filings.toolsItem 8. Financial Statements and Supplementary Data.
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Item 8. Financial Statements and Supplementary Data.
| Page | |
| Index to Financial Statements: | |
| Consolidated Balance Sheets at December 31, 2018 and 2017 | 50 |
| Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2018 | 51 |
| Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2018 | 52 |
| Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2018 | 53 |
| Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2018 | 54 |
| Notes to Consolidated Financial Statements | 56 |
| Report of Independent Registered Public Accounting Firm | 78 |
Page 49
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
| 12/31/2018 | 12/31/2017 | ||||||
| ASSETS | |||||||
| Cash and cash equivalents | $ | 1,425.2 | $ | 1,902.7 | |||
| Accounts receivable and accrued revenue | 549.6 | 565.3 | |||||
| Investments | 2,453.4 | 1,477.3 | |||||
| Assets of consolidated T. Rowe Price investment products ($1,392.6 million at December 31, 2018 and $1,839.6 million at December 31, 2017, related to variable interest entities) | 1,680.4 | 2,048.4 | |||||
| Property and equipment, net | 661.3 | 652.0 | |||||
| Goodwill | 665.7 | 665.7 | |||||
| Other assets | 253.7 | 224.0 | |||||
| Total assets | $ | 7,689.3 | $ | 7,535.4 | |||
| LIABILITIES | |||||||
| Accounts payable and accrued expenses | $ | 228.5 | $ | 216.2 | |||
| Liabilities of consolidated T. Rowe Price investment products ($22.7 million at December 31, 2018 and $39.5 million at December 31, 2017, related to variable interest entities) | 38.7 | 55.9 | |||||
| Accrued compensation and related costs | 123.3 | 108.5 | |||||
| Supplemental savings plan liability | 380.0 | 269.3 | |||||
| Income taxes payable | 54.2 | 68.3 | |||||
| Total liabilities | 824.7 | 718.2 | |||||
| Commitments and contingent liabilities | |||||||
| Redeemable non-controlling interests | 740.3 | 992.8 | |||||
| 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 238,069,000 shares at December 31, 2018 and 245,111,000 at December 31, 2017 | 47.6 | 49.0 | |||||
| Additional capital in excess of par value | 654.6 | 846.1 | |||||
| Retained earnings | 5,464.1 | 4,932.9 | |||||
| Accumulated other comprehensive loss | (42.0 | ) | (3.6 | ) | |||
| Total permanent stockholders' equity | 6,124.3 | 5,824.4 | |||||
| Total liabilities, redeemable non-controlling interests and permanent stockholders’ equity | $ | 7,689.3 | $ | 7,535.4 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per-share amounts)
| 2018 | 2017 | 2016 | |||||||||
| Revenues | |||||||||||
| Investment advisory fees | $ | 4,850.6 | $ | 4,295.8 | $ | 3,735.0 | |||||
| Administrative, distribution, and servicing fees | 522.0 | 559.1 | 549.8 | ||||||||
| Net revenues | 5,372.6 | 4,854.9 | 4,284.8 | ||||||||
| Operating expenses | |||||||||||
| Compensation and related costs | 1,808.6 | 1,664.9 | 1,494.0 | ||||||||
| Distribution and servicing costs | 281.2 | 262.6 | 233.4 | ||||||||
| Advertising and promotion | 99.6 | 92.4 | 80.2 | ||||||||
| Product-related costs | 157.1 | 146.0 | 139.7 | ||||||||
| Technology, occupancy, and facility costs | 383.9 | 350.5 | 319.8 | ||||||||
| General, administrative, and other | 296.0 | 279.7 | 218.1 | ||||||||
| Nonrecurring net charge (recoveries) related to Dell appraisal rights matter | (15.2 | ) | (50.0 | ) | 66.2 | ||||||
| Total operating expenses | 3,011.2 | 2,746.1 | 2,551.4 | ||||||||
| Net operating income | 2,361.4 | 2,108.8 | 1,733.4 | ||||||||
| Non-operating income | |||||||||||
| Net gains on investments | 119.2 | 198.3 | 108.0 | ||||||||
| Net gains (losses) on consolidated investment products | (92.9 | ) | 193.9 | 121.1 | |||||||
| Other income (loss) | (3.1 | ) | 4.1 | (2.0 | ) | ||||||
| Total non-operating income | 23.2 | 396.3 | 227.1 | ||||||||
| Income before income taxes | 2,384.6 | 2,505.1 | 1,960.5 | ||||||||
| Provision for income taxes | 615.9 | 923.9 | 706.5 | ||||||||
| Net income | 1,768.7 | 1,581.2 | 1,254.0 | ||||||||
| Less: net income (loss) attributable to redeemable non-controlling interests | (68.8 | ) | 83.4 | 39.0 | |||||||
| Net income attributable to T. Rowe Price Group | $ | 1,837.5 | $ | 1,497.8 | $ | 1,215.0 | |||||
| Earnings per share on common stock of T. Rowe Price Group | |||||||||||
| Basic | $ | 7.41 | $ | 6.07 | $ | 4.85 | |||||
| Diluted | $ | 7.27 | $ | 5.97 | $ | 4.75 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
| 2018 | 2017 | 2016 | |||||||||
| Net income | $ | 1,768.7 | $ | 1,581.2 | $ | 1,254.0 | |||||
| Other comprehensive income (loss) | |||||||||||
| Currency translation adjustments | |||||||||||
| Consolidated T. Rowe Price investment products—variable interest entities | (44.7 | ) | 66.4 | (9.5 | ) | ||||||
| Reclassification gains recognized in non-operating investment income upon deconsolidation of certain T. Rowe Price investment products | (3.6 | ) | (.1 | ) | (2.2 | ) | |||||
| Total currency translation adjustments of consolidated T. Rowe Price investment products—variable interest entities | (48.3 | ) | 66.3 | (11.7 | ) | ||||||
| Equity method investments | (15.2 | ) | 2.6 | (1.6 | ) | ||||||
| Total currency translation adjustments | (63.5 | ) | 68.9 | (13.3 | ) | ||||||
| Net unrealized holding gains (losses) on available-for-sale investments | — | 37.4 | (1.0 | ) | |||||||
| Reclassification of (gains) losses in accumulated other comprehensive income to non-operating investment income: | |||||||||||
| Capital gain distributions | — | (3.5 | ) | (6.0 | ) | ||||||
| Net gains realized on dispositions determined using average cost | — | (83.1 | ) | (53.0 | ) | ||||||
| Net unrealized gains recognized upon the transfer to trading investments | — | (23.6 | ) | — | |||||||
| Total reclassification adjustments | — | (110.2 | ) | (59.0 | ) | ||||||
| Total net unrealized holding losses recognized in other comprehensive income | — | (72.8 | ) | (60.0 | ) | ||||||
| Other comprehensive loss before income taxes | (63.5 | ) | (3.9 | ) | (73.3 | ) | |||||
| Net deferred tax benefits | 9.2 | 10.0 | 28.2 | ||||||||
| Total other comprehensive income (loss) | (54.3 | ) | 6.1 | (45.1 | ) | ||||||
| Total comprehensive income | 1,714.4 | 1,587.3 | 1,208.9 | ||||||||
| Less: comprehensive income (loss) attributable to redeemable non-controlling interests | (94.9 | ) | 104.6 | 36.5 | |||||||
| Comprehensive income attributable to T. Rowe Price Group | $ | 1,809.3 | $ | 1,482.7 | $ | 1,172.4 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| 2018 | 2017 | 2016 | |||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | 1,768.7 | $ | 1,581.2 | $ | 1,254.0 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation and amortization of property and equipment | 159.5 | 143.6 | 133.4 | ||||||||
| Stock-based compensation expense | 197.1 | 152.0 | 161.6 | ||||||||
| Realized gains on dispositions of available-for-sale T. Rowe Price investment products | — | (83.1 | ) | (53.0 | ) | ||||||
| Gains recognized upon transfer of an investment in a T. Rowe Price mutual fund from available-for-sale to held as trading | — | (23.6 | ) | — | |||||||
| Net gains recognized on other investments | (50.5 | ) | (49.7 | ) | (31.0 | ) | |||||
| Net investments in T. Rowe Price investment products to economically hedge supplemental savings plan liability | (129.5 | ) | (218.6 | ) | — | ||||||
| Net change in trading securities held by consolidated T. Rowe Price investment products | (437.0 | ) | (1,492.9 | ) | (1,297.9 | ) | |||||
| Changes in accounts receivable and accrued revenue | 12.7 | (101.6 | ) | (10.5 | ) | ||||||
| Changes in payables and accrued liabilities | 111.3 | 323.4 | 139.2 | ||||||||
| Other changes in assets and liabilities | (12.4 | ) | (1.2 | ) | (125.3 | ) | |||||
| Net cash provided by operating activities | 1,619.9 | 229.5 | 170.5 | ||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of T. Rowe Price investment products | (1,124.0 | ) | (39.9 | ) | (.3 | ) | |||||
| Dispositions T. Rowe Price investment products | 352.4 | 336.6 | 219.1 | ||||||||
| Net cash of T. Rowe Price investment products on consolidation (deconsolidation) | (23.8 | ) | (64.2 | ) | 41.4 | ||||||
| Additions to property and equipment | (168.5 | ) | (186.1 | ) | (148.3 | ) | |||||
| Other investing activity | 88.4 | (7.4 | ) | (5.7 | ) | ||||||
| Net cash provided by (used in) investing activities | (875.5 | ) | 39.0 | 106.2 | |||||||
| Cash flows from financing activities | |||||||||||
| Repurchases of common stock | (1,090.4 | ) | (458.1 | ) | (676.9 | ) | |||||
| Common share issuances under stock-based compensation plans | 74.8 | 201.1 | 126.3 | ||||||||
| Dividends paid to common stock and equity-award holders | (694.3 | ) | (563.1 | ) | (540.8 | ) | |||||
| Net subscriptions received from redeemable non-controlling interest holders | 470.4 | 1,281.6 | 915.0 | ||||||||
| Net cash provided by (used in) provided by financing activities | (1,239.5 | ) | 461.5 | (176.4 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products | (15.4 | ) | 5.3 | (2.1 | ) | ||||||
| Net change in cash and cash equivalents during period | (510.5 | ) | 735.3 | 98.2 | |||||||
| Cash and cash equivalents at beginning of period, including $103.1 million at December 31, 2017 and $65.6 million at December 31, 2016 held by consolidated T. Rowe Price investment products | 2,005.8 | 1,270.5 | 1,172.3 | ||||||||
| Cash and cash equivalents at end of period, including $70.1 million at December 31, 2018, $103.1 million at December 31, 2017, and $65.6 million at December 31, 2016, held by consolidated T. Rowe Price investment products | $ | 1,495.3 | $ | 2,005.8 | $ | 1,270.5 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(shares in thousands; dollars in millions)
| 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, 2015 | 250,469 | $ | 50.1 | $ | 654.6 | $ | 3,970.7 | $ | 86.6 | $ | 4,762.0 | $ | — | |||||||||||||
| Reclassification of T. Rowe Price investment products upon adoption of new accounting guidance on January 1, 2016 | — | — | — | 32.5 | (32.5 | ) | — | 672.7 | ||||||||||||||||||
| Cumulative effect adjustment upon adoption of new stock-based compensation guidance on January 1, 2016 | — | — | 12.9 | (9.0 | ) | — | 3.9 | |||||||||||||||||||
| Balances at January 1, 2016 | 250,469 | 50.1 | 667.5 | 3,994.2 | 54.1 | 4,765.9 | 672.7 | |||||||||||||||||||
| Net income | — | — | — | 1,215.0 | — | 1,215.0 | 39.0 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (42.6 | ) | (42.6 | ) | (2.5 | ) | ||||||||||||||||
| Dividends declared ($2.16 per share) | — | — | — | (541.2 | ) | — | (541.2 | ) | — | |||||||||||||||||
| Common stock-based compensation plans activity | ||||||||||||||||||||||||||
| Shares issued upon option exercises | 4,140 | .8 | 148.7 | — | — | 149.5 | — | |||||||||||||||||||
| Restricted shares issued, net of shares withheld for taxes | (178 | ) | — | (14.0 | ) | — | — | (14.0 | ) | — | ||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares withheld for taxes | 409 | .1 | (8.8 | ) | — | — | (8.7 | ) | — | |||||||||||||||||
| Forfeiture of restricted awards | (61 | ) | — | — | — | — | — | — | ||||||||||||||||||
| Stock-based compensation expense | — | — | 161.6 | — | — | 161.6 | — | |||||||||||||||||||
| Restricted stock units issued as dividend equivalents | — | — | .1 | (.1 | ) | — | — | — | ||||||||||||||||||
| Common shares repurchased | (9,995 | ) | (2.0 | ) | (300.6 | ) | (374.3 | ) | — | (676.9 | ) | — | ||||||||||||||
| Net subscriptions into T. Rowe Price investment products | — | — | — | — | — | — | 945.3 | |||||||||||||||||||
| Net deconsolidations of T. Rowe Price investment products | — | — | — | — | — | — | (967.3 | ) | ||||||||||||||||||
| Balances at December 31, 2016 | 244,784 | 49.0 | 654.5 | 4,293.6 | 11.5 | 5,008.6 | 687.2 | |||||||||||||||||||
| Net income | — | — | — | 1,497.8 | — | 1,497.8 | 83.4 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (15.1 | ) | (15.1 | ) | 21.2 | |||||||||||||||||
| Dividends declared ($2.28 per share) | — | — | — | (562.6 | ) | — | (562.6 | ) | — | |||||||||||||||||
| Common stock-based compensation plans activity | ||||||||||||||||||||||||||
| Shares issued upon option exercises | 6,339 | 1.2 | 251.0 | — | — | 252.2 | — | |||||||||||||||||||
| Restricted shares issued, net of shares withheld for taxes | (170 | ) | — | (19.2 | ) | — | — | (19.2 | ) | — | ||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares withheld for taxes | 789 | .1 | (31.3 | ) | — | — | (31.2 | ) | — | |||||||||||||||||
| Forfeiture of restricted awards | (19 | ) | — | — | — | — | — | — | ||||||||||||||||||
| Stock-based compensation expense | — | — | 152.0 | — | — | 152.0 | — | |||||||||||||||||||
| Restricted stock units issued as dividend equivalents | — | — | .2 | (.2 | ) | — | — | — | ||||||||||||||||||
| Common shares repurchased | (6,612 | ) | (1.3 | ) | (161.1 | ) | (295.7 | ) | — | (458.1 | ) | — | ||||||||||||||
| Net subscriptions into T. Rowe Price investment products | — | — | — | — | — | — | 1,243.7 | |||||||||||||||||||
| Net deconsolidations of T. Rowe Price investment products | — | — | — | — | — | — | (1,042.7 | ) | ||||||||||||||||||
| Balances at December 31, 2017 | 245,111 | $ | 49.0 | $ | 846.1 | $ | 4,932.9 | $ | (3.6 | ) | $ | 5,824.4 | $ | 992.8 |
(1) Accumulated other comprehensive income
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 54
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(shares in thousands; dollars in millions)
| 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, 2017 | 245,111 | $ | 49.0 | $ | 846.1 | $ | 4,932.9 | $ | (3.6 | ) | $ | 5,824.4 | $ | 992.8 | ||||||||||||
| Cumulative effect adjustment upon adoption of new financial instruments and accumulated other comprehensive income guidance on January 1, 2018(2) | — | — | — | 22.4 | (7.9 | ) | 14.5 | — | ||||||||||||||||||
| Reclassification adjustment of stranded tax benefits on currency translation adjustments upon adoption of new accumulated other comprehensive income guidance on January 1, 2018 | — | — | — | 2.3 | (2.3 | ) | — | — | ||||||||||||||||||
| Balances at January 1, 2018 | 245,111 | 49.0 | 846.1 | 4,957.6 | (13.8 | ) | 5,838.9 | 992.8 | ||||||||||||||||||
| Net income | — | — | — | 1,837.5 | — | 1,837.5 | (68.8 | ) | ||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (28.2 | ) | (28.2 | ) | (26.1 | ) | ||||||||||||||||
| Dividends declared ($2.80 per share) | — | — | — | (694.7 | ) | — | (694.7 | ) | — | |||||||||||||||||
| Common stock-based compensation plans activity | ||||||||||||||||||||||||||
| Shares issued upon option exercises | 2,870 | .5 | 120.8 | — | — | 121.3 | — | |||||||||||||||||||
| Restricted shares withheld for taxes, net of shares issued | (115 | ) | — | (11.4 | ) | — | — | (11.4 | ) | — | ||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares withheld for taxes | 1,053 | .2 | (36.8 | ) | — | — | (36.6 | ) | — | |||||||||||||||||
| Forfeiture of restricted awards | (14 | ) | — | — | — | — | — | — | ||||||||||||||||||
| Stock-based compensation expense | — | — | 197.1 | — | — | 197.1 | — | |||||||||||||||||||
| Restricted stock units issued as dividend equivalents | — | — | .2 | (.2 | ) | — | — | — | ||||||||||||||||||
| Common shares repurchased | (10,836 | ) | (2.1 | ) | (461.4 | ) | (636.1 | ) | — | (1,099.6 | ) | — | ||||||||||||||
| Net subscriptions into T. Rowe Price investment products | — | — | — | — | — | — | 468.8 | |||||||||||||||||||
| Net deconsolidations of T. Rowe Price investment products | — | — | — | — | — | — | (626.4 | ) | ||||||||||||||||||
| Balances at December 31, 2018 | 238,069 | $ | 47.6 | $ | 654.6 | $ | 5,464.1 | $ | (42.0 | ) | $ | 6,124.3 | $ | 740.3 |
(1) Accumulated other comprehensive income
(2) Includes the reclassification of $1.7 million of stranded income taxes on available-for-sale investments resulting from U.S. tax law changes enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings.
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
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. 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 PREPARATION.
These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States. These principles require that we make certain estimates and assumptions. Actual results may vary from our estimates.
In order to increase transparency of operating expenses and better align expenses that have similar cost drivers, we have changed, as of January 1, 2018, the presentation of certain line items of our income statement. In doing so, we have reclassified certain prior year amounts to conform to the 2018 presentation. These reclassifications are shown along with the impact of the new revenue recognition accounting standard adopted on January 1, 2018, in the New Accounting Guidance section below.
NEW ACCOUNTING GUIDANCE.
We adopted Accounting Standards Codification Topic 606: Revenue from Contracts with Customers ("ASC 606"), on January 1, 2018, using the retrospective method, which required adjustments to be reflected as of January 1, 2016. In connection with the adoption of this guidance, we reevaluated all of our revenue contracts and determined that the new guidance does not change the timing of when we recognize revenue. However, we did conclude that certain fees earned from the U.S. mutual funds associated with our mutual fund transfer agent, accounting, shareholder servicing, and participant recordkeeping activities could no longer be reported net of the expenses paid to third parties that perform such services, as we are deemed, under the guidance, to have control over the services before they are transferred to the U.S. mutual funds. No transition-related practical expedients were applied. Certain immaterial balance sheet reclassifications were made to conform to the 2018 presentation and all related note disclosures have been recast. Updates to our revenue recognition disclosures are included in Note 3 - Information about Receivables, Revenues, and Services and our updated revenue recognition accounting policy is included in the Summary of Significant Accounting Policies section below.
Page 56
The impact of ASC 606 and other income statement reclassifications, as previously described, on consolidated statements of income for 2017 and 2016 follows:
| 2017 | 2016 | ||||||||||||||||||||||||||||||
| (in millions) | As previously reported | Change in Presentation | Impact of ASC 606 | Recast | As previously reported | Change in Presentation | Impact of ASC 606 | Recast | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||
| Investment advisory fees | $ | 4,287.7 | $ | — | $ | 8.1 | $ | 4,295.8 | $ | 3,728.7 | $ | — | $ | 6.3 | $ | 3,735.0 | |||||||||||||||
| Administrative, distribution, and servicing fees(1) | 505.3 | — | 53.8 | 559.1 | 494.2 | — | 55.6 | 549.8 | |||||||||||||||||||||||
| Net revenues | 4,793.0 | — | 61.9 | 4,854.9 | 4,222.9 | — | 61.9 | 4,284.8 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||
| Compensation and related costs | 1,664.9 | — | — | 1,664.9 | 1,494.0 | — | — | 1,494.0 | |||||||||||||||||||||||
| Distribution and servicing costs | 147.0 | 107.4 | 8.2 | 262.6 | 141.7 | 85.4 | 6.3 | 233.4 | |||||||||||||||||||||||
| Advertising and promotion | 92.0 | — | .4 | 92.4 | 79.9 | — | .3 | 80.2 | |||||||||||||||||||||||
| Product-related costs | — | 93.2 | 52.8 | 146.0 | — | 84.8 | 54.9 | 139.7 | |||||||||||||||||||||||
| Technology, occupancy, and facility costs(2) | 338.5 | 12.0 | — | 350.5 | 306.2 | 13.7 | (.1 | ) | 319.8 | ||||||||||||||||||||||
| General, administrative, and other | 491.8 | (212.6 | ) | .5 | 279.7 | 401.5 | (183.9 | ) | .5 | 218.1 | |||||||||||||||||||||
| Nonrecurring net charge (recoveries) related to Dell appraisal rights matter | (50.0 | ) | — | — | (50.0 | ) | 66.2 | — | — | 66.2 | |||||||||||||||||||||
| Total operating expenses | 2,684.2 | — | 61.9 | 2,746.1 | 2,489.5 | — | 61.9 | 2,551.4 | |||||||||||||||||||||||
| Net operating income | $ | 2,108.8 | $ | — | $ | — | $ | 2,108.8 | $ | 1,733.4 | $ | — | $ | — | $ | 1,733.4 |
(1) The “As previously reported” column aggregates the administrative fees and distribution and servicing fees lines presented in the income statement in prior years.
(2) The “As previously reported” column aggregates the depreciation and amortization of property and equipment and occupancy and facility costs lines presented in the income statement in prior years.
We adopted Accounting Standards Update No. 2016-01 — Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2018. This update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. After January 1, 2018, the guidance requires substantially all equity investments in non-consolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting. As such, the guidance eliminated the available-for-sale investment category for equity securities. Prior to this guidance, unrealized holding gains for available-for-sale equity securities were recognized in accumulated other comprehensive income. Upon adoption, we reclassified a net unrealized holding gain of $7.9 million, net of taxes, related to our $597.1 million available-for-sale investment portfolio from accumulated other comprehensive income to retained earnings. Additionally, certain investments that do not have readily available market prices or quotations will be measured at fair value, under the new guidance, as we elected to use their calculated and reported net asset value ("NAV") per share as a practical expedient for measuring fair value. As such, we recognized a cumulative adjustment to retained earnings of $14.5 million to adjust investments previously accounted for as cost method investments to fair value on January 1, 2018. The corresponding increase in the investments’ carrying value and related deferred taxes was $19.5 million and $5.0 million, respectively. Our updated investments policy is included in the Summary of Significant Accounting Policies section below.
We adopted Accounting Standards Update No. 2018-02 — Reclassification of certain tax effects from accumulated other comprehensive income on January 1, 2018. This guidance permits tax effects stranded in accumulated other comprehensive income resulting primarily from the enactment of the U.S. tax reform bill, originally known as the Tax Cuts and Jobs Act of 2017, to be reclassified to retained earnings either on January 1, 2018, or retrospectively. We elected to adopt the guidance on January 1, 2018, and reclassified $2.3 million of stranded tax benefits related to currency translation adjustments to retained earnings. The stranded income taxes related to our available-for-sale investment portfolio at December 31, 2017, were reclassified to retained earnings with the adoption of the new
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financial instruments guidance on January 1, 2018 as discussed above. Our updated comprehensive income policy is included in the Summary of Significant Accounting Policies section below.
NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 — Leases (Topic 842). The update seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standards update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We will adopt this standard on January 1, 2019, using a modified retrospective approach without restating prior comparative periods. We will also adopt certain available practical expedients that will alleviate complexities related to the implementation. We currently expect to record a right-of-use asset of approximately $140 million, which includes the lease liability amount less any deferred rent liabilities, and a lease liability of approximately $170 million related to our operating leases, primarily our real-estate leases. The adoption will not have a material impact on our results of operations.
In August 2018, the FASB issued 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. This update provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this standard will have on our financial position and results of operations.
We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our 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. TAX REFORM AND NEWLY ENACTED MARYLAND TAX LEGISLATION.
On December 22, 2017, a comprehensive U.S. tax reform bill known as the Tax Cuts and Jobs Act ("Tax Reform") was enacted. Tax Reform included numerous changes to existing tax laws, including a permanent reduction in the federal corporate income tax rate. For the year ended December 31, 2018, the income tax provision includes an additional nonrecurring charge of $20.8 million related to the enactment of U.S. tax reform as we further adjusted our deferred tax asset and liability estimates that were initially recorded at December 31, 2017. As of December 31, 2018, we have completed our accounting for the impacts of U.S. tax reform.
On April 24, 2018, the state of Maryland enacted new state tax legislation. This new state tax legislation, effective in 2018, adopted a five-year phase-in of the single sales factor method of apportionment for calculating income tax for multi-state companies doing business in Maryland and is expected to result in a net benefit over time. Accordingly, we recognized a nonrecurring charge of $7.9 million during 2018 for the re-measurement of our deferred tax assets and liabilities to reflect the effect of this Maryland state tax legislation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Consolidation
Our consolidated financial statements include the accounts of all subsidiaries and T. Rowe Price investment products in which we have a controlling interest. We are deemed to have a controlling interest when we own the majority of a voting interest entity ("VOE") or are deemed to be the primary beneficiary of a variable interest entity ("VIE"). We perform an analysis of our investments to determine if the investment entity is a VOE or VIE. Our analysis involves judgment and considers several factors, including an entity’s legal organization, capital structure, the rights of the equity investment holders, our ownership interest in the entity, and our contractual involvement with the entity. We continually review and reconsider our VOE or VIE conclusions upon the occurrence of certain events, such as changes to our ownership interest, changes to an entity’s legal structure, or amendments to governing documents. All material accounts and transactions between consolidated entities are eliminated in consolidation.
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Variable interest entities
VIEs are entities that, by design: (i) lack sufficient equity to permit the entity to finance its activities independently or (ii) have equity holders that do not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, the obligation to absorb the entity’s losses, or the rights to receive the entity’s residual returns. We consolidate a VIE when we are the primary beneficiary, which is the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the VIE that could potentially be significant. Our Luxembourg-based SICAV funds and other T. Rowe Price investment products regulated outside the U.S. were determined to be VIEs.
Along with VIEs that we consolidate, we also hold variable interests in other VIEs, including several investment partnerships that are not consolidated because we are not the primary beneficiary.
Redeemable non-controlling interests
We recognize redeemable non-controlling interests for the portion of the net assets of our consolidated T. Rowe Price investment products held by unrelated third-party investors as their interest is convertible to cash and other assets at their option. As such, we reflect redeemable non-controlling interests as temporary equity in our consolidated balance sheets.
Investments in T. Rowe Price money market mutual funds
We do not consider our investments in T. Rowe Price money market mutual funds when performing our consolidation analysis as the guidance provides a scope exception for interests in entities that are required to comply with, or operate in accordance with, requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
Cash equivalents
Cash equivalents consist primarily of short-term, highly liquid investments in T. Rowe Price money market mutual funds. The cost of these funds is equivalent to fair value.
Investments
Investments held at fair value
Investments in T. Rowe Price investment products have been made for both general corporate investment purposes and to provide seed capital for newly formed products. Those investments that we do not consolidate are carried at fair value using the quoted closing NAV per share of each fund as of the balance sheet date. The underlying investments held by our consolidated T. Rowe Price investment products retain investment company specialized accounting in consolidation, are considered securities held in a trading account for cash flow reporting purposes and are valued in accordance with the valuation and pricing policy used to value our assets under management which is further described in the Revenue Recognition policy below.
We elected to value our interest in investment partnerships, for which market prices or quotations are not readily available, at fair value using the NAV per share as a practical expedient for measuring fair value.
Changes in the fair values of all these investments are reflected in non-operating income in our consolidated statements of income.
Equity method investments
Equity method investments consist of investments in entities, including T. Rowe Price investment products, for which we have the ability to exercise significant influence over the operating and financial policies of the investee. The carrying values of these investments are adjusted to reflect our proportionate share of the investee's net income or loss, any unrealized gain or loss resulting from the translation of foreign-denominated financial statements into U.S. dollars, and dividends received. Our proportionate share of income or loss is included in non-operating income in our consolidated statements of income. As permitted under existing accounting guidance, we adopted a policy by which we recognize our share of UTI Asset Management Company Limited’s ("UTI") earnings on a quarter lag as current financial information is not available in a timely manner. The basis difference between our carrying value and our proportionate share of UTI’s book value is primarily related to consideration paid in excess of the stepped-up basis of assets and liabilities on the date of purchase.
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Concentration of risk
Concentration of credit risk in accounts receivable is believed to be minimal in that our clients generally have substantial assets, including those in the investment portfolios that we manage for them.
Our investments held at fair value expose us to market risk, that is, the potential future loss of value that would result from a decline in the fair value of each investment or its underlying net assets. The underlying holdings of our assets under management are also subject to market risk, which may arise from changes in equity prices, credit ratings, foreign currency exchange rates, and interest rates.
Property and equipment
Property and equipment is stated at cost net of accumulated depreciation and amortization computed using the straight-line method. Provisions for depreciation and amortization are based on the following weighted-average estimated useful lives: computer and communications software and equipment, 3 years; buildings and improvements, 32 years; leasehold improvements, 8 years; furniture and other equipment, 6 years; and leased land, 99 years.
Goodwill
We evaluate the carrying amount of goodwill in our consolidated balance sheets for possible impairment on an annual basis in the third quarter of each year using a fair value approach. Our evaluations have indicated that no impairment exists.
We internally conduct, manage, and report our operations as one investment advisory business. We do not have distinct operating segments or components that separately constitute a business. Accordingly, we attribute goodwill to a single reportable business segment and reporting unit—our investment advisory business.
Revenue recognition
Our revenue is earned from investment advisory, administrative, and distribution services we provide to our clients. Each distinct service we promise in our agreements is considered a performance obligation and is the basis for determining when we recognize revenue. The fees are allocated to each distinct performance obligation and we recognize revenue when, or as, we satisfy our promises. The consideration for our services is generally variable and included in net revenues, when it is improbable that a significant reversal could occur in the future. For certain client agreements, we have the discretion to hire a third party to provide services to our clients. In these circumstances, we are generally deemed to control the services before transferring them to our clients, and accordingly present the revenues gross of the related third-party costs. The timing of when we bill our clients and related payment terms vary in accordance with agreed-upon contractual terms. For the majority of our agreements, billing occurs after we have recognized revenue, which results in accounts receivable and accrued revenue. For an insignificant portion of our contracts, billing occurs in advance of providing services, which results in deferred revenue within the accounts payable and accrued expenses line of our consolidated balance sheets.
Taxes billed to our clients based on our fees for services rendered are not included in revenues.
Investment advisory fees
The majority of our investment advisory agreements, including those with the U.S. mutual funds, have a single performance obligation as the promised services are not separately identifiable from other promises in the agreements and, therefore, are not distinct. Substantially all performance obligations for providing advisory services are satisfied over time and revenue is recognized as time passes.
Investment advisory agreements with T. Rowe Price investment products regulated outside the U.S. generally have two performance obligations; one for investment management and one for distribution. For these agreements, we allocate the management fee to each performance obligation using our best estimate of the standalone fee of each of these services. The performance obligation for providing investment management services, like our other advisory contracts, is satisfied over time and revenue is recognized as time passes. The performance obligation for distribution is satisfied at the point in time when an investor makes an investment into the product. Accordingly, a portion of the investment advisory fees earned from these products relate to distribution performance obligations
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that were satisfied during prior periods. These distribution fees are reported within the investment advisory fees line of our consolidated statements of income.
The management fee for our investment advisory agreements are based on our assets under management, which change based on fluctuations in financial markets and net cash flows from investors, and represents variable consideration. Therefore, investment advisory fees are generally constrained, and excluded from revenue, until the asset values on which our client is billed are no longer subject to financial market volatility. Investment advisory fees for investment products are presented net of fees waived pursuant to the contractual expense limitations of the product. Our assets under management are valued in accordance with valuation and pricing processes for each major type of investment. Fair values used in our processes are primarily determined from quoted market prices; prices furnished by dealers who make markets in such securities; or from data provided by an independent pricing service that considers yield or price of investments of comparable quality, coupon, maturity, and type. Investments for which market prices are not readily available are not a material portion of our total assets under management.
We provide all services to the U.S. mutual funds under contracts that are subject to periodic review and approval by the funds’ Boards. Regulations require that the funds’ shareholders also approve material changes to investment advisory contracts.
Administrative, distribution, and servicing fees
Administrative fees
The administrative services we provide include distribution, mutual fund transfer agent, accounting and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage, and trust services.
The administrative service agreements with the U.S. mutual funds for accounting oversight, transfer agency, and recordkeeping services generally have one performance obligation as the promised services in each agreement are not separately identifiable from other promises in the agreement and, therefore, are not distinct. The fees for performing these services are generally equal to the costs incurred and represent variable consideration. The fees are generally constrained and are recognized as revenue when costs are incurred to perform the services. These fees are generally offset by the costs incurred to provide such services.
Other administrative service agreements for participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage services, and trust services generally have one performance obligation as the promised services in each agreement are not separately identifiable from other performance obligations in the contract and, therefore, are not distinct. Our performance obligation in each agreement is satisfied over time and revenue is recognized as time passes. The fees for these services vary by contract and are both fixed and variable.
Distribution and servicing fees
The agreements for distribution and servicing fees earned from 12b-1 plans of the Advisor Class, R Class, and Variable Annuity II Class shares of the U.S. mutual funds have one performance obligation, as distribution services are not separately identifiable from shareholder servicing promises in the agreements and, therefore, are not distinct. Our performance obligation is satisfied at the point in time when an investor makes an investment into these share classes of the U.S. mutual funds. The fees for these distribution and servicing agreements are based on the assets under management in these shares classes, which change based on fluctuations in financial markets, and represent variable consideration. These fees are generally constrained, and excluded from revenue, until the asset values on which our client is billed are not subject to financial market volatility. Accordingly, the majority of the distribution and servicing revenue disclosed in Note 3 - Information about Receivables, Revenues and Services relates to distribution and servicing obligations that were satisfied during prior periods. These fees are offset entirely by the distribution and servicing costs paid to third-party financial intermediaries that source the assets of these share classes.
Advertising
Costs of advertising are expensed the first time that the advertising takes place.
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Stock-based compensation
We maintain three stockholder-approved employee long-term incentive plans (2012 Long-Term Incentive Plan, 2004 Stock Incentive Plan, and 2001 Stock Incentive Plan, collectively the LTI Plans) and two stockholder-approved non-employee director plans (2017 Non-Employee Director Equity Plan and 2007 Non-Employee Director Equity Plan, collectively the Director Plans). We believe that our stock-based compensation programs align the interests of our employees and directors with those of our common stockholders. As of December 31, 2018, a total of 20,024,786 shares were available for future grant under the 2012 Long-Term Incentive Plan and the 2017 Non-Employee Director Equity Plan (2017 Plan).
Under our LTI Plans, we have issued restricted shares and restricted stock units to employees that settle in shares of our common stock after vesting. Vesting of these awards is based on the individual continuing to render service over an average 5.0 year graded schedule. All restricted shareholders and restricted stock unitholders receive non-forfeitable cash dividends and cash dividend equivalents, respectively, on our dividend payable date. We are also authorized to grant qualified incentive and nonqualified fixed stock options with a maximum term of 10 years. We have not granted options to employees since 2015.
We grant performance-based restricted stock units to certain executive officers in which the number of restricted stock units ultimately retained is determined based on achievement of certain performance thresholds. The number of restricted stock units retained is also subject to similar time-based vesting requirements as the other restricted stock units described above. Cash dividend equivalents are accrued and paid to the holders of performance-based restricted stock units only after the performance period has lapsed and the performance thresholds have been met.
Under the Director Plans, we may grant options with a maximum term of 10 years, restricted shares, and restricted stock units to non-employee directors. Under the 2017 Plan, awards generally vest over one year and, in the case of restricted stock units, are settled upon the non-employee directors’ departure from the Board. For restricted shares, cash dividends are accrued and paid only after the award vests. Restricted stock unit holders receive dividend equivalents in the form of unvested stock units that vest over the same period as the underlying award. We have not granted options to non-employee directors since 2016.
We recognize the grant-date fair value of these awards as compensation expense ratably over the awards' requisite service period. Compensation expense recognized for performance-based restricted units includes an estimate regarding the probability of the performance thresholds being met. We account for forfeitures as they occur. Both time-based and performance-based restricted stock units are valued on the grant-date using the closing market price of our common stock.
We used the following weighted-average inputs to the Black-Scholes option-pricing model to estimate the fair value of each option granted in 2016 to certain non-employee directors.
| Grant-date fair value per option awarded | $ | 10.62 | |
| Assumptions used: | |||
| Expected life in years | 6.8 | ||
| Expected volatility | 20 | % | |
| Dividend yield | 2.5 | % | |
| Risk-free interest rate | 1.6 | % |
Our expected life assumptions are based on the vesting period for each option grant and our historical experience with respect to the average holding period from vesting to option exercise. The assumptions for expected volatility are based on historical experience for the same periods as our expected lives. Dividend yields are based on recent historical experience and future expectations. Risk-free interest rates are set using grant-date U.S. Treasury yield curves for the same periods as our expected lives.
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Earnings per share
We compute our basic and diluted earnings per share under the two-class method, which considers our outstanding restricted shares and stock units, on which we pay non-forfeitable dividends as if they were a separate class of stock.
Comprehensive income
The components of comprehensive income are presented in a separate statement following our consolidated statements of income and include net income and the change in our currency translation adjustments. The currency translation adjustments result from translating our proportionate share of the financial statements of our equity method investment in UTI, and certain consolidated T. Rowe Price investment products into U.S. dollars. Assets and liabilities are translated into U.S. dollars using year-end exchange rates, and revenues and expenses are translated using weighted-average exchange rates for the period. Prior to 2018, comprehensive income also included the change in net unrealized security holding gains (losses) on investments classified as available-for-sale.
The changes in accumulated balances of each component of other comprehensive income, the deferred tax impacts of each component, and information about significant items reclassified out of accumulated other comprehensive income are presented in the notes to the financial statements. The notes also indicate the line item of our consolidated statements of income in which the significant reclassifications were recognized.
We reclassify income tax effects relating to currency translation adjustments to tax expense when there is a reduction in our ownership interest in the related investment. The amount of the reclassification depends on the investment’s accounting treatment before and after the change in ownership percentage. Prior to 2018, tax effects relating to each available-for-sale investment’s unrealized holding gain or loss were reclassified upon the sale of the investment.
NOTE 2 – CASH EQUIVALENTS.
Cash equivalent investments in the T. Rowe Price money market mutual funds aggregate $1,196.0 million at December 31, 2018, and $1,726.4 million at December 31, 2017. Dividends earned on these investments totaled $27.0 million in 2018, $9.1 million in 2017, and $.3 million in 2016.
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NOTE 3 – INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES.
Revenues earned during the years ended December 31, 2018, 2017 and 2016 under agreements with clients include:
| 2018 | |||||||||||||||
| (in millions) | U.S. mutual funds | Subadvised and separate accounts and other investment products | Other clients | Total | |||||||||||
| Investment advisory fees | $ | 3,375.0 | $ | 1,475.6 | $ | — | $ | 4,850.6 | |||||||
| Administrative fees | 302.2 | — | 81.8 | 384.0 | |||||||||||
| Distribution and servicing fees | 138.0 | — | — | 138.0 | |||||||||||
| Net revenues | $ | 3,815.2 | $ | 1,475.6 | $ | 81.8 | $ | 5,372.6 | |||||||
| 2017 | |||||||||||||||
| (in millions) | U.S. mutual funds | Subadvised and separate accounts and other investment products | Other clients | Total | |||||||||||
| Investment advisory fees | $ | 3,080.0 | $ | 1,215.8 | $ | — | $ | 4,295.8 | |||||||
| Administrative fees | 333.6 | — | 78.5 | 412.1 | |||||||||||
| Distribution and servicing fees | 147.0 | — | — | 147.0 | |||||||||||
| Net revenues | $ | 3,560.6 | $ | 1,215.8 | $ | 78.5 | $ | 4,854.9 | |||||||
| 2016 | |||||||||||||||
| (in millions) | U.S. mutual funds | Subadvised and separate accounts and other investment products | Other clients | Total | |||||||||||
| Investment advisory fees | $ | 2,711.7 | $ | 1,023.3 | $ | — | $ | 3,735.0 | |||||||
| Administrative fees | 329.9 | — | 78.2 | 408.1 | |||||||||||
| Distribution and servicing fees | 141.7 | — | — | 141.7 | |||||||||||
| Net revenues | $ | 3,183.3 | $ | 1,023.3 | $ | 78.2 | $ | 4,284.8 |
The following table details the investment advisory fees earned from clients by their underlying asset class.
| (in millions) | 2018 | 2017 | 2016 | ||||||||
| U.S. mutual funds | |||||||||||
| Equity and blended assets | $ | 2,858.1 | $ | 2,571.7 | $ | 2,228.7 | |||||
| Fixed income, including money market | 516.9 | 508.3 | 483.0 | ||||||||
| 3,375.0 | 3,080.0 | 2,711.7 | |||||||||
| Subadvised and separate accounts and other investment products | |||||||||||
| Equity and blended assets | 1,236.8 | 1,009.4 | 850.3 | ||||||||
| Fixed income, including money market | 238.8 | 206.4 | 173.0 | ||||||||
| 1,475.6 | 1,215.8 | 1,023.3 | |||||||||
| Total | $ | 4,850.6 | $ | 4,295.8 | $ | 3,735.0 |
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The following table summarizes the investment portfolios and assets under management on which we earn investment advisory fees.
| (in billions) | Average during | As of December 31, | |||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||
| U.S. mutual funds | |||||||||||||||||||
| Equity and blended assets | $ | 493.6 | $ | 447.5 | $ | 386.1 | $ | 441.1 | $ | 480.5 | |||||||||
| Fixed income, including money market | 128.2 | 121.0 | 109.4 | 123.4 | 125.8 | ||||||||||||||
| 621.8 | 568.5 | 495.5 | 564.5 | 606.3 | |||||||||||||||
| Subadvised and separate accounts and other investment products | |||||||||||||||||||
| Equity and blended assets | 317.3 | 256.4 | 211.1 | 299.2 | 291.9 | ||||||||||||||
| Fixed income, including money market | 97.4 | 84.1 | 71.6 | 98.6 | 92.9 | ||||||||||||||
| 414.7 | 340.5 | 282.7 | 397.8 | 384.8 | |||||||||||||||
| Total | $ | 1,036.5 | $ | 909.0 | $ | 778.2 | $ | 962.3 | $ | 991.1 |
Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for about 6% of our assets under management at December 31, 2018 and 2017.
Total net revenues earned from T. Rowe Price investment products totaled $4,453.6 million in 2018, $4,038.8 million in 2017, and $3,569.3 million in 2016. Accounts receivable from these products aggregate to $354.8 million at December 31, 2018 and $371.9 million at December 31, 2017.
NOTE 4 – INVESTMENTS.
The carrying values of investments not consolidated are as follows:
| (in millions) | 12/31/2018 | 12/31/2017 | |||||
| Investments held at fair value | |||||||
| T. Rowe Price investment products (1) | $ | 1,538.4 | $ | 692.1 | |||
| T. Rowe Price investment products designated as an economic hedge of supplemental savings plan liability | 381.3 | 268.2 | |||||
| Investment partnerships and other investments(2) | 99.6 | 78.0 | |||||
| Equity method investments | |||||||
| T. Rowe Price investment products | 276.2 | 277.4 | |||||
| 26% interest in UTI Asset Management Company Limited (India) | 152.4 | 155.8 | |||||
| Investment partnerships and other investments | 4.5 | 4.8 | |||||
| U.S. Treasury note | 1.0 | 1.0 | |||||
| Total | $ | 2,453.4 | $ | 1,477.3 |
(1) Includes $597.1 million of investments at December 31, 2017, that were previously reported as available-for-sale investments prior to the adoption of the new financial instruments guidance on January 1, 2018. Refer to Note 1 for more information.
(2) These investments at December 31, 2017, were carried at cost. Upon adoption of new financial guidance on January 1, 2018, these investments are carried at fair value using NAV per share as a practical expedient. Refer to Note 1 for more information.
The investment partnerships are carried at fair value using 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 2018, we recognized $18.5 million of net unrealized losses on investments held at fair value that were still held at December 31, 2018. For 2017 and 2016, the majority of unrealized gains or losses on investments held at fair value are included and presented with other comprehensive income.
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Dividends, including capital gain distributions, earned on the T. Rowe Price investment products held at fair value, totaled $36.0 million in 2018, $19.2 million in 2017, and $15.8 million in 2016.
During the years ended December 31, 2018, 2017 and 2016, 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 years ended December 31, 2018, 2017 and 2016, 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 consolidated balance sheets and statements of income as of the dates the portfolios were deconsolidated or reconsolidated is detailed below.
| (in millions) | 2018 | 2017 | 2016 | ||||||||
| Net decrease in assets of consolidated T. Rowe Price investment products | $ | (736.6 | ) | $ | (1,397.2 | ) | $ | (1,342.8 | ) | ||
| Net increase (decrease) in liabilities of consolidated T. Rowe Price investment products | $ | 17.6 | $ | (153.1 | ) | $ | (37.3 | ) | |||
| Net decrease in redeemable non-controlling interests | $ | (626.4 | ) | $ | (1,042.6 | ) | $ | (967.3 | ) | ||
| Gains recognized upon deconsolidation | $ | 3.6 | $ | .1 | $ | 2.2 |
The gains 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.
During 2018, we sold our 10% holding in Daiwa SB Investments Ltd. The realized gain is recognized in net gains on investments on our consolidated statement of income and represents the majority of the increase over the prior year periods.
VARIABLE INTEREST ENTITIES.
Our investments at December 31, 2018 and 2017, 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) | 2018 | 2017 | |||||
| Investment carrying values | $ | 143.3 | $ | 129.2 | |||
| Unfunded capital commitments | 27.3 | 38.8 | |||||
| Uncollected investment advisory and administrative fees | 5.2 | 7.7 | |||||
| $ | 175.8 | $ | 175.7 |
The unfunded capital commitments, totaling $27.3 million at December 31, 2018, and $38.8 million at December 31, 2017, relate primarily to 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 5 – FAIR VALUE MEASUREMENTS.
We determine the fair value of our cash equivalents and certain investments 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.
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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 consolidated balance sheets using fair value measurements determined based on the differing levels of inputs. This table excludes investments held by consolidated T. Rowe Price investment products which are presented separately on our consolidated balance sheets and are detailed in Note 6.
| 12/31/2018 | 12/31/2017 | ||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||
| Cash equivalents held in T. Rowe Price money market funds | $ | 1,196.0 | $ | — | $ | 1,726.4 | $ | — | |||||||
| T. Rowe Price investment products(1) | 1,900.5 | 19.2 | 942.9 | 17.4 | |||||||||||
| Total | $ | 3,096.5 | $ | 19.2 | $ | 2,669.3 | $ | 17.4 |
(1) Includes $597.1 million of investments at December 31, 2017 that were previously reported as available-for sale investments prior to the adoption of new financial instruments guidance on January 1, 2018. Refer to Note 1 for more information.
At December 31, 2018, the reported investments held at fair value in Note 4 include $99.6 million of investments that are carried at fair value using the NAV per share as a practical expedient. These investments are not required to be included in the fair value hierarchy levels above.
NOTE 6 – CONSOLIDATED T. ROWE PRICE INVESTMENT PRODUCTS.
The T. Rowe Price investment products that we consolidate in our 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:
| 12/31/2018 | 12/31/2017 | ||||||||||||||||||||||
| (in millions) | VOE | VIE | Total | VOE | VIE | Total | |||||||||||||||||
| Cash and cash equivalents(1) | $ | 18.5 | $ | 51.6 | $ | 70.1 | $ | 7.1 | $ | 96.0 | $ | 103.1 | |||||||||||
| Investments(2) | 261.3 | 1,322.7 | 1,584.0 | 188.8 | 1,725.7 | 1,914.5 | |||||||||||||||||
| Other assets | 8.0 | 18.3 | 26.3 | 12.9 | 17.9 | 30.8 | |||||||||||||||||
| Total assets | 287.8 | 1,392.6 | 1,680.4 | 208.8 | 1,839.6 | 2,048.4 | |||||||||||||||||
| Liabilities | 16.0 | 22.7 | 38.7 | 16.4 | 39.5 | 55.9 | |||||||||||||||||
| Net assets | $ | 271.8 | $ | 1,369.9 | $ | 1,641.7 | $ | 192.4 | $ | 1,800.1 | $ | 1,992.5 | |||||||||||
| Attributable to T. Rowe Price Group | $ | 175.3 | $ | 726.1 | $ | 901.4 | $ | 131.6 | $ | 868.1 | $ | 999.7 | |||||||||||
| Attributable to redeemable non-controlling interests | 96.5 | 643.8 | 740.3 | 60.8 | 932.0 | 992.8 | |||||||||||||||||
| $ | 271.8 | $ | 1,369.9 | $ | 1,641.7 | $ | 192.4 | $ | 1,800.1 | $ | 1,992.5 |
(1) Cash and cash equivalents includes $18.5 million and $6.2 million at December 31, 2018 and 2017, respectively, of investments in
T. Rowe Price money market mutual funds.
(2) Investments include $43.8 million and $15.0 million at December 31, 2018 and 2017, respectively, of T. Rowe Price investment products.
Although we can redeem our net interest in the 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 consolidated statements of income and disclose the portion attributable to third-party investors as net income attributable to redeemable non-controlling interests.
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The operating results of the consolidated T. Rowe Price investment products, are reflected in our consolidated statements of income as follows:
| 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||
| (in millions) | VOE | VIE | Total | VOE | VIE | Total | VOE | VIE | Total | ||||||||||||||||||||||||||
| Operating expenses reflected in net operating income | $ | (1.9 | ) | $ | (10.8 | ) | $ | (12.7 | ) | $ | (1.1 | ) | $ | (11.2 | ) | $ | (12.3 | ) | $ | (1.6 | ) | $ | (11.4 | ) | $ | (13.0 | ) | ||||||||
| Net investment income (loss) reflected in non-operating income | (16.7 | ) | (76.2 | ) | (92.9 | ) | 18.8 | 175.1 | 193.9 | 22.5 | 98.6 | 121.1 | |||||||||||||||||||||||
| Impact on income before taxes | $ | (18.6 | ) | $ | (87.0 | ) | $ | (105.6 | ) | $ | 17.7 | $ | 163.9 | $ | 181.6 | $ | 20.9 | $ | 87.2 | $ | 108.1 | ||||||||||||||
| Net income (loss) attributable to T. Rowe Price Group | $ | (6.3 | ) | $ | (30.5 | ) | $ | (36.8 | ) | $ | 13.3 | $ | 84.9 | $ | 98.2 | $ | 15.0 | $ | 54.1 | $ | 69.1 | ||||||||||||||
| Net income (loss) attributable to redeemable non-controlling interests | (12.3 | ) | (56.5 | ) | (68.8 | ) | 4.4 | 79.0 | 83.4 | 5.9 | 33.1 | 39.0 | |||||||||||||||||||||||
| $ | (18.6 | ) | $ | (87.0 | ) | $ | (105.6 | ) | $ | 17.7 | $ | 163.9 | $ | 181.6 | $ | 20.9 | $ | 87.2 | $ | 108.1 |
The operating expenses of these consolidated products are reflected in other operating expenses. In preparing our consolidated financial statements, we eliminated operating expenses of $6.2 million in 2018, $5.6 million in 2017, and $6.5 million in 2016, against the investment advisory and administrative fees earned from these products. The net investment income reflected in non-operating income 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.
The following table details the impact of these consolidated investment products on the individual lines of our consolidated statements of cash flows.
| 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||
| (in millions) | VOE | VIE | Total | VOE | VIE | Total | VOE | VIE | Total | ||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (43.9 | ) | $ | (505.2 | ) | $ | (549.1 | ) | $ | (33.0 | ) | $ | (1,282.3 | ) | $ | (1,315.3 | ) | $ | (80.1 | ) | $ | (1,086.5 | ) | $ | (1,166.6 | ) | ||||||||
| Net cash provided by (used in) investing activities | (.8 | ) | (23.0 | ) | (23.8 | ) | (9.0 | ) | (55.2 | ) | (64.2 | ) | 21.6 | 19.8 | 41.4 | ||||||||||||||||||||
| Net cash provided by (used in) financing activities | 56.1 | 499.2 | 555.3 | 38.8 | 1,372.9 | 1,411.7 | 68.8 | 1,124.1 | 1,192.9 | ||||||||||||||||||||||||||
| FX impact on cash | — | (15.4 | ) | (15.4 | ) | — | 5.3 | 5.3 | — | (2.1 | ) | (2.1 | ) | ||||||||||||||||||||||
| Net change in cash and cash equivalents during period | 11.4 | (44.4 | ) | (33.0 | ) | (3.2 | ) | 40.7 | 37.5 | 10.3 | 55.3 | 65.6 | |||||||||||||||||||||||
| Cash and cash equivalents at beginning of year | 7.1 | 96.0 | 103.1 | 10.3 | 55.3 | 65.6 | — | — | — | ||||||||||||||||||||||||||
| Cash and cash equivalents at end of year | $ | 18.5 | $ | 51.6 | $ | 70.1 | $ | 7.1 | $ | 96.0 | $ | 103.1 | $ | 10.3 | $ | 55.3 | $ | 65.6 |
The net cash provided by financing activities includes $84.9 million in 2018, $130.1 million in 2017 and $277.9 million in 2016, of net subscriptions we made into the consolidated T. Rowe Price investment products, net of dividends received. These cash flows were eliminated in consolidation.
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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.
| 12/31/2018 | 12/31/2017 | ||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||
| Assets | |||||||||||||||
| Cash equivalents | $ | 19.3 | $ | — | $ | 6.2 | $ | .7 | |||||||
| Equity securities | 189.6 | 483.5 | 536.0 | 667.5 | |||||||||||
| Fixed income securities | — | 890.2 | — | 687.4 | |||||||||||
| Other investments | 1.7 | 19.0 | 1.3 | 22.3 | |||||||||||
| $ | 210.6 | $ | 1,392.7 | $ | 543.5 | $ | 1,377.9 | ||||||||
| Liabilities | $ | (.8 | ) | $ | (12.8 | ) | $ | (.1 | ) | $ | (13.7 | ) |
NOTE 7 – PROPERTY AND EQUIPMENT.
Property and equipment at December 31 consists of:
| (in millions) | 2018 | 2017 | |||||
| Computer and communications software and equipment | $ | 864.7 | $ | 824.4 | |||
| Buildings and improvements | 454.5 | 442.5 | |||||
| Leasehold improvements | 137.0 | 121.0 | |||||
| Furniture and other equipment | 178.9 | 168.9 | |||||
| Land | 37.4 | 37.4 | |||||
| Leased land | 2.7 | 2.7 | |||||
| 1,675.2 | 1,596.9 | ||||||
| Less accumulated depreciation and amortization | 1,013.9 | 944.9 | |||||
| Total | $ | 661.3 | $ | 652.0 |
Compensation and related costs attributable to the development of computer software for internal use, totaling $85.5 million in 2018, $62.3 million in 2017, and $28.9 million in 2016, have been capitalized.
We occupy certain office facilities and lease computer and other equipment under noncancelable operating leases. Related rental expense was $40.1 million in 2018, $36.0 million in 2017, and $32.8 million in 2016. Future minimum payments under these leases aggregate to: $31.5 million in 2019, $26.8 million in 2020, $22.9 million in 2021, $17.9 million in 2022, $15.2 million in 2023, and $53.4 million in later years.
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NOTE 8 – INCOME TAXES.
The provision for income taxes consists of:
| (in millions) | 2018 | 2017 | 2016 | ||||||||
| Current income taxes | |||||||||||
| U.S. federal | $ | 484.2 | $ | 708.1 | $ | 573.7 | |||||
| State and local | 138.7 | 131.0 | 105.8 | ||||||||
| Foreign | 28.5 | 13.1 | 13.5 | ||||||||
| Deferred income taxes (benefits) | (35.5 | ) | 71.7 | 13.5 | |||||||
| Total | $ | 615.9 | $ | 923.9 | $ | 706.5 |
On December 22, 2017, the U.S. enacted a comprehensive tax reform bill. The Tax Reform included numerous changes to existing tax laws, including a permanent reduction in the federal corporate income tax rate. For the years ended December 31, 2018 and 2017, the income tax provision includes nonrecurring charges of $20.8 million and $71.1 million, respectively, related to the enactment of Tax Reform. As of December 31, 2018, we have completed our accounting for the income tax effects of Tax Reform.
On April 24, 2018, the state of Maryland enacted new state tax legislation. This new state tax legislation, effective in 2018, adopted a five-year phase-in of the single sales factor method of apportionment for calculating income tax for multi-state companies doing business in Maryland and is expected to result in a net benefit over time. We recognized a nonrecurring charge of $7.9 million during 2018 for the re-measurement of our deferred tax assets and liabilities to reflect the effect of this Maryland state tax legislation.
Deferred income taxes and benefits arise from temporary differences between taxable income for financial statement and income tax return purposes. The deferred income taxes (benefits) recognized as part of our provision for income taxes is related to:
| (in millions) | 2018 | 2017 | 2016 | ||||||||
| Property and equipment | $ | 11.0 | $ | (3.9 | ) | $ | 3.2 | ||||
| Stock-based compensation | 7.1 | 72.4 | 1.3 | ||||||||
| Accrued compensation | (2.2 | ) | 1.2 | (1.7 | ) | ||||||
| Supplemental savings plan liability | (17.4 | ) | (8.3 | ) | (30.9 | ) | |||||
| Asset impairments | .9 | 7.3 | 10.0 | ||||||||
| Unrealized holding gains recognized in non-operating income | (32.0 | ) | 10.7 | 31.6 | |||||||
| Other | (2.9 | ) | (7.7 | ) | — | ||||||
| Total deferred income taxes (benefits) | $ | (35.5 | ) | $ | 71.7 | $ | 13.5 |
The following table reconciles the statutory federal income tax rate to our effective income tax rate.
| 2018 | 2017 | 2016 | ||||||
| Statutory U.S. federal income tax rate | 21.0 | % | 35.0 | % | 35.0 | % | ||
| Impact of nonrecurring charge relating to U.S. tax reform | .8 | 2.9 | — | |||||
| Impact of nonrecurring charge related to Maryland state tax legislation | .3 | — | — | |||||
| State income taxes for current year, net of federal income tax benefits(1) | 4.6 | 3.9 | 3.8 | |||||
| Net income attributable to redeemable non-controlling interests | .7 | (1.3 | ) | (.7 | ) | |||
| Net excess tax benefits from stock-based compensation plans activity | (1.7 | ) | (3.0 | ) | (1.7 | ) | ||
| Other items | .1 | (.6 | ) | (.4 | ) | |||
| Effective income tax rate | 25.8 | % | 36.9 | % | 36.0 | % |
(1) State income tax benefits are reflected in the total benefits for net income attributable to redeemable non-controlling interests and stock-based compensation plans activity.
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The net deferred tax assets recognized in our consolidated balance sheets in other assets as of December 31 relate to the following:
| (in millions) | 2018 | 2017 | |||||
| Deferred tax liabilities | |||||||
| Property and equipment | $ | (46.3 | ) | $ | (35.3 | ) | |
| Net unrealized holding gains recognized in income | (30.1 | ) | (53.9 | ) | |||
| Net unrealized holding gains on investments held as available-for-sale | — | (3.1 | ) | ||||
| Other | (20.4 | ) | (18.9 | ) | |||
| (96.8 | ) | (111.2 | ) | ||||
| Deferred tax assets | |||||||
| Stock-based compensation | 85.6 | 92.7 | |||||
| Asset impairments | 7.9 | 8.8 | |||||
| Accrued compensation | 6.6 | 4.4 | |||||
| Supplemental savings plan | 84.0 | 66.6 | |||||
| Currency translation adjustment | 11.4 | 2.2 | |||||
| Other | 11.2 | 6.8 | |||||
| 206.7 | 181.5 | ||||||
| Net deferred tax asset | $ | 109.9 | $ | 70.3 |
We have not recognized a state deferred tax liability for unremitted earnings of our foreign subsidiaries as T. Rowe Price intends to indefinitely reinvest these earnings outside the U.S. The unremitted earnings of these subsidiaries are estimated to be approximately $656 million at December 31, 2018. If these earnings were distributed to the U.S. in the form of dividends or otherwise, or if any of the entities were sold or otherwise transferred, we would be subject to state and local income taxes. Determination of the amount of the unrecognized deferred state liability related to these earnings is not practicable.
Other assets include tax refund receivables of $21.9 million at December 31, 2018, and $43.2 million at December 31, 2017.
Cash outflows from operating activities include net income taxes paid of $644.2 million in 2018, $857.7 million in 2017, and $680.6 million in 2016.
Additional income tax benefit arising from stock-based compensation plans activity totaling $40.6 million in 2018, $75.5 million in 2017, and $31.6 million in 2016 reduced the amount of income taxes that would have otherwise been payable. These income tax benefits were recognized in the income tax provision.
The following table summarizes the changes in our unrecognized tax benefits.
| (in millions) | 2018 | 2017 | 2016 | ||||||||
| Balance at beginning of year | $ | 7.6 | $ | 6.2 | $ | 5.8 | |||||
| Changes in tax positions related to | |||||||||||
| Current year | 5.8 | 1.5 | .6 | ||||||||
| Prior years | 3.8 | .1 | — | ||||||||
| Expired statute of limitations | (1.1 | ) | (.2 | ) | (.2 | ) | |||||
| Balance at end of year | $ | 16.1 | $ | 7.6 | $ | 6.2 |
If recognized, these tax benefits would affect our effective tax rate; however, we do not expect that unrecognized tax benefits for tax positions taken with respect to 2018 and prior years will significantly change in 2019. The U.S. has concluded examinations related to federal tax obligations through the year 2016. A net interest payable related to our unrecognized tax benefits of $1.2 million at December 31, 2018, and $1.5 million at December 31, 2017, are recognized in our consolidated balance sheets. Our accounting policy with respect to interest and penalties arising
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from income tax settlements is to recognize them as part of our provision for income taxes. Interest recognized as part of our provision for income taxes was not material.
NOTE 9 – STOCKHOLDERS' EQUITY.
SHARE REPURCHASES.
At December 31, 2018, a liability of $9.2 million is included in accounts payable and accrued expenses for common stock repurchases that settled during the first week of January 2019.
The Board of Directors has authorized the future repurchase of up to 14,347,806 common shares as of December 31, 2018.
RESTRICTED CAPITAL.
Our consolidated stockholders' equity at December 31, 2018, includes about $170 million that is restricted as to use by various regulations and agreements arising in the ordinary course of our business.
NOTE 10 – STOCK-BASED COMPENSATION.
SHARES AUTHORIZED FOR STOCK-BASED COMPENSATION PROGRAMS.
At December 31, 2018, a total of 37,976,738 shares of unissued common stock were authorized for issuance under our stock-based compensation plans. Additionally, a total of 2,340,343 shares are authorized for issuance under a plan whereby substantially all employees may acquire common stock through payroll deductions at prevailing market prices.
STOCK OPTIONS.
The following table summarizes the status of, and changes in, our stock options during 2018.
| Options | Weighted- average exercise price | Weighted-average remaining contractual term in years | ||||||
| Outstanding at December 31, 2017 | 15,221,123 | $ | 66.98 | |||||
| Exercised | (3,831,062 | ) | $ | 60.68 | ||||
| Forfeited | (73,416 | ) | $ | 76.08 | ||||
| Expired | (16,252 | ) | $ | 71.99 | ||||
| Outstanding at December 31, 2018 | 11,300,393 | $ | 69.05 | 4.5 | ||||
| Exercisable at December 31, 2018 | 9,251,542 | $ | 67.39 | 4.1 |
Compensation and related costs includes a charge for stock option-based compensation expense of $15.3 million in 2018, $28.1 million in 2017, and $44.9 million in 2016.
The total intrinsic value of options exercised was $208.4 million in 2018, $293.0 million in 2017, and $150.5 million in 2016. At December 31, 2018, the aggregate intrinsic value of in-the-money options outstanding was $262.9 million, including $230.6 million related to options exercisable.
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RESTRICTED SHARES AND STOCK UNITS.
The following table summarizes the status of, and changes in, our nonvested restricted shares and restricted stock units during 2018.
| Restricted shares | Restricted stock units | Weighted- average fair value | |||||||
| Nonvested at December 31, 2017 | 473,115 | 5,556,911 | $ | 82.37 | |||||
| Time-based grants | 8,775 | 2,438,198 | $ | 92.37 | |||||
| Performance-based grants | — | 160,821 | $ | 92.03 | |||||
| Vested (value at vest date was $160.9 million) | (330,920 | ) | (1,412,089 | ) | $ | 79.32 | |||
| Forfeited | (14,006 | ) | (139,921 | ) | $ | 79.74 | |||
| Nonvested at December 31, 2018 | 136,964 | 6,603,920 | $ | 87.07 |
Nonvested at December 31, 2018 includes 2,400 performance-based restricted shares and 473,615 performance-based restricted stock units. These nonvested performance-based restricted shares and units include 2,400 shares and 198,340 units for which the performance period has lapsed and the performance threshold has been met.
Compensation and related costs includes expenses for restricted shares and restricted stock units of $181.8 million in 2018, $124.0 million in 2017, and $116.7 million in 2016.
At December 31, 2018, non-employee directors held 47,639 vested stock units that will convert to common shares upon their separation from the Board.
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 December 31, 2018. Estimated future compensation expense will change to reflect future grants, changes in the probability of performance thresholds being met, and adjustments for actual forfeitures.
| (in millions) | |||
| First quarter 2019 | $ | 51.4 | |
| Second quarter 2019 | 50.6 | ||
| Third quarter 2019 | 50.5 | ||
| Fourth quarter 2019 | 45.2 | ||
| Total 2019 | 197.7 | ||
| 2020 through 2024 | 188.6 | ||
| Total | $ | 386.3 |
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NOTE 11 – 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 reflect the potential dilution, determined using the treasury stock method, that could occur if outstanding stock options were exercised and non-participating stock awards vested.
| (in millions) | 2018 | 2017 | 2016 | ||||||||
| Net income attributable to T. Rowe Price Group | $ | 1,837.5 | $ | 1,497.8 | $ | 1,215.0 | |||||
| Less: net income allocated to outstanding restricted stock and stock unit holders | 43.6 | 33.9 | 25.5 | ||||||||
| Net income allocated to common stockholders | $ | 1,793.9 | $ | 1,463.9 | $ | 1,189.5 | |||||
| Weighted-average common shares | |||||||||||
| Outstanding | 242.2 | 241.2 | 245.5 | ||||||||
| Outstanding assuming dilution | 246.9 | 245.1 | 250.3 |
The following table shows the weighted-average outstanding stock options that are excluded from the calculation of diluted earnings per common share as the inclusion of such shares would be anti-dilutive.
| (in millions) | 2018 | 2017 | 2016 | |||||
| Weighted-average outstanding stock options excluded | — | 5.0 | 9.9 |
NOTE 12 – OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME.
The following table presents the impact of the components of other comprehensive income or loss on deferred tax benefits (income taxes).
| (in millions) | 2018 | 2017 | 2016 | ||||||||
| Net deferred tax benefits (income taxes) on: | |||||||||||
| Currency translation adjustments | $ | 8.3 | $ | (18.5 | ) | $ | 3.5 | ||||
| Reclassification adjustment recognized in the provision for income taxes upon deconsolidation of T. Rowe Price investment product | .9 | — | .8 | ||||||||
| Total deferred tax benefits (income taxes) on currency translation adjustments | 9.2 | (18.5 | ) | 4.3 | |||||||
| Net unrealized holding gains or losses(1) | — | (14.6 | ) | .6 | |||||||
| Reclassification adjustments recognized in the provision for income taxes: | |||||||||||
| Capital gain distributions | — | 1.4 | 2.4 | ||||||||
| Net gains realized on dispositions | — | 32.5 | 20.9 | ||||||||
| Net gains recognized upon transfer to trading investments | — | 9.2 | — | ||||||||
| Net deferred tax benefits (income taxes) on net unrealized holding gains or losses | — | 28.5 | 23.9 | ||||||||
| Total net deferred tax benefits | $ | 9.2 | $ | 10.0 | $ | 28.2 |
(1) On January 1, 2018, we implemented new accounting guidance that eliminated the available-for-sale investment category for equity securities and required unrealized holding gains on equity securities to be recognized in the consolidated income statement. Prior to this guidance, unrealized holding gains for available-for-sale equity securities were recognized in accumulated other comprehensive income and reclassified to the consolidated income statement upon sale of the investment. As a result of this change, reclassification of unrealized holding gains from accumulated other comprehensive income did not occur in 2018. Refer to Note 1 for more information.
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The changes in each component of accumulated other comprehensive income (loss), including reclassification are presented below.
| Currency translation adjustments | ||||||||||||||||||||
| (in millions) | Equity method investments | Consolidated T. Rowe Price investment products - variable interest entities | Total currency translation adjustments | Net unrealized holding gains | Total | |||||||||||||||
| Balances at December 31, 2015 | $ | (30.9 | ) | $ | (2.8 | ) | $ | (33.7 | ) | $ | 120.3 | $ | 86.6 | |||||||
| Reclassification of accumulated other comprehensive income to retained earnings upon adoption of the new consolidation accounting guidance | (.5 | ) | — | (.5 | ) | (32.0 | ) | (32.5 | ) | |||||||||||
| Balance at January 1, 2016 | (31.4 | ) | (2.8 | ) | (34.2 | ) | 88.3 | 54.1 | ||||||||||||
| Other comprehensive income (loss) before reclassifications and income taxes | (1.6 | ) | (7.0 | ) | (8.6 | ) | (7.0 | ) | (15.6 | ) | ||||||||||
| Reclassification adjustments recognized in non-operating income | — | (2.2 | ) | (2.2 | ) | (53.0 | ) | (55.2 | ) | |||||||||||
| (1.6 | ) | (9.2 | ) | (10.8 | ) | (60.0 | ) | (70.8 | ) | |||||||||||
| Net deferred tax benefits (income taxes) | .7 | 3.6 | 4.3 | 23.9 | 28.2 | |||||||||||||||
| Other comprehensive income (loss) | (.9 | ) | (5.6 | ) | (6.5 | ) | (36.1 | ) | (42.6 | ) | ||||||||||
| Balances at December 31, 2016 | (32.3 | ) | (8.4 | ) | (40.7 | ) | 52.2 | 11.5 | ||||||||||||
| Other comprehensive income (loss) before reclassifications and income taxes | 2.6 | 45.2 | 47.8 | 37.4 | 85.2 | |||||||||||||||
| Reclassification adjustments recognized in non-operating income | — | (.1 | ) | (.1 | ) | (110.2 | ) | (110.3 | ) | |||||||||||
| 2.6 | 45.1 | 47.7 | (72.8 | ) | (25.1 | ) | ||||||||||||||
| Net deferred tax benefits (income taxes) | (.9 | ) | (17.6 | ) | (18.5 | ) | 28.5 | 10.0 | ||||||||||||
| Other comprehensive income (loss) | 1.7 | 27.5 | 29.2 | (44.3 | ) | (15.1 | ) | |||||||||||||
| Balances at December 31, 2017 | (30.6 | ) | 19.1 | (11.5 | ) | 7.9 | (3.6 | ) | ||||||||||||
| Reclassification of unrealized holding gains to retained earnings upon adoption of new financial instruments guidance(1)(2) | — | — | — | (7.9 | ) | (7.9 | ) | |||||||||||||
| Reclassification adjustment of stranded tax benefits on currency translation adjustments upon adoption of new accumulated other comprehensive income guidance | (6.4 | ) | 4.1 | (2.3 | ) | — | (2.3 | ) | ||||||||||||
| Balance at January 1, 2018 | (37.0 | ) | 23.2 | (13.8 | ) | — | (13.8 | ) | ||||||||||||
| Other comprehensive income (loss) before reclassifications and income taxes | (15.2 | ) | (18.6 | ) | (33.8 | ) | — | (33.8 | ) | |||||||||||
| Reclassification adjustments recognized in non-operating income | — | (3.6 | ) | (3.6 | ) | — | (3.6 | ) | ||||||||||||
| (15.2 | ) | (22.2 | ) | (37.4 | ) | — | (37.4 | ) | ||||||||||||
| Net deferred tax benefits (income taxes) | 3.4 | 5.8 | 9.2 | — | 9.2 | |||||||||||||||
| Other comprehensive income (loss) | (11.8 | ) | (16.4 | ) | (28.2 | ) | — | (28.2 | ) | |||||||||||
| Balances at December 31, 2018 | $ | (48.8 | ) | $ | 6.8 | $ | (42.0 | ) | $ | — | $ | (42.0 | ) |
(1) On January 1, 2018, we implemented new accounting guidance that eliminated the available-for-sale investment category for equity securities and required unrealized holding gains on most equity securities to be recognized in the consolidated income statement. Prior to this guidance, unrealized holding gains for available-for-sale equity securities were recognized in accumulated other comprehensive income. Upon adoption, we reclassified the accumulated net of tax unrealized holding gain related to our available-for-sale investment portfolio from accumulated other comprehensive income to retained earnings. Refer to Note 1 for more information.
(2) Includes the reclassification of $1.7 million of stranded income taxes on available-for-sale investments resulting from U.S. tax law changes enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings.
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NOTE 13 – DELL APPRAISAL RIGHTS MATTER.
In 2016, we paid $166.2 million to compensate certain U.S. mutual funds, trusts, separately managed accounts, and subadvised clients (collectively, "Clients") for the denial of their appraisal rights by the Delaware Chancery Court ("Court") in connection with the 2013 leveraged buyout of Dell, Inc. ("Dell").
On December 30, 2016, we entered into a settlement agreement for $100.0 million with our insurance carrier for insurance proceeds related to this matter. We recognized the proceeds as a reduction to the $166.2 million nonrecurring charge that we recognized in 2016 and received the proceeds in January 2017. We received an additional $50 million in insurance proceeds from other insurance carriers in early 2017 and recognized a related reduction in operating expenses.
In accordance with the compensation payment, the Clients agreed that in the event the findings made by the Court regarding the fair value of Dell were modified by a final, non-appealable judgment, T. Rowe Price and the Clients would make an appropriate adjustment between themselves, calculated in a manner that is consistent with the methodology used to compensate Clients. We have obtained repayments from Clients because all parties have settled with Dell, and the Court has approved those settlements in final non-appealable judgments. T. Rowe Price retained the first $15.2 million in repayments received in the fourth quarter of 2018 and paid back our insurers the remaining amount received. We recognized $15.2 million as a reduction in operating expenses.
NOTE 14 – 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 plaintiffs are seeking certification of the complaint as a class action. T. Rowe Price believes the claims are without merit and is vigorously defending the action. This matter is in the early stages 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.
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NOTE 15 – OTHER DISCLOSURES.
RETIREMENT PLANS.
Compensation and related costs includes expense recognized for our defined contribution retirement plans of $105.6 million in 2018, $89.4 million in 2017, and $80.7 million in 2016.
SUPPLEMENTAL SAVINGS PLAN.
The Supplemental Savings Plan provides certain senior officers the opportunity to defer receipt of up to 100% of their cash incentive compensation earned for a respective calendar year during which services are provided. The amounts deferred are adjusted in accordance with the hypothetical investments chosen by the officer from a list of mutual funds. The officer can initially defer these amounts for a period of two to 15 years. Certain senior officers elected to defer $118.9 million in 2018, $95.5 million in 2017, and $83.4 million in 2016.
NOTE 16 – SUPPLEMENTARY QUARTERLY FINANCIAL DATA (Unaudited).
| Net revenues(1) | Net income(2)(3)(4) | Net income attributable to T. Rowe Price Group(2)(3)(4) | Basic earnings on common stock(2)(3)(4)(5) | Diluted earnings on common stock(2)(3)(4)(5) | |||||||||||||||
| (in millions) | (per share) | ||||||||||||||||||
| 2018 | |||||||||||||||||||
| 1st quarter | $ | 1,328.0 | $ | 455.5 | $ | 453.7 | $ | 1.81 | $ | 1.77 | |||||||||
| 2nd quarter | $ | 1,345.0 | $ | 459.6 | $ | 448.9 | $ | 1.81 | $ | 1.77 | |||||||||
| 3rd quarter | $ | 1,394.6 | $ | 581.6 | $ | 583.0 | $ | 2.34 | $ | 2.30 | |||||||||
| 4th quarter | $ | 1,305.0 | $ | 272.0 | $ | 351.9 | $ | 1.43 | $ | 1.41 | |||||||||
| 2017 | |||||||||||||||||||
| 1st quarter | $ | 1,132.6 | $ | 400.4 | $ | 385.9 | $ | 1.56 | $ | 1.54 | |||||||||
| 2nd quarter | $ | 1,186.0 | $ | 390.0 | $ | 373.9 | $ | 1.52 | $ | 1.50 | |||||||||
| 3rd quarter | $ | 1,238.7 | $ | 404.2 | $ | 390.9 | $ | 1.59 | $ | 1.56 | |||||||||
| 4th quarter | $ | 1,297.6 | $ | 386.6 | $ | 347.1 | $ | 1.40 | $ | 1.37 |
(1)Net revenues for 2017 have been adjusted to reflect the adoption of new revenue accounting guidance on January 1, 2018. We adopted the guidance using the retrospective method, which required adjustments to be reflected as of January 1, 2016. See the New Accounting Guidance section of Note 1 to the consolidated financial statements for more information about the adoption of this guidance.
(2)During the first quarter of 2017, we recognized $50 million in insurance recoveries or $.12 in diluted earnings per share relating to the Dell matter. In the fourth quarter of 2018 we recognized a $15.2 million reduction in operating expenses, or $.05 in diluted earnings per share, upon recovering a portion of the payments we made to our clients in 2016. For more details related to the Dell appraisal rights matter, see Note 13 to the consolidated financial statements.
(3)During the fourth quarter of 2017 and the second quarter of 2018, we recognized nonrecurring charges of $71.1 million and $20.8 million, respectively, or $.28 and $.08 in diluted earnings per share related to the U.S. tax law changes that were enacted on December 22, 2017. During the second quarter of 2018 we recognized an additional nonrecurring charge of $7.9 million, or $.03 in diluted earnings per share for the re-measurement of our deferred tax assets and liabilities to reflect the effect of Maryland state tax legislation enacted on April 24, 2018. See Note 8 to the consolidated financial statements for further details.
(4)During the third quarter of 2018, we recognized a realized gain of $.27 in diluted earnings per share from the sale of our 10% holding in Daiwa SB Investments Ltd.
(5)The sums of quarterly earnings per share may not equal annual earnings per share because the computations are done independently.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
T. Rowe Price Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of T. Rowe Price Group, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, “the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 13, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2001.
Baltimore, Maryland
February 13, 2019
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