UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________ 

FORM 10-Q

______________________________________ 

QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

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)	(I.R.S. 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)

______________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer ¨
Non-accelerated filer ¨ (do not check if smaller reporting company)	Smaller reporting company ¨
	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨  Yes    x  No

The number of shares outstanding of the issuer’s common stock ($.20 par value), as of the latest practicable date, April 23, 2018, is 242,137,493.

The exhibit index is at Item 6 on page 39.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

	12/31/2017			3/31/2018
ASSETS
Cash and cash equivalents	$	1,902.7		$	1,681.4
Accounts receivable and accrued revenue	565.3			593.6
Investments	1,477.3			2,095.1
Assets of consolidated T. Rowe Price investment products ($1,839.6 million at December 31, 2017, and $1,238.5 million at March 31, 2018, related to variable interest entities)	2,048.4			1,510.8
Property and equipment, net	652.0			650.2
Goodwill	665.7			665.7
Other assets	224.0			177.5
Total assets	$	7,535.4		$	7,374.3
LIABILITIES
Accounts payable and accrued expenses	$	216.2		$	241.3
Liabilities of consolidated T. Rowe Price investment products ($39.5 million at December 31, 2017, and $27.8 million at March 31, 2018, related to variable interest entities)	55.9			53.2
Accrued compensation and related costs	108.5			187.1
Supplemental savings plan liability	269.3			284.5
Income taxes payable	68.3			159.8
Total liabilities	718.2			925.9
Commitments and contingent liabilities
Redeemable non-controlling interests	992.8			546.5
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 245,111,000 shares at December 31, 2017, and 243,282,000 at March 31, 2018	49.0			48.7
Additional capital in excess of par value	846.1			654.6
Retained earnings	4,932.9			5,205.0
Accumulated other comprehensive loss	(3.6		)	(6.4		)
Total permanent stockholders’ equity	5,824.4			5,901.9
Total liabilities, redeemable non-controlling interests, and permanent stockholders’ equity	$	7,535.4		$	7,374.3

The accompanying notes are an integral part of these statements.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per-share amounts)

	Three months ended
	3/31/2017			3/31/2018
Revenues
Investment advisory fees	$	992.7		$	1,189.2
Administrative, distribution, and servicing fees	139.9			138.8
Net revenues	1,132.6			1,328.0
Operating expenses
Compensation and related costs	397.4			441.4
Distribution and servicing	59.8			70.3
Advertising and promotion	25.7			24.6
Product-related costs	38.6			42.1
Technology, occupancy, and facility costs	82.8			94.1
General, administrative, and other	56.6			71.7
Nonrecurring insurance recoveries related to Dell appraisal rights matter	(50.0		)	—
Total operating expenses	610.9			744.2
Net operating income	521.7			583.8
Non-operating income
Net gains on investments	64.8			14.4
Net gains on consolidated investment portfolios	48.9			.8
Other income	1.3			.9
Total non-operating income	115.0			16.1
Income before income taxes	636.7			599.9
Provision for income taxes	236.3			144.4
Net income	400.4			455.5
Less: net income attributable to redeemable non-controlling interests	14.5			1.8
Net income attributable to T. Rowe Price Group	$	385.9		$	453.7
Earnings per share on common stock of T. Rowe Price Group
Basic	$	1.56		$	1.81
Diluted	$	1.54		$	1.77
Dividends declared per share	$	.57		$	.70

The accompanying notes are an integral part of these statements.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

	Three months ended
	3/31/2017			3/31/2018
Net income	$	400.4		$	455.5
Other comprehensive income (loss)
Net unrealized holding gains on available-for-sale investments	18.3			—
Reclassification gains recognized in non-operating income upon dispositions, determined using average cost	(47.6		)	—
Total net unrealized holding gains (losses) recognized in other comprehensive income	(29.3		)	—
Currency translation adjustments
Consolidated T. Rowe Price investment products - variable interest entities	7.0			16.2
Reclassification gain recognized in non-operating income upon deconsolidation of certain T. Rowe Price investment products	—			(3.1		)
Consolidated T. Rowe Price investment products - variable interest entities	7.0			13.1
Equity method investments	(3.2		)	3.8
Total currency translation adjustments	3.8			16.9
Other comprehensive income (loss) before income taxes	(25.5		)	16.9
Net deferred tax benefits (income taxes)	10.7			(2.5		)
Total other comprehensive income (loss)	(14.8		)	14.4
Total comprehensive income	385.6			469.9
Less: comprehensive income attributable to redeemable non-controlling interests	16.6			8.8
Comprehensive income attributable to T. Rowe Price Group	$	369.0		$	461.1

The accompanying notes are an integral part of these statements.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS⁽¹⁾

(in millions)

	Three months ended
	3/31/2017			3/31/2018
Cash flows from operating activities
Net income	$	400.4		$	455.5
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization of property and equipment	35.6			36.9
Stock-based compensation expense	36.8			45.6
Net gains recognized on other investments	(62.0		)	(2.6		)
Investments in U.S. mutual funds held as trading to economically hedge supplemental savings plan liability	—			(12.9		)
Net change in trading securities held by consolidated T. Rowe Price investment products	(566.3		)	(189.4		)
Other changes in assets and liabilities	344.0			187.9
Net cash provided by (used in) operating activities	188.5			521.0
Cash flows from investing activities
Purchases of T. Rowe Price investment products	(.2		)	(450.6		)
Dispositions T. Rowe Price investment products	123.3			36.7
Net cash of T. Rowe Price investment products on consolidation (deconsolidation)	(46.5		)	(21.5		)
Additions to property and equipment	(46.9		)	(36.7		)
Other investing activity	(0.3		)	(47.7		)
Net cash provided by (used in) investing activities	29.4			(519.8		)
Cash flows from financing activities
Repurchases of common stock	(306.1		)	(291.3		)
Common share issuances under stock-based compensation plans	41.9			46.2
Dividends paid to common stockholders of T. Rowe Price Group	(140.9		)	(174.8		)
Net subscriptions received from redeemable non-controlling interest holders	551.1			177.8
Net cash provided by (used in) financing activities	146.0			(242.1		)
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products	(3.4		)	1.3
Net change in cash and cash equivalents during period	360.5			(239.6		)
Cash and cash equivalents at beginning of year	1,270.5			2,005.8
Cash and cash equivalents at end of period, including $50.2 million at March 31, 2017, and $84.8 million at March 31, 2018, held by consolidated T. Rowe Price investment products	$	1,631.0		$	1,766.2

⁽¹⁾ See note 12 for a supplementary consolidating cash flow schedule.

The accompanying notes are an integral part of these statements.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENT 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				Redeemable non-controlling interests
Balances at December 31, 2017	245,111			$	49.0			$	846.1			$	4,932.9			$	(3.6	)		$	5,824.4			$	992.8
Cumulative effect adjustment upon adoption of new financial instruments and accumulated other comprehensive income guidance on January 1, 2018(1)												22.4				(7.9		)		14.5
Reclassification adjustment of stranded tax benefits on currency translation adjustments upon adoption of new accumulated other comprehensive income guidance on January 1, 2018												2.3				(2.3		)		—
Balances at January 1, 2018	245,111		—	49.0			—	846.1			—	4,957.6			—	(13.8		)	—	5,838.9			—	992.8
Net income	—			—				—				453.7				—				453.7				1.8
Other comprehensive income (loss), net of tax	—			—				—				—				7.4				7.4				7.0
Dividends declared	—			—				—				(174.9		)		—				(174.9		)
Common stock-based compensation plans activity
Shares issued upon option exercises	1,103			.2				44.9				—				—				45.1				—
Shares issued upon vesting of restricted stock units, net of shares withheld for taxes	6			—				(.4		)		—				—				(.4		)		—
Forfeiture of restricted awards	(4	)		—				—				—				—				—				—
Stock-based compensation expense	—			—				45.6				—				—				45.6				—
Restricted stock units issued as dividend equivalents	—			—				.1				(.1		)		—				—
Common shares repurchased	(2,934	)		(.5		)		(281.7		)		(31.3		)		—				(313.5		)		—
Net subscriptions into T. Rowe Price investment products	—			—				—				—				—				—				177.8
Net deconsolidations of T. Rowe Price investment products	—			—				—				—				—				—				(632.9		)
Balances at March 31, 2018	243,282			$	48.7			$	654.6			$	5,205.0			$	(6.4	)		$	5,901.9			$	546.5

⁽¹⁾ Includes the reclassification of $1.7 million of stranded income taxes on available-for-sale investments resulting from the U.S. tax law changes enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings.

The accompanying notes are an integral part of these statements.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – THE COMPANY AND BASIS OF PREPARATION.

T. Rowe Price Group (Price Group) derives its consolidated revenues and net income primarily from investment advisory services that its subsidiaries provide to individual and institutional investors in the T. Rowe Price U.S. mutual funds (U.S. mutual funds) and other investment products, including separately managed accounts, subadvised funds, and other T. Rowe Price investment products. We also provide our investment advisory clients with related administrative services, including distribution, mutual fund transfer agent, accounting, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage; and trust services.

Investment advisory revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and results of operations.

These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the use of estimates and reflect all adjustments that are, in the opinion of management, necessary to a fair statement of our results for the interim periods presented. All such adjustments are of a normal recurring nature. Actual results may vary from our estimates.

In order to increase transparency of operating expenses and better align expenses that have similar cost drivers, we have changed the presentation of certain line items of our income statement. In doing so, we have reclassified certain prior year amounts to conform to the 2018 presentation. These reclassifications are shown along with the impact of the new revenue recognition accounting standard adopted on January 1, 2018, in the New Accounting Guidance section below.

The unaudited interim financial information contained in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our 2017 Annual Report.

NEW ACCOUNTING GUIDANCE.

We adopted Accounting Standards Codification Topic 606: Revenue from Contracts with Customers (ASC 606), on January 1, 2018, using the retrospective method which required adjustments to be reflected as of January 1, 2016. In connection with the adoption of this guidance, we reevaluated all of our revenue contracts and determined that the new guidance does not change the timing of when we recognize revenue. However, we did conclude that certain fees earned from the U.S. mutual funds associated with our mutual fund transfer agent, accounting, shareholder servicing, and participant recordkeeping activities could no longer be reported net of the expenses paid to third parties that perform such services as we are deemed, under the guidance, to have control over the services before they are transferred to the U.S. mutual funds. No transition-related practical expedients were applied. Certain immaterial balance sheet reclassifications were made to conform to the 2018 presentation and all related note disclosures have been recast. Updates to our revenue recognition disclosures are included in Note 2 - Information about Receivables, Revenues, and Services and our updated revenue recognition accounting policy is included in the Summary of Significant Accounting Policies section below.

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The impact of ASC 606 and other income statement reclassifications, as described above, on the condensed consolidated statements of income for each quarter of 2017 follows:

	Three months ended 3/31/2017														Three months ended 6/30/2017
(in millions)	As previously reported				Change in Presentation				Impact of ASC 606			As reported herein			As previously reported			Change in Presentation			Impact of ASC 606				Recast
Revenues
Investment advisory fees	$	991.1			$	—			$	1.6		$	992.7		$	1,043.9		$	—		$	2.1			$	1,046.0
Administrative, distribution, and servicing fees(1)	122.5			—	—			—	17.4		—	139.9			127.7		—	—			12.3			—	140.0
Net revenues	1,113.6				—				19.0			1,132.6			1,171.6			—			14.4				1,186.0
Operating expenses
Compensation and related costs	397.4				—				—			397.4			403.8			—			—				403.8
Distribution and servicing	35.2				22.9				1.7			59.8			36.4			26.4			2.0				64.8
Advertising and promotion	25.6				—				.1			25.7			18.6			—			.1				18.7
Product-related costs	—				21.4				17.2			38.6			—			22.4			12.0				34.4
Technology, occupancy, and facility costs(2)	81.0			—	1.8				—		—	82.8			83.1		—	2.5			—			—	85.6
General, administrative, and other	102.7				(46.1		)		—			56.6			122.1			(51.3		)	.3				71.1
Nonrecurring insurance recoveries related to Dell appraisal rights matter	(50.0		)		—				—			(50.0		)	—			—			—				—
Total operating expenses	591.9				—				19.0			610.9			664.0			—			14.4				678.4
Net operating income	$	521.7			$	—			$	—		$	521.7		$	507.6		$	—		$	—			$	507.6
	Three months ended 9/30/2017														Three months ended 12/31/2017
(in millions)	As previously reported				Change in Presentation				Impact of ASC 606			Recast			As previously reported			Change in Presentation			Impact of ASC 606				Recast
Revenues
Investment advisory fees	$	1,096.7			$	—			$	2.2		$	1,098.9		$	1,156.0		$	—		$	2.2			$	1,158.2
Administrative, distribution, and servicing fees(1)	125.0			—	—				14.8		—	139.8			130.1		—	—			9.3			—	139.4
Net revenues	1,221.7				—				17.0			1,238.7			1,286.1			—			11.5				1,297.6
Operating expenses
Compensation and related costs	417.4				—				—			417.4			446.3			—			—				446.3
Distribution and servicing	37.4				27.9				2.1			67.4			38.0			30.2			2.4				70.6
Advertising and promotion	14.0				—				—			14.0			33.8			—			.2				34.0
Product-related costs	—				23.4				14.5			37.9			—			26.0			9.1				35.1
Technology, occupancy, and facility costs(2)	84.0			—	2.2				.1		—	86.3			90.4		—	5.5			(.1		)	—	95.8
General, administrative, and other	120.4				(53.5		)		.3			67.2			146.6			(61.7		)	(.1		)		84.8
Total operating expenses	673.2				—				17.0			690.2			755.1			—			11.5				766.6
Net operating income	$	548.5			$	—			$	—		$	548.5		$	531.0		$	—		$	—			$	531.0

⁽¹⁾ The previously reported column aggregates the administrative fees and distribution and servicing fees lines presented in the income statement in prior year.

⁽²⁾ The previously reported column aggregates the depreciation and amortization of property and equipment and occupancy and facility costs lines presented in the income statement in prior year.

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We adopted Accounting Standards Update No. 2016-01 — Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2018. This standard update addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. After January 1, 2018, the guidance requires substantially all equity investments in non-consolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting. As such, the guidance eliminated the available-for-sale investment category for equity securities, which required unrealized holding gains to be recognized in accumulated other comprehensive income. Upon adoption, we reclassified net unrealized holding gain of $7.9 million, net of taxes, related to our $597.1 million available-for-sale investment portfolio from accumulated other comprehensive income to retained earnings. Additionally, certain investments that do not have readily available market prices or quotations will be measured at fair value, under the new guidance, as we elected to use their calculated and reported net asset value (NAV) per share as a practical expedient for measuring their fair value in accordance with ASC 946. As such, we recognized a cumulative adjustment to retained earnings of $14.5 million to adjust investments previously accounted for as cost method investments to fair value on January 1, 2018. The corresponding increase in the investments’ carrying value and related deferred taxes was of $19.5 million and $5.0 million, respectively. Our updated investments policy is included in the Summary of Significant Accounting Policies section below.

We adopted Accounting Standards Update No. 2018-02 — Reclassification of certain tax effects from accumulated other comprehensive income on January 1, 2018. This guidance permits tax effects stranded in accumulated other comprehensive income primarily resulting from the enactment of the U.S. tax reform bill originally known as the Tax Cuts and Jobs Act of 2017 to be reclassified to retained earnings either on January 1, 2018 or retrospectively. We elected to adopt the guidance on January 1, 2018 and reclassified $2.3 million of stranded tax benefits related to currency translation adjustments to retained earnings. The stranded income taxes related to our available-for-sale investment portfolio at December 31, 2017, were reclassified to retained earnings with the adoption of Accounting Standards Update No. 2016-01 on January 1, 2018. Our updated comprehensive income policy is included in the Summary of Significant Accounting Policies section below.

NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 — Leases (Topic 842). The standard update seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standards update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and certain practical expedients are available. While we continue evaluating the full impact this standard will have on our financial position and results of operations, we currently expect the most significant impact will be the recognition of a right of use asset and lease liability on our consolidated balance sheets for each real-estate operating lease. We plan to adopt the standard on its effective date, January 1, 2019.

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

REVENUE RECOGNITION.

Our revenue is earned from investment advisory, administrative, and distribution services we provide to our clients. Each distinct service we promise in our agreements is considered a performance obligation and is the basis for determining when we recognize revenue. The fees are allocated to each distinct performance obligation and we recognize revenue when, or as, we satisfy our promises. The timing of when we bill our clients varies in accordance with agreed-upon contractual terms. For the majority of our agreements, billing occurs after we have recognized revenue which results in accounts receivable and accrued revenue. For an insignificant portion of our contracts, billing occurs in advance of providing services which results in deferred revenue within the accounts payable and accrued expenses line of our condensed consolidated balance sheets.

Taxes billed to our clients based on our fees for services rendered are not included in revenues.

Investment advisory fees

The majority of our investment advisory agreements, including those with the U.S. mutual funds, have a single performance obligation as the promised services are not separately identifiable from other promises in the agreements and, therefore, are not

Page 9

distinct. Substantially all performance obligations for providing advisory services are satisfied over time and revenue is recognized as time passes.

Investment advisory agreements with T. Rowe Price investment products regulated outside the U.S. generally have two performance obligations; one for investment management and one for distribution. For these agreements, we allocate the management fee to each performance obligation using our best estimate of the standalone fee of each of these services. The performance obligation for providing investment management services, like our other advisory contracts, is satisfied over time and revenue is recognized as time passes. The performance obligation for distribution is satisfied at the point in time when an investor makes an investment into the product. Accordingly, a portion of the investment advisory fees earned from these products relate to distribution performance obligations that were satisfied during prior periods. These distribution fees are reported within the investment advisory fees line of our condensed consolidated statements of income.

The management fee for our investment advisory agreements are based on our assets under management, which change based on fluctuations in financial markets, and represent variable consideration. Therefore, investment advisory fees are generally constrained, and excluded from revenue, until the asset values on which our client is billed are no longer subject to financial market volatility. Our assets under management are valued in accordance with valuation and pricing processes for each major type of investment. Fair values used in our processes are primarily determined from quoted market prices; prices furnished by dealers who make markets in such securities; or from data provided by an independent pricing service that considers yield or price of investments of comparable quality, coupon, maturity, and type. Investments for which market prices are not readily available are not a material portion of our total assets under management.

We provide all services to the U.S. mutual funds under contracts that are subject to periodic review and approval by the funds’ Boards. Regulations require that the funds’ shareholders also approve material changes to investment advisory contracts.

Administrative, distribution, and servicing fees

Administrative fees

The administrative services we provide include distribution, mutual fund transfer agent, accounting and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage, and trust services.

The administrative service agreements with the U.S. mutual funds for accounting oversight, transfer agency and recordkeeping services generally have one performance obligation as the promised services in each agreement are not separately identifiable from other promises in the agreement and, therefore, are not distinct. The fees for performing these services are generally equal to the costs incurred and represent variable consideration. The fees are generally constrained, and are recognized as revenue when costs are incurred to perform the services. These fees are generally offset by the costs incurred to provide such services.

Other administrative service agreements for participant recordkeeping and transfer agent services for defined contribution retirement plans; brokerage services, and trust services generally have one performance obligation as the promised services in each agreement are not separately identifiable from other performance obligations in the contract and, therefore, are not distinct. Our performance obligation in each agreement is satisfied over time and revenue is recognized as time passes. The fees for these services vary by contract and are both fixed and variable.

Distribution and servicing fees

The agreements for distribution and servicing fees earned from 12b-1 plans of the Advisor Class, R Class, and Variable Annuity II Class shares of the U.S. mutual funds have one performance obligation, as distribution services are not separately identifiable from shareholder servicing promises in the agreements and, therefore, are not distinct. Our performance obligation is satisfied at the point in time when an investor makes an investment into these share classes of the U.S. mutual funds. The fees for these distribution and servicing agreements are based on the assets under management in these shares classes, which change based on fluctuations in financial markets, and represent variable consideration. These fees are generally constrained, and excluded from revenue, until the asset values on which our client is billed are not subject to financial market volatility. Accordingly, the majority of the distribution and servicing revenue disclosed in Note 2 - information about receivables, revenues and services relates to distribution and servicing obligations that were satisfied during prior periods. These fees are offset entirely by the

distribution and servicing costs paid to third-party financial intermediaries that source the assets of these share classes.

INVESTMENTS.

Investments held at fair value

Investments in T. Rowe Price investment products have been made for both general corporate investment purposes and to provide seed capital for newly formed products. Those investments that we do not consolidate are carried at fair value using the quoted closing NAV per share of each fund as of the balance sheet date. The underlying investments held by our consolidated T.

Page 10

Rowe Price investment products are considered trading securities and are valued in accordance with the valuation and pricing policy used to value our assets under management which is further described in the Revenue Recognition policy above.

We elected to value our interest in investment partnerships for which market prices or quotations are not readily available, at fair value using the NAV per share as a practical expedient for measuring fair value.

Changes in the fair values of all these investments are reflected in non-operating income in our condensed consolidated statements of income.

Equity method investments

Equity method investmentsconsist of investments in entities, including T. Rowe Price investment products, for which we have the ability to exercise significant influence over the operating and financial policies of the investee. The carrying values of these investments are adjusted to reflect our proportionate share of the investee's net income or loss, any unrealized gain or loss resulting from the translation of foreign-denominated financial statements into U.S. dollars, and dividends received. Our proportionate share of income or loss is included in non-operating income in our consolidated statements of income. As permitted under existing accounting guidance, we adopted a policy by which we recognize our share of UTI Asset Management Company Limited’s (UTI) earnings on a quarter lag as current financial information is not available in a timely manner. The basis difference between our carrying value and our proportionate share of UTI’s book value is primarily related to consideration paid in excess of the stepped-up basis of assets and liabilities on the date of purchase.

COMPREHENSIVE INCOME.

The components of comprehensive income are presented in a separate statement following our consolidated statements of income and include net income, the change in our currency translation adjustments, and prior to 2018, the change in net unrealized security holding gains (losses) on investments classified as available-for-sale. The currency translation adjustments result from translating our proportionate share of the financial statements of UTI, our equity method investment, and certain consolidated T. Rowe Price investment products into U.S. dollars. Assets and liabilities are translated into U.S. dollars using year-end exchange rates, and revenues and expenses are translated using weighted-average exchange rates for the period.

The changes in accumulated balances of each component of other comprehensive income, the deferred tax impacts of each component, and information about significant items reclassified out of accumulated other comprehensive income are presented in the notes to the financial statements. The notes also indicate the line item of our consolidated statements of income to which the significant reclassifications were recognized.

We reclassify income tax effects relating to currency translation adjustments to tax expense when there is a reduction in our ownership interest in the related investment. The amount of the reclassification depends on the investment’s accounting treatment before and after the change in ownership percentage. Prior to 2018, tax effects relating to each available-for-sale investment’s unrealized holding gain or loss, were reclassified upon the sale of the investment.

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NOTE 2 – INFORMATION ABOUT RECEIVABLES, REVENUES, AND SERVICES.

Revenues earned during the first quarter of2017 and 2018 under agreements with clients include:

	Three months ended 3/31/2017
			Administrative, distribution, and servicing fees
(in millions)	Investment advisory fees		Administrative fees		Distribution and servicing fees		Net revenues
U.S. mutual funds	$	717.4	$	86.3	$	35.2	$	838.9
Subadvised and separately managed accounts and other investment products	275.3		—		—		275.3
Other	—		18.4		—		18.4
	$	992.7	$	104.7	$	35.2	$	1,132.6
	Three months ended 3/31/2018
			Administrative, distribution, and servicing fees
(in millions)	Investment advisory fees		Administrative fees		Distribution and servicing fees		Net revenues
U.S. mutual funds	$	832.9	$	81.8	$	36.6	$	951.3
Subadvised and separately managed accounts and other investment products	356.3		—		—		356.3
Other	—		20.4		—		20.4
	$	1,189.2	$	102.2	$	36.6	$	1,328.0

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

	Three months ended
(in millions)	3/31/2017		3/31/2018
U.S. mutual funds
Equity and blended assets	$	594.2	$	705.5
Fixed income and money market	123.2		127.4
	717.4		832.9
Subadvised and separately managed accounts and other investment products
Equity and blended assets	227.9		297.0
Fixed income and money market	47.4		59.3
	275.3		356.3
Total	$	992.7	$	1,189.2

The following table summarizes the investment portfolios and assets under management on which we earn investment advisory fees.

	Average during
	the first quarter of				As of
(in billions)	2017		2018		12/31/2017		3/31/2018
U.S. mutual funds
Equity and blended assets	$	421.0	$	494.6	$	480.5	$	484.1
Fixed income and money market	115.5		127.4		125.8		128.8
	536.5		622.0		606.3		612.9
Subadvised and separately managed accounts and other investment products
Equity and blended assets	231.6		308.2		291.9		304.8
Fixed income and money market	77.3		95.3		92.9		96.5
	308.9		403.5		384.8		401.3
Total	$	845.4	$	1,025.5	$	991.1	$	1,014.2

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Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for 5.8% and 6.0% of our assets under management at December 31, 2017, and March 31, 2018, respectively.

Total net revenues earned from T. Rowe Price investment products aggregate $945.0 million and $1,100.6 for the first quarter of2017 and 2018, respectively. Accounts receivable from these products aggregates $365.3 million at December 31, 2017, and $388.8 million at March 31, 2018.

NOTE 3 – INVESTMENTS.

The carrying values of investments we do not consolidate are as follows:

(in millions)	12/31/2017		3/31/2018
Investments held at fair value
T. Rowe Price investment products (1)	$	692.1	$	1,231.1
T. Rowe Price investment products designated as an economic hedge of supplemental savings plan liability	268.2		283.3
Investment partnerships and other investments(2)	78.0		95.2
Equity method investments
T. Rowe Price investment products	277.4		316.7
26% interest in UTI Asset Management Company Limited (India)	155.8		163.2
Investment partnerships and other investments	4.8		4.6
U.S. Treasury note	1.0		1.0
Total	$	1,477.3	$	2,095.1

⁽¹⁾ Includes $597.1 million of investments at December 31, 2017, that were previously reported as available-for sale investments prior to the adoption of the new financial instruments guidance on January 1, 2018. Refer to Note 1 for more information.

⁽²⁾ These investments at December 31, 2017 were carried at cost. Upon adoption of new financial guidance on January 1, 2018, these investments are carried at fair value using NAV per share as a practical expedient. Refer to Note 1 for more information.

The other investments at fair value include investment partnerships that are carried at fair value using their net asset value per share as a practical expedient. Our interests in these partnerships are generally not redeemable and are subject to significant restrictions on transferability. The underlying investments of these partnerships have contractual terms through 2029, though we may receive distributions of liquidating assets over a longer term. The investment strategies of these partnerships include growth equity, buyout, venture capital, and real estate.

Net gains on investments during the first quarter of2018 includes $1.9 million of net unrealized losses recognized on investments held at fair value that were still held at March 31, 2018. For the first quarter of 2017, the majority of unrealized gains or losses on investments held at fair value are included and presented with other comprehensive income.

During the first three months of 2017 and 2018, certain T. Rowe Price investment products in which we provided initial seed capital at the time of formation were deconsolidated, as we no longer had a controlling interest. Depending on our ownership interest, we are now reporting our residual interests in these T. Rowe Price investment products as either an equity method investment or an investment held at fair value. Additionally, during the first three months of 2017 certain T. Rowe Price investment products that were being accounted for as equity method investments were consolidated, as we regained a controlling interest. The net impact of these changes on our condensed consolidated balance sheets and income statements as of the dates the portfolios were deconsolidated or reconsolidated is detailed below.

	Three months ended
(in millions)	3/31/2017			3/31/2018
Net increase (decrease) in assets of consolidated T. Rowe Price investment products	$	(1,035.9	)	$	(757.5	)
Net increase (decrease) in liabilities of consolidated T. Rowe Price investment products	$	(133.2	)	$	(5.2	)
Net increase (decrease) in redeemable non-controlling interests	$	(767.7	)	$	(632.9	)
Gains (losses) recognized upon deconsolidation	$	—		$	3.1

The gains or losses recognized upon deconsolidation were the result of reclassifying currency translation adjustments accumulated on certain T. Rowe Price investment products with non-USD functional currencies from accumulated other comprehensive income to non-operating income.

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VARIABLE INTEREST ENTITIES.

Our investments at December 31, 2017 and March 31, 2018, include interests in variable interest entities that we do not consolidate as we are not deemed the primary beneficiary. Our maximum risk of loss related to our involvement with these entities is as follows:

(in millions)	12/31/2017		3/31/2018
Investment carrying values	$	129.2	$	254.3
Unfunded capital commitments	38.8		37.2
Uncollected investment advisory and administrative fees	7.7		9.3
	$	175.7	$	300.8

The unfunded capital commitments totaling $38.8 million and $37.2 million at December 31, 2017 and March 31, 2018, respectively, relate primarily to the investment partnerships in which we have an existing investment. In addition to such amounts, a percentage of prior distributions may be called under certain circumstances.

NOTE 4 – FAIR VALUE MEASUREMENTS.

We determine the fair value of our cash equivalents and certain investments using the following broad levels of inputs as defined by related accounting standards:

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

Level 2 – observable inputs other than Level 1 quoted prices including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds, and credit risk. These inputs are based on market data obtained from independent sources.

Level 3 – unobservable inputs reflecting our own assumptions based on the best information available. We do not value any investments using Level 3 inputs.

These levels are not necessarily an indication of the risk or liquidity associated with our investments. There have been no transfers between the levels. The following table summarizes our investments that are recognized in our condensed consolidated balance sheets using fair value measurements determined based on the differing levels of inputs. This table excludes investments held by consolidated T. Rowe Price investment products which are presented separately on our condensed consolidated balance sheets and are detailed in Note 5.

	12/31/17				3/31/18
(in millions)	Level 1		Level 2		Level 1		Level 2
Cash equivalents	$	1,726.4	$	—	$	1,488.9	$	—
T. Rowe Price investment products(1)	942.9		17.4		1,496.4		18.0
Total	$	2,669.3	$	17.4	$	2,985.3	$	18.0

⁽¹⁾Includes $597.1 million of investments at December 31, 2017 that were previously reported as available-for sale investments prior to the adoption of new financial instruments guidance on January 1, 2018. Refer to Note 1 for more information.

At March 31, 2018, the reported investments held at fair value in Note 3 include $95.2 million of investments that are carried at fair value using the NAV per share as a practical expedient. These investments are not required to be included in the fair value hierarchy levels above.

NOTE 5 – CONSOLIDATED T. ROWE PRICE INVESTMENT PRODUCTS.

The T. Rowe Price investment products that we consolidate in our condensed consolidated financial statements are generally those products we provided initial seed capital at the time of their formation and have a controlling interest. Our U.S. mutual funds are considered voting interest entities, while those regulated outside the U.S. are considered variable interest entities.

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The following table details the net assets of the consolidated T. Rowe Price investment products:

	12/31/2017						3/31/2018
(in millions)	Voting interest entities		Variable interest entities		Total		Voting interest entities		Variable interest entities		Total
Cash and cash equivalents(1)	$	7.1	$	96.0	$	103.1	$	17.7	$	67.1	$	84.8
Investments(2)	188.8		1,725.7		1,914.5		234.0		1,157.2		1,391.2
Other assets	12.9		17.9		30.8		20.6		14.2		34.8
Total assets	208.8		1,839.6		2,048.4		272.3		1,238.5		1,510.8
Liabilities	16.4		39.5		55.9		25.4		27.8		53.2
Net assets	$	192.4	$	1,800.1	$	1,992.5	$	246.9	$	1,210.7	$	1,457.6
Attributable to T. Rowe Price Group	$	131.6	$	868.1	$	999.7	$	180.0	$	731.1	$	911.1
Attributable to redeemable non-controlling interests	60.8		932.0		992.8		66.9		479.6		546.5
	$	192.4	$	1,800.1	$	1,992.5	$	246.9	$	1,210.7	$	1,457.6

⁽¹⁾Cash and cash equivalents includes $6.2 million and $15.7 million at December 31, 2017 and March 31, 2018, respectively, of investments in T. Rowe Price money market mutual funds.

⁽²⁾Investments include $15.0 million and $45.3 million at December 31, 2017 and March 31, 2018, respectively, of T. Rowe Price investment products.

Although we can redeem our net interest in these T. Rowe Price investment products at any time, we cannot directly access or sell the assets held by these products to obtain cash for general operations. Additionally, the assets of these investment products are not available to our general creditors.

Since third party investors in these investment products have no recourse to our credit, our overall risk related to the net assets of consolidated T. Rowe Price investment products is limited to valuation changes associated with our net interest. We, however, are required to recognize the valuation changes associated with all underlying investments held by these products in our condensed consolidated statements of income, and disclose the portion attributable to third party investors as net income attributable to redeemable non-controlling interests.

The operating results of the consolidated T. Rowe Price investment products for the three months ended March 31, 2017 and 2018 are reflected in our condensed consolidated statements of income as follows:

	Three months ended
	3/31/2017									3/31/2018
(in millions)	Voting interest entities			Variable interest entities			Total			Voting interest entities			Variable interest entities			Total
Operating expenses reflected in net operating income	$	(.3	)	$	(2.3	)	$	(2.6	)	$	(.3	)	$	(2.2	)	$	(2.5	)
Net investment income reflected in non-operating income	5.3			43.6			48.9			(.8		)	1.6			.8
Impact on income before taxes	$	5.0		$	41.3		$	46.3		$	(1.1	)	$	(.6	)	$	(1.7	)
Net income attributable to T. Rowe Price Group	$	3.9		$	27.9		$	31.8		$	(.7	)	$	(2.8	)	$	(3.5	)
Net income attributable to redeemable non-controlling interests	1.1			13.4			14.5			(.4		)	2.2			1.8
	$	5.0		$	41.3		$	46.3		$	(1.1	)	$	(.6	)	$	(1.7	)

The operating expenses of these consolidated products are reflected in other operating expenses. Operating expenses eliminated for the three months ended March 31, 2017 and 2018, were $.8 million and $1.7 million, respectively, against the investment advisory and administrative fees earned from these products. The net investment income reflected in non-operating income includes dividend and interest income and realized and unrealized gains and losses on the underlying securities held by the consolidated T. Rowe Price investment products.

Page 15

The table below details the impact of these consolidated investment products on the individual lines of our condensed consolidated statements of cash flows (in millions) for the three months endedMarch 31, 2017 and 2018.

	Three months ended
	3/31/2017									3/31/2018
(in millions)	Voting interest entities			Variable interest entities			Total			Voting interest entities			Variable interest entities			Total
Net cash provided by (used in) operating activities	$	(.6	)	$	(538.2	)	$	(538.8	)	$	(52.8	)	$	(148.2	)	$	(201.0	)
Net cash provided by (used in) investing activities	(6.2		)	(40.3		)	(46.5		)	—			(21.5		)	(21.5		)
Net cash provided by (used in) financing activities	3.2			570.1			573.3			63.4			139.5			202.9
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products	—			(3.4		)	(3.4		)	—			1.3			1.3
Net change in cash and cash equivalents during period	(3.6		)	(11.8		)	(15.4		)	10.6			(28.9		)	(18.3		)
Cash and cash equivalents at beginning of year	10.3			55.3			65.6			7.1			96.0			103.1
Cash and cash equivalents at end of period	$	6.7		$	43.5		$	50.2		$	17.7		$	67.1		$	84.8

The net cash provided by financing activities during the first quarter of 2017 and 2018 includes $22.2 million and $25.1 million, respectively, of net subscriptions we made into the consolidated T. Rowe Price investment products, net of dividends received. These cash flows were eliminated in consolidation.

FAIR VALUE MEASUREMENTS.

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

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

Level 2 – observable inputs other than Level 1 quoted prices including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds, and credit risk. These inputs are based on market data obtained from independent sources.

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

These levels are not necessarily an indication of the risk or liquidity associated with these investment holdings. There have been no material transfers between the levels. The following table summarizes the investment holdings held by our consolidated T. Rowe Price investment products using fair value measurements determined based on the differing levels of inputs.

	12/31/17						3/31/18
(in millions)	Level 1			Level 2			Level 1			Level 2
Assets
Cash equivalents	$	6.2		$	.7		$	15.7		$	1.6
Equity securities	536.0			667.5			178.5			471.0
Fixed income securities	—			687.4			—			721.3
Other investments	1.3			22.3			1.1			19.3
	$	543.5		$	1,377.9		$	195.3		$	1,213.2
Liabilities	$	(.1	)	$	(13.7	)	$	(.8	)	$	(6.7	)

NOTE 6 – STOCKHOLDERS’ EQUITY.

Regular cash dividends declared per share during the first three months of 2017 and 2018 were $.57 and $.70, respectively.

At March 31, 2018, a liability of $22.2 million is included in accounts payable and accrued expenses for common stock repurchases that settled by April 3, 2018.

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NOTE 7 – STOCK-BASED COMPENSATION.

STOCK OPTIONS.

The following table summarizes the status of, and changes in, our stock options during the first quarter of 2018.

	Options		Weighted- average exercise price
Outstanding at December 31, 2017	15,221,123		$	66.98
Exercised	(1,492,576	)	$	59.69
Forfeited	(24,538	)	$	75.74
Expired	(14,364	)	$	71.15
Outstanding at March 31, 2018	13,689,645		$	67.76
Exercisable at March 31, 2018	9,635,926		$	64.42

RESTRICTED SHARES AND STOCK UNITS.

The following table summarizes the status of, and changes in, our nonvested restricted shares and restricted stock units during the first quarter of 2018.

	Restricted shares		Restricted stock units		Weighted-average fair value
Nonvested at December 31, 2017	473,115		5,556,911		$	82.37
Time-based grants	—		4,741		$	106.77
Vested	(1,420	)	(10,294	)	$	72.43
Forfeited	(3,626	)	(37,854	)	$	78.52
Nonvested at March 31, 2018	468,069		5,513,504		$	82.43

Nonvested at March 31, 2018, includes 7,200 performance-based restricted shares and 406,412 performance-based restricted stock units. These performance-based restricted shares and units include 7,200 restricted shares and 291,958 restricted stock units for which the performance period has lapsed and the performance threshold has been met.

FUTURE STOCK-BASED COMPENSATION EXPENSE.

The following table presents the compensation expense (in millions) to be recognized over the remaining vesting periods of the stock-based awards outstanding at March 31, 2018. Estimated future compensation expense will change to reflect future grants of restricted stock awards and units, future option grants, changes in the probability of performance thresholds being met, and adjustments for actual forfeitures.

Second quarter 2018	$	46.3
Third quarter 2018	45.7
Fourth quarter 2018	40.1
2019	95.9
2020 through 2023	79.5
Total	$	307.5

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NOTE 8 – EARNINGS PER SHARE CALCULATIONS.

The following table presents the reconciliation of net income attributable to T. Rowe Price Group to net income allocated to our common stockholders and the weighted-average shares that are used in calculating the basic and diluted earnings per share on our common stock. Weighted-average common shares outstanding assuming dilution reflect the potential dilution, determined using the treasury stock method, that could occur if outstanding stock options were exercised and non-participating stock awards vested.

	Three months ended
(in millions)	3/31/2017		3/31/2018
Net income attributable to T. Rowe Price Group	$	385.9	$	453.7
Less: net income allocated to outstanding restricted stock and stock unit holders	8.7		10.6
Net income allocated to common stockholders	$	377.2	$	443.1
Weighted-average common shares
Outstanding	242.1		244.3
Outstanding assuming dilution	245.5		249.8

The following table shows the weighted-average outstanding stock options that are excluded from the calculation of diluted earnings per common share as the inclusion of such shares would be anti-dilutive.

	Three months ended
(in millions)	3/31/2017	3/31/2018
Weighted-average outstanding stock options excluded	9.5	—

NOTE 9 – OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME.

The following table presents the impact of the components of other comprehensive income or loss on deferred tax benefits (income taxes).

	Three months ended
(in millions)	3/31/2017			3/31/2018
Net deferred tax benefits (income taxes) on:
Net unrealized holding gains or losses	$	(7.1	)	$	—
Reclassification adjustments recognized in the provision for income taxes:
Net gains realized on dispositions	18.6			—
Net deferred tax benefits (income taxes) on net unrealized holding gains or losses	11.5			—
Currency translation adjustments	(.8		)	(3.3		)
Reclassification adjustment recognized in the provision for income taxes upon deconsolidation of T. Rowe Price investment product	—			.8
Total deferred tax benefits (income taxes) on currency translation adjustments	(.8		)	(2.5		)
Total net deferred tax benefits (income taxes)	$	10.7		$	(2.5	)

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The changes in each component of accumulated other comprehensive income (loss), including reclassification adjustments for the first quarter of 2018 are presented in the table below.

				Currency translation adjustments
(in millions)	Net unrealized holding gains			Equity method investments			Consolidated T. Rowe Price investment products - variable interest entities			Total currency translation adjustments			Total
Balances at December 31, 2017	$	7.9		$	(30.6	)	$	19.1		$	(11.5	)	$	(3.6	)
Reclassification of unrealized holding gains to retained earnings upon adoption of new financial instruments guidance(1)	(7.9		)	—			—			—			(7.9		)
Reclassification adjustment of stranded tax benefits on currency translation adjustments upon adoption of new accumulated other comprehensive income guidance				(6.4		)	4.1			(2.3		)	(2.3		)
Balance at January 1, 2018	—			(37.0		)	23.2			(13.8		)	(13.8		)
Other comprehensive income before reclassifications and income taxes	—			3.8			9.2			13.0			13.0
Reclassification adjustments recognized in non-operating income	—			—			(3.1		)	(3.1		)	(3.1		)
	—			3.8			6.1			9.9			9.9
Net deferred tax income taxes	—			(.8		)	(1.7		)	(2.5		)	(2.5		)
Other comprehensive income (loss)	—			3.0			4.4			7.4			7.4
Balances at March 31, 2018	$	—		$	(34.0	)	$	27.6		$	(6.4	)	$	(6.4	)

⁽¹⁾ Includes the reclassification of $1.7 million of stranded income taxes on available-for-sale investments resulting from the U.S. tax law changes enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings.

NOTE 10 – DELL APPRAISAL RIGHTS MATTER.

In 2016, we paid $166.2 million to compensate certain U.S. mutual funds, trusts, separately managed accounts, and subadvised clients (collectively, Clients) for the denial of their appraisal rights by the Delaware Chancery Court (Court) in connection with the 2013 leveraged buyout of Dell, Inc. (Dell).

On December 30, 2016, we entered into a settlement agreement for $100.0 million with our insurance carrier for insurance proceeds related to this matter. We recognized the proceeds as a reduction to the $166.2 million nonrecurring charge that we recognized earlier in 2016 and received the proceeds in January 2017. We received an additional $50 million in insurance proceeds from other insurance carriers in early 2017 and recognized a related reduction in operating expenses.

In accordance with the compensation payment, the Clients agreed that in the event the findings made by the Court regarding the fair value of Dell or the amount of interest to be applied were modified by a final, non-appealable judgment, T. Rowe Price and the Clients would make an appropriate adjustment between themselves, calculated in a manner that is consistent with the methodology used to compensate Clients. In December 2016, several parties, including Dell and the successful appraisal petitioners, filed appeals to the Delaware Supreme Court to challenge the Court’s valuation ruling. On December 14, 2017, the Delaware Supreme Court reversed the Court's judgment and remanded the case for further proceedings. It is not clear how the Court will eventually rule and what the ultimate valuation will be, although the Supreme Court’s opinion suggests that an appraisal value closer to the deal price of $13.75 may be the ultimate outcome.

Once the Court enters a final, non-appealable judgment, Clients will be required to repay any overpayment using the methodology used to calculate the original payment. We estimate that the first $15.2 million reclaimed from our Clients would be paid back to T. Rowe Price Group. We would then be required to repay any additional reclaimed funds to our insurers in a specific order.

NOTE 11 – COMMITMENTS AND CONTINGENCIES.

On February 14, 2017, T. Rowe Price Group, Inc., T. Rowe Price Associates, Inc., T. Rowe Price Trust Company, current and former members of the management committee, and trustees of the T. Rowe Price U.S. Retirement Program were named as

Page 19

defendants in a lawsuit filed in the United States District Court for the District of Maryland. The lawsuit alleges breaches of ERISA’s fiduciary duty and prohibited transaction provisions on behalf of a class of all participants and beneficiaries of the T. Rowe Price 401(k) Plan from February 14, 2011, to the time of judgment. The plaintiffs are seeking certification of the complaint as a class action. T. Rowe Price believes the claims are without merit and is vigorously defending the action. This matter is in the early stages of litigation and we cannot predict the eventual outcome or whether it will have a material negative impact on our financial results, or estimate the possible loss or range of loss that may arise from any negative outcome.

On April 27, 2016, certain shareholders in the T. Rowe Price Blue Chip Growth Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe Price Equity Income Fund, T. Rowe Price Growth Stock Fund, T. Rowe Price International Stock Fund, T. Rowe Price High Yield Fund, T. Rowe Price New Income Fund and T. Rowe Price Small Cap Stock Fund (the “Funds”) filed a Section 36(b) complaint under the caption Zoidis v. T. Rowe Price Assoc., Inc., against T. Rowe Price Associates, Inc. (“T. Rowe Price”) in the United States District Court for the Northern District of California. The complaint alleges that the management fees for the identified funds are excessive because T. Rowe Price charges lower advisory fees to subadvised clients with funds in the same strategy. The complaint seeks to recover the allegedly excessive advisory fees received by T. Rowe Price in the year preceding the start of the lawsuit, along with investments’ returns and profits. In the alternative, the complaint seeks the rescission of each fund’s investment management agreement and restitution of any allegedly excessive management fees. T. Rowe Price believes the claims are without merit and is vigorously defending the action. This matter is in the early stages of litigation and we cannot predict the eventual outcome or whether it will have a material negative impact on our financial results, or estimate the possible loss or range of loss that may arise from any negative outcome.

In addition to the matters discussed above, various claims against us arise in the ordinary course of business, including employment-related claims. In the opinion of management, after consultation with counsel, the likelihood of an adverse determination in one or more of these pending ordinary course of business claims that would have a material adverse effect on our financial position or results of operations is remote.

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NOTE 12 – SUPPLEMENTARY CONSOLIDATING CASH FLOW STATEMENT.

The following tables summarize the cash flows for the three months ended March 31, 2017 and 2018, that are attributable to T. Rowe Price Group, our consolidated T. Rowe Price investment products and the related eliminations required in preparing the statements.

	Three months ended
	3/31/2017												3/31/2018
(in millions)	Cash flow attributable to T. Rowe Price Group			Cash flow attributable to consolidated T. Rowe Price investment products			Eliminations			As reported			Cash flow attributable to T. Rowe Price Group			Cash flow attributable to consolidated T. Rowe Price investment products			Eliminations			As reported
Cash flows from operating activities
Net income	$	385.9		$	46.3		$	(31.8	)	$	400.4		$	453.7		$	(1.7	)	$	3.5		$	455.5
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization of property and equipment	35.6			—			—			35.6			36.9			—			—			36.9
Stock-based compensation expense	36.8			—			—			36.8			45.6			—			—			45.6
Net gains recognized on investments	(93.8		)	—			31.8			(62.0		)	.9			—			(3.5		)	(2.6		)
Investments in U.S. mutual funds held as trading to economically hedge supplemental savings plan liability	—			—			—			—			(12.9		)	—			—			(12.9		)
Net change in trading securities held by consolidated T. Rowe Price investment products	—			(566.3		)	—			(566.3		)	—			(189.4		)	—			(189.4		)
Other changes in assets and liabilities	363.6			(18.8		)	(.8		)	344.0			198.7			(9.9		)	(.9		)	187.9
Net cash provided by (used in) operating activities	728.1			(538.8		)	(.8		)	188.5			722.9			(201.0		)	(.9		)	521.0
Net cash provided by (used in) investing activities	52.9			(46.5		)	23.0			29.4			(524.3		)	(21.5		)	26.0			(519.8		)
Net cash provided by (used in) financing activities	(405.1		)	573.3			(22.2		)	146.0			(419.9		)	202.9			(25.1		)	(242.1		)
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products	—			(3.4		)	—			(3.4		)	—			1.3			—			1.3
Net change in cash and cash equivalents during period	375.9			(15.4		)	—			360.5			(221.3		)	(18.3		)	—			(239.6		)
Cash and cash equivalents at beginning of year	1,204.9			65.6			—			1,270.5			1,902.7			103.1			—			2,005.8
Cash and cash equivalents at end of period	$	1,580.8		$	50.2		$	—		$	1,631.0		$	1,681.4		$	84.8		$	—		$	1,766.2

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

T. Rowe Price Group, Inc.:

Results of Review of Interim Financial Information

We have reviewed the condensed consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries ("the Company") as of March 31, 2018, the related condensed consolidated statements of income, comprehensive income, and cash flows for the three-month periods ended March 31, 2018 and 2017, the related condensed consolidated statement of stockholders' equity for the three-month period ended March 31, 2018, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 16, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Baltimore, Maryland

April 25, 2018

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Item 2. 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 U.S. mutual funds and other investment products. The other investment products include: separately managed accounts, subadvised funds, and other T. Rowe Price products including collective investment trusts, target-date retirement trusts, open-ended investment products offered to investors outside the U.S., and products offered through variable annuity life insurance plans in the U.S. Investment advisory clients domiciled outside the U.S. account for 6% of our assets under management at March 31, 2018.

We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and other investment products, 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 incur significant expenditures to develop new products and services, and improve and expand our capabilities and distribution channels in order 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.

We remain debt-free with ample liquidity and resources that allow us to take advantage of attractive growth opportunities; invest in key capabilities, including investment professionals, technologies, and new product 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. We currently expect our 2018 non-GAAP operating expenses to grow in the range of 8-11%. This expense growth range factors in a number cost optimization efforts.

BACKGROUND.

Most major U.S. stock market indexes edged lower in the first quarter of 2018. After rising to record highs through late January—helped by favorable corporate earnings reports and momentum from the tax reform legislation passed in late 2017—the major indexes fell sharply in response to stronger-than-expected wage growth data and concerns that the Federal Reserve would respond to rising inflation with a faster pace of interest rate increases. Equities pared their losses after bottoming in early February, but stocks fell again in March in response to the Trump administration’s announcements of tariffs, especially those targeting Chinese imports, and restrictions on Chinese technology transfers and acquisitions.

Stocks in developed non-U.S. equity markets fared modestly worse than U.S. shares, even though stronger non-U.S. currencies reduced losses in dollar terms. Shares in developed Asian markets were mixed; Japanese shares returned about 1%. Developed European markets were also mixed. UK shares lagged with a decline of nearly 4%, hindered by continuing Brexit uncertainty and elevated inflation that may prompt the central bank to raise rates in May.

Stocks in emerging equity markets outperformed developed markets. Most Latin American markets rose, but Asian markets were widely mixed. In emerging Europe, Russian stocks advanced more than 9%, thanks in part to rising oil prices, falling domestic interest rates, and an S&P Global credit rating upgrade of the sovereign debt into investment-grade territory.

Returns of several major equity market indexes for the first quarter of2018, are as follows:

	Three months ended
Index	3/31/2018
S&P 500 Index	(.8)%
NASDAQ Composite Index(1)	2.3%
Russell 2000 Index	(.1)%
MSCI EAFE (Europe, Australasia, and Far East) Index	(1.4)%
MSCI Emerging Markets Index	1.5%

⁽¹⁾Returns exclude dividends

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Global bond returns in the first quarter were mixed in U.S. dollar terms. In the U.S., short-term Treasury yields rose in anticipation of a Fed interest rate increase in March and additional rate increases in 2018. Long-term Treasury yields also rose: the 10-year Treasury note yield started the quarter at 2.5% and ended around 2.7% after climbing to four-year highs near 3.0% in February. Investment-grade corporate bonds faced some headwinds from elevated supply and waning demand from outside the U.S. Municipal bonds outperformed taxable bonds amid muted new issuance. High yield bonds declined, but losses were limited by their lower interest rate sensitivity.

Bonds in developed non-U.S. markets performed well, as stronger non-U.S. currencies boosted local returns in dollar terms. In the UK, 10-year government bond yields rose on expectations that the central bank will raise short-term interest rates in May due to continued elevated inflation. In the eurozone, 10-year German sovereign bond yields rose slightly for the quarter but finished well below their early February highs. In Japan, the central bank’s yield curve control policy kept 10-year government bond yields close