T. Rowe Price Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
T. Rowe Price primarily earns investment advisory fees based on assets under management (AUM), alongside administrative, distribution, and servicing fees. Results are therefore sensitive to market performance, investor flows, asset mix, and fee rates. The period includes Oak Hill Advisors (OHA), acquired in December 2021; OHA reported $57 billion of capital under management at June 30, 2022.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenues | $1,513.0 | $1,929.3 | $3,376.0 | $3,756.1 |
| Net operating income | $668.6 | $958.1 | $1,546.0 | $1,851.3 |
| Net income attributable to T. Rowe Price | $339.6 | $815.7 | $907.5 | $1,565.1 |
| Diluted EPS | $1.46 | $3.46 | $3.88 | $6.63 |
| Operating margin | 44.2% | 49.7% | 45.8% | 49.3% |
- AUM: $1,309.7 billion at quarter-end, down $242.1 billion from March 31 and $378.1 billion from year-end 2021. Q2 AUM fell $227.4 billion from market depreciation and distributions and $14.7 billion from net cash outflows. Average AUM was $1,407.1 billion, down 11.2% year over year.
- Fees: Q2 investment advisory fees fell 16.3% to $1,496.7 million. The average annualized effective fee rate declined to 42.7 basis points from 45.2 basis points a year earlier, reflecting asset mix, transfers to lower-fee vehicles, and prior target-date fee reductions.
- Cash flow and liquidity: Six-month reported operating cash flow was $1,727.0 million, versus $1,802.0 million a year earlier. Cash and cash equivalents on the company’s balance sheet were $2,116.0 million at June 30, versus $1,523.1 million at year-end. Management reported $4,331.0 million in cash and investments in T. Rowe Price products, while noting that some seeded or consolidated fund assets are not available for general operations.
- Debt and commitments: The filing reports $102.3 million of debt associated with affiliated CLO investments, included in accounts payable and accrued expenses. T. Rowe Price committed $493.3 million to fund OHA products over five years. The OHA acquisition also includes contingent cash earnout consideration of up to $900 million, potentially payable from 2025 through 2027 subject to revenue targets.
Material changes versus the prior comparable period
- Q2 net revenue declined 21.6% and attributable net income declined 58.4% year over year; six-month net revenue declined 10.1% and attributable net income declined 42.0%.
- Investment advisory revenue and AUM fell amid weak equity and bond markets. Capital allocation-based income reduced Q2 revenue by $126.3 million, including market-related carried-interest reductions and non-cash OHA acquisition accounting amortization.
- GAAP non-operating results swung to a $279.9 million loss in Q2 from $143.9 million income in Q2 2021. The six-month loss was $478.4 million versus $246.0 million income, reflecting investment and consolidated fund losses in 2022 versus gains in 2021.
- GAAP operating expenses decreased 13.1% in Q2, but this was substantially affected by market-driven changes in the supplemental savings plan. On an adjusted non-GAAP basis, Q2 expenses increased 1.7%; six-month adjusted expenses increased 7.9%, including OHA costs and technology investment.
- Product and recordkeeping costs rose sharply, largely due to the expanded FIS relationship that began in August 2021; the filing says some associated compensation costs fell after approximately 800 associates transitioned to FIS.
Outlook, management commentary, and risks
- Management revised its 2022 non-GAAP expense-growth forecast to 4%–7%, from 10%–14%, citing lower market-related expenses and slower hiring; a full year of OHA expenses is the main expected growth driver. Management may adjust spending if circumstances, including significant market movements, change.
- Management estimated a 2022 effective tax rate of 23%–26% on a GAAP basis and 23%–25% on a non-GAAP basis. Full-year capital expenditures were expected to be about $290 million, with more than three-quarters planned for technology.
- No specific revenue or EPS guidance is stated in the supplied filing text. Management emphasizes that revenue and results depend on market levels, AUM composition and flows, investment performance, fee rates, and carried interest. It also identifies persistent growth in passive investing as a challenge to new client inflows.
- Management described ample liquidity and no external liquidity facility. It also cited risks from market volatility, inflation and interest-rate changes, competition, investment performance, fee pressure, technology and integration costs, regulation, and attracting and retaining personnel.
- A 401(k) fiduciary-duty class action was settled and dismissed with prejudice on July 6, 2022; the settlement was described as not material. Management said the likelihood of material adverse outcomes from other ordinary-course claims was remote.
Important facts for investors to verify
- Whether AUM flows and market performance stabilize, and how those trends affect advisory fees and fee rates.
- Whether the revised 4%–7% non-GAAP expense-growth outlook and planned technology spending remain achievable as OHA is integrated.
- The valuation sensitivity of carried interest, investments, supplemental savings plan hedges, and the OHA earnout; Q2 results included substantial market-related losses and a $50.3 million quarterly gain from remeasurement of contingent consideration.
- Cash available for general corporate purposes versus assets held in investment products, as well as the timing and funding of OHA commitments and potential earnout payments.
- Performance indicators: for the one-year period, 46% of U.S. mutual funds outperformed their Morningstar median and 40% outperformed passive peer medians; the filing cautions that past performance is no guarantee of future results.