T. Rowe Price(TROW) - 2023 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the first quarter of 2023 Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Q1 2023, including balance sheets, income statements, cash flows, and detailed notes Condensed Consolidated Balance Sheets This section provides a summary of the company's financial position as of March 31, 2023, and December 31, 2022 Balance Sheet Summary (as of March 31, 2023) | Balance Sheet Item | 3/31/2023 (in millions) | 12/31/2022 (in millions) | | :--- | :--- | :--- | | Total Assets | $12,156.6 | $11,643.3 | | Cash and cash equivalents | $2,094.1 | $1,755.6 | | Investments | $2,606.2 | $2,539.2 | | Goodwill | $2,642.8 | $2,642.8 | | Total Liabilities | $2,082.7 | $1,956.4 | | Total Stockholders' Equity | $9,239.8 | $9,030.2 | Condensed Consolidated Statements of Income This section presents the company's financial performance for the three months ended March 31, 2023, and 2022 Income Statement Summary (Three months ended March 31) | Income Statement Item | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Net Revenues | $1,537.6 | $1,863.0 | | Investment advisory fees | $1,391.8 | $1,662.1 | | Total Operating Expenses | $1,053.4 | $985.6 | | Net Operating Income | $484.2 | $877.4 | | Income before income taxes | $619.6 | $678.9 | | Net Income | $441.7 | $514.4 | | Net Income Attributable to T. Rowe Price Group | $421.5 | $567.9 | | Diluted Earnings Per Share | $1.83 | $2.41 | Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31 Cash Flow Summary (Three months ended March 31) | Cash Flow Item | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $511.7 | $1,103.4 | | Net cash provided by (used in) investing activities | $(57.5) | $3.8 | | Net cash used in financing activities | $(144.2) | $(644.1) | | Net change in cash and cash equivalents | $311.5 | $460.4 | Notes to Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements - The company's primary revenue source is investment advisory services, which are dependent on the total value and composition of assets under management (AUM)[17][18] Net Revenues and Average AUM by Asset Class (Q1 2023 vs Q1 2022) | Category | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Investment Advisory Fees (in millions) | | | | Equity | $833.9 | $1,086.0 | | Fixed income, including money market | $102.4 | $106.6 | | Multi-asset | $386.0 | $404.6 | | Alternatives | $69.5 | $64.9 | | Total Investment Advisory Fees | $1,391.8 | $1,662.1 | | Net Revenues | $1,537.6 | $1,863.0 | | Average AUM (in billions) | | | | Equity | $687.0 | $886.5 | | Fixed income, including money market | $169.6 | $177.8 | | Multi-asset | $422.2 | $453.7 | | Alternatives | $44.1 | $41.9 | | Total Average AUM | $1,322.9 | $1,559.9 | - As part of the OHA acquisition in 2021, a contingent consideration of up to $900 million may be payable starting in 2025 based on revenue targets, with the fair value of this liability reduced from $95.8 million to $46.2 million in Q1 2023[42][43] - The company has committed $472.4 million to fund OHA products over the next four years[69] Item 2. Management's Discussion and Analysis (MD&A) Management discusses Q1 2023 financial results, covering market trends, AUM changes, investment performance, operating results, and the company's liquidity and capital return Market Trends This section analyzes the key market movements and economic factors influencing the company's performance during Q1 2023 - In Q1 2023, major U.S. stock indexes rose, with large-cap growth stocks outperforming value, while market volatility was driven by Federal Reserve rate hikes and U.S. banking system stability concerns[83] Major Equity Market Index Returns (Q1 2023) | Index | Three months ended 3/31/2023 | | :--- | :--- | | S&P 500 Index | 7.5% | | NASDAQ Composite Index | 16.8% | | Russell 2000 Index | 2.7% | | MSCI EAFE Index | 8.6% | | MSCI Emerging Markets Index | 4.0% | - Global bonds produced mostly positive returns in Q1 2023, as U.S. Treasury yields declined due to a flight to safety, and high-yield issues outperformed higher-quality fixed income securities[87][88] Assets Under Management (AUM) This section details the changes in total assets under management, including the impact of market appreciation and net cash flows - Total AUM increased by $67.0 billion during Q1 2023 to end the period at $1.342 trillion, driven by market appreciation of $83.1 billion partially offset by net cash outflows of $16.1 billion[91] AUM Change by Asset Class (Q1 2023, in billions) | Asset Class | Beginning AUM (12/31/22) | Net Cash Flows | Market Appreciation | Ending AUM (3/31/23) | | :--- | :--- | :--- | :--- | :--- | | Equity | $664.2 | $(23.5) | $54.4 | $695.1 | | Fixed income | $167.0 | $0.1 | $3.3 | $170.4 | | Multi-asset | $400.1 | $7.1 | $24.7 | $431.9 | | Alternatives | $43.4 | $0.2 | $0.7 | $44.3 | | Total | $1,274.7 | $(16.1) | $83.1 | $1,341.7 | - Target date retirement products, a significant part of the multi-asset category, saw net inflows of $7.5 billion in Q1 2023, primarily driven by inflows into collective investment trusts[92] Investment Performance This section evaluates the performance of the company's investment products against benchmarks and peer groups Percentage of U.S. Mutual Funds Outperforming Morningstar Median (as of 3/31/2023) | Period | 1 year | 3 years | 5 years | 10 years | | :--- | :--- | :--- | :--- | :--- | | All Funds | 40% | 61% | 66% | 76% | Percentage of Composites Outperforming Benchmarks (as of 3/31/2023) | Period | 1 year | 3 years | 5 years | 10 years | | :--- | :--- | :--- | :--- | :--- | | All Composites | 31% | 51% | 50% | 71% | - As of March 31, 2023, 48.8% of the firm's rated U.S. mutual funds received an overall Morningstar rating of 4 or 5 stars, compared to 32.5% for the broader fund population[99] Results of Operations This section provides a detailed analysis of the company's revenues, expenses, and profitability for the reporting period Financial Results Summary (Q1 2023 vs Q1 2022) | Metric (U.S. GAAP) | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Revenues | $1,537.6 M | $1,863.0 M | (17.5)% | | Operating Expenses | $1,053.4 M | $985.6 M | 6.9% | | Net Operating Income | $484.2 M | $877.4 M | (44.8)% | | Diluted EPS | $1.83 | $2.41 | (24.1)% | | Metric (Non-GAAP) | Q1 2023 | Q1 2022 | % Change | | Operating Expenses | $1,022.5 M | $1,039.1 M | (1.6)% | | Diluted EPS | $1.69 | $2.62 | (35.5)% | - The decline in Q1 2023 net revenues was primarily due to a 16.3% decrease in investment advisory fees, resulting from a 15.2% decline in average AUM compared to Q1 2022[103] - GAAP operating expenses increased mainly due to higher compensation and technology costs, causing the GAAP operating margin to fall to 31.5% in Q1 2023 from 47.1% in Q1 2022[106][108] - The effective tax rate for Q1 2023 was 28.7%, up from 24.2% in Q1 2022, primarily due to valuation allowances on foreign-based deferred tax assets[131] Capital Resources and Liquidity This section assesses the company's financial strength, including its cash position, investment capacity, and capital allocation strategies Liquidity Position (in millions) | Category | 3/31/2023 | 12/31/2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $2,094.1 | $1,755.6 | | Discretionary investments | $464.3 | $449.7 | | Total cash and discretionary investments | $2,558.4 | $2,205.3 | - In Q1 2023, the company returned $283.4 million to stockholders, consisting of $280.7 million in dividends and $2.7 million in stock repurchases[146][147] - Anticipated capital expenditures for the full year 2023 are approximately $370 million, with about two-thirds planned for technology initiatives[147] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and controls and procedures Item 1. Legal Proceedings A class action lawsuit concerning biometric voiceprints was dismissed in February 2023, with other claims deemed unlikely to have a material adverse effect - A class action lawsuit alleging violations of the California Invasion of Privacy Act (CIPA) was dismissed by the plaintiffs on February 27, 2023[70] Item 1A. Risk Factors No material changes to the previously disclosed risk factors from the 2022 Annual Report on Form 10-K were reported - No material changes in risk factors were reported from the Form 10-K Annual Report for 2022[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activity during Q1 2023, including 25,000 shares repurchased under a public program Share Repurchase Activity (Q1 2023) | Month | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | January | 63,937 | $111.12 | 25,000 | | February | 38,675 | — | — | | March | 2,466 | — | — | | Total | 105,078 | $114.40 | 25,000 | - As of March 31, 2023, the company has authorization to repurchase an additional 8,750,217 shares under its March 2020 program[169] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of March 31, 2023[162] - No changes in internal control over financial reporting occurred during Q1 2023 that have materially affected, or are reasonably likely to materially affect, internal controls[163]