10Q- Q3 2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
Commission File Number: 000-32191
______________________________________
T. ROWE PRICE GROUP, INC.
(Exact name of registrant as specified in its charter)
______________________________________
|
| | |
Maryland | | 52-2264646 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
100 East Pratt Street, Baltimore, Maryland 21202
(Address, including Zip Code, of principal executive offices)
(410) 345-2000
(Registrant’s telephone number, including area code)
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | |
Large accelerated filer x | | Accelerated filer ¨ |
Non-accelerated filer ¨ | | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The number of shares outstanding of the issuer’s common stock ($.20 par value), as of the latest practicable date, October 21, 2014, is 259,388,321.
The exhibit index is at Item 6 on page 23.
PART I – FINANCIAL INFORMATION
| |
Item 1. | Financial Statements. |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
|
| | | | | | | |
| 12/31/2013 | | 9/30/2014 |
ASSETS | | | |
Cash and cash equivalents | $ | 1,398.0 |
| | $ | 1,644.5 |
|
Accounts receivable and accrued revenue | 398.8 |
| | 423.6 |
|
Investments in sponsored funds | 1,611.9 |
| | 1,936.7 |
|
Other investments | 313.6 |
| | 418.0 |
|
Property and equipment | 572.9 |
| | 572.3 |
|
Goodwill | 665.7 |
| | 665.7 |
|
Other assets | 72.2 |
| | 107.2 |
|
Total assets | $ | 5,033.1 |
| | $ | 5,768.0 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Liabilities | | | |
Accounts payable and accrued expenses | $ | 103.9 |
| | $ | 150.6 |
|
Accrued compensation and related costs | 72.4 |
| | 367.3 |
|
Income taxes payable | 38.7 |
| | 22.6 |
|
Total liabilities | 215.0 |
| | 540.5 |
|
| | | |
Commitments and contingent liabilities |
| |
|
| | | |
Stockholders’ equity | | | |
Preferred stock, undesignated, $.20 par value – authorized and unissued 20,000,000 shares | — |
| | — |
|
Common stock, $.20 par value - authorized 750,000,000; issued 262,073,000 shares in 2013 and 260,655,000 in 2014 | 52.4 |
| | 52.1 |
|
Additional capital in excess of par value | 894.6 |
| | 760.3 |
|
Retained earnings | 3,682.8 |
| | 4,249.1 |
|
Accumulated other comprehensive income | 188.3 |
| | 166.0 |
|
Total stockholders’ equity | 4,818.1 |
| | 5,227.5 |
|
Total liabilities and stockholders’ equity | $ | 5,033.1 |
| | $ | 5,768.0 |
|
The accompanying notes are an integral part of these statements.
Page 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per-share amounts)
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| 9/30/2013 | | 9/30/2014 | | 9/30/2013 | | 9/30/2014 |
Revenues | | | | | | | |
Investment advisory fees | $ | 768.3 |
| | $ | 890.7 |
| | $ | 2,210.9 |
| | $ | 2,572.4 |
|
Administrative fees | 85.4 |
| | 92.7 |
| | 258.1 |
| | 280.8 |
|
Distribution and servicing fees | 30.5 |
| | 37.4 |
| | 84.8 |
| | 106.5 |
|
Net revenue of savings bank subsidiary | .2 |
| | — |
| | .6 |
| | — |
|
Net revenues | 884.4 |
| | 1,020.8 |
| | 2,554.4 |
| | 2,959.7 |
|
| | | | | | | |
Operating expenses | | | | | | | |
Compensation and related costs | 291.3 |
| | 346.4 |
| | 858.7 |
| | 991.7 |
|
Advertising and promotion | 14.7 |
| | 12.7 |
| | 58.9 |
| | 49.9 |
|
Distribution and servicing costs | 30.5 |
| | 37.4 |
| | 84.8 |
| | 106.5 |
|
Depreciation and amortization of property and equipment | 22.1 |
| | 28.3 |
| | 65.5 |
| | 83.4 |
|
Occupancy and facility costs | 32.9 |
| | 35.9 |
| | 101.0 |
| | 107.3 |
|
Other operating expenses | 67.0 |
| | 71.4 |
| | 188.2 |
| | 210.0 |
|
Total operating expenses | 458.5 |
| | 532.1 |
| | 1,357.1 |
| | 1,548.8 |
|
| | | | | | | |
Net operating income | 425.9 |
| | 488.7 |
| | 1,197.3 |
| | 1,410.9 |
|
| | | | | | | |
Non-operating investment income | 11.6 |
| | 5.2 |
| | 31.3 |
| | 73.4 |
|
| | | | | | | |
Income before income taxes | 437.5 |
| | 493.9 |
| | 1,228.6 |
| | 1,484.3 |
|
Provision for income taxes | 167.2 |
| | 190.3 |
| | 468.6 |
| | 570.6 |
|
Net income | $ | 270.3 |
| | $ | 303.6 |
| | $ | 760.0 |
| | $ | 913.7 |
|
| | | | | | | |
Earnings per share on common stock | | | | | | | |
Basic | $ | 1.03 |
| | $ | 1.15 |
| | $ | 2.92 |
| | $ | 3.47 |
|
Diluted | $ | 1.00 |
| | $ | 1.12 |
| | $ | 2.83 |
| | $ | 3.37 |
|
| | | | | | | |
Dividends declared per share | $ | .38 |
| | $ | .44 |
| | $ | 1.14 |
| | $ | 1.32 |
|
The accompanying notes are an integral part of these statements.
Page 3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| 9/30/2013 | | 9/30/2014 | | 9/30/2013 | | 9/30/2014 |
Net income | $ | 270.3 |
| | $ | 303.6 |
| | $ | 760.0 |
| | $ | 913.7 |
|
Other comprehensive income (loss) | | | | | | | |
Net unrealized holding gains (losses) on available-for-sale investments | 62.5 |
| | (56.8 | ) | | 90.7 |
| | 3.0 |
|
Reclassification adjustments related to net gains realized on dispositions recognized in non-operating investment income, determined using average cost | — |
| | (.9 | ) | | (11.5 | ) | | (44.6 | ) |
Total net unrealized holding gains (losses) recognized in other comprehensive income | 62.5 |
| | (57.7 | ) | | 79.2 |
| | (41.6 | ) |
Currency translation adjustments | (12.2 | ) | | (2.5 | ) | | (17.3 | ) | | 4.8 |
|
Other comprehensive income (loss) before income taxes | 50.3 |
| | (60.2 | ) | | 61.9 |
| | (36.8 | ) |
Deferred tax benefit (income taxes) | (19.8 | ) | | 23.3 |
| | (24.9 | ) | | 14.5 |
|
Total other comprehensive income (loss) | 30.5 |
| | (36.9 | ) | | 37.0 |
| | (22.3 | ) |
Total comprehensive income | $ | 300.8 |
| | $ | 266.7 |
| | $ | 797.0 |
| | $ | 891.4 |
|
The accompanying notes are an integral part of these statements.
Page 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
| | | | | | | |
| Nine months ended |
| 9/30/2013 | | 9/30/2014 |
Cash flows from operating activities | | | |
Net income | $ | 760.0 |
| | $ | 913.7 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | |
Depreciation and amortization of property and equipment | 65.5 |
| | 83.4 |
|
Stock-based compensation expense | 81.3 |
| | 95.9 |
|
Realized gains on dispositions of sponsored funds | (11.5 | ) | | (44.6 | ) |
Net gains recognized on other investments | (7.3 | ) | | (9.0 | ) |
Net change in trading securities held by consolidated sponsored investment portfolios | (25.7 | ) | | (90.1 | ) |
Other changes in assets and liabilities | 296.0 |
| | 266.8 |
|
Net cash provided by operating activities | 1,158.3 |
| | 1,216.1 |
|
| | | |
Cash flows from investing activities | | | |
Investments in sponsored funds | (112.5 | ) | | (445.8 | ) |
Dispositions of sponsored funds | 37.0 |
| | 123.8 |
|
Investments in debt securities held by savings bank subsidiary | (26.8 | ) | | — |
|
Proceeds from debt securities held by savings bank subsidiary | 36.0 |
| | — |
|
Additions to property and equipment | (74.6 | ) | | (82.6 | ) |
Other investing activity | 2.3 |
| | (11.1 | ) |
Net cash used in investing activities | (138.6 | ) | | (415.7 | ) |
| | | |
Cash flows from financing activities | | | |
Repurchases of common stock | (14.1 | ) | | (283.7 | ) |
Common share issuances under stock-based compensation plans | 101.2 |
| | 52.6 |
|
Excess tax benefits from stock-based compensation plans | 26.3 |
| | 24.4 |
|
Dividends | (297.1 | ) | | (347.2 | ) |
Change in savings bank subsidiary deposits | (21.8 | ) | | — |
|
Net cash used in financing activities | (205.5 | ) | | (553.9 | ) |
| | | |
Cash and cash equivalents | | | |
Net change during period | 814.2 |
| | 246.5 |
|
At beginning of year | 879.1 |
| | 1,398.0 |
|
At end of period | $ | 1,693.3 |
| | $ | 1,644.5 |
|
The accompanying notes are an integral part of these statements.
Page 5
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(shares in thousands; dollars in millions)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common shares outstanding | | Common stock | | Additional capital in excess of par value | | Retained earnings | | Accumulated other comprehensive income | | Total stockholders’ equity |
Balances at December 31, 2013 | 262,073 |
| | $ | 52.4 |
| | $ | 894.6 |
| | $ | 3,682.8 |
| | $ | 188.3 |
| | $ | 4,818.1 |
|
Net income | | | | | | | 913.7 |
| | | | 913.7 |
|
Other comprehensive loss, net of tax | | | | | | | | | (22.3 | ) | | (22.3 | ) |
Dividends | | | | | | | (347.2 | ) | | | | (347.2 | ) |
Common stock-based compensation plans activity | | | | | | | | | | | |
Shares issued upon option exercises | 1,839 |
| | .3 |
| | 51.8 |
| | | | | | 52.1 |
|
Restricted shares issued, net of shares withheld for taxes | 762 |
| | .2 |
| | (.3 | ) | | | | | | (.1 | ) |
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes | 4 |
| | — |
| | (.1 | ) | | | | | | (.1 | ) |
Forfeiture of restricted awards | (115 | ) | | — |
| | — |
| | | | | | — |
|
Net tax benefits | | | | | 24.7 |
| | | | | | 24.7 |
|
Stock-based compensation expense | | | | | 95.9 |
| | | | | | 95.9 |
|
Restricted stock units issued as dividend equivalents | | | | | .2 |
| | (.2 | ) | | | | — |
|
Common shares repurchased | (3,908 | ) | | (.8 | ) | | (306.5 | ) | | — |
| | | | (307.3 | ) |
Balances at September 30, 2014 | 260,655 |
| | $ | 52.1 |
| | $ | 760.3 |
| | $ | 4,249.1 |
| | $ | 166.0 |
| | $ | 5,227.5 |
|
The accompanying notes are an integral part of these statements.
Page 6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| |
NOTE 1 | – THE COMPANY AND BASIS OF PREPARATION. |
T. Rowe Price Group derives its consolidated revenues and net income primarily from investment advisory services that its subsidiaries provide to individual and institutional investors in the sponsored T. Rowe Price U.S. mutual funds and other investment portfolios, including separately managed accounts, subadvised funds, and other sponsored investment portfolios. We also provide our investment advisory clients with related administrative services, including distribution, mutual fund transfer agent, accounting, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage; and trust services.
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 impact our revenues and results of operations.
These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates and reflect all adjustments that are, in the opinion of management, necessary to a fair statement of our results for the interim periods presented. All such adjustments are of a normal recurring nature. Actual results may vary from our estimates. Certain prior year items have been reclassified to conform to current year presentation.
The unaudited interim financial information contained in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our 2013 Annual Report.
| |
NOTE 2 | – INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES. |
Accounts receivable from our sponsored mutual funds for advisory fees and advisory-related administrative services aggregate $221.9 million at December 31, 2013, and $237.4 million at September 30, 2014.
Revenues (in millions) from advisory services provided under agreements with our sponsored mutual funds and other investment clients include:
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| 9/30/2013 | | 9/30/2014 | | 9/30/2013 | | 9/30/2014 |
Sponsored U.S. mutual funds | | | | | | | |
Stock and blended asset | $ | 452.0 |
| | $ | 537.8 |
| | $ | 1,276.3 |
| | $ | 1,549.8 |
|
Bond and money market | 89.3 |
| | 103.8 |
| | 275.0 |
| | 296.0 |
|
| 541.3 |
| | 641.6 |
| | 1,551.3 |
| | 1,845.8 |
|
Other investment portfolios | | | | | | | |
Stock and blended asset | 187.4 |
| | 210.8 |
| | 538.1 |
| | 610.1 |
|
Bond, money market, and stable value | 39.6 |
| | 38.3 |
| | 121.5 |
| | 116.5 |
|
| 227.0 |
| | 249.1 |
| | 659.6 |
| | 726.6 |
|
Total | $ | 768.3 |
| | $ | 890.7 |
| | $ | 2,210.9 |
| | $ | 2,572.4 |
|
The following table summarizes the investment portfolios and assets under management (in billions) on which we earn advisory fees.
|
| | | | | | | | | | | | | | | |
| Average during | | Average during |
| the third quarter of | | the first nine months of |
| 2013 | | 2014 | | 2013 | | 2014 |
Sponsored U.S. mutual funds | | | | | | | |
Stock and blended asset | $ | 305.4 |
| | $ | 367.5 |
| | $ | 289.5 |
| | $ | 356.3 |
|
Bond and money market | 90.8 |
| | 104.2 |
| | 91.8 |
| | 100.6 |
|
| 396.2 |
| | 471.7 |
| | 381.3 |
| | 456.9 |
|
Other investment portfolios | | | | | | | |
Stock and blended asset | 182.5 |
| | 205.7 |
| | 177.3 |
| | 200.2 |
|
Bond, money market, and stable value | 57.6 |
| | 62.1 |
| | 62.3 |
| | 62.3 |
|
| 240.1 |
| | 267.8 |
| | 239.6 |
| | 262.5 |
|
Total | $ | 636.3 |
| | $ | 739.5 |
| | $ | 620.9 |
| | $ | 719.4 |
|
| | | | | | | |
| | | | | As of |
| | | | | 12/31/2013 | | 9/30/2014 |
Sponsored U.S. mutual funds | | | | | | | |
Stock and blended asset | | | | | $ | 341.7 |
| | $ | 362.0 |
|
Bond and money market | | | | | 93.6 |
| | 104.4 |
|
| | | | | 435.3 |
| | 466.4 |
|
Other investment portfolios | | | | | | | |
Stock and blended asset | | | | | 195.3 |
| | 203.5 |
|
Bond, money market, and stable value | | | | | 61.8 |
| | 61.3 |
|
| | | | | 257.1 |
| | 264.8 |
|
Total | | | | | $ | 692.4 |
| | $ | 731.2 |
|
Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for 6.1% of our assets under management at September 30, 2014.
The following table summarizes the other fees (in millions) earned from our sponsored U.S. mutual funds. |
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| 9/30/2013 | | 9/30/2014 | | 9/30/2013 | | 9/30/2014 |
Administrative fees | $ | 65.3 |
| | $ | 73.5 |
| | $ | 199.1 |
| | $ | 222.1 |
|
Distribution and servicing fees | $ | 30.5 |
| | $ | 37.4 |
| | $ | 84.8 |
| | $ | 106.5 |
|
| |
NOTE 3 | – INVESTMENTS IN SPONSORED FUNDS - AVAILABLE-FOR-SALE. |
We make investments in our sponsored funds for general corporate investment purposes or to provide seed capital for newly formed funds. These sponsored funds (in millions) are voting interest entities and include:
|
| | | | | | | | | | | | | | | |
| Aggregate cost | | Unrealized holding | | Aggregate fair value |
| | gains | | losses | |
December 31, 2013 | | | | | | | |
Stock and blended asset funds | $ | 354.7 |
| | $ | 302.5 |
| | $ | — |
| | $ | 657.2 |
|
Bond funds | 904.0 |
| | 53.6 |
| | (2.9 | ) | | 954.7 |
|
Total | $ | 1,258.7 |
| | $ | 356.1 |
| | $ | (2.9 | ) | | $ | 1,611.9 |
|
| | | | | | | |
September 30, 2014 | | | | | | | |
Stock and blended asset funds | $ | 496.1 |
| | $ | 259.2 |
| | $ | (.6 | ) | | $ | 754.7 |
|
Bond funds | 1,129.1 |
| | 56.6 |
| | (3.7 | ) | | 1,182.0 |
|
Total | $ | 1,625.2 |
| | $ | 315.8 |
| | $ | (4.3 | ) | | $ | 1,936.7 |
|
The unrealized holding losses are attributable to six fund holdings with an aggregate fair value of $155.9 million at December 31, 2013, and 11 fund holdings with an aggregate fair value of $322.7 million at September 30, 2014. These unrealized losses are considered temporary.
| |
NOTE 4 | – OTHER INVESTMENTS. |
These investments (in millions) include:
|
| | | | | | | |
| 12/31/2013 | | 9/30/2014 |
Cost method investments | | | |
10% interest in Daiwa SB Investments Ltd. (Japan) | $ | 6.6 |
| | $ | 3.0 |
|
Other investments | 53.5 |
| | 60.1 |
|
Equity method investments | | | |
26% interest in UTI Asset Management Company Limited (India) | 122.6 |
| | 134.7 |
|
Sponsored fund investments | 104.1 |
| | 129.4 |
|
Other investments | 4.8 |
| | 5.4 |
|
Investments held as trading | | | |
Sponsored fund investments | 8.5 |
| | 10.5 |
|
Securities held by consolidated sponsored investment portfolios | 12.5 |
| | 73.9 |
|
U.S. Treasury note | 1.0 |
| | 1.0 |
|
Total | $ | 313.6 |
| | $ | 418.0 |
|
The securities held by consolidated sponsored investment portfolios, sponsored fund investments held as trading, and the sponsored fund investments treated as equity method investments relate to investment portfolios in which we provided initial seed capital at the time of its formation. We have determined at December 31, 2013 and September 30, 2014, that these investment portfolios are voting interest entities and, as a result, have consolidated those sponsored portfolios in which we own a majority of the voting interest.
During the third quarter of 2014, we deconsolidated certain sponsored investment portfolios, in which we provided initial seed capital at the time of its formation, as we no longer had a controlling financial interest. Accordingly, we deconsolidated the carrying value of the investments held as trading, which was $25.5 million at the deconsolidation dates, and are reporting our residual interest in these sponsored investment portfolios as an equity method investment. Since our consolidated investment portfolios were carried at fair value, we did not recognize any gain or loss in our condensed consolidated statement of income upon deconsolidation. The impact of the deconsolidation on our condensed consolidated balance sheet was immaterial.
| |
NOTE 5 | – FAIR VALUE MEASUREMENTS. |
We determine the fair value of our investments using the following broad levels of inputs as defined by related accounting standards:
Level 1 – quoted prices in active markets for identical securities.
Level 2 – observable inputs other than Level 1 quoted prices including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds, and credit risk. These inputs are based on market data obtained from independent sources.
Level 3 – unobservable inputs reflecting our own assumptions based on the best information available. We do not value any investments using Level 3 inputs.
These levels are not necessarily an indication of the risk or liquidity associated with our investments. There have been no material transfers between the levels. The following table summarizes our investments (in millions) that are recognized in our condensed consolidated balance sheets using fair value measurements determined based on the differing levels of inputs.
|
| | | | | | | |
| Level 1 | | Level 2 |
December 31, 2013 | | | |
Cash equivalents | $ | 1,288.1 |
| | $ | — |
|
Investments in sponsored funds - available-for-sale | 1,611.9 |
| | — |
|
Investments held as trading | 21.0 |
| | — |
|
Total | $ | 2,921.0 |
| | $ | — |
|
| | | |
September 30, 2014 | | | |
Cash equivalents | $ | 1,424.9 |
| | $ | — |
|
Investments in sponsored funds - available-for-sale | 1,936.7 |
| | — |
|
Investments held as trading | 29.4 |
| | 55.0 |
|
Total | $ | 3,391.0 |
| | $ | 55.0 |
|
| |
NOTE 6 | – COMMON STOCK REPURCHASES. |
At September 30, 2014, a liability of $23.6 million is included in accounts payable and accrued expenses for common stock repurchases that settled the first week of October.
| |
NOTE 7 | – STOCK-BASED COMPENSATION. |
STOCK OPTIONS.
The following table summarizes the status of and changes in our stock option grants during the first nine months of 2014.
|
| | | | | | |
| Options | | Weighted- average exercise price |
Outstanding at January 1, 2014 | 31,574,958 |
| | $ | 52.18 |
|
Semiannual grants | 3,506,465 |
| | $ | 80.15 |
|
New hire grants | 37,250 |
| | $ | 80.04 |
|
Non-employee director grants | 8,400 |
| | $ | 81.80 |
|
Exercised | (2,535,645 | ) | | $ | 43.01 |
|
Forfeited | (436,613 | ) | | $ | 61.12 |
|
Expired | (946 | ) | | $ | 52.62 |
|
Outstanding at September 30, 2014 | 32,153,869 |
| | $ | 55.87 |
|
Exercisable at September 30, 2014 | 16,752,105 |
| | $ | 48.17 |
|
RESTRICTED SHARES AND STOCK UNITS.
The following table summarizes the status of and changes in our nonvested restricted shares and restricted stock units during the first nine months of 2014.
|
| | | | | | | | | |
| Restricted shares | | Restricted stock units | | Weighted-average fair value |
Nonvested at December 31, 2013 | 1,877,086 |
| | 823,593 |
| | $ | 67.21 |
|
Granted to employees and non-employee directors - time-based | 751,635 |
| | 370,020 |
| | $ | 80.16 |
|
Granted to employees - performance-based | 12,000 |
| | 67,200 |
| | $ | 80.14 |
|
Vested | (15,917 | ) | | (16,903 | ) | | $ | 69.61 |
|
Forfeited | (115,367 | ) | | (24,377 | ) | | $ | 69.20 |
|
Nonvested at September 30, 2014 | 2,509,437 |
| | 1,219,533 |
| | $ | 71.29 |
|
The nonvested at September 30, 2014, includes 55,200 performance-based restricted shares and 186,150 performance-based restricted stock units. These performance-based restricted shares and units include 43,200 restricted shares and 118,950 restricted stock units for which the performance period has lapsed and the performance threshold has been met.
FUTURE STOCK-BASED COMPENSATION EXPENSE.
The following table presents the compensation expense (in millions) to be recognized over the remaining vesting periods of the stock-based awards outstanding at September 30, 2014. Estimated future compensation expense will change to reflect future option grants; future awards of unrestricted shares, restricted shares, and restricted stock units; changes in estimated forfeitures; changes in the probability of performance thresholds being met; and adjustments for actual forfeitures.
|
| | | |
Fourth quarter 2014 | $ | 37.1 |
|
2015 | 110.4 |
|
2016 through 2019 | 115.8 |
|
Total | $ | 263.3 |
|
| |
NOTE 8 | – EARNINGS PER SHARE CALCULATIONS. |
The following table presents the reconciliation (in millions) of our net income to net income allocated to our common stockholders and the weighted-average shares (in millions) that are used in calculating the basic and diluted earnings per share on our common stock. Weighted-average common shares outstanding assuming dilution reflects the potential dilution, determined using the treasury stock method, that could occur if outstanding stock options were exercised and non-participating stock awards vested.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| 9/30/2013 | | 9/30/2014 | | 9/30/2013 | | 9/30/2014 |
Net income | $ | 270.3 |
| | $ | 303.6 |
| | $ | 760.0 |
| | $ | 913.7 |
|
Less: net income allocated to outstanding restricted stock and stock unit holders | (2.6 | ) | | (3.8 | ) | | (6.4 | ) | | (10.5 | ) |
Net income allocated to common stockholders | $ | 267.7 |
| | $ | 299.8 |
| | $ | 753.6 |
| | $ | 903.2 |
|
| | | | | | | |
Weighted-average common shares | | | | | | | |
Outstanding | 258.7 |
| | 259.7 |
| | 257.9 |
| | 260.2 |
|
Outstanding assuming dilution | 266.5 |
| | 267.4 |
| | 265.9 |
| | 268.2 |
|
The following table shows the weighted-average outstanding stock options (in millions) that are excluded from the calculation of diluted earnings per common share as the inclusion of such shares would be anti-dilutive.
|
| | | | | | | | | | | |
| Three months ended | | Nine months ended |
| 9/30/2013 | | 9/30/2014 | | 9/30/2013 | | 9/30/2014 |
Weighted-average outstanding stock options excluded | 2.7 |
| | 3.9 |
| | 2.9 |
| | 3.7 |
|
NOTE 9 - OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
The following table presents the impact of the components (in millions) of other comprehensive income or loss on deferred tax benefits (income taxes).
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| 9/30/2013 | | 9/30/2014 | | 9/30/2013 | | 9/30/2014 |
Deferred tax benefit (income taxes) on: | | | | | | | |
Net unrealized holding gains or losses | $ | (24.1 | ) | | $ | 22.2 |
| | $ | (35.5 | ) | | $ | (1.1 | ) |
Reclassification adjustment recognized in the provision for income taxes related to net gains realized on dispositions | — |
| | .3 |
| | 4.5 |
| | 17.3 |
|
Deferred tax benefit (income taxes) on net unrealized holding gains or losses | (24.1 | ) | | 22.5 |
| | (31.0 | ) | | 16.2 |
|
Deferred tax benefit (income taxes) on currency translation adjustments | 4.3 |
| | .8 |
| | 6.1 |
| | (1.7 | ) |
Total net deferred tax benefit (income taxes) | $ | (19.8 | ) | | $ | 23.3 |
| | $ | (24.9 | ) | | $ | 14.5 |
|
The changes (in millions) in each component of accumulated other comprehensive income, including reclassification adjustments for the first nine months of 2014 are presented in the table below.
|
| | | | | | | | | | | | | | | | | | | |
| Net unrealized holding gains | | | | |
| Investments in sponsored funds | | Equity share of UTI’s net unrealized holding gains | | Total net unrealized holding gains | | Currency translation adjustments | | Total |
Balances at December 31, 2013 | $ | 215.9 |
| | $ | .4 |
| | $ | 216.3 |
| | $ | (28.0 | ) | | $ | 188.3 |
|
Other comprehensive income before reclassifications and income taxes | 2.8 |
| | .2 |
| | 3.0 |
| | 4.8 |
| | 7.8 |
|
Reclassification adjustments related to net gains realized on dispositions recognized in non-operating investment income, determined using average cost | (44.6 | ) | | — |
| | (44.6 | ) | | — |
| | (44.6 | ) |
| (41.8 | ) | | .2 |
| | (41.6 | ) | | 4.8 |
| | (36.8 | ) |
Deferred tax benefits (income taxes) | 16.3 |
| | (.1 | ) | | 16.2 |
| | (1.7 | ) | | 14.5 |
|
Other comprehensive income (loss) | (25.5 | ) | | .1 |
| | (25.4 | ) | | 3.1 |
| | (22.3 | ) |
Balances at September 30, 2014 | $ | 190.4 |
| | $ | .5 |
| | $ | 190.9 |
| | $ | (24.9 | ) | | $ | 166.0 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
T. Rowe Price Group, Inc.:
We have reviewed the condensed consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries (“the Company”) as of September 30, 2014, the related condensed consolidated statements of income and comprehensive income for the three- and nine- month periods ended September 30, 2014 and 2013, the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2014 and 2013, and the related condensed consolidated statement of stockholders’ equity for the nine-month period ended September 30, 2014. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries as of December 31, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 4, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2013, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Baltimore, Maryland
October 23, 2014
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
GENERAL.
Our revenues and net income are derived primarily from investment advisory services provided to individual and institutional investors in our sponsored U.S. mutual funds and other investment portfolios. The other investment portfolios include separately managed accounts, subadvised funds, and other sponsored investment portfolios including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans. Investment advisory clients domiciled outside the U.S. account for 6.1% of our assets under management at September 30, 2014.
We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and other investment portfolios, 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.
We remain debt-free with substantial liquidity and resources that allow us to take advantage of attractive growth opportunities, invest in key capabilities, including investment professionals, technologies, and new fund offerings; and, most importantly, provide our clients with strong investment management expertise and service both now and in the future. In the coming quarters, we expect to increase funding for long-term initiatives to sustain and deepen our investment talent, expand our capabilities through enhanced technology, and broaden our distribution reach globally.
BACKGROUND.
U.S. stocks were mixed in the third quarter. Despite ongoing unrest in the Middle East and Ukraine and the Fed’s tapering of its asset purchases, major large-cap indexes continued grinding their way to new all-time highs for most of the period. Their advance was supported by generally favorable U.S. economic data and corporate fundamentals, as well as new stimulus measures from central banks in the eurozone and China. Falling long-term U.S. interest rates for much of the quarter also helped. Mid-cap and small-cap shares stumbled, however, amid concerns about valuations and risks following several years of robust returns.
Stocks in developed non-U.S. markets produced negative returns in U.S. dollar terms, in part because of a significantly stronger dollar. Equities in Europe fared worse than stocks in Asia, as the eurozone economic recovery faltered and some countries slipped back into recession. Equities in developing markets declined but outperformed most developed non-U.S. markets. All major emerging regions fell, but Asian markets held up fairly well.
Returns of several major equity market indexes for the three- and nine-month periods ended September 30, 2014, are as follows:
|
| | | | |
| | Three months ended | | Nine months ended |
Index | | 9/30/2014 | | 9/30/2014 |
S&P 500 Index | | 1.1% | | 8.3% |
NASDAQ Composite Index (1) | | 1.9% | | 7.6% |
Russell 2000 Index | | (7.4)% | | (4.4)% |
MSCI EAFE (Europe, Australasia, and Far East) Index | | (5.8)% | | (1.0)% |
MSCI Emerging Markets Index | | (3.4)% | | 2.8% |
(1) returns exclude dividends
Global and higher-risk bonds generally declined in the third quarter. In the U.S., long-term Treasuries performed well as long-term interest rates declined to their lowest levels in more than a year before rebounding in September. The yield on the benchmark 10-year Treasury note, which was 2.5% at the end of June, slipped to nearly 2.3% near the end of August but rose to 2.5% by the end of September. Municipal bonds also did well amid limited new issuance and strong demand. Other investment-grade bond segments were mostly flat. High yield bonds declined and underperformed investment-grade issues, as credit spreads widened in response to risk aversion and weaker demand.
Bonds in developed non-U.S. markets declined in dollar terms as the U.S. dollar strengthened versus other currencies. Emerging markets bonds declined but held up somewhat better than bonds in developed markets. Bonds denominated in local currencies fared worse than dollar-denominated emerging markets debt.
Returns for several major bond market indexes for the three- and nine-month periods ended September 30, 2014, are as follows:
|
| | | | |
| | Three months ended | | Nine months ended |
Index | | 9/30/2014 | | 9/30/2014 |
Barclays U.S. Aggregate Bond Index | | 0.2% | | 4.1% |
Credit Suisse High Yield Index | | (1.9)% | | 3.5% |
Barclays Municipal Bond Index | | 1.5% | | 7.6% |
Barclays Global Aggregate Ex-U.S. Dollar Bond Index | | (5.4)% | | (0.1)% |
JPMorgan Emerging Markets Bond Index Plus | | (2.1)% | | 7.2% |
ASSETS UNDER MANAGEMENT.
Assets under management (in billions) as of December 31, 2013 and September 30, 2014, are presented by investment portfolio and investment objective in the following table.
|
| | | | | | | |
| As of |
| 12/31/2013 | | 9/30/2014 |
Sponsored U.S. mutual funds | $ | 435.3 |
| | $ | 466.4 |
|
Other investment portfolios | 257.1 |
| | 264.8 |
|
Total | $ | 692.4 |
| | $ | 731.2 |
|
| | | |
| As of |
| 12/31/2013 | | 9/30/2014 |
Stock and blended asset portfolios | $ | 537.0 |
| | $ | 565.5 |
|
Fixed income portfolios | 155.4 |
| | 165.7 |
|
Total | $ | 692.4 |
| | $ | 731.2 |
|
The following table details the changes in our assets under management (in billions) and the amount of our net cash flows (in billions) that were sourced from our target-date retirement funds during the first nine months of 2014.
|
| | | | | | | | | | | | | | | |
| Quarter ended 3/31/2014 | | Quarter ended 6/30/2014 | | Quarter ended 9/30/2014 | | Nine months ended 9/30/2014 |
Assets under management at beginning of period | $ | 692.4 |
| | $ | 711.4 |
| | $ | 738.4 |
| | $ | 692.4 |
|
Net cash flows | | | | | | | |
Sponsored U.S. mutual funds | 8.4 |
| | 3.6 |
| | 1.1 |
| | 13.1 |
|
Other investment portfolios | .4 |
| | (3.8 | ) | | (.9 | ) | | (4.3 | ) |
| 8.8 |
| | (.2 | ) | | .2 |
| | 8.8 |
|
Market valuation changes and income | 10.2 |
| | 27.2 |
| | (7.4 | ) | | 30.0 |
|
Change during the period | 19.0 |
| | 27.0 |
| | (7.2 | ) | | 38.8 |
|
Assets under management at end of period | $ | 711.4 |
| | $ | 738.4 |
| | $ | 731.2 |
| | $ | 731.2 |
|
| | | | | | | |
| | | | | | | |
Net cash flows sourced from target-date retirement portfolios | $ | 6.0 |
| | $ | 5.2 |
| | $ | 3.7 |
| | $ | 14.9 |
|
| | | | | | | |
The target-date retirement portfolios invest in a broadly diversified portfolio of other Price funds or Price collective investment trusts, and automatically rebalance to maintain their specific asset allocation weightings. Assets under management in these retirement portfolios at September 30, 2014, totaled $142.4 billion, including $122.5 billion in target-date retirement funds and $19.9 billion in target-date retirement trusts.
We incur significant expenditures to attract new investment advisory clients and additional investments from our existing clients. These efforts involve costs that generally precede any future revenues that we might recognize from additions to our assets under management.
RESULTS OF OPERATIONS.
Third quarter of 2014 versus third quarter of 2013.
|
| | | | | | | | | | | | | | | |
| | Three months ended | | | | |
| | 9/30/2014 | | 9/30/2013 | | Dollar Change | | Percent Change |
(in millions, except per-share data) | | | | | | | | |
Investment advisory fees | | $ | 890.7 |
| | $ | 768.3 |
| | $ | 122.4 |
| | 15.9 | % |
Net revenues | | $ | 1,020.8 |
| | $ | 884.4 |
| | $ | 136.4 |
| | 15.4 | % |
Operating expenses | | $ | 532.1 |
| | $ | 458.5 |
| | $ | 73.6 |
| | 16.1 | % |
Net operating income | | $ | 488.7 |
| | $ | 425.9 |
| | $ | 62.8 |
| | 14.7 | % |
Non-operating investment income | | $ | 5.2 |
| | $ | 11.6 |
| | $ | (6.4 | ) | | (55.2 | )% |
Net income | | $ | 303.6 |
| | $ | 270.3 |
| | $ | 33.3 |
| | 12.3 | % |
| | | | | | | | |
Diluted earnings per share on common stock | | $ | 1.12 |
| | $ | 1.00 |
| | $ | .12 |
| | 12.0 | % |
Investment advisory fees earned in the third quarter of 2014 are up over the comparable 2013 quarter as average assets under our management increased $103.2 billion, or 16.2%, to $739.5 billion. The average annualized effective fee rate earned on our assets under management during the third quarter of 2014 was 47.8 basis points, which is virtually unchanged from the 47.9 basis points earned during the third quarter of 2013 and 47.7 basis points earned during the full year 2013. We voluntarily waived $14.6 million in money market related fees, including advisory fees and fund expenses, in the third quarter of 2014, in order to maintain a positive yield for fund investors. The fee waivers in the third quarter of 2014 were up $.7 million from the comparable 2013 quarter and represent about 2% of total investment advisory fees earned during the third quarter of 2014. Fees were waived from each of our money market mutual funds and trusts, which have combined net assets of $16.3 billion at September 30, 2014. We expect that these fee waivers will continue for the remainder of 2014 and into 2015.
Our operating margin in the third quarter of 2014 was 47.9%, a slight decline compared to 48.2% in the 2013 quarter, as we continue to make investments to broaden and deepen our investment and distribution capabilities around the world.
Net revenues
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. were $641.6 million, an increase of $100.3 million, or 18.5%, on higher average assets under management. Average mutual fund assets under management in the third quarter of 2014 were $471.7 billion, an increase of 19.1% from the average in the third quarter of 2013.
Mutual fund assets at September 30, 2014, were $466.4 billion, down $4.5 billion from the end of June 2014. Net cash inflows into the mutual funds were $1.1 billion during the third quarter of 2014 as net inflows into the bond funds of $1.9 billion were offset in part by net outflows of $.7 billion from the stock and blended asset funds and $.1 billion from the money market funds. These cash flow amounts for the third quarter of 2014 include $3.4 billion that originated in our target-date retirement funds. Decreases in market valuations, net of income, lowered our mutual fund assets under management by $5.6 billion during the third quarter of 2014.
Investment advisory revenues earned in the third quarter of 2014 from our other investment portfolios were $249.1 million, an increase of $22.1 million from the comparable 2013 quarter. Average assets under management in the third quarter of 2014 were $267.8 billion, an increase of $27.7 billion, or 11.5%, from the average in the third quarter of 2013. Assets under
management in these portfolios at September 30, 2014, were $264.8 billion, down $2.7 billion from the end of June 2014, as market depreciation, net of income, of $1.8 billion and net cash outflows of $.9 billion reduced assets under management during the 2014 quarter. These net cash outflows were primarily concentrated among a small number of institutional investors who redeemed from both equity and fixed income mandates. Investors domiciled outside the United States accounted for 6.1% of the firm's assets under management at September 30, 2014.
Administrative fee revenues increased $7.3 million to $92.7 million in the third quarter of 2014. The increase is primarily attributable to increased costs incurred to provide transfer agent servicing activities to the mutual funds and their investors. Changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their shareholders.
Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor, R, and variable annuity II class shares of our sponsored funds and portfolios increased $6.9 million from the third quarter of 2013 on greater average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs in the condensed consolidated statements of income.
Operating expenses
Compensation and related costs were $346.4 million in the third quarter of 2014, an increase of $55.1 million, or 18.9%, compared to the third quarter of 2013. The largest part of the change is attributable to a $22.6 million increase in the interim accrual for our annual variable compensation programs and $19.0 million in higher base salaries and related benefits, which result from a modest increase in salaries at the beginning of 2014 combined with a 4.9% increase in our average staff size from the third quarter of 2013. The balance of the change from the 2013 quarter is attributable to an increase in temporary personnel to support our continued investment in our capabilities, an increase in non-cash stock-based compensation expense, and higher other employee-related costs. At September 30, 2014, we employed 5,824 associates.
Advertising and promotion costs were $12.7 million in the third quarter of 2014, a decrease of $2.0 million from the comparable 2013 period. The decrease in cost is primarily a result of repurposing this spending to other distribution activities. As such, we expect total advertising and promotion costs for 2014 to be about 10% lower than such costs in 2013.
Occupancy and facility costs, together with depreciation and amortization expense, were $64.2 million in the third quarter of 2014, up $9.2 million compared to the third quarter of 2013. About a third of the increase is attributable to the opening of two new buildings at our Owings Mills, Maryland campus in the fourth quarter of 2013. The increase also includes the added costs to renovate certain existing facilities, as well as update and enhance technology capabilities, including related maintenance programs.
Other operating expenses in the third quarter of 2014 were up $4.4 million from the comparable 2013 quarter, as increased business demands and our continued investment in our operating capabilities have increased costs. These higher costs in the third quarter of 2014 include those related to our defined contribution recordkeeping business and travel costs.
Non-operating investment income
Net non-operating investment income, which includes the recognition of investment gains and losses, in the third quarter of 2014 decreased $6.4 million from the 2013 quarter to $5.2 million. The decrease is primarily due to lower market valuations which resulted in net investment losses to be recognized on certain of the firm's other investments in the third quarter of 2014 compared with net investment gains in the 2013 quarter.
Provision for income taxes
The effective tax rate for the third quarter of 2014 was 38.5%, and we currently estimate that our effective tax rate for the full-year 2014 will be about 38.4%. Our effective income tax rate reflects the relative contribution of pre-tax income generated by our non-U.S. subsidiaries that are subject to tax rates that are lower than our U.S. rates. Changes in the relative contribution of pre-tax income from U.S. and non-U.S. sources or changes in tax rates in the U.S. or relevant non-U.S. jurisdictions may affect our effective income tax rate and overall net income in the future.
First nine months of 2014 versus first nine months of 2013.
|
| | | | | | | | | | | | | | | |
| | Nine months ended | | | | |
| | 9/30/2014 | | 9/30/2013 | | Dollar Change | | Percent Change |
(in millions, except per-share data) | | | | | | | | |
Investment advisory fees | | $ | 2,572.4 |
| | $ | 2,210.9 |
| | $ | 361.5 |
| | 16.4 | % |
Net revenues | | $ | 2,959.7 |
| | $ | 2,554.4 |
| | $ | 405.3 |
| | 15.9 | % |
Operating expenses | | $ | 1,548.8 |
| | $ | 1,357.1 |
| | $ | 191.7 |
| | 14.1 | % |
Net operating income | | $ | 1,410.9 |
| | $ | 1,197.3 |
| | $ | 213.6 |
| | 17.8 | % |
Non-operating investment income | | $ | 73.4 |
| | $ | 31.3 |
| | $ | 42.1 |
| | 134.5 | % |
Net income | | $ | 913.7 |
| | $ | 760.0 |
| | $ | 153.7 |
| | 20.2 | % |
| | | | | | | | |
Diluted earnings per share on common stock | | $ | 3.37 |
| | $ | 2.83 |
| | $ | .54 |
| | 19.1 | % |
Investment advisory revenues earned in the first nine months of 2014 increased over the comparable 2013 period, as average assets under our management increased $98.5 billion, or 15.9%, to $719.4 billion. The average annualized fee rate earned on our assets under management was 47.8 basis points in the first nine months of 2014, up from the 47.6 basis points earned in the first nine months of 2013. We waived $43.9 million in money market related fees, including advisory fees and fund expenses, in the first nine months of 2014, an increase of $7.1 million from the $36.8 million waived in the 2013 period. The fee waivers in the first nine months of 2014 represent about 2% of our total investment advisory revenues earned during the same period.
Greater average assets under management and the higher annualized fee rate have increased our investment advisory revenues and helped lift our operating margin in the first nine months of 2014 to 47.7% compared to 46.9% in the 2013 period. Non-operating investment income for the first nine months of 2014 includes higher gains of $33.1 million realized from the sale of certain of our sponsored fund holdings. The proceeds were used to provide additional seed capital to other sponsored funds in support of our distribution efforts outside the U.S.
Net revenues
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. increased 19.0%, or $294.5 million, to $1.8 billion, on higher average mutual fund assets. Average mutual fund assets in the first nine months of 2014 were $456.9 billion, an increase of 19.8% from the average for the comparable 2013 period.
Mutual fund assets were $466.4 billion at September 30, 2014, an increase of $31.1 billion from $435.3 billion at the end of 2013. Investors added net cash inflows during the first nine months of 2014 of $13.1 billion, including $7.9 billion into our bond funds and $5.2 billion into our stock and blended asset funds. These cash flow amounts for the first nine months of 2014 include $12.1 billion that originated in our target-date retirement funds. Higher market appreciation and income in the first nine months of 2014 increased our mutual fund assets under management by $18.0 billion.
Investment advisory revenues earned on the other investment portfolios for the first nine months of 2014 were $726.6 million, an increase of $67.0 million, or 10.2%, from the $659.6 million earned in the comparable 2013 period. Average assets in these portfolios were $262.5 billion during the first nine months of 2014, up $22.9 billion from the comparable 2013 period. Assets under management in our other investments portfolios increased $7.7 billion from the end of 2013 to $264.8 billion at September 30, 2014. Market appreciation and income of $12.0 billion was offset in part by net outflows of $4.3 billion during the first nine months of 2014. These net cash outflows were primarily concentrated among a few subadvisory and international institutional clients and came from both fixed income and equity mandates.
Administrative fee revenues increased $22.7 million to $280.8 million in the first nine months of 2014. The increase is primarily attributable to the increased costs incurred to provide transfer agent servicing activities to the mutual funds and their investors. As noted above, changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their investors.
Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor, R, and variable annuity II class shares of our sponsored portfolios were $106.5 million in the first nine months of 2014, an increase of $21.7 million from the comparable 2013 period on greater average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the
costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs in the condensed consolidated income statements.
Operating expenses
Compensation and related costs were $991.7 million in the first nine months of 2014, an increase of $133.0 million, or 15.5%, compared to the 2013 period. The largest part of the increase is attributable to a $47.2 million increase in our interim accrual for our annual variable compensation program and a $44.9 million increase in salaries and related benefits. Our average staff size has increased 5.1% from the first nine months of 2013. Higher temporary staff expenses, non-cash stock-based compensation expense, and other employee costs account for the remainder of the increase in compensation and related costs in the 2014 period.
Advertising and promotion costs were $49.9 million in the first nine months of 2014, a decrease of $9.0 million from the comparable 2013 period. The decrease in cost is primarily a result of repurposing this spending to other distribution activities.
Occupancy and facility costs, together with depreciation expense, increased $24.2 million, or 14.5%, compared to the first nine months of 2013. Nearly half of the increase is attributable to the opening of two new buildings at our Owings Mills, Maryland campus in the fourth quarter of 2013. The increase also includes the added costs to renovate certain existing facilities, as well as update and enhance technology capabilities, including related maintenance programs. These increases were offset by the non-recurrence of $3.5 million in costs incurred in the first nine months of 2013 to terminate certain facility leases.
Other operating expenses were $210.0 million in the first nine months of 2014, an increase of $21.8 million from the comparable 2013 period as increased business demands and our continued investment in capabilities have increased costs. These costs include costs related to our defined contribution recordkeeping business, information and third-party service costs, travel costs, and consulting and professional fees.
Non-operating investment income
Our non-operating investment income, which includes the recognition of investment gains and losses, was up $42.1 million from the first nine months of 2013. The increase is primarily due to the 2014 results including $44.6 million in gains realized on the sale of certain sponsored fund holdings compared with $11.5 million in gains realized in the comparable 2013 period. The balance of the increase is primarily a result of higher dividends earned on our sponsored investment portfolios and higher earnings recognized from our investment in UTI during the first nine months of 2014.
CAPITAL RESOURCES AND LIQUIDITY.
Operating activities during the first nine months of 2014 provided cash flows of $1,216.1 million, up $57.8 million from the 2013 period. Higher net income, non-cash depreciation and amortization, and non-cash stock-based compensation in the 2014 period increased cash flows by $153.7 million, $17.9 million, and $14.6 million, respectively, over the 2013 year-to-date period. These increases were offset by $64.4 million in more cash used in the first nine months of 2014 to seed new sponsored investment portfolios that we are consolidating and treating their underlying investment holdings as trading securities. Our operating cash flows in the first nine months of 2014 were also adjusted for $33.1 million in higher gains realized from the sale of certain available-for-sale sponsored fund investments as the related proceeds are reflected as an investing activity in our condensed consolidated statements of cash flows. Timing differences on the cash settlement of our assets and liabilities decreased our operating cash flows by $29.2 million compared to the 2013 period. Our interim operating cash flows do not include the cash impact of variable compensation that is accrued throughout the year before being substantially paid out in December.
Net cash used in investing activities totaled $415.7 million in the first nine months of 2014, an increase of $277.1 million from the comparable 2013 period, including an additional $246.5 million of net investments made into our sponsored funds. We also increased our property and equipment additions and other net investing activity by $8.0 million and $13.4 million, respectively, during the first nine months of 2014 compared to the 2013 period. The first nine months of 2013 also included $9.2 million in net cash proceeds received from the debt securities held by our savings bank subsidiary, an entity that was sold in the fourth quarter of 2013.
Net cash used in financing activities was $553.9 million in the first nine months of 2014, up $348.4 million from the comparable 2013 period. We increased our common stock repurchases by almost $270 million through the first nine months of 2014 compared with the 2013 period. Our cash outflow for dividends paid in 2014 increased $50.1 million due primarily to the 16% increase in our quarterly per-share dividend. The remaining increase in net cash used in financing activities is primarily
due to a $48.6 million decrease in proceeds received from option exercises, as the number of options exercised during the first nine months of 2014 declined by about 1.5 million compared to the 2013 period.
Our cash and sponsored investment holdings at September 30, 2014, were $3.6 billion, and we have no debt. We anticipate property and equipment expenditures for the full year 2014 to be about $130 million and expect to fund them from our operating resources. We generally repurchase shares of our common stock over time to offset the dilution created by our equity-based compensation plans. Given the availability of our financial resources, we do not maintain an available external source of liquidity.
NEW ACCOUNTING STANDARDS.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 - Revenue from Contracts with Customers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that will be applied to determine the measurement of revenue and timing of when it is recognized. We are required to adopt the new standard on January 1, 2017. We are currently evaluating the impact this standard will have on our financial position and results of operations.
We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our condensed consolidated statements, including that which we have not yet adopted. We do not believe that any such guidance has or will have a material effect on our financial position or results of operations.
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 estimated effective income tax rate; and our expectations regarding financial markets, future transactions, dividends, 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 our Form 10-K Annual Report for 2013. 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 T. Rowe Price U.S. mutual funds (Price funds) and other managed investment portfolios; 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 portfolios; 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 Price funds and other managed investment portfolios as compared to 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 Price funds and could be adversely affected if the independent directors of one or more of the 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 investee’s 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 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.; variations in the level of total compensation expense due to, among other things, bonuses, stock option grants and other equity grants, other incentive awards, 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 our investment in and 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; 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 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 mutual funds and investing in general, or in particular classes of mutual funds or other investments.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
There has been no material change in the information provided in Item 7A of the Form 10-K Annual Report for 2013.
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Item 4. | Controls and Procedures. |
Our management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. Based on that evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures as of September 30, 2014, are effective at the reasonable assurance level to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, including this Form 10-Q quarterly report, is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive and principal financial officers, has evaluated any change in our internal control over financial reporting that occurred during the third quarter of 2014, and has concluded that there was no change during the third quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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Item 1. | Legal Proceedings. |
From time to time, various claims against us arise in the ordinary course of business, including employment-related claims. In the opinion of management, after consultation with counsel, the likelihood that an adverse determination in one or more pending claims would have a material adverse effect on our financial position or results of operations is remote.
With the exception to the update provided below related to our legal and regulatory risk factors, there have been no material changes in the information provided in Item 1A of our Form 10-K Annual Report for 2013.
On July 23, 2014, the Securities and Exchange Commission (SEC) adopted additional reforms regulating money market funds. The reforms will require institutional non-government money market funds to operate with a floating net asset value (NAV) and require all non-government money market funds to impose liquidity fees and redemption gates under certain conditions. Government and retail money market funds will continue using current pricing and accounting methods to seek to maintain a stable NAV. The SEC adopted other reforms for money market funds, including additional disclosure and reporting requirements, tightening of diversification requirements, and enhanced stress testing. These reforms will take effect over the next two years and could have a negative impact on the attractiveness of such funds to investors and also subject us to additional regulatory requirements and costs to comply with such requirements. However, we do not believe that these reforms, once effective, will have a material impact on our business.
We are subject to various laws and regulations in the jurisdictions where we operate outside the U.S., including pan-European Directives, such as the Alternative Investment Fund Management Directive (AIFMD). The AIFMD has come into effect and, although there are additional reporting and other requirements mandated by it, we do not anticipate any material impacts from its implementation.
As previously noted, we cannot predict the nature of future changes to the legal and regulatory requirements applicable to our business, nor the extent of the impacts that will result from current or future proposals. However, any such changes are likely to increase the costs of compliance and the complexity of our operations. They may also result in changes to our product or service offerings. The changing regulatory landscape may also impact a number of our service providers and to the extent such providers alter their services or increase their fees it may impact our expenses or those of the products we offer.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
(c) Repurchase activity during the third quarter of 2014 is as follows.
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Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares that May Yet Be Purchased Under the Program |
July | | 414,971 |
| | $ | 79.54 |
| | 400,000 |
| | 10,087,428 |
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August | | 1,866,002 |
| | $ | 78.26 |
| | 1,800,000 |
| | 8,287,428 |
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September | | 1,025,504 |
| | $ | 79.22 |
| | 982,758 |
| | 7,304,670 |
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Total | | 3,306,477 |
| | $ | 78.72 |
| | 3,182,758 |
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Shares repurchased by us in a quarter may include repurchases conducted pursuant to publicly announced board authorizations, outstanding shares surrendered to the company to pay the exercise price in connection with swap exercises of employee stock options, and shares withheld to cover the minimum tax withholding obligation associated with the vesting of restricted stock awards. Of the total number of shares purchased during the third quarter of 2014, 122,991 were related to shares surrendered in connection with employee stock option exercises and 728 were related to shares withheld to cover tax withholdings associated with the vesting of restricted stock awards.
The 3,182,758 shares of our common stock were repurchased pursuant to the Board of Directors’ September 8, 2010, publicly announced authorization.
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Item 4. | Mine Safety Disclosures. |
Not applicable.
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Item 5. | Other Information. |
On October 23, 2014, we issued an earnings release reporting our results of operations for the third quarter of 2014 and first nine months of 2014. A copy of that earnings release is furnished herewith as Exhibit 99. This information shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.
SEC FILINGS.
We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. To obtain any of this information, access our website at troweprice.com. We use our website as a channel of distribution for material company information.
The following exhibits required by Item 601 of Regulation S-K are furnished herewith.
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3(i).1 | | Charter of T. Rowe Price Group, Inc., as Amended by Articles of Amendment dated April 10, 2008. (Incorporated by reference from Form 10-Q Report for the quarterly period ended June 30, 2008 filed on April 10, 2008; File No. 033-07012-99). |
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3(ii) | | Amended and Restated By-Laws of T. Rowe Price Group, Inc. as of February 12, 2009. (Incorporated by reference from Form 8-K Current Report file on February 17, 2009; File No. 033-07012-99). |
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10.03 | | Transfer Agency and Service Agreement as of January 1, 2014, between T. Rowe Price Services, Inc. and the T. Rowe Price Funds. (Incorporated by reference from Form 485BPOS filed on April 25, 2014; File No. 033-05646). |
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10.04 | | Agreement as of January 1, 2014, between T. Rowe Price Retirement Plan Services, Inc. and certain of the T. Rowe Price Funds. (Incorporated by reference from Form 485BPOS filed on April 25, 2014; File No. 033-05646). |
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10.05 | | Agreement as of January 1, 2014 between T. Rowe Price Associates, Inc. and the T. Rowe Price Funds. (Incorporated by reference from Form 485BPOS filed on April 25, 2014; File No. 033-05646). |
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10.19 | | Supplemental Savings Plan (Incorporated by reference from Form S-8 registration statement filed on October 23, 2014; File No. 333-199560) |
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10.19.1 | | Supplemental Savings Plan - Schedule 1 - Sponsoring Employees (Incorporated by reference from Form S-8 registration statement filed on October 23, 2014; File No. 333-199560) |
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10.19.2 | | Supplemental Savings Plan - Schedule 2 - UK Addendum (Incorporated by reference from Form S-8 registration statement filed on October 23, 2014; File No. 333-199560) |
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15 | | Letter from KPMG LLP, independent registered public accounting firm, re unaudited interim financial information. |
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31(i).1 | | Rule 13a-14(a) Certification of Principal Executive Officer. |
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31(i).2 | | Rule 13a-14(a) Certification of Principal Financial Officer. |
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32 | | Section 1350 Certifications. |
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99 | | Earnings release issued October 23, 2014, reporting our results of operations for the third quarter and first nine months of 2014. |
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101 | | The following series of unaudited XBRL-formatted documents are collectively included herewith as Exhibit 101. The financial information is extracted from T. Rowe Price Group’s unaudited condensed consolidated interim financial statements and notes that are included in this Form 10-Q Report. |
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| | 101.INS | XBRL Instance Document (File name: trow-20140930.xml). |
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| | 101.SCH | XBRL Taxonomy Extension Schema Document (File name: trow-20140930.xsd). |
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| | 101.CAL | XBRL Taxonomy Calculation Linkbase Document (File name: trow-20140930_cal.xml). |
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| | 101.LAB | XBRL Taxonomy Label Linkbase Document (File name: trow-20140930_lab.xml). |
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| | 101.PRE | XBRL Taxonomy Presentation Linkbase Document (File name: trow-20140930_pre.xml). |
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| | 101.DEF | XBRL Taxonomy Definition Linkbase Document (File name: trow-20140930_def.xml). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on October 23, 2014.
T. Rowe Price Group, Inc.
By: /s/ Kenneth V. Moreland
Vice President, Chief Financial Officer and Treasurer