PRICE T ROWE GROUP INC quarterly report, Q3 FY2020

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T. Rowe Price Group, Inc. — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. Amounts are U.S. dollars; financial statement figures are unaudited. T. Rowe Price primarily earns investment advisory fees based on assets under management (AUM).

Financial performance and position

  • Q3 revenue: Net revenues were $1.596 billion, up 11.9% from $1.427 billion a year earlier. Investment advisory fees rose 12.7% to $1.469 billion.
  • Q3 earnings and margins: Net operating income was $729 million, up 10.6%; GAAP operating margin was 45.7%, versus 46.2%. Net income attributable to T. Rowe Price was $643 million, up 17.8%; diluted EPS was $2.73, up 22.4%. Adjusted non-GAAP diluted EPS was $2.55, up 19.7%.
  • Nine-month results: Net revenues were $4.474 billion, up 7.8%; net operating income was $1.990 billion, up 10.1%. Net income attributable to the company was $1.589 billion, essentially flat with $1.586 billion in 2019; diluted EPS increased 2.9% to $6.66. GAAP operating margin improved to 44.5% from 43.5%.
  • AUM: Ending AUM was $1.310 trillion, up 16.3% year over year and $103.6 billion from year-end 2019. Q3 market appreciation and income added $94.5 billion; net cash outflows were $5.3 billion. Nine-month net inflows were $3.4 billion. Average Q3 AUM increased 14.4% year over year to $1.293 trillion.
  • Cash flow: For the first nine months, consolidated net cash provided by operating activities was $1.917 billion, compared with $1.501 billion in 2019. Cash flow from operating activities attributable to T. Rowe Price Group, excluding consolidated investment-product effects, was $2.265 billion. Investing activities used $53 million and financing activities used $1.419 billion on a consolidated basis.
  • Liquidity and debt: The company reported no debt and $2.228 billion in cash and cash equivalents at September 30. Cash and discretionary investments totaled $4.347 billion; broader cash and investments in T. Rowe Price products totaled $6.050 billion, including seed capital and supplemental savings plan hedges. Assets held by consolidated investment products are not available for general operations or to general creditors.
  • Capital returns: The company repurchased approximately 10.8 million shares for $1.2 billion and paid $636 million in dividends during the first nine months. The quarterly dividend was increased 18.4% in February to $0.90 per share.

Material changes versus comparable periods

  • Q3 advisory-fee growth reflected higher average AUM; nine-month growth was led particularly by subadvised funds, separate accounts, collective investment trusts, and other products.
  • The annualized effective advisory fee rate declined to 45.2 basis points in Q3 from 45.8 basis points a year earlier, and to 45.6 basis points for the nine months from 46.2 basis points. Management cited transfers to lower-fee vehicles or share classes and money-market fee waivers.
  • Q3 operating expenses increased 12.9% to $867 million; adjusted non-GAAP expenses increased 8.5%. Higher compensation, supplemental savings plan expense, and strategic investment spending were key factors. Nine-month operating expenses increased 6.0% to $2.484 billion.
  • Q3 non-operating income rose to $192 million from $43 million, including $101 million of gains on consolidated investment products. Nine-month non-operating income fell to $106 million from $370 million, reflecting lower investment gains than in 2019.
  • The company acquired client contracts from PNC Bank in September, adding $1.2 billion of stable-value AUM. It also reported an October UTI Asset Management IPO-related sale, with approximately $28 million in proceeds and a $3.5 million gain recognized in Q4 2020.

Outlook, commentary, risks, and contingencies

  • Management narrowed full-year 2020 non-GAAP operating-expense growth guidance to 4%–6% from 3%–6%; Q4 growth was expected to be below the 6.5% year-to-date rate. It estimated 2021 non-GAAP expense growth of 6%–9%, including strategic investments.
  • Management estimated full-year 2020 GAAP and non-GAAP effective tax rates of 23%–25%. Full-year 2020 capital expenditures were expected to be about $230 million, more than three-quarters for technology initiatives.
  • The company waived $6.4 million of Q3 advisory fees on certain money-market and other portfolios to maintain positive yields, and expected waivers to continue at least through year-end 2020. Nine-month waivers were $9.1 million.
  • Management cited persistent growth in passive investing as a challenge to new client inflows. Results remain sensitive to market movements, AUM composition and flows, investment performance, fee rates, and client confidence. The filing identifies the coronavirus pandemic as a risk to markets, operations, revenue, and results.
  • Two material lawsuits remain unresolved: a certified class action alleging ERISA fiduciary-duty violations related to the company’s 401(k) plan, and a Section 36(b) fund-fee lawsuit. The company disputes the claims; outcomes and potential losses cannot be predicted or estimated. Management considers the likelihood of a material adverse outcome from other ordinary-course claims remote.
  • Q3 gains on the supplemental savings plan hedge investments largely offset related compensation expense. Consolidated investment-product results and market-driven investment gains also meaningfully affected reported GAAP results; non-GAAP measures exclude specified items and are not substitutes for GAAP.

Important facts for investors to verify

  • Whether AUM growth can be sustained through net client flows, especially given Q3 outflows and target-date product outflows of $5.5 billion in the quarter.
  • Whether fee-rate pressure and money-market waivers continue, and how they affect advisory revenue and margins.
  • Actual expense growth against the 2020 and 2021 non-GAAP guidance ranges, including continued strategic investment spending.
  • The extent to which investment gains, consolidated fund performance, and supplemental savings plan hedges affect reported earnings compared with core operating results.
  • Developments in the ERISA and fund-fee litigation, and any material change in estimated exposure.