T. Rowe Price Group, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual filing; quarterly figures below refer to the fourth quarter of 2015. T. Rowe Price is an investment manager whose revenue depends primarily on advisory fees tied to the value and mix of client assets under management (AUM).
Financial and operating performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net revenue | $4,200.6 million | $3,982.1 million | +5.5% |
| Investment advisory fees | $3,687.3 million | $3,464.5 million | +6.4% |
| Operating expenses | $2,301.7 million | $2,091.2 million | +10.1% |
| Net operating income | $1,898.9 million | $1,890.9 million | +0.4% |
| Operating margin | 45.2% | 47.5% | Down 2.3 percentage points |
| Net income | $1,223.0 million | $1,229.6 million | -0.5% |
| Diluted EPS | $4.63 | $4.55 | +1.8% |
| Cash from operating activities | $1,506.4 million | $1,291.3 million | +16.7% |
- Average AUM rose 6.0% to $767.9 billion, while year-end AUM increased 2.2% to $763.1 billion. Market appreciation and income, net of distributions not reinvested, contributed $14.7 billion; net cash inflows added $1.6 billion.
- Operating expenses grew faster than revenue, reflecting higher compensation, technology and facilities spending, business growth, and costs paid to BNY Mellon for administrative services. The average annualized advisory fee rate edged up to 48.0 basis points from 47.8 basis points.
- At December 31, cash and cash equivalents were $1,172.3 million; total assets were $5,106.9 million and stockholders’ equity was $4,762.0 million. The company reported no debt and cash plus sponsored-fund investment holdings of approximately $2.8 billion. It said it did not maintain an external liquidity source.
- FY 2015 cash returned to shareholders was approximately $2.05 billion: $987.8 million of repurchases, $534.5 million of regular dividends, and $524.5 million of special dividends. Regular dividends were $2.08 per share and the special dividend was $2.00 per share.
Fourth-quarter snapshot
Q4 2015 net revenue was $1,052.2 million versus $1,022.4 million in Q4 2014. Net income was $303.2 million versus $315.9 million; diluted EPS was $1.17 versus $1.18.
Material changes, outlook, and unusual items
- Net cash inflows were modest and fell from $3.7 billion in 2014 to $1.6 billion in 2015. Target-date portfolios remained a major source of flows, generating $16.2 billion of net inflows; their year-end AUM was $165.7 billion.
- The company launched three fixed-income strategies and an emerging-markets value equity product, expanded institutional share classes, and added a retirement-date series for institutional investors.
- Fund accounting and certain recordkeeping services began transitioning to BNY Mellon in August 2015; 210 associates transferred. Management did not expect the net effect on future operating results to be material.
- Money-market fee waivers were $47.6 million in 2015, down from $58.4 million in 2014; management expected waivers to continue in 2016. The company forecast 2016 capital expenditures of up to $180 million, advertising and promotion costs comparable to 2015, and an effective tax rate of about 38.7%. It expected continued operating-margin pressure in 2016 and beyond as it invests in capabilities and faces market effects on revenue.
- Non-operating investment income fell to $103.5 million from $112.2 million. Reported 2015 items included a $4.8 million other-than-temporary impairment and a $5.8 million loss reclassified upon deconsolidation of a sponsored fund.
- Adoption of consolidation guidance on January 1, 2016 was expected to bring additional sponsored funds onto the balance sheet, with corresponding non-controlling interests and changes in where certain fair-value movements are reported. The full effect was still under evaluation.
Risks and contingencies
- Revenue and earnings are sensitive to market values and AUM mix, investment performance, client withdrawals, fee pressure, and competition—particularly from passive and index strategies. AUM declines could reduce earnings and margins disproportionately because some costs are fixed.
- Other notable exposures include low interest rates and money-market fee waivers; dependence on fund service agreements subject to termination; key-personnel retention; operational, cyber, technology and third-party vendor risks; and extensive, changing regulation.
- Management highlighted potential effects of fiduciary-rule changes, money-market reforms, derivatives and liquidity rules, MiFID II, and possible UK withdrawal from the EU. The company also has currency exposure through its 26% investment in India’s UTI Asset Management Company.
- Contractual obligations included $250 million of operating leases and $182 million of purchase commitments; investment partnership contributions of $48.2 million were also committed. Management said the likelihood of pending claims having a material adverse effect was remote.
Most important facts for investors to verify
- Whether AUM growth and net flows improve, and whether the relatively low 2015 net inflow level persists.
- Whether expense growth moderates and operating margin stabilizes after the disclosed decline to 45.2%.
- How much money-market fee waivers continue to reduce advisory revenue and profitability.
- The actual costs, reporting effects, and operational progress of the BNY Mellon transition and the 2016 consolidation-accounting change.
- Whether planned investment spending, capital returns, and market conditions remain consistent with the company’s liquidity and margin outlook.