Item 1. Financial Statements
Item 1.
Financial Statements.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
6/30/2020
12/31/2019
ASSETS
Cash and cash equivalents
$
2,058.1
$
1,781.8
Accounts receivable and accrued revenue
655.7
646.6
Investments
2,900.0
2,939.8
Assets of consolidated T. Rowe Price investment products ($2,005.4 million at June 30, 2020 and $1,975.3 million at December 31, 2019, related to variable interest entities)
2,161.5
2,276.9
Operating lease assets
131.5
110.8
Property and equipment, net
685.4
674.4
Goodwill
665.7
665.7
Other assets
219.4
234.4
Total assets
$
9,477.3
$
9,330.4
LIABILITIES
Accounts payable and accrued expenses
$
194.3
$
214.5
Liabilities of consolidated T. Rowe Price investment products ($41.6 million at June 30, 2020 and $27.0 million at December 31, 2019, related to variable interest entities)
54.8
39.2
Operating lease liabilities
166.4
146.3
Accrued compensation and related costs
384.7
112.1
Supplemental savings plan liability
577.0
563.4
Income taxes payable
259.3
31.8
Total liabilities
1,636.5
1,107.3
Commitments and contingent liabilities
Redeemable non-controlling interests
1,090.1
1,121.0
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 226,990,000 shares at June 30, 2020 and 235,214,000 at December 31, 2019
45.4
47.0
Additional capital in excess of par value
654.6
654.6
Retained earnings
6,102.9
6,443.5
Accumulated other comprehensive loss
( 52.2
)
( 43.0
)
Total permanent stockholders’ equity
6,750.7
7,102.1
Total liabilities, redeemable non-controlling interests, and permanent stockholders’ equity
$
9,477.3
$
9,330.4
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
Six months ended
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Revenues
Investment advisory fees
$
1,293.8
$
1,270.2
$
2,621.6
$
2,464.4
Administrative, distribution, and servicing fees
121.6
125.0
256.4
258.1
Net revenues
1,415.4
1,395.2
2,878.0
2,722.5
Operating expenses
Compensation and related costs
549.0
483.2
989.7
974.7
Distribution and servicing
62.0
64.4
127.7
130.8
Advertising and promotion
13.4
19.8
38.3
41.4
Product-related costs
39.6
33.4
81.2
77.6
Technology, occupancy, and facility costs
111.3
104.9
216.7
203.0
General, administrative, and other
86.4
74.4
163.5
147.4
Total operating expenses
861.7
780.1
1,617.1
1,574.9
Net operating income
553.7
615.1
1,260.9
1,147.6
Non-operating income (loss)
Net gains on investments
170.6
61.8
16.0
161.9
Net gains (losses) on consolidated investment products
242.5
62.8
( 87.8
)
164.7
Other income (loss)
2.0
( .1
)
( 13.4
)
.7
Total non-operating income (loss)
415.1
124.5
( 85.2
)
327.3
Income before income taxes
968.8
739.6
1,175.7
1,474.9
Provision for income taxes
240.3
183.7
280.6
365.0
Net income
728.5
555.9
895.1
1,109.9
Less: net income (loss) attributable to redeemable non-controlling interests
125.5
28.4
( 51.0
)
69.8
Net income attributable to T. Rowe Price Group
$
603.0
$
527.5
$
946.1
$
1,040.1
Earnings per share on common stock of T. Rowe Price Group
Basic
$
2.58
$
2.18
$
3.99
$
4.29
Diluted
$
2.55
$
2.15
$
3.95
$
4.23
The accompanying notes are an integral part of these statements.
Page 3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Three months ended
Six months ended
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Net income
$
728.5
$
555.9
$
895.1
$
1,109.9
Other comprehensive income (loss)
Currency translation adjustments
Consolidated T. Rowe Price investment products - variable interest entities
15.9
3.7
( 9.2
)
( 2.1
)
Reclassification gains recognized in non-operating income upon deconsolidation of certain T. Rowe Price investment products
—
( .1
)
( .1
)
( .2
)
Total currency translation adjustments of consolidated T. Rowe Price investment products - variable interest entities
15.9
3.6
( 9.3
)
( 2.3
)
Equity method investments
( 9.4
)
1.5
( 9.5
)
6.4
Other comprehensive income (loss) before income taxes
6.5
5.1
( 18.8
)
4.1
Net deferred tax benefits
.7
( 1.0
)
2.7
( .9
)
Total other comprehensive income (loss)
7.2
4.1
( 16.1
)
3.2
Total comprehensive income
735.7
560.0
879.0
1,113.1
Less: comprehensive income (loss) attributable to redeemable non-controlling interests
135.8
29.4
( 57.9
)
69.5
Total comprehensive income attributable to T. Rowe Price Group
$
599.9
$
530.6
$
936.9
$
1,043.6
The accompanying notes are an integral part of these statements.
Page 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Six months ended
6/30/2020
6/30/2019
Cash flows from operating activities
Net income
$
895.1
$
1,109.9
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of property and equipment
94.3
86.0
Stock-based compensation expense
111.6
90.7
Net (gains) losses recognized on investments
3.4
( 124.4
)
Net investments in T. Rowe Price investment products used to economically hedge supplemental savings plan liability
( 10.0
)
( 19.3
)
Net change in securities held by consolidated T. Rowe Price investment products
40.8
( 444.0
)
Other changes in assets and liabilities
505.5
249.9
Net cash provided by operating activities
1,640.7
948.8
Cash flows from investing activities
Purchases of T. Rowe Price investment products
( 237.1
)
( 34.9
)
Dispositions of T. Rowe Price investment products
347.9
103.8
Net cash of T. Rowe Price investment products on deconsolidation
( 9.2
)
( 5.1
)
Additions to property and equipment
( 105.3
)
( 94.5
)
Other investing activity
6.1
1.6
Net cash provided by (used in) investing activities
2.4
( 29.1
)
Cash flows from financing activities
Repurchases of common stock
( 1,027.1
)
( 402.8
)
Common share issuances under stock-based compensation plans
54.0
78.8
Dividends paid to common stockholders of T. Rowe Price Group
( 425.7
)
( 367.8
)
Net subscriptions received from redeemable non-controlling interest holders
87.7
190.3
Net cash used in financing activities
( 1,311.1
)
( 501.5
)
Effect of exchange rate changes on cash and cash equivalents of consolidated
T. Rowe Price investment products
( 7.4
)
( .4
)
Net change in cash and cash equivalents during period
324.6
417.8
Cash and cash equivalents at beginning of period, including $76.5 million at December 31, 2019, and $70.1 million at December 31, 2018, held by consolidated T. Rowe Price investment products
1,858.3
1,495.3
Cash and cash equivalents at end of period, including $124.8 million at June 30, 2020, and $110.7 million at June 30, 2019, held by consolidated T. Rowe Price investment products
$
2,182.9
$
1,913.1
The accompanying notes are an integral part of these statements.
Page 5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(shares in thousands; dollars in millions)
Three months ended 6/30/2020
Common
shares
outstanding
Common
stock
Additional
capital in
excess of
par value
Retained
earnings
AOCI (1)
Total
stockholders’
equity
Redeemable non-controlling interests
Balances at March 31, 2020
227,985
$
45.6
$
654.6
$
5,782.9
$
( 49.1
)
$
6,434.0
971.0
Net income
—
—
—
603.0
—
603.0
125.5
Other comprehensive loss, net of tax
—
—
—
—
( 3.1
)
( 3.1
)
10.3
Dividends declared ($0.90 per share)
—
—
—
( 210.3
)
—
( 210.3
)
—
Shares issued upon option exercises
296
.1
15.8
—
—
15.9
—
Restricted shares issued, net of shares withheld for taxes
8
—
—
—
—
—
—
Net shares issued upon vesting of restricted stock units
6
—
( .3
)
—
—
( .3
)
—
Stock-based compensation expense
—
—
53.3
—
—
53.3
—
Restricted stock units issued as dividend equivalents
—
—
.1
( .1
)
—
—
—
Common shares repurchased
( 1,305
)
( .3
)
( 68.9
)
( 72.6
)
—
( 141.8
)
—
Net subscriptions into T. Rowe Price investment products
—
—
—
—
—
—
26.1
Net deconsolidations of T. Rowe Price investment products
—
—
—
—
—
—
( 42.8
)
Balances at June 30, 2020
226,990
$
45.4
$
654.6
$
6,102.9
$
( 52.2
)
$
6,750.7
$
1,090.1
Three months ended 6/30/2019
Common
shares
outstanding
Common
stock
Additional
capital in
excess of
par value
Retained
earnings
AOCI (1)
Total
stockholders’
equity
Redeemable non-controlling interests
Balances at March 31, 2019
236,432
$
47.3
$
654.5
$
5,650.8
$
( 41.6
)
$
6,311.0
$
886.7
Net income
—
—
—
527.5
—
527.5
28.4
Other comprehensive income (loss), net of tax
—
—
—
—
3.1
3.1
1.0
Dividends declared ($0.76 per share)
—
—
—
( 183.4
)
—
( 183.4
)
—
Shares issued upon option exercises
665
.1
37.7
—
—
37.8
—
Restricted shares issued, net of shares withheld for taxes
7
—
( .1
)
—
—
( .1
)
—
Net shares issued upon vesting of restricted stock units
19
—
( .2
)
—
—
( .2
)
—
Forfeiture of restricted awards
( 2
)
—
—
—
—
—
—
Stock-based compensation expense
—
—
47.2
—
—
47.2
—
Restricted stock units issued as dividend equivalents
—
—
.1
( .1
)
—
—
—
Common shares repurchased
( 1,603
)
( .3
)
( 84.6
)
( 78.9
)
—
( 163.8
)
—
Net subscriptions into T. Rowe Price investment products
—
—
—
—
—
—
125.7
Net deconsolidations of T. Rowe Price investment products
—
—
—
—
—
—
( 29.5
)
Balances at June 30, 2019
235,518
$
47.1
$
654.6
$
5,915.9
$
( 38.5
)
$
6,579.1
$
1,012.3
(1) Accumulated other comprehensive income.
The accompanying notes are an integral part of these statements.
Page 6
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(shares in thousands; dollars in millions)
Six months ended 6/30/2020
Common
shares
outstanding
Common
stock
Additional
capital in
excess of
par value
Retained
earnings
AOCI (1)
Total
stockholders’
equity
Redeemable non-controlling interests
Balances at December 31, 2019
235,214
$
47.0
$
654.6
$
6,443.5
$
( 43.0
)
$
7,102.1
$
1,121.0
Net income
—
—
—
946.1
—
946.1
( 51.0
)
Other comprehensive income (loss), net of tax
—
—
—
—
( 9.2
)
( 9.2
)
( 6.9
)
Dividends declared ($1.80 per share)
—
—
—
( 425.1
)
—
( 425.1
)
—
Shares issued upon option exercises
1,364
.3
56.9
—
—
57.2
—
Restricted shares issued, net of shares withheld for taxes
8
—
—
—
—
—
—
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
43
—
( 3.3
)
—
—
( 3.3
)
—
Stock-based compensation expense
—
—
111.6
—
—
111.6
—
Restricted stock units issued as dividend equivalents
—
—
.1
( .1
)
—
—
—
Common shares repurchased
( 9,639
)
( 1.9
)
( 165.3
)
( 861.5
)
—
( 1,028.7
)
—
Net subscriptions into T. Rowe Price investment products
—
—
—
—
—
—
89.9
Net deconsolidations of T. Rowe Price investment products
—
—
—
—
—
—
( 62.9
)
Balances at June 30, 2020
226,990
$
45.4
$
654.6
$
6,102.9
$
( 52.2
)
$
6,750.7
$
1,090.1
Six months ended 6/30/2019
Common
shares
outstanding
Common
stock
Additional
capital in
excess of
par value
Retained
earnings
AOCI (1)
Total
stockholders’
equity
Redeemable non-controlling interests
Balances at December 31, 2018
238,069
$
47.6
$
654.6
$
5,464.1
$
( 42.0
)
$
6,124.3
$
740.3
Net income
—
—
—
1,040.1
—
1,040.1
69.8
Other comprehensive income (loss), net of tax
—
—
—
—
3.5
3.5
( .3
)
Dividends declared ($1.52 per share)
—
—
—
( 367.2
)
—
( 367.2
)
—
Shares issued upon option exercises
1,495
.3
82.5
—
—
82.8
—
Restricted shares issued, net of shares withheld for taxes
7
—
( .1
)
—
—
( .1
)
—
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
33
—
( 1.4
)
—
—
( 1.4
)
—
Forfeiture of restricted awards
( 7
)
—
—
—
—
—
—
Stock-based compensation expense
—
—
90.7
—
—
90.7
—
Restricted stock units issued as dividend equivalents
—
—
.1
( .1
)
—
—
—
Common shares repurchased
( 4,079
)
( .8
)
( 171.8
)
( 221.0
)
—
( 393.6
)
—
Net subscriptions into T. Rowe Price investment products
—
—
—
—
—
—
211.6
Net deconsolidations of T. Rowe Price investment products
—
—
—
—
—
—
( 9.1
)
Balances at June 30, 2019
235,518
$
47.1
$
654.6
$
5,915.9
$
( 38.5
)
$
6,579.1
$
1,012.3
(1) Accumulated other comprehensive income.
The accompanying notes are an integral part of these statements.
Page 7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – THE COMPANY AND BASIS OF PREPARATION.
T. Rowe Price Group Inc. derives its consolidated revenues and net income primarily from investment advisory services that its subsidiaries provide to individual and institutional investors in the T. Rowe Price U.S. mutual funds (“ U.S. mutual funds ”), separately managed accounts, subadvised funds, and other T. Rowe Price products. The other T. Rowe Price products include: collective investment trusts, open-ended investment products offered to investors outside the U.S., and products offered through variable annuity life insurance plans in the U.S. We also provide certain 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.
BASIS OF PRESENTATION.
These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These principles require the use of estimates and reflect all adjustments that are, in the opinion of management, necessary for 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 amounts have been reclassified to conform to the 2020 presentation.
The unaudited interim financial information contained in these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our 2019 Annual Report.
NEW ACCOUNTING GUIDANCE.
We adopted Accounting Standards Update No. 2018-15 — Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract on January 1, 2020 using the prospective method of adoption. This update required implementation costs incurred in cloud computing arrangements to be deferred and recognized over the term of the hosting arrangement. A hosting arrangement is an agreement that allows customers, like us, to access and use software on an as-needed basis without having possession of the software. Beginning on January 1, 2020, we are required to defer such qualifying implementation costs. As of June 30, 2020, we capitalized an immaterial amount of implementation costs incurred in a cloud computing arrangement. Accordingly, the adoption of this guidance did not have a material impact on our consolidated balance sheets or our consolidated statements of income.
NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE
We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our unaudited condensed consolidated statements, including those 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.
U.S. ECONOMIC RELIEF LEGISLATION
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic Security ("CARES") Act. The CARES Act provides economic relief to eligible businesses and individuals impacted by the novel coronavirus pandemic. The CARES Act’s provisions will not have a material impact on our financial position and results of operations.
Page 8
NOTE 2 – INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES.
Revenues earned during the three- and six-month periods ended June 30, 2020 and 2019 under agreements with clients include:
Three months ended 6/30/2020
Three months ended 6/30/2019
Administrative, distribution, and servicing fees
Administrative, distribution, and servicing fees
(in millions)
Investment advisory fees
Administrative fees
Distribution and servicing fees
Net revenues
Investment advisory fees
Administrative fees
Distribution and servicing fees
Net revenues
U.S. mutual funds
$
823.1
$
69.4
$
25.7
$
918.2
$
860.7
$
69.7
$
30.1
$
960.5
Subadvised and separate accounts and other investment products
470.7
—
—
470.7
409.5
—
—
409.5
Other clients
—
26.5
—
26.5
—
25.2
—
25.2
$
1,293.8
$
95.9
$
25.7
$
1,415.4
$
1,270.2
$
94.9
$
30.1
$
1,395.2
Six months ended 6/30/2020
Six months ended 6/30/2019
Administrative, distribution, and servicing fees
Administrative, distribution, and servicing fees
(in millions)
Investment advisory fees
Administrative fees
Distribution and servicing fees
Net revenues
Investment advisory fees
Administrative fees
Distribution and servicing fees
Net revenues
U.S. mutual funds
$
1,699.3
$
146.6
$
53.6
$
1,899.5
$
1,676.6
$
146.3
$
60.3
$
1,883.2
Subadvised and separate accounts and other investment products
922.3
—
—
922.3
787.8
—
—
787.8
Other clients
—
56.2
—
56.2
—
51.5
—
51.5
$
2,621.6
$
202.8
$
53.6
$
2,878.0
$
2,464.4
$
197.8
$
60.3
$
2,722.5
Total net revenues earned from our related parties, specifically T. Rowe Price investment products , aggregate $ 1,142.8 million and $ 1,147.6 million for the three months ended June 30, 2020 and 2019 , respectively. Total net revenues earned during the six months ended June 30, 2020 and 2019 aggregate $ 2,350.5 million and $ 2,241.0 million , respectively. Accounts receivable from these products aggregate to $ 410.6 million at June 30, 2020 , and $ 424.8 million at December 31, 2019 .
Following a change to the fee structure of the target date retirement funds in the second quarter of 2020, we have modified our investment advisory fee and assets under management presentation below to separately breakout the fees earned from clients and related assets under management of our multi-asset portfolios. All prior periods have been recast to conform to this new presentation and to provide comparability.
Page 9
The following table details the investment advisory fees earned from clients by their underlying asset class.
Three months ended
Six months ended
(in millions)
6/30/2020
6/30/2019
6/30/2020
6/30/2019
U.S. mutual funds
Equity
$
545.9
$
553.8
$
1,114.3
$
1,071.2
Fixed income, including money market
66.8
69.1
138.5
137.9
Multi-asset
210.4
237.8
446.5
467.5
823.1
860.7
1,699.3
1,676.6
Subadvised and separate accounts and other investment products
Equity
305.6
255.0
585.1
491.5
Fixed income, including money market
33.9
39.0
71.9
76.3
Multi-asset
131.2
115.5
265.3
220.0
470.7
409.5
922.3
787.8
Total
$
1,293.8
$
1,270.2
$
2,621.6
$
2,464.4
The following table summarizes the assets under management on which we earn investment advisory fees.
Average during
Average during
Three months ended
Six months ended
As of
(in billions)
6/30/2020
6/30/2019
6/30/2020
6/30/2019
6/30/2020
12/31/2019
U.S. mutual funds
Equity
$
374.5
$
375.8
$
381.4
$
365.1
$
407.3
$
407.1
Fixed income, including money market
74.2
70.8
75.0
70.3
75.3
73.7
Multi-asset
179.9
191.9
185.1
189.0
188.2
201.9
628.6
638.5
641.5
624.4
670.8
682.7
Subadvised and separate accounts and other investment products
Equity
293.2
254.1
285.3
245.5
311.6
291.7
Fixed income, including money market
77.1
78.6
79.2
77.9
77.7
74.2
Multi-asset
141.3
128.6
145.4
124.0
159.9
158.2
511.6
461.3
509.9
447.4
549.2
524.1
Total
$
1,140.2
$
1,099.8
$
1,151.4
$
1,071.8
$
1,220.0
$
1,206.8
Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for 8.2 % and 6.9 % of our assets under management at June 30, 2020 , and December 31, 2019 , respectively.
Page 10
NOTE 3 – INVESTMENTS.
The carrying values of our investments that are not part of the consolidated T. Rowe Price investment products are as follows:
(in millions)
6/30/2020
12/31/2019
Investments held at fair value
T. Rowe Price investment products - discretionary investments
$
992.4
$
1,221.8
T. Rowe Price investment products - seed capital
132.2
181.1
T. Rowe Price investment products - supplemental savings plan liability economic hedges
529.2
561.1
Investment partnerships and other investments
93.4
99.7
Equity method investments
T. Rowe Price investment products - discretionary investments
809.6
610.0
T. Rowe Price investment products - seed capital
145.3
95.6
T. Rowe Price investment products - supplemental savings plan liability economic hedges
35.3
—
26% interest in UTI Asset Management Company Limited (India)
155.9
164.5
Investment partnerships and other investments
5.7
5.0
U.S. Treasury note
1.0
1.0
Total
$
2,900.0
$
2,939.8
The investment partnerships are carried at fair value using net asset value (“NAV”) per share as a practical expedient. Our interests in these partnerships are generally not redeemable and are subject to significant restrictions on transferability. The underlying investments of these partnerships have contractual terms through 2029, though we may receive distributions of liquidating assets over a longer term. The investment strategies of these partnerships include growth equity, buyout, venture capital, and real estate.
During the three- and six- months ended June 30, 2020 , net gains on investments included $ 125.5 million and $ 21.9 million , respectively, of net unrealized gains related to investments held at fair value that were still held at June 30, 2020 . For the same period of 2019, the net gains on investments included $ 28.7 million and $ 79.3 million , respectively, of net unrealized gains on investments held at fair value that were still held at June 30, 2019 .
During the six months ended June 30, 2020 and 2019, certain T. Rowe Price investment products in which we provided initial seed capital at the time of formation were deconsolidated, as we no longer had a controlling interest. Depending on our ownership interest, we are now reporting our residual interests in these T. Rowe Price investment products as either an equity method investment or an investment held at fair value. Additionally, during the six months ended 2019 , certain T. Rowe Price investment products that were being accounted for as equity method investments were consolidated, as we regained a controlling interest. The net impact of these changes on our unaudited condensed consolidated balance sheets and statements of income as of the dates the portfolios were deconsolidated or reconsolidated is detailed below.
Three months ended
Six months ended
(in millions)
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Net increase (decrease) in assets of consolidated T. Rowe Price investment products
$
( 100.0
)
$
( 68.4
)
$
( 146.2
)
$
( 56.1
)
Net decrease in liabilities of consolidated T. Rowe Price investment products
$
( 1.2
)
$
( .3
)
$
( 3.6
)
$
( 1.2
)
Net increase (decrease) in redeemable non-controlling interests
$
( 42.8
)
$
( 29.5
)
$
( 62.9
)
$
( 9.1
)
Gains recognized upon deconsolidation
$
—
$
.1
$
.1
$
.2
Page 11
The gains or losses recognized upon deconsolidation were the result of reclassifying currency translation adjustments accumulated on certain T. Rowe Price investment products with non-USD functional currencies from accumulated other comprehensive income to non-operating income (loss).
VARIABLE INTEREST ENTITIES.
Our investments at June 30, 2020 and December 31, 2019 , include interests in variable interest entities that we do not consolidate as we are not deemed the primary beneficiary. Our maximum risk of loss related to our involvement with these entities is as follows:
(in millions)
6/30/2020
12/31/2019
Investment carrying values
$
112.5
$
156.0
Unfunded capital commitments
14.4
18.1
Uncollected investment advisory and administrative fees
8.1
10.5
$
135.0
$
184.6
The unfunded capital commitments totaling $ 14.4 million at June 30, 2020 , and $ 18.1 million at December 31, 2019 , relate primarily to the investment partnerships in which we have an existing investment. In addition to such amounts, a percentage of prior distributions may be called under certain circumstances.
NOTE 4 – FAIR VALUE MEASUREMENTS.
We determine the fair value of our cash equivalents and investments held at fair value 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. The following table summarizes our investments that are recognized in our unaudited condensed consolidated balance sheets using fair value measurements determined based on the differing levels of inputs. This table excludes investments held by the consolidated T. Rowe Price investment products which are presented separately on our unaudited condensed consolidated balance sheets and are detailed in Note 5.
6/30/2020
12/31/2019
(in millions)
Level 1
Level 2
Level 1
Level 2
Cash equivalents held in T. Rowe Price money market funds
$
1,705.1
$
—
$
1,355.6
$
—
T. Rowe Price investment products - discretionary investments
992.4
—
1,221.8
—
T. Rowe Price investment products - seed capital
122.3
9.9
171.2
9.9
T. Rowe Price investment products - supplemental savings plan liability economic hedges
529.2
—
561.1
—
Other investments
.2
2.7
—
—
Total
$
3,349.2
$
12.6
$
3,309.7
$
9.9
As required by the accounting guidance, the fair value hierarchy level table above does not include the investment partnerships and other investments for which fair value is estimated using their NAV per share as a practical expedient. The carrying value of these investments as disclosed in Note 3 were $ 90.5 million at June 30, 2020 , and $ 99.7 million at December 31, 2019 .
Page 12
NOTE 5 – CONSOLIDATED T. ROWE PRICE INVESTMENT PRODUCTS.
The T. Rowe Price investment products that we consolidate in our unaudited condensed consolidated financial statements are generally those products we provided initial seed capital at the time of their formation and have a controlling interest. Our U.S. mutual funds are considered voting interest entities, while those regulated outside the U.S. are considered variable interest entities.
The following table details the net assets of the consolidated T. Rowe Price investment products :
6/30/2020
12/31/2019
(in millions)
Voting
interest entities
Variable interest entities
Total
Voting
interest entities
Variable interest entities
Total
Cash and cash equivalents (1)
$
11.4
$
113.4
$
124.8
$
9.9
$
66.6
$
76.5
Investments (2)
138.0
1,865.8
2,003.8
281.1
1,891.3
2,172.4
Other assets
6.7
26.2
32.9
10.6
17.4
28.0
Total assets
156.1
2,005.4
2,161.5
301.6
1,975.3
2,276.9
Liabilities
13.2
41.6
54.8
12.2
27.0
39.2
Net assets
$
142.9
$
1,963.8
$
2,106.7
$
289.4
$
1,948.3
$
2,237.7
Attributable to T. Rowe Price Group
$
111.4
$
905.2
$
1,016.6
$
199.6
$
917.1
$
1,116.7
Attributable to redeemable non-controlling interests
31.5
1,058.6
1,090.1
89.8
1,031.2
1,121.0
$
142.9
$
1,963.8
$
2,106.7
$
289.4
$
1,948.3
$
2,237.7
(1) Cash and cash equivalents includes $ 10.5 million at June 30, 2020 , and $ 9.1 million at December 31, 2019 , of T. Rowe Price money market mutual funds.
(2) Investments includes $ 45.9 million at June 30, 2020 , and $ 40.2 million at December 31, 2019 of T. Rowe Price investment products.
Although we can redeem our net interest in these consolidated T. Rowe Price investment products at any time, we cannot directly access or sell the assets held by these products to obtain cash for general operations. Additionally, the assets of these investment products are not available to our general creditors.
Since third party investors in these investment products have no recourse to our credit, our overall risk related to the net assets of consolidated T. Rowe Price investment products is limited to valuation changes associated with our net interest. We, however, are required to recognize the valuation changes associated with all underlying investments held by these products in our unaudited condensed consolidated statements of income and disclose the portion attributable to third party investors as net income attributable to redeemable non-controlling interests.
Page 13
The operating results of the consolidated T. Rowe Price investment products for the three- and six- months ended June 30, 2020 and 2019 , are reflected in our unaudited condensed consolidated statements of income as follows:
Three months ended
6/30/2020
6/30/2019
(in millions)
Voting interest entities
Variable interest entities
Total
Voting interest entities
Variable interest entities
Total
Operating expenses reflected in net operating income
$
( .3
)
$
( 3.3
)
$
( 3.6
)
$
( .7
)
$
( 3.1
)
$
( 3.8
)
Net investment income (loss) reflected in non-operating income (loss)
16.4
226.0
242.4
11.4
51.4
62.8
Impact on income before taxes
$
16.1
$
222.7
$
238.8
$
10.7
$
48.3
$
59.0
Net income (loss) attributable to T. Rowe Price Group
$
12.9
$
100.4
$
113.3
$
5.2
$
25.4
$
30.6
Net income (loss) attributable to redeemable non-controlling interests
3.2
122.3
125.5
5.5
22.9
28.4
$
16.1
$
222.7
$
238.8
$
10.7
$
48.3
$
59.0
Six months ended
6/30/2020
6/30/2019
(in millions)
Voting
interest entities
Variable interest entities
Total
Voting
interest entities
Variable interest entities
Total
Operating expenses reflected in net operating income
$
( .5
)
$
( 6.8
)
$
( 7.3
)
$
( 1.0
)
$
( 5.9
)
$
( 6.9
)
Net investment income (loss) reflected in non-operating income
( 18.8
)
( 69.1
)
( 87.9
)
19.4
145.3
164.7
Impact on income before taxes
$
( 19.3
)
$
( 75.9
)
$
( 95.2
)
$
18.4
$
139.4
$
157.8
Net income (loss) attributable to T. Rowe Price Group
$
( 9.7
)
$
( 34.5
)
$
( 44.2
)
$
13.9
$
74.1
$
88.0
Net income (loss) attributable to redeemable non-controlling interests
( 9.6
)
( 41.4
)
( 51.0
)
4.5
65.3
69.8
$
( 19.3
)
$
( 75.9
)
$
( 95.2
)
$
18.4
$
139.4
$
157.8
The operating expenses of the consolidated investment products are reflected in other operating expenses. In preparing our unaudited condensed consolidated financial statements, we eliminated operating expenses of $ 2.1 million and $ 2.2 million for the three months ended June 30, 2020 and 2019 , respectively, against the investment advisory and administrative fees earned from these products. Operating expenses eliminated for the six months ended June 30, 2020 and 2019 , were $ 4.6 million and $ 3.7 million , respectively. The net investment income (loss) reflected in non-operating income (loss) includes dividend and interest income and realized and unrealized gains and losses on the underlying securities held by the consolidated T. Rowe Price investment products .
Page 14
The table below details the impact of these consolidated investment products on the individual lines of our unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019 .
Six months ended
6/30/2020
6/30/2019
(in millions)
Voting
interest entities
Variable interest entities
Total
Voting
interest entities
Variable interest entities
Total
Net cash provided by (used in) operating activities
$
.8
$
( 49.8
)
$
( 49.0
)
$
( 32.7
)
$
( 258.4
)
$
( 291.1
)
Net cash used in investing activities
( 9.2
)
—
( 9.2
)
( 5.1
)
—
( 5.1
)
Net cash provided by in financing activities
9.9
104.0
113.9
34.5
302.7
337.2
Effect of exchange rate changes on cash and cash equivalents of consolidated
T. Rowe Price investment products
—
( 7.4
)
( 7.4
)
—
( .4
)
( .4
)
Net change in cash and cash equivalents during period
1.5
46.8
48.3
( 3.3
)
43.9
40.6
Cash and cash equivalents at beginning of year
9.9
66.6
76.5
18.5
51.6
70.1
Cash and cash equivalents at end of period
$
11.4
$
113.4
$
124.8
$
15.2
$
95.5
$
110.7
The net cash provided by financing activities during the six months ended June 30, 2020 and 2019 includes $ 26.2 million and $ 146.9 million , respectively, of net subscriptions we made into the consolidated T. Rowe Price investment products , net of dividends received. These cash flows were eliminated in consolidation.
FAIR VALUE MEASUREMENTS.
We determine the fair value of investments held by consolidated T. Rowe Price investment products 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. The value of investments using Level 3 inputs is insignificant.
These levels are not necessarily an indication of the risk or liquidity associated with these investment holdings. The following table summarizes the investment holdings held by our consolidated T. Rowe Price investment products using fair value measurements determined based on the differing levels of inputs.
6/30/2020
12/31/2019
(in millions)
Level 1
Level 2
Level 1
Level 2
Assets
Cash equivalents
$
10.5
$
—
$
9.1
$
1.1
Equity securities
185.1
668.1
162.8
724.5
Fixed income securities
—
1,123.1
—
1,248.6
Other investments
2.5
25.0
2.7
33.8
$
198.1
$
1,816.2
$
174.6
$
2,008.0
Liabilities
$
( .6
)
$
( 15.4
)
$
( .4
)
$
( 11.2
)
NOTE 6 – STOCKHOLDERS’ EQUITY.
Accounts payable and accrued expenses includes liabilities of $ 10.6 million at June 30, 2020 , and $ 12.2 million at December 31, 2019 , for common stock repurchases that settled during the first week of July 2020 and January 2020, respectively.
Page 15
NOTE 7 – STOCK-BASED COMPENSATION.
STOCK OPTIONS.
The following table summarizes the status of, and changes in, our stock options during the six months ended June 30, 2020 .
Options
Weighted-
average
exercise
price
Outstanding at December 31, 2019
7,388,068
$
71.06
Exercised
( 1,944,942
)
$
68.29
Forfeited
( 5,457
)
$
74.09
Outstanding at June 30, 2020
5,437,669
$
72.05
Exercisable at June 30, 2020
4,772,891
$
71.52
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 six months ended June 30, 2020 .
Restricted
shares
Restricted
stock
units
Weighted-average
fair value
Nonvested at December 31, 2019
7,404
6,718,261
$
98.75
Time-based grants
7,412
39,925
$
116.08
Dividend equivalents granted to non-employee directors
—
1,243
$
110.74
Vested
( 7,404
)
( 87,021
)
$
97.44
Forfeited
—
( 67,294
)
$
96.82
Nonvested at June 30, 2020
7,412
6,605,114
$
98.91
Nonvested at June 30, 2020 , includes 403,008 performance-based restricted stock units, including 318,768 restricted stock units for which the performance period has expired and the performance threshold has been met.
FUTURE STOCK-BASED COMPENSATION EXPENSE.
The following table presents the compensation expense to be recognized over the remaining vesting periods of the stock-based awards outstanding at June 30, 2020 . Estimated future compensation expense will change to reflect future grants of restricted stock awards and units, future option grants, changes in the probability of performance thresholds being met, and adjustments for actual forfeitures.
(in millions)
Third quarter 2020
$
53.6
Fourth quarter 2020
46.7
2021
108.7
2022 through 2026
90.0
Total
$
299.0
NOTE 8 – EARNINGS PER SHARE CALCULATIONS.
The following table presents the reconciliation of net income attributable to T. Rowe Price Group to net income allocated to our common stockholders and the weighted-average shares 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
Page 16
options were exercised and non-participating stock awards vested. No outstanding stock options had an anti-dilutive impact on the diluted earnings per common share calculation in the periods presented.
Three months ended
Six months ended
(in millions)
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Net income attributable to T. Rowe Price Group
$
603.0
$
527.5
$
946.1
$
1,040.1
Less: net income allocated to outstanding restricted stock and stock unit holders
16.8
13.8
26.2
26.8
Net income allocated to common stockholders
$
586.2
$
513.7
$
919.9
$
1,013.3
Weighted-average common shares
Outstanding
227.4
235.9
230.7
236.2
Outstanding assuming dilution
229.5
239.2
233.1
239.4
NOTE 9 – OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS.
The changes in each component of accumulated other comprehensive loss, including reclassification adjustments for the three months ended June 30, 2020 and 2019 are presented in the table below.
Three months ended 6/30/2020
Three months ended 6/30/2019
(in millions)
Equity method investments
Consolidated T. Rowe Price investment products - variable interest entities
Total currency translation adjustments
Equity method investments
Consolidated T. Rowe Price investment products - variable interest entities
Total currency translation adjustments
Balances at beginning of period
$
( 47.0
)
$
( 2.1
)
$
( 49.1
)
$
( 45.0
)
$
3.4
$
( 41.6
)
Other comprehensive income (loss) before reclassifications and income taxes
( 7.3
)
5.7
( 1.6
)
1.5
2.7
4.2
Reclassification adjustments recognized in non-operating income
—
—
—
—
( .1
)
( .1
)
( 7.3
)
5.7
( 1.6
)
1.5
2.6
4.1
Net deferred tax benefits (income taxes)
( .1
)
( 1.4
)
( 1.5
)
( .3
)
( .7
)
( 1.0
)
Other comprehensive income (loss)
( 7.4
)
4.3
( 3.1
)
1.2
1.9
3.1
Balances at end of period
$
( 54.4
)
$
2.2
$
( 52.2
)
$
( 43.8
)
$
5.3
$
( 38.5
)
The other comprehensive income (loss) in the table above excludes $ 10.3 million in the 2020 quarter and $ 1.0 million in the 2019 quarter of other comprehensive income related to redeemable non-controlling interests held in our consolidated products.
Page 17
The changes in each component of accumulated other comprehensive loss, including reclassification adjustments for six months ended June 30, 2020 and 2019 , are presented in the table below.
Six months ended 6/30/2020
Six months ended 6/30/2019
(in millions)
Equity method investments
Consolidated T. Rowe Price investment products - variable interest entities
Total currency translation adjustments
Equity method investments
Consolidated T. Rowe Price investment products - variable interest entities
Total currency translation adjustments
Balances at beginning of period
$
( 46.9
)
$
3.9
$
( 43.0
)
( 48.8
)
6.8
( 42.0
)
Other comprehensive income (loss) before reclassifications and income taxes
( 7.4
)
( 2.2
)
( 9.6
)
6.4
( 1.8
)
4.6
Reclassification adjustments recognized in non-operating income
—
( .1
)
( .1
)
—
( .2
)
( .2
)
( 7.4
)
( 2.3
)
( 9.7
)
6.4
( 2.0
)
4.4
Net deferred tax income taxes
( .1
)
.6
.5
( 1.4
)
.5
( .9
)
Other comprehensive income (loss)
( 7.5
)
( 1.7
)
( 9.2
)
5.0
( 1.5
)
3.5
Balances at end of period
$
( 54.4
)
$
2.2
$
( 52.2
)
$
( 43.8
)
$
5.3
$
( 38.5
)
The other comprehensive income (loss) in the table above excludes $ 6.9 million for the 2020 period and $ .3 million for the 2019 period of other comprehensive losses.
NOTE 10 – COMMITMENTS AND CONTINGENCIES.
On February 14, 2017, T. Rowe Price Group, Inc., T. Rowe Price Associates, Inc., T. Rowe Price Trust Company, current and former members of the management committee, and trustees of the T. Rowe Price U.S. Retirement Program were named as defendants in a lawsuit filed in the United States District Court for the District of Maryland. The lawsuit alleges breaches of ERISA’s fiduciary duty and prohibited transaction provisions on behalf of a class of all participants and beneficiaries of the T. Rowe Price 401(k) Plan from February 14, 2011, to the time of judgment. The matter has been certified as a class action. T. Rowe Price believes the claims are without merit and is vigorously defending the action. This matter is in the expert discovery phase of litigation and we cannot predict the eventual outcome, or whether it will have a material negative impact on our financial results, or estimate the possible loss or range of loss that may arise from any negative outcome.
On April 27, 2016, certain shareholders in the T. Rowe Price Blue Chip Growth Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe Price Equity Income Fund, T. Rowe Price Growth Stock Fund, T. Rowe Price International Stock Fund, T. Rowe Price High Yield Fund, T. Rowe Price New Income Fund and T. Rowe Price Small Cap Stock Fund (the “Funds”) filed a Section 36(b) complaint under the caption Zoidis v. T. Rowe Price Assoc., Inc., against T. Rowe Price Associates, Inc. (“T. Rowe Price”) in the United States District Court for the Northern District of California. The complaint alleges that the management fees for the identified funds are excessive because
T. Rowe Price charges lower advisory fees to subadvised clients with funds in the same strategy. The complaint seeks to recover the allegedly excessive advisory fees received by T. Rowe Price in the year preceding the start of the lawsuit, along with investments’ returns and profits. In the alternative, the complaint seeks the rescission of each fund’s investment management agreement and restitution of any allegedly excessive management fees.
T. Rowe Price believes the claims are without merit and is vigorously defending the action. This matter is in the discovery phase of litigation and we cannot predict the eventual outcome, or whether it will have a material negative impact on our financial results, or estimate the possible loss or range of loss that may arise from any negative outcome.
In addition to the matters discussed above, 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 of an adverse determination in one or more of these pending ordinary course of business claims that would have a material adverse effect on our financial position or results of operations is remote.
Page 18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
T. Rowe Price Group, Inc.:
Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries ("the Company") as of June 30, 2020 , the related condensed consolidated statements of income and comprehensive income, and stockholders’ equity for the three-month and six-month periods ended June 30, 2020 and 2019 , the related condensed consolidated statements of cash flows for the six -month periods ended June 30, 2020 and 2019 , and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019 , 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 13, 2020 , 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, 2019 , is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated 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 PCAOB, 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.
/ s / KPMG LLP
Baltimore, Maryland
July 29, 2020
Page 19
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.