Item 8. Financial Statements and Supplementary Data.

122K characters. Original on sec.gov · Markdown

Item 8. Financial Statements and Supplementary Data.


			Page
Index to Financial Statements:
Consolidated Balance Sheets at December 31, 2020 and 2019			51
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2020			52
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2020			53
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2020			54
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2020			55
Notes to Consolidated Financial Statements			57
Report of Independent Registered Public Accounting Firm			79

Page 50

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)


	12/31/2020		12/31/2019
ASSETS
Cash and cash equivalents	$	2,151.7	$	1,781.8
Accounts receivable and accrued revenue	863.1		646.6
Investments	3,250.8		2,939.8
Assets of consolidated T. Rowe Price investment products ($2,497.4 million at December 31, 2020 and $1,975.3 million at December 31, 2019, related to variable interest entities)	2,695.5		2,276.9
Operating lease assets	117.6		110.8
Property and equipment, net	695.4		674.4
Goodwill	665.7		665.7
Other assets	219.2		234.4
Total assets	$	10,659.0	$	9,330.4

LIABILITIES
Accounts payable and accrued expenses	$	187.7	$	214.5
Liabilities of consolidated T. Rowe Price investment products ($47.7 million at December 31, 2020 and $27.0 million at December 31, 2019, related to variable interest entities)	57.7		39.2
Operating lease liabilities	154.1		146.3
Accrued compensation and related costs	133.6		112.1
Supplemental savings plan liability	772.2		563.4
Income taxes payable	85.0		31.8
Total liabilities	1,390.3		1,107.3

Commitments and contingent liabilities

Redeemable non-controlling interests	1,561.7		1,121.0

STOCKHOLDERS’ EQUITY
Preferred stock, undesignated, $.20 par value—authorized and unissued 20,000,000 shares	—		—
Common stock, $.20 par value—authorized 750,000,000; issued 227,965,000 shares at December 31, 2020 and 235,214,000 at December 31, 2019	45.6		47.0
Additional capital in excess of par value	654.6		654.6
Retained earnings	7,029.8		6,443.5
Accumulated other comprehensive loss	(23.0)		(43.0)
Total permanent stockholders' equity	7,707.0		7,102.1
Total liabilities, redeemable non-controlling interests and permanent stockholders’ equity	$	10,659.0	$	9,330.4

The accompanying notes to consolidated financial statements are an integral part of these statements.

Page 51

CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per-share amounts)


	2020		2019		2018
Revenues
Investment advisory fees	$	5,693.1	$	5,112.5	$	4,850.6
Administrative, distribution, and servicing fees	513.6		505.4		522.0
Net revenues	6,206.7		5,617.9		5,372.6

Operating expenses
Compensation and related costs	2,182.4		1,969.2		1,808.6
Distribution and servicing costs	278.5		262.5		281.2
Advertising and promotion	83.7		96.8		99.6
Product-related costs	155.5		153.2		157.1
Technology, occupancy, and facility costs	444.8		427.3		383.9
General, administrative, and other	316.1		321.9		296.0
Nonrecurring recoveries related to Dell appraisal rights matter	—		—		(15.2)
Total operating expenses	3,461.0		3,230.9		3,011.2

Net operating income	2,745.7		2,387.0		2,361.4

Non-operating income
Net gains on investments	246.8		260.4		119.2
Net gains (losses) on consolidated investment products	251.7		272.9		(92.9)
Other income (loss)	(2.0)		7.0		(3.1)
Total non-operating income	496.5		540.3		23.2

Income before income taxes	3,242.2		2,927.3		2,384.6
Provision for income taxes	718.9		678.4		615.9
Net income	2,523.3		2,248.9		1,768.7
Less: net income (loss) attributable to redeemable non-controlling interests	150.6		117.6		(68.8)
Net income attributable to T. Rowe Price Group	$	2,372.7	$	2,131.3	$	1,837.5

Earnings per share on common stock of T. Rowe Price Group
Basic	$	10.08	$	8.82	$	7.41
Diluted	$	9.98	$	8.70	$	7.27

The accompanying notes to consolidated financial statements are an integral part of these statements.

Page 52

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)


	2020		2019		2018
Net income	$	2,523.3	$	2,248.9	$	1,768.7
Other comprehensive income (loss)
Currency translation adjustments:
Consolidated T. Rowe Price investment products—variable interest entities	57.8		(3.4)		(44.7)
Reclassification gains recognized in non-operating investment income upon deconsolidation of certain T. Rowe Price investment products	(.7)		(.1)		(3.6)
Total currency translation adjustments of consolidated T. Rowe Price investment products—variable interest entities	57.1		(3.5)		(48.3)
Equity method investments	2.1		2.4		(15.2)
Reclassification adjustment recognized upon partial disposition of equity method investment	7.5		—		—
Total equity method investments	9.6		2.4		(15.2)









Other comprehensive income (loss) before income taxes	66.7		(1.1)		(63.5)
Net deferred tax benefits	(11.8)		.5		9.2
Total other comprehensive income (loss)	54.9		(.6)		(54.3)
Total comprehensive income	2,578.2		2,248.3		1,714.4
Less: comprehensive income (loss) attributable to redeemable non-controlling interests	185.5		118.0		(94.9)
Comprehensive income attributable to T. Rowe Price Group	$	2,392.7	$	2,130.3	$	1,809.3

The accompanying notes to consolidated financial statements are an integral part of these statements.

Page 53

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)


	2020		2019		2018
Cash flows from operating activities
Net income	$	2,523.3	$	2,248.9	$	1,768.7
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and impairment of property and equipment	189.6		190.8		159.5
Stock-based compensation expense	246.2		206.6		197.1


Net gains recognized on other investments	(189.6)		(176.3)		(50.5)
Net investments in T. Rowe Price investment products used to economically hedge supplemental savings plan liability	(142.9)		(126.0)		(129.5)
Net change in securities held by consolidated T. Rowe Price investment products	(798.8)		(930.9)		(437.0)


Other changes in assets and liabilities	91.1		109.6		111.6
Net cash provided by operating activities	1,918.9		1,522.7		1,619.9

Cash flows from investing activities
Purchases of T. Rowe Price investment products	(272.4)		(239.7)		(1,124.0)
Dispositions of T. Rowe Price investment products	454.1		131.4		352.4
Net cash of T. Rowe Price investment products on consolidation (deconsolidation)	(53.9)		(18.4)		(23.8)
Additions to property and equipment	(214.6)		(204.6)		(168.5)
Other investing activity	50.5		6.8		88.4
Net cash provided by (used in) investing activities	(36.3)		(324.5)		(875.5)

Cash flows from financing activities
Repurchases of common stock	(1,201.9)		(705.8)		(1,090.4)
Common share issuances under stock-based compensation plans	3.9		83.3		74.8
Dividends paid to common stock and equity-award holders	(845.8)		(733.9)		(694.3)
Net subscriptions received from redeemable non-controlling interest holders	557.5		523.7		470.4
Net cash provided by (used in) financing activities	(1,486.3)		(832.7)		(1,239.5)
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products	1.9		(2.5)		(15.4)
Net change in cash and cash equivalents during period	398.2		363.0		(510.5)
Cash and cash equivalents at beginning of period, including $76.5 million at December 31, 2019, $70.1 million at December 31, 2018 and $103.1 million at December 31, 2017 held by consolidated T. Rowe Price investment products	1,858.3		1,495.3		2,005.8
Cash and cash equivalents at end of period, including $104.8 million at December 31, 2020, $76.5 million at December 31, 2019, and $70.1 million at December 31, 2018, held by consolidated T. Rowe Price investment products	$	2,256.5	$	1,858.3	$	1,495.3

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 AOCI(1) 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 ($2.8 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 issued, net of shares withheld for taxes	(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



Net income	—	—		—		2,131.3		—		2,131.3		117.6
Other comprehensive income (loss), net of tax	—	—		—		—		(1.0)		(1.0)		.4
Dividends declared ($3.04 per share)	—	—		—		(733.6)		—		(733.6)		—
Common stock-based compensation plans activity:
Shares issued upon option exercises	2,924	.6		147.9		—		—		148.5		—
Restricted shares issued, net of shares withheld for taxes	(41)	—		(5.9)		—		—		(5.9)		—
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes	1,245	.2		(59.5)		—		—		(59.3)		—
Forfeiture of restricted awards	(10)	—		—		—		—		—		—
Stock-based compensation expense	—	—		206.6		—		—		206.6		—
Restricted stock units issued as dividend equivalents	—	—		.2		(.2)		—		—		—
Common shares repurchased	(6,973)	(1.4)		(289.3)		(418.1)		—		(708.8)		—
Net subscriptions into T. Rowe Price investment products	—	—		—		—		—		—		530.3
Net deconsolidations of T. Rowe Price investment products	—	—		—		—		—		—		(267.6)
Balances at December 31, 2019	235,214	$	47.0	$	654.6	$	6,443.5	$	(43.0)	$	7,102.1	$	1,121.0

The accompanying notes to consolidated financial statements are an integral part of these statements.

Page 55

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, 2019	235,214	$	47.0	$	654.6	$	6,443.5	$	(43.0)	$	7,102.1	$	1,121.0



Net income	—	—		—		2,372.7		—		2,372.7		150.6
Other comprehensive income (loss), net of tax	—	—		—		—		20.0		20.0		34.9
Dividends declared ($3.60 per share)	—	—		—		(846.1)		—		(846.1)		—
Common stock-based compensation plans activity:
Shares issued upon option exercises	2,194	.5		95.5		—		—		96.0		—
Restricted shares withheld for taxes, net of shares issued	8	—		—		—		—		—		—
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes	1,457	.3		(92.0)		—		—		(91.7)		—
Forfeiture of restricted awards	—	—		—		—		—		—		—
Stock-based compensation expense	—	—		246.2		—		—		246.2		—
Restricted stock units issued as dividend equivalents	—	—		.3		(.3)		—		—		—
Common shares repurchased	(10,908)	(2.2)		(250.0)		(940.0)		—		(1,192.2)		—
Net subscriptions into T. Rowe Price investment products	—	—		—		—		—		—		563.3
Net deconsolidations of T. Rowe Price investment products	—	—		—		—		—		—		(308.1)
Balances at December 31, 2020	227,965	$	45.6	$	654.6	$	7,029.8	$	(23.0)	$	7,707.0	$	1,561.7

(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 56

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"), subadvised funds, separately managed accounts, collective investment trusts, and other T. Rowe Price products. The other T. Rowe Price products include: open-ended investment products offered to investors outside the U.S. and products offered through variable annuity life insurance plans in the U.S. We also provide certain investment advisory clients with related administrative services, including distribution, mutual fund transfer agent, accounting, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage; trust services; and non-discretionary advisory services through model delivery.

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.

NEW ACCOUNTING GUIDANCE.

We adopted Accounting Standards Update No. 2018-15 — Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract on January 1, 2020 using the prospective method of adoption. This update required implementation costs incurred in cloud computing arrangements to be deferred and recognized over the term of the hosting arrangement. A hosting arrangement is an agreement that allows customers, like us, to access and use software on an as-needed basis without having possession of the software. Beginning January 1, 2020, we were required to defer such qualifying implementation costs. We have capitalized an immaterial amount of implementation costs incurred in a cloud computing arrangement. Accordingly, the adoption of this guidance did not have a material impact on our consolidated balance sheets or our consolidated statements of income.

NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.

We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our consolidated statements, including those we have not yet adopted. We do not believe that any such guidance has or will have a material effect on our financial position or results of operations.

U.S. ECONOMIC RELIEF LEGISLATION.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic Security ("CARES") Act. The CARES Act provides economic relief to eligible businesses and individuals impacted by the novel coronavirus pandemic. The CARES Act's provisions will not have a material impact on our financial position and results of operations.

Further, on December 27, 2020, the U.S. enacted the Consolidated Appropriations Act ("CAA"). The CAA provides additional economic relief to eligible businesses and individuals impacted by the coronavirus pandemic as well as extending certain provisions of the CARES Act. We are currently reviewing the CAA, but we do not expect it to have a material impact on our financial position and results of operations.

Page 57

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 a 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.

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 interests are 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.

Page 58

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.

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 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.

Leases

We review new arrangements at inception to evaluate whether we have the right to obtain substantially all the economic benefits of and have the right to control the use of an asset. If we determine that an arrangement qualifies as a lease, we recognize a lease liability and a corresponding asset on the lease’s commencement date. The lease liability is initially measured at the present value of the future minimum lease payments over the lease term using the rate implicit in the arrangement or, if not available, our incremental borrowing rate. An operating lease asset is measured initially at the value of the lease liability less any lease incentives and initial direct costs incurred.

Our leases qualify as operating leases and consist primarily of real estate leases for corporate offices, data centers, and other facilities. We measure our operating lease liabilities using an estimated incremental borrowing rate as an implicit rate cannot be readily determinable from any of our operating lease arrangements. Since we do not have any outstanding borrowings, we estimate our incremental borrowing rate using an estimated credit rating and available market information. Additionally, certain of our leases contain options to extend or terminate the lease term that, if exercised, would result in the remeasurement of the operating lease liability.

Our operating leases contain both lease and non-lease components. Non-lease components are distinct elements of a contract that are not related to securing the use of the lease assets, such as common area maintenance and other management costs. We elected to measure the lease liability of our real estate operating leases by combining the lease and non-lease components into one single lease component. As such, we included the fixed payments and any payments that depend on a rate or index related to our lease and non-lease components in measuring the operating lease liability.

We recognize operating lease expense on a straight-line basis over the lease term as part of technology, occupancy, and facility costs in our consolidated statements of income.

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, 33 years; leasehold improvements, 7 years; and furniture and other equipment, 6 years.

Page 59

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 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.

Page 60

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; trust services; and non-discretionary advisory services through model delivery.

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.

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 share 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.

We also recognize the corresponding costs paid to the third-party financial intermediaries that distribute these funds' share classes within the distribution and servicing costs line of the consolidated statements of income. The fee revenue that we recognize from the funds and the expense that we recognize for the fees paid to third-party intermediaries are equal in amount and, therefore, do not impact our net operating income.

Advertising

Costs of advertising are expensed the first time that the advertising takes place.

Stock-based compensation

We maintain three stockholder-approved employee long-term incentive plans (2020 Long-Term Incentive Plan, 2012 Long-Term Incentive Plan, and 2004 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, 2020, a total of 11,085,553 shares were available for future grant under the 2020 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 stockholders and restricted stock unit holders 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.

Page 61

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.

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.

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.

NOTE 2 – CASH EQUIVALENTS.

Cash equivalent investments in the T. Rowe Price money market mutual funds aggregate to $1,931.1 million at December 31, 2020, and $1,355.6 million at December 31, 2019. Dividends earned on these investments totaled $4.2 million in 2020, $33.3 million in 2019, and $27.0 million in 2018.

Page 62

NOTE 3 – INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES.

Revenues earned during the years ended December 31, 2020, 2019 and 2018 under agreements with clients include:


	2020
			Administrative, distribution, and servicing fees
(in millions)	Investment advisory fees		Administrative fees		Distribution and servicing fees		Net revenues
U.S. mutual funds	$	3,639.9	$	291.3	$	111.3	$	4,042.5
Subadvised funds, separate accounts, collective investment trusts, and other investment products	2,053.2		—		—		2,053.2
Other clients	—		111.0		—		111.0
	$	5,693.1	$	402.3	$	111.3	$	6,206.7

	2019
			Administrative, distribution, and servicing fees
(in millions)	Investment advisory fees		Administrative fees		Distribution and servicing fees		Net revenues
U.S. mutual funds	$	3,452.5	$	281.8	$	120.0	$	3,854.3
Subadvised funds, separate accounts, collective investment trusts, and other investment products	1,660.0		—		—		1,660.0
Other clients	—		103.6		—		103.6
	$	5,112.5	$	385.4	$	120.0	$	5,617.9

	2018
			Administrative, distribution, and servicing fees
(in millions)	Investment Advisory Fees		Administrative Fees		Distribution and servicing fees		Net Revenues
U.S. mutual funds	$	3,375.0	$	302.2	$	138.0	$	3,815.2
Subadvised funds, separate accounts, collective investment trusts, and other investment products	1,475.6		—		—		1,475.6
Other clients	—		81.8		—		81.8
	$	4,850.6	$	384.0	$	138.0	$	5,372.6

In the second quarter of 2020, we changed our fee structure of the target date retirement funds such that our investment advisory fee revenue is now earned at the target date retirement fund level rather than at the underlying mutual fund level. As a result, we have modified our investment advisory fee and assets under management presentation below to separately disclose the fees earned from clients and related assets under management of our multi-asset portfolios. All prior periods have been recast to conform to this new presentation and to provide comparability.

Page 63

The following table details the investment advisory fees earned from clients by their underlying asset class.


(in millions)	2020		2019		2018
U.S. mutual funds
Equity	$	2,440.4	$	2,219.1	$	2,125.4
Fixed income, including money market	266.5		280.1		288.2
Multi-asset	933.0		953.3		961.4
	3,639.9		3,452.5		3,375.0
Subadvised funds, separate accounts, collective investment trusts, and other investment products
Equity and blended assets	1,326.3		1,033.4		892.0
Fixed income, including money market	149.3		153.7		227.4
Multi-asset	577.6		472.9		356.2
	2,053.2		1,660.0		1,475.6
Total	$	5,693.1	$	5,112.5	$	4,850.6

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,
	2020		2019		2018		2020		2019
U.S. mutual funds
Equity	$	417.0	$	376.3	$	356.9	$	498.6	$	407.1
Fixed income, including money market	76.8		72.0		70.3		79.4		73.7
Multi-Asset	193.9		192.1		194.6		216.6		201.9
	687.7		640.4		621.8		794.6		682.7
Subadvised funds, separate accounts, collective investment trusts, and other investment products
Equity	321.3		257.3		218.1		397.2		291.7
Fixed income, including money market	82.1		79.5		92.6		89.3		74.2
Multi-Asset	156.8		132.1		104.0		189.4		158.2
	560.2		468.9		414.7		675.9		524.1
Total	$	1,247.9	$	1,109.3	$	1,036.5	$	1,470.5	$	1,206.8

Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for about 9.3% and 6.9% of our assets under management at December 31, 2020 and 2019, respectively.

Total net revenues earned from T. Rowe Price investment products totaled $5,044.3 million in 2020, $4,626.3 million in 2019, and $4,453.6 million in 2018. Accounts receivable from these products aggregate to $523.4 million at December 31, 2020 and $424.8 million at December 31, 2019.

Page 64

NOTE 4 – INVESTMENTS.

The carrying values of investments that are not part of the consolidated T. Rowe Price investment products at December 31 are as follows:


(in millions)	2020		2019

Investments held at fair value
T. Rowe Price investment products
Discretionary investments	$	1,647.7	$	1,221.8
Seed capital	169.5		181.1
Supplemental savings plan liability economic hedges	768.1		561.1
Investment partnerships and other investments	95.1		99.7
Equity method investments
T. Rowe Price investment products
Discretionary investments	242.9		610.0
Seed capital	178.6		95.6

Investment in UTI Asset Management Company Limited (India)	145.5		164.5
Investment partnerships and other investments	2.4		5.0
U.S. Treasury note	1.0		1.0
Total	$	3,250.8	$	2,939.8

The investment partnerships are carried at fair value using net asset value ("NAV") per share as a practical expedient. Our interests in these partnerships are generally not redeemable and are subject to significant transferability restrictions. 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 2020, we recognized $142.7 million of net unrealized gains on investments held at fair value that were still held at December 31, 2020. For 2019, we recognized $105.4 million of net unrealized gains on investments held at fair value that were still held at December 31, 2019. For 2018, we recognized $18.5 million of net unrealized losses on investments held at fair value that were still held at December 31, 2018.

Dividends, including capital gain distributions, earned on the T. Rowe Price investment products held at fair value, totaled $50.8 million in 2020, $50.6 million in 2019, and $36.0 million in 2018.

During each of the last three years, 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 2019 and 2018, 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)	2020		2019		2018
Net decrease in assets of consolidated T. Rowe Price investment products	$	(546.1)	$	(380.5)	$	(736.6)
Net increase (decrease) in liabilities of consolidated T. Rowe Price investment products	$	(10.5)	$	(15.0)	$	17.6
Net decrease in redeemable non-controlling interests	$	(308.1)	$	(267.6)	$	(626.4)

Gains recognized upon deconsolidation	$	.7	$	.1	$	3.6

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.

Page 65

In October 2020, UTI Asset Management Company Limited (India), one of our equity method investments, held an initial public offering in India. As part of the offering, we sold a portion of our 26% interest and recorded a net gain on the sale of approximately $2.8 million in the fourth quarter of 2020. Subsequent to the sale, we have an ownership interest of 23% in UTI Asset Management Company Limited (India) and are restricted from selling any interest for one year from the date of the initial public offering.

VARIABLE INTEREST ENTITIES.

Our investments at December 31, 2020 and 2019, include interests in variable interest entities that we do not consolidate as we are not deemed the primary beneficiary. Our maximum risk of loss related to our involvement with these entities is as follows:


(in millions)	2020		2019
Investment carrying values	$	144.7	$	156.0
Unfunded capital commitments	12.3		18.1
Receivable for investment advisory and administrative fees	13.8		10.5
	$	170.8	$	184.6

The unfunded capital commitments, totaling $12.3 million at December 31, 2020, and $18.1 million at December 31, 2019, 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.

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 at December 31 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.


	2020				2019
(in millions)	Level 1		Level 2		Level 1		Level 2
T. Rowe Price investment products
Cash equivalents held in money market funds	$	1,931.1	$	—	$	1,355.6	$	—
Discretionary investments	1,647.7				1,221.8		—
Seed capital	156.6		12.9		171.2		9.9
Supplemental savings plan liability economic hedges	768.1		—		561.1		—
Other investments	.5		.6		—		—
Total	$	4,504.0	$	13.5	$	3,309.7	$	9.9

At December 31, 2020, the reported investments held at fair value in Note 4 include $94.0 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.

Page 66

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 at December 31:


	2020						2019
(in millions)	VOE		VIE		Total		VOE		VIE		Total
Cash and cash equivalents(1)	$	7.1	$	97.7	$	104.8	$	9.9	$	66.6	$	76.5
Investments(2)	188.2		2,372.7		2,560.9		281.1		1,891.3		2,172.4
Other assets	2.8		27.0		29.8		10.6		17.4		28.0
Total assets	198.1		2,497.4		2,695.5		301.6		1,975.3		2,276.9
Liabilities	10.0		47.7		57.7		12.2		27.0		39.2
Net assets	$	188.1	$	2,449.7	$	2,637.8	$	289.4	$	1,948.3	$	2,237.7

Attributable to T. Rowe Price Group	$	130.7	$	945.4	$	1,076.1	$	199.6	$	917.1	$	1,116.7
Attributable to redeemable non-controlling interests	57.4		1,504.3		1,561.7		89.8		1,031.2		1,121.0
	$	188.1	$	2,449.7	$	2,637.8	$	289.4	$	1,948.3	$	2,237.7

(1) Cash and cash equivalents includes $7.0 million and $9.1 million at December 31, 2020 and 2019, respectively, of investments in

T. Rowe Price money market mutual funds.

(2) Investments include $26.9 million and $40.2 million at December 31, 2020 and 2019, 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.

The operating results of the consolidated T. Rowe Price investment products, are reflected in our consolidated statements of income for the year ended December 31 as follows:


	2020						2019						2018
(in millions)	VOE		VIE		Total		VOE		VIE		Total		VOE		VIE		Total
Operating expenses reflected in net operating income	$	(1.6)	$	(14.8)	$	(16.4)	$	(2.2)	$	(12.5)	$	(14.7)	$	(1.9)	$	(10.8)	$	(12.7)
Net gains (losses) reflected in non-operating income	13.2		238.5		251.7		31.0		241.9		272.9		(16.7)		(76.2)		(92.9)
Impact on income before taxes	$	11.6	$	223.7	$	235.3	$	28.8	$	229.4	$	258.2	$	(18.6)	$	(87.0)	$	(105.6)

Net income (loss) attributable to T. Rowe Price Group	$	11.6	$	73.1	$	84.7	$	21.3	$	119.3	$	140.6	$	(6.3)	$	(30.5)	$	(36.8)
Net income (loss) attributable to redeemable non-controlling interests	—		150.6		150.6		7.5		110.1		117.6		(12.3)		(56.5)		(68.8)
	$	11.6	$	223.7	$	235.3	$	28.8	$	229.4	$	258.2	$	(18.6)	$	(87.0)	$	(105.6)

Page 67

The operating expenses of these consolidated products are reflected in other operating expenses. In preparing our consolidated financial statements, we eliminated operating expenses of $9.9 million in 2020, $6.8 million in 2019, and $6.2 million in 2018, against the investment advisory and administrative fees earned from these products. The net gains (losses) 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.


	2020						2019						2018
(in millions)	VOE		VIE		Total		VOE		VIE		Total		VOE		VIE		Total
Net cash provided by operating activities	$	(155.4)	$	(401.3)	$	(556.7)	$	(7.2)	$	(663.6)	$	(670.8)	$	(43.9)	$	(505.2)	$	(549.1)
Net cash provided by (used in) investing activities	(23.4)		(30.5)		(53.9)		(7.1)		(11.3)		(18.4)		(.8)		(23.0)		(23.8)
Net cash used in financing activities	176.0		461.0		637.0		5.7		692.4		698.1		56.1		499.2		555.3
FX impact on cash	—		1.9		1.9		—		(2.5)		(2.5)		—		(15.4)		(15.4)
Net change in cash and cash equivalents during period	(2.8)		31.1		28.3		(8.6)		15.0		6.4		11.4		(44.4)		(33.0)
Cash and cash equivalents at beginning of year	9.9		66.6		76.5		18.5		51.6		70.1		7.1		96.0		103.1
Cash and cash equivalents at end of year	$	7.1	$	97.7	$	104.8	$	9.9	$	66.6	$	76.5	$	18.5	$	51.6	$	70.1

The net cash provided by financing activities includes $79.5 million in 2020, $174.4 million in 2019 and $84.9 million in 2018, of net subscriptions we made into the consolidated T. Rowe Price investment products, net of dividends received. These cash flows were eliminated in consolidation.

FAIR VALUE MEASUREMENTS.

We determine the fair value of investments held by consolidated T. Rowe Price investment products using the following broad levels of inputs as defined by related accounting standards:

Level 1 – quoted prices in active markets for identical securities.

Level 2 – observable inputs other than Level 1 quoted prices including, but not limited to, quoted prices for similar

securities, interest rates, prepayment speeds, and credit risk. These inputs are based on market data

obtained from independent sources.

Level 3 – unobservable inputs reflecting our own assumptions based on the best information available. The value of

investments using Level 3 inputs is insignificant.

Page 68

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 as of December 31.


	2020				2019
(in millions)	Level 1		Level 2		Level 1		Level 2
Assets
Cash equivalents	$	7.0	$	—	$	9.1	$	1.1
Equity securities	308.0		708.0		162.8		724.5
Fixed income securities	—		1,411.3		—		1,248.6
Other investments	2.6		131.0		2.7		33.8
	$	317.6	$	2,250.3	$	174.6	$	2,008.0

Liabilities	$	(.4)	$	(18.8)	$	(.4)	$	(11.2)

NOTE 7 – LEASES.

All of our leases are operating leases and primarily consist of real estate leases for corporate offices, data centers, and other facilities. In December 2020, we announced that we signed a letter of intent for a long-term lease for our global headquarters in a different downtown location in Baltimore, Maryland. We plan to relocate our operations from our East Pratt Street offices in 2024.

As of December 31, 2020, the weighted-average remaining lease term on our leases is approximately 4.8 and the weighted-average discount rate used to measure the lease liabilities is 3.5%.

Operating lease expense was $32.1 million in 2020, $29.0 million in 2019, and $40.1 million in 2018. Charges related to our operating leases that are variable, including variable common area maintenance charges and other management-related costs, and not included in the measurement of the lease liabilities, were $9.3 million in 2020.

We made lease payments of $31.2 million during 2020. Our future undiscounted cash flows related to our operating leases and the reconciliation to the operating lease liability as of December 31, 2020, are as follows:


(in millions)	2020
2021	$	35.3
2022	32.8
2023	29.9
2024	42.9
2025	14.8
Thereafter	12.6
Total future undiscounted cash flows	168.3
Less: imputed interest to be recognized in lease expense	(14.2)
Operating lease liabilities, as reported	$	154.1

Page 69

NOTE 8 – PROPERTY AND EQUIPMENT.

Property and equipment at December 31 consists of:


(in millions)	2020		2019
Computer and communications software and equipment	$	1,113.1	$	963.8
Buildings and improvements	457.5		466.1
Leasehold improvements	169.2		157.3
Furniture and other equipment	193.3		193.5
Land	37.2		33.4
Leased land	—		2.7
	1,970.3		1,816.8
Less accumulated depreciation and amortization	1,274.9		1,142.4
Total	$	695.4	$	674.4

Compensation and related costs attributable to the development of computer software for internal use, totaling $125.9 million in 2020, $95.5 million in 2019, and $85.5 million in 2018, have been capitalized.

NOTE 9 – INCOME TAXES.

The provision for income taxes consists of:


(in millions)	2020		2019		2018
Current income taxes
U.S. federal	$	547.1	$	490.9	$	484.2
State and local	135.2		135.9		138.7
Foreign	22.9		18.3		28.5
Deferred income taxes (benefits)	13.7		33.3		(35.5)
Total	$	718.9	$	678.4	$	615.9

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 year ended December 31, 2018, the income tax provision includes nonrecurring charges of $20.8 million related to the enactment of Tax Reform. As of December 31, 2018, we 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.

Page 70

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)	2020		2019		2018
Property and equipment	$	15.6	$	3.0	$	11.0
Asset impairments	2.9		(2.4)		.9


Stock-based compensation	1.8		4.5		7.1
Accrued compensation	(2.2)		1.3		(2.2)
Supplemental savings plan liability	(43.3)		(33.6)		(17.4)
Unrealized holding gains recognized in non-operating income	46.8		63.0		(32.0)
Other	(7.9)		(2.5)		(2.9)
Total deferred income taxes (benefits)	$	13.7	$	33.3	$	(35.5)

The following table reconciles the statutory federal income tax rate to our effective income tax rate.


	2020		2019		2018
Statutory U.S. federal income tax rate	21.0	%	21.0	%	21.0	%
Nonrecurring charge relating to U.S. tax reform	—		—		.8
Nonrecurring charge related to Maryland state tax legislation	—		—		.3
State income taxes for current year, net of federal income tax benefits(1)	3.8		4.3		4.6
Net income attributable to redeemable non-controlling interests	(1.2)		(1.0)		.7
Net excess tax benefits from stock-based compensation plans activity	(1.9)		(1.5)		(1.7)
Other items	.5		.4		.1
Effective income tax rate	22.2	%	23.2	%	25.8	%

(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.

Page 71

The net deferred tax assets recognized in our consolidated balance sheets in other assets as of December 31 relate to the following:


(in millions)	2020		2019
Deferred tax assets
Stock-based compensation	$	79.3	$	81.1
Asset impairments	7.4		10.3
Operating lease liabilities	34.9		33.9
Accrued compensation	7.5		5.3
Supplemental savings plan	160.9		117.6
Currency translation adjustment	.2		11.9
Other	13.5		15.4
	303.7		275.5

Deferred tax liabilities
Property and equipment	(64.9)		(49.3)
Operating lease assets	(34.9)		(33.9)
Net unrealized holding gains recognized in income	(130.9)		(93.1)
Net unrealized holding gains on investments held as available-for-sale	—		—
Other	(12.4)		(22.1)
	(243.1)		(198.4)
Net deferred tax asset	$	60.6	$	77.1

We intend to repatriate earnings of T. Rowe Price foreign subsidiaries to the U.S. in an amount not to exceed these subsidiaries' previously taxed earnings and profits ("PTEP"), which are estimated to be approximately $791 million at December 31, 2020. These earnings as well as our pro rata share of the earnings of foreign corporations in which T. Rowe Price owns 10% or more were subject to the repatriation tax enacted with the U.S. tax reform and are treated as PTEP. As such, we did not record a deferred tax liability with respect to the U.S. federal or foreign withholding taxes as the PTEP should not be taxed in these jurisdictions. We did recognize a state deferred tax liability of $1.0 million for the intended repatriation as states have varying rules on taxation of these amounts.

Other assets include tax refund receivables of $25.0 million at December 31, 2020, and $31.8 million at December 31, 2019.

Cash outflows from operating activities include net income taxes paid of $643.0 million in 2020, $677.3 million in 2019, and $644.2 million in 2018.

Additional income tax benefit arising from stock-based compensation plans activity totaling $61.9 million in 2020, $42.7 million in 2019, and $40.6 million in 2018 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)	2020		2019		2018
Balance at beginning of year	$	23.9	$	16.1	$	7.6
Changes in tax positions related to
Current year	7.7		8.1		5.8
Prior years	(2.6)		.5		3.8
Expired statute of limitations	(2.3)		(.8)		(1.1)
Balance at end of year	$	26.7	$	23.9	$	16.1

Page 72

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 2020 and prior years will significantly change in 2021. The U.S. has concluded examinations related to federal tax obligations through the year 2016 as well as the 2018 year. The 2017 year examination has not yet been concluded. A net interest payable related to our unrecognized tax benefits of $1.9 million at December 31, 2020, and $2.1 million at December 31, 2019, are recognized in our consolidated balance sheets. Our accounting policy with respect to interest and penalties arising 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 10 – STOCKHOLDERS' EQUITY.

SHARE REPURCHASES.

At December 31, 2020 and 2019, liabilities of $2.5 million and $12.2 million were included in accounts payable and accrued expenses for common stock repurchases that settled during the first week of January 2021 and January 2020, respectively.

The Board of Directors has authorized the future repurchase of up to 21,467,311 common shares as of December 31, 2020.

RESTRICTED CAPITAL.

Our consolidated stockholders' equity at December 31, 2020, includes about $256 million that is restricted as to use by various regulations and agreements arising in the ordinary course of our business.

NOTE 11 – STOCK-BASED COMPENSATION.

SHARES AUTHORIZED FOR STOCK-BASED COMPENSATION PROGRAMS.

At December 31, 2020, a total of 21,858,020 shares of unissued common stock were authorized for issuance under our stock-based compensation plans. Additionally, a total of 1,602,666 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 2020.


	Options	Weighted- average exercise price		Weighted-average remaining contractual term in years
Outstanding at December 31, 2019	7,388,068	$	71.06

Exercised	(3,046,414)	$	69.01
Forfeited	(6,874)	$	74.48
Expired	(5,724)	$	53.22
Outstanding at December 31, 2020	4,329,056	$	72.52	3.1
Exercisable at December 31, 2020	4,329,056	$	72.52	3.1

Compensation and related costs includes a charge for stock option-based compensation expense of $2.0 million in 2020, $5.1 million in 2019, and $15.3 million in 2018.

The total intrinsic value of options exercised was $198.3 million in 2020, $170.9 million in 2019, and $208.4 million in 2018. At December 31, 2020, the aggregate intrinsic value of in-the-money options outstanding was $341.4 million, all outstanding options are exercisable.

Page 73

RESTRICTED SHARES AND STOCK UNITS.

The following table summarizes the status of, and changes in, our nonvested restricted shares and restricted stock units during 2020.


	Restricted shares	Restricted stock units	Weighted- average fair value
Nonvested at December 31, 2019	7,404	6,718,261	$	98.75
Time-based grants	7,412	1,780,119	$	151.90
Performance-based grants	—	79,164	$	153.17
Vested (value at vest date was $310.5 million)	(7,404)	(2,096,963)	$	92.14
Nonvested dividend equivalents granted to non-employee directors	—	2,356	$	123.48
Forfeited	—	(115,878)	$	99.76
Nonvested at December 31, 2020	7,412	6,367,059	$	116.51

Nonvested at December 31, 2020 includes performance-based restricted stock units of 416,664. These nonvested performance-based restricted units include 253,260 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 $244.1 million in 2020, $201.5 million in 2019, and $181.8 million in 2018.

At December 31, 2020, non-employee directors held 76,352 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, 2020. 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 2021	$	58.3
Second quarter 2021	57.0
Third quarter 2021	56.8
Fourth quarter 2021	50.3
Total 2021	222.4
2022 through 2026	215.1
Total	$	437.5

Page 74

NOTE 12 – 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)	2020		2019		2018
Net income attributable to T. Rowe Price Group	$	2,372.7	$	2,131.3	$	1,837.5
Less: net income allocated to outstanding restricted stock and stock unit holders	65.3		55.3		43.6
Net income allocated to common stockholders	$	2,307.4	$	2,076.0	$	1,793.9

Weighted-average common shares
Outstanding	228.8		235.4		242.2
Outstanding assuming dilution	231.2		238.6		246.9

For the past three years, no stock options have been excluded from the calculation of diluted earnings per common share as none of the options' inclusion would be anti-dilutive.

NOTE 13 – 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)	2020		2019		2018
Net deferred tax benefits (income taxes) on:
Currency translation adjustments	$	(10.3)	$	.5	$	8.3
Reclassification adjustment recognized upon partial disposition of equity method investment	(1.7)		—		—
Reclassification adjustment recognized in the provision for income taxes upon deconsolidation of T. Rowe Price investment product	.2		—		.9







Total net deferred tax benefits	$	(11.8)	$	.5	$	9.2

Page 75

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, 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)
Other comprehensive income (loss) before reclassifications and income taxes	2.4		(3.8)		(1.4)		—		(1.4)
Reclassification adjustments recognized in non-operating income	—		(.1)		(.1)		—		(.1)
	2.4		(3.9)		(1.5)		—		(1.5)
Net deferred tax benefits (income taxes)	(.5)		1.0		.5		—		.5
Other comprehensive income (loss)	1.9		(2.9)		(1.0)		—		(1.0)
Balances at December 31, 2019	(46.9)		3.9		(43.0)		—		(43.0)



Other comprehensive income before reclassifications and income taxes	2.1		22.9		25.0		—		25.0
Reclassification adjustments recognized in non-operating income	7.5		(.7)		6.8		—		6.8
	9.6		22.2		31.8		—		31.8
Net deferred tax benefits (income taxes)	(6.3)		(5.5)		(11.8)		—		(11.8)
Other comprehensive income (loss)	3.3		16.7		20.0		—		20.0
Balances at December 31, 2020	$	(43.6)	$	20.6	$	(23.0)	$	—	$	(23.0)

(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.

Page 76

NOTE 14 – DELL APPRAISAL RIGHTS MATTER.

In 2016, we paid $166.2 million to compensate certain U.S. mutual funds, trusts, subadvised clients, and separately managed accounts (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"). Later in 2016 and 2017, we entered into settlement agreements totaling $150.0 million with our insurance carrier. These insurance proceeds were recognized in operating expenses as an offset to the charge we recognized for compensation paid to Clients in operating expenses.

In 2018, all parties settled with Dell, and the Court approved final adjustments to the compensation paid to Clients in final non-appealable judgments. As a result, we obtained repayments from Clients, of which we retained the first $15.2 million and paid the remaining amount received back to our insurers. We recognized $15.2 million as a reduction in operating expenses in 2018. The net impact of the Dell appraisal matter on our financial statements was $1.0 million of operating expenses.

NOTE 15 – COMMITMENTS AND CONTINGENCIES.

On February 14, 2017, T. Rowe Price Group, Inc., T. Rowe Price Associates, Inc., T. Rowe Price Trust Company, current and former members of the management committee, and trustees of the T. Rowe Price U.S. Retirement Program were named as defendants in a lawsuit filed in the United States District Court for the District of Maryland. The lawsuit alleges breaches of ERISA’s fiduciary duty and prohibited transaction provisions on behalf of a class of all participants and beneficiaries of the T. Rowe Price 401(k) Plan from February 14, 2011, to the time of judgment. The matter has been certified as a class action. T. Rowe Price believes the claims are without merit and is vigorously defending the action. The parties each filed motions for summary judgement and, with the exception of one claim, the court has denied the parties’ cross motions for summary judgment and will schedule the case for trial. 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. The parties filed a stipulation of dismissal with prejudice in the United States District Court on December 30, 2020. There was no settlement or other consideration given by T. Rowe Price to the plaintiffs.

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.

NOTE 16 – OTHER DISCLOSURES.

RETIREMENT PLANS.

Compensation and related costs includes expense recognized for our defined contribution retirement plans of $117.0 million in 2020, $104.6 million in 2019, and $105.6 million in 2018.

Page 77

SUPPLEMENTAL SAVINGS PLAN.

Through the 2020 plan year, 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 $105.8 million in 2020, $107.5 million in 2019, and $118.9 million in 2018.

Beginning with the plan's 2021 year, the maximum that certain senior officers can defer will be the lesser of 50% of their annual cash incentive earned or $2 million. Additionally, the officers can now defer amounts for a minimum of five years rather than the two years prior to the plan's 2021 year.

NOTE 17 – SUPPLEMENTARY QUARTERLY FINANCIAL DATA (Unaudited).


	Net revenues		Net income		Net income attributable to T. Rowe Price Group		Basic earnings on common stock(1)		Diluted earnings on common stock(1)
	(in millions)						(per share)
2020
1st quarter	$	1,462.6	$	166.6	$	343.1	$	1.43	$	1.41
2nd quarter	$	1,415.4	$	728.5	$	603.0	$	2.58	$	2.55
3rd quarter	$	1,595.8	$	698.6	$	643.2	$	2.75	$	2.73
4th quarter	$	1,732.9	$	929.6	$	783.4	$	3.36	$	3.33

2019
1st quarter	$	1,327.3	$	554.0	$	512.6	$	2.11	$	2.09
2nd quarter	$	1,395.2	$	555.9	$	527.5	$	2.18	$	2.15
3rd quarter	$	1,426.7	$	545.1	$	545.9	$	2.26	$	2.23
4th quarter	$	1,468.7	$	593.9	$	545.3	$	2.27	$	2.24

*(1)*The sums of quarterly earnings per share may not equal annual earnings per share because the computations are done independently.

Page 78

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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, 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, 2020, 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 11, 2021, 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that is communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of the completeness and accuracy of assets under management data used in the calculation of investment advisory fees revenue

As discussed in Note 1 to the consolidated financial statements, the Company recognizes fees for its investment advisory agreements based on a percentage of its assets under management (AUM). AUM data represents a significant input to the calculation of investment advisory fees. The Company recognized $3.6 billion in investment advisory fees related to T. Rowe Price U.S. mutual funds (Funds) during the year ended December 31, 2020.

Page 79

We identified the evaluation of the completeness and accuracy of AUM data for the Funds as a critical audit matter as AUM data is transmitted through multiple information technology (IT) systems used in the calculation of investment advisory fee revenue. Given the Company's use of multiple IT systems, the nature and extent of audit effort involved in performing procedures to evaluate the completeness and accuracy of AUM data required the use of IT professionals with specialized skills and knowledge.

The following are the primary procedures we performed to address the critical audit matter. We evaluated the design and tested the operational effectiveness of certain internal controls over the Company’s revenue processes, including manual controls over the completeness and accuracy of AUM data. We involved IT professionals with specialized skills and knowledge, who assisted in the testing of general IT controls and the interface of data between multiple IT systems used to maintain AUM data. To assess the AUM data, we (1) compared AUM used in the calculation of a sample of investment advisory fees to the source IT systems, and (2) for a selection of Funds, compared AUM on select dates from the source IT system to the audited Fund financial statements.

/s/ KPMG LLP

We have served as the Company’s auditor since 2001.

Baltimore, Maryland

February 11, 2021

Page 80

Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk. · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.