T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its first quarter of 2018 results, including net revenues of $1.3 billion, net income of $453.7 million, and diluted earnings per common share of $1.77. For the first quarter of 2017, net revenues were $1.1 billion, net income was

$385.9 million, and diluted earnings per share was $1.54. On a non-GAAP basis, diluted earnings per share for the first quarter of 2018 was $1.74, compared with $1.18 in the 2017 quarter. The growth in the firm's diluted earnings per share year over year is due in part to the significant decline in the firm's tax rate as U.S. tax reform reduced the U.S. federal corporate tax rate beginning January 1, 2018, from 35% to 21%.

The first quarter of 2017 net revenues and operating expenses presented within this release have been recast to reflect the impact of the firm adopting new accounting guidance on January 1, 2018, related to revenue recognition. As previously disclosed in its 2017 Form 10-K, the firm elected to adopt the new guidance on a retrospective basis, which requires 2017 and 2016 results to be restated. The new guidance requires certain revenue related expenses that are incurred in servicing the firm's U.S. mutual funds to be recognized in operating expenses versus being presented net against the related revenues. As such, net revenues and certain product-related operating expenses were recast to reflect an increase of $19.0 million for the first quarter of 2017 and $61.9 million for the full year 2017.

Financial Highlights

The table below presents financial results on a U.S. GAAP basis as well as a non-GAAP basis that adjusts for the impact of the Dell (DELL) appraisal rights matter, the consolidated T. Rowe Price (TROW) investment products, the supplemental savings plan, and other non-operating income. The firm believes the non-GAAP financial measures below provide relevant and meaningful information to investors about its core operating results.

The assets under management in the firm's target date retirement products, which are reported as part of the multi-asset column in the table above, were $239.9 billion at March 31, 2018, compared with $233.8 billion at December 31, 2017. Net cash flows into these portfolios were $6.0 billion in the first quarter of 2018.

Investors domiciled outside the United States accounted for about 6% of the firm's assets under management at March 31, 2018 and December 31, 2017.

Financial Results

In order to increase transparency of operating expenses and better align expenses that have similar cost drivers, the firm has changed the presentation of certain line items of its income statement. In doing so, the firm has reclassified certain prior year amounts to conform to the 2018 presentation. The financial results for the first quarter of 2017 have been recast to conform to the new presentation as well as to reflect the impact of the new revenue recognition guidance. For a recast of 2017 quarterly financial results, refer to the Form 10-Q to be filed later today.

Investment advisory revenues earned in the current quarter from the firm's U.S. mutual funds were $832.9 million, an increase of 16.1% from the comparable 2017 quarter. Average assets under management in these funds increased 15.9% to $622.0 billion.

Investment advisory revenues earned in the current quarter for subadvised and separate accounts as well as other investment products were $356.3 million, an increase of 29.4% from the comparable 2017 quarter. Average assets under management for these products increased 30.6% to $403.5 billion.

Operating expenses were $744.2 million in the first quarter of 2018 compared with $610.9 million in the first quarter of 2017, and $766.6 million in the fourth quarter of 2017. The operating expenses for the first quarter of 2017 were reduced by the recognition of $50 million in insurance recoveries related to the Dell appraisal rights matter. On a non-GAAP basis, the firm's operating expenses in the first quarter of 2018 increased 12.4% to $741.0 million compared to the 2017 quarter, while decreasing 2.4% compared to the fourth quarter of 2017. The 12.4% increase from the first quarter of 2017 is primarily due to higher market and performance driven expenses and continued strategic investments. The firm continues to expect its 2018 non-GAAP operating expenses to grow in the range of 8-11%. This expense growth range factors in the firm's cost optimization efforts.

Compensation and related costs were $441.4 million in the current quarter, an increase of 11.1% over the first quarter of 2017, due primarily to an increase in salaries and benefits from higher headcount, the interim accrual of the annual bonus, and stock-based compensation expense. These increases were offset in part by lower compensation expense related to the supplemental savings plan as markets in the first quarter of 2018 were not as strong as in the 2017 quarter. Average staff size increased by 8.2% from the first quarter of 2017, and the firm employed 6,878 associates at March 31, 2018.

Distribution and servicing includes those costs incurred to distribute the T. Rowe Price products as well as client or shareholder servicing, recordkeeping, and administrative services. These costs were $70.3 million for the first quarter of 2018, an increase of 17.6% over the $59.8 million recognized in the first quarter of 2017. The increase was primarily driven by strong markets and net cash flows over the last twelve months, which has resulted in higher assets under management in these products.

Product-related costs is a new financial statement line item that consists of non-advisory costs of certain T. Rowe Price products incurred by the firm. These costs were $42.1 million in the current quarter, an increase of 9.1% over the $38.6 million recognized in the first quarter of 2017. The increase is primarily due to higher operating costs of the firm's collective investment trusts as the number of trusts and their net assets have increased since the end of the first quarter of 2017. The servicing costs the firm incurs that are reimbursed by its U.S. mutual funds and recognized in administrative, distribution, and servicing fees have also increased over prior year.

Technology, occupancy, and facility costs is a new financial statement line item that consists of depreciation expense, technology-related equipment and maintenance, software, and costs related to the firm's facilities. These costs were $94.1 million in the current quarter, an increase of 13.6% compared to the $82.8 million recognized in the first quarter of 2017. The increase is due primarily to incremental costs to update and enhance technology capabilities, including related maintenance programs, as well as expanded office facilities.

General, administrative, and other consist of costs associated with the overall management of the firm, including information services, professional services, travel and entertainment, research costs, and other general operating expenses. These costs were $71.7 million in the current quarter, an increase of 26.7% compared to the $56.6 million recognized in the first quarter of 2017. The increase was a result of the firm's investment in its strategic initiatives and other growing operational and regulatory business demands.

Non-operating income was $16.1 million in the current quarter, a decrease of $98.9 million from the first quarter of 2017. The decrease was driven primarily by realized gains in the first quarter of 2017 that did not reoccur in the 2018 quarter, and lower net investment gains recognized on the firm's consolidated investment products. The components of non-operating income for the first quarter of 2017 and 2018 are included in the tables at the back of this release.

The firm's income tax provision for the first quarter of 2018 was 24.1%, compared with 37.1% in the 2017 quarter, as U.S. tax reform reduced the U.S. federal corporate tax rate from 35% to 21% on January 1, 2018. The following reconciles the statutory federal income tax rate to the firm's effective tax rate for the first quarter of 2018:

The firm estimates its effective tax rate for the full-year 2018 will be in the range of 24% to 27%.

On April 24, 2018, the Governor of the State of Maryland signed legislation to adopt the single sales factor method of apportionment for calculating income tax for multi-state companies doing business in Maryland. This legislation is effective for years beginning in 2018 and will be phased in over a five year period. The firm is assessing the full impact the change in law will have on its effective tax rate, but expect it will result in a net benefit to T. Rowe Price in future years.

Capital Management

During the first quarter of 2018, the firm rebalanced its cash and discretionary investments portfolio resulting in the reallocation of cash invested in T. Rowe Price money market funds to certain T. Rowe Price short-term fixed income funds. The firm's common shares outstanding decreased during the first quarter of 2018, as the firm expended $313.5 million to repurchase 2.9 million shares, or 1.2%, of its outstanding common shares at an average price of $106.84. The firm invested $36.7 million during the first quarter of 2018 in capitalized facilities and technology, and expects capital expenditures for 2018 to be about $180 million, of which about two-thirds is planned for technology initiatives. These expenditures are expected to continue to be funded from operating resources.

Management Commentary

William J. Stromberg, the company's president and chief executive officer, commented: "This was another very good quarter for the firm and our clients. Despite volatile markets that generally edged lower, our assets under management increased 2.3% during the first quarter of 2018. This growth was supported by investment performance that remains strong versus peers and benchmarks, and by near-record quarterly net inflows exceeded only by those in the first quarter of 2012. The diversity of our flows across geographies, client segments, and asset classes, continues to reflect robust investor interest in our approach to active management.

"As another indicator of the strength and success of our global investment platform, dozens of T. Rowe Price strategies, as well as several of our portfolio managers, have recently received industry awards, including from Morningstar and Thomson Reuters Lipper. Along with our strong overall investment performance, this recognition highlights the strength of T. Rowe Price's fundamentally driven investing approach.

"As we execute on our strategic plan, we are encouraged by the resilience of our core business and the traction we are getting with newer products and channels. We expect that the ongoing build out of our product and investment strategy lineup, our growing distribution reach, and further enhancements in our technology capabilities will allow us to continue to grow and diversify our company. Recent highlights include:

• Investment Capabilities - The launch of the Multi-Strategy Total Return Fund marks our entry into liquid alternatives and takes advantage of our broad investment capabilities and extensive global research platform across equity, fixed income and multi-asset. Our target date retirement franchise remains a key driver of net inflows, with momentum in this space augmented by the recent inception of our Retirement Blend Trusts.
• U.S. Intermediary and Institutional Distribution - Investments in client facing resources, including further growth of our sales teams, continue to deepen relationships and drive new business. In our U.S. intermediary segment, flows through no transaction fee platforms remain robust across asset classes and we are seeing greater traction in the broker-dealer channel. Also, the buildout of our business intelligence team is enhancing our capabilities to deploy data-enabled client segmentation and engagement strategies.
• EMEA and APAC Distribution - The extension of our SICAV lineup continues, with the launch this month of several new fixed income and global equity sub-funds and the addition of share classes across a variety of strategies. We also plan to launch locally domiciled Japan Investment Trusts to capture additional opportunities in the Japanese market.
• Technology and Client Experience - The hiring of additional client-experience designers, technologists, and data scientists has enabled us to become more agile and accelerate our digital transformation efforts. We continue to broaden the number and types of customer journeys and client experiences we are reengineering, most recently with a focus on helping retirement plan participants more easily rollover outside funds into their T. Rowe Price managed plans.

"We are grateful to our dedicated and hard-working associates for their successful efforts to build our business, and to drive operational efficiency so we can reinvest further in our strategic initiatives. Our business model and financial health remain very strong, as does our commitment to meet the needs of our clients and deliver durable value to our stockholders."

In addition, 87% of the firm's rated U.S. mutual funds' assets under management ended the quarter with an overall rating of four or five stars from Morningstar. The performance of the firm's institutional strategies against their benchmarks remains very competitive, especially over longer time periods.

Other Matters

The financial results presented in this release are unaudited. The firm expects that it will file its Form 10-Q Quarterly Report for the first quarter of 2018 with the U.S. Securities and Exchange Commission later today. The Form 10-Q will include additional information on the firm's unaudited financial results at March 31, 2018.

Founded in 1937, Baltimore-based T. Rowe Price (troweprice.com) is a global investment management organization that provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The organization also offers a variety of sophisticated investment planning and guidance tools. T. Rowe Price's disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research.