10-K 1 a201410k.htm 10-K 2014 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
Commission file number 000-32191
T. ROWE PRICE GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
52-2264646
State of incorporation
 
IRS Employer Identification No. 
100 East Pratt Street, Baltimore, Maryland 21202
Address, including zip code, of principal executive offices
(410) 345-2000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common stock, $.20 par value per share
 
The NASDAQ Stock Market LLC
(Title of class)
 
(Name of exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    [X]  Yes    [   ]  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    [   ]  Yes    [X]  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    [X]  Yes    [   ]  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months.    [X]  Yes    [   ]  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
 
Accelerated filer
 
[   ]
Non-accelerated filer
[   ]
 
Smaller reporting company
 
[   ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    [   ]  Yes    [X]  No
The aggregate market value of the common equity (all voting) held by non-affiliates (excludes current executive officers and directors) computed using $84.41 per share (the NASDAQ Official Closing Price on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter) was $21.6 billion.
The number of shares outstanding of the registrant's common stock as of the latest practicable date, February 3, 2015, is 260,726,853.
DOCUMENTS INCORPORATED BY REFERENCE: In Part III, the Definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
Exhibit index begins on page 57.



  
 
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ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
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ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
 
ITEM 15.



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PART I

Item 1.
Business.

T. Rowe Price Group, Inc. is a financial services holding company that provides global investment management services through its subsidiaries to individual and institutional investors in the sponsored T. Rowe Price mutual funds distributed in the United States and other investment portfolios. These other investment portfolios include separately managed accounts, subadvised funds, and other sponsored investment portfolios, including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the United States, and portfolios offered through variable annuity life insurance plans in the U.S.

The late Thomas Rowe Price, Jr., founded our firm in 1937, and the common stock of T. Rowe Price Associates, Inc. was first offered to the public in 1986. The T. Rowe Price Group corporate holding company structure was established in 2000.

We derive the vast majority of our consolidated net revenue and net income from investment advisory services provided by our subsidiaries, primarily T. Rowe Price Associates and T. Rowe Price International Ltd. Our 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. At December 31, 2014, we had $746.8 billion in assets under management, including $477.6 billion in the Price funds and $269.2 billion in other investment portfolios.

Our assets under management are accumulated from a diversified client base across four primary distribution channels: third-party financial intermediaries that distribute our managed investment portfolios in the U.S. and other countries; individual U.S. investors on a direct basis; U.S. defined contribution retirement plans; and institutional investors globally. As of December 31, 2014, nearly forty-five percent of our assets under management are sourced from our third-party financial intermediary distribution channel with the remaining three distribution channels comprising the balance. We have taken steps to broaden and deepen our distribution reach in overseas markets and with financial intermediaries. These initiatives are part of multi-year plans designed to further diversify our assets under management and client base. In 2014, we made key hires and continued to make investments in infrastructure to support these initiatives over the long-term.

The assets we manage are a broad range of U.S. and international stock, blended asset, bond, and money market mutual funds and other investment portfolios that are designed to meet the varied and changing needs and objectives of individual and institutional investors. Investors select mutual funds based on the distinct objective that is described in each fund’s prospectus and can exchange balances among the funds as permitted when economic and market conditions and their investment needs change. The investment objectives and investment management approaches employed in our other investment portfolios are similar to those in the Price funds. We also offer specialized advisory services, including management of stable value investment contracts and a distribution management service for the disposition of equity securities our clients receive from third-party venture capital investment pools.

Investment objectives for our managed investment portfolios, including the Price funds, accommodate a variety of strategies. Equity investment strategies may emphasize large-cap, mid-cap or small-cap investing; growth, value or core investing; and U.S., global, multi-regional and regional international, emerging market, and sector investing. Our fixed income strategies may focus on high yield, U.S. taxable bond, taxable low-duration, international, and municipal tax-free investing. We also combine strategies across asset classes to create solutions that help our clients achieve a single investment objective. To this end, we offer systematic, tax-efficient, blended equity, and asset allocation investment strategies, including target-date retirement investment portfolios.

We employ fundamental and quantitative security analysis in the performance of the investment advisory function through substantial internal equity and fixed income investment research capabilities. We perform original industry and company research using such sources as inspection of corporate activities, management interviews, company-published financial and other information, financial newspapers and magazines, corporate rating services, and field checks with suppliers and competitors in the same industry and particular business sector. Our research staff operates primarily from offices located in the U.S. and England with additional staff based in Australia, Hong Kong, Japan, and Singapore. We also use research provided by brokerage firms and security analysts in a supportive capacity and information received from private economists, political observers, commentators, government experts, and market analysts. Our securities selection process for some investment portfolios is based on quantitative analysis using computerized data modeling.

From time to time, we introduce new funds and other investment portfolios to complement and expand our investment offerings, respond to competitive developments in the financial marketplace, and meet the changing needs of our investment advisory clients. We will introduce a new investment strategy if we believe that we have the appropriate investment


Page 2



management expertise and that its objective will be useful for investors over a long period. Since the beginning of 2014, we have launched three new equity products—Asia Opportunities, Frontier Markets, and International Concentrated Equity—and three new fixed income products—Dynamic Global Bond, Credit Opportunities, and Intermediate Tax Free High Yield. Two additional fixed income products were opened in January 2015. We typically provide seed capital for the new investment portfolio to enable the portfolio manager to begin building an investment performance history in advance of the portfolio receiving sustainable client assets. The length of time we hold our seed capital investment will vary for each new investment portfolio as it is highly dependent on how long it takes to generate cash flows into the portfolio from unrelated investors. We attempt to ensure that the new investment portfolio has a sustainable level of assets from unrelated shareholders before we consider redemption of our seed capital investment in order to not negatively impact the new investment portfolio's net asset value or its investment performance record. At December 31, 2014, approximately 39% of our investments in sponsored portfolios and other investments is considered seed investments.

Conversely, we may also limit new investments into a mutual fund or investment strategy in order to maintain the integrity of the investment strategy and to protect the interests of its existing fund shareholders and investors. At present, the following mutual funds and affiliated other investment portfolios are closed to new investors.
Fund
Date Closed
Institutional Mid-Cap Equity Growth Fund
December 8, 2003
Mid-Cap Growth Fund
May 31, 2010
Mid-Cap Value Fund
May 31, 2010
High Yield Fund
April 27, 2012
Institutional High Yield Fund
April 27, 2012
Institutional Small-Cap Stock Fund
December 31, 2013
New Horizons Fund
December 31, 2013
Small-Cap Stock Fund
December 31, 2013
Capital Appreciation Fund
June 30, 2014

We also provide certain administrative services as ancillary services to our investment advisory clients. These administrative services are provided by several of our subsidiaries and include mutual fund transfer agent, accounting, distribution, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans investing in our sponsored mutual funds; recordkeeping services for defined contribution retirement plans investing in mutual funds outside the T. Rowe Price complex; brokerage; and trust services. Substantially all of our administrative and distribution and servicing fee revenues in 2014 were determined based generally on the recovery of our related costs to provide these services. Therefore, changes in our administrative fees, distribution and servicing fees, and related expenses generally do not significantly affect our net operating income or net income.

In 2014, we made a long-term strategic decision to change our delivery of certain administrative services, including fund accounting and other investment recordkeeping operations. We are currently in negotiations with BNY Mellon to perform these services. If a formal agreement is reached, we do not expect that the impact on our future operating results will be material.

2014 DEVELOPMENTS.

U.S. equities, as measured by the S&P 500 Index, rose in 2014 for the sixth consecutive year. The S&P 500 Index and the NASDAQ Composite Index, which is heavily weighted in technology companies, returned 13.7% and 13.4%, respectively, in 2014. Equities in developed non-U.S. markets declined in dollar terms in 2014, as a stronger U.S. dollar versus other currencies reduced overseas returns to U.S. investors. Emerging markets equities, in aggregate, declined in dollar terms but held up better than developed non-U.S. markets. Global bonds produced mostly positive returns in 2014.

Our 2014 results include net revenues of nearly $4.0 billion, net income of $1.2 billion, and diluted earnings per share of $4.55, an increase of 16.7% from the $3.90 per share earned in 2013. Investment advisory fees earned in 2014 are up 14.6% over 2013 as average assets under our management increased $90.9 billion, or 14.3%, to $724.7 billion. The average annualized fee rate earned on our assets under management was 47.8 basis points during 2014, virtually unchanged from the 47.7 basis points earned in 2013.

Six Price funds - Growth Stock, Equity Income, Mid-Cap Growth, Blue-Chip Growth, Value, and Capital Appreciation - accounted for 27% of our investment advisory revenues in 2014, and 23% of our assets under management at December 31,


Page 3



2014. Our largest client account relationship apart from the Price funds is with a third-party financial intermediary that accounted for about 4% of our investment advisory revenues in 2014.

Assets under management ended 2014 at a record $746.8 billion, an increase of $54.4 billion from the end of 2013. Market appreciation and income, net of distributions not reinvested, added $50.7 billion and net cash inflows added $3.7 billion in assets under management during 2014. Net cash inflows of $11.8 billion into the Price funds were partially offset by net cash outflows of $8.1 billion from our other investment portfolios. These net cash outflows were primarily from a few institutional and subadvisory clients who redeemed significant amounts from a small number of equity and fixed income strategies. The mutual fund and other investment portfolio 2014 cash flow amounts are each presented net of $5.3 billion in assets clients transferred from the mutual funds to other sponsored investment portfolios during the year, primarily our target-date retirement trusts.

Our target-date retirement funds and trusts, which provide shareholders with single, diversified portfolios that invest in underlying T. Rowe Price funds and T. Rowe Price collective investment trusts, continue to be a significant source of our asset growth. In 2014, our net cash flows include $17.7 billion that originated in these portfolios, including $13.2 billion in our target-date retirement funds.

Details of our assets under management (in billions) at December 31, 2014, are as follows:
 
Assets under management by investment portfolio
 
Sponsored U.S. mutual funds
$
477.6

Other investment portfolios
269.2

Total
$
746.8

 
 
Assets under management by mandate
 
U.S. stocks and blended asset
$
496.9

International stocks and blended asset
83.0

Total stock and blended asset portfolios
579.9

 
 
U.S. fixed income
149.5

International fixed income
17.4

Total fixed income portfolios
166.9

 
$
746.8

Assets under management by account type
 
Retirement accounts and variable annuity portfolios
$
511.2

Other
235.6

 
$
746.8


Our target-date retirement portfolios account for 19.9% of our managed assets at December 31, 2014, compared with 17.5% at the end of 2013. The assets under management in these portfolios totaled $148.5 billion at December 31, 2014, including $126.0 billion in target-date retirement funds and $22.5 billion in target-date retirement trusts.

Non-U.S. dollar denominated securities held in client accounts are $100.7 billion, or 13.5% of our total assets under management at December 31, 2014. Investors domiciled outside the U.S. represent 5.6% of total assets under management at the end of 2014. We service clients in 36 countries around the world.

Investment Performance.

Strong investment performance and brand awareness is a key driver to attracting assets and to our long-term success. As of the end of 2014, 74% of the T. Rowe Price U.S. mutual funds across their share classes outperformed their comparable Lipper averages on a total return basis for the three-year period, 80% outperformed for the five-year period, 88% outperformed for the 10-year period, and 73% outperformed for the one-year period. In addition, T. Rowe Price stock, bond and blended asset funds that were given an overall rating of four or five stars from Morningstar at December 31, 2014, account for 82% of the assets


Page 4



under management in our rated funds. The performance of our institutional strategies against their benchmarks was substantially similar. Our target-date retirement funds continue to deliver very attractive long-term performance, with 100% of these funds outperforming their comparable Lipper averages on a total return basis for the three- and five-year periods ended December 31, 2014.

Capital Resources.

At December 31, 2014, we remain debt-free with substantial liquidity and resources, including cash and fund investment holdings of $3.4 billion. During the full year of 2014, we expended $415.5 million to repurchase 5.3 million shares of common stock. We generally repurchase shares of our common stock over time to offset the dilution created by our equity-based compensation plans. We presently plan to declare and pay quarterly cash dividends in 2015 that, taken together, will exceed the $1.76 per share in annual regular dividends declared and paid in 2014; however, there can be no assurance that we will continue to pay dividends at increasing rates or at all.

We also invested $126 million during the year in capitalized technology and facilities from existing cash balances. We currently expect total capital expenditures for facilities, equipment, and technology development for 2015 to be up to $175 million, which will be funded from operating resources.

Our substantial liquidity and resources also allow us to take advantage of attractive growth opportunities; invest in key capabilities, including investment professionals, technologies, and new investment strategy offerings; and, most importantly, provide our clients with strong investment management expertise and service both now and in the future. In the coming years, we expect to increase funding for long-term initiatives to sustain and deepen our investment talent, expand capabilities through enhanced technology, and broaden our distribution reach globally.

Additional information concerning our revenues, results of operations and total assets, and our assets under management during the past three years is contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K as well as our consolidated financial statements, which are included in Item 8 of this report.

PRICE FUNDS.

We provide investment advisory, distribution, and other administrative services to the Price funds under various agreements. Investment advisory services are provided to each fund under individual investment management agreements that grant the fund the right to use the T. Rowe Price name. The boards of the respective funds, including a majority of directors who are not interested persons of the funds or of T. Rowe Price Group (as defined in the Investment Company Act of 1940), must approve the investment management agreements annually. Fund shareholders must approve material changes to these investment management agreements. Each agreement automatically terminates in the event of its assignment (as defined in the Investment Company Act) and, generally, either party may terminate the agreement without penalty after a 60-day notice. The termination of one or more of these agreements could have a material adverse effect on our results of operations. Independent directors and trustees of the Price funds regularly review our fee structures.

Advisory Services.

Investment advisory revenues earned from the Price funds are determined daily based on the net assets managed in each fund. The advisory fee paid monthly by each of the Price funds is computed on a daily basis by multiplying a fund’s net assets by its effective fee rate. Details of each fund's fee arrangement are available in its prospectus.

For the majority of the Price funds, the fee rate is equal to the sum of a tiered group fee rate plus an individual fund rate. The tiered group rate is based on the combined net assets of nearly all of the Price funds. If the combined net assets of these Price funds exceed $400 billion, the weighted-average fee across pricing tiers is 29.5 basis points for the first $400 billion of net assets plus 27.5 basis points for net assets in excess of $400 billion. To the extent that the combined net assets of the funds included in the group rate calculation increase, the group charge component of a fund's advisory fee rate and the resulting advisory fee rate paid by each fund will decrease.

The individual fund rates are generally flat rates that are set based on the fund’s specific investment objective. Several funds, including the Blue Chip Growth, Equity Income, Growth Stock and Mid-Cap Growth funds, have an effective tiered individual fund rate in which their base individual flat rate is reduced by about 15% on net assets in excess of $15 billion. The New Income and Value funds have their base individual flat rate reduced by about 20% on net assets in excess of $20 billion. The effective fee rates for the stock and bond funds on which we earned annual advisory fees of at least $6.0 million in 2014 varied


Page 5



from a low of 39 basis points for the Maryland Tax-Free Bond, Tax-Free Short-Intermediate, and Short-Term Bond funds to a high of 104 basis points for the Emerging Markets Stock, International Discovery, and Latin America funds.

The fee rate of several of the Price funds, including the Index and Summit funds as well as specific funds offered solely to institutional investors, do not include a group fee component but rather an individual fund fee or an all-inclusive fee. An all-inclusive fee covers both the investment management fee and ordinary operating expenses incurred by the fund. Each of the funds in the series of Spectrum Funds and in the series of target-date retirement funds that we offer invests in a diversified portfolio of other Price funds and has no separate investment advisory fee; rather, they indirectly bear the expenses of the funds in which they invest.

Each Price fund typically bears all expenses associated with its operation and the issuance and redemption of its securities. In particular, each fund pays investment advisory fees; shareholder servicing fees and expenses; fund accounting fees and expenses; transfer agent fees; custodian fees and expenses; legal and auditing fees; expenses of preparing, printing and mailing prospectuses and shareholder reports to existing shareholders; registration fees and expenses; proxy and annual meeting expenses; and independent trustee or director fees and expenses.

We usually provide that a newly organized fund’s expenses will not exceed a specified percentage of its net assets during an initial operating period. Generally, during the earlier portion of the period, we will waive advisory fees and absorb other mutual fund expenses in excess of these self-imposed limits. During the latter portion of the period, we may recover some or all of the waived fees and absorbed costs, but such recovery is not assured.

In 2014, we continued to voluntarily waive advisory fees and other fund expenses of all of our money market funds and trusts in order to maintain a positive yield for investors. Total fees waived in 2014 were $58.4 million, or about 2% of total investment advisory revenues earned during the year, compared to $51.2 million in 2013. We expect that these fee waivers will continue in 2015.

Assets under Management.

At December 31, 2014, assets under our management in the Price funds aggregated $477.6 billion, an increase of 9.7% or $42.3 billion from the beginning of the year. The following table presents the net assets (in billions) and the year of formation of our largest Price funds (net assets in excess of $1.0 billion at December 31, 2014) at December 31.
 
2013
 
2014
Stock and blended asset funds:
 
 
 
Balanced (1991)
$
3.7

 
$
3.9

Blue Chip Growth (1993)
22.8

 
26.4

Capital Appreciation (1986)
19.1

 
22.9

Dividend Growth (1992)
4.1

 
4.6

Emerging Markets Stock (1995)
7.1

 
7.6

Equity Income (1985)
29.5

 
29.8

Equity Index 500 (1990)
20.2

 
24.4

European Stock (1990)
1.5

 
1.4

Global Technology (2000)
1.0

 
1.6

Growth & Income (1982)
1.5

 
1.6

Growth Stock (1950)
41.6

 
43.0

Health Sciences (1995)
8.6

 
11.8

Institutional Large-Cap Core Growth (2003)
.9

 
1.5

Institutional Large-Cap Growth (2001)
9.7

 
11.7

Institutional Large-Cap Value (2000)
1.6

 
2.2

Institutional Mid-Cap Equity Growth (1996)
4.2

 
5.5

Institutional Small-Cap Stock (2000)
1.6

 
2.0

International Discovery (1988)
3.5

 
3.6

International Growth & Income (1998)
9.0

 
10.2



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2013
 
2014
International Stock (1980)
12.3

 
12.9

Media & Telecommunications (1993)
3.3

 
3.2

Mid-Cap Growth (1992)
23.2

 
24.1

Mid-Cap Value (1996)
11.6

 
12.2

New America Growth (1985)
4.5

 
4.3

New Asia (1990)
4.6

 
4.0

New Era (1969)
4.3

 
3.6

New Horizons (1960)
15.8

 
15.4

Overseas Stock (2006)
7.5

 
9.4

Personal Strategy Balanced (1994)
1.7

 
1.7

Personal Strategy Growth (1994)
1.3

 
1.4

Personal Strategy Income (1994)
1.0

 
1.1

Real Assets (2010)
3.7

 
4.3

Real Estate (1997)
3.7

 
5.1

Science & Technology (1987)
3.4

 
3.7

Small-Cap Stock (1992)
10.3

 
9.8

Small-Cap Value (1988)
10.2

 
9.2

Total Equity Market Index (1998)
1.0

 
1.1

Value (1994)
18.2

 
22.2

Other stock and blended asset funds
8.9

 
8.6

 
341.7

 
373.0

Bond and money market funds:
 
 
 
Emerging Markets Bond (1994)
3.9

 
4.3

GNMA (1985)
1.5

 
1.6

High Yield (1984)
9.8

 
9.4

Inflation Focused Bond (2006)
5.3

 
6.8

Institutional Floating Rate (2008)
3.2

 
3.2

Institutional High Yield (2002)
2.9

 
2.2

International Bond (1986)
5.0

 
4.6

Maryland Tax-Free Bond (1987)
1.8

 
2.0

New Income (1973)
21.3

 
27.4

Prime Reserve (1976)
6.4

 
6.6

Short-Term Bond (1984)
6.4

 
6.5

Summit Cash Reserves (1993)
5.7

 
5.3

Summit Municipal Intermediate (1993)
3.0

 
3.9

Tax-Free High Yield (1985)
2.2

 
3.3

Tax-Free Income (1976)
2.4

 
2.6

Tax-Free Short-Intermediate (1983)
1.9

 
2.1

U.S. Treasury Money (1982)
2.0

 
2.1

Other bond and money market funds
8.9

 
10.7

 
93.6

 
104.6

 
$
435.3

 
$
477.6


The Spectrum Funds, Target Retirement Funds, and Retirement Date Funds are not presented in the table above because their assets are already included in the assets of their underlying fund holdings.

Our operating subsidiaries invest in many of the T. Rowe Price funds.


Page 7




Administrative Services.

Our subsidiaries provide advisory-related administrative services to the Price funds and their shareholders. T. Rowe Price Services provides mutual fund transfer agency and shareholder services, including maintenance of staff, facilities, technology, and other equipment to respond to inquiries from fund shareholders. T. Rowe Price Associates provides mutual fund accounting services, including maintenance of financial records, preparation of financial statements and reports, daily valuation of portfolio securities, and computation of daily net asset values per share. T. Rowe Price Retirement Plan Services provides participant accounting, plan administration, and transfer agent services for defined contribution retirement plans that invest in both the Price funds and funds outside the Price fund complex. Plan sponsors and participants compensate us for some of the administrative services while the Price funds compensate us for maintaining and administering the individual participant accounts for those plans that invest in the Price funds.

We provide trustee services through our subsidiary, T. Rowe Price Trust Company, a Maryland-chartered limited service trust company. Through this entity, we offer collective investment trusts for investment by qualified retirement plans and serve as trustee for employer sponsored retirement plans and other retirement products. T. Rowe Price Trust Company may not accept deposits and cannot make personal or commercial loans.

We also provide non-discretionary advisory planning services to fund shareholders and potential investors through our subsidiary T. Rowe Price Advisory Services. These services are limited in scope and include retirement planning services, such as saving for retirement, transitioning into retirement, and income in retirement. An investment portfolio evaluation service is an integral part of these services. An ongoing checkup service is also available to assist an investor in remaining on track to achieve their financial goals.

Distribution and Servicing.

The Investor class of all Price funds can be purchased in the U.S. on a no-load basis, without a sales commission or 12b-1 fee. No-load mutual fund shares offer investors a low-cost and relatively easy method of directly investing in a variety of stock and fixed income portfolios.

Certain of the Price funds also offer Advisor Class and R Class shares that are distributed to mutual fund shareholders, and defined contribution retirement plans, respectively, through third-party financial intermediaries. These share classes pay 12b-1 fees of 25 and 50 basis points, respectively, for distribution, administration, and personal services. Our subsidiary, T. Rowe Price Investment Services, is the principal distributor of the Price funds and enters into a tri-party agreement with each intermediary and fund. Under the agreement, each fund is responsible to pay the distribution and service fees directly to the applicable intermediaries. In addition, those Price funds offered to investors through variable annuity life insurance plans have a share class that pays a 12b-1 fee of 25 basis points.

In accounting for 12b-1 fees, the applicable mutual fund share classes incur the related expense and we recognize the corresponding distribution and servicing fee revenue in our consolidated statements of income. We also recognize, as distribution and servicing costs in the consolidated statements of income, the corresponding cost paid to the third-party financial intermediaries who distribute these fund share classes. 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.

We believe that our lower fund cost structure, distribution methods, and fund shareholder and administrative services help promote the stability of our fund assets under management through market cycles.

Except as noted above for 12b-1 fees, we bear all advertising and promotion expenses associated with the distribution of the Price funds. These costs are recognized currently, and include advertising and direct mail communications to potential fund shareholders as well as substantial staff and communications capabilities to respond to investor inquiries. Marketing and promotional efforts are focused in print media, television, and the Internet. In addition, we direct considerable marketing efforts to defined contribution plans that invest in mutual funds. Advertising and promotion expenditures vary over time based on investor interest, market conditions, new and existing investment offerings, and the development and expansion of new marketing initiatives, including the enhancement of our digital capabilities.



Page 8



OTHER INVESTMENT PORTFOLIOS.

Our other client investment portfolios had assets under management of $269.2 billion at December 31, 2014, an increase of $12.1 billion from the beginning of the year. We provide investment advisory services to these clients through our subsidiaries on a separately managed or subadvised account basis and through sponsored investment portfolios, including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans in the U.S. At December 31, the assets under management in these portfolios included the following investment mandates:

 
2013
 
2014
U.S. equities
$
171.5

 
$
179.3

International equities
23.8

 
27.6

Stable value assets
17.6

 
17.8

Bonds and money market securities
44.2

 
44.5

 
$
257.1

 
$
269.2


We charge fees for investment management to these clients based on, among other things, the specific investment services to be provided. Our standard form of investment advisory agreement for client accounts provides that the agreement may be terminated at any time and that any unearned fees paid in advance will be refunded.

Our fees for managing these investment portfolios are computed using the value of assets under our management at a contracted annual fee rate. The value of assets under management billed is generally based on daily valuations, month-end average valuations, or end of billing period valuations. In 2014, approximately 69% of advisory fees were recognized based on daily portfolio valuations, 13% were based on month-end averages, and 18% were based on end of billing period valuations.

Our subsidiaries, T. Rowe Price (Luxembourg) Management Sàrl and T. Rowe Price International provide management company and investment management services, respectively, to our Luxembourg-based SICAVs (Société d'Investissement à Capital Variable) and FCPs (Fonds Commun de Placement). These funds are distributed outside the U.S. through distribution agents and other financial intermediaries. The fees earned for these distribution and marketing services are part of the overall investment management fees earned for managing the SICAV and FCP fund assets. We recognize any related distribution fees paid to financial intermediaries in other operating expenses. At December 31, 2014, assets under management in these funds were $11.2 billion.

REGULATION.

T. Rowe Price Associates, T. Rowe Price International, T. Rowe Price (Canada), Inc., T. Rowe Price Hong Kong Limited, T. Rowe Price Singapore Private Ltd. and T. Rowe Price Advisory Services, Inc. are registered with the Securities and Exchange Commission (SEC) as investment advisers under the Investment Advisers Act of 1940. T. Rowe Price International is also regulated by the Financial Conduct Authority (FCA) in the United Kingdom and, in certain cases, by other foreign regulators in countries in which we have a license to conduct business. The Securities and Futures Commission (SFC) and Monetary Authority of Singapore (MAS) also regulate T. Rowe Price Hong Kong and T. Rowe Price Singapore, respectively. T. Rowe Price (Canada) is also registered with several of the provincial securities commissions in Canada. T. Rowe Price (Luxembourg) Management Sàrl, the management company of our Luxembourg-based FCP (Fonds Commun de Placement) and SICAV funds is regulated by the Commission de Surveillance du Secteur Financier (CSSF).

Our subsidiaries providing transfer agent services are registered under the Securities Exchange Act of 1934, and our trust company is regulated by the State of Maryland, Commissioner of Financial Regulation.

T. Rowe Price Investment Services is a registered broker-dealer and member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation. We provide introducing brokerage services through this subsidiary primarily to complement the other services provided to shareholders of the Price funds. Pershing, a third-party clearing broker and affiliate of the BNY Mellon, maintains our brokerage’s customer accounts and clears all transactions.

Following the sale of 100% of the stock of T. Rowe Price Savings Bank in December 2013, T. Rowe Price Group received confirmation in early February 2014 from the Federal Reserve Bank of Richmond that T. Rowe Price Group and T. Rowe Price Associates were de-registered as savings and loan holding companies as defined in the Home Owners' Loan Act.


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All aspects of our business are subject to extensive federal, state, and foreign laws and regulations. These laws and regulations are primarily intended to benefit or protect our clients and the Price funds' shareholders. They generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict the conduct of our business in the event that we fail to comply with laws and regulations. Possible sanctions that may be imposed on us, in the event that we fail to comply, include the suspension of individual employees, limitations on engaging in certain business activities for specified periods of time, revocation of our investment adviser, and other registrations, censures, and fines.

Certain of our subsidiaries are subject to net capital requirements including those of various federal, state, and international regulatory agencies. Each of our subsidiaries’ net capital, as defined, meets or exceeds all minimum requirements.

For further discussion of the potential impact of current or proposed legal or regulatory requirements, please see the Legal and Regulatory risk factors included in Item 1A of this Form 10-K.

COMPETITION.

As a member of the financial services industry, we are subject to substantial competition in all aspects of our business. A significant number of proprietary and other sponsors’ mutual funds are sold to the public by other investment management firms, broker-dealers, mutual fund companies, banks, and insurance companies. We compete with brokerage and investment banking firms, insurance companies, banks, mutual fund companies, hedge funds, and other financial institutions and funds in all aspects of our business and in every country in which we offer our advisory services. Many of these financial institutions have substantially greater resources than we do. We compete with other providers of investment advisory services primarily based on the availability and objectives of the investment portfolios offered, investment performance, and the scope and quality of investment advice and other client services. In order to maintain and enhance our competitive position, we may review acquisition and venture opportunities and, if appropriate, engage in discussions and negotiations that could lead to the acquisition of a new equity or other financial relationship.

EMPLOYEES.

At December 31, 2014, we employed 5,870 associates, up 3.6% from the 5,668 associates employed at the end of 2013. We may add additional temporary and part-time personnel to our staff from time to time to meet periodic and special project demands, primarily for technology and mutual fund administrative services.

AVAILABLE INFORMATION.
Our Internet address is troweprice.com. At our Investor Relations website, http://trow.client.shareholder.com, we make available free of charge a variety of information for investors. Our goal is to maintain our websites as a portal through which investors can easily find or navigate to pertinent information about us and as a channel of distribution for material company information, including but not limited to:
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file that material with, or furnish them to the SEC;

our financial statement information from our periodic SEC filings in the form of XBRL data files that may be used to facilitate computer-assisted investor analysis;

corporate governance information including our charter, bylaws, governance guidelines, committee charters, senior officer code of ethics and conduct, and other governance-related policies;

other news and announcements that we may post from time to time that investors might find useful or interesting; and

opportunities to sign up for email alerts and RSS feeds to have information pushed in real time.

The information found on our website is not part of this or any other report we file with, or furnish to, the SEC.



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Item 1A.
Risk Factors.

An investment in our common stock involves various risks, including those mentioned below and those that are discussed from time to time in our periodic filings with the SEC. Investors should carefully consider these risks, along with the other information contained in this report, before making an investment decision regarding our common stock. There may be additional risks of which we are currently unaware, or which we currently consider immaterial. Any of these risks could have a material adverse effect on our financial condition, results of operations, and value of our common stock.

RISKS RELATING TO OUR BUSINESS AND THE FINANCIAL SERVICES INDUSTRY.

Our revenues are based on the market value and composition of the assets under our management, all of which are subject to fluctuation caused by factors outside of our control.

We derive our revenues primarily from investment advisory services provided by our subsidiaries to individual and institutional investors in the T. Rowe Price mutual funds distributed in the U.S. and other investment portfolios. Our investment advisory fees typically are calculated as a percentage of the market value of the assets under our management. We generally earn higher fees on assets invested in our equity funds and equity investment portfolios than we earn on assets invested in our fixed income funds and portfolios. Among equity investments, there is a significant variation in fees earned from index-based funds and portfolios at the low end and emerging markets funds and portfolios at the high end. Fees also vary across the fixed income funds and portfolios, though not as widely as equity investments, with stable value portfolios and money market securities at the lower end and non-U.S. dollar denominated bonds at the high end. As a result, our revenues are dependent on the value and composition of the assets under our management, all of which are subject to substantial fluctuation due to many factors, including:

Investor Mobility. Our investors generally may withdraw their funds at any time, on very short notice and without any significant penalty.
General Market Declines. A downturn in stock or bond prices would cause the value of assets under our management to decrease, and may also cause investors to withdraw their investments, thereby further decreasing the level of assets under our management.
Investment Performance. If the investment performance of our managed portfolios is less than that of our competitors or applicable third-party benchmarks, we could lose existing and potential customers and suffer a decrease in assets under management. Institutional investors in particular consider changing investment advisers based upon poor relative investment performance. Individual investors in contrast are more likely to react to poor absolute investment performance. Prolonged periods of strong relative investment performance may result in capacity constraints within certain portfolios, which in turn may negatively impact our ability to achieve strong investments results in subsequent periods.
Investing Trends. Changes in investing trends and, in particular, investor preference for passive or alternative investment portfolios, retirement savings trends, including the prevalence of defined contribution retirement plans and target-date retirement products, may reduce interest in our funds and portfolios and may alter our mix of assets under management.
Interest Rate Changes. Investor interest in and the valuation of our fixed income investment funds and portfolios are affected by changes in interest rates.
International Exposure. Our managed portfolios may have significant investments in international markets that are subject to risk of loss from political or diplomatic developments, government policies, civil unrest, currency fluctuations, and changes in legislation related to foreign ownership. International markets, particularly emerging markets, which are often smaller, may not have the liquidity of established markets, may lack established regulations, and may experience significantly more volatility than established markets.
Tax Regulation Changes. Changes in the status of tax deferred retirement plan investments and tax-free municipal bonds, the capital gains and corporate dividend tax rates, and other individual and corporate tax rates and regulations could adversely affect investor behavior and may cause investors to view certain investment offerings less favorably and withdraw their investment assets, thereby decreasing the level of assets under our management.

A decrease in the value of assets under our management, or an adverse change in their composition, could have a material adverse effect on our investment advisory fees and revenues. For any period in which revenues decline, net income and operating margins will likely decline by a greater proportion because certain expenses will be fixed over that finite period and may not decrease in proportion to the decrease in revenues.



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The performance of our money market funds and portfolios are impacted by the historically low interest rate environment.

Our money market funds' and portfolios' performance or yield is dependent on the income earned from the underlying securities exceeding the operating costs of the fund. When interest rates are at or near the historic lows, the operating costs of the funds will become a greater portion of the portfolio's net income, thereby reducing the yield of the funds to very low levels. Since the second half of 2009, such an environment has led us to voluntarily waive our advisory and other fees earned on our money market funds and trusts in order to maintain yields at or above 0% for fund investors. Such actions reduce our advisory fee income and net income. The actual amount of fees waived is dependent on a number of variables including, among others, changes in the net assets held by our money market funds, changes in market yields, changes in the expense levels of the funds, and our willingness to voluntarily continue such fee waivers. Also, bank deposits may become more attractive to investors and money market funds could experience significant redemptions, which could decrease our revenues and net income. For further discussion of the fees we waived in the current period, management's expectation as to future fee waivers, and the net cash flows of our money market funds and trusts, please see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K.

A significant majority of our revenues are based on contracts with the Price funds that are subject to termination without cause and on short notice.

We provide investment advisory, distribution, and other administrative services to the Price funds under various agreements. Investment advisory services are provided to each Price fund under individual investment management agreements. The board of each Price fund must annually approve the terms of the investment management and service agreements and can terminate the agreement upon 60-days notice. If a Price fund seeks to lower the fees that we receive or terminate its contract with us, we would experience a decline in fees earned from the Price funds, which could have a material adverse effect on our revenues and net income.

We operate in an intensely competitive industry, which could cause a loss of customers and their assets, thereby reducing our assets under management and our revenues and net income.

We are subject to competition in all aspects of our business from:

asset management firms,
mutual fund companies,
commercial banks and thrift institutions,
insurance companies,
hedge funds,
exchange traded funds,
brokerage and investment banking firms, and
other financial institutions including multinational firms and subsidiaries of diversified conglomerates.

Many of these financial institutions have substantially greater resources than we do and may offer a broader range of financial products across more markets. Some operate in a different regulatory environment than we do which may give them certain competitive advantages in the investment products and portfolio structures that they offer. We compete with other providers of investment advisory services primarily based on the availability and objectives of the investment portfolios offered, investment performance, fees and related expenses, and the scope and quality of investment advice and other client services. Some institutions have proprietary products and distribution channels that make it more difficult for us to compete with them. Most of our investment portfolios are available without sales or redemption fees, which means that investors may be more willing to transfer assets to competing funds.

If current or potential customers decide to use one of our competitors, we could face a significant decline in market share, assets under management, revenues, and net income. In the event that we were to decide to reduce the fees we charge for investment advisory services in response to competitive pressures, revenues and operating margins could be adversely impacted.



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Our success depends on our key personnel and our financial performance could be negatively affected by the loss of their services.

Our success depends on our highly skilled personnel, including our portfolio and fund managers, investment analysts, sales and client relationship personnel, and corporate officers, many of whom have specialized expertise and extensive experience in our industry. Strong financial services professionals are in demand, and we face significant competition for highly qualified employees. Our key employees do not have employment contracts, and generally can terminate their employment with us at any time. We cannot assure that we will be able to retain or replace key personnel. We have near- and long-term succession planning processes, including programs to develop our future leaders, which are intended to address future talent needs and minimize the impact of losing key talent. However, in order to retain or replace our key personnel, we may be required to increase compensation, which would decrease net income. The loss of key personnel could damage our reputation and make it more difficult to retain and attract new employees and investors. Losses of assets from our client investors would decrease our revenues and net income, possibly materially.

Our operations are complex and a failure to perform operational tasks or the misrepresentation of products and services could have an adverse effect on our reputation and subject us to regulatory sanctions, fines, penalties, litigation, and a decrease in revenues.

Operating risks include:

failure to properly perform or oversee fund or portfolio recordkeeping responsibilities, including portfolio accounting, security pricing, corporate actions, investment restrictions compliance, daily net asset value computations, account reconciliations, and required distributions to fund shareholders to comply with tax regulations;
failure to properly perform transfer agent and participant recordkeeping responsibilities, including transaction processing, supervision of staff, tax reporting, and record retention;
sales and marketing risks, including the intentional or unintentional misrepresentation of products and services in advertising materials, public relations information, or other external communications, and failure to properly calculate and present investment performance data accurately and in accordance with established guidelines and regulations; and
our reliance on third-party vendors who, now or in the future, may perform or support important parts of our operations as there can be no assurance that they will perform properly or that our processes and plans to transition or delegate these functions to others will be successful or that there will not be interruptions in services from these third parties.

Any damage to our reputation could harm our business and lead to a loss of revenues and net income.

We have spent many years developing our reputation for integrity, strong investment performance, and superior client services. Our brand is a valuable intangible asset, but it is vulnerable to a variety of threats that can be difficult or impossible to control, and costly or even impossible to remediate. Regulatory inquiries and rumors can tarnish or substantially damage our reputation, even if those inquiries are satisfactorily addressed. Any damage to our brand could impede our ability to attract and retain customers and key personnel, and reduce the amount of assets under our management, any of which could have a material adverse effect on our revenues and net income.

Our expenses are subject to significant fluctuations that could materially decrease net income.

Our operating results are dependent on the level of our expenses, which can vary significantly for many reasons, including:

changes in the level of our advertising expenses, including the costs of expanding investment advisory services to investors outside of the U.S. and further penetrating U.S. distribution channels;
variations in the level of total compensation expense due to, among other things, bonuses, stock option grants and other stock-based awards, changes in employee benefit costs due to regulatory or plan design changes, changes in our employee count and mix, competitive factors, and inflation;
a future impairment of investments recognized in our consolidated balance sheet;
a future impairment of goodwill that is recognized in our consolidated balance sheet;
unanticipated material fluctuations in foreign currency exchange rates applicable to the costs of our operations abroad;
expenses and capital costs incurred to maintain and enhance our administrative and operating services infrastructure, such as technology assets, depreciation, amortization, and research and development;


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unanticipated costs incurred to protect investor accounts and client goodwill; and
disruptions of third-party services such as communications, power, and mutual fund transfer agent and accounting systems.

Under our agreements with the T. Rowe Price mutual funds, we charge the mutual funds certain administrative fees and related expenses based upon contracted terms. If we fail to accurately estimate our underlying expense levels or are required to incur expenses relating to the mutual funds that are not otherwise paid by the funds, our operating results will be adversely affected. While we are under no obligation to provide financial support to any of our sponsored investment products, any financial support provided would reduce capital available for other purposes and may have an adverse effect on revenues and net income.

We have contracted with third-party financial intermediaries that distribute our investment portfolios in the U.S. and abroad and such relationships may not be available or profitable to us in the future.

These contracted third-party intermediaries generally offer their clients various investment products in addition to, and in competition with, our investment offerings, and have no contractual obligation to encourage investment in our portfolios. It would be difficult for us to acquire or retain the management of those assets without the assistance of the intermediaries, and we cannot assure that we will be able to maintain an adequate number of investment product offerings and successful distribution relationships. In addition, some investors rely on third-party financial planners, registered investment advisers, and other consultants or financial professionals to advise them on the choice of investment adviser and investment portfolio. These professionals and consultants can favor a competing investment portfolio as better meeting their particular client’s needs. We cannot assure that our investment offerings will be among their recommended choices in the future. Further, their recommendations can change over time and we could lose their recommendation and their client assets under our management. Mergers, acquisitions, and other ownership or management changes could also adversely impact our relationships with these third-party intermediaries. The presence of any of the adverse conditions discussed above would reduce revenues and net income, possibly by material amounts.

Natural disasters and other unpredictable events could adversely affect our operations.

Armed conflict, terrorist attacks, cyber-attacks, power failures, and natural disasters could adversely affect our revenues, expenses, and net income by:

decreasing investment valuations in, and returns on, the investment portfolios that we manage,
causing disruptions in national or global economies that decrease investor confidence and make investment products generally less attractive,
incapacitating or inflicting losses of lives among our associates,
interrupting our business operations or those of critical service providers,
triggering technology delays or failures, and
requiring substantial capital expenditures and operating expenses to remediate damage, replace our facilities, and restore our operations.

A significant portion of our business operations are concentrated in the Baltimore, Maryland region and in London, England. We have developed various backup systems and contingency plans but we cannot be assured that they will be adequate in all circumstances that could arise or that material interruptions and disruptions will not occur. In addition, we rely to varying degrees on outside vendors for disaster contingency support, and we cannot be assured that these vendors will be able to perform in an adequate and timely manner. If we lose the availability of any associates, or if we are unable to respond adequately to such an event in a timely manner, we may be unable to timely resume our business operations, which could lead to a tarnished reputation and loss of customers that results in a decrease in assets under management, lower revenues, and materially reduced net income.

Our investment income and asset levels may be negatively impacted by fluctuations in our investment portfolio.

We currently have a substantial portion of our assets invested in sponsored stock, blended asset, and bond funds. All of these investments are subject to investment market risk and our non-operating investment income could be adversely affected by the realization of losses upon the disposition of our investments or the recognition of significant other-than-temporary impairments


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in the case of our available-for-sale portfolio and the recognition of unrealized losses related to our sponsored investment portfolios that are held as trading and accounted for under the equity method. In addition, related investment income has fluctuated significantly over the years depending upon the performance of our corporate investments, including the impact of market conditions and interest rates, and the size of our corporate money market and longer-term mutual fund holdings. Fluctuations in other investment income are expected to occur in the future.

We may review and pursue acquisition and venture opportunities in order to maintain or enhance our competitive position.

Any strategic transaction can involve a number of risks, including additional demands on our staff; unanticipated problems regarding integration of investor account and investment security recordkeeping, additional or new regulatory requirements, operating facilities and technologies, and new employees; adverse effects in the event acquired intangible assets or goodwill become impaired; and the existence of liabilities or contingencies not disclosed to or otherwise known by us prior to closing a transaction.

We own a 26% investment in UTI Asset Management Company Ltd (UTI), an Indian asset management company, and we may consider non-controlling minority investments in other entities in the future. We may not realize future returns from such investments or any collaborative activities that may develop in the future.

We are exposed to a number of risks arising from our international operations.

We operate in a number of jurisdictions outside of the U.S. and have an equity investment in UTI. Our international operations require us to comply with the legal and regulatory requirements of various foreign jurisdictions and expose us to the political consequences of operating in foreign jurisdictions. Our foreign business operations are also subject to the following risks:

difficulty in managing, operating, and marketing our international operations;
fluctuations in currency exchange rates which may result in substantial negative effects on assets under our management, revenues, expenses, and assets in our U.S. dollar based financial statements; and
significant adverse changes in international legal and regulatory environments.

LEGAL AND REGULATORY RISKS.

Compliance within a complex regulatory environment imposes significant financial and strategic costs on our business, and non-compliance could result in fines and penalties.

If we are unable to maintain compliance with applicable laws and regulations, we could be subject to criminal and civil liability, the suspension of our employees, fines, penalties, sanctions, injunctive relief, exclusion from certain markets, or temporary or permanent loss of licenses or registrations necessary to conduct our business. A regulatory proceeding, even if it does not result in a finding of wrongdoing or sanctions, could consume substantial expenditures of time and capital. Any regulatory investigation and any failure to maintain compliance with applicable laws and regulations could severely damage our reputation, adversely affect our ability to conduct business, and decrease revenue and net income.

Legal and regulatory developments in the mutual fund and investment advisory industry could increase our regulatory burden, impose significant financial and strategic costs on our business, and cause a loss of, or impact the servicing of, our clients and fund shareholders.

Our regulatory environment is frequently altered by new regulations and by revisions to, and evolving interpretations of, existing regulations. Future changes could require us to modify or curtail our investment offerings and business operations, or impact our expenses and profitability. Additionally, some regulations may not directly apply to our business but may impact the capital markets, service providers or other indirect effects on our ability to provide services to our clients.

Potential impacts of current or proposed legal or regulatory requirements include, without limitation, the following:

The Volcker Rule will not directly impact T. Rowe Price Group; however, there remains the risk that the rule could impact the liquidity in capital markets, which may make it more difficult or costly to execute certain security transactions on behalf of our clients.

As part of the debate in Washington, D.C. related to the economy and the U.S. deficit, there has been increasing focus on the framework of the U.S. retirement system. We could incur increased costs if new regulatory requirements are adopted


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since retirement plans are a significant part of our client base and other types of retirement accounts invest in our mutual funds. In addition, changes to the current framework may impact our business in other ways. For example, proposals to reduce contributions to Individual Retirement Accounts and Defined Contribution plans for certain individuals, as well as potential changes to Defined Benefit plans, may result in increased plan terminations and reduce our opportunity to manage and service retirement assets.

The U.S. Department of Labor and Securities and Exchange Commission (SEC) are considering changes to definitions and rules related to fiduciaries. Depending on their nature, these changes may impact our ability to service clients or engage in certain distribution or other business activities.

The Federal Reserve Board has adopted final regulations related to non-bank Systemically Important Financial Institutions (SIFIs), and other jurisdictions are contemplating similar regulation. It has been suggested that large mutual funds, particularly money market funds, should be designated as SIFIs. We do not believe that mutual funds should be deemed SIFIs. Further, we do not believe SIFI designation was intended for traditional asset management businesses. If, however, any T. Rowe Price fund or T. Rowe Price affiliate is deemed a SIFI, increased regulatory oversight would apply, which may include enhanced capital, liquidity, leverage, stress testing, resolution planning, and risk management requirements.

On July 23, 2014, the SEC adopted additional reforms regulating money market funds. The reforms will require institutional non-government money market funds to operate with a floating net asset value (NAV) and require all non-government money market funds to impose liquidity fees and redemption gates under certain conditions. Government and retail money market funds will continue using current pricing and accounting methods to seek to maintain a stable NAV. The SEC adopted other reforms for money market funds, including additional disclosure and reporting requirements, tightening of diversification requirements, and enhanced stress testing. These reforms will take effect over the next two years and could have a negative impact on the attractiveness of such funds to investors and also subject us to additional regulatory requirements and costs to comply with such requirements.

The Commodity Futures Trading Commission has adopted certain amendments to its rules that would limit the ability of mutual funds and certain other products we sponsor to use commodities, futures, swaps, and other derivatives without additional registration. If our use of these products on behalf of client accounts increases so as to require registration, we would be subject to additional regulatory requirements and costs associated with registration.

There has been increased global regulatory focus on the manner in which intermediaries are paid for distribution of mutual funds. Changes to long-standing market practices related to fees or enhanced disclosure requirements may negatively impact sales of mutual funds by intermediaries, especially if such requirements are not applied to other investment products.

Global regulations on OTC derivatives are evolving, including new and proposed regulations under The Dodd-Frank Wall Street Reform and Consumer Protection Act and European Market Infrastructure Regulation relating to central clearing counterparties, trade reporting, and repositories. There remains uncertainty related to various requirements under these regulations and the exact manner in which they will impact current trading strategies for our clients.

The revised Markets in Financial Instruments Directive (MiFID II Directive) and Regulation (MiFIR) (together “MiFID II”) will apply across the European Union (EU) and member states of the European Economic Area from January 3, 2017. Implementation of MiFID II will significantly impact both the structure and operation of EU financial markets. Some of the main changes introduced under MiFID II include applying enhanced disclosure requirements, further conduct of business requirements, enhancing governance requirements, broadening the scope of pre and post trade transparency, increasing transaction reporting requirements, and changes to the regulation of trading venues. Compliance with MiFID II will increase our costs.

We cannot predict the nature of future changes to the legal and regulatory requirements applicable to our business, nor the extent of the impacts that will result from current or future proposals. However, any such changes are likely to increase the costs of compliance and the complexity of our operations. They may also result in changes to our product or service offerings. The changing regulatory landscape may also impact a number of our service providers and to the extent such providers alter their services or increase their fees it may impact our expenses or those of the products we offer.



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We may become involved in legal and regulatory proceedings that may not be covered by insurance.

We are subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such proceeding could involve substantial financial penalties. From time to time, various claims against us arise in the ordinary course of business, including employment-related claims. There also has been an increase in litigation and in regulatory investigations in the financial services industry in recent years, including customer claims, class action suits, and government actions alleging substantial monetary damages and penalties.

We carry insurance in amounts and under terms that we believe are appropriate. We cannot be assured that our insurance will cover every liability and loss to which we may be exposed, or that our insurance policies will continue to be available at acceptable terms and fees. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As our insurance policies come up for renewal, we may need to assume higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase our expenses and reduce our net income.

Net capital requirements may impede the business operations of our subsidiaries.

Certain of our subsidiaries are subject to net capital requirements imposed by various federal, state, and foreign authorities. Each of our subsidiaries’ net capital meets or exceeds all current minimum requirements; however, a significant change in the required net capital, an operating loss, or an extraordinary charge against net capital could adversely affect the ability of our subsidiaries to expand or even maintain their operations if we were unable to make additional investments in them.

TECHNOLOGY RISKS.

We require specialized technology to operate our business and would be adversely affected if we fail to maintain adequate infrastructure to conduct or expand our operations or if our technology became inoperative or obsolete.

We depend on highly specialized and, in many cases, proprietary technology to support our business functions, including among others:

securities analysis,
securities trading,
portfolio management,
customer service,
accounting and internal financial reporting processes and controls, and
regulatory compliance and reporting.

All of our technology systems, including those provided by vendors, are vulnerable to disability or failures due to cyber-attacks such as hacking or viruses, natural disasters, power failures, acts of war or terrorism, sabotage, and other causes. A suspension or termination of vendor-provided software licenses or related support, upgrades, and maintenance could cause system delays or interruption. Although we have robust business and disaster recovery plans, if our technology systems were to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of customers and could harm our reputation. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to disciplinary action and to liability to our customers.

In addition, our continued success depends on our ability to effectively integrate operations across many countries, and to adopt new or adapt existing technologies to meet client, industry, and regulatory demands. We might be required to make significant capital expenditures to maintain competitive infrastructure. If we are unable to upgrade our infrastructure in a timely fashion, we might lose customers and fail to maintain regulatory compliance, which could affect our results of operations and severely damage our reputation.

We could be subject to losses if we fail to properly safeguard sensitive and confidential information.

As part of our normal operations, we maintain and transmit confidential information about our clients as well as proprietary information relating to our business operations. We maintain a system of internal controls designed to provide reasonable assurance that fraudulent activity, including misappropriation of assets, fraudulent financial reporting, and unauthorized access to sensitive or confidential data is either prevented or timely detected. Our systems or our third-party service providers’ systems


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could be victimized by unauthorized users or corrupted by computer viruses or other malicious software code, or authorized persons could inadvertently or intentionally release confidential or proprietary information. Such disclosure could, among other things:

seriously damage our reputation,
allow competitors access to our proprietary business information,
subject us to liability for a failure to safeguard client data,
result in the termination of contracts by our existing customers,
subject us to regulatory action, and
require significant capital and operating expenditures to investigate and remediate the breach.

Item 1B.
Unresolved Staff Comments.

None.

Item 2.
Properties.

Our corporate headquarters occupies 422,000 square feet of space at 100 East Pratt Street in Baltimore, Maryland. In January 2014, we renewed and extended this lease through 2027. We have offices in 14 countries around the world, including the U.S.

Our operating and servicing activities are largely conducted at owned facilities in campus settings comprising 290,000 square feet in Colorado Springs, Colorado and 1.2 million square feet on three parcels of land in close proximity to Baltimore in Owings Mills, Maryland, including 405,100 square feet of space in two new facilities that we placed into service in the fourth quarter of 2013. We maintain a 59,940 square foot technology support facility in Hagerstown, Maryland, and own a 72-acre parcel of land in Pasco County, Florida to accommodate potential future development as business demands require.

We have six investor centers for walk-in traffic and investor meetings, four of which are in leased facilities located in Baltimore, Maryland, Tampa, Florida, Washington, D.C, and McLean, VA. The remaining two investor centers are located in our owned facilities in Colorado Springs and Owings Mills.

We lease all our offices outside the U.S., including London and Hong Kong, as well as our business operations recovery site in Maryland and our customer service call center in Tampa. We added new leased office space in Italy, Sweden, and Australia in 2014.

Information concerning our anticipated capital expenditures in 2015 and our future minimum rental payments under noncancelable operating leases at December 31, 2014, is set forth in the capital resources and liquidity and contractual obligations discussions in Item 7 of this Form 10-K.

Item 3.
Legal Proceedings.

From time to time, 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 that an adverse determination in one or more pending claims would have a material adverse effect on our financial position or results of operations is remote.

Item 4.
Mine Safety Disclosures.

Not applicable.



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Item.   Executive Officers of the Registrant.

The following information includes the names, ages, and positions of our executive officers. There are no arrangements or understandings pursuant to which any person serves as an officer. The first six individuals are members of our management committee.

James A.C. Kennedy (61), Chief Executive Officer and President since 2007.

Brian C. Rogers (59), Chairman since 2007, Chief Investment Officer since 2004, and a Vice President since 1985.

Edward C. Bernard (58), Vice Chairman since 2007, and a Vice President since 1989.

William J. Stromberg (54), Head of Equity since 2010, and a Vice President since 1990.

Christopher D. Alderson (52), Head of International Equity since 2009 and a Vice President since 2002.

Edward A. Wiese (55), Head of Fixed Income since January 2015, and a Vice President since 2001.

William W. Strickland, Jr. (53), Head of Services and Technology since 2012, and a Vice President since 2001.

Kenneth V. Moreland (58), Chief Financial Officer and a Vice President since 2004, and Treasurer since 2010.

Jessica M. Hiebler (39), Principal Accounting Officer since 2010 and a Vice President since 2009.



Page 19



PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock ($.20 par value per share) trades on the NASDAQ Global Select Market under the symbol TROW. The high and low trade price information and dividends per share during the past two years were:
 
 
1st
Quarter
 
2nd
Quarter
 
3rd
Quarter
 
4th
Quarter
2013 – High price
 
$
76.00

 
$
80.13

 
$
80.26

 
$
83.99

  Low price
 
$
66.18

 
$
70.07

 
$
69.90

 
$
70.96

  Cash dividends declared
 
$
.38

 
$
.38

 
$
.38

 
$
.38

 
 
 
 
 
 
 
 
 
2014 – High price
 
$
84.41

 
$
84.89

 
$
85.74

 
$
88.64

  Low price
 
$
75.57

 
$
76.76

 
$
75.61

 
$
71.78

  Cash dividends declared
 
$
.44

 
$
.44

 
$
.44

 
$
.44


We presently plan to declare and pay quarterly cash dividends in 2015 that, taken together, will exceed the $1.76 per share in annual regular dividends declared and paid in 2014. Our annual regular dividends per share have increased every year since we became a public company in 1986; however, there can be no assurance that we will continue to pay dividends at increasing rates or at all.

Our common stockholders have approved all of our equity-based compensation plans. These plans provide for the following issuances of shares of our common stock at December 31, 2014:
 
 
Employee Long-Term Incentive Plans & Non-Employee Director Plans
 
Employee Stock Purchase Plan
 
Total
Exercise of outstanding options
 
29,761,519

 

 
29,761,519

Settlement of outstanding restricted stock units
 
1,055,015

 

 
1,055,015

Future issuances
 
14,101,640

 
3,412,508

 
17,514,148

Total
 
44,918,174

 
3,412,508

 
48,330,682


The outstanding options above have a weighted-average exercise price of $56.95. Under the terms of the 2012 Long-Term Incentive Plan, approved by stockholders in April 2012, the number of shares provided and available for future issuance will increase as we repurchase common stock in the future with the proceeds from stock option exercises. No shares have been issued under our Employee Stock Purchase Plan since its inception; all shares have been purchased in the open market.

The following table presents repurchase activity during the fourth quarter of 2014.
Month
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
Maximum Number of
Shares that May Yet
Be Purchased Under
the Program
October
 
1,338,157

 
$
76.79

 
1,303,866

 
6,000,804

November
 
192,660

 
$
82.39

 
100,000

 
5,900,804

December
 
433,762

 
$
85.03

 

 
20,900,804

Total
 
1,964,579

 
$
79.15

 
1,403,866

 
 

Shares repurchased by us in a quarter may include repurchases conducted pursuant to publicly announced board authorizations, outstanding shares surrendered to the company to pay the exercise price in connection with swap exercises of employee stock options, and shares withheld to cover the minimum tax withholding obligations associated with the vesting of restricted stock awards. Of the shares purchased in the fourth quarter of 2014, there were 416,157 related to shares surrendered to the company in connection with employee stock option exercises and 144,556 related to shares withheld to cover tax withholdings associated with the vesting of restricted stock awards.


Page 20




During 2014, we repurchased 5,312,663 shares of our common stock pursuant to the Board of Directors’ September 8, 2010 authorization. On December 11, 2014, our Board of Directors approved a 15 million share increase in the authorization to repurchase our common stock.

We have 6,359 stockholders of record and approximately 195,000 beneficial stockholder accounts held by brokers, banks, and other intermediaries holding our common stock. Common stock owned outright by our associates, combined with outstanding vested stock options and unvested restricted stock awards, total nearly 16% of our outstanding shares and outstanding vested stock options at December 31, 2014.

Item 6.
Selected Financial Data.
 
 
2010
 
2011
 
2012
 
2013
 
2014
 
(in millions, except per-share data)
Net revenues
$
2,367

 
$
2,747

 
$
3,023

 
$
3,484

 
$
3,982

Net operating income
$
1,037

 
$
1,227

 
$
1,364

 
$
1,637

 
$
1,891

Net income
$
672

 
$
773

 
$
884

 
$
1,048

 
$
1,230

 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
733

 
$
948

 
$
903

 
$
1,233

 
$
1,291

 
 
 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
 
 
Basic earnings
$
2.60

 
$
3.01

 
$
3.47

 
$
4.02

 
$
4.68

Diluted earnings
$
2.53

 
$
2.92

 
$
3.36

 
$
3.90

 
$
4.55

Cash dividends declared (1)
$
1.08

 
$
1.24

 
$
2.36

 
$
1.52

 
$
1.76

 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
257.2

 
255.6

 
253.4

 
258.3

 
259.6

Weighted-average common shares outstanding assuming dilution
265.1

 
263.3

 
261.0

 
266.3

 
267.4


(1) Cash dividends declared in 2012 includes a special dividend of $1.00 per share that we paid on December 28, 2012.

 
December 31,
 
2010
 
2011
 
2012
 
2013
 
2014
Balance sheet data (in millions)
 
Total assets
$
3,642

 
$
3,770

 
$
4,203

 
$
5,033

 
$
5,644

Stockholders’ equity
$
3,297

 
$
3,421

 
$
3,846

 
$
4,818

 
$
5,395

Assets under management (in billions)
$
482.0

 
$
489.5

 
$
576.8

 
$
692.4

 
$
746.8



Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL.

Our revenues and net income are derived primarily from investment advisory services provided to individual and institutional investors in our sponsored U.S. mutual funds and other investment portfolios. The other investment portfolios include separately managed accounts, subadvised funds, and other sponsored investment portfolios including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans in the U.S. Investment advisory clients outside the U.S. account for 5.6% of our assets under management at December 31, 2014.



Page 21



We manage a broad range of U.S., international, and global stock, bond, and money market mutual funds and other investment portfolios, which meet the varied needs and objectives of individual and institutional investors. 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 affect our revenues and results of operations.

We remain debt-free with substantial liquidity and resources that allow us to take advantage of attractive growth opportunities; invest in key capabilities, including investment professionals, technologies, and new fund offerings; and most importantly, provide our clients with strong investment management expertise and service both now and in the future. We expect to continue our investment in long-term initiatives to sustain and deepen our investment talent, add investment capabilities both in terms of new strategies and new investment vehicles, expand capabilities through enhanced technology, and broaden our distribution reach globally.

BACKGROUND.

U.S. equities, as measured by the S&P 500 Index, rose in 2014 for the sixth consecutive year, as the economy rebounded strongly from a first-quarter weather-related contraction. Although economic growth faltered overseas and geopolitical tensions increased because of Russia’s actions involving Ukraine and international sanctions, the U.S. market was supported by falling long-term interest rates, favorable corporate earnings, and expanded stimulus efforts in the eurozone and Japan. Also, tumbling oil prices in the second half of the year, though unfavorable for the energy sector, were seen as a generally positive factor for the U.S.

Equities in developed non-U.S. markets declined in dollar terms in 2014, as a stronger U.S. dollar versus other currencies reduced overseas returns to U.S. investors. Asian markets generally held up better than European markets. In Japan, the economy entered recession following an April 1, 2014 sales tax increase that caused consumers and businesses to significantly curtail spending. The eurozone struggled with low inflation, high unemployment, and a loss of consumer and business confidence.

Emerging markets equities, in aggregate, declined in dollar terms but held up better than developed non-U.S. markets. Developing Asian markets performed best with many markets in the region producing strong returns. Latin American markets mostly declined. Emerging European markets underperformed amid severe weakness in Russia, whose currency plunged 45%.

Results of several major equity market indexes for the full year 2014 are as follows:
Index
 
S&P 500 Index
13.7
 %
NASDAQ Composite Index (excluding dividends)
13.4
 %
Russell 2000 Index
4.9
 %
MSCI EAFE (Europe, Australasia, and Far East) Index
(4.5
)%
MSCI Emerging Markets Index
(1.8
)%

Global bonds produced mostly positive returns in 2014. In the U.S., lower-quality corporate bonds underperformed investment-grade issues for the year and declined in the second half of the year because of weakness in the energy sector, the largest segment of the high yield market. Investment-grade issues produced good results, led by long-term Treasury securities amid strong demand for relatively high-yielding safe-haven government debt. Long-term interest rates declined despite the Federal Reserve’s reduction of monthly asset purchases and conclusion of such purchases in October. The 10-year Treasury note yield finished 2014 at 2.2% versus 3.0% at the end of 2013.

Government bonds in developed non-U.S. markets produced moderate losses in U.S. dollar terms, as the stronger dollar more than offset local-currency gains stemming from declining yields in key government bond markets. Emerging markets bonds performed well amid persistent demand for higher-yielding assets and as concerns about the impact of Fed tapering on global liquidity diminished as the year progressed. Dollar-denominated emerging markets bonds performed better than local-currency issues.



Page 22



Results of several major bond market indexes for the full year 2014 are as follows:
Index
 
Barclays U.S. Aggregate Bond Index
6.0
 %
Credit Suisse High Yield Index
1.9
 %
Barclays Municipal Bond Index
9.1
 %
Barclays Global Aggregate Ex-U.S. Dollar Bond Index
(3.1
)%
JPMorgan Emerging Markets Index Plus
6.2
 %

ASSETS UNDER MANAGEMENT.

Reflecting the strong growth in equity markets, our assets under management ended 2014 at a record $746.8 billion, an increase of $54.4 billion from the end of 2013. Market appreciation and income, net of distributions not reinvested, added $50.7 billion, and net cash inflows added $3.7 billion in assets under management during 2014.

Assets under management (in billions) at the end of the year and changes during each of the last three years are detailed below.

Assets under management by investment portfolio
 
 
 
 
 
 
December 31,
 
2012
 
2013
 
2014
Sponsored U.S. mutual funds
$
346.9

 
$
435.3

 
$
477.6

Other investment portfolios
229.9

 
257.1

 
269.2

Total
$
576.8

 
$
692.4

 
$
746.8


Assets under management by investment objective
 
 
 
 
 
 
December 31,
 
2012
 
2013
 
2014
Stock and blended asset
$
421.1

 
$
537.0

 
$
579.9

Fixed income portfolios
155.7

 
155.4

 
166.9

Total
$
576.8

 
$
692.4

 
$
746.8


Components of changes in assets under management
 
 
 
 
 
 
Year ended December 31,
 
2012
 
2013
 
2014
Assets under management at beginning of year
$
489.5

 
$
576.8

 
$
692.4

Net cash flows
 
 
 
 
 
Sponsored U.S. mutual funds
15.7

 
10.2

 
11.8

Other investment portfolios
1.5

 
(22.2
)
 
(8.1
)
 
17.2

 
(12.0
)
 
3.7

Net market gains and income
70.7

 
128.4

 
52.4

Distributions not reinvested
(.6
)
 
(.8
)
 
(1.7
)
Change during the period
87.3

 
115.6

 
54.4

Assets under management at end of year
$
576.8

 
$
692.4

 
$
746.8

 
 
 
 
 
 
Assets under management transferred from our sponsored U.S. mutual funds to our other investment portfolios
$
4.5

 
$
7.7

 
$
5.3


The net cash inflows in our sponsored U.S. mutual funds over the last three years were sourced primarily from third-party financial intermediaries. In 2013, a vast majority of the net outflows from our other investment portfolios were concentrated


Page 23



among several large institutional clients outside the U.S. and intermediary clients that changed their investment objectives, repositioned their strategy allocations, or experienced investment performance challenges within their portfolio. In 2014, the net outflows from our other investment portfolios were primarily from a few institutional and subadvisory clients who redeemed significant amounts from a small number of equity and fixed income strategies.

The majority of the assets transferred by clients from our sponsored mutual funds to our other investment portfolios disclosed in the previous table were moved from our target-date retirement funds to our collective investment trusts and target-date retirement trusts.

Our target-date retirement funds and trusts, which invest in a broadly diversified portfolio of other T. Rowe Price funds and T. Rowe Price collective investment trusts and automatically rebalance to maintain their specific asset allocation weightings, are a significant source of cash flows. Net cash flows shown in the previous table include or are net of the following net cash inflows that originated in our target-date portfolios.
 
2012
 
2013
 
2014
Target-date retirement funds
$
6.4

 
$
6.6

 
$
13.2

Target-date retirement trusts
3.7

 
4.9

 
4.5

Total target-date portfolios
$
10.1

 
$
11.5

 
$
17.7


Assets under management at December 31, 2014, in these target-date portfolios totaled $148.5 billion, including $126.0 billion in target-date retirement funds and $22.5 billion in target-date retirement trusts.

Strong investment performance and brand awareness is a key driver to attracting assets and to our long-term success. For 2014, 74% of the T. Rowe Price U.S. mutual funds across their share classes outperformed their comparable Lipper averages on a total return basis for the three-year period ended December 31, 2014, 80% outperformed for the five-year period, 88% outperformed for the 10-year period, and 73% outperformed for the one-year period. In addition, T. Rowe Price stock, bond and blended asset funds that were given an overall rating of four or five stars from Morningstar at December 31, 2014, account for 82% of the assets under management in our rated funds. The performance of our institutional strategies against their benchmarks was substantially similar. Our target-date retirement funds continue to deliver very attractive long-term performance, with 100% of these funds outperforming their comparable Lipper averages on a total return basis for the three- and five-year periods ended December 31, 2014.

We incur significant expenditures to attract new investment advisory clients and additional investments from our existing clients. These efforts often involve costs that precede any future revenues that we may recognize from an increase to our assets under management.

RESULTS OF OPERATIONS.

2014 versus 2013.
 
 
Year ended December 31,
 
 
 
 
 
 
2014
 
2013
 
Dollar Change
 
Percent Change
(in millions, except per-share data)
 
 
 
 
 
 
 
 
Investment advisory fees
 
$
3,464.5

 
$
3,022.6

 
$
441.9

 
14.6
%
Net revenues
 
$
3,982.1

 
$
3,484.2

 
$
497.9

 
14.3
%
Operating expenses
 
$
2,091.2

 
$
1,846.8

 
$
244.4

 
13.2
%
Net operating income
 
$
1,890.9

 
$
1,637.4

 
$
253.5

 
15.5
%
Non-operating investment income
 
$
112.2

 
$
63.0

 
$
49.2

 
78.1
%
Net income
 
$
1,229.6

 
$
1,047.7

 
$
181.9

 
17.4
%
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
4.55

 
$
3.90

 
$
.65

 
16.7
%



Page 24



Investment advisory fees earned in 2014 are up 14.6% over 2013 as average assets under our management increased $90.9 billion, or 14.3%, to $724.7 billion. The average annualized fee rate earned on our assets under management was 47.8 basis points during 2014, virtually unchanged from the 47.7 basis points earned in 2013. In 2014, we voluntarily waived $58.4 million in money market-related fees, including advisory fees and fund expenses, in order to maintain a positive yield for fund investors. The fee waivers in 2014 were up $7.2 million from the $51.2 million waived in 2013 and represent about 2% of total investment advisory revenues earned in 2014. Fees were waived from each of our money market funds and trusts, which have combined net assets at December 31, 2014, of $16.0 billion, or 2.1% of our total assets under management. We expect that these fee waivers will continue in 2015.

Greater average assets under management have increased our investment advisory revenues and helped lift our operating margin in 2014 to 47.5% compared to 47.0% in the 2013 period. Non-operating investment income in 2014 includes higher gains of $35.8 million realized from the sale of certain of our sponsored fund holdings. The proceeds from these sales were primarily used to provide additional seed capital to other sponsored funds in support of our distribution efforts outside the U.S.

Net revenues

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. were $2.5 billion in 2014, an increase of 16.9%, or $359.7 million, on higher average mutual fund assets. In 2014, average mutual fund assets were $460.9 billion, an increase of 17.8% from the 2013 average.

Mutual fund assets were $477.6 billion at December 31, 2014, an increase of $42.3 billion from $435.3 billion at the end of 2013. Investors added net cash inflows during 2014 of $11.8 billion, including $3.7 billion into our stock and blended asset funds and $8.3 billion into our bond funds. The money market funds had net outflows of $.2 billion. These cash flow amounts are presented net of $5.3 billion that clients transferred to the other investment portfolios, primarily our collective investment trusts and target-date retirement trusts. Without these transfers, the mutual funds would have had net cash inflows of $17.1 billion in 2014. Market appreciation and income, net of distributions not reinvested, added $30.5 billion to our mutual fund assets under management in 2014.
 
Investment advisory revenues earned on the other investment portfolios that we manage increased $82.2 million, or 9.2%, to $978.7 million. Average assets in these portfolios were $263.8 billion during 2014, an increase of $21.2 billion, or 8.7%, from the 2013 year. Assets in these portfolios at December 31, 2014, were $269.2 billion, an increase of $12.1 billion from the end of 2013. Market appreciation and income of $20.2 billion was partially offset by net outflows of $8.1 billion during 2014. Net outflows during 2014 are presented net of the $5.3 billion assets that clients transferred in from the mutual funds. These net outflows were primarily from a few number of institutional and subadvisory clients who redeemed significant amounts from a small number of equity and fixed income strategies.

Administrative fees increased $30.3 million to $374.0 million in 2014. The increase is primarily attributable to increased costs incurred to provide fund accounting services and transfer agent servicing activities to the mutual funds and their investors. Changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their investors.

Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor Class, R Class, and variable annuity class shares of our sponsored portfolios were $143.6 million in 2014, an increase of $26.4 million from the comparable 2013 period, on greater average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs on the face of our consolidated income statements.

Operating expenses

Compensation and related costs increased 14.9% from 2013 to about $1.3 billion. A significant part of the increase is attributable to a $60.7 million increase in our annual variable compensation program and a $60.8 million increase in salaries and related benefits, which result from a modest increase in salaries at the beginning of 2014 combined with a 4.8% increase in our average staff size over the 2013 period. We continue to increase our staff size to support both business growth and added capabilities. Higher temporary staff expenses, noncash stock-based compensation expense, and other employee costs account for the remainder of the increase in compensation and related costs in the 2014 period. At December 31, 2014, we employed 5,870 associates, an increase of 3.6% from the end of 2013.

Advertising and promotion expenditures were $76.0 million in 2014, a decrease of $11.0 million from the 2013 period. The decrease in cost from the 2013 period is primarily a result of repurposing this spending to other distribution activities. We


Page 25



currently expect that advertising and promotion costs for the first quarter of 2015 to be comparable to the fourth quarter of 2014, and the full year 2015 costs could increase about 5% from 2014 levels.

Occupancy and facility costs together with depreciation expense increased $29.2 million, or 12.9%, versus 2013. Nearly half of the increase is attributable to the opening of two new buildings at our Owings Mills campus in the fourth quarter of 2013 and the renovation of certain existing facilities. The increase also includes the added costs to update and enhance our technology capabilities, including related maintenance programs. These increases were offset by the non-recurrence of the $3.5 million in costs recognized to terminate certain facility leases in 2013.

Other operating expenses were $286.4 million in 2014, an increase of $27.1 million from the comparable 2013 period, as higher business demands and our continued investment in our capabilities have increased our costs. These increased costs include those related to our defined contribution recordkeeping business, information and other third-party service costs, travel costs, and other general and administrative costs.

Non-operating investment income

Our non-operating investment income, which includes the recognition of investment gains and losses, was up $49.2 million from the 2013 period. The increase is due in part to the 2014 results including $49.3 million in gains realized on the sale of certain sponsored fund holdings compared with $13.5 million in gains realized in the comparable 2013 period. Larger year-end dividends, including capital gain distributions, earned from our mutual fund investments of $21.8 million were offset in part by a decrease in net investment gains recognized on certain of our other investments in the 2014 period. The 2013 year also included a $1.5 million gain recognized on the sale of our savings bank subsidiary.

Provision for income taxes

Our effective tax rate was 38.6% in 2014 compared to 38.4% in 2013. We currently estimate our effective tax rate for 2015 will be about 38.5%. Our effective income tax rate reflects the relative contribution of pretax income generated by our foreign subsidiaries that are subject to tax rates lower than our U.S. rates. Changes in the relative contribution of pretax income from U.S. and foreign sources or changes in tax rates in relevant foreign jurisdictions may affect our effective income tax rate and overall net income in the future.

2013 versus 2012.

Investment advisory fees in 2013 are up over 2012 as average assets under our management increased $84.4 billion to $633.8 billion for the 2013 year. In addition, the average annualized fee rate earned on our assets under management increased to 47.7 basis points during 2013 from the 47.2 basis points earned in 2012, due primarily to asset growth in higher than average fee rate strategies. We voluntarily waived $51.2 million in money market advisory fees in 2013, an increase of $16.2 million from the $35.0 million waived in 2012, in order to maintain a positive yield for fund investors. These fee waivers represent about 2% of total investment advisory revenues earned in 2013. Fees were waived from each of our money market funds and trusts that have combined net assets at December 31, 2013, of $16.3 billion, or 2.4% of our total assets under management.

Greater average assets under management and a higher annualized fee rate have increased our investment advisory revenues and helped lift our operating margin in 2013 to 47.0% compared to 45.1% in the 2012 period. Non-operating investment income in 2013 is down compared to 2012, primarily because we sold fewer sponsored fund holdings in 2013 resulting in lower realized gains.

Net revenues

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. were $2.1 billion in 2013, an increase of 18.8%, or $335.8 million, on higher average mutual fund assets. Average mutual fund assets in 2013 were $391.2 billion, an increase of 19.8% from the 2012 average. Mutual fund assets at December 31, 2013, were $435.3 billion, up $88.4 billion from the end of 2012.

Net inflows into the mutual funds during 2013 were $10.2 billion, including $5.8 billion into our stock and blended asset funds, $3.5 billion into our bond funds, and $.9 billion into the money market funds. These mutual fund net inflow amounts are presented net of $7.7 billion that clients transferred to the other investment portfolios, primarily our collective investment trusts and target-date retirement trusts. Without these transfers, the mutual funds would have had net cash inflows of $17.9 billion in 2013. Market appreciation and income, net of distributions not reinvested, added $78.2 billion to our mutual fund assets under management in 2013.


Page 26



 
Investment advisory revenues earned on the other investment portfolios that we manage increased $94.8 million, or 11.8%, to $896.5 million. Average assets in these portfolios were $242.6 billion during 2013, an increase of $19.8 billion, or 8.9%, from the 2012 year. Ending assets at December 31, 2013, were $257.1 billion, an increase of $27.2 billion from the end of 2012. Market appreciation and income of $49.4 billion was reduced by net outflows of $22.2 billion during 2013. Net outflows during 2013 are presented net of the $7.7 billion assets that clients transferred in from the mutual funds. The vast majority of these net outflows were concentrated among several large institutional clients outside the U.S. and intermediary clients that changed their investment objectives, repositioned their strategy allocations, or experienced investment performance challenges within their portfolio.

Administrative fees increased $11.1 million to $343.7 million in 2013. The increase is primarily attributable to our transfer agent servicing activities and defined contribution recordkeeping services for the mutual funds and their investors. Changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their investors.

Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor Class, R Class, and variable annuity class shares of our sponsored portfolios were $117.2 million in 2013, an increase of $21.1 million from the comparable 2012 period on greater average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs on the face of our consolidated income statements.

Operating expenses

Compensation and related costs increased 10.4% from 2012 to about $1.2 billion. A significant part of the increase is attributable to a $45.4 million increase in our annual variable compensation program and a $37.2 million increase in salaries and related benefits. We increased our average staff size by 4.1% over 2012 to support both business growth and added capabilities. Higher temporary staff expenses, noncash stock-based compensation expense, and other employee costs account for the remainder of the increase in compensation and related costs in the 2013 period. At December 31, 2013, we employed 5,668 associates, an increase of 5.5% from the end of 2012.

Advertising and promotion expenditures were $87.0 million in 2013 compared to $88.5 million in 2012. The decrease in cost from the 2012 period is primarily attributable to process efficiencies realized through the realignment of certain marketing activities.

Occupancy and facility costs together with depreciation expense increased $20.8 million, or 10.1%, versus 2012. The increase in costs is largely attributable to the expansion of our international facilities, the opening of two new buildings located at our Owings Mills campus, and continued investment in our technology capabilities, including related maintenance programs. The 2013 year also includes a non-recurring charge of $3.5 million related to the termination of certain facility leases.

Other operating expenses were $259.3 million in 2013, an increase of $38.9 million from the comparable 2012 period as increased business demands and our continued investment in our capabilities have increased our costs. These costs include consulting and professional fees, costs related to our defined contribution recordkeeping business, information services, and other third-party services. We also made a higher charitable contribution to the T. Rowe Price Foundation in 2013 than in 2012.

Non-operating investment income

Our non-operating investment income, which includes the recognition of investment gains and losses, was down $7.8 million from the 2012 period. The decrease is due in part to the 2013 results including $13.5 million in gains realized on the sale of certain sponsored fund holdings compared with $35.1 million in gains realized in the comparable 2012 period. This reduction in realized gains was partially offset by $7.9 million in higher dividends received on our sponsored mutual fund holdings and $5.6 million in higher gains recognized on our other investments. The 2013 year also includes a $1.5 million gain recognized on the sale of our savings bank subsidiary.

Provision for income taxes

Our 2013 effective tax rate of 38.4% is unchanged from the 2012 rate. Our effective income tax rate reflects the relative contribution of pretax income generated by our non-U.S. subsidiaries that are subject to tax rates lower than our U.S. rates. Changes in the relative contribution of pretax income from U.S. and non-U.S. sources or changes in tax rates in relevant non-U.S. jurisdictions may affect our effective income tax rate and overall net income in the future.


Page 27





CAPITAL RESOURCES AND LIQUIDITY.

During 2014, stockholders’ equity increased from $4.8 billion to $5.4 billion. In 2014, we paid $1.76 per share in regular dividends and expended $415.5 million to repurchase 5,312,663 common shares from existing cash balances and cash generated from operations. We generally repurchase shares of our common stock over time to offset the dilution created by our equity-based compensation plans. Tangible book value is $4.7 billion at December 31, 2014, and our cash and fund investment holdings total $3.4 billion. Given the availability of these financial resources, we do not maintain an available external source of liquidity.

At December 31, 2014, we had outstanding commitments to make additional contributions totaling $36.6 million to various investment partnerships in which we have an existing investment. These outstanding commitments, if called, will be funded from operating resources. We currently expect total capital expenditures for facilities, equipment, and technology development for 2015 to be up to $175 million, which will be funded from operating resources.

2014 versus 2013.

Operating activities during 2014 provided cash flows of nearly $1.3 billion, up $58.1 million from the 2013 period. Higher net income, noncash depreciation and amortization, and noncash stock-based compensation in the 2014 period increased cash flows, in aggregate, $221.8 million over the 2013 levels. This aggregate increase was offset by $64.5 million in more cash used in 2014 to seed new sponsored investment portfolios that we are consolidating and treating their underlying investment holdings as trading securities. Timing differences in the cash settlement of our accounts receivable and accrued revenues, payables and accrued liabilities, and other assets and liabilities also decreased our operating cash flows by $69.2 million compared to the 2013 year. Our 2014 operating cash flows were also increased by $35.8 million in higher gains realized from the sale of certain available-for-sale sponsored fund investments as the related proceeds are reflected as an investing activity in our consolidated statements of cash flows.

Net cash used in investing activities totaled $443.4 million, an increase of $5.9 million from 2013. We increased our capital expenditures and other investments activity in 2014 by $20.4 million and $12.1 million, respectively. These increases in net cash used were more than offset by $35.2 million in less net cash invested in our sponsored funds, as we sold more existing investments to fund the new investments in 2014 compared to the 2013 period. The 2013 year also included $8.6 million in net cash proceeds related to our savings bank subsidiary and its sale in December 2013.

Net cash used in financing activities was $739.8 million in 2014, up $463.0 million from the comparable 2013 period. We increased our common stock repurchases by $401.4 million in 2014 compared with the 2013 period. Cash used for dividends paid in 2014 increased $65.4 million due primarily to the 16% increase in our per-share dividend rate.

2013 versus 2012.

Operating activities during 2013 provided cash flows of $1.2 billion, up $330.4 million from the 2012 period, including a $164.1 million increase in net income. Timing differences in the cash settlement of our accounts receivable and accrued revenues, payables and accrued liabilities, and other assets and liabilities increased our operating cash flows by $62.4 million compared to the 2012 year. The increase from 2012 is also a result of a $63.7 million reduction in cash used to make net purchases of trading securities held by our consolidated sponsored investment portfolios and a $21.6 million reduction in the adjustment for gains realized from the sale of certain available-for-sale sponsored fund investments as less investments were sold in 2013.

Net cash used in investing activities totaled $437.5 million, up $127.4 million from 2012. We made $60.1 million more net investments in our sponsored funds during 2013 compared with 2012 as we utilized more of our cash to make additional investments as compared to the rebalancing of the portfolio in 2012. The 2012 year also included greater net cash proceeds of $40.1 million from the sale of debt securities held by our savings bank subsidiary as the bank was sold in early December 2013. We spent $28.9 million more in property and equipment additions in 2013 compared to the 2012 period. The 2013 year also includes a net cash outflow of $11.7 million related to the sale of our savings bank subsidiary as the cash that was held by the bank on the closing date was greater than the $23.6 million in proceeds we received.

Net cash used in financing activities was $276.8 million in 2013, down $334.7 million from the comparable 2012 period. The decrease is primarily attributable to the repurchase of 2.1 million more shares of common stock and the payment of a $1.00 special dividend in 2012.


Page 28




CONTRACTUAL OBLIGATIONS.

The following table presents a summary of our future obligations (in millions) under the terms of existing operating leases and other contractual cash purchase commitments at December 31, 2014. Other purchase commitments include contractual amounts that will be due for the purchase of goods or services to be used in our operations and may be cancelable at earlier times than those indicated, under certain conditions that may involve termination fees. Because these obligations are generally of a normal recurring nature, we expect that we will fund them from future cash flows from operations. The information presented does not include operating expenses or capital expenditures that will be committed in the normal course of operations in 2015 and future years. The information also excludes the $5.6 million of unrecognized tax benefits discussed in Note 7 to our consolidated financial statements because it is not possible to estimate the time period in which a payment might be made to the tax authorities.

 
Total
 
2015
 
2016-17
 
2018-19
 
Later
Noncancelable operating leases
$
241

 
$
26

 
$
48

 
$
47

 
$
120

Other purchase commitments
167

 
122

 
38

 
7

 

Total
$
408

 
$
148

 
$
86

 
$
54

 
$
120


We also have outstanding commitments to fund additional contributions to investment partnerships totaling $36.6 million at December 31, 2014. The vast majority of these additional contributions will be made to investment partnerships in which we have an existing investment. In addition to such amounts, a percentage of prior distributions may be called under certain circumstances.

CRITICAL ACCOUNTING POLICIES.

The preparation of financial statements often requires the selection of specific accounting methods and policies from among several acceptable alternatives. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in our consolidated balance sheets, the revenues and expenses in our consolidated statements of income, and the information that is contained in our significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that we include currently in our consolidated financial statements, significant accounting policies, and notes.

We present those significant accounting policies used in the preparation of our consolidated financial statements as an integral part of those statements within this 2014 Annual Report. In the following discussion, we highlight and explain further certain of those policies that are most critical to the preparation and understanding of our financial statements.

Other-than-temporary impairments of available-for-sale securities. We generally classify our investment holdings in sponsored funds as available-for-sale if we are not deemed to a have a controlling financial interest. At the end of each quarter, we mark the carrying amount of each investment holding to fair value and recognize an unrealized gain or loss as a component of comprehensive income within the consolidated statements of comprehensive income. We next review each individual security position that has an unrealized loss or impairment to determine if that impairment is other than temporary.

In determining whether a mutual fund holding is other-than-temporarily impaired, we consider many factors, including the duration of time the impairment has existed, the severity of the impairment, any subsequent changes in value, and our intent and ability to hold the security for a period of time sufficient for an anticipated recovery in fair value. Subject to the other considerations noted above, we believe a fund holding with an unrealized loss that has persisted daily throughout the six months between quarter-ends is generally presumed to have an other-than-temporary impairment. We may also recognize an other-than-temporary impairment for losses that have existed for less than six months in our consolidated statements of income if the particular circumstances of the underlying investment do not warrant our belief that a near-term recovery is possible.

Other-than-temporary impairments of equity method investments. We evaluate our equity method investments, including our investment in UTI, for impairment when events or changes in circumstances indicate that the carrying value of the investment exceeds its fair value, and the decline in fair value is other than temporary.



Page 29



Goodwill. We internally conduct, manage, and report our operations as one investment advisory business. We do not have distinct operating segments or components that separately constitute a business. Accordingly, we attribute goodwill to a single reportable business segment and reporting unit – our investment advisory business.

We evaluate the carrying amount of goodwill in our consolidated balance sheets for possible impairment on an annual basis in the third quarter of each year using a fair value approach. Goodwill would be considered impaired whenever our historical carrying amount exceeds the fair value of our investment advisory business. Our annual testing has demonstrated that the fair value of our investment advisory business (our market capitalization) exceeds our carrying amount (our stockholders’ equity) and, therefore, no impairment exists. Should we reach a different conclusion in the future, additional work would be performed to ascertain the amount of the noncash impairment charge to be recognized. We must also perform impairment testing at other times if an event or circumstance occurs indicating that it is more likely than not that an impairment has been incurred. The maximum future impairment of goodwill that we could incur is the amount recognized in our consolidated balance sheets, $665.7 million.

Stock options. We recognize stock option-based compensation expense in our consolidated statements of income using a fair value based method. Fair value methods use a valuation model for shorter-term, market-traded financial instruments to theoretically value stock option grants even though they are not available for trading and are of longer duration. The Black-Scholes option-pricing model that we use includes the input of certain variables that are dependent on future expectations, including the expected lives of our options from grant date to exercise date, the volatility of our underlying common shares in the market over that time period, and the rate of dividends that we will pay during that time. Our estimates of these variables are made for the purpose of using the valuation model to determine an expense for each reporting period and are not subsequently adjusted. Unlike most of our expenses, the resulting charge to earnings using a fair value based method is a non-cash charge that is never measured by, or adjusted based on, a cash outflow.

Provision for income taxes. After compensation and related costs, our provision for income taxes on our earnings is our largest annual expense. We operate in numerous states and countries through our various subsidiaries and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Annually, we file tax returns that represent our filing positions with each jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable earnings determinations. From time to time, we may also provide for estimated liabilities associated with uncertain tax return filing positions that are subject to, or in the process of, being audited by various tax authorities. Because the determination of our annual provision is subject to judgments and estimates, it is likely that actual results will vary from those recognized in our financial statements. As a result, we recognize additions to, or reductions of, income tax expense during a reporting period that pertain to prior period provisions as our estimated liabilities are revised and actual tax returns and tax audits are settled. We recognize any such prior period adjustment in the discrete quarterly period in which it is determined.

NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 - Revenue from Contracts with Customers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that will be applied to determine the measurement of revenue and timing of when it is recognized. We are required to adopt the new standard on January 1, 2017. We are currently evaluating the impact this standard will have on our financial position and results of operations.

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



Page 30



FORWARD-LOOKING INFORMATION.

From time to time, information or statements provided by or on behalf of T. Rowe Price, including those within this report, may contain certain forward-looking information, including information or anticipated information relating to: our revenues, net income, and earnings per share on common stock; changes in the amount and composition of our assets under management; our expense levels; our estimated effective income tax rate; and our expectations regarding financial markets, future transactions, dividends, investments, capital expenditures, and other conditions. Readers are cautioned that any forward-looking information provided by or on behalf of T. Rowe Price is not a guarantee of future performance. Actual results may differ materially from those in forward-looking information because of various factors including, but not limited to, those discussed below and in Item 1A, Risk Factors, of this Form 10-K Annual Report. Further, forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events.

Our future revenues and results of operations will fluctuate primarily due to changes in the total value and composition of assets under our management. Such changes result from many factors including, among other things: cash inflows and outflows in the T. Rowe Price mutual funds and other managed investment portfolios, fluctuations in global financial markets that result in appreciation or depreciation of the assets under our management, our introduction of new mutual funds and investment portfolios, and changes in retirement savings trends relative to participant-directed investments and defined contribution plans. The ability to attract and retain investors’ assets under our management is dependent on investor sentiment and confidence; the relative investment performance of the Price mutual funds and other managed investment portfolios as compared to competing offerings and market indexes; the ability to maintain our investment management and administrative fees at appropriate levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; and our level of success in implementing our strategy to expand our business. Our revenues are substantially dependent on fees earned under contracts with the Price funds and could be adversely affected if the independent directors of one or more of the Price funds terminated or significantly altered the terms of the investment management or related administrative services agreements. Non-operating investment income will also fluctuate primarily due to the size of our investments, changes in their market valuations, and any other-than-temporary impairments that may arise or, in the case of our equity method investments, our proportionate share of the investee’s net income.

Our future results are also dependent upon the level of our expenses, which are subject to fluctuation for the following or other reasons: changes in the level of our advertising expenses in response to market conditions, including our efforts to expand our investment advisory business to investors outside the U.S. and to further penetrate our distribution channels within the U.S.; variations in the level of total compensation expense due to, among other things, bonuses, stock option and other equity grants, other incentive awards, changes in our employee count and mix, and competitive factors; any goodwill or other asset impairment that may arise; fluctuation in foreign currency exchange rates applicable to the costs of our international operations; expenses and capital costs, such as technology assets, depreciation, amortization, and research and development, incurred to maintain and enhance our administrative and operating services infrastructure; unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; and disruptions of services, including those provided by third parties, such as facilities, communications, power, and the mutual fund transfer agent and accounting systems.

Our business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on our operations and results, including, but not limited to, effects on costs that we incur and effects on investor interest in mutual funds and investing in general or in particular classes of mutual funds or other investments.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.

The following table (in millions) presents the equity price risk from investments in sponsored funds that are accounted for as available-for-sale securities by assuming a hypothetical decline in the fair values of fund shares. We have chosen to use a variant of each fund's net asset value to quantify the equity price risk as we believe the volatility in each fund's net asset value best reflects the underlying risk potential as well as the market trends surrounding each fund's investment objective. The potential future loss of value, before any income tax benefits, of our fund investments at year-end was determined by using the lower of each fund’s lowest net asset value per share during 2014 or its net asset value per share at December 31, 2014, reduced by 10%. In considering this presentation, it is important to note that: not all funds experienced their lowest net asset value per share on the same day; it is likely that the composition of the fund investment portfolio would be changed if adverse market conditions persisted; and we could experience future losses in excess of those presented below.
 


Page 31



 
Fair value 12/31/2014
 
Percentage of portfolio
 
Potential lower value
 
Percentage of portfolio
 
Potential
loss
  Stock and blended asset funds
$
732.6

 
39
%
 
$
656.5

 
39
%
 
$
76.1

 
10
%
  Bond funds
1,151.4

 
61
%
 
1,036.2

 
61
%
 
115.2

 
10
%
 
$
1,884.0

 
100
%
 
$
1,692.7

 
100
%
 
$
191.3

 
10
%

The comparable potential loss of value in 2013 using the same methodology noted above was $247.1 million, or 15%, on sponsored fund investments of $1,611.9 million. During 2014, we experienced actual net unrealized losses of $2.1 million.
 
As available-for-sale securities, we recognize unrealized losses that are considered temporary in other comprehensive income. We review the carrying amount of each investment on a quarterly basis and recognize an impairment charge in non-operating investment income (loss) whenever an unrealized loss is considered other than temporary.

Investments in mutual funds generally moderate market risk because funds, by their nature, are diversified investment portfolios that invest in a number of different financial instruments. T. Rowe Price further manages its exposure to market risk by diversifying its investments among many domestic and international funds. In addition, investment holdings may be altered from time to time in response to changes in market risks and other factors, as management deems appropriate.

We hold $125.6 million at December 31, 2014, in equity method investments related to seed capital investments we have in sponsored funds in which we are deemed to have significant influence. Given that the funds' net assets are at fair value, we utilized the same methodology to quantify the impact of equity risk on our carrying value as we did for our available-for-sale portfolio as further discussed above. The potential loss in value before any income tax benefits of our equity method investments in sponsored funds was $12.6 million.

Our equity method investment in UTI of $132.4 million at December 31, 2014, exposes us to foreign currency risk related to translating our proportionate share of its financial statements, which are denominated in Indian rupees (INR), to U.S. dollars (USD) each reporting period. We do not use derivative financial instruments to manage this foreign currency risk, so both positive and negative fluctuations in the INR against the USD will affect accumulated other comprehensive income and the carrying amount of our investment. We had a cumulative translation loss, net of tax, of $25.7 million at December 31, 2014, related to our investment in UTI. Given the nature of UTI’s business, should conditions deteriorate in markets in which they operate, we are at risk for loss up to our carrying amount.

We operate in several foreign countries of which the United Kingdom is the most prominent. We incur operating expenses and have foreign currency-denominated assets and liabilities associated with these operations, though our revenues are predominately realized in USD. We do not believe that foreign currency fluctuations materially affect our results of operations.



Page 32



Item 8.
Financial Statements and Supplementary Data.
 
 
Page
Index to Financial Statements:
 
Consolidated Balance Sheets at December 31, 2013 and 2014
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2014
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2014
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2014
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2014


Page 33



CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
 
12/31/2013
 
12/31/2014
ASSETS
 
 
 
Cash and cash equivalents
$
1,398.0

 
$
1,506.1

Accounts receivable and accrued revenue
398.8

 
442.8

Investments in sponsored funds
1,611.9

 
1,884.0

Other investments
313.6

 
408.3

Property and equipment, net
572.9

 
586.4

Goodwill
665.7

 
665.7

Other assets
72.2

 
151.1

Total assets
$
5,033.1

 
$
5,644.4

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Accounts payable and accrued expenses
$
103.9

 
$
143.4

Accrued compensation and related costs
72.4

 
82.2

Income taxes payable
38.7

 
23.6

Total liabilities
215.0

 
249.2

 
 
 
 
Commitments and contingent liabilities

 

 
 
 
 
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 262,073,000 shares in 2013 and 261,110,000 in 2014
52.4

 
52.2

Additional capital in excess of par value
894.6

 
756.5

Retained earnings
3,682.8

 
4,450.1

Accumulated other comprehensive income
188.3

 
136.4

Total stockholders' equity
4,818.1

 
5,395.2

Total liabilities and stockholders' equity
$
5,033.1

 
$
5,644.4



The accompanying summary of significant accounting policies and notes to consolidated financial statements are an integral part of these statements.
Page 34


CONSOLIDATED STATEMENTS OF INCOME
(in millions, except earnings per share)
 
 
Year ended December 31,
 
2012
 
2013
 
2014
Revenues
 
 
 
 
 
Investment advisory fees
$
2,592.0

 
$
3,022.6

 
$
3,464.5

Administrative fees
332.6

 
343.7

 
374.0

Distribution and servicing fees
96.1

 
117.2

 
143.6

Net revenue of savings bank subsidiary
1.8

 
.7

 

Net revenues
3,022.5

 
3,484.2

 
3,982.1

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Compensation and related costs
1,047.6

 
1,156.9

 
1,329.6

Advertising and promotion
88.5

 
87.0

 
76.0

Distribution and servicing costs
96.1

 
117.2

 
143.6

Depreciation and amortization of property and equipment
80.9

 
90.6

 
111.7

Occupancy and facility costs
124.7

 
135.8

 
143.9

Other operating expenses
220.4

 
259.3

 
286.4

Total operating expenses
1,658.2

 
1,846.8

 
2,091.2

 
 
 
 
 
 
Net operating income
1,364.3

 
1,637.4

 
1,890.9

 
 
 
 
 
 
Non-operating investment income
70.8

 
63.0

 
112.2

 
 
 
 
 
 
Income before income taxes
1,435.1

 
1,700.4

 
2,003.1

Provision for income taxes
551.5

 
652.7

 
773.5

Net income
$
883.6

 
$
1,047.7

 
$
1,229.6

 
 
 
 
 
 
Earnings per share on common stock
 
 
 
 
 
Basic
$
3.47

 
$
4.02

 
$
4.68

Diluted
$
3.36

 
$
3.90

 
$
4.55


The accompanying summary of significant accounting policies and notes to consolidated financial statements are an integral part of these statements.
Page 35


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)

 
Year ended December 31,
 
2012
 
2013
 
2014
Net income
$
883.6

 
$
1,047.7

 
$
1,229.6

Other comprehensive income (loss)
 
 
 
 
 
Net unrealized holding gains (losses) on available-for-sale investments
100.2

 
148.1

 
(1.9
)
Reclassification adjustments recognized in non-operating investment income:
 
 
 
 
 
Capital gain distributions
(4.7
)
 
(15.3
)
 
(31.1
)
Net gains realized on dispositions determined using average cost
(35.1
)
 
(13.5
)
 
(49.3
)
Net unrealized holding gains derecognized upon the sale of savings bank subsidiary

 
(1.6
)
 

Total reclassification adjustments
(39.8
)
 
(30.4
)
 
(80.4
)
Total net unrealized holding gains (losses) recognized in other comprehensive income
60.4

 
117.7

 
(82.3
)
Currency translation adjustments
(10.7
)
 
(23.7
)
 
(1.8
)
Other comprehensive income (loss) before income taxes
49.7

 
94.0

 
(84.1
)
Deferred tax benefits (income taxes)
(20.6
)
 
(37.6
)
 
32.2

Total other comprehensive income (loss)
29.1

 
56.4

 
(51.9
)
Total comprehensive income
$
912.7

 
$
1,104.1

 
$
1,177.7



The accompanying summary of significant accounting policies and notes to consolidated financial statements are an integral part of these statements.
Page 36


CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
 
Year ended December 31,
 
2012
 
2013
 
2014
Cash flows from operating activities
 
 
 
 
 
Net income
$
883.6

 
$
1,047.7

 
$
1,229.6

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
Depreciation and amortization of property and equipment
80.9

 
90.6

 
111.7

Stock-based compensation expense
104.1

 
114.6

 
133.4

Realized gains on the dispositions of sponsored funds
(35.1
)
 
(13.5
)
 
(49.3
)
Net gains recognized on other investments
(11.4
)
 
(13.0
)
 
(7.2
)
Net change in trading securities held by consolidated sponsored investment portfolios
(89.3
)
 
(25.6
)
 
(90.1
)
Changes in accounts receivable and accrued revenue
(49.7
)
 
(44.7
)
 
(31.5
)
Changes in payables and accrued liabilities
35.3

 
(5.1
)
 
36.5

Other changes in assets and liabilities
(15.6
)
 
82.2

 
(41.8
)
Net cash provided by operating activities
902.8

 
1,233.2

 
1,291.3

 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
Investments in sponsored funds
(498.5
)
 
(377.7
)
 
(471.9
)
Dispositions of sponsored funds
218.1

 
37.2

 
166.6

Investments in debt securities held by savings bank subsidiary
(31.1
)
 
(28.2
)
 

Proceeds from debt securities held by savings bank subsidiary
91.5

 
48.5

 

Additions to property and equipment
(76.9
)
 
(105.8
)
 
(126.2
)
Other investing activity
(13.2
)
 
(11.5
)
 
(11.9
)
Net cash used in investing activities
(310.1
)
 
(437.5
)
 
(443.4
)
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
Repurchases of common stock
(135.2
)
 
(14.1
)
 
(415.5
)
Common share issuances under stock-based compensation plans
86.6

 
118.2

 
85.2

Excess tax benefits from stock-based compensation plans
59.3

 
45.5

 
52.6

Dividends
(603.4
)
 
(396.7
)
 
(462.1
)
Change in savings bank subsidiary deposits
(18.8
)
 
(29.7
)
 

Net cash used in financing activities
(611.5
)
 
(276.8
)
 
(739.8
)
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
Net change during year
(18.8
)
 
518.9

 
108.1

At beginning of year
897.9

 
879.1

 
1,398.0

At end of year
$
879.1

 
$
1,398.0

 
$
1,506.1


The accompanying summary of significant accounting policies and notes to consolidated financial statements are an integral part of these statements.
Page 37


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
 
Accumulated
other
comprehensive
income (loss)
 
Total
stockholders’
equity
Balances at December 31, 2011
253,272

 
$
50.7

 
$
502.0

 
$
2,765.2

 
$
102.8

 
$
3,420.7

Net income
 
 
 
 
 
 
883.6

 
 
 
883.6

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
29.1

 
29.1

Dividends
 
 
 
 
 
 
(603.6
)
 
 
 
(603.6
)
Common stock-based compensation plans activity
 
 
 
 
 
 
 
 
 
 
 
Shares issued upon option exercises
5,239

 
1.1

 
91.5

 
 
 
 
 
92.6

Restricted shares issued, net of shares withheld for taxes
734

 
.1

 
(4.1
)
 
 
 
 
 
(4.0
)
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
101

 

 
(2.0
)
 
 
 
 
 
(2.0
)
Forfeiture of restricted awards
(26
)
 

 

 
 
 
 
 

Net tax benefits
 
 
 
 
60.8

 
 
 
 
 
60.8

Stock-based compensation expense
 
 
 
 
104.1

 
 
 
 
 
104.1

Common shares repurchased
(2,302
)
 
(.5
)
 
(121.3
)
 
(13.4
)
 
 
 
(135.2
)
Balances at December 31, 2012
257,018

 
51.4

 
631.0

 
3,031.8

 
131.9

 
3,846.1

Net income
 
 
 
 
 
 
1,047.7

 
 
 
1,047.7

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
56.4

 
56.4

Dividends
 
 
 
 
 
 
(396.6
)
 
 
 
(396.6
)
Common stock-based compensation plans activity
 
 
 
 
 
 
 
 
 
 
 
Shares issued upon option exercises
4,147

 
.8

 
127.3

 
 
 
 
 
128.1

Restricted shares issued, net of shares withheld for taxes
1,041

 
.2

 
(6.9
)
 
 
 
 
 
(6.7
)
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
149

 

 
(3.3
)
 
 
 
 
 
(3.3
)
Forfeiture of restricted awards
(82
)
 

 

 
 
 
 
 

Net tax benefits
 
 
 
 
45.9

 
 
 
 
 
45.9

Stock-based compensation expense
 
 
 
 
114.6

 
 
 
 
 
114.6

Restricted stock units issued as dividend equivalents
 
 
 
 
.1

 
(.1
)
 
 
 

Common shares repurchased
(200
)
 

 
(14.1
)
 

 
 
 
(14.1
)
Balances at December 31, 2013
262,073

 
52.4

 
894.6

 
3,682.8

 
188.3

 
4,818.1

Net income
 
 
 
 
 
 
1,229.6

 
 
 
1,229.6

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(51.9
)
 
(51.9
)
Dividends
 
 
 
 
 
 
(462.1
)
 
 
 
(462.1
)
Common stock-based compensation plans activity
 
 
 
 
 
 
 
 
 
 
 
Shares issued upon option exercises
3,679

 
.8

 
106.3

 
 
 
 
 
107.1

Restricted shares issued, net of shares withheld for taxes
625

 
.1

 
(12.3
)
 
 
 
 
 
(12.2
)
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
163

 

 
(4.7
)