T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its third quarter of 2018 results, including net revenues of $1.4 billion, net income of $583.0 million, and diluted earnings per common share of $2.30. The firm's U.S. GAAP results for the third quarter of 2018 include a realized gain of $.27 in diluted earnings per share from the sale of its 10% holding in Daiwa SB Investments Ltd. For the third quarter of 2017, net revenues were $1.2 billion, net income was $390.9 million, and diluted earnings per share was $1.56. On a non-GAAP basis, diluted earnings per share for the third quarter of 2018 was $1.99, compared with $1.45 in 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, among other items, for the impact of consolidated T. Rowe Price investment products, the impact of market movements on the supplemental savings plan liability and related economic hedges, investment income related to certain other investments, and certain nonrecurring charges and gains. 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 $39.7 billion in the third quarter of 2018 to $1.084 trillion at September 30, 2018. The firm's net cash inflows were $2.7 billion in the third quarter of 2018. Clients transferred $3.2 billion in net assets from the U.S. mutual funds to other investment products, including the retirement date trusts, in the third 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 $252.1 billion at September 30, 2018, compared with $244.2 billion at June 30, 2018, and $233.8 billion at December 31, 2017. Net cash flows into these portfolios were $1.7 billion in the third quarter of 2018 and $10.2 billion for the nine months ended September 30, 2018.

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

Financial Results

Investment advisory revenues earned in the third quarter of 2018 from the firm's U.S. mutual funds were $877.3 million, an increase of 11.6% from the comparable 2017 quarter. Average assets under management in these funds increased 11.4% to $641.5 billion.

Investment advisory revenues earned in the third quarter of 2018 from subadvised and separate accounts as well as other investment products were $386.0 million, an increase of 23.4% from the comparable 2017 quarter. Average assets under management for these products increased 22.7% to $430.9 billion.

Administrative, distribution, and servicing fees in the third quarter of 2018 were $131.3 million, a decrease of $8.5 million from the comparable 2017 quarter. The decrease was primarily attributable to lower transfer agent and distribution servicing revenue earned from the T. Rowe Price U.S. mutual funds due to client transfers among vehicles and share classes.

Operating expenses were $754.0 million in the third quarter of 2018 compared with $690.2 million in the third quarter of 2017, and $750.3 million in the second quarter of 2018. On a non-GAAP basis, the firm's operating expenses in the third quarter of 2018 increased 9.1% to $744.5 million compared to the 2017 quarter and were lower than the $745.3 million recognized in the second quarter of 2018. The 9.1% increase in non-GAAP operating expenses from the third quarter of 2017 was due primarily 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 $454.3 million in the third quarter of 2018, an increase of 8.8% over the third quarter of 2017, due primarily to an increase in average headcount, the interim accrual of the annual bonus, and stock-based compensation expense. The firm's average staff size increased 4.2% from the third quarter of 2017. The firm employed 6,946 associates at September 30, 2018.

Advertising and promotion expense was $20.2 million in the third quarter of 2018, an increase of 44.3% over the $14.0 million recognized in the third quarter of 2017. The increase was primarily driven by the launch of the firm's new media advertising campaign in the third quarter of 2018.

Technology, occupancy, and facility costs were $96.5 million in the third quarter of 2018, an increase of 11.8% compared to the $86.3 million recognized in the third quarter of 2017. The increase was due primarily to incremental investment in the firm's technology capabilities, including related depreciation, hosted solution licenses, and maintenance programs.

General, administrative, and other costs were $73.7 million in the third quarter of 2018, an increase of 9.7% compared to the $67.2 million recognized in the third quarter of 2017. The increase reflects growing operational and regulatory business demands.

Non-operating income was $124.9 million in the third quarter of 2018, an increase of $57.6 million from the third quarter of 2017. The increase is due primarily to the gain the firm realized from the sale of its 10% holding in Daiwa SB Investments Ltd. This realized gain was partially offset by a decrease in net investment gains from the consolidated T. Rowe Price sponsored investment products. The components of non-operating income for the third quarter and the first nine months of 2017 and 2018, are included in the tables at the back of this release.

The firm's effective tax rate for the third quarter of 2018 was 24.0%, compared with 34.4% 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 third quarter rate of 24.0% contributes to an effective tax rate for nine months ended September 30, 2018 of 24.9%. 

The firm's common shares outstanding were 242.6 million at September 30, 2018, compared with 245.1 million at the end of 2017. During the third quarter of 2018, the firm expended $124.5 million to repurchase 1.1 million shares of its common stock at an average price of $110.76. These repurchases bring the total amount expended for the nine months ended September 30, 2018, to $574.8 million, representing 5.4 million shares, or 2.2%, of outstanding common shares at an average price of $107.38. The firm invested $121.5 million during the first nine months of 2018 in capitalized facilities and technology, and expects capital expenditures for 2018 to be about $170 million, of which about 70% 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 the third quarter, the combination of strong stock returns and solid net client inflows helped increase our assets under management by 3.8%. We are pleased with the pace and diversity of new sales across geographies and channels, and with our organic growth through the third quarter.

"Our long-term investment performance versus our peers remains strong, and we remain highly focused on delivering for our clients. We also continue to execute on our strategic plan across investment capabilities, distribution, and technology, including creating operational efficiency gains. Recent highlights include:

• Investment Capabilities - We continue to build out our investment professional staff globally, including additions to our equity research and dedicated multi-asset investment teams. We filed to launch the Dynamic Credit Fund and also expect to launch several other new products in 2019.
• Americas Distribution - In our U.S. intermediary segment, continued hiring across our sales and relationship management teams is deepening client engagement and generating net inflows, particularly in the broker-dealer and DCIO channels. We remain pleased with the traction we have gained on no transaction fee platforms. We also continue to build out our managed accounts program with the launch of dual contracts and the addition of clients and assets to our model portfolios and retail separately managed accounts.
• EMEA and APAC Distribution - Supporting client interest in our investment strategies, we added new sub-funds and share classes to our SICAV lineup. We also extended the lineup of SICAV funds available for distribution in Hong Kong, with more planned, and remain on track for the upcoming launch of locally domiciled Japan Investment Trusts. Our progress in these regions is also underpinned by continued improvement in brand recognition with intermediaries and institutions.
• Technology and Client Experience - We are growing our technology teams outside the U.S., building on progress being made to transform our clients' digital experiences, and further expanding innovation resources and activities in Maryland and New York.

"While our business is very competitive, our positioning remains strong. With the continued hard work of our associates around the world we are confident in our ability to add significant value for our clients and stockholders over time."

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 September 30, 2018, were:

In addition, 81% 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 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 third 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 September 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 third 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.