T. Rowe Price Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. T. Rowe Price earns most revenue from investment advisory services; revenue therefore depends heavily on the value and composition of assets under management (AUM). The filing was reviewed by KPMG, which reported no material modifications were needed to the interim financial information.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net revenues | $1,415.4 million | $1,395.2 million | $2,878.0 million | $2,722.5 million |
| Net operating income | $553.7 million | $615.1 million | $1,260.9 million | $1,147.6 million |
| Net income attributable to T. Rowe Price Group | $603.0 million | $527.5 million | $946.1 million | $1,040.1 million |
| Diluted EPS | $2.55 | $2.15 | $3.95 | $4.23 |
| Operating margin | 39.1% | 44.1% | 43.8% | 42.2% |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $1,640.7 million | $948.8 million |
- Q2 net revenues rose 1.4%; investment advisory fees increased 1.9%. Average AUM increased 3.7% year over year to $1,140.2 billion. The average annualized effective advisory fee rate declined to 45.6 basis points from 46.3 basis points.
- Q2 operating expenses grew 10.5% to $861.7 million, chiefly reflecting a $60.5 million increase in market-related supplemental savings plan compensation expense. Q2 GAAP operating income fell 10.0%, while diluted EPS rose 18.6%, supported by investment gains and fewer weighted-average shares.
- First-half net revenues rose 5.7% and operating income rose 9.9%; attributable net income declined 9.0% and diluted EPS declined 6.6%, mainly because investment results shifted from gains in 2019 to losses in 2020.
- Non-GAAP diluted EPS was $2.29 for Q2 versus $2.03, and $4.15 for the first half versus $3.90. These company-adjusted measures exclude specified effects, including consolidated investment products and supplemental savings plan market movements.
- Non-operating income was $415.1 million in Q2 versus $124.5 million a year earlier; the first half recorded a non-operating loss of $85.2 million versus income of $327.3 million. The sharp quarterly rebound included gains on investments and consolidated sponsored portfolios; these results are market-sensitive and include amounts attributable to outside investors.
AUM, cash, debt, and capital allocation
- Ending AUM was $1.220 trillion, up $95.0 billion year over year and $13.2 billion from year-end 2019. Q2 net cash inflows were $14.7 billion, while market appreciation and income added approximately $196.5 billion. First-half net inflows were $8.7 billion.
- At June 30, cash and cash equivalents were $2,058.1 million, investments were $2,900.0 million, and total assets were $9,477.3 million. The company stated it was debt-free and had no external liquidity facility, citing cash and expected operating cash generation.
- Management reported $5,718.7 million of cash and investments in T. Rowe Price products, including seed capital and supplemental savings plan hedges. This total is not all unrestricted operating liquidity: assets held by consolidated investment products are unavailable to general creditors and cannot be directly accessed for general operations.
- First-half operating cash flow was $1,640.7 million. Financing activities used $1,311.1 million, including $1,027.1 million of share repurchases and $425.7 million of dividends paid. The company repurchased 9.6 million shares for $1,028.7 million during the first half and raised its quarterly dividend 18.4% to $0.90 per share.
Outlook, commentary, and risks
- Management raised its expected full-year 2020 non-GAAP operating expense growth range to 3%–6%, from 1%–4% in April, citing higher AUM-related expenses after the second-quarter market recovery. The range includes strategic investments and may change with market conditions and pandemic-related disruption.
- Management estimated full-year 2020 effective tax rates of 23%–26% on a GAAP basis and 23%–25% on a non-GAAP basis. It expected money market fee waivers—$2.7 million in Q2—to continue at least through the remainder of 2020 to support positive investor yields.
- The coronavirus pandemic and related market volatility may affect AUM, client flows, revenue, operations, and investment values. Management noted uncertainty about the pandemic’s continuing effects, despite business continuity and remote-work measures. The filing also cites persistent industry movement toward passive investing as a pressure on new client inflows.
- Two material disclosed lawsuits remain unresolved: a certified class action alleging ERISA fiduciary-duty and prohibited-transaction violations concerning the company 401(k) plan, and a Section 36(b) action alleging excessive advisory fees for certain funds. The company considers the claims without merit, is defending them, and cannot estimate a possible loss or range of loss.
- Market-linked investment results materially affected reported earnings. The filing’s sensitivity analysis estimated a $295.2 million potential loss on specified non-consolidated investments under its stated scenario; it also cautioned that actual losses could exceed the estimate.
Important facts for investors to verify
- Whether AUM growth and net inflows continue, and how client transfers to lower-fee vehicles affect advisory fee rates and revenue.
- Whether the 3%–6% non-GAAP expense-growth outlook and tax-rate ranges remain appropriate as markets and pandemic conditions evolve.
- How much reported earnings in future periods reflect investment gains or losses, supplemental savings plan hedges, and consolidated investment products rather than core advisory operations.
- The availability of liquidity for corporate use, distinguishing company cash and discretionary investments from seed capital, hedge investments, and assets of consolidated funds.
- Developments in the disclosed ERISA and advisory-fee litigation, including any change in potential financial exposure.