T. Rowe Price Group, Inc.
PRICE T ROWE GROUP INC (Form: 10-Q, Received: 10/27/2016 11:57:21)


 
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 September 30, 2016
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
 
Accelerated filer  ¨
Non-accelerated filer ¨
 
Smaller reporting company  ¨
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, October 25, 2016 , is 243,433,151 .
The exhibit index is at Item 6 on page 38 .
 




PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
 
 
12/31/2015
 
9/30/2016
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
1,172.3

 
$
1,401.0

Accounts receivable and accrued revenue
 
446.0

 
446.9

Investments
 
1,961.2

 
1,214.9

Assets of consolidated sponsored investment portfolios ($0 and $1,917.3 million, respectively, related to variable interest entities)
 
57.7

 
2,134.0

Property and equipment, net
 
607.1

 
615.6

Goodwill
 
665.7

 
665.7

Other assets
 
196.9

 
245.4

Total assets
 
$
5,106.9

 
$
6,723.5

 
 
 
 
 
LIABILITIES
 
 
 
 
Accounts payable and accrued expenses
 
$
170.6

 
$
205.0

Liabilities of consolidated sponsored investment portfolios ($0 and $41.1 million, respectively, related to variable interest entities)
 

 
52.5

Accrued compensation and related costs
 
153.1

 
478.0

Income taxes payable
 
21.2

 
40.4

Total liabilities
 
344.9

 
775.9

 
 
 
 
 
Commitments and contingent liabilities
 

 

 
 
 
 
 
Redeemable non-controlling interests
 

 
1,113.9

 
 
 
 
 
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 250,469,000 shares at December 31, 2015, and 244,829,000 at September 30, 2016
 
50.1

 
49.0

Additional capital in excess of par value
 
654.6

 
654.5

Retained earnings
 
3,970.7

 
4,096.9

Accumulated other comprehensive income
 
86.6

 
33.3

Total stockholders’ equity
 
4,762.0

 
4,833.7

Total liabilities, redeemable non-controlling interests, and stockholders’ equity
 
$
5,106.9

 
$
6,723.5


The accompanying notes are an integral part of these statements.
Page 2



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
 
 
Three months ended
 
Nine months ended
 
9/30/2015
 
9/30/2016
 
9/30/2015
 
9/30/2016
Revenues
 
 
 
 
 
 
 
Investment advisory fees
$
922.6

 
$
970.5

 
$
2,761.3

 
$
2,761.9

Administrative fees
88.3

 
85.7

 
272.9

 
263.6

Distribution and servicing fees
38.1

 
36.7

 
114.2

 
106.2

Net revenues
1,049.0

 
1,092.9

 
3,148.4

 
3,131.7

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Compensation and related costs
379.4

 
386.2

 
1,086.8

 
1,112.4

Advertising and promotion
13.2

 
14.7

 
52.7

 
52.7

Distribution and servicing costs
38.1

 
36.7

 
114.2

 
106.2

Depreciation and amortization of property and equipment
33.1

 
34.0

 
94.4

 
100.0

Occupancy and facility costs
40.3

 
45.3

 
118.5

 
127.5

Other operating expenses
86.6

 
100.3

 
237.9

 
296.6

Nonrecurring charge related to Dell appraisal rights matter

 

 

 
166.2

Total operating expenses
590.7

 
617.2

 
1,704.5

 
1,961.6

 
 
 
 
 
 
 
 
Net operating income
458.3

 
475.7

 
1,443.9

 
1,170.1

 
 
 
 
 
 
 
 
Non-operating income
 
 
 
 
 
 
 
Net investment income on investments
3.5

 
14.5

 
61.8

 
91.1

Net investment income (losses) on consolidated sponsored investment portfolios
(1.5
)
 
73.8

 
.9

 
124.0

Other expenses
(1.7
)
 

 
(2.6
)
 
(.2
)
Total non-operating income
.3

 
88.3

 
60.1

 
214.9

 
 
 
 
 
 
 
 
Income before income taxes
458.6

 
564.0

 
1,504.0

 
1,385.0

Provision for income taxes
181.5

 
201.3

 
584.2

 
497.8

Net income
277.1

 
362.7

 
919.8

 
887.2

Less: net income attributable to redeemable non-controlling interests

 
34.9

 

 
52.0

Net income attributable to T. Rowe Price Group
$
277.1

 
$
327.8

 
$
919.8

 
$
835.2

 
 
 
 
 
 
 
 
Earnings per share on common stock of T. Rowe Price Group
 
 
 
 
 
 
 
Basic
$
1.08

 
$
1.30

 
$
3.54

 
$
3.32

Diluted
$
1.06

 
$
1.28

 
$
3.45

 
$
3.25

 
 
 
 
 
 
 
 
Dividends declared per share
$
.52

 
$
.54

 
$
3.56

 
$
1.62



The accompanying notes are an integral part of these statements.
Page 3



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
 
Three months ended
 
Nine months ended
 
9/30/2015
 
9/30/2016
 
9/30/2015
 
9/30/2016
Net income
$
277.1

 
$
362.7

 
$
919.8

 
$
887.2

Other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on available-for-sale investments
(54.8
)
 
10.3

 
(32.7
)
 
9.4

Reclassification adjustments recognized in non-operating income:
 
 
 
 
 
 
 
Net gains realized on dispositions determined using average cost
(9.6
)
 

 
(48.9
)
 
(52.3
)
Other-than-temporary impairments
4.8

 

 
4.8

 

Total net unrealized holding gains (losses) recognized in other comprehensive income
(59.6
)
 
10.3

 
(76.8
)
 
(42.9
)
 
 
 
 
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
Currency translation adjustments of consolidated sponsored investment portfolios - variable interest entities
(3.1
)
 
16.8

 
(5.2
)
 
30.8

Reclassification loss (gain) recognized in non-operating investment income upon deconsolidation of sponsored fund subsidiary
5.8

 
(1.1
)
 
5.8

 
(1.1
)
Currency translation adjustments of consolidated sponsored investment portfolios - variable interest entities
2.7

 
15.7

 
.6

 
29.7

Equity method investments
(2.5
)
 
(2.7
)
 
(4.5
)
 
(3.5
)
Total currency translation adjustments
.2

 
13.0

 
(3.9
)
 
26.2

 
 
 
 
 
 
 
 
Other comprehensive income (loss) before income taxes
(59.4
)
 
23.3

 
(80.7
)
 
(16.7
)
Net deferred tax benefits (income taxes)
22.5

 
(4.7
)
 
33.2

 
13.5

Total other comprehensive income (loss)
(36.9
)
 
18.6

 
(47.5
)
 
(3.2
)
Total comprehensive income
240.2

 
381.3

 
$
872.3

 
$
884.0

Less: comprehensive income attributable to redeemable non-controlling interests

 
46.5

 

 
$
69.6

Comprehensive income attributable to T. Rowe Price Group
$
240.2

 
$
334.8

 
$
872.3

 
$
814.4



The accompanying notes are an integral part of these statements.
Page 4



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (See Note 11)
(in millions)
 
 
Nine months ended
 
9/30/2015
 
9/30/2016
Cash flows from operating activities
 
 
 
Net income
$
919.8

 
$
887.2

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
Depreciation and amortization of property and equipment
94.4

 
100.0

Stock-based compensation expense
107.4

 
117.9

Realized gains on dispositions of available-for-sale sponsored investment portfolios
(48.9
)
 
(52.3
)
Net gains recognized on investments
(3.2
)
 
(28.1
)
Net change in trading securities held by consolidated sponsored investment portfolios
(2.5
)
 
(1,084.1
)
Other changes in assets and liabilities
326.6

 
327.6

Net cash provided by operating activities
1,393.6

 
268.2

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of available-for-sale sponsored fund investments
(155.3
)
 
(.1
)
Dispositions of available-for-sale sponsored fund investments
227.7

 
89.2

Net cash of sponsored investment portfolios on consolidation

 
54.3

Additions to property and equipment
(114.6
)
 
(112.5
)
Other investing activity
(6.4
)
 
79.4

Net cash provided by (used in) investing activities
(48.6
)
 
110.3

 
 
 
 
Cash flows from financing activities
 
 
 
Repurchases of common stock
(820.7
)
 
(525.7
)
Common share issuances under stock-based compensation plans
61.2

 
88.8

Dividends paid to common stockholders of T. Rowe Price Group
(927.2
)
 
(406.6
)
Net subscriptions received from redeemable non-controlling interest holders

 
798.2

Net cash used in financing activities
(1,686.7
)
 
(45.3
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios

 
(18.2
)
 
 
 
 
Net change in cash and cash equivalents during period
(341.7
)
 
315.0

Cash and cash equivalents at beginning of year
1,506.1

 
1,172.3

Cash and cash equivalents at end of period, including $86.3 million held by consolidated sponsored investment portfolios at September 30, 2016
$
1,164.4

 
$
1,487.3



The accompanying notes are an integral part of these statements.
Page 5



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
 
Total
stockholders’
equity
 
Redeemable non-controlling interests
Balances at December 31, 2015
250,469

 
$
50.1

 
$
654.6

 
$
3,970.7

 
$
86.6

 
$
4,762.0

 
$

Reclassification of sponsored investment portfolios upon adoption of new accounting guidance on January 1, 2016
 
 
 
 
 
 
32.5

 
(32.5
)
 

 
672.7

Cumulative effect adjustment upon adoption of new stock-based compensation guidance on
January 1, 2016

 

 
12.9

 
(9.0
)
 

 
3.9

 

Balances at January 1, 2016
250,469

 
50.1

 
667.5

 
3,994.2

 
54.1

 
4,765.9

 
672.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
835.2

 

 
835.2

 
52.0

Other comprehensive income (loss), net of tax

 

 

 

 
(20.8
)
 
(20.8
)
 
17.6

Dividends declared

 

 

 
(406.9
)
 

 
(406.9
)
 
 
Common stock-based compensation plans activity
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued upon option exercises
2,394

 
.5

 
89.8

 

 

 
90.3

 

Restricted shares issued, net of shares withheld for taxes
1

 

 
(.1
)
 

 

 
(.1
)
 

Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
36

 

 
(.9
)
 

 

 
(.9
)
 

Forfeiture of restricted awards
(42
)
 

 


 

 

 

 

Stock-based compensation expense

 

 
117.9

 

 

 
117.9

 

Restricted stock units issued as dividend equivalents

 

 

 

 

 

 
 
Common shares repurchased
(8,029
)
 
(1.6
)
 
(219.7
)
 
(325.6
)
 

 
(546.9
)
 

Net subscriptions into sponsored investment portfolios

 

 

 

 

 

 
770.2

Net deconsolidations of sponsored investment portfolios

 

 

 

 

 

 
(398.6
)
Balances at September 30, 2016
244,829

 
$
49.0

 
$
654.5

 
$
4,096.9

 
$
33.3

 
$
4,833.7

 
$
1,113.9



The accompanying notes are an integral part of these statements.
Page 6



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 sponsored T. Rowe Price U.S. mutual funds and other investment portfolios, including separately managed accounts, subadvised funds, and other sponsored investment portfolios. 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. Certain prior year amounts have been reclassified to conform to the 2016 presentation.

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 2015 Annual Report.

NEW ACCOUNTING GUIDANCE.

We implemented Accounting Standards Update No. 2015-02 - Consolidation (Topic 810): Amendments to the Consolidation Analysis on January 1, 2016, which did not require the restatement of prior year periods. In connection with the adoption of this guidance, we reevaluated all of our investments for consolidation, including our investments in sponsored investment portfolios. The adoption of the guidance resulted in sponsored investment products regulated outside the U.S. previously accounted for as voting interest entities (VOE) to be evaluated as variable interest entities (VIE) and led to the consolidation of an additional 24 portfolios that were previously accounted for as available-for-sale securities. The adoption also resulted in the consolidation of an additional eight U.S. sponsored investment portfolios that were previously accounted for as available-for sale-securities. The impact to the condensed consolidated balance sheet upon adoption was the consolidation of $1.6 billion of assets, $21.3 million of liabilities, and $672.7 million of non-controlling interests. We also reclassified $32.5 million in accumulated comprehensive income to retained earnings. The consolidation guidance provides a scope exception for reporting entities with interests in legal entities that are required to comply with, or operate in accordance with, requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. Additional disclosures relating to consolidated voting interest entities and variable interest entities, and the impact the new accounting guidance has had on the quarter and year-to-date period are included in Note 5.

We early adopted Accounting Standards Update No. 2016-09 - Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting on July 1, 2016, which required adjustments to be reflected as of January 1, 2016. The amendments in this update change the accounting for certain aspects of stock-based compensation awards, including the accounting for income taxes upon settlement of awards, the classification of cash flows associated with awards, and the accounting for award forfeitures. The primary impact of early adoption was the recognition in our provision for income taxes for the nine-month period ended September 30, 2016, of excess tax benefits over financial statement expense totaling $16.9 million , or $.06 in diluted earnings per share, that was previously recognized in additional paid in capital during the first half of 2016. We also elected to account for forfeitures of stock-based compensation awards as they occur; therefore, we reversed forfeiture estimates, net of tax, of $9.0 million recognized prior to January 1, 2016, as a cumulative effect adjustment to our condensed consolidated balance sheet, resulting in a reduction of retained earnings of $9.0 million and an increase of other assets and additional paid in capital balances totaling $3.9 million and $12.9 million , respectively. Lastly, the guidance requires excess tax benefits from share-based compensation awards to be reported as operating activities in the consolidated statements of cash flows rather than financing activities. As permitted by the guidance, we elected to apply this guidance retrospectively and have reclassified $22.1 million in excess tax benefits previously disclosed as a financing activity in the statement of cash flows for the nine-month period ended September 30, 2015, to operating activities.


Page 7



CONSOLIDATION.

Our condensed consolidated financial statements include the accounts of all subsidiaries and sponsored investment portfolios in which we have a controlling interest. We are generally deemed to have a controlling interest when we own the majority of the voting interest of an entity or are deemed to be the primary beneficiary of a VIE. We perform an analysis of our investments to determine if the investment entity is a VOE or VIE. Our analysis involves judgment and considers several factors, including an entity’s legal organization, capital structure, the rights of the equity investment holders, our ownership interest in the entity, and our contractual involvement with the entity. We continually review and reconsider our VIE or VOE conclusions upon the occurrence of certain events, such as changes to our ownership interest, changes to an entity’s legal structure, or amendments to governing documents. All material accounts and transactions between consolidated entities are eliminated in consolidation.

Upon consolidation of sponsored investment portfolios, the Company retains the specialized investment company accounting principles of the underlying funds. All of the underlying investments held by these portfolios are carried at fair value with corresponding changes in the investments’ fair values reflected in non-operating income (expense) on the condensed consolidated statements of income.

Variable interest entities
VIEs are entities that, by design (i ) lack sufficient equity to permit the entity to finance its activities independently, or (ii) have equity holders that do not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance, the obligation to absorb the entity’s losses, or the rights to receive the entity’s residual returns. We consolidate a VIE when we are the primary beneficiary, which is the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the VIE that could potentially be significant. Our Luxembourg-based SICAV (Société d'Investissement à Capital Variable) funds and other sponsored investment portfolios regulated outside the U.S. are determined to be VIEs.

Along with VIEs that we consolidate, we also hold variable interests in other VIEs, including several investment partnerships, that are not consolidated because we are not the primary beneficiary.

Redeemable non-controlling interests
We recognize redeemable non-controlling interests for the portion of the net assets of our consolidated sponsored investment portfolios held by unrelated third party investors as their interest is convertible to cash and other assets at their option. As such, we reflect redeemable non-controlling interests as temporary equity in our condensed consolidated balance sheet.


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

Accounts receivable from our sponsored investment portfolios, including our U.S. mutual funds, for advisory fees and advisory-related administrative services aggregate $287.1 million at December 31, 2015 , and $291.3 million at September 30, 2016 .

Revenues (in millions) from advisory services provided under agreements with our sponsored U.S. mutual funds and other investment clients include:
 
Three months ended
 
Nine months ended
 
9/30/2015
 
9/30/2016
 
9/30/2015
 
9/30/2016
Sponsored U.S. mutual funds
 
 
 
 
 
 
 
Stock and blended asset
$
563.0

 
$
579.3

 
$
1,681.7

 
$
1,649.9

Bond and money market
107.8

 
124.2

 
318.0

 
354.8

 
670.8

 
703.5

 
1,999.7

 
2,004.7

Other investment portfolios
 
 
 
 
 
 
 
Stock and blended asset
212.2

 
222.2

 
645.2

 
630.4

Bond, money market, and stable value
39.6

 
44.8

 
116.4

 
126.8

 
251.8

 
267.0

 
761.6

 
757.2

Total
$
922.6

 
$
970.5

 
$
2,761.3

 
$
2,761.9

 


Page 8



Other investment portfolios include advisory revenues of $93.5 million and $101.1 million for the three months ended September 30, 2015 and 2016 , respectively, that were earned on other sponsored investment portfolios. Fees earned during the nine months ended September 30, 2015 and 2016 , total $273.9 million and $283.3 million , respectively.

We voluntarily waived $11.6 million and $2.1 million in money market related fees, including advisory fees and fund expenses, in the third quarter of 2015 and 2016 , respectively, in order to maintain a positive yield for investors. Fees waived during the nine months ended September 30, 2015 and 2016 , total $37.8 million and $9.4 million , respectively.

The following table summarizes the investment portfolios and assets under management (in billions) on which we earn advisory fees.
 
Average during
 
Average during
 
the third quarter of
 
the first nine months of
 
2015
 
2016
 
2015
 
2016
Sponsored U.S. mutual funds
 
 
 
 
 
 
 
Stock and blended asset
$
386.0

 
$
399.3

 
$
388.8

 
$
381.5

Bond and money market
105.7

 
112.0

 
106.2

 
108.2

 
491.7

 
511.3

 
495.0

 
489.7

Other investment portfolios
 
 
 
 
 
 
 
Stock and blended asset
207.2

 
218.2

 
210.3

 
208.2

Bond, money market, and stable value
64.2

 
74.1

 
63.3

 
70.4

 
271.4

 
292.3

 
273.6

 
278.6

Total
$
763.1

 
$
803.6

 
$
768.6

 
$
768.3

 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
 
 
12/31/2015
 
9/30/2016
Sponsored U.S. mutual funds
 
 
 
 
 
 
 
Stock and blended asset
 
 
 
 
$
383.0

 
$
403.1

Bond and money market
 
 
 
 
104.1

 
113.9

 
 
 
 
 
487.1

 
517.0

Other investment portfolios
 
 
 
 
 
 
 
Stock and blended asset
 
 
 
 
209.8

 
220.5

Bond, money market, and stable value
 
 
 
 
66.2

 
75.4

 
 
 
 
 
276.0

 
295.9

Total
 
 
 
 
$
763.1

 
$
812.9


Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for 4.9% and 5.0% of our assets under management at December 31, 2015 , and September 30, 2016 , respectively.

The following table summarizes the other fees (in millions) earned from our sponsored U.S. mutual funds.
 
Three months ended
 
Nine months ended
 
9/30/2015
 
9/30/2016
 
9/30/2015
 
9/30/2016
Administrative fees
$
71.2

 
$
66.6

 
$
221.8

 
$
208.6

Distribution and servicing fees
$
38.1

 
$
36.7

 
$
114.2

 
$
106.2




Page 9



NOTE 3 - INVESTMENTS.

The carrying values of investments (in millions) we do not consolidate are as follows:
 
12/31/2015
 
9/30/2016
Available-for-sale sponsored investment portfolios
$
1,612.3

 
$
694.3

Equity method investments
 
 
 
Sponsored investment portfolios
113.7

 
245.9

26% interest in UTI Asset Management Company Limited (India)
132.8

 
135.4

Investment partnerships
6.2

 
5.8

Sponsored investment portfolios held as trading
25.8

 
59.4

Cost method investments
69.4

 
73.1

U.S. Treasury note
1.0

 
1.0

Total
$
1,961.2

 
$
1,214.9


In connection with the adoption of the new consolidation accounting guidance on January 1, 2016, we reevaluated all of our investments for consolidation, including our investments in sponsored investment portfolios. We determined that our interests in a number of our available-for-sale holdings held at December 31, 2015, were deemed controlling interests under the new accounting standard and resulted in these sponsored investment portfolios being consolidated on January 1, 2016.
During the first nine months of 2015 and 2016, certain sponsored investment portfolios in which we provided initial seed capital at the time of formation were deconsolidated, as we no longer had a controlling interest. Additionally, during 2016 a sponsored investment portfolio that was being accounted for as an equity method investment was consolidated, as we regained a controlling interest. The net impact of these changes on our condensed consolidated balance sheet in 2016 was a net reduction of portfolio assets of $678.3 million , liabilities of $31.0 million and redeemable non-controlling interests of $398.6 million , which represent the carrying values on the date the portfolios were deconsolidated or consolidated. The impact of deconsolidation on our consolidated balance sheet in 2015 was immaterial.
The impact of deconsolidating certain sponsored investment portfolios on our condensed consolidated statement of income during the first nine months of 2015 and 2016 was a loss of $5.8 million and a gain of $1.1 million , respectively. These losses and gains were the result of reclassifying currency translation adjustments accumulated on investment portfolios’ with non-USD functional currencies from accumulated other comprehensive income to non-operating income. Since the remaining consolidated investment portfolios’ functional currency in 2016 was U.S. dollars and carried at fair value, we did not recognize any additional gain or loss in our consolidated statement of income upon deconsolidation. Depending on our ownership interest, we are now reporting our residual interests in deconsolidated sponsored investment portfolios as either equity method or available-for-sale investments.

AVAILABLE-FOR-SALE SPONSORED INVESTMENT PORTFOLIOS.

The available-for-sale sponsored investment portfolios (in millions) include:
 
Aggregate cost
 
Unrealized holding
 
Aggregate
fair value
 
 
gains
 
losses
 
December 31, 2015
 
 
 
 
 
 
 
Stock and blended asset funds
$
428.6

 
$
180.3

 
$
(9.1
)
 
$
599.8

Bond funds
990.5

 
39.1

 
(17.1
)
 
1,012.5

Total
$
1,419.1

 
$
219.4

 
$
(26.2
)
 
$
1,612.3

 
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
Stock and blended asset funds
$
165.4

 
$
97.3

 
$
(.1
)
 
$
262.6

Bond funds
428.4

 
4.8

 
(1.5
)
 
431.7

Total
$
593.8

 
$
102.1

 
$
(1.6
)
 
$
694.3




Page 10



The following table details the number of holdings, the unrealized holding losses, and the aggregate fair value of available-for-sale sponsored investment portfolios with unrealized losses categorized by the length of time they have been in a continuous unrealized loss position:
 
Number of holdings
 
Unrealized 
holding losses
 
Aggregate
fair value
December 31, 2015
 
 
 
 
 
Less than 12 months
18
 
$
(15.8
)
 
$
419.6

12 months or more
4

 
(10.4
)
 
298.6

Total
22
 
$
(26.2
)
 
$
718.2

 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
Less than 12 months
4
 
$
(.1
)
 
$
25.2

12 months or more
2

 
(1.5
)
 
171.0

Total
6
 
$
(1.6
)
 
$
196.2


In addition to the duration of the impairments, we reviewed the severity of the impairment as well as our intent and ability to hold the investments for a period of time sufficient for an anticipated recovery in fair value. Accordingly, impairment of these investment holdings is considered temporary at December 31, 2015 and September 30, 2016 .

VARIABLE INTEREST ENTITIES.
Our investments at September 30, 2016 , include $111.3 million of investments 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 at September 30, 2016 , is $164.5 million , which includes our carrying value, any unfunded capital commitments, and uncollected investment advisory and administrative fees.

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.



Page 11



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 (in millions) that are recognized in our condensed consolidated balance sheets using fair value measurements determined based on the differing levels of inputs.
 
Level 1
 
Level 2
December 31, 2015
 
 
 
Cash equivalents
$
997.5

 
$

Available-for-sale sponsored investment portfolios
1,612.3

 

Sponsored investment portfolios held as trading
25.8

 

Total
$
2,635.6

 
$

 
 
 
 
September 30, 2016
 
 
 
Cash equivalents
$
1,183.6

 
$

Available-for-sale sponsored investment portfolios
694.3

 

Sponsored investment portfolios held as trading
56.6

 
2.8

Total
$
1,934.5

 
$
2.8


The table above excludes investments held by consolidated sponsored investment portfolios which are presented separately on our condensed consolidated balance sheets and are detailed in Note 5.


NOTE 5 - CONSOLIDATED SPONSORED INVESTMENT PORTFOLIOS.

The sponsored investment portfolios 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. sponsored investment portfolios are considered voting interest entities, while those regulated outside the U.S. are considered variable interest entities.

The following table details the net assets of the consolidated sponsored investment portfolios at September 30, 2016 .

 
Voting
interest entities
 
Variable interest entities
 
Total
Cash and cash equivalents
$
12.6

 
$
73.7

 
$
86.3

Investments
200.1

 
1,815.5

 
2,015.6

Other assets
4.0

 
28.1

 
32.1

Total assets
216.7

 
1,917.3

 
2,134.0

Liabilities
11.4

 
41.1

 
52.5

Net assets
$
205.3

 
$
1,876.2

 
$
2,081.5

 
 
 
 
 
 
Attributable to redeemable non-controlling interests
$
64.5

 
$
1,049.4

 
$
1,113.9

Attributable to T. Rowe Price Group
140.8

 
826.8

 
967.6

 
$
205.3

 
$
1,876.2

 
$
2,081.5


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

Since third party investors in these investment funds have no recourse to our credit, our overall risk related to the net assets of consolidated sponsored investment portfolios 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 portfolios 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.



Page 12



The operating results (in millions) of the consolidated sponsored investment portfolios for the three- and nine- months ended September 30, 2016 , are reflected in our condensed consolidated statement of income as follows:

 
Three months ended 9/30/2016
 
Nine months ended 9/30/2016
 
Voting
interest entities
 
Variable interest entities
 
Total
 
Voting
interest entities
 
Variable interest entities
 
Total
Operating expenses reflected in net operating income
$
(.4
)
 
$
(3.4
)
 
$
(3.8
)
 
$
(1.2
)
 
$
(8.7
)
 
$
(9.9
)
Net investment income reflected in non-operating income
8.7

 
65.1

 
73.8

 
20.8

 
103.2

 
124.0

Impact on income before taxes
$
8.3

 
$
61.7

 
$
70.0

 
$
19.6

 
$
94.5

 
$
114.1

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to T. Rowe Price Group
$
6.2

 
$
28.9

 
$
35.1

 
$
13.9

 
$
48.2

 
$
62.1

Net income attributable to redeemable non-controlling interests
2.1

 
32.8

 
34.9

 
5.7

 
46.3

 
52.0

 
$
8.3

 
$
61.7

 
$
70.0

 
$
19.6

 
$
94.5

 
$
114.1


The operating expenses of these consolidated portfolios are reflected in other operating expenses. For the three- and nine- months ended September 30, 2016 , we eliminated $2.2 million and $5.3 million , respectively, of these expenses against our investment advisory and administrative fees earned in preparing our condensed consolidated financial statements. 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 sponsored investment portfolios.

The table below details the impact of these consolidated investment portfolios on the individual lines of our condensed consolidated statement of cash flows (in millions) for the nine months ended September 30, 2016 .
 
Nine months ended 9/30/2016
 
Voting
interest entities
 
Variable interest entities
 
Total
Net cash provided by (used in) operating activities
$
(48.0
)
 
$
(915.1
)
 
$
(963.1
)
Net cash provided by (used in) investing activities
22.2

 
32.1

 
54.3

Net cash provided by (used in) financing activities
38.4

 
974.9

 
1,013.3

Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios

 
(18.2
)
 
(18.2
)
Net change in cash and cash equivalents during period
12.6

 
73.7

 
86.3

Cash and cash equivalents at beginning of year

 

 

Cash and cash equivalents at end of period
$
12.6

 
$
73.7

 
$
86.3


The net cash provided by (used in) financing activities during the first nine months of 2016 includes $215.1 million of net subscriptions we made into the consolidated sponsored investment portfolios, net of dividends received. These cash flows were eliminated in consolidation.



Page 13



FAIR VALUE MEASUREMENTS.

We determine the fair value of investments held by consolidated sponsored investment portfolios 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 these investment holdings. There have been no material transfers between the levels. The following table summarizes the investment holdings held by our consolidated sponsored investment portfolios (in millions) using fair value measurements determined based on the differing levels of inputs.
 
Level 1
 
Level 2
December 31, 2015
 
 
 
Assets
 
 
 
Equity securities
$
2.8

 
$
11.2

Fixed income securities

 
43.0

Other investments
.7

 

 
$
3.5

 
$
54.2

 
 
 
 
September 30, 2016
 
 
 
Assets
 
 
 
  Cash equivalents
$
10.8

 
$
1.9

  Equity securities
282.0

 
347.3

  Fixed income securities

 
1,367.6

  Other investments
.2

 
18.5

 
$
293.0

 
$
1,735.3

 
 
 
 
Liabilities
$
(.5
)
 
$
(5.8
)


NOTE 6 – STOCKHOLDERS’ EQUITY.

Regular cash dividends declared per share during the first nine months of 2015 and 2016 were $1.56 and $1.62 , respectively. A $2.00 per share special dividend was also declared and paid in the first nine months of 2015.

At September 30, 2016 , a liability of $21.2 million is included in accounts payable and accrued expenses for common stock repurchases that settled by October 5, 2016.




Page 14



NOTE 7
– STOCK-BASED COMPENSATION.

STOCK OPTIONS.

The following table summarizes the status of, and changes in, our stock options during the first nine months of 2016 .
 
 
Options
 
Weighted-
average
exercise
price
Outstanding at December 31, 2015
30,818,229

 
$
59.24

Non-employee director grants
13,050

 
$
75.29

Exercised
(3,116,764
)
 
$
46.03

Forfeited
(365,287
)
 
$
71.78

Expired
(29,827
)
 
$
75.18

Outstanding at September 30, 2016
27,319,401

 
$
60.58

Exercisable at September 30, 2016
16,760,572

 
$
53.41


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 nine months of 2016 .
 
Restricted
shares
 
Restricted
stock
units
 
Weighted-average
fair value
Nonvested at December 31, 2015
1,470,827

 
2,216,431

 
$
74.66

Time-based grants
2,600

 
2,756,079

 
$
69.65

Performance-based grants

 
259,312

 
$
69.94

Vested
(23,677
)
 
(49,716
)
 
$
73.53

Forfeited
(41,867
)
 
(76,321
)
 
$
74.70

Nonvested at September 30, 2016
1,407,883

 
5,105,785

 
$
72.36


Nonvested at September 30, 2016 , includes 21,600 performance-based restricted shares and 453,923 performance-based restricted stock units. These performance-based restricted shares and units include 21,600 restricted shares and 167,340 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 September 30, 2016 . Estimated future compensation expense will change to reflect future option grants, future awards of unrestricted shares and restricted stock units, changes in the probability of performance thresholds being met, and adjustments for actual forfeitures.
 
Fourth quarter 2016
$
47.2

2017
146.2

2018 through 2021
157.6

Total
$
351.0





Page 15



NOTE 8
– EARNINGS PER SHARE CALCULATIONS.

The following table presents the reconciliation (in millions) of net income attributable to T. Rowe Price Group to net income allocated to our common stockholders and the weighted-average shares (in millions) 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
 
Nine months ended
 
9/30/2015
 
9/30/2016
 
9/30/2015
 
9/30/2016
Net income attributable to T. Rowe Price Group
$
277.1

 
$
327.8

 
$
919.8

 
$
835.2

Less: net income allocated to outstanding restricted stock and stock unit holders
4.1

 
7.3

 
11.8

 
17.1

Net income allocated to common stockholders
$
273.0

 
$
320.5

 
$
908.0

 
$
818.1

 
 
 
 
 
 
 
 
Weighted-average common shares
 
 
 
 
 
 
 
Outstanding
252.7

 
245.6

 
256.3

 
246.4

Outstanding assuming dilution
258.6

 
250.1

 
262.9

 
251.5


The following table shows the weighted-average outstanding stock options (in millions) 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
 
Nine months ended
 
9/30/2015
 
9/30/2016
 
9/30/2015
 
9/30/2016
Weighted-average outstanding stock options excluded
6.9

 
10.3

 
5.7

 
9.9



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

The following table presents the impact of the components (in millions) of other comprehensive income or loss on deferred tax benefits (income taxes).
 
Three months ended
 
Nine months ended
 
9/30/2015
 
9/30/2016
 
9/30/2015
 
9/30/2016
Net deferred tax benefits (income taxes) on:
 
 
 
 
 
 
 
Net unrealized holding gains or losses
$
21.0

 
$
(4.0
)
 
$
15.5

 
$
(3.6
)
Reclassification adjustments recognized in the provision for income taxes:
 
 
 
 
 
 
 
 Net gains realized on dispositions
3.5

 

 
18.2

 
20.6

 Other-than-temporary impairments
(1.9
)
 

 
(1.9
)
 

Net deferred tax benefits (income taxes) on net unrealized holding gains or losses
22.6

 
(4.0
)
 
31.8

 
17.0

 
 
 
 
 
 
 
 
Currency translation adjustments
1.1

 
(1.1
)
 
2.6

 
(3.9
)
Reclassification adjustment recognized in the provision for income taxes upon deconsolidation of sponsored fund subsidiary
(1.2
)
 
.4

 
(1.2
)
 
.4

Total deferred tax benefits (income taxes) on currency translation adjustments
(.1
)
 
(.7
)
 
1.4

 
(3.5
)
Total net deferred tax benefits (income taxes)
$
22.5

 
$
(4.7
)
 
$
33.2

 
$
13.5



Page 16



The changes (in millions) in each component of accumulated other comprehensive income, including reclassification adjustments for the first nine months of 2016 are presented in the table below.
 
 
 
Currency translation adjustments
 
 
 
Net unrealized holding gains
 
Equity method investments
 
Consolidated sponsored investment portfolios - variable interest entities
 
Total currency translation adjustments
 
Total
Balances at December 31, 2015
$
120.3

 
$
(30.9
)
 
$
(2.8
)
 
$
(33.7
)
 
$
86.6

Reclassification of accumulated other comprehensive income to retained earnings upon adoption of the new consolidation accounting guidance
(32.0
)
 
(.5
)
 

 
(.5
)
 
(32.5
)
Balance at January 1, 2016
88.3

 
(31.4
)
 
(2.8
)
 
(34.2
)
 
54.1

Other comprehensive income (loss) before reclassifications and income taxes
9.4

 
(3.5
)
 
13.2

 
9.7

 
19.1

Reclassification adjustments recognized in non-operating income
(52.3
)
 

 
(1.1
)
 
(1.1
)
 
(53.4
)
 
(42.9
)
 
(3.5
)
 
12.1

 
8.6

 
(34.3
)
Net deferred tax benefits (income taxes)
17.0

 
1.2

 
(4.7
)
 
(3.5
)
 
13.5

Other comprehensive income (loss)
(25.9
)
 
(2.3
)
 
7.4

 
5.1

 
(20.8
)
Balances at September 30, 2016
$
62.4

 
$
(33.7
)
 
$
4.6

 
$
(29.1
)
 
$
33.3


NOTE 10 - DELL APPRAISAL RIGHTS MATTER.

During the second quarter of 2016, we recognized a nonrecurring operating charge of $166.2 million to compensate certain T. Rowe Price mutual funds, trusts, separately managed accounts, and subadvised clients (collectively, “Clients”) for the difference in valuation plus statutory interest, resulting from the denial of their appraisal rights by the Delaware Chancery Court (Court) in connection with the 2013 leveraged buyout of Dell, Inc. (Dell).

The Court ruled on May 11, 2016, that the Clients could not pursue an appraisal of any shares they held that were voted in favor of the Dell merger. The appraisal statute governing the transaction required the record holder to vote against or abstain from voting on the transaction in order to assert appraisal rights. After previously voting against prior transaction proposals, the voting instructions submitted on behalf of the Clients in connection with voting on the final proposed transaction were incorrectly submitted in favor of the transaction.

On May 31, 2016, the Court determined that the fair value of Dell at the time of the merger was $17.62 per share, as opposed to the $13.75 price offered in the transaction. As a result, any shareholder perfecting appraisal rights is entitled to a payment at $17.62 per share plus statutory interest from the date the Dell transaction closed. The compensation to Clients was intended to make them whole for the voting discrepancy that resulted in the denial of their appraisal rights.



Page 17



NOTE 11 - SUPPLEMENTARY CONSOLIDATING CASH FLOW STATEMENT.

The following table summarizes the cash flows (in millions) for the nine months ended September 30, 2016 , that are attributable to T. Rowe Price Group, our consolidated sponsored investment portfolios and the related eliminations required in preparing the statement.
 
 
 
For nine months ended 9/30/2016
 
As reported for the nine months ended 9/30/2015
 
Cash flow attributable to T. Rowe Price Group
 
Cash flow attributable to consolidated sponsored investment portfolios
 
Eliminations
 
As reported on statement of cash flows
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
Net income
$
919.8

 
$
835.2

 
$
114.1

 
$
(62.1
)
 
$
887.2

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
 
 
 
 
 
Depreciation and amortization of property and equipment
94.4

 
100.0

 
$

 

 
100.0

Stock-based compensation expense
107.4

 
117.9

 
$

 

 
117.9

Realized gains on dispositions of available-for-sale sponsored investment portfolios
(48.9
)
 
(52.3
)
 
$

 

 
(52.3
)
Net gains recognized on investments
(3.2
)
 
(90.2
)
 
$

 
62.1

 
(28.1
)
Net change in trading securities held by consolidated sponsored investment portfolios
(2.5
)
 

 
$
(1,084.1
)
 

 
(1,084.1
)
Other changes in assets and liabilities
326.6

 
324.7

 
$
6.9

 
(4.0
)
 
327.6

Net cash provided by (used in) operating activities
1,393.6

 
1,235.3

 
(963.1
)
 
(4.0
)
 
268.2

Net cash provided by (used in) investing activities
(48.6
)
 
(163.1
)
 
54.3

 
219.1

 
110.3

Net cash provided by (used in) financing activities
(1,686.7
)
 
(843.5
)
 
1,013.3

 
(215.1
)
 
(45.3
)
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios

 

 
(18.2
)
 

 
(18.2
)
Net change in cash and cash equivalents during period
(341.7
)
 
228.7

 
$
86.3

 

 
315.0

Cash and cash equivalents at beginning of year
1,506.1

 
1,172.3

 
$

 

 
1,172.3

Cash and cash equivalents at end of period
$
1,164.4

 
$
1,401.0

 
$
86.3

 
$

 
$
1,487.3




Page 18



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
T. Rowe Price Group, Inc.:

We have reviewed the condensed consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries (“the Company”) as of September 30, 2016 , the related condensed consolidated statements of income and comprehensive income for the three- and nine- month periods ended September 30, 2016 and 2015 , the related condensed consolidated statements of cash flows for the nine -month periods ended September 30, 2016 and 2015 , and the related condensed consolidated statement of stockholders’ equity for the nine -month period ended September 30, 2016 . These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of 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 Public Company Accounting Oversight Board (United States), 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.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of T. Rowe Price Group, Inc. and subsidiaries as of December 31, 2015 , and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 5, 2016 , 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, 2015 , is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/ s / KPMG LLP
Baltimore, Maryland
October 27, 2016
 


Page 19



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 our sponsored U.S. mutual funds and other investment portfolios. The other investment portfolios include: separately managed accounts, subadvised funds, and other sponsored investment portfolios including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans in the U.S. Investment advisory clients domiciled outside the U.S. account for nearly 5% of our assets under management at September 30, 2016 .

We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and other investment portfolios, 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 substantial liquidity and resources that allow us to take advantage of attractive growth opportunities, invest in key capabilities, including investment professionals, technologies, and new investment strategies and products; and, most importantly, provide our clients with strong investment management expertise and service both now and in the future.

We expect to increase our pace of spending on a series of key strategic priorities to address evolving client needs and to grow and further diversify our business. We currently expect that our 2016 expenses (excluding the $166.2 million charge recognized in the second quarter of 2016 related to the Dell appraisal rights matter) will be about six percent higher than 2015. We also expect, based on current planned initiatives and depending on market conditions, operating expenses will grow in the mid- to high single-digit range in 2017 compared with 2016 expenses (excluding the $166.2 million charge related to the Dell appraisal rights matter).


BACKGROUND.

U.S. equities rose in the third quarter of 2016 as the stock market rallied in July amid expectations that major central banks would act to mitigate an expected economic slowdown following the UK’s late-June decision to leave the European Union. Equities were also helped by better than expected second-quarter earnings—although year-over-year earnings declined for the fifth consecutive quarter and, following a fairly quiet August, market volatility picked up in September amid concerns that central banks in developed countries were reaching limits in their ability to provide stimulus. While the Federal Reserve did not raise short-term interest rates at its September policy meeting, Fed officials noted in their post-meeting statement that “the case for an increase in the federal funds rate has strengthened.” This could mean that a rate hike will occur in the next few months.

Stocks in developed non-U.S. markets outperformed large-cap U.S. shares, as strength in some non-U.S. currencies lifted returns in dollar terms. Most developed Asian markets produced strong returns; Japanese shares rose almost 9%. In Europe, most markets advanced. Equities in the UK returned about 4% in dollar terms, as a weaker British pound sterling reduced stronger local returns to U.S. investors. Emerging markets stocks outperformed shares in developed markets, with Asian markets performing best. In emerging Europe, Russian shares rallied about 9%, while stocks in Turkey fell more than 5%, as the government tightened its grip on the country following a failed coup attempt in mid-July. In Latin America, Brazilian shares climbed more than 11%.



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Returns of several major equity market indexes for the three- and nine-month periods ended September 30, 2016 , are as follows:
 
 
Three months ended
 
Nine months ended
Index
 
9/30/2016
 
9/30/2016
S&P 500 Index
 
3.9%
 
7.8%
NASDAQ Composite Index (1)
 
9.7%
 
6.1%
Russell 2000 Index
 
9.1%
 
11.5%
MSCI EAFE (Europe, Australasia, and Far East) Index
 
6.5%
 
2.2%
MSCI Emerging Markets Index
 
9.2%
 
16.4%
  (1) returns exclude dividends

Global bond returns in the third quarter were mostly positive in dollar terms. In the U.S., even though the Fed refrained from raising short-term rates, Treasury and municipal bond prices declined and yields increased across all maturities. The 10-year Treasury note yield rose from 1.5% to 1.6%. Investment-grade corporate bonds performed well, thanks to strong demand. Mortgage-backed securities edged higher. High yield bonds significantly outperformed high-quality bonds, as investors continued to seek securities with attractive yields.

Government bonds in developed non-U.S. markets produced positive returns in dollar terms, as the dollar depreciated against some major currencies amid uncertainty about the upcoming U.S. elections and the timing of the Fed’s next interest rate increase. Emerging markets bonds also produced gains for U.S. investors, helped by demand for fixed income securities with attractive yields.

Returns for several major bond market indexes for the three- and nine-month periods ended September 30, 2016 , are as follows:
 
 
Three months ended
 
Nine months ended
Index
 
9/30/2016
 
9/30/2016
Bloomberg Barclays U.S. Aggregate Bond Index
 
.5%
 
5.8%
JPMorgan Global High Yield Index    
 
5.5%
 
15.5%
Bloomberg Barclays Municipal Bond Index
 
(.3)%
 
4.0%
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index
 
1.0%
 
13.1%
JPMorgan Emerging Markets Bond Index Plus
 
3.1%
 
15.8%
 

ASSETS UNDER MANAGEMENT.

Assets under management ended the third quarter of 2016 at $812.9 billion , an increase of $36.3 billion from June 30, 2016 , and $49.8 billion from December 31, 2015 . The following table presents our assets under management (in billions) at December 31, 2015 , and September 30, 2016 , by investment portfolio and asset class.
 
As of
 
12/31/2015
 
9/30/2016
Sponsored U.S. mutual funds
$
487.1

 
$
517.0

Other investment portfolios
276.0

 
295.9

Total assets under management
$
763.1

 
$
812.9

 
 
 
 
 
As of
 
12/31/2015
 
9/30/2016
Stock and blended asset portfolios
$
592.8

 
$
623.6

Fixed income portfolios
170.3

 
189.3

Total assets under management
$
763.1

 
$
812.9




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The following table details the changes in our assets under management (in billions) during the three- and nine-month periods ended September 30, 2016 :
 
Three months ended 9/30/2016
 
Nine months ended 9/30/2016
 
Sponsored U.S. mutual funds
 
Other investment portfolios
 
Total
 
Sponsored U.S. mutual funds
 
Other investment portfolios
 
Total
Assets under management at beginning of period
$
494.4

 
$
282.2

 
$
776.6

 
$
487.1

 
$
276.0

 
$
763.1