.4 | ) | | — |
| | (3.4 | ) |
Net change in cash and cash equivalents during period | 150.6 |
| | 77.5 |
| | — |
| | 228.1 |
| | 375.9 |
| | (15.4 | ) | | — |
| | 360.5 |
|
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 | $ | 1,322.9 |
| | $ | 77.5 |
| | $ | — |
| | $ | 1,400.4 |
| | $ | 1,580.8 |
| | $ | 50.2 |
| | $ | — |
| | $ | 1,631.0 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
T. Rowe Price Group, Inc.:
We have reviewed the condensed consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries (“the Company”) as of March 31, 2017, the related condensed consolidated statements of income, comprehensive income and cash flows for the three month periods ended March 31, 2017 and 2016, and the related condensed consolidated statement of stockholders’ equity for the three-month period ended March 31, 2017. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries as of December 31, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 7, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Baltimore, Maryland
April 25, 2017
| |
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 nearly 5% of our assets under management at March 31, 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 increase our 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 that our planned operating expenses, excluding the operating expense impact of the Dell appraisal rights matter, will grow about 10% in 2017 versus 2016. We could elect to moderate the pace of spending on our planned initiatives should markets decline significantly. In addition, other events not currently planned or expected could impact our expense levels.
BACKGROUND.
U.S. stocks rose in the first quarter of 2017, continuing their post-election rally, helped by positive domestic economic data and signs of stronger growth around the world. Large-cap stocks outperformed their smaller peers. For much of the period, investors were optimistic that the new president and a Republican-controlled Congress would quickly pass legislation that would reduce tax rates, increase infrastructure spending, and ultimately contribute to stronger U.S. growth and corporate profits. Stocks struggled a bit in March, however, as the Federal Reserve raised short-term interest rates on March 15. Also, the failure of the House of Representatives to pass legislation replacing the Affordable Care Act raised some concerns that the president’s legislative agenda would have more difficulty passing through Congress than previously believed.
Stocks in developed non-U.S. markets performed better than U.S. shares, as a weaker dollar versus major non-U.S. currencies lifted returns in dollar terms. Japanese shares were flat in yen terms but rose more than 4% in U.S. dollar terms due to a stronger yen versus the dollar. In Europe, equity markets were buoyed by improving macroeconomic trends and produced good returns. UK shares returned about 5%, as the government formally began the two-year process of leaving the European Union in March.
Emerging markets equities outperformed stocks in developed markets, helped in part by stronger currencies versus the dollar. Asian markets were led by India and South Korea. Latin American markets rose broadly. In emerging Europe, Russian shares fell more than 4% in dollar terms, as the economy remained sluggish, oil prices sagged, and hopes faded for U.S. sanctions to be lifted.
Returns of several major equity market indexes for the first quarter of 2017, are as follows:
|
| | |
| | Three months ended |
Index | | 3/31/2017 |
S&P 500 Index | | 6.1% |
NASDAQ Composite Index (1) | | 9.8% |
Russell 2000 Index | | 2.5% |
MSCI EAFE (Europe, Australasia, and Far East) Index | | 7.4% |
MSCI Emerging Markets Index | | 11.5% |
(1) returns exclude dividends
Global bond returns were mostly positive in the first quarter of 2017. In the U.S., investment-grade bond prices rose as long-term interest rates edged lower, even though the Fed raised short-term rates in March and Fed officials projected two more rate increases this year. The 10-year Treasury note yield slipped from 2.45% to 2.40% during the quarter. Municipal bonds outperformed taxable bonds, helped by limited issuance and a pickup in demand. High yield bonds struggled in March but outperformed high-quality bonds for the quarter, as investors continued to seek securities with attractive yields.
Bonds in developed international markets produced solid returns, as stronger international currencies boosted returns in dollar terms. In Europe, increasing inflation and anticipation of rising U.S. interest rates pressured some bond yields higher. In Japan, the central bank continued pursuing its policy of keeping the 10-year government bond yield near 0%. Bonds in emerging markets outpaced bonds in developed markets, helped by investors’ demand for higher-yielding securities. In general, bonds denominated in local currencies did better than dollar-denominated debt.
Returns for several major bond market indexes for the first quarter of 2017, are as follows:
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| | |
| | Three months ended |
Index | | 3/31/2017 |
Bloomberg Barclays U.S. Aggregate Bond Index | | .8% |
JPMorgan Global High Yield Index | | 2.9% |
Bloomberg Barclays Municipal Bond Index | | 1.6% |
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index | | 2.5% |
JPMorgan Emerging Markets Bond Index Plus | | 3.8% |
ASSETS UNDER MANAGEMENT.
Assets under management ended the first quarter of 2017 at $861.6 billion, an increase of $50.8 billion from December 31, 2016. We had net cash inflows of $.7 billion in the first quarter of 2017. The following table presents our assets under management (in billions) at December 31, 2016, and March 31, 2017, by investment portfolio and asset class.
|
| | | | | | | |
| As of |
| 12/31/2016 | | 3/31/2017 |
Sponsored U.S. mutual funds | $ | 514.2 |
| | $ | 548.3 |
|
Other investment portfolios | 296.6 |
| | 313.3 |
|
Total assets under management | $ | 810.8 |
| | $ | 861.6 |
|
|
| | | | | | | |
| As of |
| 12/31/2016 | | 3/31/2017 |
Equity | $ | 450.6 |
| | $ | 482.9 |
|
Fixed income | 121.2 |
| | 123.5 |
|
Asset allocation | 239.0 |
| | 255.2 |
|
Total assets under management | $ | 810.8 |
| | $ | 861.6 |
|
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, continue to be a significant part of our assets under management. Assets under management at March 31, 2017, in these target date portfolios totaled $202.6 billion, including $163.4 billion in target date retirement funds and $39.2 billion in target date retirement trusts.
The following table details the changes in our assets under management (in billions) during the first quarter of 2017:
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| | | | | | | | | | | |
| Sponsored U.S. mutual funds | | Other investment portfolios | | Total |
Assets under management at beginning of period | $ | 514.2 |
| | $ | 296.6 |
| | $ | 810.8 |
|
| | | | | |
Net cash flows before client transfers | 2.5 |
| | (1.8 | ) | | .7 |
|
Client transfers from mutual funds to other portfolios | (.3 | ) | | .3 |
| | — |
|
Net cash flows after client transfers | 2.2 |
| | (1.5 | ) | | .7 |
|
Net market appreciation and income | 31.9 |
| | 18.2 |
| | 50.1 |
|
Change during the period | 34.1 |
| | 16.7 |
| | 50.8 |
|
| | | | | |
Assets under management at March 31, 2017 | $ | 548.3 |
| | $ | 313.3 |
| | $ | 861.6 |
|
The client transfers from mutual funds to other investment portfolios noted in the table above were primarily transfers from mutual funds to subadvised accounts.
The net cash flows after client transfers (in billions) during the first quarter of 2017, include the following:
|
| | | | |
| | Three months ended 3/31/2017 |
Sponsored U.S. mutual funds | | |
Stock and blended asset funds | | $ | (1.0 | ) |
Bond funds | | 2.6 |
|
Money market funds | | .6 |
|
| | 2.2 |
|
Other investment portfolios | | |
Stock and blended assets | | (2.9 | ) |
Fixed income, money market, and stable value | | 1.4 |
|
| | (1.5 | ) |
Total net cash flows after client transfers | | $ | .7 |
|
Our net cash flows continue to be impacted in the first quarter of 2017 by clients reallocating to passive investments. Net cash inflows into our target date retirement portfolios were $2.3 billion in the first quarter of 2017.
RESULTS OF OPERATIONS.
The table below presents financial results on a U.S. GAAP basis as well as a non-GAAP basis to adjust for the impact of the consolidated sponsored investment portfolios and other non-operating income as well as the additional insurance recovery related to the Dell appraisal rights matter. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results.
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| | | | | | | | | | | | | | | |
| | Three months ended | | | | |
(in millions, except per-share data) | | 3/31/2016 | | 3/31/2017 | | Dollar change | | Percentage change |
| | | | | | | | |
U.S. GAAP Basis | | | | | | | | |
Investment advisory fees | | $ | 870.8 |
| | $ | 991.1 |
| | $ | 120.3 |
| | 13.8 | % |
Net revenues | | $ | 994.1 |
| | $ | 1,113.6 |
| | $ | 119.5 |
| | 12.0 | % |
Operating expenses | | $ | 583.2 |
| | $ | 591.9 |
| | $ | 8.7 |
| | 1.5 | % |
Net operating income | | $ | 410.9 |
| | $ | 521.7 |
| | $ | 110.8 |
| | 27.0 | % |
Non-operating income | | $ | 85.1 |
| | $ | 115.0 |
| | $ | 29.9 |
| | 35.1 | % |
Net income attributable to T. Rowe Price Group | | $ | 304.1 |
| | $ | 385.9 |
| | $ | 81.8 |
| | 26.9 | % |
Diluted earnings per share on common stock of T. Rowe Price Group | | $ | 1.18 |
| | $ | 1.54 |
| | $ | .36 |
| | 30.5 | % |
Weighted average common shares outstanding assuming dilution | | 251.9 |
| | 245.5 |
| | (6.4 | ) | | (2.5 | )% |
| | | | | | | | |
Adjusted(1) | | | | | | | | |
Operating expenses | | $ | 581.9 |
| | $ | 640.1 |
| | $ | 58.2 |
| | 10.0 | % |
Net income attributable to T. Rowe Price Group | | $ | 260.1 |
| | $ | 297.2 |
| | $ | 37.1 |
| | 14.3 | % |
Diluted earnings per share on common stock of T. Rowe Price Group | | $ | 1.01 |
| | $ | 1.18 |
| | $ | .17 |
| | 16.8 | % |
| | | | | | | | |
Assets under management (in billions) | | | | | | | | |
Average assets under management | | $ | 728.1 |
| | $ | 845.4 |
| | $ | 117.3 |
| | 16.1 | % |
Ending assets under management | | $ | 764.6 |
| | $ | 861.6 |
| | $ | 97.0 |
| | 12.7 | % |
(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 first quarter of 2017 increased over the comparable 2016 quarter as average assets under our management increased $117.3 billion, or 16.1%, to $845.4 billion. The average annualized effective fee rate earned on our assets under management during the first quarter of 2017 was 47.5 basis points, compared with 48.1 basis points earned during the first quarter of 2016. Our effective fee rate has declined in part due to fee reductions we made to certain mutual funds and other portfolios in 2016. We regularly assess the competitiveness of such fees and will continue to make adjustments as deemed appropriate. Recent increases in money market fund yields have resulted in no fee waivers in the first quarter of 2017. Comparably, we waived $4.0 million in advisory fees and fund expenses from certain of our money market mutual funds in the first quarter of 2016 quarter.
In the first quarter of 2017, we recognized a $50.0 million reduction in pre-tax operating expenses from successful insurance claims made in relation to the Dell appraisal rights 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 (expected) | | — |
| | 10.0 |
|
Total impact from Dell appraisal rights matter | | $ | 16.2 |
| | $ | (16.2 | ) |
Our operating margin in the first quarter of 2017 was 46.8%, compared to 41.3% earned in the 2016 quarter. The insurance recovery related to the Dell appraisal rights matter we recognized in the first quarter of 2017 increased our operating margin by about 4.5%.
Net revenues
Investment advisory revenues earned in the first quarter of 2017 from the T. Rowe Price mutual funds distributed in the U.S. were $715.8 million, an increase of $83.7 million, or 13.2%, from the comparable 2016 quarter. Average mutual fund assets under management in the first quarter of 2017 were $536.5 billion, an increase of 15.2% from the average in the first quarter of 2016.
Investment advisory revenues earned in the first quarter of 2017 from the other investment portfolios were $275.3 million, an increase of $36.6 million, or 15.3%, from the comparable 2016 quarter. Average assets under management for these portfolios in the first quarter of 2017 were $308.9 billion, an increase of 17.7% from the average in the first quarter of 2016.
Operating expenses
Compensation and related costs was $397.4 million in the first quarter of 2017, an increase of $42.2 million, or 11.9%, compared to the first quarter of 2016. Our base salaries and related benefits have increased $21.0 million as a result of modest increases in base salaries at the beginning of 2017, combined with a 5.5% increase in our average staff size from the first quarter of 2016. Our interim accrual for annual variable compensation increased $18.4 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 operating income to forecasted annual net operating income. Higher market valuations on a larger supplemental savings plan liability resulted in $6.7 million in additional compensation expense in the first quarter of 2017 compared with the 2016 period. The remainder of the change from the first quarter of 2016 is related to increases in our recruiting and relocation costs as we hired a number of key positions, increases in other employee-related costs, decreases in temporary personnel, and higher labor capitalization related to internally developed software as we continue to invest in its technology capabilities. We employed 6,474 associates at March 31, 2017.
Advertising and promotion costs were $25.6 million in the first quarter of 2017, compared with $23.1 million in the 2016 quarter. We currently expect advertising and promotion costs for 2017 to be up to 10% higher than the 2016 year as we execute on a number of strategic initiatives.
Occupancy and facility costs together with depreciation expense were $81.0 million in the first quarter of 2017, an increase of $7.4 million, or 10.1%, compared to the first quarter of 2016. The increase is primarily attributable to the added costs to update and enhance technology capabilities, including related maintenance programs.
Other operating expenses in the first quarter of 2017 were up $5.3 million from the comparable 2016 quarter. The increase is due to higher business demands and the firm's continued investment in its operating capabilities.
Non-operating income
Net non-operating income in the first quarter of 2017 was $115.0 million, an increase of $29.9 million from the 2016 quarter. The following table details the components of non-operating income (in millions) during the first quarter of 2016 and 2017 and the related change.
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| | | | | | | | | | | | |
| | Three months ended | |
|
| | 3/31/2016 | | 3/31/2017 | | Dollar change |
| | | | | | |
Net gains realized on dispositions of available-for-sale investments | | $ | 52.3 |
| | $ | 47.6 |
| | $ | (4.7 | ) |
Capital gain and ordinary dividend distributions from sponsored fund investments | | 1.5 |
| | 2.4 |
| | .9 |
|
Unrealized gains on sponsored equity method and trading investments | | 5.3 |
| | 10.3 |
| | 5.0 |
|
Net investment income on sponsored fund investments not consolidated | | 59.1 |
| | 60.3 |
| | 1.2 |
|
Other investment income | | 2.2 |
| | 4.5 |
| | 2.3 |
|
Total earned from investments | | 61.3 |
| | 64.8 |
| | 3.5 |
|
Net investment income of consolidated sponsored investment portfolios | | 23.8 |
| | 48.9 |
| | 25.1 |
|
Other non-operating income | | — |
| | 1.3 |
| | 1.3 |
|
|