T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its 4th-quarter of 2K17 results, including net revenues of $1.30B, net income of $347.10M, and diluted earnings for each common share of $1.370. For the 4th-quarter of 2016, net revenues were $1.10B, net income was $379.80M, and diluted earnings for each common share was $1.5. On a non-GAAP basis, diluted earnings for each share for the 4th-quarter of 2K17 was $1.520, compared with $1.210 in the 2016 quarter.
Financial Highlights:
Assets Under Management:
Assets under management increased $43.20B in the 4th-quarter of 2K17 to $991.10B at December 31, 2K17. The firm’s net cash inflows were $3.70B in the 4th-quarter of 2K17, inclusive of $4.20B of client transfers from the T. Rowe Price U.S. mutual funds to other investment products.
The firm’s common shares outstanding were 245.10M at December 31, 2K17, compared with 244.80M at December 31, 2016, as the firm issued more shares from the exercise and vesting of equity awards than the firm repurchased in 2K17. The firm expended $458.10M in 2K17 to repurchase 6.60M shares, or 2.70 percent, of its outstanding common shares, including $1.40M to repurchase 15,000.00 shares during the 4th-quarter of 2K17. The firm invested $186.10M during 2K17 in capitalized facilities and technology and expects capital expenditures for 2018 to be about $180.00M, of which about two-thirds is planned for technology initiatives. These expenditures are expected to continue to be funded from operating resources.
Financial Results
Investment advisory revenues earned in the current quarter from the T. Rowe Price U.S. mutual funds were $817.90M, an increase of 16.70 percent from the comparable 2016 quarter. Average assets under management in these funds increased 17.10 percent to $600.60B.
Investment advisory revenues earned in the current quarter from other investment products were $338.10M, an increase of 27.10 percent from the comparable 2016 quarter. Average assets under management for these products increased 27.50 percent to $375.80B.
Operating expenses were $755.10M in the 4th-quarter of 2K17 compared with $527.90M in the 4th-quarter of 2016. The 4th-quarter of 2016 operating expenses were reduced by the recognition of the $100.00M insurance recovery related to the Dell appraisal rights matter. For the year, operating expenses were $2,684.20M in 2K17 compared with $2,489.50M in 2016. On a non-GAAP basis, the firm’s operating expenses in the 4th-quarter of 2K17 increased 19.40 percent to $747.70M, and for the year increased 12.40 percent to $2,715.80M. This 12.40 percent increase was primarily due to market-driven expenses and continued strategic spend in light of strong markets and early successes of the firm’s investments.
The firm currently expects 2018 non-GAAP operating expense growth to lessen relative to 2K17, even as growth in market-driven expenses and investments in the business continue. However, the firm could elect to adjust its expense growth should markets increase or decline significantly. In addition, other events not currently planned or expected could impact the firm’s expense level in 2018. The firm is carefully evaluating the impact the U.S. tax reform will have on the firm, and factoring in the potential investment, operating expense, and capital management implications.
Compensation and related costs were $446.30M in the current quarter, an increase of 17.00 percent over the 4th-quarter of 2016, due primarily to additional headcount, an increase in the interim accrual of the annual bonus to reward strong performance and higher benefits. Higher benefit expenses primarily relate to an increase in health care costs, greater payroll taxes resulting from the impact the firm’s higher stock price had on equity-based awards, and additional compensation expense related to the supplemental savings plan as stronger equity markets have increased the liability. Average staff size increased by 9.00 percent from the 4th-quarter of 2016, and the firm employed 6,881.00 associates on December 31, 2K17, an increase of 552.00 associates from the end of 2016.
Advertising and promotion costs were $33.80M in the current quarter, an increase of 24.30 percent over the 4th-quarter of 2016. For the full year, advertising and promotion costs increased 15.10 percent over the 2016 year. The firm increased its spend in 2K17 in support of efforts to broaden its distribution reach and in response to investor sentiment and the strong market environment.
Occupancy and facility costs, together with depreciation expense, were $90.40M in the current quarter, an increase of 14.90 percent compared to the 4th-quarter of 2016. The increase is due primarily to added costs to update and enhance technology capabilities, including related maintenance programs, as well as expanded office facilities and new locations.
Other operating expenses were $146.60M in the current quarter, an increase of 39.80 percent from the comparable 2016 quarter. The increase was a result of the firm’s investment in its strategic initiatives, higher distribution and client servicing costs driven by the strong market performance, and other growing operational and regulatory business demands.
Net non-operating income was $102.00M in the current quarter, an increase of $89.80M from the 4th-quarter of 2016. The increase was driven primarily by higher investment income resulting from the strong market performance in 2K17. The components of net non-operating income for the quarter as well as the full-year ended December 31, 2016, and 2K17 are included in the tables at the back of this release.
The firm’s income tax provision for the 4th-quarter of 2K17 includes a non-recurring charge of $71.10M to reflect the estimated effect of the U.S. tax law changes enacted on December 22, 2K17. The recognized charge is based on current interpretation of the tax law changes and includes $18.90M for the remeasurement of the firm’s deferred tax assets and liabilities, and a $52.20M tax liability for the mandatory deemed repatriation of foreign sourced net earnings. The increase in the firm’s 2K17 effective tax rate resulting from this charge was offset in part by higher than expected tax benefits related to the exercise of stock options, vesting of restricted stock, and net income attributable to redeemable non-controlling interests, which is not taxable to the firm.
