T. Rowe Price Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; compared with the same 2021 periods. The filing is unaudited. T. Rowe Price primarily earns investment advisory fees tied to assets under management (AUM). Results include Oak Hill Advisors (OHA), acquired in December 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $1.588B | $1.954B | $4.964B | $5.710B |
| Net operating income | $574.6M | $996.2M | $2.121B | $2.848B |
| Operating margin | 36.2% | 51.0% | 42.7% | 49.9% |
| Net income attributable to T. Rowe Price | $384.4M | $777.2M | $1.292B | $2.342B |
| Diluted EPS | $1.66 | $3.31 | $5.54 | $9.94 |
| Average AUM | $1.348T | $1.649T | $1.437T | $1.581T |
- Revenue and earnings: Q3 revenue fell 18.7% and diluted EPS fell 49.8% year over year. For the first nine months, revenue declined 13.1% and diluted EPS declined 44.3%. Investment advisory fees declined 20.5% in Q3 and 13.0% year to date, mainly reflecting lower average AUM.
- Operating costs and profitability: GAAP operating expenses rose 5.8% in Q3 to $1.014B, but decreased 0.7% year to date to $2.844B. Management cited compensation, OHA costs and technology investment as cost pressures. Q3 non-GAAP operating expenses increased 7.4%; year-to-date non-GAAP expenses rose 7.7%.
- Markets, flows and AUM: Ending AUM was $1.230T, down $79.7B from June 30 and $457.8B from year-end 2021. Q3 change included $55.1B of market depreciation and distributions not reinvested, and $24.6B of net outflows. Year-to-date, those factors were $413.2B and $44.6B, respectively.
- Cash flow: Consolidated operating cash flow for the first nine months was $2.495B, versus $3.091B in 2021. Investing activities used $69.5M, compared with $57.6M provided in 2021. Financing activities used $1.617B, including $832.4M of dividends paid and $727.9M of share repurchases.
- Liquidity and debt: Cash and cash equivalents were $2.366B at September 30, versus $1.523B at year-end 2021. Management reported $4.458B of cash and investments in T. Rowe Price products, but some amounts hedge the supplemental savings plan or are invested in seeded products; consolidated product assets are not available for general operations or creditors. The filing reports $94.6M of debt associated with affiliated CLO investments, carried in accounts payable and accrued expenses. It does not provide a clear value for other corporate borrowings.
- Balance sheet: Total assets were $11.993B; total liabilities were $2.298B. Stockholders’ equity was $9.115B, alongside $580.8M of redeemable non-controlling interests.
Material changes and unusual items
- Investment markets declined sharply; average AUM was down 18.3% year over year in Q3 and ending AUM was down 23.7% year over year. The annualized effective advisory fee rate was 42.5 basis points in Q3, versus 43.6 basis points a year earlier, reflecting asset and vehicle mix.
- GAAP non-operating losses were $82.8M in Q3 and $561.2M for the first nine months, compared with losses of $11.5M and income of $234.5M in the comparable 2021 periods. These results included market losses on investments and consolidated investment products; the year-to-date results also included substantial losses on supplemental savings plan hedges.
- Year-to-date capital allocation-based income was negative $80.8M, including lower accrued carried interest and non-cash amortization related to OHA acquisition-date investment values. The Q3 amount was positive $1.1M.
- OHA-related items included $81.4M of intangible amortization and $54.3M of retention-arrangement expense year to date, partly offset by a $125.7M favorable fair-value remeasurement of contingent consideration. OHA had $56B of capital under management at quarter-end.
Outlook, commentary and risks
- Management maintained expected full-year 2022 non-GAAP operating expense growth of 4%–7%, citing lower market-related expenses and expense management; OHA’s addition drives nearly all forecast growth. Full-year tax-rate estimates are 24%–27% GAAP and 24%–26% non-GAAP.
- No specific revenue or EPS guidance is stated in the provided filing text. Management described the firm as having ample liquidity and resources to pursue growth opportunities and said 2022 capital expenditures were expected to be about $250M, more than three-quarters for technology.
- Management identified persistent growth in passive investing as a headwind to new client inflows. Results remain sensitive to market levels and asset mix, client flows, investment performance, fee pressure, interest rates, inflation, competition, regulation, and the integration and costs of OHA. The filing notes that actual results may differ materially from forward-looking statements.
- The company committed $482.3M to fund OHA products over five years. Ordinary-course claims are disclosed; management, after consulting counsel, considered a material adverse determination remote. The OHA earnout may total up to $900M, subject to revenue targets beginning in 2025 and extending through 2027.
- The Inflation Reduction Act introduces a 15% minimum tax on adjusted book income and a 1% excise tax on net share repurchases, both effective after 2022. The company was assessing the impact and did not expect it to be material.
Most important facts for investors to verify
- Whether AUM and net flows stabilize, and how market performance and client transfers affect advisory revenue and fee rates.
- Whether the 4%–7% full-year non-GAAP expense-growth outlook and tax-rate ranges remain achievable, including the effects of OHA and technology spending.
- How much reported liquidity is readily available for corporate purposes, given restrictions on consolidated investment-product assets and the role of hedge investments.
- The future size and timing of OHA earnout and other acquisition-related compensation obligations, and the performance of OHA’s business.
- The continued impact of market-driven investment losses, supplemental savings plan hedges, and any new tax effects on earnings, cash flows and repurchases.