01—Abstract
Summary
Summary of the 10-K filed February 7, 2017. Cited figures are marked; the original filing is the authoritative source.
T.
Rowe Price Group, Inc. is a financial services holding company providing global investment management through its subsidiaries. It ended 2016 with $810.8 billiona in assets under management, up $47.7 billion from year-end 2015, driven by $50.5 billion of market appreciation and income, partly offset by net cash outflows of $2.8 billion. The company attributed outflows largely to clients reallocating to passive investments and the impact of closed strategies.
The company remained debt-free with cash and discretionary sponsored portfolio investment holdings of $1.9 billionb at December 31, 2016. Reported 2016 results were mixed. U.S. GAAP net revenues were $4,222.9 million, up 0.5% from $4,200.6 million, while net operating income fell 8.7% to $1,733.4 million, reflected in a $166.2 million payment to clients over the Dell appraisal rights matter, partly offset by a $100 million insurance recovery.
Net income attributable to T. Rowe Price Group declined 0.7% to $1,215.0 millionc, but diluted EPS rose 2.6% to $4.75. On an adjusted, non-GAAP basis, diluted EPS was $4.49, up 2.3%.
The company stated that consolidating a larger number of sponsored investment portfolios under new accounting guidance significantly affected the 2016 income statement. Management expects planned operating expenses, excluding the Dell charge, to grow in the high-single-digit range in 2017 as it increases spending on strategic priorities, and it returned $1.2 billiond to stockholders in 2016 through dividends and repurchases. The company also disclosed a pending Section 36(b) fee lawsuit (Zoidis v.
T. Rowe Price Associates) that it intends to vigorously defend.
02—Key points
Key Highlights
- Assets under management ended 2016 at $810.8 billion, up $47.7 billion, with net cash outflows of $2.8 billion offset by $50.5 billion of market appreciation and income.
- U.S. GAAP net operating income declined 8.7% to $1,733.4 million, reflecting a $66.2 million net nonrecurring charge for the Dell appraisal rights matter ($166.2 million paid to clients less a $100 million insurance recovery).
- Diluted EPS on a U.S. GAAP basis rose 2.6% to $4.75; adjusted diluted EPS was $4.49, up 2.3%.
- Net income attributable to T. Rowe Price Group was $1,215.0 million, versus $1,223.0 million in 2015, with non-operating income rising to $227.1 million from $103.5 million.
- The company remains debt-free, with $1.9 billion in cash and discretionary sponsored portfolio investment holdings at December 31, 2016.
- Regular dividends of $2.16 per share were paid in 2016, up 3.8%, and $676.9 million was spent repurchasing 10.0 million shares.
- Management expects 2017 planned operating expenses, excluding the Dell charge, to grow in the high-single-digit range, and advertising and promotion costs of up to 10% higher than 2016.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 7, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $4.28B$4.20B | +2.0% |
| Operating Expenses | $2.55B$2.30B | +10.8% |
| Operating Income | $1.73B$1.90B | −8.7% |
| Net Income | $1.22B$1.22B | −0.7% |
| EPS (Basic) | $4.85$4.74 | +2.3% |
| EPS (Diluted) | $4.75$4.63 | +2.6% |
| Shares Outstanding (Basic) | 245.50M254.60M | −3.6% |
| Shares Outstanding (Diluted) | 250.30M260.90M | −4.1% |
05—Questions
Frequently Asked Questions
Why did operating income fall in 2016 even though revenues rose?
Net revenues rose 0.5% to $4,222.9 million, but operating expenses increased 8.2% to $2,489.5 million. The increase includes a $66.2 million net nonrecurring charge for the Dell appraisal rights matter. The filing also cites investments in broadening and deepening investment management, distribution, and service capabilities, which reduced the operating margin to 41.0% from 45.2%.
What is the Dell appraisal rights matter?
In 2016, T. Rowe Price paid $166.2 million to clients after the Delaware Chancery Court denied their appraisal rights in the 2013 Dell leveraged buyout, because their shares were voted in favor of the merger. The company signed a settlement with its primary insurance carrier for $100 million in recovery, and up to $50 million in additional claims remain pending.
Why did reported net income and adjusted earnings differ?
The non-GAAP adjustments remove the Dell charge (net of insurance), the impact of consolidated sponsored investment portfolios, and other non-operating income. Adjusted net income attributable to T. Rowe Price Group was $1,148.9 million, compared with $1,215.0 million on a U.S. GAAP basis.
What drove the change in assets under management?
Market appreciation and income, net of distributions not reinvested, added $50.5 billion. Net cash outflows of $2.8 billion were largely attributed to clients reallocating to passive investments and the impact of closed strategies. Target date retirement portfolios contributed $8.1 billion of net cash flows and ended the year at $189.2 billion.
What pending legal matter does the company disclose?
Certain shareholders in eight T. Rowe Price funds filed a Section 36(b) complaint in April 2016 alleging excessive management fees because lower advisory fees are charged to subadvised clients with funds in the same strategy. The company believes the claims are without merit and intends to vigorously defend the action.
06—Continue