T. Rowe Price Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company provides investment management and related services; advisory revenue is primarily driven by assets under management (AUM), market performance, and asset mix.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenues | $1,394.6 million | $1,238.7 million | $4,067.6 million | $3,557.3 million |
| Net operating income | $640.6 million | $548.5 million | $1,819.1 million | $1,577.8 million |
| Net income attributable to T. Rowe Price Group | $583.0 million | $390.9 million | $1,485.6 million | $1,150.7 million |
| Diluted EPS | $2.30 | $1.56 | $5.85 | $4.60 |
| Operating margin | 45.9% | 44.3% | 44.7% | 44.4% |
- Q3 advisory fees rose 15.0% to $1,263.3 million; average AUM increased 15.6% to $1,072.4 billion. Ending AUM was $1,083.8 billion, up 14.3% from September 2017 and $92.7 billion from year-end 2017. Net cash inflows were $2.7 billion in Q3 and $21.6 billion year to date.
- Operating expenses increased 9.2% year over year in Q3 to $754.0 million. Adjusted non-GAAP operating expenses rose 9.1% to $744.5 million. Q3 adjusted non-GAAP diluted EPS was $1.99, compared with $1.45 a year earlier; year-to-date adjusted non-GAAP diluted EPS was $5.60 versus $3.91.
- Q3 non-operating income was $124.9 million, up from $67.3 million. The increase included a realized gain from the sale of the company’s 10% interest in Daiwa SB Investments. Year-to-date non-operating income fell to $175.1 million from $294.3 million, principally reflecting lower gains on consolidated investment products and the prior-year investment gains.
- For the first nine months, reported operating cash flow was $1,486.4 million, investing cash flow was negative $830.4 million, and financing cash flow was negative $463.1 million. Cash flow attributable to T. Rowe Price Group, excluding consolidated investment products, was $2,060.9 million from operations.
- At September 30, cash and cash equivalents were $2,090.6 million, investments were $2,414.4 million, total assets were $8,530.6 million, and total liabilities were $1,209.5 million. The company reported no debt and described its liquidity as ample. Its broader measure of cash and investments in T. Rowe Price products was $5,226.1 million; some consolidated-product assets are not available for general operations or creditors.
- Dividends declared were $0.70 per share in Q3 and $2.10 per share for the first nine months. The company repurchased 5.4 million shares for $574.8 million year to date.
Changes, outlook, and notable items
- Growth reflected higher AUM and market appreciation, while administrative, distribution, and servicing fees declined 6.1% in Q3, primarily due to client transfers among vehicles and share classes. The average annualized advisory fee rate eased to 46.7 basis points from 47.0 basis points a year earlier, reflecting transfers to lower-fee offerings and some fee reductions.
- Management expected 2018 non-GAAP operating expenses to grow 8%–11%. It forecast a full-year effective tax rate of 24%–26%, and a non-GAAP rate of 23%–25%. Management cited continued strategic investment in investment talent, technology, products, and global distribution.
- Tax provisions included nonrecurring charges of $20.8 million related to U.S. tax reform and $7.9 million related to Maryland tax legislation. The company said the Maryland legislation is expected to provide a net benefit over time. Q3 effective tax rate was 24.0%, versus 34.4% in Q3 2017.
- The company adopted new revenue-recognition guidance retrospectively. It changed presentation of certain service fees and related third-party costs to gross reporting; management said the guidance did not change revenue-recognition timing. New financial-instrument rules also moved fair-value changes on most equity investments into earnings.
- In October 2018, a final order resolved the Dell appraisal-rights matter. The company estimated the first $15.2 million reclaimed from clients would be paid to T. Rowe Price, with additional recovered amounts potentially repayable to insurers.
- Management cited market fluctuations, asset flows and mix, investment performance, fee competitiveness, expense levels, and regulatory or tax changes as factors that could materially affect results. Two pending lawsuits involve alleged ERISA fiduciary breaches and allegedly excessive mutual-fund advisory fees; the company contests both and said outcomes and potential losses could not be estimated. It also noted regulatory developments concerning standards of care for financial-services firms.
- For 2019, the company expected lease accounting adoption to add approximately $115 million–$140 million in right-of-use assets and lease liabilities, with no material effect on operating results expected.
Important facts for investors to verify
- Whether AUM growth and net inflows persist, and how market movements and client transfers affect advisory fees and the average fee rate.
- Whether expense growth remains within management’s 8%–11% non-GAAP outlook and whether strategic spending supports future growth.
- The contribution of the Daiwa disposal gain and other investment returns to reported earnings, versus recurring operating performance.
- Actual tax rates and the realized effect of U.S. and Maryland tax changes.
- Developments in the Dell recovery and repayment process, pending lawsuits, and relevant regulatory changes.
- Cash availability: distinguish corporate liquidity from assets held in consolidated investment products that are unavailable for general operations.