filings.toolsItem 8. Financial Statements.
153K characters. Original on sec.gov · Markdown
Item 8. Financial Statements.
| Page | |||||
| Index to Financial Statements: | |||||
| Consolidated Balance Sheets at December 31, 2022 and 2021 | 57 | ||||
| Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2022 | 58 | ||||
| Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2022 | 59 | ||||
| Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2022 | 60 | ||||
| Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2022 | 61 | ||||
| Notes to Consolidated Financial Statements | 63 | ||||
| Report of Independent Registered Public Accounting Firm (KPMG LLP, Baltimore, MD, Auditor ID: 185) | 91 |
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CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
| 12/31/2022 | 12/31/2021 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 1,755.6 | $ | 1,523.1 | |||||||
| Accounts receivable and accrued revenue | 748.7 | 1,058.3 | |||||||||
| Investments | 2,539.2 | 2,975.5 | |||||||||
| Assets of consolidated sponsored investment products ($1,375.6 million at December 31, 2022 and $1,761.5 million at December 31, 2021, related to variable interest entities) | 1,603.4 | 1,962.8 | |||||||||
| Operating lease assets | 279.4 | 201.2 | |||||||||
| Property, equipment and software, net | 755.7 | 736.2 | |||||||||
| Intangible assets | 629.8 | 913.4 | |||||||||
| Goodwill | 2,642.8 | 2,693.2 | |||||||||
| Other assets | 688.7 | 445.3 | |||||||||
| Total assets | $ | 11,643.3 | $ | 12,509.0 | |||||||
| LIABILITIES | |||||||||||
| Accounts payable and accrued expenses | $ | 406.7 | $ | 431.0 | |||||||
| Liabilities of consolidated sponsored investment products ($39.1 million at December 31, 2022 and $36.2 million at December 31, 2021, related to variable interest entities) | 89.1 | 51.5 | |||||||||
| Operating lease liabilities | 329.6 | 249.2 | |||||||||
| Accrued compensation and related costs | 228.0 | 256.8 | |||||||||
| Supplemental savings plan liability | 761.2 | 882.6 | |||||||||
| Contingent consideration liability | 95.8 | 306.3 | |||||||||
| Income taxes payable | 46.0 | 77.9 | |||||||||
| Total liabilities | 1,956.4 | 2,255.3 | |||||||||
| Commitments and contingent liabilities | |||||||||||
| Redeemable non-controlling interests | 656.7 | 982.3 | |||||||||
| 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 224,310,000 shares at December 31, 2022 and 229,175,000 at December 31, 2021 | 44.9 | 45.8 | |||||||||
| Additional capital in excess of par value | 437.9 | 919.8 | |||||||||
| Retained earnings | 8,409.7 | 8,083.6 | |||||||||
| Accumulated other comprehensive loss | (53.0) | (26.5) | |||||||||
| Total stockholders' equity attributable to T. Rowe Price Group, Inc. | 8,839.5 | 9,022.7 | |||||||||
| Non-controlling interests in consolidated entities | 190.7 | 248.7 | |||||||||
| Total permanent stockholders' equity | 9,030.2 | 9,271.4 | |||||||||
| Total liabilities, redeemable non-controlling interests and permanent stockholders’ equity | $ | 11,643.3 | $ | 12,509.0 |
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)
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenues | |||||||||||||||||
| Investment advisory fees | $ | 5,969.1 | $ | 7,098.1 | $ | 5,693.1 | |||||||||||
| Capital allocation-based income | (54.3) | — | — | ||||||||||||||
| Administrative, distribution, and servicing fees | 573.6 | 573.8 | 513.6 | ||||||||||||||
| Net revenues | 6,488.4 | 7,671.9 | 6,206.7 | ||||||||||||||
| Operating expenses | |||||||||||||||||
| Compensation and related costs | 2,320.8 | 2,383.0 | 2,182.4 | ||||||||||||||
| Distribution and servicing costs | 301.5 | 373.9 | 278.5 | ||||||||||||||
| Advertising and promotion | 97.3 | 100.2 | 83.7 | ||||||||||||||
| Product and recordkeeping related costs | 300.1 | 236.3 | 155.5 | ||||||||||||||
| Technology, occupancy, and facility costs | 560.5 | 484.9 | 444.8 | ||||||||||||||
| General, administrative, and other | 412.2 | 383.6 | 316.1 | ||||||||||||||
| Change in fair value of contingent consideration | (161.2) | — | — | ||||||||||||||
| Acquisition-related amortization and impairment costs | 283.5 | — | — | ||||||||||||||
| Total operating expenses | 4,114.7 | 3,961.9 | 3,461.0 | ||||||||||||||
| Net operating income | 2,373.7 | 3,710.0 | 2,745.7 | ||||||||||||||
| Non-operating income (loss) | |||||||||||||||||
| Net gains (losses) on investments | (204.7) | 215.8 | 246.8 | ||||||||||||||
| Net gains (losses) on consolidated investment products | (203.5) | 74.7 | 251.7 | ||||||||||||||
| Other losses | (17.3) | (5.9) | (2.0) | ||||||||||||||
| Total non-operating income (loss) | (425.5) | 284.6 | 496.5 | ||||||||||||||
| Income before income taxes | 1,948.2 | 3,994.6 | 3,242.2 | ||||||||||||||
| Provision for income taxes | 498.6 | 896.1 | 718.9 | ||||||||||||||
| Net income | 1,449.6 | 3,098.5 | 2,523.3 | ||||||||||||||
| Less: net income (loss) attributable to redeemable non-controlling interests | (108.3) | 15.6 | 150.6 | ||||||||||||||
| Net income attributable to T. Rowe Price Group | $ | 1,557.9 | $ | 3,082.9 | $ | 2,372.7 | |||||||||||
| Earnings per share on common stock of T. Rowe Price Group | |||||||||||||||||
| Basic | $ | 6.73 | $ | 13.25 | $ | 10.08 | |||||||||||
| Diluted | $ | 6.70 | $ | 13.12 | $ | 9.98 |
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)
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income | $ | 1,449.6 | $ | 3,098.5 | $ | 2,523.3 | |||||||||||
| Other comprehensive income (loss) | |||||||||||||||||
| Currency translation adjustments: | |||||||||||||||||
| Consolidated sponsored investment products—variable interest entities | (34.9) | (37.7) | 57.8 | ||||||||||||||
| Reclassification gains recognized in non-operating investment income upon deconsolidation of certain sponsored investment products | (3.0) | (2.4) | (.7) | ||||||||||||||
| Total currency translation adjustments of consolidated sponsored investment products—variable interest entities | (37.9) | (40.1) | 57.1 | ||||||||||||||
| Equity method investments | (14.6) | 7.0 | 2.1 | ||||||||||||||
| Reclassification adjustment recognized upon partial disposition of equity method investment | — | — | 7.5 | ||||||||||||||
| Total equity method investments | (14.6) | 7.0 | 9.6 | ||||||||||||||
| Other comprehensive income (loss) before income taxes | (52.5) | (33.1) | 66.7 | ||||||||||||||
| Net deferred tax benefits | 5.0 | 3.4 | (11.8) | ||||||||||||||
| Total other comprehensive income (loss) | (47.5) | (29.7) | 54.9 | ||||||||||||||
| Total comprehensive income | 1,402.1 | 3,068.8 | 2,578.2 | ||||||||||||||
| Less: comprehensive income (loss) attributable to redeemable non-controlling interests | (129.1) | (10.6) | 185.5 | ||||||||||||||
| Comprehensive income attributable to T. Rowe Price Group | $ | 1,531.2 | $ | 3,079.4 | $ | 2,392.7 |
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)
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income | $ | 1,449.6 | $ | 3,098.5 | $ | 2,523.3 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||||||||
| Depreciation, amortization and impairment of property, equipment and software | 225.7 | 204.8 | 189.6 | ||||||||||||||
| Amortization and impairment of acquisition-related assets and retention arrangements | 420.1 | — | — | ||||||||||||||
| Fair value remeasurement of contingent consideration liability | (161.2) | — | — | ||||||||||||||
| Stock-based compensation expense | 285.4 | 274.6 | 246.2 | ||||||||||||||
| Net gains recognized on other investments | 210.6 | (122.5) | (189.6) | ||||||||||||||
| Net investments in sponsored investment products used to economically hedge supplemental savings plan liability | (18.8) | (85.7) | (142.9) | ||||||||||||||
| Net change in securities held by consolidated sponsored investment products | 87.9 | 14.9 | (798.8) | ||||||||||||||
| Other changes in assets and liabilities | (139.9) | 67.4 | 91.1 | ||||||||||||||
| Net cash provided by operating activities | 2,359.4 | 3,452.0 | 1,918.9 | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Purchases of sponsored investment products | (55.1) | (48.0) | (272.4) | ||||||||||||||
| Dispositions of sponsored investment products | 263.6 | 1,625.8 | 454.1 | ||||||||||||||
| Net cash of sponsored investment products on consolidation (deconsolidation) | (8.7) | (16.9) | (53.9) | ||||||||||||||
| Additions to property and equipment | (237.6) | (239.1) | (214.6) | ||||||||||||||
| Acquisition, net of cash acquired | — | (2,450.8) | — | ||||||||||||||
| Other investing activity | (3.7) | 30.9 | 50.5 | ||||||||||||||
| Net cash used in investing activities | (41.5) | (1,098.1) | (36.3) | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Repurchases of common stock | (849.8) | (1,138.5) | (1,201.9) | ||||||||||||||
| Common share issuances under stock-based compensation plans | (36.2) | (81.6) | 3.9 | ||||||||||||||
| Dividends paid to common stock and equity-award holders | (1,107.4) | (1,701.9) | (845.8) | ||||||||||||||
| Net distributions to non-controlling interests in consolidated entities | (35.1) | — | — | ||||||||||||||
| Net subscriptions (redemptions) from redeemable non-controlling interest holders | (48.4) | (66.8) | 557.5 | ||||||||||||||
| Net cash used in financing activities | (2,076.9) | (2,988.8) | (1,486.3) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment products | 9.5 | 2.6 | 1.9 | ||||||||||||||
| Net change in cash and cash equivalents during period | 250.5 | (632.3) | 398.2 | ||||||||||||||
| Cash and cash equivalents at beginning of period, including $101.1 million at December 31, 2021, $104.8 million at December 31, 2020 and $76.5 million at December 31, 2019 held by consolidated sponsored investment products | 1,624.2 | 2,256.5 | 1,858.3 | ||||||||||||||
| Cash and cash equivalents at end of period, including $119.1 million at December 31, 2022, $101.1 million at December 31, 2021, and $104.8 million at December 31, 2020, held by consolidated sponsored investment products | $ | 1,874.7 | $ | 1,624.2 | $ | 2,256.5 |
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 attributable to T. Rowe Price Group, Inc. | Non-controlling interests in consolidated entities | Total permanent 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 | $ | — | $ | 7,102.1 | $ | 1,121.0 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 2,372.7 | — | 2,372.7 | — | 2,372.7 | 150.6 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | 20.0 | 20.0 | — | 20.0 | 34.9 | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($3.60 per share) | — | — | — | (846.1) | — | (846.1) | — | (846.1) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock-based compensation plans activity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon option exercises | 2,194 | .5 | 95.5 | — | — | 96.0 | — | 96.0 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted shares issued, net of shares withheld for taxes | 8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares withheld for taxes | 1,457 | .3 | (92.0) | — | — | (91.7) | — | (91.7) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 246.2 | — | — | 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) | — | (1,192.2) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net subscriptions into sponsored investment products | — | — | — | — | — | — | — | — | 563.3 | ||||||||||||||||||||||||||||||||||||||||||||
| Net deconsolidations of sponsored investment products | — | — | — | — | — | — | — | — | (308.1) | ||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | 227,965 | 45.6 | 654.6 | 7,029.8 | (23.0) | 7,707.0 | — | 7,707.0 | 1,561.7 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,082.9 | — | 3,082.9 | — | 3,082.9 | 15.6 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (3.5) | (3.5) | — | (3.5) | (26.2) | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($4.32 per share) | — | — | — | (1,003.5) | — | (1,003.5) | — | (1,003.5) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Special cash dividend declared ($3.00 per share) | — | — | — | (699.5) | — | (699.5) | — | (699.5) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock-based compensation plans activity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon option exercises | 1,206 | .2 | 46.8 | — | — | 47.0 | — | 47.0 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted shares issued, net of shares withheld for taxes | 6 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares withheld for taxes | 1,492 | .3 | (128.0) | — | — | (127.7) | — | (127.7) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 274.6 | — | — | 274.6 | — | 274.6 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units issued as dividend equivalents | — | — | .6 | (.7) | — | (.1) | — | (.1) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares repurchased | (5,941) | (1.2) | (809.4) | (325.4) | — | (1,136.0) | — | (1,136.0) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for acquisition | 4,447 | .9 | 880.6 | — | — | 881.5 | — | 881.5 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interests | — | — | — | — | — | — | 248.7 | 248.7 | |||||||||||||||||||||||||||||||||||||||||||||
| Net redemptions into sponsored investment products | — | — | — | — | — | — | — | — | (67.7) | ||||||||||||||||||||||||||||||||||||||||||||
| Net deconsolidations of sponsored investment products | — | — | — | — | — | — | — | — | (501.1) | ||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | 229,175 | $ | 45.8 | $ | 919.8 | $ | 8,083.6 | $ | (26.5) | $ | 9,022.7 | $ | 248.7 | $ | 9,271.4 | $ | 982.3 |
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 attributable to T. Rowe Price Group, Inc. | Non-controlling interests in consolidated entities | Total permanent stockholders' equity | Redeemable non-controlling interests | |||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | 229,175 | $ | 45.8 | $ | 919.8 | $ | 8,083.6 | $ | (26.5) | $ | 9,022.7 | $ | 248.7 | $ | 9,271.4 | $ | 982.3 | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 1,557.9 | — | 1,557.9 | (22.9) | 1,535.0 | (108.3) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (26.5) | (26.5) | — | (26.5) | (21.0) | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($4.80 per share) | — | — | — | (1,108.7) | — | (1,108.7) | — | (1,108.7) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock-based compensation plans activity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon option exercises | 522 | .1 | 28.2 | — | — | 28.3 | — | 28.3 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted shares withheld for taxes, net of shares issued | 9 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares withheld for taxes | 1,355 | .3 | (64.6) | — | — | (64.3) | — | (64.3) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 285.4 | — | — | 285.4 | — | 285.4 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units issued as dividend equivalents | — | — | .5 | (.5) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares repurchased | (6,751) | (1.3) | (731.4) | (122.6) | — | (855.3) | — | (855.3) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net distributions to non-controlling interests in consolidated entities | — | — | — | — | — | — | (35.1) | (35.1) | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net redemptions from sponsored investment products | — | — | — | — | — | — | — | — | (49.3) | ||||||||||||||||||||||||||||||||||||||||||||
| Net deconsolidations of sponsored investment products | — | — | — | — | — | — | — | — | (147.0) | ||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | 224,310 | $ | 44.9 | $ | 437.9 | $ | 8,409.7 | $ | (53.0) | $ | 8,839.5 | $ | 190.7 | $ | 9,030.2 | $ | 656.7 |
(1) Accumulated other comprehensive income
The accompanying notes to consolidated financial statements are an integral part of these statements.
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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., products offered through variable annuity life insurance plans in the U.S., affiliated private investment funds and collateralized loan obligations. 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.
On December 29, 2021, we completed our acquisition of Oak Hill Advisors, L.P., a leading alternative credit manager, and other entities that have common ownership (collectively, "OHA"). We acquired 100% of the equity interests of Oak Hill Advisors, L.P., 100% of the equity interests in entities that make co-investments in certain affiliated private investment funds (the "co-investment entities") and a majority of the equity interests in entities that have interests in general partners of affiliated private investment funds and are entitled to a disproportionate allocation of income (the "carried interest entities"). The acquisition accelerated our expansion into alternatives investment markets and complemented our existing global platform and ongoing strategic initiatives in our core investments and distribution capabilities. OHA and its advisory affiliates provide investment advisory, asset management and other advisory services primarily to affiliated private investment funds and private accounts investing in leveraged loans, high yield bonds, structured products, private lending, distressed securities and turnaround investments.
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.
U.S. INFLATION REDUCTION LEGISLATION.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 ("IRA"). The IRA establishes new tax provisions and various incentives and tax credits. Among other things, the IRA created a 15% minimum tax on adjusted book income effective for taxable years beginning after December 31, 2022 as well as an excise tax of 1% on stock repurchases, net of stock issuances, for publicly traded companies effective for net stock repurchases made after December 31, 2022. We do not believe the impact of the IRA’s provisions will be material to our financial position and results of operations.
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.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Business Combinations
We account for business combinations under the acquisition method of accounting, whereby we recognize assets acquired and liabilities assumed, including separately identified intangible assets, contingent liabilities, and non-controlling interests, based on the fair value estimates as of the date of the acquisition. Any excess purchase consideration over the fair value of the identified net assets acquired is recognized as goodwill. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in earnings.
Consolidation
Our consolidated financial statements include the accounts of all subsidiaries and sponsored 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 sponsored investment products regulated outside the U.S., were determined to be VIEs. In addition, as part of the OHA acquisition, we acquired a majority of the carried interest entities. These carried interest entities are considered VIEs and T. Rowe Price is determined to be the primary beneficiary.
Further, our carried interest entities hold general partner interests in affiliated private investment funds that are VIEs, though these carried interest entities were determined to not be the primary beneficiary. Therefore, these affiliated private investment funds are not consolidated.
Redeemable non-controlling interests
We recognize redeemable non-controlling interests for the portion of the net assets of our consolidated sponsored 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.
Non-controlling interests in consolidated entities
We recognize non-controlling interests in the consolidated carried interest entities and present it as a component of permanent equity in our consolidated balance sheets. The non-controlling interests represent the minority interest held by limited partnerships controlled by employees, one of which is a member of our Board of Directors. Income (loss) is allocated to these non-controlling interests based on the contractual arrangements that govern the allocation of income (loss).
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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 sponsored 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 sponsored 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.
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 sponsored 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.
Investments in affiliated private investment funds
The investments in affiliated private investment funds - carried interest represent interests in general partners of affiliated private investment funds that have arrangements that entitle them to a disproportionate allocation of income, which is also referred to as carried interest. We account for these investments as financial instruments under ASC 323, Investments – Equity Method and Joint Ventures ("ASC 323") since the general partner has significant governance rights in the investment funds in which it invests, which demonstrate significant influence. The income earned is recognized as capital-allocation based income in our consolidated statements of income.
Held to Maturity
Investments in rated notes of certain European collateralized loan obligation funds are designated as held-to-maturity and carried on the balance sheet at amortized cost.
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.
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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 received 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, equipment and software
Property, equipment and software 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, 8 years; and furniture and other equipment, 6 years.
Intangible assets
Intangible assets consist primarily of acquired investment advisory agreements and the OHA trade name. The fair values of the acquired investment advisory agreements are based on the net present value of estimated future cash flows attributable to the agreements, which include significant assumptions related to revenue, discount rate, and effective tax rate. The investment advisory agreement intangible assets are amortized using the straight-line method over their estimated useful lives unless the asset is determined to have an indefinite life as there is no foreseeable limit on the contract period. The weighted average remaining useful life of definite-lived intangibles assets is approximately 6.5 years.
The trade name fair value is determined using the relief from royalty method based on net present value of estimated cash flows, which include significant assumptions about royalty rate, revenue growth rate, discount rate and effective tax rate. Additionally, we identified the trade name intangible asset as indefinite-lived as there is no foreseeable limit on the use of the OHA name.
Indefinite-lived intangible assets are tested for impairment annually or more frequently when an event occurs or circumstances change that more likely than not reduce the fair value of the indefinite-lived intangible asset below its carrying value.
Definite-lived intangible assets are tested when there is an indication of impairment. Impairment is indicated when the carrying value of the asset is not recoverable and exceeds its fair value. If indicators are present, we perform a
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recoverability test by comparing the estimated undiscounted future cash flows attributable to the asset group in question to the asset group’s carrying amount. If the undiscounted estimated future cash flows are less than the carrying amount of the asset, the asset’s cost is adjusted to fair value and an impairment loss is recognized.
Goodwill
We internally conduct, manage, and report our operations as one investment advisory business. This reflects how the chief operating decision maker allocates resources and assesses performance. Accordingly, we have one reporting unit - investment advisory business, consistent with our single operating segment, to which all goodwill has been assigned.
We evaluate the carrying amount of goodwill in our consolidated balance sheets for possible impairment on an annual basis in the fourth quarter of each year using a fair value approach. Our evaluations have indicated that no impairment exists.
Revenue recognition
Our revenue is earned from investment advisory, administrative, and distribution services we provide to our clients as well as capital allocation-based income. 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 sponsored 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
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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.
Investment advisory fees also include fees earned from affiliated private investment funds or private accounts that are determined either monthly or quarterly and are generally based on the fund’s or account's net asset value or invested capital. Investment advisory fees earned from CLOs include senior collateral management fees and subordinated collateral management fees, which are generally determined quarterly based on the sum of collateral principal amounts and the aggregate principal amount of all defaulted obligations. If amounts distributable on any payment date are insufficient to pay the collateral management fee according to the priority of payments, any shortfall is deferred and payable on subsequent payment dates.
We recognize performance-based incentive fees in connection with the investment advisory agreements from certain separately managed and subadvised accounts. We are entitled to receive performance-based incentive fees when the return on investment assets exceeds a certain benchmark return. In such arrangements, these incentive fees are recognized at the end of the measurement period when the performance benchmark or contractual outperformance has been achieved. Performance-based incentive fees are considered a form of variable consideration, and as such these fees are subject to potential reversal up until the end of the measurement period (which is generally one year) when the performance-based incentive fees become fixed, determinable, and are not subject to significant reversal. There are no significant judgments made when determining the performance-based incentive fees.
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 earned based on basis points of the related assets under management 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 4 - Information about Receivables, Revenues and Services relates to distribution and servicing obligations that were satisfied during prior periods.
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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.
Capital allocation-based income
This represents the income earned from investments in affiliated private investment funds with arrangements that are entitled to a disproportionate allocation of income, which is also known as carried interest. These investments are accounted for under ASC 323 and the income recognized represents the proportionate share of the income or loss of the fund assuming the fund was liquidated as of each reporting date pursuant to each investment fund's governing agreements. Capital allocation-based income will fluctuate period-to-period to reflect the adjustment to accrued carried interest for the change in value of the affiliated funds' underlying investments assuming the value was realized as of the end of the period, regardless of whether the fund's underlying investments have been realized. The realization of accrued carried interest occurs over a number of years. Accordingly, this income is accounted for outside of the scope of ASC 606, Revenue Recognition, and recorded as part of capital allocation-based income in our consolidated statements of income. A portion of this income is allocated to non-controlling interest holders and is reflected as compensation expense.
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, 2022, a total of 10,437,953 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 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 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.
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.
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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 sponsored 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 - ACQUISITION.
As discussed in Note 1, on December 29, 2021, T. Rowe Price Group, Inc. and certain wholly-owned subsidiaries completed the acquisition of Oak Hill Advisors, L.P., a leading alternative credit manager, and other entities that have common ownership (collectively, "OHA").
The upfront purchase consideration transferred included cash consideration of $2,487.4 million, and 4.4 million shares of common stock valued at $881.5 million. The upfront purchase consideration included the retirement of $217.1 million of OHA debt. An additional $8.5 million of cash was paid to the sellers in June 2022 following the finalization of the purchase consideration. The equity consideration transferred was restricted from sale for one year. In addition, contingent consideration in the amount of up to $900.0 million in cash may be due as part of an earnout payment starting in 2025 and ending in 2027, upon satisfying or exceeding certain defined revenue targets. These defined revenue targets are evaluated on a cumulative basis beginning at the end of 2024, with the ability to extend two additional years if the defined revenue targets are not achieved. The earnout amount is subject to a proportional reduction if OHA's actual revenue at the end of the earnout period does not meet the defined revenue targets and could result in no earnout payout if OHA's actual revenue falls below 75% of the defined revenue target. About 22% of the earnout is conditioned upon continued service with T. Rowe Price and was excluded from the purchase consideration transferred as further discussed in Compensation Arrangements below. The portion of the earnout which is not conditioned upon continued service with T. Rowe Price had a fair value of $95.8 million and $306.3 million at December 31, 2022 and 2021, respectively, and is recorded as a contingent consideration liability in our consolidated balance sheets.
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The following table sets forth the preliminary and revised fair values of the assets acquired and liabilities assumed in connection with the acquisition:
| (in millions) | Acquisition date fair value | Adjustments | Revised fair value | |||||||||||||||||
| Cash and cash equivalents | $ | 22.1 | $ | — | $ | 22.1 | ||||||||||||||
| Accounts receivable and accrued revenue | 122.2 | — | 122.2 | |||||||||||||||||
| Investments | 891.0 | — | 891.0 | |||||||||||||||||
| Property, equipment and software, net | 22.4 | — | 22.4 | |||||||||||||||||
| Operating lease asset | 101.5 | — | 101.5 | |||||||||||||||||
| Intangible assets | 913.4 | — | 913.4 | |||||||||||||||||
| Goodwill | 2,027.5 | (50.4) | 1,977.1 | |||||||||||||||||
| Other assets | 27.2 | — | 27.2 | |||||||||||||||||
| Total assets | 4,127.3 | (50.4) | 4,076.9 | |||||||||||||||||
| Accounts payable and accrued expenses | $ | 133.3 | $ | — | $ | 133.3 | ||||||||||||||
| Operating lease liability | 114.1 | — | 114.1 | |||||||||||||||||
| Deferred tax liabilities, included in other assets in the consolidated balance sheet | 125.7 | (9.6) | 116.1 | |||||||||||||||||
| Contingent consideration liability | 306.3 | (49.3) | 257.0 | |||||||||||||||||
| Total liabilities | 679.4 | (58.9) | 620.5 | |||||||||||||||||
| Total identifiable net assets | $ | 3,447.9 | $ | 8.5 | $ | 3,456.4 |
The adjustments to the acquisition date fair values are a result of new information obtained about facts that existed as of the acquisition date.
As part of the acquisition, T. Rowe Price Group, Inc. incurred approximately $31.9 million of acquisition-related costs in 2021 that are included in general, administrative and other expenses in our 2021 consolidated statement of income. We incurred additional $.9 million of acquisition-related costs during 2022.
GOODWILL AND INTANGIBLE ASSETS
Goodwill is comprised of future benefits for T. Rowe Price from the OHA acquisition, which do not qualify as separately recognized intangible assets.
Approximately $1.2 billion of the goodwill generated by the acquisition is deductible in future periods for U.S. federal income tax purposes. The remaining goodwill is not deductible for tax purposes. The non-deductible goodwill is part of a tax basis difference associated with our investment in OHA, and, as permitted by accounting guidance, we have adopted an accounting policy to not record a related deferred tax liability.
The separately identified intangible assets at acquisition close included an indefinite-lived trade name of $134.7 million and both indefinite- and definite-lived investment advisory agreements totaling $778.7 million.
See Note 10 for more details on goodwill and the intangible assets.
INVESTMENTS
As part of the OHA acquisition, investments in affiliated private investment funds were recorded at fair value of $761.1 million as of the acquisition date. The difference of $375.0 million between the carrying value of these investments on OHA’s books and their fair value represented the basis difference, of which $306.5 million is being amortized on a straight-line basis over the funds’ estimated weighted average life of 5.9 years at acquisition. Since T. Rowe Price acquired the majority, but not 100% of the equity interest in these carried interest entities, non-controlling interests were recorded in permanent stockholders' equity at a fair value of $248.7 million as of the
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acquisition date. The fair value of these non-controlling interests included a basis difference of $154.3 million, of which $129.1 million is attributable to funds with a definite life and is being amortized on a straight-line basis over the funds’ estimated weighted average life of 5.9 years at acquisition. The non-controlling interests are held by employees that participate in the management of the investments in affiliated private investment funds and therefore profit and loss allocations is reflected as compensation expense in the consolidated statements of income.
COMPENSATION ARRANGEMENTS
In connection with the OHA acquisition, a portion of the upfront purchase consideration and future payments to sellers or employees related to other compensation arrangements were conditioned upon continued service or a future performance period. These arrangements are treated as post-combination compensation expense recognized over a period of three to five years, and had an aggregate fair value of $459.9 million as of the acquisition closing date. These arrangements include an agreement among certain sellers whereby $283.2 million of their upfront purchase consideration would be forfeited and redistributed among the other sellers who are party to the agreement if employment with T. Rowe Price or an affiliate was voluntarily terminated prior to the fifth anniversary of the acquisition date. Additionally, these arrangements include about 22% of the total earnout with a fair value of $88.2 million as of December 31, 2021, and $58.3 million in retention bonuses that will be paid to certain employees of OHA following the completion of a service period. The aggregate fair value of $459.9 million also includes an agreement, referred to as the Value Creation Agreement, whereby certain employees of OHA will receive incentive payments in the aggregate equal to 10% of the appreciated value of the OHA business, subject to an annualized preferred return to T. Rowe Price, on the fifth anniversary of the acquisition date. The fair value of the earnout and Value Creation Agreement will be remeasured each reporting period and recognized over the related service periods. See Note 6 for more information on the Value Creation Agreement.
CASH FLOW INFORMATION
For the 2021 statement of cash flow, there were non-cash financing activities of $881.5 million for the issuance of T. Rowe Price Group, Inc. common stock as part of the purchase consideration and non-cash investing activities of $306.3 million related to the contingent consideration for the earnout.
PRO FORMA SUMMARY
The following unaudited pro forma summary presents combined results of operations of T. Rowe Price Group, Inc. as if the OHA acquisition had occurred on January 1, 2020. The pro forma adjustments include acquisition-related costs and adjustments to intangible amortization expense. These pro forma results are not indicative of results of operations that would have been achieved had the acquisition occurred on January 1, 2020, nor are they indicative of future results of operations of the combined entity.
| Pro forma years ended (unaudited) | ||||||||
| (in millions) | 12/31/2021 | 12/31/2020 | ||||||
| Revenue | $ | 8,162 | $ | 6,479 | ||||
| Net income | $ | 3,016 | $ | 2,241 |
NOTE 3 – CASH EQUIVALENTS.
Cash equivalent investments in the T. Rowe Price money market mutual funds aggregate to $1,412.0 million at December 31, 2022, and $1,183.9 million at December 31, 2021. Dividends earned on these investments totaled $30.0 million in 2022, $0.3 million in 2021, and $4.2 million in 2020.
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NOTE 4 – INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES.
Revenues earned during the years ended December 31, 2022, 2021 and 2020, under agreements with clients include:
| 2022 | |||||||||||||||||||||||||||||
| Administrative, distribution, and servicing fees | |||||||||||||||||||||||||||||
| (in millions) | Investment advisory fees | Administrative fees | Distribution and servicing fees | Capital allocation-based income | Net revenues | ||||||||||||||||||||||||
| U.S. mutual funds | $ | 3,486.2 | $ | 338.3 | $ | 92.2 | $ | — | $ | 3,916.7 | |||||||||||||||||||
| Subadvised funds, separate accounts, collective investment trusts, and other investment products | 2,482.9 | 16.1 | — | (54.3) | 2,444.7 | ||||||||||||||||||||||||
| Other clients | — | 127.0 | — | — | 127.0 | ||||||||||||||||||||||||
| $ | 5,969.1 | $ | 481.4 | $ | 92.2 | $ | (54.3) | $ | 6,488.4 | ||||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| Administrative, distribution, and servicing fees | |||||||||||||||||||||||
| (in millions) | Investment advisory fees | Administrative fees | Distribution and servicing fees | Net revenues | |||||||||||||||||||
| U.S. mutual funds | $ | 4,388.9 | $ | 333.4 | $ | 120.3 | $ | 4,842.6 | |||||||||||||||
| Subadvised funds, separate accounts, collective investment trusts, and other investment products | 2,709.2 | — | — | 2,709.2 | |||||||||||||||||||
| Other clients | — | 120.1 | — | 120.1 | |||||||||||||||||||
| $ | 7,098.1 | $ | 453.5 | $ | 120.3 | $ | 7,671.9 | ||||||||||||||||
| 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 |
The following table details the investment advisory fees earned from clients by their underlying asset class.
| (in millions) | 2022 | 2021 | 2020 | ||||||||||||||
| U.S. mutual funds | |||||||||||||||||
| Equity | $ | 2,415.3 | $ | 3,118.5 | $ | 2,440.4 | |||||||||||
| Fixed income, including money market | 261.4 | 245.2 | 266.5 | ||||||||||||||
| Multi-asset | 809.5 | 1,025.2 | 933.0 | ||||||||||||||
| 3,486.2 | 4,388.9 | 3,639.9 | |||||||||||||||
| Subadvised funds, separate accounts, collective investment trusts, and other investment products | |||||||||||||||||
| Equity and blended assets | 1,344.4 | 1,781.4 | 1,326.3 | ||||||||||||||
| Fixed income, including money market | 166.0 | 164.6 | 149.3 | ||||||||||||||
| Multi-asset | 699.4 | 763.2 | 577.6 | ||||||||||||||
| Alternatives | 273.1 | — | — | ||||||||||||||
| 2,482.9 | 2,709.2 | 2,053.2 | |||||||||||||||
| Total | $ | 5,969.1 | $ | 7,098.1 | $ | 5,693.1 |
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The following table summarizes the investment portfolios and assets under management on which we earned investment advisory fees.
| (in billions) | Average during | As of December 31, | |||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2021 | |||||||||||||||||||||||||
| U.S. mutual funds | |||||||||||||||||||||||||||||
| Equity | $ | 424.9 | $ | 540.4 | $ | 417.0 | $ | 369.8 | $ | 553.9 | |||||||||||||||||||
| Fixed income, including money market | 81.0 | 86.4 | 76.8 | 73.8 | 85.3 | ||||||||||||||||||||||||
| Multi-Asset | 199.8 | 229.8 | 193.9 | 184.2 | 232.2 | ||||||||||||||||||||||||
| 705.7 | 856.6 | 687.7 | 627.8 | 871.4 | |||||||||||||||||||||||||
| Subadvised funds, separate accounts, collective investment trusts, and other investment products | |||||||||||||||||||||||||||||
| Equity | 338.7 | 431.6 | 321.3 | 294.4 | 438.8 | ||||||||||||||||||||||||
| Fixed income, including money market | 92.4 | 91.3 | 82.1 | 93.2 | 90.4 | ||||||||||||||||||||||||
| Multi-Asset | 218.9 | 219.8 | 156.8 | 215.9 | 245.5 | ||||||||||||||||||||||||
| Alternatives | 42.7 | — | — | 43.4 | 41.7 | ||||||||||||||||||||||||
| 692.7 | 742.7 | 560.2 | 646.9 | 816.4 | |||||||||||||||||||||||||
| Total | $ | 1,398.4 | $ | 1,599.3 | $ | 1,247.9 | $ | 1,274.7 | $ | 1,687.8 |
Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for about 9.1% and 9.9% of our assets under management at December 31, 2022 and 2021, respectively.
Total net revenues earned from sponsored investment products totaled $5,326.3 million in 2022, $6,259.3 million in 2021, and $5,044.3 million in 2020. Accounts receivable from these products aggregate to $492.4 million at December 31, 2022 and $577.9 million at December 31, 2021.
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NOTE 5 – INVESTMENTS.
The carrying values of investments that are not part of the consolidated sponsored investment products at December 31 are as follows:
| (in millions) | 2022 | 2021 | |||||||||
| Investments held at fair value | |||||||||||
| T. Rowe Price investment products | |||||||||||
| Discretionary investments | $ | 242.0 | $ | 518.7 | |||||||
| Seed capital | 195.1 | 264.8 | |||||||||
| Supplemental savings plan liability economic hedges | 760.7 | 881.5 | |||||||||
| Investment partnerships and other investments | 87.1 | 108.9 | |||||||||
| Investments in affiliated collateralized loan obligations | 6.4 | 10.8 | |||||||||
| Equity method investments | |||||||||||
| T. Rowe Price investment products | |||||||||||
| Discretionary investments | 199.6 | — | |||||||||
| Seed capital | 125.7 | 141.7 | |||||||||
| Investment in UTI Asset Management Company Limited (India) | 158.8 | 165.4 | |||||||||
| Investments in affiliated private investment funds - carried interest | 467.8 | 609.8 | |||||||||
| Investments in affiliated private investment funds - seed/co-investment | 173.8 | 151.3 | |||||||||
| Other investment partnerships and investments | 2.4 | 2.5 | |||||||||
| Held to maturity | |||||||||||
| Investments in affiliated collateralized loan obligations | 109.6 | 119.1 | |||||||||
| Certificates of deposit | 9.2 | — | |||||||||
| U.S. Treasury note | 1.0 | 1.0 | |||||||||
| Total | $ | 2,539.2 | $ | 2,975.5 |
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 2022, we recognized $240.5 million of net unrealized losses on investments held at fair value that were still held at December 31, 2022. For 2021, we recognized $63.6 million of net unrealized gains on investments held at fair value that were still held at December 31, 2021. For 2020, we recognized $142.7 million of net unrealized gains on investments held at fair value that were still held at December 31, 2020.
Dividends, including capital gain distributions, earned on the sponsored investment products held at fair value, totaled $45.3 million in 2022, $90.2 million in 2021, and $50.8 million in 2020.
During each of the last three years, certain sponsored 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 sponsored investment products as either an equity method investment or an investment held at fair value. Additionally, during 2022 and 2021, certain sponsored investment products that were being accounted for as either equity method or fair value 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.
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| (in millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Net decrease in assets of consolidated sponsored investment products | $ | (256.9) | $ | (753.0) | $ | (546.1) | |||||||||||
| Net decrease in liabilities of consolidated sponsored investment products | $ | (12.8) | $ | (17.6) | $ | (10.5) | |||||||||||
| Net decrease in redeemable non-controlling interests | $ | (147.2) | $ | (501.1) | $ | (308.1) | |||||||||||
| Gains recognized upon deconsolidation | $ | 3.0 | $ | 2.4 | $ | .7 |
The gains recognized upon deconsolidation were the result of reclassifying currency translation adjustments accumulated on certain sponsored investment products with non-USD functional currencies from accumulated other comprehensive income to non-operating income.
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).
INVESTMENTS IN AFFILIATED COLLATERALIZED LOAN OBLIGATIONS.
As part of the OHA acquisition, we acquired long-term investments in collateralized loan obligations ("CLOs") and assumed debt associated with these investments. The European CLOs, which were valued at $116.0 million at December 31, 2022, invest in 5% vertical strips in each class of rated notes and subordinated notes. Certain investments in the debt tranches of the CLOs are measured at amortized cost as investments held to maturity and included in investments in our consolidated balance sheets. The subordinated note tranches of these investments are accounted for as equity method investments and our allocable share of income is included in non-operating income (loss) in the consolidated statements of income. Certain of the investments in the debt tranches of the CLOs have been pledged as collateral against the repurchase agreements.
There is debt associated with our long-term investments in affiliated CLOs. As of December 31, 2022 and 2021, the debt is carried at $103.0 million and $113.5 million, respectively, and is reported in accounts payable and accrued expenses in our consolidated balance sheets. The debt includes outstanding repurchase agreements of €66.7 million (equivalent to $71.3 million at December 31, 2022 and $75.9 million at December 31, 2021 at the respective EUR spot rates) and collateralized by our CLO investments. Interest income on the underlying investments accrues quarterly and those amounts are retained by the counterparty. Interest expense accrues quarterly, which is equal to the interest income retained by the counterparty, plus 0.5% per annum on the notes of the underlying pledged investments. We still hold the legal rights and obligations associated with the underlying assets and therefore continue to satisfy the United Kingdom risk retention requirements.
The debt also includes outstanding note facilities of €35.6 million (equivalent to $31.7 million at December 31, 2022 and $36.9 million at December 31, 2021 at the respective EUR spot rates) and are collateralized by first priority security interests in the assets of the consolidated OHA entity that is party to the notes. These notes bear interest at rates based on EURIBOR plus the initial margin, which equals all-in rates ranging from 3.16% to 3.41% as of December 31, 2022. The notes mature on various dates through 2032 or if the investment is paid back in full or cancelled, whichever is sooner. Payments are required on the debt when payments are received on the investments. Each deed contains covenants which, if not met, may cause the termination of the note facility and declare principal and interest immediately due and payable. The consolidated entity that is the party to the notes was in compliance with all such covenants at December 31, 2022 and 2021.
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VARIABLE INTEREST ENTITIES.
Our investments at December 31, 2022 and 2021, 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) | 2022 | 2021 | |||||||||
| Investment carrying values | $ | 762.2 | $ | 943.3 | |||||||
| Unfunded capital commitments | 84.7 | 94.2 | |||||||||
| Accounts receivable | 91.5 | 145.1 | |||||||||
| $ | 938.4 | $ | 1,182.6 |
The unfunded capital commitments, totaling $84.7 million at December 31, 2022, and $94.2 million at December 31, 2021, relate primarily to the affiliated private investment funds and the 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.
INVESTMENTS IN AFFILIATED FUNDS.
As part of the OHA acquisition in December 2021, we acquired a majority of the equity interests in entities that have interests in general partners of affiliated private investment funds and are entitled to a disproportionate allocation of income. These entities are considered variable interest entities and are consolidated as T. Rowe Price is determined to be the primary beneficiary.
The total assets, liabilities and non-controlling interests of these consolidated variable interest entities as of December 31, 2022 and 2021 are as follows:
| (in millions) | 2022 | 2021 | |||||||||
| Assets | $ | 526.2 | $ | 692.7 | |||||||
| Liabilities | $ | 15.8 | $ | 56.4 | |||||||
| Non-controlling interest | $ | 190.7 | $ | 248.7 |
NOTE 6 – 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. The inputs into the determination of fair value require significant management judgment or estimation. Investments in this category generally include investments for which there is not an actively-traded market.
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 sponsored investment products which are presented separately on our consolidated balance sheets and are detailed in Note 7.
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| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| T. Rowe Price investment products | |||||||||||||||||||||||||||||||||||
| Cash equivalents held in money market funds | $ | 1,412.0 | $ | — | $ | — | $ | 1,183.9 | $ | — | $ | — | |||||||||||||||||||||||
| Discretionary investments | 242.0 | — | — | 518.7 | — | — | |||||||||||||||||||||||||||||
| Seed capital | 161.0 | 34.1 | — | 241.4 | 23.4 | — | |||||||||||||||||||||||||||||
| Supplemental savings plan liability economic hedges | 760.7 | — | — | 881.5 | — | — | |||||||||||||||||||||||||||||
| Other investments | .6 | .1 | — | .7 | .1 | — | |||||||||||||||||||||||||||||
| Investments in affiliated collateralized loan obligations | — | 6.4 | — | — | 10.8 | — | |||||||||||||||||||||||||||||
| Total | $ | 2,576.3 | $ | 40.6 | $ | — | $ | 2,826.2 | $ | 34.3 | $ | — | |||||||||||||||||||||||
| Contingent consideration liability | $ | — | $ | — | $ | 95.8 | $ | — | $ | — | $ | 306.3 |
The fair value hierarchy level table above does not include the investment partnerships and other investments for which fair value is estimated using their NAV per share as a practical expedient. The carrying value of these investments as disclosed in Note 5 were $86.4 million and $108.1 million at December 31, 2022 and 2021, respectively.
As part of the purchase consideration for our acquisition of OHA in December 2021, there was contingent consideration in the amount of up to $900.0 million as part of an earnout payment. See Note 2 for more details on the earnout arrangement. About 22% of the earnout is conditioned upon continued service with T. Rowe Price and was excluded from the purchase consideration and deemed compensatory. The fair value of the earnout deemed compensatory is remeasured each reporting period and recognized over the related service period. For the year ended December 31, 2022, $13.5 million was recorded as part of compensation expense in our consolidated statements of income for the portion of the earnout deemed compensatory.
The change in the contingent consideration liability measured at fair value for which we used Level 3 inputs to determine fair value is as follows:
| Contingent Consideration Liability | ||||||||
| (in millions) | Year ended 12/31/2022 | |||||||
| Balance at beginning of period | $ | 306.3 | ||||||
| Measurement period adjustment | (49.3) | |||||||
| Unrealized gains, included in earnings | (161.2) | |||||||
| Balance, December 31, 2022 | $ | 95.8 |
The fair value of the contingent consideration is measured using the Monte Carlo simulation methodology of valuation. The most significant assumptions used relate to the discount rates and from changes pertaining to the achievement of the defined financial targets.
In addition, simultaneously with the OHA acquisition, a Value Creation Agreement was entered into whereby certain employees of OHA will receive incentive payments based on the appreciated value of the OHA business on the fifth anniversary of the acquisition date. See Note 2 for more details on this arrangement. This arrangement is treated as a post-combination compensation expense. This arrangement will be remeasured at fair value at each reporting date and recognized over the related service period. For the year ended December 31, 2022, $8.9 million was recognized as part of compensation expense in our consolidated statements of income.
During 2022, we recognized impairment charges on certain of our identified intangible assets related to the OHA acquisition. As part of the impairment recognition, a fair value measurement was determined for these intangible assets. See Note 10 for further discussion of the impairments.
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NOTE 7 – CONSOLIDATED SPONSORED INVESTMENT PRODUCTS.
The sponsored 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 and certain other sponsored products 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 sponsored investment products at December 31:
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (in millions) | VOE | VIE | Total | VOE | VIE | Total | |||||||||||||||||||||||||||||
| Cash and cash equivalents(1) | $ | 16.2 | $ | 102.9 | $ | 119.1 | $ | 7.3 | $ | 93.8 | $ | 101.1 | |||||||||||||||||||||||
| Investments(2) | 205.3 | 1,255.5 | 1,460.8 | 188.9 | 1,645.0 | 1,833.9 | |||||||||||||||||||||||||||||
| Other assets | 6.3 | 17.2 | 23.5 | 5.1 | 22.7 | 27.8 | |||||||||||||||||||||||||||||
| Total assets | 227.8 | 1,375.6 | 1,603.4 | 201.3 | 1,761.5 | 1,962.8 | |||||||||||||||||||||||||||||
| Liabilities | 50.0 | 39.1 | 89.1 | 15.3 | 36.2 | 51.5 | |||||||||||||||||||||||||||||
| Net assets | $ | 177.8 | $ | 1,336.5 | $ | 1,514.3 | $ | 186.0 | $ | 1,725.3 | $ | 1,911.3 | |||||||||||||||||||||||
| Attributable to T. Rowe Price Group | $ | 142.4 | $ | 715.2 | $ | 857.6 | $ | 125.3 | $ | 803.7 | $ | 929.0 | |||||||||||||||||||||||
| Attributable to redeemable non-controlling interests | 35.4 | 621.3 | 656.7 | 60.7 | 921.6 | 982.3 | |||||||||||||||||||||||||||||
| $ | 177.8 | $ | 1,336.5 | $ | 1,514.3 | $ | 186.0 | $ | 1,725.3 | $ | 1,911.3 |
(1) Cash and cash equivalents includes $2.6 million and $6.5 million at December 31, 2022 and 2021, respectively, of investments in
T. Rowe Price money market mutual funds.
(2) Investments include $7.6 million and $42.5 million at December 31, 2022 and 2021, respectively, of sponsored investment products.
Although we can generally redeem our net interest in the sponsored 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 sponsored 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 sponsored investment products, are reflected in our consolidated statements of income for the year ended December 31 as follows:
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | VOE | VIE | Total | VOE | VIE | Total | VOE | VIE | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses reflected in net operating income | $ | (.5) | $ | (7.7) | $ | (8.2) | $ | (.6) | $ | (11.6) | $ | (12.2) | $ | (1.6) | $ | (14.8) | $ | (16.4) | |||||||||||||||||||||||||||||||||||
| Net gains (losses) reflected in non-operating income | (13.4) | (190.1) | (203.5) | 18.0 | 56.7 | 74.7 | 13.2 | 238.5 | 251.7 | ||||||||||||||||||||||||||||||||||||||||||||
| Impact on income before taxes | $ | (13.9) | $ | (197.8) | $ | (211.7) | $ | 17.4 | $ | 45.1 | $ | 62.5 | $ | 11.6 | $ | 223.7 | $ | 235.3 | |||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to T. Rowe Price Group | $ | (9.5) | $ | (93.9) | $ | (103.4) | $ | 11.4 | $ | 35.5 | $ | 46.9 | $ | 11.6 | $ | 73.1 | $ | 84.7 | |||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to redeemable non-controlling interests | (4.4) | (103.9) | (108.3) | 6.0 | 9.6 | 15.6 | — | 150.6 | 150.6 | ||||||||||||||||||||||||||||||||||||||||||||
| $ | (13.9) | $ | (197.8) | $ | (211.7) | $ | 17.4 | $ | 45.1 | $ | 62.5 | $ | 11.6 | $ | 223.7 | $ | 235.3 |
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The operating expenses of these consolidated products are reflected in other operating expenses. In preparing our consolidated financial statements, we eliminated operating expenses of $2.0 million in 2022, $5.5 million in 2021, and $9.9 million in 2020, 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 sponsored investment products.
The following table details the impact of these consolidated investment products on the individual lines of our consolidated statements of cash flows.
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | VOE | VIE | Total | VOE | VIE | Total | VOE | VIE | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | (84.1) | $ | 6.9 | $ | (77.2) | $ | (135.3) | $ | 160.8 | $ | 25.5 | $ | (155.4) | $ | (401.3) | $ | (556.7) | |||||||||||||||||||||||||||||||||||
| Net cash provided by (used in) investing activities | .1 | (8.8) | (8.7) | (11.9) | (5.0) | (16.9) | (23.4) | (30.5) | (53.9) | ||||||||||||||||||||||||||||||||||||||||||||
| Net cash used in financing activities | 92.9 | 1.5 | 94.4 | 147.4 | (162.3) | (14.9) | 176.0 | 461.0 | 637.0 | ||||||||||||||||||||||||||||||||||||||||||||
| FX impact on cash | — | 9.5 | 9.5 | — | 2.6 | 2.6 | — | 1.9 | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||
| Net change in cash and cash equivalents during period | 8.9 | 9.1 | 18.0 | .2 | (3.9) | (3.7) | (2.8) | 31.1 | 28.3 | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents at beginning of year | 7.3 | 93.8 | 101.1 | 7.1 | 97.7 | 104.8 | 9.9 | 66.6 | 76.5 | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents at end of year | $ | 16.2 | $ | 102.9 | $ | 119.1 | $ | 7.3 | $ | 93.8 | $ | 101.1 | $ | 7.1 | $ | 97.7 | $ | 104.8 |
The net cash provided by financing activities includes $142.8 million in 2022, $51.9 million in 2021 and $79.5 million in 2020, of net subscriptions we made into the consolidated sponsored 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 sponsored 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.
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 sponsored investment products using fair value measurements determined based on the differing levels of inputs as of December 31.
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| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Cash equivalents | $ | 4.4 | $ | 20.6 | $ | — | $ | 6.5 | $ | .7 | $ | — | |||||||||||||||||||||||
| Equity securities | 136.7 | 167.8 | — | 247.8 | 340.3 | — | |||||||||||||||||||||||||||||
| Fixed income securities | 36.4 | 1,014.7 | — | — | 1,187.4 | — | |||||||||||||||||||||||||||||
| Other investments | 3.3 | 30.1 | 71.8 | 5.7 | 52.7 | — | |||||||||||||||||||||||||||||
| $ | 180.8 | $ | 1,233.2 | $ | 71.8 | $ | 260.0 | $ | 1,581.1 | $ | — | ||||||||||||||||||||||||
| Liabilities | $ | (.9) | $ | (19.1) | $ | — | $ | (.7) | $ | (9.7) | $ | — |
The fair value of Level 3 investments held by consolidated sponsored investment products are derived from inputs that are unobservable and which reflect the company's own determinations about the assumptions that market participants would use in pricing the investments, including assumptions about risk. These inputs are developed based on the company's own data, which is adjusted if information indicates that market participants would use different assumptions. Changes in fair value Level 3 are solely attributable to the purchases of investments during 2022. There were no transfers into or out of Level 3 of the fair value hierarchy for the year ended December 31, 2022.
The following table provides information about the significant Level 3 inputs:
| Fair value measurements as of December 31, 2022 | |||||||||||||||||||||||
| (in millions) | Fair value | Valuation techniques | Unobservable inputs | Ranges | |||||||||||||||||||
| Other investments | $ | 71.8 | Market Yield (Comparables) | Yield | 9.8% - 12.4% |
NOTE 8 – 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, 2022, the weighted-average remaining lease term on our leases is approximately 10.6 years and the weighted-average discount rate used to measure the lease liabilities is 3.3%.
Operating lease expense was $50.0 million in 2022, $32.5 million in 2021, and $32.1 million in 2020. 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 $10.2 million in 2022. We made lease payments of $44.8 million during 2022.
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Our future undiscounted cash flows related to our operating leases, including operating leases associated with OHA, and the reconciliation to the operating lease liability as of December 31, 2022, are as follows:
| (in millions) | 2022 | ||||
| 2023 | $ | 40.8 | |||
| 2024 | 56.4 | ||||
| 2025 | 26.0 | ||||
| 2026 | 34.1 | ||||
| 2027 | 34.2 | ||||
| Thereafter | 203.5 | ||||
| Total future undiscounted cash flows | 395.0 | ||||
| Less: imputed interest to be recognized in lease expense | (65.4) | ||||
| Operating lease liabilities, as reported | $ | 329.6 |
NOTE 9 – PROPERTY, EQUIPMENT AND SOFTWARE.
Property, equipment and software at December 31 consists of:
| (in millions) | 2022 | 2021 | |||||||||
| Computer and communications software and equipment | $ | 1,364.6 | $ | 1,293.5 | |||||||
| Buildings and improvements | 488.9 | 472.0 | |||||||||
| Leasehold improvements | 236.3 | 196.4 | |||||||||
| Furniture and other equipment | 209.7 | 205.6 | |||||||||
| Land | 25.7 | 25.7 | |||||||||
| 2,325.2 | 2,193.2 | ||||||||||
| Less accumulated depreciation and amortization | 1,569.5 | 1,457.0 | |||||||||
| Total | $ | 755.7 | $ | 736.2 |
Compensation and related costs attributable to the development of computer software for internal use, totaling $134.6 million in 2022, $137.6 million in 2021, and $125.9 million in 2020, have been capitalized.
NOTE 10 - GOODWILL AND INTANGIBLE ASSETS.
Goodwill and intangible assets consist of the following:
| (in millions) | As of December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Goodwill | $ | 2,642.8 | $ | 2,693.2 | |||||||
| Indefinite-lived intangible assets - trade name | 117.1 | 134.7 | |||||||||
| Indefinite-lived intangible assets - investment advisory agreements | 65.6 | 164.8 | |||||||||
| Definite-lived intangible assets - investment advisory agreements | 447.1 | 613.9 | |||||||||
| Total | $ | 3,272.6 | $ | 3,606.6 |
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GOODWILL.
Goodwill activity during the years ended December 31, 2022 and 2021, was as follows:
| (in millions) | 2022 | 2021 | |||||||||
| Balance, beginning of the year | $ | 2,693.2 | $ | 665.7 | |||||||
| Acquisition of OHA | — | 2,027.5 | |||||||||
| Measurement period adjustments | (50.4) | — | |||||||||
| Balance, end of year | $ | 2,642.8 | $ | 2,693.2 |
We evaluate the carrying amount of goodwill in our consolidated balance sheets for possible impairment on an annual basis in the fourth quarter of each year using a fair value approach. We did not record any impairment charges for goodwill for the years ended December 31, 2022, 2021, or 2020.
INTANGIBLE ASSETS**.**
Impairment
Our indefinite-lived intangible assets are tested for impairment annually, in the fourth quarter, or more frequently if events or changes in circumstances indicate that it is more likely than not that the intangible asset is impaired. Based on a review of qualitative factors, primarily, the current market environment and future outlook, we determined that it was necessary to perform a quantitative impairment test. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount. During 2022, we determined that the carrying amount of our indefinite-lived intangible assets exceeded their fair value. Accordingly, we recognized an impairment loss equal to that excess in the amount of $99.2 million for the investment advisory agreements and $17.6 million for the trade name. Fair value for each asset was determined using a discounted cash flow analysis where estimated future cash flows were discounted to arrive at a single present value amount. This approach included inputs that required significant management judgment, the most relevant of which included revenue growth, discount rates, and effective tax rates.
Definite-lived intangible assets are reviewed for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable (i.e., the carrying amount is less than the undiscounted estimated future cash flows). Based on a review of factors significant to these assets, we determined that the carrying amount is not recoverable from certain of these intangible assets. Accordingly, we then assessed whether the fair value was less than the asset's carrying amount. During 2022, we determined that the carrying amount of certain intangible assets exceeded their fair value and recorded an impairment loss equal to that excess in the amount of $58.3 million. Fair value was determined using a discounted cash flow analysis where estimated future cash flows were discounted to arrive at a single present value amount. This approach included inputs that required significant management judgment, the most relevant of which included revenue growth, discount rates, and effective tax rates.
Should conditions that led us to recognize these impairment charges continue or deteriorate, additional impairments may be recognized in future periods.
As of December 31, 2022, the estimated weighted average remaining life for the definite-lived intangible assets is 6.5 years. Amortization expense for the definite-lived investment advisory agreement intangible assets was $108.5 million for 2022. Estimated amortization expense for the definite-lived investment advisory agreements intangible assets for 2023 through 2027 is, $96.3 million for 2023, $93.9 million for 2024, $93.2 million for 2025, $75.9 million for 2026, and $51.6 million for 2027.
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NOTE 11 – INCOME TAXES.
The provision for income taxes consists of:
| (in millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Current income taxes | |||||||||||||||||
| U.S. federal | $ | 574.7 | $ | 745.0 | $ | 547.1 | |||||||||||
| State and local | 115.4 | 179.3 | 135.2 | ||||||||||||||
| Foreign | 15.5 | 28.1 | 22.9 | ||||||||||||||
| Deferred income taxes (benefits) | (207.0) | (56.3) | 13.7 | ||||||||||||||
| Total | $ | 498.6 | $ | 896.1 | $ | 718.9 |
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) | 2022 | 2021 | 2020 | ||||||||||||||
| Property and equipment | $ | (64.0) | $ | 11.8 | $ | 15.6 | |||||||||||
| Asset impairments | 4.6 | 2.0 | 2.9 | ||||||||||||||
| Operating lease assets | 24.7 | (10.6) | 1.0 | ||||||||||||||
| Operating lease liabilities | (24.2) | 10.6 | (1.0) | ||||||||||||||
| Stock-based compensation | (8.7) | (8.1) | 1.8 | ||||||||||||||
| Accrued compensation | (.5) | (1.6) | (2.2) | ||||||||||||||
| Supplemental savings plan liability | 21.3 | (29.3) | (43.3) | ||||||||||||||
| Acquisition-related retention liability | (13.6) | — | — | ||||||||||||||
| Contingent consideration liability | 32.4 | — | — | ||||||||||||||
| Acquired investments | (73.0) | — | — | ||||||||||||||
| Unrealized holding gains recognized in non-operating income | (114.6) | (26.1) | 46.8 | ||||||||||||||
| Other | 8.6 | (5.0) | (7.9) | ||||||||||||||
| Total deferred income taxes (benefits) | $ | (207.0) | $ | (56.3) | $ | 13.7 |
The following table reconciles the statutory federal income tax rate to our effective income tax rate.
| 2022 | 2021 | 2020 | |||||||||||||||
| Statutory U.S. federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| State income taxes for current year, net of federal income tax benefits(1) | 3.4 | 3.7 | 3.8 | ||||||||||||||
| Net income attributable to redeemable non-controlling interests(2) | 1.3 | (.1) | (1.2) | ||||||||||||||
| Net excess tax benefits from stock-based compensation plans activity | (.4) | (2.1) | (1.9) | ||||||||||||||
| Other items | .3 | (.1) | .5 | ||||||||||||||
| Effective income tax rate | 25.6 | % | 22.4 | % | 22.2 | % |
(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.
(2) Net income attributable to redeemable non-controlling interests represents the portion of earnings held in the firm's consolidated investment products, which are not taxable to the firm despite being included in pre-tax income.
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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) | 2022 | 2021 | |||||||||
| Deferred tax assets | |||||||||||
| Stock-based compensation | $ | 96.1 | $ | 87.4 | |||||||
| Asset impairments | — | 5.4 | |||||||||
| Operating lease liabilities | 48.5 | 24.3 | |||||||||
| Accrued compensation | 9.6 | 9.1 | |||||||||
| Acquired investments | 20.8 | — | |||||||||
| Supplemental savings plan | 168.9 | 190.2 | |||||||||
| Net unrealized holding losses recognized in income | 10.6 | — | |||||||||
| Currency translation adjustment | 8.5 | 2.0 | |||||||||
| Other | 14.3 | 24.6 | |||||||||
| 377.3 | 343.0 | ||||||||||
| Deferred tax liabilities | |||||||||||
| Acquisition-related retention liability | (54.3) | (68.4) | |||||||||
| Contingent consideration liability | (32.4) | — | |||||||||
| Acquired Investments | — | (59.2) | |||||||||
| Property and equipment | (12.7) | (76.7) | |||||||||
| Operating lease assets | (49.0) | (24.3) | |||||||||
| Net unrealized holding gains recognized in income | — | (104.8) | |||||||||
| Other | (12.8) | (16.6) | |||||||||
| (161.2) | (350.0) | ||||||||||
| Net deferred tax (liability) asset | $ | 216.1 | $ | (7.0) |
We consider the need for valuation allowances against our deferred tax assets to the extent that we are not able to generate sufficient taxable income. During 2022, we recognized an immaterial amount of valuation allowances against our deferred tax assets. Unless we are able to generate sufficient taxable income in future periods, we may need to record additional valuation allowances to further reduce our deferred tax assets. Any additional amount of valuation allowances could materially increase our income tax expenses in future periods.
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 $874 million at December 31, 2022. 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 $0.9 million for the intended repatriation as states have varying rules on taxation of these amounts.
Other assets include tax refund receivables of $71.2 million at December 31, 2022, and $11.9 million at December 31, 2021.
Cash outflows from operating activities include net income taxes paid of $794.2 million in 2022, $948.9 million in 2021, and $643.0 million in 2020.
Additional income tax benefit arising from stock-based compensation plans activity totaling $7.1 million in 2022, $82.7 million in 2021, and $61.9 million in 2020 reduced the amount of income taxes that would have otherwise been payable. These income tax benefits were recognized in the income tax provision.
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The following table summarizes the changes in our unrecognized tax benefits.
| (in millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Balance at beginning of year | $ | 29.3 | $ | 26.7 | $ | 23.9 | |||||||||||
| Changes in tax positions related to | |||||||||||||||||
| Current year | 5.5 | 8.9 | 7.7 | ||||||||||||||
| Prior years | 1.3 | (1.0) | (2.6) | ||||||||||||||
| Expired statute of limitations | (.7) | (5.3) | (2.3) | ||||||||||||||
| Balance at end of year | $ | 35.4 | $ | 29.3 | $ | 26.7 |
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 2022 and prior years will significantly change in 2023. The U.S. has concluded examinations related to federal tax obligations through the year 2020. A net interest payable related to our unrecognized tax benefits of $2.3 million at December 31, 2022, and $1.6 million at December 31, 2021, 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 12 – STOCKHOLDERS' EQUITY.
SPECIAL DIVIDEND.
On June 14, 2021, the Board of Directors declared a special cash dividend of $3.00 per common share, or $699.8 million, that was paid on July 7, 2021, to stockholders of record as of the close of business on June 25, 2021.
SHARE REPURCHASES.
The Board of Directors has authorized the future repurchase of up to 8,775,217 common shares as of December 31, 2022.
Accounts payable and accrued expenses includes liabilities of $5.5 million at December 31, 2022 for common stock repurchases that settled during the first week of January 2023.
RESTRICTED CAPITAL.
Our consolidated stockholders' equity at December 31, 2022, includes about $402 million that is restricted as to use by various regulations and agreements arising in the ordinary course of our business.
NOTE 13 – STOCK-BASED COMPENSATION.
SHARES AUTHORIZED FOR STOCK-BASED COMPENSATION PROGRAMS.
At December 31, 2022, a total of 18,652,998 shares of unissued common stock were authorized for issuance under our stock-based compensation plans. Additionally, a total of 907,014 shares are authorized for issuance under a plan whereby substantially all employees may acquire common stock through payroll deductions at prevailing market prices.
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STOCK OPTIONS.
The following table summarizes the status of, and changes in, our stock options during 2022.
| Options | Weighted- average exercise price | Weighted-average remaining contractual term in years | |||||||||||||||
| Outstanding at December 31, 2021 | 2,846,579 | $ | 72.87 | ||||||||||||||
| Exercised | (628,073) | $ | 67.79 | ||||||||||||||
| Outstanding at December 31, 2022 | 2,218,506 | $ | 74.31 | 1.7 | |||||||||||||
| Exercisable at December 31, 2022 | 2,218,506 | $ | 74.31 | 1.7 |
Compensation and related costs includes a charge for stock option-based compensation expense. There was no stock option-based compensation expense in 2022 and 2021, but, in 2020, we recorded $2.0 million of stock option-based compensation expense.
The total intrinsic value of options exercised was $40.3 million in 2022, $177.2 million in 2021, and $198.3 million in 2020. At December 31, 2022, the aggregate intrinsic value of in-the-money options outstanding was $77.1 million. All outstanding options are exercisable.
RESTRICTED SHARES AND STOCK UNITS.
The following table summarizes the status of, and changes in, our nonvested restricted shares and restricted stock units during 2022.
| Restricted shares | Restricted stock units | Weighted- average fair value | |||||||||||||||
| Nonvested at December 31, 2021 | 5,720 | 5,701,865 | $ | 146.87 | |||||||||||||
| Time-based grants | 8,715 | 2,191,601 | $ | 121.51 | |||||||||||||
| Performance-based grants | — | 77,372 | $ | 121.33 | |||||||||||||
| Vested (value at vest date was $231.4 million) | (5,720) | (1,877,992) | $ | 130.49 | |||||||||||||
| Nonvested dividend equivalents granted to non-employee directors | — | 3,980 | $ | 119.52 | |||||||||||||
| Forfeited | — | (195,226) | $ | 144.00 | |||||||||||||
| Nonvested at December 31, 2022 | 8,715 | 5,901,600 | $ | 142.37 |
Nonvested at December 31, 2022 includes performance-based restricted stock units of 371,890. These nonvested performance-based restricted units include 81,123 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 $285.4 million in 2022, $274.6 million in 2021, and $244.1 million in 2020.
At December 31, 2022, non-employee directors held 94,939 vested stock units that will convert to common shares upon their separation from the Board.
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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, 2022. 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 2023 | $ | 60.6 | |||
| Second quarter 2023 | 59.2 | ||||
| Third quarter 2023 | 58.0 | ||||
| Fourth quarter 2023 | 50.7 | ||||
| Total 2023 | 228.5 | ||||
| 2024 through 2028 | 218.0 | ||||
| Total | $ | 446.5 |
NOTE 14 – 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) | 2022 | 2021 | 2020 | ||||||||||||||
| Net income attributable to T. Rowe Price Group | $ | 1,557.9 | $ | 3,082.9 | $ | 2,372.7 | |||||||||||
| Less: net income allocated to outstanding restricted stock and stock unit holders | 36.1 | 80.5 | 65.3 | ||||||||||||||
| Net income allocated to common stockholders | $ | 1,521.8 | $ | 3,002.4 | $ | 2,307.4 | |||||||||||
| Weighted-average common shares | |||||||||||||||||
| Outstanding | 226.0 | 226.6 | 228.8 | ||||||||||||||
| Outstanding assuming dilution | 227.1 | 228.8 | 231.2 |
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 15 – 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) | 2022 | 2021 | 2020 | ||||||||||||||
| Net deferred tax benefits (income taxes) on: | |||||||||||||||||
| Currency translation adjustments | $ | 4.2 | $ | 2.8 | $ | (10.3) | |||||||||||
| 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 | .8 | .6 | .2 | ||||||||||||||
| Total net deferred tax benefits | $ | 5.0 | $ | 3.4 | $ | (11.8) |
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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 sponsored investment products - variable interest entities | Total currency translation adjustments | Total | ||||||||||||||||||||||||||||
| Balances at December 31, 2019 | $ | (46.9) | $ | 3.9 | $ | (43.0) | $ | (43.0) | ||||||||||||||||||||||||
| Other comprehensive income (loss) 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) | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications and income taxes | 7.0 | (11.5) | (4.5) | (4.5) | ||||||||||||||||||||||||||||
| Reclassification adjustments recognized in non-operating income | — | (2.4) | (2.4) | (2.4) | ||||||||||||||||||||||||||||
| 7.0 | (13.9) | (6.9) | (6.9) | |||||||||||||||||||||||||||||
| Net deferred tax benefits (income taxes) | (.1) | 3.5 | 3.4 | 3.4 | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 6.9 | (10.4) | (3.5) | (3.5) | ||||||||||||||||||||||||||||
| Balances at December 31, 2021 | (36.7) | 10.2 | (26.5) | (26.5) | ||||||||||||||||||||||||||||
| Other comprehensive income before reclassifications and income taxes | (14.6) | (13.9) | (28.5) | (28.5) | ||||||||||||||||||||||||||||
| Reclassification adjustments recognized in non-operating income | — | (3.0) | (3.0) | (3.0) | ||||||||||||||||||||||||||||
| (14.6) | (16.9) | (31.5) | (31.5) | |||||||||||||||||||||||||||||
| Net deferred tax benefits (income taxes) | .8 | 4.2 | 5.0 | 5.0 | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (13.8) | (12.7) | (26.5) | (26.5) | ||||||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | (50.5) | $ | (2.5) | $ | (53.0) | $ | (53.0) |
The other comprehensive income (loss) in the table above excludes $(21.0) million in 2022, $(26.2) million in 2021, and $34.9 million in 2020 of other comprehensive income (loss) related to redeemable non-controlling interests held in our consolidated products.
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NOTE 16 – COMMITMENTS AND CONTINGENCIES.
COMMITMENTS.
T. Rowe Price has committed $464.1 million to fund OHA products over the next four years.
CONTINGENCIES.
On October 27, 2022, two individuals filed a class action lawsuit in the United States District Court for the Southern District of California against T. Rowe Price Retirement Plan Services, Inc. (“RPS”). The complaint alleges that use of certain biometric voiceprints to validate the identity of callers as participants in retirement plans serviced by RPS violated the California Invasion of Privacy Act (“CIPA”) because RPS did not obtain their express written consent.
While we believe the claims are without merit and will vigorously defend the case, we cannot predict at this time the outcome of the litigation or estimate the possible loss or range of loss that may arise from the proceeding.
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 17 – OTHER DISCLOSURES.
RETIREMENT PLANS.
Compensation and related costs includes expense recognized for our defined contribution retirement plans of $130.2 million in 2022, $124.2 million in 2021, and $117.0 million in 2020.
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. Beginning with the plan's 2021 year, the maximum that certain senior officers can defer is the lesser of 50% of their annual cash incentive earned or $2 million. Previous to the 2021 plan year, the officer could initially defer these amounts for a period of two to 15 years. This was updated to five to 15 years beginning with the plan's 2021 year. Certain senior officers elected to defer $51.8 million in 2022, $62.4 million in 2021, and $105.8 million in 2020.
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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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022, 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 15, 2023 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 was communicated or required to be communicated to the audit committee and that:
(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. 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 fee 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 $3.5 billion in investment advisory fees related to T. Rowe Price U.S. mutual funds (Funds) during the year ended December 31, 2022.
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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 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 15, 2023
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