T. Rowe Price Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. T. Rowe Price earns most revenue from investment advisory services; revenue is substantially tied to the value and composition of assets under management (AUM).
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net revenues | $1,171.6 million | $1,044.7 million | $2,285.2 million | $2,038.8 million |
| Net operating income | $507.6 million | $283.5 million | $1,029.3 million | $694.4 million |
| Net income attributable to T. Rowe Price Group | $373.9 million | $203.3 million | $759.8 million | $507.4 million |
| Diluted EPS | $1.50 | $0.79 | $3.04 | $1.97 |
| Adjusted diluted EPS (non-GAAP) | $1.28 | $1.11 | $2.46 | $2.12 |
- Q2 revenue rose 12.1%; advisory fees rose 13.4%. First-half revenue rose 12.1%; advisory fees rose 13.6%.
- Average AUM was $885.9 billion in Q2, up 14.6% year over year, and $865.6 billion in the first half, up 15.4%. Ending AUM was $903.6 billion at June 30, up $92.8 billion from year-end 2016.
- Net inflows were $3.7 billion in Q2 and $4.4 billion in the first half. Market appreciation and income added $38.3 billion in Q2 and $88.4 billion in the first half.
- Annualized effective advisory fee rate declined to 47.3 basis points in Q2 from 47.9 basis points a year earlier; management cited fee reductions, partly offset by a higher equity-asset mix. No money-market fee waivers were recorded in 2017.
- Operating margin was 43.3% in Q2 and 45.0% in the first half. Excluding the Dell-related items, first-half margins were 42.9% in 2017 and 42.2% in 2016; Q2 2016 margin excluding its Dell charge was 43.0%.
- Non-operating income increased to $112.0 million in Q2 and $227.0 million in the first half, driven in part by investment gains and income from consolidated sponsored portfolios.
Cash, balance sheet and capital returns
- At June 30, cash and cash equivalents were $1.542 billion; total assets were $6.533 billion and total liabilities were $736.4 million. The company reported no debt and described its liquidity as ample.
- Reported consolidated operating cash flow was $139.2 million for the first half, versus cash used of $14.2 million in the prior-year period. Management separately reported $876.1 million of operating cash flow attributable to the parent company, including $150 million of Dell-related insurance proceeds.
- Cash and sponsored investment holdings totaled $3.562 billion under management’s liquidity presentation. Some seed-capital and consolidated portfolio assets are not directly available for general operations or to general creditors.
- First-half capital expenditures were $82.6 million. Full-year 2017 property and equipment spending was expected to be up to $200 million, about two-thirds for technology initiatives.
- The company repurchased $447 million of shares in the first half and paid $280 million in dividends. The quarterly dividend was increased 5.6% to $0.57 per share.
Changes, outlook and notable items
- GAAP earnings benefited from comparison with Q2 2016, when a $166.2 million Dell appraisal-rights charge was recorded. The company received $150 million in insurance proceeds by June 2017, recognizing $50 million as a first-quarter 2017 expense reduction. Adjusted results exclude these Dell items.
- Management expected 2017 operating expenses, excluding Dell-related effects, to grow about 10% versus 2016; 2018 expenses could grow up to 7% over 2017. The company could moderate planned spending if markets declined significantly. Advertising and promotion costs were expected to be up to 10% higher in 2017.
- Management estimated a 37.4% effective tax rate for full-year 2017 and noted potential volatility from stock-based compensation, portfolio consolidation and the mix of domestic and foreign income.
- Investment results and revenue remain exposed to market movements, client flows, relative investment performance, fee competition, and the mix of AUM. Management also cited ongoing strategic investment in talent, technology, products and distribution.
- The filing describes an ERISA class-action claim concerning the company’s 401(k) plan and a separate fund-shareholder suit alleging excessive advisory fees. The company disputed both claims; outcomes and potential losses could not be estimated. It also highlighted evolving regulatory requirements, including MiFID II, as potential sources of compliance costs and operational change.
- The interim financial statements were reviewed by KPMG, not audited. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether AUM flows, investment performance and asset mix sustain advisory-fee growth, especially given the lower effective fee rate.
- Whether expense growth follows management’s stated 2017 and 2018 expectations and whether strategic spending supports future growth.
- How much reported earnings growth reflects core operations versus market-related investment income, consolidated sponsored portfolios and the Dell insurance recovery.
- Developments in the ERISA and advisory-fee litigation, Dell appraisal appeals, and regulatory changes that could affect costs or services.
- Cash-flow comparability: distinguish parent-company cash generation from consolidated portfolio cash flows and one-time Dell insurance proceeds.