OVERVIEW.
Our revenues and net income are derived primarily from investment advisory
services provided to individual and institutional investors in U.S. mutual
funds, subadvised funds, separately managed accounts, and other T. Rowe Price
products. The other T. Rowe Price products include: collective investment
trusts, open-ended investment products offered to investors outside the U.S.,
and products offered through variable annuity life insurance plans in the U.S.
We manage a broad range of U.S., international and global stock, bond, and money
market mutual funds and other investment products, which meet the varied needs
and objectives of individual and institutional investors. Investment advisory
revenues depend largely on the total value and composition of assets under our
management. Accordingly, fluctuations in financial markets and in the
composition of assets under management affect our revenues and results of
operations. Additionally, approximately one-third of our operating expenses are
impacted by financial markets. We incur significant expenditures to develop new
products and services and improve and expand our capabilities and distribution
channels in order to attract new investment advisory clients and additional
investments from our existing clients. These efforts often involve costs that
precede any future revenues that we may recognize from an increase to our assets
under management.
The general trend to passive investing has been persistent and accelerated in
recent years, which has negatively impacted our new client inflows. However,
over the long term we expect well-executed active management to play an
important role for investors. In this regard, we remain debt-free with ample
liquidity and resources that allow us to take advantage of attractive growth
opportunities. We are investing in key capabilities, including investment
professionals, technologies, and new product offerings; and, most importantly,
we provide our clients with strong investment management expertise and service
both now and in the future.
MARKET TRENDS.
U.S. stocks surged in 2019, as equities bounced back strongly from deep losses
in the fourth quarter of 2018. A major driver of market performance was the
Federal Reserve's decision to keep short-term interest rates steady in the first
half of the year, then reduce rates three times starting in late July as a
"midcycle adjustment" of its monetary policy. Many other central banks around
the world also reduced rates in response to slowing economic growth. The trade
conflict between the U.S. and China was another major driver of market
sentiment. Markets wavered at times through much of the year as both sides
announced new tariffs on the other's goods. Speculation then arose in the fall
that the U.S. and China were close to reaching an agreement, but a preliminary
"phase one" trade deal was not reached until December.
Stocks in developed non-U.S. equity markets rose strongly but underperformed
U.S. shares. European stocks were widely positive. UK shares advanced more than
21% but lagged the region as Brexit-related uncertainty persisted for most of
the year. Boris Johnson succeeded Theresa May as Prime Minister during the
summer, but the House of Commons did not vote in favor of the United Kingdom's
Withdrawal Agreement with the European Union until December, shortly after the
Conservative Party decisively won a general election. Returns in developed Asian
markets were broadly positive in U.S. dollar terms. Hong Kong underperformed the
region with a 10% gain. Hong Kong's economy and stock market have been hurt by
ongoing protests that were triggered by a controversial extradition bill.
Emerging markets stocks underperformed shares in developed markets. Asian
equities were mostly positive in U.S. dollar terms, but most markets
significantly lagged strong returns in China and Taiwan. In emerging Europe,
Russian stocks surged about 53%; Turkish stocks lagged with a 12% gain. In Latin
America, stocks in Colombia and Brazil posted very strong returns, but shares in
Argentina and Chile fell sharply.
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Results of several major equity market indexes for 2019 are as follows:
S&P 500 Index
31.5%
NASDAQ Composite Index(1) 35.2%
Russell 2000 Index 25.5%
MSCI EAFE (Europe, Australasia, and Far East) Index 22.7%
MSCI Emerging Markets Index 18.9%
(1) Returns exclude dividends
Global bond returns were broadly positive, as longer-term government bond yields
in developed markets declined and various central banks enacted new stimulus
measures. In the U.S., the Federal Reserve reduced the federal funds target rate
to a range of 1.50%-1.75% by the end of the year. The 10-year Treasury note
yield decreased from 2.69% to 1.92% at year-end, though above its late-summer
lows, which were around 1.50%.
In the U.S., the investment-grade bond market, long-term Treasuries and
corporate bonds fared best. Mortgage-backed securities advanced to a lesser
extent, hindered by an increase in mortgage prepayments and refinancing
activity. Municipal bonds did well amid solid demand but slightly underperformed
taxable securities. High yield bonds advanced strongly for the year as investors
embraced riskier assets and searched for higher yields because of falling
interest rates.
Bonds in developed non-U.S. markets produced positive returns in U.S. dollar
terms, as the dollar weakened against most major currencies and government bond
yields generally declined. In the eurozone, the European Central Bank decided to
cut its short-term benchmark rate deeper into negative territory in September.
On November 1, the European Central Bank resumed its quantitative easing program
and began purchasing €20 billion of securities every month. Emerging markets
debt appreciated strongly in dollar terms. Bonds denominated in U.S. dollars
outperformed local currency debt, as a few key emerging markets currencies
declined against the dollar.
Results of several major bond market indexes for 2019 are as follows:
Bloomberg Barclays U.S. Aggregate Bond Index
8.7%
JPMorgan Global High Yield Index 14.6%
Bloomberg Barclays Municipal Bond Index 7.5%
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index 5.1%
JPMorgan Emerging Markets Bond Index Plus
12.6%
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ASSETS UNDER MANAGEMENT.
Assets under management ended 2019 at $1,206.8 billion, an increase of $244.5
billion from the end of 2018. Net cash inflows of $13.2 billion for 2019,
combined with market appreciation and income, net of distributions not
reinvested, increased our assets under management by $231.3 billion. The
following table details changes in our assets under management by vehicle during
the last three years:
Subadvised and Other investment
(in billions) U.S. mutual funds separate accounts products Total
Assets under management at December
31, 2016 $ 514.2 $ 206.9 $ 89.7 $ 810.8
Net cash flows before client
transfers 9.4 1.4 3.2 14.0
Client transfers(1) (20.2 ) 1.7 18.5 -
Net cash flows after client
transfers (10.8 ) 3.1 21.7 14.0
Net market appreciation and income 104.6 45.2 18.2 168.0
Distributions not reinvested (1.7 ) - - (1.7 )
Change during the period 92.1 48.3 39.9 180.3
Assets under management at December
31, 2017 606.3 255.2 129.6 991.1
Net cash flows before client
transfers 4.4 (.2 ) 9.0 13.2
Client transfers(1) (20.5 ) 2.8 17.7 -
Net cash flows after client
transfers (16.1 ) 2.6 26.7 13.2
Net market depreciation, net of
income (22.7 ) (7.8 ) (8.4 ) (38.9 )
Distributions not reinvested (3.0 ) - (.1 ) (3.1 )
Change during the period (41.8 ) (5.2 ) 18.2 (28.8 )
Assets under management at December
31, 2018 564.5 250.0 147.8 962.3
Net cash flows before client
transfers 7.6 (.3 ) 5.9 13.2
Client transfers(1) (23.2 ) 1.1 22.1 -
Net cash flows after client
transfers (15.6 ) .8 28.0 13.2
Net market appreciation and income 135.6 63.0 34.5 233.1
Distributions not reinvested (1.8 ) - - (1.8 )
Change during the period 118.2 63.8 62.5 244.5
Assets under management at December
31, 2019 $ 682.7 $ 313.8
$ 210.3 $ 1,206.8
(1)In all three years, the majority of the client transfers were from the T.
Rowe Price U.S. mutual funds to the T. Rowe Price collective investment trusts,
which are included in other investment products.
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The following table details changes in our assets under management by asset
class during the last three years:
Fixed income,
(in billions) Equity including money market Multi-asset(1) Total
Assets under management at December
31, 2016 $ 450.6 $ 121.2 $ 239.0 $ 810.8
Net cash flows (1.6 ) 8.6 7.0 14.0
Net market appreciation and
income(2) 115.1 4.6 46.6 166.3
Change during the period 113.5 13.2 53.6 180.3
Assets under management at December
31, 2017 564.1 134.4 292.6 991.1
Net cash flows (1.4 ) 2.9 11.7 13.2
Net market depreciation, net of
income(2) (22.8 ) (1.2 ) (18.0 ) (42.0 )
Change during the period (24.2 ) 1.7 (6.3 ) (28.8 )
Assets under management at December
31, 2018 539.9 136.1 286.3 962.3
Net cash flows (.2 ) 3.5 9.9 13.2
Net market appreciation and
income(2) 159.2 8.3 63.8 231.3
Change during the period 159.0 11.8 73.7 244.5
Assets under management at December
31, 2019 $ 698.9 $ 147.9 $ 360.0 $ 1,206.8
(1) The underlying assets under management of the multi-asset portfolios have
been aggregated and presented in this category and not reported in the equity
and fixed income columns.
(2) Reported net of distributions not reinvested.
Investment advisory clients outside the U.S. account for 6.9% of our assets
under management at December 31, 2019, and 6.2% at December 31, 2018.
Our net cash flows in 2019, 2018, and 2017 were driven by diversified inflows
across distribution channels and geographies, the strength of our multi-asset
franchise, and positive flows into fixed income and international equity.
Our target date retirement products, which are included in the multi-asset
totals shown above, continue to be a significant part of our assets under
management. Net cash flows after client transfers shown above include $9.8
billion in 2019, $12.0 billion in 2018, and $7.1 billion in 2017 from the target
date retirement products. Assets under management in our target date retirement
products, by vehicle, are as follows:
(in billions) 12/31/19 12/31/18 12/31/17
U.S. mutual funds $ 164.8 $ 144.8 $ 168.4
Separately managed accounts 8.4 5.9 1.7
Collective investment trusts 119.2 79.7 63.7
$ 292.4 $ 230.4 $ 233.8
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INVESTMENT PERFORMANCE.
Strong investment performance and brand awareness is a key driver to attracting
and retaining assets-and to our long-term success. The percentage of our U.S.
mutual funds1 (across primary share classes) that outperformed their comparable
Morningstar median on a total return basis and that are in the top Morningstar
quartile for the one-, three-, five-, and 10-years ended December 31, 2019,
were:
1 year 3 years 5 years 10 years
Outperformed Morningstar median(2)
All funds 64% 75% 80% 82%
Multi-asset funds 69% 85% 94% 95%
Top Morningstar quartile(2)
All funds 32% 45% 50% 55%
Multi-asset funds 36% 59% 65% 74%
(1) Excludes passive and fund categories not ranked by Morningstar.
(2) Source: © 2019 Morningstar, Inc. All rights reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted to be
accurate, complete, or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this information.
Past performance is no guarantee of future results. Historically, the firm has
disclosed the percentage of U.S. mutual funds (across all share classes) that
outperformed their comparable Lipper averages on a total return basis and that
are in the top Lipper quartile for the same periods. Investment performance
results using the new measures are similar to the Lipper results.
In addition, 84% of our rated U.S. mutual funds' assets under management ended
the quarter with an overall rating of four or five stars from Morningstar. The
performance of our institutional strategies against their benchmarks remains
competitive, especially over longer time periods.
RESULTS OF OPERATIONS.
The following table and discussion set forth information regarding our
consolidated financial results for 2019, 2018 and 2017 on a U.S. GAAP basis as
well as a non-GAAP basis. The non-GAAP basis adjusts for the impact of our
consolidated T. Rowe Price investment products, the impact of market movements
on the supplemental savings plan liability and related economic hedges,
investment income related to certain other investments, and certain nonrecurring
charges and gains.
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2019
compared with 2018 2018 compared with 2017
(in millions, except
per-share data) 2019 2018 2017 $ Change
% Change $ Change % Change
U.S. GAAP basis
Investment advisory
fees $ 5,112.5 $ 4,850.6 $ 4,295.8 $ 261.9 5.4 % $ 554.8 12.9 %
Net revenues $ 5,617.9 $ 5,372.6 $ 4,854.9 $ 245.3 4.6 % $ 517.7 10.7 %
Operating expenses $ 3,230.9 $ 3,011.2 $ 2,746.1 $ 219.7 7.3 % $ 265.1 9.7 %
Net operating income $ 2,387.0 $ 2,361.4 $ 2,108.8 $ 25.6
1.1 % $ 252.6 12.0 %
Non-operating
income(1) $ 540.3 $ 23.2 $ 396.3 $ 517.1 n/m $ (373.1 ) n/m
Net income
attributable to
T. Rowe Price Group $ 2,131.3 $ 1,837.5 $ 1,497.8 $ 293.8 16.0 % $ 339.7 22.7 %
Diluted earnings per
share on common
share $ 8.70 $ 7.27 $ 5.97 $ 1.43 19.7 % $ 1.30 21.8 %
Weighted average
common shares
outstanding assuming
dilution 238.6 246.9 245.1 (8.3 ) (3.4 )% 1.8 .7 %
Adjusted non-GAAP
basis(2)
Operating expenses $ 3,149.8 $ 3,025.5 $ 2,777.7 $ 124.3 4.1 % $ 247.8 8.9 %
Net income
attributable to
T. Rowe Price Group $ 1,975.6 $ 1,807.4 $ 1,361.1 $ 168.2 9.3 % $ 446.3 32.8 %
Diluted earnings per
share on common
share $ 8.07 $ 7.15 $ 5.43 $ .92 12.9 % $ 1.72 31.7 %
Assets under management (in billions)
Average assets under
management $ 1,109.3 $ 1,036.5 $ 909.0 $ 72.8 7.0 % $ 127.5 14.0 %
Ending assets under
management $ 1,206.8 $ 962.3 $ 991.1 $ 244.5 25.4 % $ (28.8 ) (2.9 )%
(1) The percentage change in non-operating income is not meaningful (n/m).
(2) See the reconciliation to the comparable U.S. GAAP measures at the end of
the Results of Operations section of this Management's Discussion and Analysis.
Results Overview
Investment advisory revenues. Investment advisory fees are earned based on the
value and composition of our assets under management, which change based on
fluctuations in financial markets and net cash flows. As our average assets
under management increase or decrease in a given period, the level of our
investment advisory fee revenue for that same period generally fluctuates in a
similar manner. Our annualized effective fee rates can be impacted by market or
cash flow related shifts among asset and share classes, price changes in
existing products, and asset level changes in products with tiered-fee
structures.
Investment advisory revenues earned in 2019 increased 5.4% over the comparable
2018 period as average assets under our management increased $72.8 billion, or
7.0%, to $1,109.3 billion. The average annualized fee rate earned on our assets
under management was 46.1 basis points in 2019, compared with 46.8 basis points
earned in 2018. Our effective fee rate has declined largely due to client
transfers within the complex to lower fee vehicles or share classes over the
last year and, to a lesser extent, fee reductions we made to certain mutual
funds and other products since 2018. We regularly assess the competitiveness of
our investment advisory fees and will continue to make adjustments as deemed
appropriate.
In 2018, investment advisory revenues increased 12.9% over the comparable 2017
period as average assets under our management increased $127.5 billion, or
14.0%, to $1,036.5 billion. The average annualized fee rate earned on our assets
under management was 46.8 basis points in 2018, compared with 47.3 basis points
earned in 2017. Our effective fee rate declined in part due to client transfers
within the complex to lower fee vehicles or share classes and, to a lesser
extent, fee reductions we made to certain mutual funds and other products since
2017. Further
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contributing to our lower effective fee rate in 2018 was a greater percentage of
our assets under management in lower fee products due to lower equity valuations
in the fourth quarter of 2018.
Operating expenses. Operating expenses were $3,230.9 million in 2019, an
increase of 7.3% over the comparable 2018 period. The increase in operating
expenses was primarily due to greater market-related compensation expense
related to the supplemental savings plan liability, higher salaries and
benefits, higher bonus and stock-based compensation expense and the cost of our
continued strategic investments. The 2018 period also includes the non-recurring
$15.2 million reduction in operating expenses related to the conclusion of the
Dell appraisal rights matter. The higher expense related to the supplemental
savings plan in 2019 is partially offset by non-operating gains earned on the
investments used to hedge the related liability.
For 2018, operating expenses were $3,011.2 million as compared with $2,746.1
million in the 2017 period. The increase in operating expenses was primarily due
to our continued strategic investments and higher bonus and stock-based
compensation, which were driven by our 2018 operating results.
On a non-GAAP basis, our operating expenses in 2019 increased 4.1% to $3,149.8
million compared with 2018. In 2018, our non-GAAP operating expenses increased
8.9% to $3,025.5 million compared with 2017. Our non-GAAP operating expenses
exclude the impacts of our supplemental savings plan, investment income related
to certain other investments, our consolidated T. Rowe Price investment
products, and certain non-recurring items. See our non-GAAP reconciliations
later in this Management's Discussion and Analysis section.
Our 2017 and 2018 operating expenses include certain financial impacts related
to the Dell appraisal rights matter as further discussed in Note 14 to our
consolidated financial statements. A summary of the financial impact of the Dell
appraisal rights matter on our annual pre-tax operating expenses and pre-tax
operating cash flows since the matter arose in 2016 is as follows:
Pre-tax operating Pre-tax operating cash
(in millions) expense (income) inflows (outflows)
2016 $ 66.2 $ (166.2 )
2017 (50.0 ) 150.0
2018 (15.2 ) 15.2
Total impact from Dell appraisal rights matter $ 1.0
$ (1.0 )
There was no operating expense or cash flows impact related to the Dell
appraisal rights matter in 2019.
In 2020, we expect to advance our strategic priorities to sustain and deepen our
investment talent, add investment capabilities both in terms of new strategies
and new investment vehicles, expand capabilities through enhanced technology,
and broaden our distribution reach globally. We currently expect our 2020
non-GAAP operating expenses to grow in the range of 6% to 9%. This expense
growth guidance includes continued investments in the business and technology
capabilities, our cost optimization efforts, and the final part of the phased
implementation of paying for all third-party investment research. As such, 2020
operating expenses will reflect a full year of all third-party investment
research costs globally. We could elect to adjust our expense growth should
unforeseen circumstances arise, including significant market movements.
Operating margin. Our operating margin in 2019 was 42.5%, compared with 44.0% in
2018 and 43.4% in 2017. The decrease in our operating margin in 2019 compared
with 2018 is primarily driven by the higher compensation expense growth related
to our supplemental savings plan as compared with the percentage growth in net
revenues during 2019. The increase in our operating margin in 2018 compared to
2017 was driven by the higher percentage growth in net revenue attributable
primarily to increases in our average assets under management compared with the
percentage growth in operating expenses.
Diluted earnings per share was $8.70 in 2019, $7.27 in 2018, and $5.97 in 2017.
The 19.7% increase in diluted earnings per share in 2019 compared to 2018 was
primarily driven by higher non-operating income, the benefit realized from
increased share buybacks, which lowered the weighted-average shares outstanding,
and a lower effective tax rate. The 21.8% increase in diluted earnings per share
in 2018 compared with 2017 was driven by higher operating income and the benefit
realized from a lower corporate tax rate under U.S. Tax Reform.
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On a non-GAAP basis, diluted earnings per share were $8.07 in 2019, $7.15 in
2018, and $5.43 in 2017. The 12.9% increase in non-GAAP diluted earnings per
share in 2019 compared to 2018 was primarily driven by higher operating income,
higher investment income earned on our cash and discretionary investment
portfolio, and lower weighted-average shares outstanding. See our non-GAAP
reconciliations later in this Management's Discussion and Analysis section.
Net revenues
2019
compared with 2018 2018 compared with 2017
(in millions)
2019 2018 2017 $ Change % Change $ Change % Change
Investment advisory
fees
U.S. mutual funds $ 3,452.5 $ 3,375.0 $ 3,080.0 $ 77.5 2.3 % $ 295.0 9.6 %
Subadvised and
separate accounts and
other investment
products 1,660.0 1,475.6 1,215.8 184.4
12.5 % 259.8 21.4 %
5,112.5 4,850.6 4,295.8 261.9 5.4 % 554.8 12.9 %
Administrative,
distribution, and
servicing fees
Administrative fees 385.4 384.0 412.1 1.4 .4 % (28.1 ) (6.8 )%
Distribution and
servicing fees 120.0 138.0 147.0 (18.0 ) (13.0 )% (9.0 ) (6.1 )%
505.4 522.0 559.1 (16.6 ) (3.2 )% (37.1 ) (6.6 )%
Net revenues $ 5,617.9 $ 5,372.6 $ 4,854.9 $ 245.3 4.6 % $ 517.7 10.7 %
Investment advisory fees. Investment advisory fees are earned based on the value
and composition of our assets under management, which change based on
fluctuations in financial markets and net cash flows. As our average assets
under management increase or decrease in a given period, the level of our
investment advisory fee revenue for that same period generally fluctuates in a
similar manner. The relationship between the change in average assets under
management and the change in investment advisory fee revenue for 2019, 2018 and
2017 are presented below.
2019 compared with 2018 2018 compared with 2017
Increase in Increase in
average average
assets Increase in assets Increase in
under investment under investment
management advisory fees management advisory fees
U.S. mutual funds 3.0 % 2.3 % 9.4 % 9.6 %
Subadvised and separate accounts and
other investment products 13.1 % 12.5 %
21.8 % 21.4 %
Total investment advisory fees 7.0 % 5.4 %
14.0 % 12.9 %
Market fluctuations and net cash flows can shift the asset and share class mix
among different fee rates and products including those with tiered-fee
structures. Over the last few years, we have also reduced the management fees of
certain products.
While equity markets outperformed fixed income markets in 2019 and resulted in a
shift of the U.S. mutual fund average asset mix to higher fee equity products
over 2018, lower incremental fee tiered rates and certain fund price reductions
created lower incremental revenues. Strong market returns in 2019 and U.S.
mutual fund to trust transfers have primarily increased average assets under
management for our subadvised and separate accounts and other products. However,
lower incremental fee rates on higher average assets and growth in lower fee
share classes resulted in slower revenue growth in 2019 over 2018.
In 2018, investment advisory fees earned on our subadvised and separate accounts
and other investment products grew slower relative to average assets under
management as a result of the significant client transfers from mutual funds to
lower fee vehicles.
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Administrative, distribution, and servicing fees. Administrative, distribution,
and servicing fees represent fees earned from providing administrative and
distribution services to our investment advisory clients, primarily U.S. mutual
funds and their investors. For 2019, these fees were $505.4 million, a decrease
of $16.6 million from the comparable 2018 period. The decrease was primarily
attributable to lower 12b-1 revenue earned on certain share classes, including
the Advisor and R classes, of the U.S. mutual funds as client transfers to lower
fee vehicles and share classes has reduced assets under management in these
share classes. The decrease in 12b-1 revenue is offset entirely by a reduction
in the costs paid to third-party intermediaries that source these assets and is
reported in distribution and servicing expense. In addition, higher
recordkeeping fees and transaction fees were partially offset by lower mutual
fund service revenues.
For 2018, administrative, distribution, and servicing fees were $522.0 million,
a decrease of $37.1 million from the comparable 2017 period. The decrease was
primarily attributable to lower assets under management in the U.S. mutual funds
resulting from client transfers among vehicles and share classes and the sharp
market decline at the end of 2018.
Net revenues include the elimination of $6.8 million for 2019, $6.2 million for
2018, and $5.6 million for 2017, earned from our consolidated T. Rowe Price
investment products. The corresponding expenses recognized by these consolidated
products were also eliminated from operating expenses.
Operating expenses
2019
compared with 2018 2018 compared with 2017
(in millions)
2019 2018 2017 $ Change % Change $ Change % Change
Compensation and
related costs $ 1,969.2 $ 1,808.6 $ 1,664.9 $ 160.6 8.9 % $ 143.7 8.6 %
Distribution and
servicing costs 262.5 281.2 262.6 (18.7 ) (6.7 )% 18.6 7.1 %
Advertising and
promotion 96.8 99.6 92.4 (2.8 ) (2.8 )% 7.2 7.8 %
Product-related costs 153.2 157.1 146.0 (3.9 ) (2.5 )% 11.1 7.6 %
Technology,
occupancy, and
facility costs 427.3 383.9 350.5 43.4 11.3 % 33.4 9.5 %
General,
administrative, and
other 321.9 296.0 279.7 25.9 8.8 % 16.3 5.8 %
Nonrecurring net
recoveries related to
Dell appraisal rights
matter(1) - (15.2 ) (50.0 ) 15.2 n/m 34.8 n/m
Total operating
expenses $ 3,230.9 $ 3,011.2 $ 2,746.1 $ 219.7 7.3 % $ 265.1 9.7 %
(1) The percentage change in nonrecurring net recoveries related to Dell
appraisal rights matter is not meaningful (n/m).
Compensation and related costs. Compensation and related costs increased $160.6
million, or 8.9%, for 2019 as compared with 2018. Nearly half of the increase in
compensation and related costs is attributable to $78.8 million in higher
expense related to our supplemental savings plan given the strong equity market
returns experienced in 2019 compared with the sharp equity market declines in
late 2018. The higher expense related to the supplemental savings plan is
partially offset by the non-operating gains earned on the investments used to
economically hedge the related liability. We also experienced increases in base
salaries, benefits, and related employee costs, of $66.0 million as our average
staff size grew 3.1% in 2019 and we modestly increased base salaries at the
beginning of 2019. Our 2019 operating results led to a $28.8 million increase in
annual variable compensation, primarily bonus compensation, as well as a $9.5
million increase in non-cash stock-based compensation expense. These increases
in compensation and related costs were offset in part by the absence of the
one-time $9.0 million bonus paid to certain associates in the second quarter of
2018 and $10.0 million in higher labor capitalization related to internally
developed software in 2019.
For 2018, compensation and related costs increased $143.7 million, or 8.6%, as
compared with 2017. The largest part of the increase was an increase base
salaries, benefits and related employee costs of $77.1 million, resulting from
an increase of 6.2% in average headcount, combined with a modest increase in
salaries at the beginning of 2018. Our operating results led to a $68.0 million
increase in variable compensation and contributed to the $45.0 million increase
in non-cash stock-based compensation expense as the annual grant value was
higher in 2018. Additionally, our 2018 equity grant reflected the adoption of
more favorable post-retirement vesting provisions, which shifted a greater
percentage of the expense related to the annual grant to be recognized for 2018.
The 2018
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period also included $9.0 million in one-time bonuses paid to certain associates
from U.S. tax reform benefits. These increases were partially offset by lower
market-related expense of $30.3 million from our supplemental savings plan and
higher labor capitalization related to internally developed software.
Distribution and servicing costs. Distribution and servicing costs includes
those costs incurred to distribute the T. Rowe Price products as well as client
and shareholder servicing, recordkeeping, and administrative services.
Distribution and servicing costs were $262.5 million for 2019, a decrease of
$18.7 million, or 6.7%, compared to 2018. The decrease for 2019 from 2018 was
primarily driven by client transfers, largely from Advisor and R classes, to
lower fee vehicles or share classes during 2019, which resulted in lower assets
under management in those mutual funds on which we pay distribution and
servicing costs. These costs include those distribution and servicing costs paid
to third-party intermediaries that source the assets of certain share classes of
our U.S. mutual funds and is offset entirely by the 12b-1 revenue we earn and
report in administrative, distribution, and servicing fees.
Distribution and servicing costs were $281.2 million for 2018, an increase of
$18.6 million, or 7.1%, compared with 2017. The increase was primarily driven by
overall strong markets and net cash flows from the end of 2017 through the third
quarter of 2018, which grew the assets in those share classes and products for
which we pay a related distribution and servicing fee.
Advertising and promotion. Advertising and promotion costs were $96.8 million
for 2019, a decrease of $2.8 million, or 2.8%, compared with 2018. The decrease
for 2019 from 2018 was primarily driven by the absence in 2019 of the creation
and launch of a media advertising campaign in 2018.
Advertising and promotion costs were $99.6 million for 2018, an increase of $7.2
million, or 7.8%, compared with 2017. The increase in advertising and promotion
costs for 2018 from 2017 is primarily driven by the creation and launch of a
media advertising campaign in 2018.
Product-related costs. Product-related costs consists of non-advisory related
costs that we incur to service certain T. Rowe Price products. Product-related
costs were $153.2 million for 2019, a decrease of $3.9 million, or 2.5%,
compared with 2018. The decrease is primarily due to lower costs incurred to
provide administrative services to the U.S. mutual funds, partially offset by
higher operating costs of our collective investment trusts as client transfers
have increased the number of trusts and their average net assets over the last
year.
Product-related costs were $157.1 million for 2018, an increase of $11.1
million, or 7.6%, compared with 2017. The increase is primarily due to higher
operating costs of our collective investment trusts as client transfers have
increased the number of trusts and their average net assets over the last year.
Also contributing to the increase were higher costs incurred to provide
administrative services to the U.S. mutual funds.
Technology, occupancy, and facility costs. Technology, occupancy, and facility
costs consists of depreciation expense, technology equipment and maintenance,
software, and costs related to our facilities. These costs were $427.3 million
for 2019, $383.9 million for 2018, and $350.5 million for 2017. The increases
over the last two years were due primarily to additional incremental investment
in our technology capabilities, including related depreciation and hosted
solution licenses, as well as office expansion costs. The 2019 year also
included certain non-recurring office facility costs that were recognized in the
fourth quarter.
General, administrative, and other costs. General, administrative, and other
costs consist of costs associated with the overall management of the firm,
including information services, professional services, travel and entertainment,
research costs, and other general operating expenses. These costs were $321.9
million for 2019, $296.0 million for 2018, and $279.7 million for 2017. The
increases for 2019 from 2018 and for 2018 from 2017 were a result of our
continued investment in our strategic initiatives, higher third-party investment
research costs, and other growing operational and regulatory demands on the
business.
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Non-operating income
Net non-operating investment income increased $517.1 million for the year ended
December 31, 2019 compared with 2018 and decreased $373.1 million for the year
ended December 31, 2018 compared with 2017. Net non-operating investment
activity for the years ended December 31, 2019, 2018 and 2017 comprised the
following:
2019 compared with 2018 compared
2018 with 2017
(in millions) 2019 2018 2017 $ Change $ Change
Net gains (losses) from
non-consolidated T. Rowe Price
investment products
Cash and discretionary
investments
Dividend income $ 67.6 $ 48.8 $ 15.2 $ 18.8 $ 33.6
Market related gains (losses)
and equity in earnings 58.4 (16.0 ) 1.3 74.4 (17.3 )
Seed capital investments
Dividend income 2.3 3.9 7.0 (1.6 ) (3.1 )
Market related gains (losses)
and equity in earnings 42.7 (22.5 ) 54.8 65.2 (77.3 )
Net realized gains on
dispositions of
available-for-sale investments - - 83.1 - (83.1 )
Net gain (loss) recognized
upon deconsolidation .1 3.6 .1 (3.5 ) 3.5
Investments used to hedge the
supplemental savings plan
liability 67.9 (6.1 ) 12.3 74.0 (18.4 )
Total net gains from
non-consolidated T. Rowe Price
investment products 239.0 11.7 173.8 227.3 (162.1 )
Other investment income 21.4 107.5 24.5 (86.1 ) 83.0
Net gains on investments 260.4 119.2 198.3
141.2 (79.1 )
Net gains on consolidated
sponsored investment
portfolios 272.9 (92.9 ) 193.9 365.8 (286.8 )
Other income (loss), including
foreign currency gains and
losses 7.0 (3.1 ) 4.1 10.1 (7.2 )
Non-operating income $ 540.3 $ 23.2 $ 396.3 $ 517.1 $ (373.1 )
During 2019, non-operating income reflected the sharp market returns which
resulted in significant unrealized gains on our investment portfolio, including
our consolidated investment portfolios, compared with losses in 2018. Partially
offsetting the market increases was the absence in 2019 of the realized gain
from the sale of our 10% holding in Daiwa SB Investments Ltd. that was
recognized in 2018. Our cash and discretionary investments generated income of
$126.0 million in 2019 as compared to $32.8 million in 2018.
During 2018, non-operating income included the impact of sharp market declines
in the later part of 2018, which resulted in unrealized losses on our investment
portfolio, including our consolidated products, compared with unrealized gains
recognized during 2017. Partially offsetting these losses was the recognition
during 2018 of a realized gain in other investment income associated with the
sale of our 10% holding in Daiwa SB Investments Ltd. Additionally, on January 1,
2018, we implemented new accounting guidance that eliminated the
available-for-sale investment category for equity securities. As a result of
this change, realized gains of $83.1 million from the sale of certain
available-for-sale investments recognized in 2017 did not reoccur in 2018.
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The impact of consolidating certain T. Rowe Price investment products on the
individual lines of our consolidated statements of income for 2019, 2018, and
2017 is as follows:
2019 compared with 2018 compared
2018 with 2017
(in millions) 2019 2018 2017 $ Change $ Change
Operating expenses reflected in net
operating income $ (14.7 ) $ (12.7 ) $ (12.3 ) $ (2.0 ) $ (.4 )
Net investment income (loss)
reflected in non-operating income 272.9 (92.9 ) 193.9 365.8 (286.8 )
Impact on income before taxes $ 258.2 $ (105.6 ) $ 181.6 $
363.8 $ (287.2 )
Net income (loss) attributable to
our interest in the consolidated T.
Rowe Price investment products $ 140.6 $ (36.8 ) $ 98.2 $ 177.4 $ (135.0 )
Net income (loss) attributable to
redeemable non-controlling
interests (unrelated third-party
investors) 117.6 (68.8 ) 83.4 186.4 (152.2 )
Impact on income before taxes $ 258.2 $ (105.6 ) $ 181.6 $
363.8 $ (287.2 )
Provision for income taxes
Our effective tax rate for 2019 was 23.2%, compared with 25.8% for 2018 and
36.9% for 2017. The decrease in our effective tax rate in 2019 from 2018 was
primarily due to higher net income attributable to redeemable non-controlling
interests related to our consolidated T. Rowe Price investment products, as
these earnings are not taxable to us, as well as a lower state tax rate from the
Maryland state legislation in 2018, and the absence in 2019 of the 2018
nonrecurring charges related to the enactment of U.S. tax reform. The decrease
in our effective tax rate in 2018 from 2017 was primarily due to the reduction
in the U.S. federal corporate tax rate from 35% to 21% on January 1, 2018
following the enactment on December 22, 2017, of a comprehensive U.S. tax reform
bill known as the Tax Cuts and Jobs Act ("Tax Reform"). For 2018 and 2017, the
income tax provision includes nonrecurring charges of $20.8 million and $71.1
million, respectively, related to the enactment of U.S. tax reform as we
adjusted our deferred tax asset and liability estimates.
On April 24, 2018, the state of Maryland enacted new state tax legislation. This
new state tax legislation, effective in 2018, adopted a five-year phase-in of
the single sales factor method of apportionment for calculating income tax for
multi-state companies doing business in Maryland and is expected to result in a
net benefit over time. Accordingly, we recognized a nonrecurring charge of $7.9
million during 2018 for the re-measurement of our deferred tax assets and
liabilities to reflect the effect of this Maryland state tax legislation. Based
on information currently available, we expect that the Maryland state tax
legislation will reduce our effective state tax rate over the five-year phase-in
period to less than 3%.
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The following table reconciles the statutory federal income tax rate to our
effective tax rate for the years ended December 31, 2019, 2018, and 2017:
2019 2018
2017
Statutory U.S. federal income tax rate 21.0 % 21.0
% 35.0 %
Impact of nonrecurring charge relating to U.S. tax
reform
- .8
2.9
Impact of nonrecurring charge related to Maryland
state tax legislation - .3 -
State income taxes for current year, net of federal
income tax benefits(1)
4.3 4.6
3.9
Net income attributable to redeemable
non-controlling interests (1.0 ) .7 (1.3 )
Net excess tax benefits from stock-based
compensation plans activity (1.5 ) (1.7 ) (3.0 )
Other items .4 .1 (.6 )
Effective income tax rate 23.2 % 25.8 % 36.9 %
(1) State income tax benefits are reflected in the total benefits for net income
attributable to redeemable non-controlling interests and stock-based
compensation plans activity.
Our effective tax rate will continue to experience volatility in future periods
as the tax benefits recognized from stock-based compensation are impacted by
market fluctuations in our stock price and timing of option exercises. The rate
will also be impacted by changes in our consolidated investment products that
are driven by market fluctuations and changes in the proportion of their net
income that is attributable to non-controlling interests. We currently estimate
our effective tax rate for the full-year 2020 will be in the range of 23% to
26%.
NON-GAAP INFORMATION AND RECONCILIATION.
We believe the non-GAAP financial measures below provide relevant and meaningful
information to investors about our core operating results. These measures have
been established in order to increase transparency for the purpose of evaluating
our core business, for comparing current results with prior period results, and
to enable more appropriate comparison with industry peers. However, non-GAAP
financial measures should not be considered a substitute for financial measures
calculated in accordance with U.S. GAAP and may be calculated differently by
other companies.
The following schedules reconcile certain U.S. GAAP financial measures for each
of the last five years.
2019
Operating Net operating
Provision (benefit) Net income attributable Diluted earnings
(in millions)
expenses income Non-operating
income for income taxes(7) to T. Rowe Price Group per share(8)
U.S. GAAP Basis
$ 3,230.9 $ 2,387.0 $ 540.3 $ 678.4 $ 2,131.3 $ 8.70
Non-GAAP adjustments:
Consolidated T. Rowe
Price
investment products(1) (7.9 ) 14.7 (272.9 ) (35.7 ) (104.9 ) (.42 )
Supplemental savings
plan liability(2) (73.2 ) 73.2 (67.9 ) 1.3 4.0 .02
Other non-operating
income(3) - - (73.5 ) (18.7 ) (54.8 ) (.23 )
Adjusted Non-GAAP Basis $ 3,149.8 $ 2,474.9 $ 126.0 $ 625.3 $ 1,975.6 $ 8.07
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Provision (benefit) Net income attributable Diluted earnings
(in millions)
expenses income Non-operating
income for income taxes(7) to T. Rowe Price Group per share(8)
U.S. GAAP Basis
$ 3,011.2 $ 2,361.4 $ 23.2 $ 615.9 $ 1,837.5 $ 7.27
Non-GAAP adjustments:
Consolidated T. Rowe
Price
investment products(1) (6.5 ) 12.7 92.9 6.5 30.3 .12
Supplemental savings
plan liability(2) 5.6 (5.6 ) 6.1 .1 .4 -
Other non-operating
income(3) - - (93.7 ) (16.7 ) (77.0 ) (.30 )
Nonrecurring charge
related to
enactment of U.S. tax
reform(4) - - - (20.8 ) 20.8 .08
Nonrecurring charge
related to
enactment of Maryland
state tax
legislation(5) - - - (7.9 ) 7.9 .03
Nonrecurring net charge
(recoveries)
related to Dell appraisal
rights matter(6) 15.2 (15.2 ) - (2.7 ) (12.5 ) (.05 )
Adjusted Non-GAAP Basis $ 3,025.5 $ 2,353.3 $ 28.5 $ 574.4 $ 1,807.4 $ 7.15
2017
Operating Net operating
Provision (benefit) Net income attributable Diluted earnings
(in millions)
expenses income Non-operating
income for income taxes(7) to T. Rowe Price Group per share(8)
U.S. GAAP Basis
$ 2,746.1 $ 2,108.8 $ 396.3 $ 923.9 $ 1,497.8 $ 5.97
Non-GAAP adjustments:
Consolidated T. Rowe
Price
investment products(1) (6.7 ) 12.3 (193.9 ) (37.8 ) (60.3 ) (.24 )
Supplemental savings
plan liability(2) (11.7 ) 11.7 (12.3 ) (.3 ) (.4 ) -
Other non-operating
income(3) - - (190.1 ) (73.4 ) (116.7 ) (.46 )
Nonrecurring charge
related to
enactment of U.S. tax
reform(4) - - - (71.1 ) 71.1 .28
Nonrecurring net charge
(recoveries)
related to Dell appraisal
rights matter(6) 50.0 (50.0 ) - (19.6 ) (30.4 ) (.12 )
Adjusted Non-GAAP Basis $ 2,777.7 $ 2,082.8 $ - $ 721.7 $ 1,361.1 $ 5.43
2016
Operating Net operating
Provision (benefit) Net income attributable Diluted earnings
(in millions)
expenses income Non-operating
income for income taxes(7) to T. Rowe Price Group per share(8)
U.S. GAAP Basis
$ 2,551.4 $ 1,733.4 $ 227.1 $ 706.5 $ 1,215.0 $ 4.75
Non-GAAP adjustments:
Consolidated T. Rowe
Price
investment products(1) (6.5 ) 13.0 (121.1 ) (27.1 ) (42.0 ) (.16 )
Other non-operating
income(3) - - (106.0 ) (41.7 ) (64.3 ) (.25 )
Nonrecurring net charge
(recoveries)
related to Dell appraisal
rights matter(6) (66.2 ) 66.2 - 26.0 40.2 .15
Adjusted Non-GAAP Basis $ 2,478.7 $ 1,812.6 $ - $ 663.7 $ 1,148.9 $ 4.49
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Provision (benefit) Net income attributable Diluted earnings
(in millions)
expenses income Non-operating
income for income taxes(7) to T. Rowe Price Group per share(8)
U.S. GAAP Basis
$ 2,301.7 $ 1,898.9 $ 103.5 $ 779.4 $ 1,223.0 $ 4.63
Non-GAAP adjustments:
Consolidated T. Rowe
Price
investment products(1) - - (1.5 ) (.6 ) (.9 ) (.01 )
Other non-operating
income(3) - - (102.0 ) (40.2 ) (61.8 ) (.23 )
Adjusted Non-GAAP Basis $ 2,301.7 $ 1,898.9 $ - $ 738.6 $ 1,160.3 $ 4.39
(1) These non-GAAP adjustments remove the impact the consolidated T. Rowe Price
investment products have on our U.S. GAAP consolidated statements of income.
Specifically, we add back the operating expenses and subtract the investment
income of the consolidated T. Rowe Price investment products. The adjustment
to our operating expenses represents the operating expenses of the
consolidated products, net of the elimination of related management and
administrative fees. The adjustment to net income attributable to T. Rowe
Price Group represents the net income of the consolidated products, net of
redeemable non-controlling interest. We remove the impact of the
consolidated
T. Rowe Price investment products as we believe they impact the reader's ability
to understand our core operating results.
(2) These non-GAAP adjustments remove the compensation expense from market
valuation changes in the supplemental savings plan liability and the related
net gains (losses) on investments designated as an economic hedge against
the related liability. Amounts deferred under the supplemental savings plan
are adjusted for appreciation (depreciation) of hypothetical investments
chosen by participants. We use T. Rowe Price investment products to
economically hedge the exposure to these market movements. We believe it is
useful to offset the non-operating investment income (loss) realized on the
hedges against the related compensation expense and remove the net impact to
help the reader's ability to understand our core operating results and to
increase comparability period to period.
(3) This non-GAAP adjustment represents the other non-operating income (loss)
and the net gains (losses) earned on our non-consolidated investment
portfolio that are not designated as economic hedges of the supplemental
savings plan liability, and, beginning in the second quarter of 2018,
non-consolidated seed investments and other investments that are not part of
the cash and discretionary investment portfolio. In the second quarter of
2018, we decided to retain the investment gains recognized on our
non-consolidated cash and discretionary investments as these assets and
related income (loss) are considered part of our core operations. The impact
on previously reported non-GAAP measures is immaterial. We believe adjusting
for these non-operating income (loss) items helps the reader's ability to
understand our core operating results and increases comparability to prior
years. Additionally, we do not emphasize the impact of the portion of
non-operating income (loss) removed when managing and evaluating our core
performance.
(4) During the second quarter of 2018, we recognized a nonrecurring charge of
$20.8 million for an adjustment made to the charge taken in 2017 related to
the enactment of U.S. tax reform. We believe it is useful to readers of our
consolidated statements of income to adjust for this nonrecurring charge in
arriving at net income attributable to
T. Rowe Price Group and diluted earnings per share.
(5) During the second quarter of 2018, we recognized a nonrecurring charge of
$7.9 million for the remeasurement of our deferred tax assets and
liabilities to reflect the effect of Maryland state tax legislation enacted
on April 24, 2018. We believe it is useful to readers of our consolidated
statements of income to adjust for this nonrecurring charge in arriving at
net income attributable to T. Rowe Price Group and diluted earnings per
share.
(6) In 2016, we recognized a nonrecurring charge, net of insurance recoveries,
of $66.2 million related to our decision to compensate certain clients in
regard to the Dell appraisal rights matter. In 2017, we recognized
additional insurance recoveries of $50 million as a reduction in operating
expenses. During 2018, we recognized an additional reduction in operating
expenses of $15.2 million upon recovering a portion of the payments we made
to our clients in 2016. We believe it is useful to our readers of our
consolidated statements of income to adjust for these charges and
nonrecurring recoveries in arriving at adjusted operating expenses, net
operating income, provision for income taxes, net income attributable to T.
Rowe Price Group and diluted earnings per share.
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(7) The income tax impacts were calculated in order to achieve an overall
non-GAAP effective tax rate of 24.0% for 2019, 24.1% for 2018, 34.7% for
2017, 36.6% for 2016, and 38.9% for 2015. We estimate that our effective tax
rate for the full-year 2020 on a non-GAAP basis will be in the range of
23.5% to 25.5%.
(8) This non-GAAP measure was calculated by applying the two-class method to
adjusted net income attributable to
T. Rowe Price Group divided by the weighted-average common shares outstanding
assuming dilution. The calculation of net income allocated to common
stockholders is as follows:
Year ended
(in millions) 2019 2018 2017 2016 2015
Adjusted net income attributable to T.
Rowe Price Group $ 1,975.6 $ 1,807.4 $ 1,361.1 $ 1,148.9 $ 1,160.3
Less: net income allocated to
outstanding restricted stock and stock
unit holders 50.9 42.5 30.5 24.2 15.2
Adjusted net income allocated to common
stockholders $ 1,924.7 $ 1,764.9 $ 1,330.6 $ 1,124.7 $ 1,145.1CAPITAL RESOURCES AND LIQUIDITY.
During 2019, stockholders' equity increased from $6.1 billion to $7.1 billion.
Tangible book value increased to $6.4 billion at December 31, 2019.
Sources of Liquidity
We remain debt-free with ample liquidity, including cash and investments in T.
Rowe Price products as follows:
(in millions) 12/31/2019 12/31/2018
Cash and cash equivalents $ 1,781.8 $ 1,425.2
Discretionary investments 1,899.6 1,597.1
Total cash and discretionary investments 3,681.4
3,022.3
Redeemable seed capital investments 1,325.6
1,118.9
Investments used to hedge the supplemental savings plan
liability
561.1
381.3
Total cash and investments in T. Rowe Price products $ 5,568.1 $ 4,522.5
Our discretionary investment portfolio is comprised primarily of short duration
bond funds, which typically yield higher than money market rates, and asset
allocation products. Cash and discretionary investments generated income of
$126.0 million in 2019 as compared to $32.8 million in 2018. Cash and
discretionary investments in T. Rowe Price products held by our subsidiaries
outside the U.S. were $665.8 million at December 31, 2019, and $634.5 million at
December 31, 2018. Given the availability of our financial resources and cash
expected to be generated through future operations, we do not maintain an
available external source of additional liquidity.
Our seed capital investments are redeemable, although we generally expect to be
invested for several years for the products to build an investment performance
history and until unrelated third-party investors substantially reduce our
relative ownership percentage.
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The cash and investment presentation on the consolidated balance sheet is based
on how we account for the cash or investment. The following table details how T.
Rowe Price Group's interests in cash and T. Rowe Price investment products
relate to where they are presented in the consolidated balance sheet as of
December 31, 2019.
Net assets of
consolidated T.
Rowe Price
Cash and cash investment
(in millions) equivalents Investments products * 12/31/2019
Cash and discretionary investments $ 1,781.8 $ 1,831.8 $ 67.8 $ 3,681.4
Seed capital investments - 276.7 1,048.9 1,325.6
Investments used to hedge the
supplemental savings plan liability - 561.1 - 561.1
Total cash and investments in T. Rowe
Price products attributable to T.
Rowe Price Group 1,781.8 2,669.6 1,116.7 5,568.1
Investment in UTI and other
investments - 270.2 - 270.2
Total cash and investments
attributable to T. Rowe Price Group 1,781.8 2,939.8 1,116.7 5,838.3
Redeemable non-controlling interests - - 1,121.0 1,121.0
As reported on unaudited condensed
consolidated balance sheet at
December 31, 2019 $ 1,781.8 $ 2,939.8
$ 2,237.7 $ 6,959.3
* Net assets of consolidated T. Rowe Price investment products of $2,237.7
million at December 31, 2019, include assets of $2,276.9 million less
liabilities of
$39.2 million as reflected in the consolidated balance sheet in Item 8.
Financial Statements and Supplementary Data of this Form 10-K.
Our consolidated balance sheet reflects the cash and cash equivalents,
investments, other assets and liabilities of those T. Rowe Price investment
products we consolidate, as well as redeemable non-controlling interests for the
portion of these T. Rowe Price investment products that are held by unrelated
third-party investors. Although we can redeem our net interest in these T. Rowe
Price investment products at any time, we cannot directly access or sell the
assets held by the products to obtain cash for general operations. Additionally,
the assets of these T. Rowe Price investment products are not available to our
general creditors. Our interest in these T. Rowe Price investment products was
used as initial seed capital and is recategorized as discretionary when it is
determined by management that the seed capital is no longer needed. We assess
the discretionary products and, when we decide to liquidate our interest, we
seek to do so in a way as to not impact the product and, ultimately, the
unrelated third-party investors.
Uses of Liquidity
We paid $3.04 per share in regular dividends in 2019, an increase of 8.6% over
the $2.80 per share paid in 2018. Additionally, we expended $708.8 million in
2019 to repurchase 7.0 million shares, or 2.9%, of our outstanding common stock
at an average price of $101.65 per share. These dividends and repurchases were
expended using existing cash balances and cash generated from operations. We
will generally repurchase our common stock over time to offset the dilution
created by our equity-based compensation plans.
Since the end of 2016, we have returned $4.3 billion to stockholders through
stock repurchases and our regular quarterly dividends, as follows:
Recurring Total cash returned
(in millions) dividend Stock repurchases to stockholders
2017 $ 562.6 $ 458.1 $ 1,020.7
2018 694.7 1,099.6 1,794.3
2019 733.6 708.8 1,442.4
Total $ 1,990.9 $ 2,266.5 $ 4,257.4
We anticipate property and equipment expenditures for the full-year 2020 to be
up to $210 million, of which about three-quarters is planned for technology
initiatives. We expect to fund our anticipated capital expenditures with
operating cash flows and other available resources.
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The following tables summarize the cash flows for 2019, 2018 and 2017, that are
attributable to T. Rowe Price Group, our consolidated T. Rowe Price investment
products, and the related eliminations required in preparing the statement.
2019
Cash flow attributable to:
Consolidated T.
Rowe Price
T. Rowe Price investment
(in millions) Group products Elims As reported
Cash flows from operating activities
Net income $ 2,131.3 $ 258.2 $ (140.6 ) $ 2,248.9
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation, amortization and impairments
of property and equipment 190.8 - - 190.8
Stock-based compensation expense 206.6 - - 206.6
Net gains recognized on investments (316.9 ) - 140.6 (176.3 )
Net investments in T. Rowe Price
investment products used to economically
hedge supplemental savings plan liability (126.0 ) - - (126.0 )
Net change in trading securities held by
consolidated T. Rowe Price investment
products (930.9 ) - (930.9 )
Other changes in assets and liabilities 116.5 1.9 (8.8 ) 109.6
Net cash provided by (used in) operating
activities 2,202.3 (670.8 ) (8.8 ) 1,522.7
Net cash provided by (used in) investing
activities (489.3 ) (18.4 ) 183.2 (324.5 )
Net cash provided by (used in) financing
activities (1,356.4 ) 698.1 (174.4 ) (832.7 )
Effect of exchange rate changes on cash
and cash equivalents of consolidated T.
Rowe Price investment products - (2.5 ) - (2.5 )
Net change in cash and cash equivalents
during period 356.6 6.4 - 363.0
Cash and cash equivalents at beginning of
year 1,425.2 70.1 - 1,495.3
Cash and cash equivalents at end of period $ 1,781.8 $ 76.5
$ - $ 1,858.3
2018
Cash flow attributable to:
Consolidated T.
T. Rowe Price Rowe Price
(in millions) Group investment products Elims As reported
Cash flows from operating activities
Net income $ 1,837.5 $ (105.6 ) $ 36.8 $ 1,768.7
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation, amortization and impairments
of property and equipment 159.5 - - 159.5
Stock-based compensation expense 197.1 - - 197.1
Net gains recognized on investments (13.7 ) - (36.8 ) (50.5 )
Net investments in T. Rowe Price
investment products used to economically
hedge supplemental savings plan liability (129.5 ) - - (129.5 )
Net change in trading securities held by
consolidated T. Rowe Price investment
products - (437.0 ) - (437.0 )
Other changes in assets and liabilities 127.2 (6.5 ) (9.1 ) 111.6
Net cash provided by (used in) operating
activities 2,178.1 (549.1 ) (9.1 ) 1,619.9
Net cash provided by (used in) investing
activities (945.7 ) (23.8 ) 94.0 (875.5 )
Net cash provided by (used in) financing
activities (1,709.9 ) 555.3 (84.9 ) (1,239.5 )
Effect of exchange rate changes on cash
and cash equivalents of consolidated T.
Rowe Price investment products - (15.4 ) - (15.4 )
Net change in cash and cash equivalents
during period (477.5 ) (33.0 ) - (510.5 )
Cash and cash equivalents at beginning of
year 1,902.7 103.1 - 2,005.8
Cash and cash equivalents at end of period $ 1,425.2 $ 70.1
$ - $ 1,495.3
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2017
Cash flow attributable to:
Consolidated T.
Rowe Price
T. Rowe Price investment
(in millions) Group products Elims As reported
Cash flows from operating activities
Net income $ 1,497.8 $ 181.6 $ (98.2 ) $ 1,581.2
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities
Depreciation, amortization and
impairments of property and equipment 143.6 - - 143.6
Stock-based compensation expense 152.0 - - 152.0
Realized gains on dispositions of
available-for-sale T. Rowe Price
investment products (83.1 ) - - (83.1 )
Gains recognized upon transfer of an
investment in a T. Rowe Price mutual fund
from available-for-sale to held as
trading (23.6 ) (23.6 )
Net gains recognized on investments (147.9 ) - 98.2 (49.7 )
Net investments in T. Rowe Price
investment products used to economically
hedge supplemental savings plan liability (218.6 ) (218.6 )
Net change in trading securities held by
consolidated T. Rowe Price investment
products - (1,492.9 ) - (1,492.9 )
Other changes in assets and liabilities 231.6 (4.0 ) (7.0 ) 220.6
Net cash provided by (used in) operating
activities 1,551.8 (1,315.3 ) (7.0 ) 229.5
Net cash provided by (used in) investing
activities (33.9 ) (64.2 ) 137.1 39.0
Net cash Provided by (used in) financing
activities (820.1 ) 1,411.7 (130.1 ) 461.5
Effect of exchange rate changes on cash
and cash equivalents of consolidated T.
Rowe Price investment products - 5.3 - 5.3
Net change in cash and cash equivalents
during period 697.8 37.5 - 735.3
Cash and cash equivalents at beginning of
year 1,204.9 65.6 - 1,270.5
Cash and cash equivalents at end of
period $ 1,902.7 $ 103.1 $ - $ 2,005.8
Operating activities
Operating activities attributable to T. Rowe Price Group during 2019 provided
cash flows of $2,202.3 million, an increase of $24.2 million from the 2018
period. Operating cash flows increased by $334.6 million on higher net income
after adjusting for significant non-cash activity including depreciation expense
and stock-based compensation expense. This increase was offset in part by higher
market gains on investments of $303.2 million due to stronger equity market
returns compared to 2018. During 2019, we invested an additional $126.0 million
in certain investment products that act as an economic hedge of our supplemental
savings plan liability. This level of investment is comparable to the amount
invested in 2018. Timing differences on the cash settlement of our assets and
liabilities also increased operating cash flows by $10.7 million. The remaining
change in reported cash flows from operating activities was attributable to the
net change in trading securities held in our consolidated investment products'
underlying portfolios.
Operating activities attributable to T. Rowe Price Group during 2018 provided
cash flows of $2,178.1 million, an increase of $626.3 million from
the 2017 period. The increase in these operating cash flows was driven by $641.6
million of higher net income after adjusting for significant non-cash activity
including depreciation expense, stock-based compensation expense and market
gains on investments. Adjustments for market gains on investments decreased
during 2018 in part due to a change in accounting guidance that we adopted on
January 1, 2018. The remaining decrease in investment gain activity is due to
lower gains as a result of weaker equity markets in 2018 compared with 2017.
Additionally, during 2017, we invested $218.6 million into certain investment
products to establish an economic hedge of our supplemental savings plan
liability and invested an additional $129.5 million in 2018 in order to maintain
it. The remaining $104.4 million decrease in operating cash flows attributable
to T. Rowe Price Group relates to timing differences on the cash settlement of
our assets and liabilities, including the settlement of insurance receivables
during 2017 related to the Dell appraisal rights matter. The remaining change in
reported cash flows from operating activities was attributable to the net change
in trading securities held in our consolidated investment products' underlying
portfolios.
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Investing activities
Net cash used in investing activities that are attributable to T. Rowe Price
Group totaled $489.3 million in 2019, a decrease of $456.4 million compared with
2018. During 2018, we rebalanced our cash and discretionary investments
portfolio resulting in the reallocation of cash and cash equivalents of $1.0
billion to certain T. Rowe Price fixed income funds. Such rebalancing did not
recur in 2019. Excluding the impact of the reallocation in 2018, there were net
purchases of discretionary investment products of $108.3 million during 2019,
compared to net proceeds of $228.4 million. Also contributing to the decrease in
2019 reported cash flows used in investing activities were higher property and
equipment expenditures of $36.1 million, an $89.2 million increase in the level
of seed capital provided, and the absence of the proceeds from the sale of our
10% interest in Daiwa SB Investments Ltd. received in 2018 and included in other
investing activity. Since we consolidate the seed capital in T. Rowe Price
investment products, our seed capital was eliminated in preparing our
consolidated statement of cash flows.
Net cash used in investing activities that are attributable to T. Rowe Price
Group totaled $945.7 million in 2018, an increase of $911.8 million from the
comparable 2017 period. During 2018, we rebalanced our cash and discretionary
investments portfolio resulting in the reallocation of cash and cash equivalents
of $1.0 billion to certain T. Rowe Price funds. Excluding these reallocations,
net purchases of other discretionary investment products decreased $65.3 million
during 2018 compared with 2017. These changes in investing cash flows during
2018 compared with 2017 were offset by a $43.1 million decrease in seed capital
provided, a $17.6 million decrease in property and equipment expenditures, and a
$95.8 million change in other investing activity, primarily relating to the sale
of our 10% interest in Daiwa SB Investments Ltd. during the third quarter of
2018. Since we consolidate the seed capital in T. Rowe Price investment
products, our seed capital was eliminated in preparing our consolidated
statement of cash flows. The remaining change in reported cash flows from
investing activities was attributable to a $40.4 million decrease in net cash
removed from our balance sheet from consolidating and deconsolidating investment
products during 2018 compared with the 2017 period.
Financing activities
Net cash used in financing activities attributable to T. Rowe Price Group were
$1,356.4 million in 2019, a decrease of $353.5 million compared with $1,709.9
million in 2018. The decrease in cash used in financing activities was primarily
driven by a $384.6 million decrease in the number of common stock repurchases we
made in 2019 due to the stronger equity markets. This decrease was partially
offset by a $39.6 million increase in dividends paid in 2019 as a result of an
8.6% increase in our quarterly dividend per share from 2018. The remaining
change in reported cash flows from financing activities is primarily
attributable to a $53.3 million increase in net subscriptions received from
redeemable noncontrolling interest holders of our consolidated investment
products during 2019 compared to 2018.
Net cash used in financing activities attributable to T. Rowe Price Group
totaled $1,709.9 million in 2018 compared with $820.1 million in 2017. The
increase was primarily driven by spending $632.2 million more in common stock
repurchases in 2018 as market volatility provided an opportunity to buy back
more shares. Additionally, a nearly 23% increase in our quarterly dividend per
share resulted in paying $131.2 million more in dividends in 2018. The decline
in our stock price in 2018 led to fewer stock options being exercised and a
$126.3 million decrease in related cash proceeds compared with the 2017. The
remaining change in reported cash flows from financing activities was primarily
attributable to a $811.2 million decrease in net subscriptions received from
redeemable non-controlling interest holders of our consolidated investment
products during 2018 compared with the 2017 period.
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CONTRACTUAL OBLIGATIONS.
The following table presents a summary of our future obligations under the terms
of our supplemental savings plan, existing operating leases, and other
contractual cash purchase commitments at December 31, 2019. The information
presented does not include operating expenses or capital expenditures that will
be committed in the normal course of operations in 2020 and future years. The
information also excludes the $23.9 million of unrecognized tax benefits
discussed in Note 9 to our consolidated financial statements because it is not
possible to estimate the time period in which a payment might be made to the tax
authorities.
Total 2020 2021-2022 2023-2024 Thereafter
(in millions)
Supplemental savings
plan liability(1) $ 563 $ 7 $ 88 $ 103 $ 365
Noncancelable operating
leases 164 27 50 41 46
Other purchase
commitments(2) 320 206 69 24 21
Total $ 1,047 $ 240 $ 207 $ 168 $ 432
(1) These obligations represent the amount of future expected funding
requirements related to our supplemental savings plan. Payment periods are based
on deferral elections made by participants. If no deferral election has been
made, the obligation has been included in the "Thereafter" column as the timing
of distributions will be determined upon termination of employment. We
economically hedge this liability and the related market exposure with
investments in certain T. Rowe Price products. The carrying value of these
investments at December 31, 2019 was $561.1 million and was reported within the
Investments line on our consolidated balance sheet. Either these investments or
future cash flows from operations are expected to be used to fund the future
liability payments.
(2) Other purchase commitments include contractual amounts that will be due for
the purchase of goods or services to be used in our operations and may be
cancelable at earlier times than those indicated, under certain conditions that
may involve termination fees. Because these obligations are generally of a
normal recurring nature, we expect that we will fund them from future cash flows
from operations.
We also have outstanding commitments to fund additional contributions to
investment partnerships totaling $18.1 million at December 31, 2019. The vast
majority of these additional contributions will be made to investment
partnerships in which we have an existing investment. In addition to such
amounts, a percentage of prior distributions may be called under certain
circumstances.
CRITICAL ACCOUNTING POLICIES.
The preparation of financial statements often requires the selection of specific
accounting methods and policies from among several acceptable alternatives.
Further, significant estimates and judgments may be required in selecting and
applying those methods and policies in the recognition of the assets and
liabilities in our consolidated balance sheets, the revenues and expenses in our
consolidated statements of income, and the information that is contained in our
significant accounting policies and notes to the consolidated financial
statements. Making these estimates and judgments requires the analysis of
information concerning events that may not yet be complete and of facts and
circumstances that may change over time. Accordingly, actual amounts or future
results can differ materially from those estimates that we include currently in
our consolidated financial statements, significant accounting policies, and
notes.
We present those significant accounting policies used in the preparation of our
consolidated financial statements as an integral part of those statements within
this 2019 Annual Report. In the following discussion, we highlight and explain
further certain of those policies that are most critical to the preparation and
understanding of our financial statements.
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Consolidation
We consolidate all subsidiaries and T. Rowe Price investment products in which
we have a controlling interest. We are generally deemed to have a controlling
interest when we own the majority of the voting interest of an entity or are
deemed to be the primary beneficiary of a variable interest entity ("VIE"). VIEs
are entities that lack sufficient equity to finance its activities or the equity
holders do not have defined power to direct the activities of the entity
normally associated with an equity investment. Our analysis to determine whether
an entity is a VIE or a voting interest entity ("VOE") involves judgment and
considers several factors, including an entity's legal organization, capital
structure, the rights of the equity investment holders, our ownership interest
in the entity, and our contractual involvement with the entity. We continually
review and reconsider our VIE or VOE conclusions upon the occurrence of certain
events, such as changes to our ownership interest, changes to an entity's legal
structure, or amendments to governing documents. Our VIEs are primarily T. Rowe
Price investment products and our variable interest consists of our equity
ownership in and investment management fees earned from these entities.
We are the primary beneficiary if we have the power to direct the activities of
the VIE that most significantly impact its economic performance and the
obligation to absorb losses of the entity or the right to receive benefits from
the VIE that could potentially be significant. Our SICAV funds and other T. Rowe
Price investment products regulated outside the U.S. are determined to be VIEs.
At December 31, 2019, we consolidated VIEs with net assets of $1.9 billion.
Other-than-temporary impairments of equity method investments
We evaluate our equity method investments, including our investment in UTI and
certain investments in T. Rowe Price investment products, for impairment when
events or changes in circumstances indicate that the carrying value of the
investment exceeds its fair value, and the decline in fair value is other than
temporary.
Goodwill
We internally conduct, manage, and report our operations as one investment
advisory business. We do not have distinct operating segments or components that
separately constitute a business. Accordingly, we attribute goodwill to a single
reportable business segment and reporting unit-our investment advisory business.
We evaluate the carrying amount of goodwill in our consolidated balance sheets
for possible impairment on an annual basis in the third quarter of each year
using a fair value approach. Goodwill would be considered impaired whenever our
historical carrying amount exceeds the fair value of our investment advisory
business. Our annual testing has demonstrated that the fair value of our
investment advisory business (our market capitalization) exceeds our carrying
amount (our stockholders' equity) and, therefore, no impairment exists. Should
we reach a different conclusion in the future, additional work would be
performed to ascertain the amount of the noncash impairment charge to be
recognized. We must also perform impairment testing at other times if an event
or circumstance occurs indicating that it is more likely than not that an
impairment has been incurred. The maximum future impairment of goodwill that we
could incur is the amount recognized in our consolidated balance sheets, $665.7
million as of December 31, 2019.
Provision for income taxes
After compensation and related costs, our provision for income taxes on our
earnings is our largest annual expense. We operate in numerous states and
countries through our various subsidiaries and must allocate our income,
expenses, and earnings under the various laws and regulations of each of these
taxing jurisdictions. Accordingly, our provision for income taxes represents our
total estimate of the liability that we have incurred in doing business each
year in all of our locations. Annually, we file tax returns that represent our
filing positions with each jurisdiction and settle our return liabilities. Each
jurisdiction has the right to audit those returns and may take different
positions with respect to income and expense allocations and taxable earnings
determinations. From time to time, we may also provide for estimated liabilities
associated with uncertain tax return filing positions that are subject to, or in
the process of, being audited by various tax authorities. Because the
determination of our annual provision is subject to judgments and estimates, it
is likely that actual results will vary from those recognized in our financial
statements. As a result, we recognize additions to, or reductions of, income tax
expense during a reporting period that pertain to prior period provisions as our
estimated liabilities are revised and actual tax returns and tax audits are
settled. We recognize any such prior period adjustment in the discrete quarterly
period in which it is determined.
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NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.
See Note 1 - Basis of Preparation and Summary of Significant Accounting Policies
within Item 8, Financial Statements and Supplementary Data for a discussion of
newly issued but not yet adopted accounting guidance.
FORWARD-LOOKING INFORMATION.
From time to time, information or statements provided by or on behalf of T. Rowe
Price, including those within this report, may contain certain forward-looking
information, including information or anticipated information relating to: our
revenues, net income, and earnings per share on common stock; changes in the
amount and composition of our assets under management; our expense levels; our
tax rate; and our expectations regarding financial markets, future transactions,
dividends, stock repurchases, investments, capital expenditures, and other
conditions. Readers are cautioned that any forward-looking information provided
by or on behalf of T. Rowe Price is not a guarantee of future performance.
Actual results may differ materially from those in forward-looking information
because of various factors including, but not limited to, those discussed below
and in Item 1A, Risk Factors, of this Form 10-K Annual Report. Further,
forward-looking statements speak only as of the date on which they are made, and
we undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to reflect the
occurrence of unanticipated events.
Our future revenues and results of operations will fluctuate primarily due to
changes in the total value and composition of assets under our management. Such
changes result from many factors, including, among other things: cash inflows
and outflows in the U.S. mutual funds and subadvised and separately managed
accounts and other investment products, fluctuations in global financial markets
that result in appreciation or depreciation of the assets under our management,
our introduction of new mutual funds and investment products, and changes in
retirement savings trends relative to participant-directed investments and
defined contribution plans. The ability to attract and retain investors' assets
under our management is dependent on investor sentiment and confidence; the
relative investment performance of the T. Rowe Price funds and other managed
investment products as compared with competing offerings and market indexes; the
ability to maintain our investment management and administrative fees at
appropriate levels; competitive conditions in the mutual fund, asset management,
and broader financial services sectors; and our level of success in implementing
our strategy to expand our business. Our revenues are substantially dependent on
fees earned under contracts with the T. Rowe Price funds and could be adversely
affected if the independent directors of one or more of the T. Rowe Price funds
terminated or significantly altered the terms of the investment management or
related administrative services agreements. Non-operating investment income will
also fluctuate primarily due to the size of our investments, changes in their
market valuations, and any other-than-temporary impairments that may arise or,
in the case of our equity method investments, our proportionate share of the
investees' net income.
Our future results are also dependent upon the level of our expenses, which are
subject to fluctuation for the following or other reasons: changes in the level
of our advertising and promotion expenses in response to market conditions,
including our efforts to expand our investment advisory business to investors
outside the U.S. and to further penetrate our distribution channels within the
U.S.; the pace and level of spending to support key strategic priorities;
variations in the level of total compensation expense due to, among other
things, bonuses, restricted stock units and other equity grants, other incentive
awards, our supplemental savings plan, changes in our employee count and mix,
and competitive factors; any goodwill or other asset impairment that may arise;
fluctuation in foreign currency exchange rates applicable to the costs of our
international operations; expenses and capital costs, such as technology assets,
depreciation, amortization, and research and development, incurred to maintain
and enhance our administrative and operating services infrastructure; the timing
of the assumption of all third party research payments, unanticipated costs that
may be incurred to protect investor accounts and the goodwill of our clients;
and disruptions of services, including those provided by third parties, such as
fund and product recordkeeping, facilities, communications, power, and the
mutual fund transfer agent and accounting systems.
Our business is also subject to substantial governmental regulation, and changes
in legal, regulatory, accounting, tax, and compliance requirements may have a
substantial effect on our operations and results, including, but not limited to,
effects on costs that we incur and effects on investor interest in T. Rowe Price
investment products and investing in general or in particular classes of mutual
funds or other investments.
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