T. Rowe Price Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The interim financial statements are unaudited; KPMG conducted a review, not an audit. T. Rowe Price earns most revenue from investment advisory fees, which depend primarily on assets under management (AUM) and their composition.
Financial and operating highlights
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Net revenues | $1,072.4 million | $984.3 million | +9.0% |
| Operating expenses | $564.6 million | $511.2 million | +10.4% |
| Net operating income | $507.8 million | $473.1 million | +7.3% |
| Net income | $333.2 million | $305.8 million | +9.0% |
| Diluted EPS | $1.24 | $1.13 | +9.7% |
| Average AUM | $783.6 billion | $717.2 billion | +9.3% |
- Q2 operating margin was 47.4%, down from 48.1%. Advisory fees rose 10.2% to $942.2 million; the average annualized advisory fee rate increased to 48.2 basis points from 47.8 basis points.
- For the first half, net revenues were $2,099.4 million (+8.3%), operating expenses $1,113.8 million (+9.6%), net operating income $985.6 million (+6.9%), and net income $642.7 million (+5.3%). Diluted EPS was $2.39 (+6.2%). Operating margin was 46.9%, versus 47.6%.
- First-half operating cash flow was $886.7 million, compared with $725.6 million. Investing activities used $33.9 million; financing activities used $1,089.7 million. Cash declined $236.9 million from year-end to $1,269.2 million.
- At June 30, cash and sponsored investment holdings totaled $3.1 billion; the company reported no debt. Total assets were $5.42 billion and stockholders’ equity was $4.97 billion. Management described liquidity and resources as substantial and does not maintain an external liquidity facility.
Material changes and drivers
- AUM ended at $773.0 billion, up $26.2 billion from year-end 2014. First-half net market appreciation and income added $26.4 billion; net flows after client transfers were approximately flat. Q2 net flows after transfers were negative $2.1 billion.
- U.S. mutual funds had positive net flows in Q2, while other portfolios had net outflows, largely from a small number of institutional and subadvised clients redeeming from large-cap U.S. equity strategies. Target-date portfolios generated $5.2 billion of Q2 inflows and had $166.5 billion in AUM.
- Expense growth reflected compensation, higher staffing and variable compensation, and technology and operating-capability investments. Compensation and related costs rose 10.6% in Q2; average staff size increased 4.0% year over year.
- First-half non-operating investment income declined 12.3% to $59.8 million, principally reflecting lower realized gains on sponsored-fund sales and other investment and foreign-currency results. Q2 non-operating investment income, by contrast, increased 26.4% to $33.0 million.
- First-half financing cash use included $794.5 million of dividends paid and $353.8 million of share repurchases. The company paid a $2.00-per-share special dividend and increased its regular quarterly dividend 18%; it repurchased 4.8 million shares during the half.
Outlook, risks, and unusual items
- Management expects 2015 capital expenditures of approximately $175 million, funded from operating resources, and estimates a full-year effective tax rate of about 38.7%. It expects advertising and promotion costs to rise about 5% from 2014 levels.
- Money-market-related fee waivers were $12.5 million in Q2 and $26.2 million in the first half; management expects waivers to continue for the remainder of 2015.
- The company finalized an agreement with BNY Mellon to provide certain administrative services. Approximately 220 associates were expected to transfer to BNY Mellon on August 1, 2015; management did not expect a material impact on future operating results.
- Management cited market volatility, investor flows and sentiment, relative investment performance, fee levels, competition, regulation, expenses, and service or technology disruptions as factors that could affect results. Market conditions in Q2 included a late-quarter sell-off amid Greece-related concerns; U.S. 10-year Treasury yields rose from 1.94% to 2.35% during the quarter.
- Management said ordinary-course claims were unlikely to have a material adverse effect, and reported no material change in previously disclosed risk factors or market-risk information.
Important facts for investors to verify
- Whether AUM growth and client flows persist, especially outflows from institutional and subadvised large-cap U.S. equity mandates.
- Whether market movements or asset mix affect advisory-fee growth and the effective fee rate.
- How continued staffing, technology, and capability investments affect expense growth and operating margins.
- The duration and financial effect of money-market fee waivers, and the realized gains and losses from sponsored-fund investments.
- Execution and cost effects of the BNY Mellon services transition, and actual capital spending, dividends, and repurchases versus management expectations.