T. Rowe Price Group, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2016. The company earns most revenue from investment advisory services; revenue is sensitive to market levels, assets under management (AUM), and asset mix.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenues | $1,092.9 million | $1,049.0 million | $3,131.7 million | $3,148.4 million |
| Net operating income | $475.7 million | $458.3 million | $1,170.1 million | $1,443.9 million |
| Net income attributable to T. Rowe Price Group | $327.8 million | $277.1 million | $835.2 million | $919.8 million |
| Diluted EPS | $1.28 | $1.06 | $3.25 | $3.45 |
- Q3 revenue rose 4.2%; investment advisory fees increased 5.2% to $970.5 million. Average AUM grew 5.3% year over year to $803.6 billion. The annualized effective fee rate was 48 basis points, unchanged.
- Q3 operating margin was 43.5%, versus 43.7%. Management’s adjusted diluted EPS, excluding specified portfolio and non-operating effects, was $1.17 versus $1.06; adjusted net income was $299.9 million versus $277.0 million.
- For the first nine months, GAAP revenue was nearly flat, while operating expenses increased 15.1% and operating income fell 19.0%. Results included a $166.2 million Dell-related charge, reducing net income by $100.7 million and diluted EPS by $0.39. Adjusted diluted EPS was $3.29 versus $3.31.
- Reported Q3 non-operating income was $88.3 million, including $73.8 million from consolidated sponsored portfolios. Consolidation and related investment gains materially affect comparisons; the company presents adjusted measures to exclude these effects.
- Ending AUM was $812.9 billion, up $49.8 billion from year-end 2015. Nine-month net flows after client transfers were positive $2.2 billion; market appreciation and income added $47.6 billion. Q3 net flows were slightly negative at $0.2 billion.
Cash, debt, and liquidity
- The company reported $1.401 billion of cash and cash equivalents and $1.215 billion of investments at September 30. It stated that it remained debt-free and had substantial liquidity.
- Management cited $2.1 billion of cash and discretionary sponsored-portfolio investments, plus $1.2 billion of seed-capital investments. Portfolio assets are not available to general creditors, and consolidated fund assets cannot be directly used for general operations.
- For the first nine months, reported consolidated operating cash flow was $268.2 million, versus $1.394 billion a year earlier. This figure is substantially affected by consolidation of sponsored funds, including their trading securities. Management separately reported $1.235 billion of operating cash flow attributable to the company, down $158.3 million, primarily reflecting the Dell payment.
- Reported cash at period-end, including $86.3 million held by consolidated funds, was $1.487 billion. The company repurchased $546.9 million of stock and paid $406.6 million of dividends during the nine months.
Outlook, commentary, and material matters
- Management expected 2016 expenses, excluding the Dell charge, to be about 6% above 2015; it projected 2017 operating expenses to grow in the mid- to high-single digits versus 2016, excluding that charge. These expectations depend on planned initiatives and market conditions.
- Full-year 2016 effective tax rate was estimated at 36.3%. Management expected money-market fee waivers to continue through the rest of 2016 and into 2017. Full-year advertising costs were expected to be comparable to 2015.
- Management anticipated up to $165 million in 2016 property and equipment spending, approximately two-thirds for technology, funded from operating resources. It planned to increase spending on strategic priorities, including investment, technology, products, and distribution capabilities.
- The $166.2 million Dell appraisal-rights charge compensated certain clients after voting instructions were submitted in favor of a transaction, preventing those clients from pursuing appraisal rights. The Delaware court valued Dell at $17.62 per share versus the $13.75 transaction price, plus statutory interest.
- New consolidation accounting adopted January 1, 2016 brought additional sponsored funds onto the balance sheet, including $2.134 billion of fund assets and $1.114 billion of redeemable non-controlling interests at September 30. This materially changed reported balance-sheet, income, and cash-flow figures.
- Key business risks include market declines, investment performance and net outflows, fee pressure, competition, regulation, and reliance on third-party service providers. The filing highlights potential effects of fiduciary rules, money-market reforms, derivatives and liquidity rules, and MiFID II. Brexit’s operational impact remained uncertain.
- A mutual fund shareholder lawsuit alleges excessive advisory fees for certain funds; the company said it believes the claims are without merit and intends to defend them. Management said other ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether AUM growth and investment performance translate into sustained net inflows, advisory-fee revenue, and stable fee rates.
- How much of reported earnings and cash-flow movement reflects core operations versus fund consolidation, market-sensitive investment income, and accounting changes.
- Actual expense growth against management’s 2016 and 2017 expectations, including technology, strategic investments, and BNY Mellon transition costs.
- The final cash and client impact of the Dell matter, and developments in the advisory-fee lawsuit and regulatory changes.
- Liquidity available for corporate purposes versus seed-capital and consolidated-fund assets that are not freely available for general operations.