T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its second quarter of 2018 results, including net revenues of $1.3 billion, net income of $448.9 million, and diluted earnings per common share of $1.77. For the second quarter of 2017, net revenues were $1.2 billion, net income was $373.9 million, and diluted earnings per share was $1.50. On a non-GAAP basis, diluted earnings per share for the second quarter of 2018 was $1.87, compared with $1.28in the 2017 quarter.

Financial Highlights

The table below presents financial results on a U.S. GAAP basis, as well as a non-GAAP basis that adjusts for, among other items, nonrecurring tax charges recognized in the second quarter of 2018 of $20.8 million ($.08 in diluted earnings per share) related to the enactment of U.S. tax reform and $7.9 million ($.03 in diluted earnings per share) related to the enactment of new Maryland state tax legislation. Beginning in the second quarter of 2018, the firm's non-GAAP adjustments no longer include non-operating income related to its cash and discretionary investments. The firm believes the non-GAAP financial measures below provide relevant and meaningful information to investors about its core operating results.

Assets Under Management Assets under management increased $29.9 billion in the second quarter of 2018 to $1.044 trillion at June 30, 2018. The firm's net cash inflows were $7.6 billion in the second quarter of 2018. Clients transferred $4.7 billion in net assets from the U.S. mutual funds to other investment products, including the retirement date trusts, in the second quarter of 2018. The components of the change in assets under management, by vehicle and asset class, are shown in the tables below.

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 $244.2 billion at June 30, 2018, compared with $239.9 billion at March 31, 2018 and $233.8 billion at December 31, 2017. Net cash flows into these portfolios were $2.5 billion in the second quarter of 2018 and $8.5 billion for the first half of 2018.

Investors domiciled outside the United States accounted for about 6% of the firm's assets under management at June 30, 2018 and December 31, 2017.

Financial Results Investment advisory revenues earned in the second quarter of 2018 from the firm's U.S. mutual funds were $846.9 million, an increase of 12.0% from the comparable 2017 quarter. Average assets under management in these funds increased 11.5% to $624.6 billion.

Investment advisory revenues earned in the second quarter of 2018 from subadvised and separate accounts as well as other investment products were $367.5 million, an increase of 26.9% from the comparable 2017 quarter. Average assets under management for these products increased 26.5% to $411.9 billion.

Administrative, distribution, and servicing fees in the second quarter of 2018 were $130.6 million, a decrease of $9.4 million from the comparable 2017 quarter. The decrease is primarily attributable to lower servicing revenue due to client transfers from mutual funds to other vehicles.

Operating expenses were $750.3 million in the second quarter of 2018 compared with $678.4 millionin the second quarter of 2017, and $744.2 million in the first quarter of 2018. On a non-GAAP basis, the firm's operating expenses in the second quarter of 2018 increased 10.1% to $745.3 million compared to the 2017 quarter and were in line with the $741.0 million recognized in the first quarter of 2018. The 10.1% increase from the second quarter of 2017 is primarily due to higher market driven expenses and continued strategic investments. The firm continues to expect its 2018 non-GAAP operating expenses to grow in the range of 8% to 11%. This expense growth range factors in the firm's cost optimization efforts and any contemplated uses of its expected U.S. tax reform benefits.

Compensation and related costs were $456.0 million in the current quarter, an increase of 12.9% over the second quarter of 2017, due primarily to an increase in headcount, the interim accrual of the annual bonus, and stock-based compensation expense. The firm's average staff size increased 6.2% from the second quarter of 2017. The second quarter of 2018 also includes $9.0 million in one-time bonuses paid to certain associates that was funded by U.S. tax reform benefits. These increases were offset in part by lower market-related expense from the supplemental savings plan. The firm employed 6,936 associates at June 30, 2018, compared with 6,881 associates at the end of 2017.

Distribution and servicing includes those costs incurred to distribute T. Rowe Price products as well as client or shareholder servicing, recordkeeping, and administrative services. These costs were $71.6 million in the current quarter, an increase of 10.5% over the $64.8 million recognized in the second quarter of 2017. The increase was primarily driven by strong markets and net cash flows over the last twelve months.

Product-related costs consist of non-advisory costs of certain T. Rowe Price products incurred by the firm. These costs were $37.1 million in the current quarter, an increase of 7.8% over the $34.4 millionrecognized in the second 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 second quarter of 2017.

Technology, occupancy, and facility costs consist of depreciation expense, technology-related equipment and maintenance, software, and costs related to the firm's facilities. These costs were $93.2 million in the current quarter, an increase of 8.9% compared to the $85.6 million recognized in the second quarter of 2017. The increase is due primarily to incremental investment in the firm's technology capabilities, including related depreciation and maintenance programs.

General, administrative, and other consists 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 $73.4 million in the current quarter, an increase of 3.2% compared to the $71.1 million recognized in the second quarter of 2017. The increase reflects growing operational and regulatory business demands.

Non-operating income was $34.1 million in the current quarter, a decrease of $77.9 million from the second quarter of 2017, as significant realized gains from the second quarter of 2017 did not reoccur. The components of non-operating income for the second quarter and the first half of 2017 and 2018 are included in the tables at the back of this release.

The firm's effective tax rate for the second quarter of 2018 was 26.9%, 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 income tax provision for the second quarter of 2018 includes an additional nonrecurring charge of $20.8 million related to the enactment of U.S. tax reform as the firm adjusted its deferred tax asset and liability remeasurement estimates recorded at December 31, 2017. The firm also recognized in the second quarter of 2018 a nonrecurring charge of $7.9 million for the remeasurement of the firm's deferred tax assets and liabilities to reflect the effect of Maryland state tax legislation enacted on April 24, 2018. This new state tax legislation, effective in 2018, adopted a five-year phase-in of the single sales factor method of apportionment for calculating income tax for multi-state companies doing business in Maryland and is expected to result in a net benefit to the firm over time.

During the first half of 2018, the firm rebalanced its cash and discretionary investments portfolio resulting in the reallocation of some cash from T. Rowe Price money market funds primarily to certain T. Rowe Price short-term fixed income funds.

The firm's common shares outstanding were 243.2 million at June 30, 2018, compared with 245.1 million at the end of 2017. Over the course of the first half of 2018, the firm expended $450.3 million to repurchase 4.2 million shares, or 1.7%, of its outstanding common shares at an average price of $106.48, including $136.9 million to repurchase 1.3 million shares during the second quarter of 2018. The firm invested $78.6 million during the first half of 2018 in capitalized facilities and technology, and expects capital expenditures for 2018 to be about $189 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: "In a second quarter where attractive U.S. equity returns proved the exception to volatile global markets, T. Rowe Price continued to perform well. Our assets under management increased nearly 3%, and we were pleased with the continued strength and diversification of net inflows across asset classes, client segments, and geographies. Our U.S. intermediary results were strong, and flows from EMEA and APAC remained on positive trajectories.

"The healthy client interest we are experiencing reflects our strong long-term investment performance and client service along with our success with newer products and channels. We remain pleased with our progress in executing our strategic plan across investment capabilities, products, distribution, and technology, as well as in driving operational efficiencies. Recent highlights include:

• Investment Capabilities - We have a solid pipeline of strategies nearing launch or under evaluation globally, including a new global fixed-income 'high-alpha' strategy. We continue to invest in our investment teams by adding talented new associates around the world.
• Americas Distribution - In our U.S. intermediary channel, flows through no transaction fee platforms remain robust across asset classes and we continue to build out our sales and relationship management teams. We also launched three new Canadian Pension Pooled Funds for institutional investors, extended the reach of our target date franchise with an additional sub-advisory relationship, broadened our trust lineup, and added clients to our managed accounts program.
• EMEA and APAC Distribution - To meet client needs, we added sub-funds and share classes across our U.K. Open-Ended Investment Company (OEIC), SICAV, and Australian Unit Trust (AUT) lineups. We also expanded our client service and operations teams in both regions.
• Client Experience and Technology - We broadened efforts in our Maryland Innovation Center to transform our clients' digital experiences and we continued to build out our team of data scientists and engineers in our New York Technology Development Center.

"We are very proud of our associates for their hard work in successfully moving our agenda ahead. As we reinvest in the business to achieve sustainable growth and diversification, we are confident in our ability to meet the needs of our clients and deliver durable value to our stockholders."

Investment Performance(1) The percentage of the firm's U.S. mutual funds (across primary share classes) that outperformed their comparable Morningstar median on a total return basis and that are in the top Morningstar quartile for the one-, three-, five-, and 10-years ended June 30, 2018, were:

In addition, 86% 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 second 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 June 30, 2018.

Certain statements in this earnings release may represent "forward-looking information," including information relating to anticipated changes in revenues, net income and earnings per common share, anticipated changes in the amount and composition of assets under management, anticipated expense levels, estimated tax rates, and expectations regarding financial results, future transactions, new products and services, investments, capital expenditures, dividends, stock repurchases, and other market conditions. For a discussion concerning risks and other factors that could affect future results, see the firm's 2017 Form 10-K and Form 10-Q for the second quarter of 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.