T. Rowe Price Group, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 15, 2023. This is an annual report, not a standalone fourth-quarter report. T. Rowe Price is a global investment manager whose revenue depends principally on investment advisory fees tied to assets under management (AUM). The December 2021 acquisition of Oak Hill Advisors (OHA) expanded its alternative-credit business.
Financial performance and position
- Revenue: Net revenue was $6.488 billion, down 15.4% from $7.672 billion in 2021. Investment advisory fees fell 15.9% to $5.969 billion. Average AUM declined 12.6% to $1.398 trillion, while the annualized effective fee rate decreased to 42.7 basis points from 44.4.
- AUM and flows: Year-end AUM was $1.275 trillion, down 24.5% year over year. The decrease reflected $351.4 billion of market depreciation and losses, including distributions not reinvested, and $61.7 billion of net cash outflows. Target-date products received $11.3 billion in net inflows; their year-end AUM was $334.2 billion.
- Profit and margins: Net operating income was $2.374 billion, down 36.0%; operating margin contracted to 36.6% from 48.4%. Net income attributable to T. Rowe Price was $1.558 billion, down 49.5%, and diluted EPS was $6.70 versus $13.12. On the company’s adjusted non-GAAP basis, net income was $1.865 billion and diluted EPS was $8.02, down 37.7% and 37.1%, respectively.
- Cash flow: Consolidated operating cash flow was $2.359 billion, versus $3.452 billion in 2021. Company-attributable operating cash flow was $2.440 billion, compared with $3.428 billion. Capital expenditures were $237.6 million. Cash and cash equivalents were $1.756 billion at year-end.
- Liquidity and debt: Cash and discretionary investments totaled $2.205 billion; cash and investments in T. Rowe Price products totaled $4.086 billion, though sponsored-product assets are not generally available for corporate use. Management stated it does not maintain an external source of additional liquidity. The filing reports $103.0 million of debt associated with affiliated CLO investments; it does not identify material general corporate borrowings. Operating lease liabilities were $329.6 million.
- Capital returns: The company paid $4.80 per share in regular dividends, up 11.1%, and repurchased $855.3 million of shares in 2022. It reported $8.840 billion of stockholders’ equity attributable to the company at year-end.
Material changes and unusual items
- Investment advisory revenue and AUM fell amid sharply declining global equity and bond markets and net outflows, especially from U.S. growth-oriented equity strategies. The effective fee rate also declined, partly reflecting a mix shift toward lower-fee strategies and vehicles.
- Operating expenses rose 3.9% to $4.115 billion. They included $175.1 million of impairment charges on acquired OHA intangible assets and $108.5 million of amortization of definite-lived acquired intangibles. Challenging market conditions also reduced the fair value of OHA contingent consideration, producing a $161.2 million operating-expense credit.
- Non-operating results swung from income of $284.6 million in 2021 to a loss of $425.5 million in 2022, primarily reflecting investment losses. The effective tax rate rose to 25.6% from 22.4%.
- OHA reported $57 billion of capital under management at year-end. The company recorded $54.3 million of negative capital allocation-based income, including acquired-investment basis-difference amortization and impairment effects.
Outlook, commentary, and risks
- Management estimated 2023 non-GAAP operating-expense growth of 2%–6% from a comparable 2022 base of $4.070 billion, excluding non-GAAP accrued carried-interest compensation. The outlook incorporates redeployment of $85 million of savings from 2022 expense actions to strategic priorities.
- Management forecast a 2023 GAAP effective tax rate of 24.5%–28.5% and non-GAAP rate of 24.5%–27.5%, and expected approximately $350 million in 2023 property and equipment expenditures, more than two-thirds for technology.
- Management described ongoing strategic investment in investment talent, products, distribution, and technology, while noting persistent passive-investing competition and fee pressure. Market values and investor flows remain key drivers of revenue and earnings.
- Key risks include market declines and adverse investment performance, continued client outflows, fee pressure, reliance on fund advisory contracts that may be terminated, regulatory and cybersecurity risks, and challenges integrating OHA or achieving its earnout targets. Further OHA-related impairment charges may occur if relevant conditions deteriorate.
- A class action filed in October 2022 alleges that voiceprint use in retirement-plan caller identification violated California privacy law. The company disputes the claims; it said it could not estimate a possible loss or range. Management considered other ordinary-course claims unlikely to have a material adverse effect.
Important facts for investors to verify
- Whether AUM outflows and the shift toward lower-fee products continue, and how those trends affect advisory revenue and fee rates.
- How 2023 expense growth compares with the 2%–6% estimate, including the effect of technology investment and OHA integration.
- Whether OHA meets the revenue thresholds for potential earnout payments of up to $900 million and whether acquired-asset impairments recur.
- How much reported liquidity is available for general corporate purposes, given that sponsored-product assets are not freely accessible.
- Developments in the California voiceprint lawsuit and any other material legal or regulatory matters.