T. Rowe Price Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Amounts are in U.S. dollars unless noted.
Business context and reporting period
T. Rowe Price earns most revenue from investment advisory fees, which depend primarily on assets under management (AUM) and their composition. Results include Oak Hill Advisors (OHA), acquired December 29, 2021; OHA reported $57 billion of capital under management at quarter-end.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 or comparison |
|---|---|---|
| Net revenue | $1,863.0 million | $1,826.8 million; up 2.0% |
| Investment advisory fees | $1,662.1 million | $1,687.8 million; down 1.5% |
| Operating expenses, GAAP | $985.6 million | $933.6 million; up 5.6% |
| Net operating income | $877.4 million | $893.2 million; down 1.8% |
| Operating margin | 47.1% | 48.9% |
| Net income attributable to T. Rowe Price | $567.9 million | $749.4 million; down 24.2% |
| Diluted EPS, GAAP | $2.41 | $3.17 |
| Diluted EPS, non-GAAP | $2.62 | $3.01 |
| Average AUM | $1,559.9 billion | $1,508.8 billion; up 3.4% |
| Ending AUM | $1,551.8 billion | $1,518.0 billion at March 31, 2021; down $136.0 billion from year-end 2021 |
Quarterly AUM declined by $5.3 billion of net outflows and $130.7 billion of market depreciation and losses, partly offset by distributions and other effects. The average annualized advisory fee rate was 43.2 basis points, versus 45.4 basis points a year earlier. Management cited prior target-date product fee reductions and a shift toward lower-fee vehicles and asset classes.
GAAP non-operating loss was $198.5 million, compared with income of $102.1 million in Q1 2021, reflecting investment losses amid market declines. These included $89.9 million of losses on investments and $101.4 million of losses in consolidated investment products. Non-GAAP operating expenses were $1,039.1 million, up 14.3%; non-GAAP net operating income was $838.0 million, down 8.8%.
Cash flow, balance sheet, debt, and liquidity
- Cash and cash equivalents were $1,997.5 million at March 31, up from $1,523.1 million at year-end. Total assets were $12,348.0 million; total liabilities were $2,231.0 million; permanent stockholders’ equity was $9,326.6 million.
- Reported operating cash flow was $1,103.4 million, investing cash flow was $3.8 million, and financing cash flow was negative $644.1 million. Reported quarter-end cash, including cash held by consolidated investment products, was $2,084.6 million.
- Management reported $4,490.2 million of cash and investments in T. Rowe Price products. Some consolidated-product assets are not available for general operations or to general creditors. The company said it did not maintain an external source of additional liquidity.
- The filing reports $108.7 million of debt associated with long-term investments in affiliated CLOs, included in accounts payable and accrued expenses. Rates were 1.70%–1.95% at quarter-end; maturities extend through 2032 or depend on repayment/cancellation of the investments.
- Q1 common dividends paid were $279.2 million; share repurchases were $320.1 million for 2.1 million shares. The quarterly dividend was raised 11.1% to $1.20 per share in February 2022.
Material changes versus the prior comparable period
- Revenue rose modestly, but advisory fees fell despite higher average AUM. Growth in administrative fees and newly reported capital allocation-based income offset the advisory-fee decline.
- GAAP earnings and EPS fell substantially, driven mainly by investment losses compared with investment gains in Q1 2021, alongside lower operating income.
- Expense comparisons reflect OHA’s inclusion in 2022, increased FIS recordkeeping costs and continued technology investment. Compensation costs excluding the supplemental savings plan increased 12.7%.
- Net cash provided by operating activities increased to $1,103.4 million from $994.7 million, while financing cash outflows increased to $644.1 million from $307.5 million, including higher buybacks and dividends.
Outlook, commentary, risks, and unusual items
- Management lowered its forecast for 2022 non-GAAP operating-expense growth, including a full year of OHA, to 10%–14% from 12%–16%, citing lower market-related expenses and slower net hiring in the quarter. It may adjust spending if circumstances change.
- Estimated full-year 2022 effective tax rates are 22%–25% on a GAAP basis and 23%–25% on a non-GAAP basis. Planned 2022 capital expenditures are about $290 million, more than three-quarters for technology initiatives.
- Management did not provide a specific revenue or EPS forecast in the supplied filing text. It cited market volatility, net flows, investment performance, fee pressure, competition and the ongoing shift toward passive investing as factors affecting results.
- OHA acquisition consideration includes contingent cash earnout payments of up to $900 million, potentially payable from 2025 through 2027 based on revenue targets. The quarter-end fair-value liability was $211.5 million, down from $306.3 million at year-end; remeasurement contributed a $45.5 million gain. The filing also reports a $499.1 million commitment to fund OHA products over five years.
- The company voluntarily waived $9.2 million of advisory fees in Q1 to maintain positive yields in certain portfolios, and expected the waivers to decline in Q2 and cease by the end of Q2 2022.
- Global market declines were associated with the war in Ukraine, inflation and rising interest rates. The filing states there were no material changes to previously disclosed risk factors. A certified ERISA class action settlement received preliminary court approval; management said the proposed settlement would not be material.
Important facts for investors to verify
- Subsequent AUM, net flows and investment performance, particularly after the substantial first-quarter market-driven decline.
- Whether advisory-fee pressure and the 43.2-basis-point effective fee rate stabilize, and whether the disclosed fee waivers end as expected.
- Progress integrating OHA, its contribution to earnings, and changes in the earnout liability and related compensation arrangements.
- Delivery against the 10%–14% non-GAAP expense-growth outlook and approximately $290 million capital-expenditure plan.
- Cash generation and shareholder returns, distinguishing company-available resources from assets held in consolidated investment products.