T. Rowe Price Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted. The interim financial statements are unaudited. T. Rowe Price earns most of its revenue from investment advisory services, which depend substantially on assets under management (AUM) and market performance.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenues | $1,426.7 million | $1,394.6 million | $4,149.2 million | $4,067.6 million |
| Operating expenses | $767.6 million | $754.0 million | $2,342.5 million | $2,248.5 million |
| Net operating income | $659.1 million | $640.6 million | $1,806.7 million | $1,819.1 million |
| Operating margin | 46.2% | 45.9% | 43.5% | 44.7% |
| Net income attributable to T. Rowe Price Group | $545.9 million | $583.0 million | $1,586.0 million | $1,485.6 million |
| Diluted earnings per share | $2.23 | $2.30 | $6.47 | $5.85 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1,500.7 million | $1,486.4 million |
- Q3 investment advisory fees rose 3.2% to $1,303.4 million; net revenues rose 2.3%. Average AUM increased 5.4% year over year to $1,130.2 billion, while the annualized effective fee rate declined to 45.8 basis points from 46.7 basis points.
- Q3 GAAP net income attributable to the company fell 6.4% and diluted EPS fell 3.0%, despite higher operating income. Non-operating income declined to $43.0 million from $124.9 million, principally because the 2018 quarter included a gain on the sale of the company’s Daiwa SB Investments stake.
- For the first nine months, advisory fees increased 2.8% and net revenues 2.0%; net operating income decreased 0.7%. Net income attributable to the company rose 6.8% and diluted EPS 10.6%, supported by higher non-operating gains and fewer diluted shares.
- Non-GAAP diluted EPS was $2.13 for Q3, up 7.0%, and $6.04 for nine months, up 7.9%. These company-defined measures exclude specified investment-product, savings-plan, and other investment impacts; they are not substitutes for GAAP results.
- Cash and cash equivalents were $2.213 billion at September 30, 2019, versus $1.425 billion at year-end 2018. Cash and investments in T. Rowe Price products totaled $5.609 billion, but consolidated investment-product assets are not directly available for general operations and are unavailable to general creditors.
- The company reported no debt. Total liabilities were $1.455 billion, including $146.4 million of operating lease liabilities; total assets were $9.398 billion. These balance-sheet totals include consolidated investment products and redeemable non-controlling interests.
Material changes and business developments
- Ending AUM was $1,126.3 billion, up $164.0 billion from December 31, 2018, including $10.4 billion in net cash inflows and $153.7 billion in market appreciation and income. Q3 net inflows were $2.5 billion; U.S. mutual funds had net outflows after client transfers, offset by inflows to other products.
- Administrative, distribution, and servicing fees declined 6.1% in Q3 and 4.8% year to date, mainly reflecting client transfers to lower-fee vehicles or share classes and lower transfer-agent activity. Lower distribution costs partly offset lower distribution revenue.
- Q3 operating expenses increased 1.8%; nine-month expenses increased 4.2%, with higher compensation and technology, occupancy, and facility costs. Nine-month GAAP margin was lower, primarily due to higher supplemental savings plan compensation expense.
- Operating cash flow attributable to the company was $2.028 billion for nine months, compared with $2.061 billion in 2018. The consolidated cash flow statement reported $1.501 billion. The company spent $566.7 million on share repurchases and paid $550.4 million in dividends during the period.
Outlook, commentary, and risks
- Management revised its 2019 non-GAAP operating expense growth outlook to 4%–5%, from 4%–7%, citing lower-than-planned distribution, product-related and professional-fee expenses, and headcount growth. It expects 2020 expenses to include a full year of third-party investment research costs.
- Management estimated a 2019 GAAP effective tax rate of 23%–25% and a non-GAAP rate of 23.5%–25.5%. Planned 2019 capital expenditures were about $200 million, around two-thirds for technology initiatives.
- Management cited persistent growth in passive investing as a challenge to new client inflows, while describing investments in investment talent, products, technology, and global distribution. Results remain sensitive to financial markets, AUM composition and flows, investment performance, fee levels, competition, expenses, and regulation.
- Two material lawsuits remained in discovery: a certified class action alleging ERISA fiduciary-duty and prohibited-transaction breaches relating to the 401(k) plan, and a fund shareholder suit alleging excessive advisory fees. The company disputes the claims; it said it could not predict outcomes or estimate potential losses. Management considered other ordinary-course claims unlikely to materially affect results.
- The company adopted lease accounting on January 1, 2019, recognizing lease assets and liabilities; adoption did not materially affect operating results. The filing reported no material change in risk factors or market-risk potential loss information.
Important facts for investors to verify
- Whether AUM flows, market returns, and the shift toward lower-fee products continue to affect advisory-fee growth and effective fee rates.
- How much of reported GAAP earnings is attributable to investment gains, consolidated investment products, and supplemental savings plan market movements versus core operations.
- Progress against the revised expense-growth outlook, planned technology spending, and the expected full-year 2020 third-party research cost burden.
- Developments in the ERISA and advisory-fee litigation, for which the company disclosed no estimable loss range.
- The liquidity available for corporate uses, distinguishing company cash and investments from assets held within consolidated investment products.