T. Rowe Price Group, Inc. (NASDAQ-GS: TROW) today reported its second quarter of 2017 results, including net revenues of $1.2 billion, net income of $373.9 million, and diluted earnings per common share of $1.50. On a comparable basis, net revenues were $1.0 billion, net income was $203.3 million, and diluted earnings per common share was $.79 in the second quarter of 2016. The 2016 results included the nonrecurring operating charge of $166.2 millionrelated to the Dell appraisal rights matter, which reduced net income by $100.7 million, or $.39 in diluted earnings per common share. A summary of the impact the matter has had on the firm's periodic financial results is summarized in a table at the back of this release. Adjusted diluted earnings per share for the second quarter of 2017 is up 15.3% compared to the 2016 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 the impact of the Dell appraisal rights matter, the firm's consolidated sponsored investment portfolios, 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.

Assets Under Management

Assets under management increased $42.0 billion in the second quarter of 2017 to $903.6 billion at June 30, 2017. The firm's net cash inflows were $3.7 billion in the second quarter of 2017. There were $7.6 billion of client transfers from the mutual funds to other portfolios. The components of the change in assets under management are shown in the table below.

Capital Management

T. Rowe Price remains debt-free with ample liquidity, including cash and sponsored portfolio investment holdings as follows:

The firm's common shares outstanding decreased since the end of 2016 as it expended $447.0 millionduring the first half of 2017 to repurchase 6.5 million shares, or 2.6%, of its outstanding common shares, including $130.7 million to repurchase 1.9 million shares during the second quarter of 2017. The firm invested $82.6 million during the first half of 2017 in capitalized facilities and technology and expects capital expenditures for 2017 to be up to $200 million, of which about two-thirds is planned for technology initiatives. These expenditures are expected to continue to be funded from operating resources.

Investment Performance

The percentage of T. Rowe Price mutual funds (across share classes) that outperformed their comparable Lipper averages on a total return basis and that are in the top Lipper quartile for the one-, three-, five-, and 10-years ended June 30, 2017, were:

In addition, 88% of the rated Price 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.

Financial Results

Investment advisory revenues earned in the current quarter from the T. Rowe Price mutual funds distributed in the U.S. were $754.3 million, an increase of 12.7% from the comparable 2016 quarter. Average U.S. mutual fund assets under management increased 13.8% to $560.2 billion.

Investment advisory revenues earned in the current quarter from other investment portfolios were $289.6 million, an increase of 15.1% from the comparable 2016 quarter. Average assets under management for these portfolios increased 16.1% to $325.7 billion.

The firm has reduced the management fees of certain of its mutual funds and other investment portfolios since mid-2016. These reductions were a factor in why investment advisory revenue grew slower than average assets under management during 2017. The firm regularly assesses the competitiveness of its fees and will continue to make adjustments as deemed appropriate.

Operating expenses were $664.0 million in the current quarter. Excluding the $166.2 million charge related to the Dell matter recognized in the second quarter of 2016, operating expenses have increased 11.6% from the 2016 quarter. The firm currently expects that its operating expenses, excluding the impact of the Dell matter, will grow about 10% in 2017 versus 2016. The firm could elect to modify the pace of spending on its planned initiatives should markets rise or decline significantly.

Compensation and related costs were $403.8 million in the current quarter, an increase of 8.8% over the second quarter of 2016, due primarily to additional headcount, an increase in the interim accrual of the annual bonus, and higher benefits. Benefits expenses rose primarily due to increased market valuations on its supplemental savings plan liability, which resulted in additional compensation expense. These increases were offset in part by higher labor capitalization related to internally developed software as the firm continues to invest in its technology capabilities. Average staff size increased by 6.8% from the second quarter of 2016, and the firm employed 6,651 associates at June 30, 2017.

Advertising and promotion costs were $18.6 million in the current quarter, compared with $14.9 million in the 2016 quarter. The firm currently expects advertising and promotion costs for 2017 to grow up to 10% over 2016 as the firm executes on a number of strategic initiatives.

Occupancy and facility costs, together with depreciation expense, were $83.1 million in the current quarter, an increase of 11.4% compared to the second quarter of 2016. The increase is due primarily to higher facility costs as well as the added costs to update and enhance technology capabilities, including related maintenance programs.

Other operating expenses were $122.1 million in the current quarter, an increase of 23.5% from the comparable 2016 quarter, as operational and regulatory business demands continue to grow.
Net non-operating income was $112.0 million in the current quarter, an increase of $70.5 million from the second quarter of 2016.

Nearly all of the $30.3 million in net realized gains and $23.6 million of the $32.0 million in unrealized gains on sponsored funds recognized during the second quarter of 2017 resulted from the firm's decision to economically hedge the market exposure associated with its supplemental savings plan liability.

The firm's effective tax rate for the second quarter of 2017 was 37.1%. The firm currently estimates its effective tax rate for 2017 will be about 37.4%.

Management Commentary

William J. Stromberg, the company's president and chief executive officer, commented: "U.S. stocks rose broadly in the second quarter of 2017 with many major indexes reaching all-time highs. International stocks outperformed U.S. shares, aided by strengthening currencies relative to the U.S. dollar. Fixed income returns were also positive with healthy credit conditions in the U.S. and abroad.

"Our assets under management grew by five percent in the second quarter of 2017, boosted by strong market returns, healthy alpha generation, and solid net inflows. Positive net flows continued into our international equity, fixed income, and asset allocation strategies, partially offset by modest outflows from U.S. equity.

"Overall we are encouraged by increasing levels of client activity and by execution of our strategy. Our relative investment performance remains strong, investor interest continues to grow globally, and we are making good progress with our investments in product, distribution, and technology. Some highlights of activity that reflect ways we are meeting the needs of our clients and distribution partners include:

• New Investment Products—Recently launched portfolios include the Retirement Income 2020 Fund (a new managed-payout fund) and the U.S. High Yield Fund (stemming from the acquisition of the Henderson High Yield Opportunities Fund). We have also filed preliminary registration statements for the Multi-Strategy Total Return Fund and Capital Appreciation & Income Fund, both of which we expect to launch later this year.
• Recent Vehicle Launches Gaining Traction—The T. Rowe Price ActivePlus Portfolios, retail separately managed accounts, and model portfolios are each attracting clients and assets.
• Expanding Distribution Reach—Our mutual funds are now available on Fidelity Investments' FundsNetwork® and their Institutional No Transaction Fee (iNTF) Program, further expanding their availability to retail investors and advisors with no transaction fees. This agreement follows the recent addition of our mutual funds to Charles Schwab's Mutual Fund OneSource® service with no transaction fee.
• Client Experience Enhancements—A new relationship management team servicing high-value individual investors in our direct channel is bolstering client engagement, and helping attract and retain assets. Likewise, our agile approach to innovating and developing improved client digital experiences is also seeing initial success.

"With the progress we are making on our strategic priorities and the outstanding work of our associates, we are confident we are on the right track to enhance our competitiveness and grow and diversify our business. In this our 80th year, we remain committed to our guiding principle of always doing what is right for our clients. Over time, we believe that this approach will enable us to remain a premier asset manager and create attractive long-term value for our stockholders."

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 2017 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, 2017.

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 2016 Form 10-K and June 30, 2017 Form 10-Q filed later today.

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.