T. Rowe Price Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. T. Rowe Price is an investment manager whose revenues depend primarily on fees tied to assets under management (AUM).
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $5.618 billion | $5.373 billion |
| Net operating income | $2.387 billion | $2.361 billion |
| Net income attributable to T. Rowe Price Group | $2.131 billion | $1.838 billion |
| Diluted earnings per share | $8.70 | $7.27 |
| Operating margin | 42.5% | 44.0% |
| Operating cash flow, consolidated | $1.523 billion | $1.620 billion |
- Fourth-quarter 2019 revenue was $1.469 billion; net income attributable to the company was $545.3 million and diluted EPS was $2.24.
- Ending AUM rose 25.4% to $1.207 trillion, from $962.3 billion. The increase included $231.3 billion of market appreciation and income and $13.2 billion of net cash inflows. Average AUM increased 7.0% to $1.109 trillion.
- Investment advisory fees rose 5.4% to $5.113 billion. The average annualized advisory fee rate declined to 46.1 basis points from 46.8 basis points, partly reflecting transfers to lower-fee vehicles and fee reductions.
- GAAP diluted EPS increased 19.7%; adjusted non-GAAP diluted EPS rose 12.9% to $8.07. The larger GAAP increase reflected higher non-operating investment income and a lower effective tax rate, among other factors.
- Non-operating income was $540.3 million, versus $23.2 million in 2018, primarily reflecting market-related investment gains after 2018 losses. This income is market-sensitive. The effective tax rate was 23.2%, compared with 25.8%.
- Operating expenses increased 7.3% to $3.231 billion, including higher compensation and technology costs. Compensation growth included increased supplemental savings plan expense, partly offset by gains on investments used to economically hedge that liability.
- Cash and cash equivalents were $1.782 billion; cash and discretionary investments totaled $3.681 billion. The company reported no debt and stated it had ample liquidity. Total reported assets were $9.330 billion and stockholders’ equity was $7.102 billion.
- Operating cash flow attributable to the parent company was $2.202 billion; consolidated operating cash flow includes the cash flows of consolidated investment products. Capital expenditures were $204.6 million. The company paid $3.04 per share in regular dividends and repurchased $708.8 million of stock during 2019.
Changes, outlook, and key risks
- Markets rebounded strongly in 2019 after late-2018 declines; management said market appreciation drove most of the AUM increase. Net inflows were positive but modest relative to market gains. Target-date products generated $9.8 billion of net inflows and held $292.4 billion in AUM at year-end.
- Management expects 2020 non-GAAP operating expenses to grow 6%–9%, citing continued investment in talent, products, technology and global distribution, cost optimization, and a full year of global third-party investment research costs. Expected 2020 capital expenditures were up to $210 million, about three-quarters for technology. The estimated 2020 effective tax rate was 23%–26% (23.5%–25.5% on a non-GAAP basis).
- Management identifies passive-investing growth, fee pressure, market declines, investment performance, client outflows, and changes in asset mix as significant business risks. AUM-related revenue can fall with markets or outflows; operating margins may contract because some costs are relatively fixed.
- Other disclosed risks include technology and cybersecurity incidents, reliance on third-party vendors, extensive regulation, foreign-exchange exposure, Brexit-related uncertainty, and the possibility of losing key personnel or distribution relationships.
- Two material lawsuits remained in discovery: an ERISA fiduciary-duty class action concerning the company 401(k) plan and a shareholder action alleging excessive fees at certain mutual funds. The company disputes the claims; outcomes and potential losses could not be estimated. Management considered material adverse outcomes in ordinary-course claims remote.
- Unusual items include market-driven gains in consolidated sponsored investment portfolios and gains on other investments; these materially affected GAAP earnings. The 2018 comparison also included tax-law charges, a gain from selling a 10% Daiwa SB Investments stake, and a Dell appraisal-rights recovery. The Dell matter had no operating-expense or cash-flow impact in 2019.
- The 2019 adoption of lease accounting added operating lease assets and liabilities to the balance sheet without a material effect on results. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management reported controls effective.
Investor verification priorities
- Separate market-driven AUM growth from net flows, and monitor subsequent flows and investment performance.
- Assess whether the declining advisory fee rate and continued mix shifts affect revenue and margins.
- Distinguish recurring operating earnings from volatile investment gains, consolidated-fund results, and tax effects.
- Track execution against the 2020 expense-growth and capital-expenditure outlook.
- Review developments in the ERISA and mutual-fund fee litigation, and reassess market, cybersecurity, regulatory, and distribution risks.
- Confirm liquidity analysis accounts for seed investments and consolidated-fund assets, which are not all directly available for general operations.