T. Rowe Price Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are to the corresponding 2020 periods unless noted. T. Rowe Price is an asset manager whose results depend primarily on advisory fees tied to assets under management (AUM) and market performance.
Financial and operating highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenues | $1.929 billion | $1.415 billion | $3.756 billion | $2.878 billion |
| Net operating income | $958.1 million | $553.7 million | $1.851 billion | $1.261 billion |
| Operating margin | 49.7% | 39.1% | 49.3% | 43.8% |
| Net income attributable to T. Rowe Price | $815.7 million | $603.0 million | $1.565 billion | $946.1 million |
| Diluted EPS | $3.46 | $2.55 | $6.63 | $3.95 |
| Ending AUM | $1.623 trillion at June 30, up 33% year over year | Average AUM: $1.547 trillion, up 34.4% year over year |
Q2 advisory fees rose 38.1%, driven by average AUM growth of 39.0%; the average annualized effective fee rate declined to 45.2 basis points from 45.6 basis points. Q2 AUM increased $105.1 billion, mostly from market appreciation; net cash outflows were $0.6 billion. First-half net cash inflows were $0.6 billion. Client transfers from U.S. mutual funds to other vehicles were $9.2 billion in Q2 and $14.8 billion in the first half.
Operating expenses increased 12.7% in Q2 and 17.8% in the first half. Higher compensation, distribution costs, and technology investment contributed. Q2 non-GAAP diluted EPS was $3.31, up from $2.29; first-half non-GAAP diluted EPS was $6.32, up from $4.15. These company-defined measures exclude specified investment-product, savings-plan, and other investment effects.
Cash, liquidity, debt, and capital returns
- Cash and cash equivalents were $3.515 billion at June 30, 2021, versus $2.152 billion at year-end 2020. Total assets were $11.279 billion; permanent stockholders’ equity was $7.893 billion.
- The company reported it remained debt-free and had $7.482 billion of cash and investments in T. Rowe Price products. Some consolidated investment-product assets are unavailable for general operations or to general creditors.
- First-half operating cash flow was $1.802 billion, versus $1.641 billion in 2020. Investing activities provided $5.7 million; financing activities used $492.7 million. First-half share repurchases were $308.9 million.
- The quarterly dividend was increased 20% to $1.08 per share. A $3.00-per-share special dividend, totaling approximately $699.8 million, was declared in June and paid July 7, 2021.
Outlook, commentary, and risks
- Management raised 2021 non-GAAP operating expense growth guidance to 12%–15%, from 10%–14%. It estimated the full-year effective tax rate, on both GAAP and non-GAAP bases, at 22.5%–24.5%.
- Management expected advisory-fee waivers to continue through 2021 at similar levels in each remaining quarter. Waivers were $14.3 million in Q2 and $29.3 million year to date.
- Under an expanded FIS partnership, about 800 retirement recordkeeping operations and technology employees were expected to transfer on August 1, 2021. The company anticipated transition costs, with savings ramping from 2022; related expense growth guidance includes the partnership’s impact.
- Management cited persistent growth in passive investing as a challenge to new client inflows. Results remain sensitive to market levels, investment performance, client flows, fee pressure, expenses, and regulation. The company noted that roughly 30% of operating expenses are affected by AUM fluctuations.
- Q2 non-operating income fell to $143.9 million from $415.1 million, reflecting lower investment gains than during the sharp market recovery in Q2 2020. First-half non-operating income was $246.0 million versus a loss of $85.2 million a year earlier, illustrating investment-related volatility.
- A certified ERISA class-action lawsuit had an agreement in principle for settlement, subject to court approval; management said the proposed settlement would not be material. Management considered other ordinary-course claims unlikely to have a material adverse effect.
Most important facts for investors to verify
- Whether market appreciation, investment performance, and net client flows sustain AUM and advisory-fee growth, particularly given the Q2 net outflow and lower effective fee rate.
- Progress against the revised 2021 non-GAAP expense-growth and tax-rate outlook, including FIS transition costs and expected savings from 2022 onward.
- The amount and duration of fee waivers, and their effect on fee revenue and margins.
- How investment gains, consolidated fund results, and savings-plan hedges affect GAAP earnings and cash generation relative to non-GAAP results.
- Completion and cash impact of the special dividend, future repurchases, and court approval of the proposed ERISA settlement.