What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-29 compared with 2020-04-28 · 234 added, 134 removed, 404 unchanged (48% of the section changed)

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MARKET TRENDS.

stocks plunged in the later part of the first quarter of 2020.

After starting the year on a strong note, equities fell as a coronavirus outbreak that originated in China in late 2019 rapidly spread to other countries and was deemed a global pandemic.

The sell-off intensified in March, as the coronavirus spread rapidly in the U.S., prompting government officials to close schools, nonessential businesses, and public facilities.

The Federal Reserve took drastic actions to increase financial market liquidity and support the flow of credit to consumers and businesses.

Stocks did pare some losses in the final days of the quarter as the Trump administration and Congress passed into law a massive economic stimulus bill.

equities surged during the second quarter 2020, bouncing back sharply to recover some of their steep losses in February and March.

Massive stimulus efforts from the Federal Reserve and the federal government as well as the gradual lifting of lockdowns and the reopening of economies drove the market’s vigorous gains during the quarter.

While most U.S.

economic data were dismal, some better-than-expected readings later in the quarter boosted investor sentiment.

However, as the quarter ended, investors were somewhat concerned about increasing coronavirus cases in a number of states, which prompted some governors to stop or reverse some of their reopening efforts.

Stocks in developed non-U.S.

equity markets declined broadly;

returns for U.S.

investors were hurt by a stronger U.S.

dollar versus many other currencies.

In Asia, Australian shares fell more than 33%, while equities in Japan and Hong Kong declined roughly 17%.

In Europe, equity markets in Spain and Italy, where the coronavirus outbreak has been severe, fell roughly 30% and 29%, respectively.

Stocks in emerging equity markets declined slightly more than developed markets.

In emerging Europe markets, Russian shares fell more than 36% amid plunging oil prices following OPEC heavyweight Saudi Arabia’s decision to increase production and offer discounts to global customers.

Emerging Asian markets were negative, though Chinese shares held up best with losses of roughly 10%.

China’s lockdown efforts started to ease late in the first quarter, which helped equities recover partially from earlier losses.

In Latin America, all major markets posted losses of at least 30%.

Returns of several major equity market indexes for the first quarter of 2020 , were as follows:

equity markets advanced but underperformed U.S.

European stock markets were positive in U.S.

dollar terms, with German stocks leading the way.

All developed Asian and Far East markets were positive, with Australia and New Zealand displaying the best returns.

Japanese stocks returned almost 12% in U.S.

dollar terms.

Emerging markets stocks outperformed developed non-U.S.

Asian markets were positive, with Indonesian shares leading the region.

Latin American shares were also very strong, led by Argentina and Brazil.

In emerging Europe, Russian and Turkish stocks returned about 19% in U.S.

dollar terms.

Returns of several major equity market indexes for the three- and six-month periods ended June 30, 2020 , were as follows:

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S&P 500 Index

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(1) Returns exclude dividends

Global bond returns were largely negative in U.S.

dollar terms.

investment-grade universe, Treasuries surged as the Federal Reserve slashed short-term interest rates to near 0%, announced massive purchases of U.S.

government bonds and other securities, and rolled out a variety of programs and “facilities” intended to boost market liquidity and the flow of credit.

The 10-year Treasury note yield decreased from 1.92% at the end of 2019 to 0.70% at the end of March.

Mortgage-backed securities significantly lagged Treasuries amid substantial mortgage refinancing activity.

Asset-backed securities posted slightly negative returns, while corporate bonds declined in anticipation of weaker corporate profits and a recession.

Municipal bonds underperformed taxable bonds.

High yield bonds posted significant losses as the yield difference between higher- and lower-quality bonds widened dramatically.

Global bonds produced positive returns.

investment-grade market, corporate bonds fared best as credit spreads narrowed in part because the Federal Reserve announced that it would begin buying a broad portfolio of U.S.

corporate bonds.

Asset-backed securities rose to a lesser extent, while mortgage-backed securities and Treasuries lagged with modest returns.

The Fed kept short-term interest rates near zero percent;

the 10-year Treasury note yield decreased from .70% to .66%.

Tax-free municipal bonds produced positive returns but narrowly underperformed the broad taxable bond market.

High yield bonds easily outperformed the investment-grade market.

Bonds in developed non-U.S.

countries produced negative returns in U.S.

markets produced gains in U.S.

dollar terms.

Bond prices climbed as longer-term interest rates in many countries declined, but most major currencies fell versus the dollar, reducing returns to U.S.

Most developed market governments unveiled fiscal stimulus measures, while most central banks responded with significant monetary easing programs.

Emerging markets bonds were broadly negative.

dollar-denominated emerging markets bonds slightly outperformed local currency bonds amid broad dollar strength.

Most developing market currencies declined during the quarter.

Returns for several major bond market indexes for the first quarter of 2020 , were as follows:

Eurozone bond returns to U.S.

investors were helped by dollar weakness against the Euro.

Emerging markets bonds displayed strong positive returns.

Bonds denominated in U.S.

dollars outperformed local currency issues, as weakness in certain currencies, such as the Brazilian real and the Turkish lira, weighed on local bond performance in U.S.

dollar terms.

Returns for several major bond market indexes for the three- and six-month periods ended June 30, 2020 , were as follows:

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Bloomberg Barclays U.S.

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ASSETS UNDER MANAGEMENT.

Assets under management ended the first quarter of 2020 at $1,008.8 billion , a decrease of $198.0 billion from December 31, 2019 .

Net cash outflows were $6.0 billion , and clients transferred $4.4 billion in net assets from the U.S.

mutual funds to other investment products , of which $4.3 billion was transferred to retirement date trusts.

Market depreciation and losses, net of dividends not reinvested, reduced our assets under management by $192.0 billion in the first quarter of 2020 .

The following tables detail changes in our assets under management, by vehicle and asset class during the first quarter of 2020 :

Assets under management ended the second quarter of 2020 at $1,220.0 billion , an increase of $211.2 billion from March 31, 2020 and $13.2 billion from the end of 2019 .

Net cash inflows were $14.7 billion , including large subscriptions from institutional clients into U.S.

equity and multi-asset, and clients transferred $4.4 billion in net assets from the U.S.

mutual funds to other investment products , of which $1.8 billion transferred into the retirement date trusts.

Market appreciation and income, net of dividends not reinvested, increased our assets under management by $196.5 billion in the second quarter of 2020 .

For the six months ended June 30, 2020 , net cash inflows were $8.7 billion , and clients transferred $8.8 billion in net assets from the U.S.

mutual funds to other investment products , of which $6.1 billion transferred into the retirement date trusts.

Market appreciation and income, net of dividends not reinvested, increased our assets under management by $4.5 billion in the six months ended June 30, 2020 .

The following tables detail changes in our assets under management, by vehicle and asset class during the three- and six-month periods ended June 30, 2020 :

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(in billions)

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Other investment products

Subadvised and separate accounts

Other investment products

Assets under management at beginning of period

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Net market appreciation (depreciation) and income

Net distributions reinvested (not reinvested)

Net distributions not reinvested

Change during the period

Assets under management at March 31, 2020

Assets under management at June 30, 2020

Three months ended 6/30/2020

Six months ended 6/30/2020

(in billions)

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Multi-asset (1)

Fixed income, including money market

Multi-asset (1)

Assets under management at beginning of period

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Change during the period

Assets under management at March 31, 2020

Assets under management at June 30, 2020

(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.

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Investment advisory clients outside the U.S.

account for about 7.4% of our assets under management at March 31, 2020 and 6.9% at December 31, 2019 .

account for about 8.2% of our assets under management at June 30, 2020 and 6.9% at December 31, 2019 .

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.

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Target date retirement U.S.

Target date separately managed retirement accounts

Target date separate accounts

Target date retirement trusts

Net cash inflows into our target date retirement products were $.7 billion in the first quarter of 2020 .

A redemption in a risk-managed strategy from a large institutional investor was the primary driver of the multi-asset outflows during the first quarter of 2020 .

Our target date retirement products experienced net cash outflows of $.2 billion in the second quarter of 2020 and net cash inflows of $.5 billion in the first six months of 2020 .

INVESTMENT PERFORMANCE.

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The percentage of our U.S.

mutual funds (1) (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 March 31, 2020 , were:

Outperformed Morningstar median (2)

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RESULTS OF OPERATIONS.

The following table and discussion sets forth information regarding our consolidated financial results for the three months ended March 31, 2020 and 2019 on a U.S.

The following table and discussion sets forth information regarding our consolidated financial results for the three and six months ended June 30, 2020 and 2019 on a U.S.

GAAP basis as well as a non-GAAP basis.

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(in millions, except per-share data)

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Net operating income

Non-operating income (loss) (1)

Non-operating income (1)

Net income attributable to T.

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GAAP measures at the end of the Results of Operations section of this Management’s Discussion and Analysis.

Results Overview

Results Overview - Quarter ended June 30, 2020

Investment advisory revenues.

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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 the first quarter of 2020 increased over the comparable 2019 quarter as average assets under our management increase d $119.2 billion , or 11.4% , to $1,162.7 billion .

The average annualized effective fee rate earned during the first quarter of 2020 was 45.9 basis points , compared with 46.4 basis points earned during the first quarter of 2019 .

The decline in our effective fee rate for the first quarter of 2020 compared to the same period in 2019 was primarily due to client transfers within the complex from higher fee vehicles to lower fee vehicles over the last twelve months.

Investment advisory revenues earned in the second quarter of 2020 increased over the comparable 2019 quarter as average assets under our management increase d $40.4 billion , or 3.7% , to $1,140.2 billion .

The average annualized effective fee rate earned during the second quarter of 2020 was 45.6 basis points , compared with 46.3 basis points earned during the second quarter of 2019 .

Further, beginning in the second quarter of 2020 , we voluntarily waived a portion of our money market advisory fees and fund expenses in order to maintain a positive yield for investors.

We waived $2.7 million, or less than 1% of total investment advisory fees from certain of our money market mutual funds, trusts and other investment portfolios during the second quarter of 2020 .

At June 30, 2020 , combined net assets of the funds and trusts in which we waived fees in the second quarter of 2020 were $22.4 billion.

We expect to continue to waive fees for at least the remainder of 2020 .

Our annualized effective fee rate declined primarily due to client transfers within the complex to lower fee vehicles or share classes over the last twelve months.

Operating expenses.

Operating expenses were $755.4 million in the first quarter of 2020 compared with $794.8 million in the first quarter of 2019 .

The decrease in operating expenses for the first quarter of 2020 was primarily due to a change in market-related compensation expense of $100.3 million related to the supplemental savings plan.

Partially offsetting this decrease were higher salary and benefits, interim bonus accrual, stock-based compensation expense and the continued strategic investments in the first quarter of 2020 compared to the first quarter of 2019 .

For the first quarter of 2020 , the compensation expense related to the supplemental savings plan is more than offset by the non-operating losses incurred on the investments used to economically hedge the related liability.

On a non-GAAP basis, our operating expenses in the first quarter of 2020 increased 8.1% to $817.9 million compared to the first quarter of 2019 .

Operating expenses were $861.7 million in the second quarter of 2020 compared with $780.1 million in the second quarter of 2019 .

The increase in operating expenses for the second quarter of 2020 was primarily due to an increase in market-related compensation expense of $60.5 million related to the increase in the supplemental savings plan liability and, to a lesser extent, higher salaries and the firm’s continued strategic investments.

For the second quarter of 2020 , the higher compensation expense related to the supplemental savings plan was largely offset by the non-operating gains earned on the investments used to economically hedge the related liability.

On a non-GAAP basis, our operating expenses in the second quarter of 2020 increased 2.8% to $785.8 million compared to the second quarter of 2019 .

Our non-GAAP operating expenses do not include the impact of our supplemental savings plan and consolidated sponsored investment products.

See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.

Given the market environment, we updated our 2020 non-GAAP operating expense growth range guidance from a range of 6%-9% to a range of 1%-4%.

We expect certain expense categories, such as travel- and AUM-related, to be naturally impacted more than others.

Most importantly, we will continue to make investments in our critical strategic initiatives to promote long-term growth in the business.

Operating margin.

Our operating margin in the second quarter of 2020 was 39.1% , compared to 44.1% earned in the 2019 quarter.

The decrease in our operating margin for the second quarter of 2020 compared to the 2019 period was primarily driven by the higher compensation expense related to our supplemental savings plan as markets in the second quarter of 2020 outperformed the same period in 2019 .

Diluted earnings per share.

Diluted earnings per share was $2.55 for the second quarter of 2020 as compared to $2.15 for the second quarter of 2019 .

The 18.6% increase was primarily driven by the significantly higher investment gains recognized in the second quarter of 2020 as compared to the second quarter of 2019 as well as a 4.1% decline in weighted average shares outstanding.

These drivers of the increase in diluted earnings per share were partially offset by lower operating income in the second quarter of 2020.

On a non-GAAP basis, diluted earnings per share was $2.29 for the second quarter of 2020 as compared to $2.03 for the second quarter of 2019 .

The increase in diluted earnings per share was primarily due to higher investment gains and lower shares outstanding.

Results Overview - Year-to-Date ended June 30, 2020

Investment advisory revenues.

Investment advisory revenues earned in the six months ended June 30, 2020 increased over the comparable 2019 period as average assets under our management increased $79.6 billion , or 7.4% , to $1,151.4 billion .

The average annualized effective fee rate earned on our assets under management during the six months ended June 30, 2020 was 45.8 basis points compared with 46.4 basis points earned during the same period of 2019 .

Our annualized effective fee rate declined primarily due to client transfers within the complex to lower fee vehicles or share classes over the last twelve months.

Operating expenses.

Operating expenses were $1,617.1 million in the six months ended June 30, 2020 compared with $1,574.9 million in the 2019 period.

The increase in operating expenses was primarily due to higher salary and benefits expense, interim bonus accrual, stock-based compensation expense and our continued strategic investments.

These increases were partially offset by lower market-related compensation expense of $39.8 million related to the supplemental savings plan.

On a non-GAAP basis, our operating expenses for the six months ended June 30, 2020 increased 5.4% to $1,603.7 million compared to the 2019 period.

Our non-GAAP operating expenses do not include the impact of our supplemental savings plan and consolidated sponsored investment products.

See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.

While we anticipate that the coronavirus pandemic will continue to reduce certain expense categories, such as travel, we have changed our expected full-year 2020 non-GAAP operating expense growth to 3%-6%, from the 1%-4% provided in April 2020 as the sharp market recovery in the second quarter of 2020 has increased our AUM-related expenses.

This range includes investments in our critical strategic initiatives to promote long-term growth of the business.

We could elect to further adjust our expense growth should unforeseen circumstances arise, including significant market movements and ongoing disruption resulting from the coronavirus pandemic.

Operating margin.

Our operating margin in the first quarter of 2020 was 48.4% , compared to 40.1% earned in the 2019 quarter.

The increase in our operating margin for the three months ended March 31, 2020 compared to the 2019 period is primarily driven by the lower compensation expense related to our supplemental savings plan as markets in the first quarter of 2020 underperformed the same period in 2019.

Our operating margin in the six months ended June 30, 2020 was 43.8% , compared to 42.2% earned in the 2019 period.

The increase in our operating margin for the six months ended June 30, 2020 compared

to the 2019 period was primarily driven by the lower compensation expense related to our supplemental savings plan as markets in the first half of 2020 underperformed the same period in 2019 as global markets were disrupted by the coronavirus pandemic during 2020.

Diluted earnings per share.

Diluted earnings per share was $1.41 for the three months ended March 31, 2020 and $2.09 for the three months ended March 31, 2019 .

The 32.5% decrease was primarily driven by significant losses incurred on our investment portfolio in the three months ended March 31, 2020 as compared to gains generated in the three months ended March 31, 2019 .

This decrease in diluted earnings per share was partially offset by higher operating income and a lower effective tax rate.

On a non-GAAP basis, diluted earnings per share was $1.87 for both the three months ended March 31, 2020 and 2019 .

For the three months ended March 31, 2020 , higher operating income, lower shares outstanding, and a lower effective tax rate were completely offset by non-operating losses.

Diluted earnings per share was $3.95 for the six months ended June 30, 2020 as compared to $4.23 for the six months ended June 30, 2019 .

The 6.6% decrease was primarily driven by investment losses recognized in the six months ended June 30, 2020 as compared to gains generated in the six months ended June 30, 2019 .

Higher operating income, lower outstanding shares, and a lower effective tax rate in the first half of 2020 reduced the impact of the investment losses.

Diluted earnings per share on a non-GAAP basis was $4.15 for the six months ended June 30, 2020 as compared to $3.90 for the six months ended June 30, 2019 .

The increase in adjusted diluted earnings per share was primarily due to higher operating income, lower shares outstanding, and a lower effective tax rate.

The impact of these drivers were partially offset by investment losses recognized in the 2020 period.

See our non-GAAP reconciliations later in this Management’s Discussion and Analysis section.

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Investment advisory fees.

Investment advisory revenues earned in the first quarter of 2020 from our U.S.

mutual funds were $876.2 million , an increase of 7.4% from the comparable 2019 quarter.

Average assets under management in these funds for the first quarter of 2020 increased 7.2% from the 2019 quarter to $654.3 billion .

Investment advisory revenues earned in the second quarter of 2020 from our U.S.

mutual funds were $823.1 million , a decrease of 4.4% from the comparable 2019 quarter.

Average assets under management in these funds for the second quarter of 2020 decreased 1.6% from the 2019 quarter to $628.6 billion .

Investment advisory revenues earned in the six months ended June 30, 2020 from the firm's U.S.

mutual funds were $1,699.3 million , an increase of 1.4% from the comparable 2019 period.

Average assets under management in these funds for the six months ended June 30, 2020 increased 2.7% from the 2019 period to $641.5 billion .

The difference in the percentage of change in revenue compared with assets under management for both the 2020 quarter and year-to-date periods from the 2019 period is primarily due to client transfers within the complex to lower fee vehicles or shares classes during the last twelve months.

Subadvised and separate accounts and other investment products

Investment advisory revenues earned in the first quarter of 2020 from subadvised and separate accounts and other investment products were $451.6 million , an increase of 19.4% from the comparable 2019 quarter.

Investment advisory revenues earned in the second quarter of 2020 from subadvised and separate accounts and other investment products were $470.7 million , an increase of 14.9% from the comparable 2019 quarter.

Average assets under management for these products increase d 10.9% from the 2019 quarter to $511.6 billion .

Since the first quarter of 2019, the inflows into the Japanese ITMs, which have a higher than average fee rate, have caused investment advisory fees to increase at a rate greater than the increase in average assets under management for our subadvised and separate accounts and other products.

Investment advisory revenues earned in the six months ended June 30, 2020 from subadvised and separate accounts as well as other investment products were $922.3 million , an increase of 17.1% from the 2019 period.

Average assets under management for these products increased 14.0% from the 2019 period to $509.9 billion .

Inflows into the Japanese ITMs, which have a higher than average fee rate have caused investment advisory fees in these portfolios to increase at a rate greater than the increase in their average assets under management.

The fee rate earned on the Japanese ITMs is substantially offset by the costs incurred to distribute these products.

Those costs are recorded as part of distribution and servicing expenses.

Administrative, distribution, and servicing fees.

Administrative, distribution, and servicing fees in the first quarter of 2020 were $134.8 million , an increase of $1.7 million , or 1.3% , from the comparable 2019 quarter.

Administrative, distribution, and servicing fees in the second quarter of 2020 were $121.6 million , a decrease of $3.4 million , or 2.7% , from the comparable 2019 quarter.

For the six months ended June 30, 2020 , these fees were $256.4 million , a decrease of $1.7 million , or .7% , from the 2019 period.

In this line, we recognize fees earned from providing administrative and distribution services to our investment advisory clients, primarily our U.S.

mutual funds and their investors.

The increase was primarily due to increased transfer agent servicing activities and higher recordkeeping fees, partially offset by lower 12b-1 revenue earned on certain share classes, including the Advisor and R classes, of the U.S.

mutual funds.

The decline in 12b-1 revenue is attributable primarily to a reduction in assets under management as client transferred assets to lower fee vehicles and share classes.

The decrease for both periods was primarily due to lower 12b-1 revenue earned on certain share classes, including the Advisor and R classes, of the U.S.

mutual funds as lower markets in 2020 as well as client transfers to lower fee vehicles and share classes over the last twelve months have reduced assets under management in these share classes.

The decline in 12b-1 revenue is offset entirely by a reduction in the costs paid to third-party intermediaries that source these assets and reported in distribution and servicing expense.

Our first quarter net revenues reflect the elimination of $2.5 million in 2020 and $1.5 million in 2019 , of revenue earned from our consolidated T.

For the six months ended June 30, 2020 compared to the same period of 2019 , the lower 12b-1 revenue was partially offset by increased retail transfer agent servicing activities and higher administrative services provided to fund shareholders.

Our second quarter net revenues reflect the elimination of $2.1 million in 2020 and $2.2 million in 2019 , of revenue earned from our consolidated T.

Rowe Price investment products .

For the six months ended June 30, 2020 and 2019 , we eliminated $4.6 million in 2020 and $3.7 million in 2019 of net revenue.

The corresponding expenses recognized by these products, and consolidated in our financial statements, were eliminated from operating expenses.

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Compensation and related costs.

Compensation and related costs were $ 440.7 million in the first quarter of 2020 , a decrease of $ 50.8 million , or 10.3% , compared to the 2019 quarter.

The decrease was primarily due to a change in market-related expense of $ 100.3 million related to our supplemental savings plan as falling markets in the first quarter of 2020 reduced the liability and $ 4.7 million of higher labor capitalization related to internally developed software.

These decreases in compensation and related costs were offset in part by increases in base salary, employee benefits and related employee costs of $22.6 million, primarily as a result of a 5.3% increase in our average staff size and, to a lesser extent, the modest increases in base salaries at the beginning of 2020 .

Our interim accrual for annual variable compensation, primarily bonus compensation, also increased $16.1 million from the 2019 quarter and non-cash stock-based compensation expense increased by $ 14.8 million .

Compensation and related costs were $ 549.0 million in the second quarter of 2020 , an increase of $ 65.8 million , or 13.6% , compared to the 2019 quarter.

The increase was primarily due to an increase in market-related expense of $ 60.5 million related to our supplemental savings plan as the sharp market recovery in the second quarter of 2020 increased the liability.

Additionally, increases in base salaries and related employee costs, due to a 5.1% increase in our average staff size and, to a lesser extent, the modest increases in base salaries at the beginning of 2020 , and higher non-cash stock-based compensation expense contributed to the increase in compensation and related costs in the 2020 period.

These increases in compensation and related costs were offset in part by higher labor capitalization related to internally developed software and a lower interim accrual for annual variable compensation, primarily bonus compensation, from the 2019 quarter.

We recognize the interim bonus accrual ratably over the year using the ratio of recognized quarterly net revenues to currently forecasted annual net revenues.

Compensation and related costs were $989.7 million in the six months ended June 30, 2020 , an increase of $15.0 million , or 1.5% , compared to the 2019 period.

The increase in compensation and related costs was primarily due to an increase in salaries, benefits and related employee costs, which have increased $32.2 million from the 2019

An increase of 5.4% in our average staff size and modest increases in base salaries at the beginning of 2020 have contributed to higher associate-related costs.

Our interim accrual for annual variable compensation, primarily bonus compensation, also increased $10.8 million in 2020 from the 2019 period.

These increases in compensation and related costs were offset in part by $39.8 million in lower market-related expense related to our supplemental savings plan and $13.0 million in higher labor capitalization related to internally developed software in 2020 period.

Distribution and servicing.

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Rowe Price products as well as client and shareholder servicing, recordkeeping, and administrative services.

These costs were $ 65.7 million for the first quarter of 2020 , a decrease of 1.1% from the $ 66.4 million recognized in the 2019 quarter.

The decrease for the period is primarily driven by lower assets under management in those mutual funds for which we pay distribution and servicing costs as clients transferred assets to lower fee vehicles or share classes over the last twelve months.

The decreases in costs related to these products were partially offset by higher distribution costs as a result of inflows into our Japanese ITMs since the end of the first quarter of 2019.

These costs were $ 62.0 million for the second quarter of 2020 , a decrease of 3.7% from the $ 64.4 million recognized in the 2019 quarter.

For the six months ended June 30, 2020 , these costs were $127.7 million , a decrease of 2.4% over the $130.8 million recognized in the comparable 2019 period.

The decrease for both periods is primarily driven by lower assets under management in those mutual funds for which we pay distribution and servicing costs as lower markets and client transfers to lower fee vehicles or share classes over the last twelve months reduced assets under management for these share classes.

The decreases in costs related to these products were partially offset by higher distribution costs as a result of inflows into our Japanese ITMs.

Distribution and servicing costs paid to third-party intermediaries that source the assets of certain share classes of our U.S.

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Advertising and promotion.

Advertising and promotion costs were $24.9 million in the first quarter of 2020 , an increase of $3.3 million , or 15.3% , compared to the $21.6 million recognized in the 2019 quarter.

The increase for the period is due primarily to increased television media advertising activity in 2020 as compared to 2019.

Advertising and promotion costs were $13.4 million in the second quarter of 2020 , a decrease of $6.4 million , or 32.3% , compared to the $19.8 million recognized in the 2019 quarter.

For the six months ended June 30, 2020 , these costs were $38.3 million , a decrease of $3.1 million , or 7.5% , compared to the 2019 period.

The decrease for both periods is due primarily to lower media activity and fewer conference events in 2020 as compared to 2019.

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 $ 105.4 million in the first quarter of 2020 , an increase of $ 7.3 million , or 7.4% , compared to the $ 98.1 million recognized in the 2019 quarter.

The increase for the period is due primarily to the ongoing investment in our technology capabilities, including related depreciation and hosted solution licenses.

These costs were $ 111.3 million in the second quarter of 2020 , an increase of $ 6.4 million , or 6.1% , compared to the $ 104.9 million recognized in the 2019 quarter.

For the six months ended June 30, 2020 , these costs were $216.7 million , an increase of $13.7 million , or 6.7% , compared to the 2019 period.

The increase for both periods is due primarily to the ongoing investment in our technology capabilities, including related depreciation and hosted solution licenses.

General, administrative, and other.

General, administrative, and other expenses were $77.1 million in the first quarter of 2020 , an increase of $4.1 million , or 5.6% , compared to the $73.0 million recognized in the 2019 quarter.

The increase in the first quarter of 2020 compared with the 2019 period is primarily due to an increase in third-party investment research costs and higher professional fees, partially offset by lower travel expenses as global travel restrictions were put in place amid the coronavirus pandemic.

General, administrative, and other expenses were $86.4 million in the second quarter of 2020 , an increase of $12.0 million , or 16.1% , compared to the $74.4 million recognized in the 2019 quarter.

For the six months ended June 30, 2020 , these costs were $163.5 million , an increase of $16.1 million , or 10.9% , compared to the 2019 period.

The increase for both periods is primarily due to certain nonrecurring administrative expenses, along with higher third-party investment research costs and higher professional fees.

These increases were partially offset by lower travel expenses in the second quarter of 2020.

Non-operating income (loss)

Non-operating loss in the first quarter of 2020 was $500.3 million , a decrease of $703.1 million from non-operating income in the first quarter of 2019 of $202.8 million .

The following table details the components of non-operating income during both the first quarter of March 31, 2020 and 2019 .

Non-operating income for the second quarter of 2020 was $415.1 million , an increase of $290.6 million from non-operating income in the second quarter of 2019 of $124.5 million .

Non-operating loss for the six months ended June 30, 2020 was $85.2 million , a decrease of $412.5 million from non-operating income in the comparable 2019 period of $327.3 million .

The following table details the components of non-operating income for the quarter and year-to-date periods.

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Dividend income

Market related gains (losses) and equity in earnings

Market related gains and equity in earnings

Seed capital investments

Dividend income

Market related gains (losses) and equity in earnings

Market related gains (losses) and equity in earnings (losses)

Net gain recognized upon deconsolidation

Investments used to hedge the supplemental savings plan liability

Total net gains (losses) from non-consolidated T.

Total net gains from non-consolidated T.

Rowe Price investment products

Other investment income

Other investment income (loss)

Net gains (losses) on investments

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Non-operating income (loss)

During the first quarter of 2020 , our investment portfolio incurred steep declines in market value as global economies and markets are disrupted by the coronavirus pandemic.

Our consolidated investment products and supplemental savings plan hedge portfolio comprised about 80% of the net losses recognized during the first quarter of 2020 .

The cash and discretionary investment portfolio also experienced net investment losses of $61.2 million in the first quarter of 2020 .

Our investment portfolio recognized significant gains in the second quarter of 2020 as the markets rebounded sharply from the market losses experienced in the first quarter of 2020.

Our consolidated investment products and supplemental savings plan hedge portfolio comprised about 75% of the net gains recognized during the second quarter of 2020 .

The cash and discretionary investment portfolio also experienced net investment gains of $85.8 million in the second quarter of 2020 .

Despite the sharp market recovery in the second quarter of 2020 , our investment portfolio for the six months ended June 30, 2020 has experienced net losses due to the global economies and markets disruption caused by the coronavirus pandemic in the first quarter of 2020.

Our consolidated investment products and supplemental savings plan hedge portfolio comprised most of the net losses recognized during the six months ended June 30, 2020 .

The cash and discretionary investment portfolio partially offset these losses with net investment gains of $24.6 million in the six months ended June 30, 2020 .

The table above includes the net investment income of the underlying portfolios included in the consolidated T.

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The table below shows the impact that the consolidated T.

Rowe Price investment products have on the individual lines of our unaudited condensed consolidated statements of income and the portion attributable to our interest:

Rowe Price investment products had on the individual lines of our unaudited condensed consolidated statements of income and the portion attributable to our interest:

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(in millions)

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Provision for income taxes

Our effective tax rate for the first quarter of 2020 was 19.5% , compared with 24.7% in the 2019 quarter.

The lower effective tax rate for the first quarter of 2020 as compared to the 2019 quarter is primarily due to higher discrete tax benefits associated with option exercises.

These benefits were partially offset by net losses attributable to redeemable non-controlling interests held in the firm’s consolidated investment products, which are not taxable to us despite being included in pre-tax income, and a higher state effective tax rate.

The higher state effective tax rate results primarily from the remeasurement of deferred tax liabilities related to our investment portfolio.

The following table reconciles the statutory federal income tax rate to our effective tax rate for both the three months ended March 31, 2020 and 2019 :

Our effective tax rate for the second quarter of 2020 and 2019 was 24.8% .

The effective tax rate for the second quarter of 2020 was impacted by a lower state effective tax rate, resulting primarily from the remeasurement of deferred tax liabilities related to the firm's investment portfolio, higher net gains attributable to redeemable non-controlling interests held in the firm's consolidated investment products, which are not taxable to the firm despite being included in pre-tax income, and lower discrete tax benefits associated with option exercises.

Our effective tax rate for the six months ended June 30, 2020 was 23.9% , compared with 24.7% in the 2019 period.

The year-to-date 2020 effective tax rate was lower than the 2019 period primarily due to higher discrete tax benefits associated with option exercises in the 2020 period.

The following table reconciles the statutory federal income tax rate to our effective tax rate for both the three- and six- months ended June 30, 2020 and 2019 :

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Statutory U.S.

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State income taxes for current year, net of federal income tax benefits (1)

Net losses (income) attributable to redeemable non-controlling interests

Net (income) losses attributable to redeemable non-controlling interests

Net excess tax benefits from stock-based compensation plans activity

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The rate will also be impacted by net investment income recognized on 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.

Our non-GAAP effective tax rate for the first quarter of 2020 and 2019 was 22.5% and 25.3% , respectively.

Our non-GAAP effective tax rate for the second quarter of 2020 and 2019 was 24.8% and 25.5% , respectively.

Our non-GAAP effective tax rate for the six months ended June 30, 2020 and 2019 was 23.8% and 25.4% , respectively.

The non-GAAP tax rate primarily adjusts for the impact of the consolidated investment products, including the significant net losses attributable to the redeemable non-controlling interests.

The decrease in the non-GAAP effective tax rate is primarily due to the higher tax benefits associated with option exercises.

The decrease in the non-GAAP effective tax rate is primarily due to the lower state effective rate, slightly offset by lower discrete tax benefits associated with option exercises.

We currently estimate our non-GAAP effective tax rate for the full-year 2020 will be in the range of 23% to 25% .

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GAAP financial measures for the three months ended

March 31, 2020 and 2019 .

June 30, 2020 and 2019 .

Three months ended 6/30/2020

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Adjusted Non-GAAP Basis

These non-GAAP adjustments remove the impact the consolidated T.

The following schedules reconcile certain U.S.

GAAP financial measures for the six months ended June 30, 2020 and 2019 .

Six months ended 6/30/2020

Operating expenses

Net operating income

Non-operating income (loss)

Provision (benefit) for income taxes (4)

Net income attributable to T.

Rowe Price Group

Diluted earnings per share (5)

Non-GAAP adjustments:

Consolidated T.

investment products (1)

Supplemental savings plan liability (2)

Other non-operating income (3)

Adjusted Non-GAAP Basis

Six months ended 6/30/2019

Operating expenses

Net operating income

Non-operating income (loss)

Provision (benefit) for income taxes (4)

Net income attributable to T.

Rowe Price Group

Diluted earnings per share (5)

Non-GAAP adjustments:

Consolidated T.

investment products (1)

Supplemental savings plan liability (2)

Other non-operating income (3)

Adjusted Non-GAAP Basis

These non-GAAP adjustments remove the impact that the consolidated T.

Rowe Price investment products have on our U.S.

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Additionally, we do not emphasize the impact of the portion of non-operating income (loss) removed when managing and evaluating our core performance.

The income tax impacts were calculated in order to achieve an overall non-GAAP effective tax rate of 22.5% for 2020 and 25.3% for 2019 .

The income tax impacts were calculated in order to achieve an overall non-GAAP effective tax rate of 23.8% for the first half of 2020 and 25.4% for the first half of 2019 .

As such, the non-GAAP effective tax rate for the second quarter was 24.8% for 2020 and 25.5% for 2019.

We estimate that our effective tax rate for the full-year 2020 on a non-GAAP basis will be in the range of 23% to 25% .

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Adjusted net income attributable to T.

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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 incurred losses of $61.2 million in the three months ended March 31, 2020 , as compared to generating income of $44.2 million in the prior quarter.

Cash and discretionary investments returned gains of $85.8 million and $24.6 million in the three- and six- months ended June 30, 2020 , respectively, as compared to generating income of $35.8 million and $80.0 million in the three- and six- months ended June 30, 2019 .

Cash and discretionary investments in T.

Rowe Price products held by our subsidiaries outside the U.S.

were $684.3 million at March 31, 2020 and $665.8 million at December 31, 2019 .

were $720.5 million at June 30, 2020 and $665.8 million at December 31, 2019 .

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.

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The following table details how T.

Rowe Price Group’s interests in cash and investments relate to where they are presented on the unaudited condensed consolidated balance sheet as of March 31, 2020 .

Rowe Price Group’s interests in cash and investments relate to where they are presented on the unaudited condensed consolidated balance sheet as of June 30, 2020 .

(in millions)

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Redeemable non-controlling interests

As reported on unaudited condensed consolidated balance sheet at March 31, 2020

As reported on unaudited condensed consolidated balance sheet at June 30, 2020

Rowe Price investment products that we consolidate are generally those products we provided seed capital at the time of their formation and we have a controlling interest.

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The net assets of the T.

Rowe Price investment products at March 31, 2020 consist of the assets of these products that we consolidate on our unaudited condensed consolidated balance sheets of $2,024.3 million , less the liabilities of these products of $82.9 million .

Rowe Price investment products at June 30, 2020 consist of product assets we consolidate on our unaudited condensed consolidated balance sheets of $2,161.5 million , less the liabilities of these products of $54.8 million .

Our unaudited condensed consolidated balance sheet reflects the cash and cash equivalents, investments, other assets and liabilities of those T.

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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.

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.

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We increased our quarterly recurring dividend per common share in February 2020 by 18.4% to $.90 per common share from $.76 per common share.

Additionally, we expended $887.0 million in the first quarter of 2020 to repurchase 8.3 million shares, or 3.5% , of our outstanding common stock at an average price of $106.43 per share.

Additionally, we expended $1,028.7 million in the first half of 2020 to repurchase 9.6 million shares, or 4.1% , of our outstanding common stock at an average price of $106.43 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.

While opportunistic in our approach to stock buybacks, we will generally repurchase our common stock over time to offset the dilution created by our equity-based compensation plans.

Since the end of 2017 , we have returned $4.7 billion to stockholders through stock repurchases and our regular quarterly dividends, as follows:

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Total cash returned to stockholders

Three months ended 3/31/2020

We anticipate property and equipment expenditures for the full-year 2020 to be about $230 million , of which about three-quarters is planned for technology initiatives.

Six months ended 6/30/2020

We anticipate property and equipment expenditures for the full-year 2020 to be about $225 million , of which more than three-quarters is planned for technology initiatives.

We expect to fund our anticipated capital expenditures with operating cash flows and other available resources.

The following table summarizes the cash flows for the three months ended March 31, 2020 and 2019 , that are attributable to T.

The following table summarizes the cash flows for the six months ended June 30, 2020 and 2019 , that are attributable to T.

Rowe Price Group, our consolidated T.

Rowe Price investment products , and the related eliminations required in preparing the statement.

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(in millions)

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Operating activities attributable to T.

Rowe Price Group during the first quarter of 2020 provided cash flows of $864.0 million as compared to $673.4 million during the first quarter of 2019 .

Rowe Price Group during the first half of 2020 provided cash flows of $1,690.7 million as compared to $1,243.0 million during the first half of 2019 .

Operating cash flows attributable to T.

Rowe Price Group increased $190.6 million as $492.5 million in higher non-cash adjustments, including unrealized investment gains/losses, depreciation, and stock-based compensation expense, more than offset the $169.5 million decline in net income from the first quarter of 2019.

The non-cash adjustments were driven by a $464.2 million change in net investment gains/losses as we recognized investment losses in the first quarter of 2020 compared with gains in the first quarter of 2019 .

The investment losses in 2020, which are added back to net income, were a result of the market disruption caused by the coronavirus pandemic.

The majority of the remaining adjustments related to timing differences on the cash settlement of our assets and liabilities, which decreased cash flows by $132.4 million .

Rowe Price Group increased $447.7 million as $298.5 million in higher non-cash adjustments, including unrealized investment gains/losses, depreciation, and stock-based compensation expense, more than offset the $94.0 million decline in net income from the first half of 2019.

The non-cash adjustments were driven by a $260.0 million change in net investment gains/losses as we recognized overall investment losses in the first half of 2020 compared with gains in the first half of 2019 .

The overall investment losses in 2020, which are added back to net income, were a result of the market disruption caused by the coronavirus pandemic in 2020.

Additionally, timing differences on the cash settlement of our assets and liabilities decreased cash flows by $243.2 million .

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.

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Net cash used in investing activities that are attributable to T.

Rowe Price Group totaled $15.0 million in the first quarter of 2020 compared with $69.2 million in the 2019 period.

During 2020, we received net proceeds from our discretionary investments of $74.0 million compared to net proceeds of $17.9 million during 2019.

In addition, we decreased our property and equipment expenditures by $1.7 million and decreased the level of seed capital provided by $4.6 million .

Rowe Price Group totaled $15.6 million in the first half of 2020 compared with $174.0 million in the 2019 period.

During 2020, we received net proceeds from the sale of certain of our discretionary investments of $110.8 million compared to net proceeds of $68.9 million during 2019.

In addition, while we increased our property and equipment expenditures by $10.8 million , we decreased the level of seed capital provided by $122.8 million .

Since we consolidate the seed capital in T.

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Net cash used in financing activities attributable to T.

Rowe Price Group were $1,068.4 million in the first quarter of 2020 compared with $372.0 million in the 2019 period.

During 2020, there was a $660.3 million increase in cash paid for common stock repurchases as we repurchased 5.8 million more common stock in the first quarter of 2020 as compared to the first quarter of 2019 .

Rowe Price Group were $1,398.8 million in the first half of 2020 compared with $691.8 million in the 2019 period.

During 2020, there was a $624.3 million increase in cash paid for common stock repurchases as we repurchased 5.5 million more shares of common stock in the first half of 2020 as compared to the first half of 2019 .

Additionally, there was a $57.9 million increase in dividends paid in 2020 as a result of an 18.4% increase in our quarterly dividend per share.

The remaining change in reported cash flows from financing activities is primarily attributable to a $10.1 million increase in net subscriptions received from redeemable non-controlling interest holders of our consolidated investment products during the first quarter of 2020 compared to the 2019 period.

The remaining change in reported cash flows from financing activities is primarily attributable to a $102.6 million decrease in net subscriptions received from redeemable non-controlling interest holders of our consolidated investment products during the first half of 2020 compared to the 2019 period.

CRITICAL ACCOUNTING POLICIES.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis