T. Rowe Price Group, Inc.
PRICE T ROWE GROUP INC (Form: 10-Q, Received: 07/25/2017 11:12:29)


 
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 June 30, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  ¨
Non-accelerated filer ¨ (do not check if smaller reporting company)
 
Smaller reporting company  ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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, July 21, 2017 , is 240,357,961 .
The exhibit index is at Item 6 on page 39 .
 




PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
 
 
12/31/2016
 
6/30/2017
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
1,204.9

 
$
1,542.2

Accounts receivable and accrued revenue
 
455.1

 
488.7

Investments
 
1,257.5

 
1,333.7

Assets of consolidated sponsored investment portfolios ($1,446.1 million at December 31, 2016 and $1,412.6 million at June 30, 2017, related to variable interest entities)
 
1,680.5

 
1,604.0

Property and equipment, net
 
615.1

 
624.3

Goodwill
 
665.7

 
665.7

Other assets
 
346.2

 
274.0

Total assets
 
$
6,225.0

 
$
6,532.6

 
 
 
 
 
LIABILITIES
 
 
 
 
Accounts payable and accrued expenses
 
$
180.8

 
$
185.8

Liabilities of consolidated sponsored investment portfolios ($56.8 million at December 31, 2016, and $44.2 million at June 30, 2017, related to variable interest entities)
 
65.6

 
55.4

Accrued compensation and related costs
 
92.6

 
306.3

Supplemental savings plan liability
 
150.9

 
172.9

Income taxes payable
 
39.3

 
16.0

Total liabilities
 
529.2

 
736.4

 
 
 
 
 
Commitments and contingent liabilities
 


 


 
 
 
 
 
Redeemable non-controlling interests
 
687.2

 
627.6

 
 
 
 
 
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 244,784,000 shares at December 31, 2016, and 240,262,000 at June 30, 2017
 
49.0

 
48.1

Additional capital in excess of par value
 
654.5

 
654.5

Retained earnings
 
4,293.6

 
4,477.6

Accumulated other comprehensive income (loss)
 
11.5

 
(11.6
)
Total permanent stockholders’ equity
 
5,008.6

 
5,168.6

Total liabilities, redeemable non-controlling interests, and permanent stockholders’ equity
 
$
6,225.0

 
$
6,532.6


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
 
Six months ended
 
6/30/2016
 
6/30/2017
 
6/30/2016
 
6/30/2017
Revenues
 
 
 
 
 
 
 
Investment advisory fees
$
920.6

 
$
1,043.9

 
$
1,791.4

 
$
2,035.0

Administrative fees
88.5

 
91.3

 
177.9

 
178.6

Distribution and servicing fees
35.6

 
36.4

 
69.5

 
71.6

Net revenues
1,044.7

 
1,171.6

 
2,038.8

 
2,285.2

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Compensation and related costs
371.0

 
403.8

 
726.2

 
801.2

Advertising and promotion
14.9

 
18.6

 
38.0

 
44.2

Distribution and servicing costs
35.6

 
36.4

 
69.5

 
71.6

Depreciation and amortization of property and equipment
33.8

 
36.3

 
66.0

 
71.9

Occupancy and facility costs
40.8

 
46.8

 
82.2

 
92.2

Other operating expenses
98.9

 
122.1

 
196.3

 
224.8

Nonrecurring charge (insurance recoveries) related to Dell appraisal rights matter
166.2

 

 
166.2

 
(50.0
)
Total operating expenses
761.2

 
664.0

 
1,344.4

 
1,255.9

 
 
 
 
 
 
 
 
Net operating income
283.5

 
507.6

 
694.4

 
1,029.3

 
 
 
 
 
 
 
 
Non-operating income
 
 
 
 
 
 
 
Net investment income on investments
15.3

 
71.4

 
76.6

 
136.2

Net investment income on consolidated sponsored investment portfolios
26.4

 
39.4

 
50.2

 
88.3

Other income (expense)
(.2
)
 
1.2

 
(.2
)
 
2.5

Total non-operating income
41.5

 
112.0

 
126.6

 
227.0

 
 
 
 
 
 
 
 
Income before income taxes
325.0

 
619.6

 
821.0

 
1,256.3

Provision for income taxes
113.8

 
229.6

 
296.5

 
465.9

Net income
211.2

 
390.0

 
524.5

 
790.4

Less: net income attributable to redeemable non-controlling interests
7.9

 
16.1

 
17.1

 
30.6

Net income attributable to T. Rowe Price Group
$
203.3

 
$
373.9

 
$
507.4

 
$
759.8

 
 
 
 
 
 
 
 
Earnings per share on common stock of T. Rowe Price Group
 
 
 
 
 
 
 
Basic
$
.81

 
$
1.52

 
$
2.02

 
$
3.08

Diluted
$
.79

 
$
1.50

 
$
1.97

 
$
3.04

 
 
 
 
 
 
 
 
Dividends declared per share
$
.54

 
$
.57

 
$
1.08

 
$
1.14



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



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
 
Three months ended
 
Six months ended
 
6/30/2016
 
6/30/2017
 
6/30/2016
 
6/30/2017
Net income
$
211.2

 
$
390.0

 
$
524.5

 
$
790.4

Other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on available-for-sale investments
5.4

 
13.9

 
(.9
)
 
32.2

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

 
(30.3
)
 
(52.3
)
 
(77.9
)
Net unrealized gains recognized upon the transfer to trading investments

 
(23.6
)
 

 
(23.6
)
Total net unrealized holding gains (losses) recognized in other comprehensive income
5.4

 
(40.0
)
 
(53.2
)
 
(69.3
)
 
 
 
 
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
Consolidated sponsored investment portfolios - variable interest entities
(26.9
)
 
30.0

 
14.0

 
37.0

Equity method investments

 
6.7

 
(.8
)
 
3.5

Total currency translation adjustments
(26.9
)
 
36.7

 
13.2

 
40.5

 
 
 
 
 
 
 
 
Other comprehensive loss before income taxes
(21.5
)
 
(3.3
)
 
(40.0
)
 
(28.8
)
Net deferred tax benefits
1.8

 
4.6

 
18.2

 
15.3

Total other comprehensive income (loss)
(19.7
)
 
1.3

 
(21.8
)
 
(13.5
)
 
 
 
 
 
 
 
 
Total comprehensive income
191.5

 
391.3

 
$
502.7

 
$
776.9

Less: comprehensive income (loss) attributable to redeemable non-controlling interests
(9.0
)
 
23.6

 
23.1

 
$
40.2

Comprehensive income attributable to T. Rowe Price Group
200.5

 
367.7

 
479.6

 
736.7



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



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (1)
(in millions)
 
 
Six months ended
 
6/30/2016
 
6/30/2017
Cash flows from operating activities
 
 
 
Net income
$
524.5

 
$
790.4

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization of property and equipment
66.0

 
71.9

Stock-based compensation expense
75.6

 
74.2

Realized gains on dispositions of available-for-sale sponsored investment portfolios
(52.3
)
 
(77.9
)
Gains recognized upon transfer of an available-for-sale sponsored investment portfolio to sponsored investment portfolios held as trading

 
(23.6
)
Net gains recognized on other investments
(16.9
)
 
(23.9
)
Investments in sponsored investment portfolios held as trading to economically hedge supplemental savings plan liability

 
(129.0
)
Net change in trading securities held by consolidated sponsored investment portfolios
(717.2
)
 
(802.0
)
Other changes in assets and liabilities
106.1

 
259.1

Net cash (used in) provided by operating activities
(14.2
)
 
139.2

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of available-for-sale sponsored investment portfolios

 
(.7
)
Dispositions of available-for-sale sponsored investment portfolios
89.2

 
293.7

Net cash of sponsored investment portfolios on consolidation (deconsolidation)
68.3

 
(45.9
)
Additions to property and equipment
(79.2
)
 
(82.6
)
Other investing activity
83.7

 
(26.9
)
Net cash provided by investing activities
162.0

 
137.6

 
 
 
 
Cash flows from financing activities
 
 
 
Repurchases of common stock
(244.0
)
 
(446.9
)
Common share issuances under stock-based compensation plans
59.4

 
74.4

Dividends paid to common stockholders of T. Rowe Price Group
(271.6
)
 
(280.4
)
Net subscriptions received from redeemable non-controlling interest holders
540.0

 
717.7

Net cash provided by financing activities
83.8

 
64.8

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents of consolidated sponsored investment portfolios
(21.3
)
 
3.8

 
 
 
 
Net change in cash and cash equivalents during period
210.3

 
345.4

Cash and cash equivalents at beginning of year
1,172.3

 
1,270.5

Cash and cash equivalents at end of period, including $107.4 million at June 30, 2016 and $73.7 million at June 30, 2017 held by consolidated sponsored investment portfolios
$
1,382.6

 
$
1,615.9

(1) See note 12 for a supplementary consolidating cash flow schedule.

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 (loss)
 
Total
stockholders’
equity
 
Redeemable non-controlling interests
Balances at December 31, 2016
244,784

 
$
49.0

 
$
654.5

 
$
4,293.6

 
$
11.5

 
$
5,008.6

 
$
687.2

Net income

 

 

 
759.8

 

 
759.8

 
30.6

Other comprehensive income (loss), net of tax

 

 

 

 
(23.1
)
 
(23.1
)
 
9.6

Dividends declared

 

 

 
(280.0
)
 

 
(280.0
)
 
 
Common stock-based compensation plans activity
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued upon option exercises
1,942

 
.4

 
76.1

 

 

 
76.5

 

Restricted shares issued, net of shares withheld for taxes
15

 

 
(.1
)
 

 

 
(.1
)
 

Shares issued upon vesting of restricted stock units, net of shares withheld for taxes
6

 

 
(.3
)
 

 

 
(.3
)
 

Forfeiture of restricted awards
(5
)
 

 


 

 

 

 

Stock-based compensation expense

 

 
74.2

 

 

 
74.2

 

Restricted stock units issued as dividend equivalents

 

 
.1

 
(.1
)
 

 

 
 
Common shares repurchased
(6,480
)
 
(1.3
)
 
(150.0
)
 
(295.7
)
 

 
(447.0
)
 

Net subscriptions into sponsored investment portfolios

 

 

 

 

 

 
687.4

Net deconsolidations of sponsored investment portfolios

 

 

 

 

 

 
(787.2
)
Balances at June 30, 2017
240,262

 
$
48.1

 
$
654.5

 
$
4,477.6

 
$
(11.6
)
 
$
5,168.6

 
$
627.6



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 2017 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 2016 Annual Report.

NEW ACCOUNTING GUIDANCE
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 changed 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, the accounting for award forfeitures, and the treatment of hypothetical tax benefits when calculating weighted-average shares outstanding assuming dilution. The guidance required adjustments to be reflected as of January 1, 2016, so we recognized adjustments related to the first and second quarter of 2016 in our condensed consolidated financial statement results for the nine months ended September 30, 2016. As such, we have revised the three- and six- months ended June 30, 2016 financial statements reported in these statements to reflect the impact of the new guidance.

For the three and six months ended June 30, 2016, the recognition of net tax benefits on exercised options and vested restricted stock relative to the stock-based compensation expense reduced our previously reported income tax provisions by $8 million and $16.9 million , respectively. The impact (in millions) on our condensed consolidated statement of income and earnings per share on common stock data three- and six- months is as follows:
 
Three months ended 6/30/2016
 
Six months ended 6/30/2016
 
As previously reported
 
As reported herein
 
As previously reported
 
As reported herein
Income before income taxes
$
325.0

 
$
325.0

 
$
821.0

 
$
821.0

Provision for income taxes
121.8

 
113.8

 
313.4

 
296.5

Net income
203.2

 
211.2

 
507.6

 
524.5

Less: net income attributable to redeemable non-controlling interests
7.9

 
7.9

 
17.1

 
17.1

Net income attributable to T. Rowe Price Group
$
195.3

 
$
203.3

 
$
490.5

 
$
507.4

Less: net income allocated to outstanding restricted stock and stock unit holders
3.8

 
4.0

 
9.4

 
9.8

Net income allocated to common stockholders
$
191.5

 
$
199.3

 
$
481.1

 
$
497.6

 
 
 
 
 
 
 
 


Page 7


Earnings per share on common stock of T. Rowe Price Group
 
 
 
 
 
 
 
Basic
$
.78

 
$
.81

 
$
1.95

 
$
2.02

Diluted
$
.76

 
$
.79

 
$
1.91

 
$
1.97

 
 
 
 
 
 
 
 
Weighted-average common shares
 
 
 
 
 
 
 
Outstanding
246.9

 
246.9

 
246.8

 
246.8

Outstanding assuming dilution
252.1

 
252.6

 
251.8

 
252.2


The impact (in millions) of reporting excess tax benefits from stock-based compensation as an operating activity rather than a financing activity in the consolidated statements of cash flows for the six months ended June 30, 2016 , follows:
 
As previously reported
 
As reported herein
Net cash provided by operating activities
$
(31.5
)
 
$
(14.2
)
Net cash (used in) provided by financing activities
$
101.1

 
$
83.8


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 $303.1 million at December 31, 2016 , and $320.7 million at June 30, 2017 .

Revenues (in millions) from advisory services provided under agreements with our sponsored U.S. mutual funds and other investment clients include:
 
Three months ended
Six months ended
 
6/30/2016
 
6/30/2017
6/30/2016
 
6/30/2017
Sponsored U.S. mutual funds
 
 
 
 
 
 
Stock and blended asset
$
551.1

 
$
628.6

$
1,070.6

 
$
1,222.7

Bond and money market
118.0

 
125.7

230.6

 
247.4

 
669.1

 
754.3

1,301.2

 
1,470.1

Other investment portfolios
 
 
 
 
 
 
Stock and blended asset
210.3

 
240.3

408.2

 
468.2

Bond, money market, and stable value
41.2

 
49.3

82.0

 
96.7

 
251.5

 
289.6

490.2

 
564.9

Total
$
920.6

 
$
1,043.9

$
1,791.4

 
$
2,035.0

 
Other investment portfolios include advisory revenues of $94.0 million and $108.6 million for the three months ended June 30, 2016 and 2017 , respectively, that were earned from other sponsored investment portfolios. Fees earned during the six months ended June 30, 2016 and 2017 , total $182.2 million and $214.7 million respectively.

We voluntarily waived $3.3 million and $7.3 million in money market related fees, including advisory fees and fund expenses, during the three and six months ended June 30, 2016 respectively, in order to maintain a positive yield for investors. We did not waive any money market related fees during 2017 .



Page 8



The following table summarizes the investment portfolios and assets under management (in billions) on which we earn advisory fees.
 
Average during
 
Average during
 
the second quarter of
 
the first half of
 
2016
 
2017
 
2016
 
2017
Sponsored U.S. mutual funds
 
 
 
 
 
 
 
Stock and blended asset
$
383.6

 
$
440.1

 
$
372.4

 
$
430.6

Bond and money market
108.5

 
120.1

 
106.4

 
117.8

 
492.1

 
560.2

 
478.8

 
548.4

Other investment portfolios
 
 
 
 
 
 
 
Stock and blended asset
209.9

 
244.7

 
203.2

 
238.0

Bond, money market, and stable value
70.7

 
81.0

 
68.4

 
79.2

 
280.6

 
325.7

 
271.6

 
317.2

Total
$
772.7

 
$
885.9

 
$
750.4

 
$
865.6

 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
 
 
12/31/2016
 
6/30/2017
Sponsored U.S. mutual funds
 
 
 
 
 
 
 
Stock and blended asset
 
 
 
 
$
401.3

 
$
445.5

Bond and money market
 
 
 
 
112.9

 
121.0

 
 
 
 
 
514.2

 
566.5

Other investment portfolios
 
 
 
 
 
 
 
Stock and blended asset
 
 
 
 
220.8

 
254.0

Bond, money market, and stable value
 
 
 
 
75.8

 
83.1

 
 
 
 
 
296.6

 
337.1

Total
 
 
 
 
$
810.8

 
$
903.6


Investors that we serve are primarily domiciled in the U.S.; investment advisory clients outside the U.S. account for 4.7% and 4.9% of our assets under management at December 31, 2016 , and June 30, 2017 , respectively.

The following table summarizes other fees (in millions) we earn from our sponsored U.S. mutual funds.
 
Three months ended
 
Six months ended
 
6/30/2016
 
6/30/2017
 
6/30/2016
 
6/30/2017
Administrative fees
$
69.7

 
$
71.9

 
$
142.0

 
$
141.4

Distribution and servicing fees
$
35.6

 
$
36.4

 
$
69.5

 
$
71.6




Page 9



NOTE 3 - INVESTMENTS.

The carrying values of investments (in millions) we do not consolidate are as follows:
 
12/31/2016
 
6/30/2017
Available-for-sale sponsored investment portfolios
$
709.0

 
$
524.4

Equity method investments
 
 
 
Sponsored investment portfolios
252.3

 
317.8

26% interest in UTI Asset Management Company Limited (India)
140.9

 
151.4

Investment partnerships
5.3

 
5.1

Sponsored investment portfolios held as trading
75.4

 
256.9

Cost method investments
73.6

 
77.1

U.S. Treasury note
1.0

 
1.0

Total
$
1,257.5

 
$
1,333.7


During the first six months of 2016 and 2017 , 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 the first six months of 2016 and 2017 , certain sponsored investment portfolios that were being accounted for as equity method investments were consolidated, as we regained a controlling interest. The net impact of these changes on our condensed consolidated balance sheets and income statements as of the dates the portfolios were deconsolidated or reconsolidated is detailed below.
 
Three months ended
 
Six months ended
 
6/30/2016
 
6/30/2017
 
6/30/2016
 
6/30/2017
Net decrease in assets of consolidated sponsored investment portfolios
$
(24.4
)
 
$
(38.1
)
 
$
(363.2
)
 
$
(1,074.0
)
Net decrease in liabilities of consolidated sponsored investment portfolios
$
(1.3
)
 
$
(0.4
)
 
$
(2.2
)
 
$
(133.6
)
Net decrease in redeemable non-controlling interests
$
(8.7
)
 
$
(19.5
)
 
$
(161.3
)
 
$
(787.2
)
 
 
 
 
 
 
 
 
Gain (loss) recognized upon deconsolidation
$

 
$

 
$

 
$

We did not recognize any additional gain or loss in our consolidated statements of income upon deconsolidation as the sponsored investment portfolios’ functional currencies were U.S. dollars and were carried at fair value. Depending on our ownership interest, we are now reporting our residual interests in these 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, 2016
 
 
 
 
 
 
 
Stock and blended asset funds
$
162.9

 
$
88.0

 
$
(1.9
)
 
$
249.0

Bond funds
463.3

 
1.7

 
(5.0
)
 
460.0

Total
$
626.2

 
$
89.7

 
$
(6.9
)
 
$
709.0

 
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
Stock and blended asset funds
$
106.0

 
$
12.0

 
$

 
$
118.0

Bond funds
405.6

 
3.8

 
(3.0
)
 
406.4

Total
$
511.6

 
$
15.8

 
$
(3.0
)
 
$
524.4




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, 2016
 
 
 
 
 
Less than 12 months
8

 
$
(4.2
)
 
$
328.1

12 months or more
2

 
(2.7
)
 
169.5

Total
10

 
$
(6.9
)
 
$
497.6

 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
Less than 12 months
3

 
$
(.8
)
 
$
24.5

12 months or more
1

 
(2.2
)
 
168.3

Total
4

 
$
(3.0
)
 
$
192.8


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, 2016 and June 30, 2017 .

VARIABLE INTEREST ENTITIES.
Our investments at December 31, 2016 and June 30, 2017 , include interests in variable interest entities that we do not consolidate as we are not deemed the primary beneficiary. Our maximum risk of loss (in millions) related to our involvement with these entities is as follows:
 
12/31/2016

 
6/30/2017

Investment carrying values
$
149.2

 
$
116.4

Unfunded capital commitments
46.4

 
45.7

Uncollected investment advisory and administrative fees
5.9

 
5.8

 
$
201.5

 
$
167.9


The unfunded capital commitments totaling $45.7 million relate primarily to investment partnerships in which we have an existing investment. In addition to such amounts, a percentage of prior distributions may be called under certain circumstances.

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, 2016
 
 
 
Cash equivalents
$
1,052.3

 
$

Available-for-sale sponsored investment portfolios
709.0

 

Sponsored investment portfolios held as trading
60.3

 
15.1

Total
$
1,821.6

 
$
15.1

 
 
 
 
June 30, 2017
 
 
 
Cash equivalents
$
1,323.8

 
$

Available-for-sale sponsored investment portfolios
524.4

 

Sponsored investment portfolios held as trading
239.3

 
17.6

Total
$
2,087.5

 
$
17.6


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:

 
December 31, 2016
 
June 30, 2017
 
Voting
interest entities
 
Variable interest entities
 
Total
 
Voting
interest entities
 
Variable interest entities
 
Total
Cash and cash equivalents (1)
$
10.3

 
$
55.3

 
$
65.6

 
$
6.6

 
$
67.1

 
$
73.7

Investments (2)
219.3

 
1,340.6

 
1,559.9

 
179.8

 
1,325.6

 
1,505.4

Other assets
4.8

 
50.2

 
55.0

 
5.0

 
19.9

 
24.9

Total assets
234.4

 
1,446.1

 
1,680.5

 
191.4

 
1,412.6

 
1,604.0

Liabilities
8.8

 
56.8

 
65.6

 
11.2

 
44.2

 
55.4

Net assets
$
225.6

 
$
1,389.3

 
$
1,614.9

 
$
180.2

 
$
1,368.4

 
$
1,548.6

 
 
 
 
 
 
 
 
 
 
 
 
Attributable to redeemable non-controlling interests
$
69.5

 
$
617.7

 
$
687.2

 
$
50.1

 
$
577.5

 
$
627.6

Attributable to T. Rowe Price Group
156.1

 
771.6

 
927.7

 
130.1

 
790.9

 
921.0

 
$
225.6

 
$
1,389.3

 
$
1,614.9

 
$
180.2

 
$
1,368.4

 
$
1,548.6

(1) Cash and cash equivalents includes $8.8 million and $5.9 million at December 31, 2016 and June 30, 2017 , respectively, of investments in sponsored money market mutual funds.
(2) Investments includes $4.2 million and $9.0 million at December 31, 2016 and June 30, 2017 , respectively, of investments in sponsored portfolios.

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


Page 12



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.

The operating results (in millions) of the consolidated sponsored investment portfolios for the three- and six- months ended June 30, 2016 and 2017 , are reflected in our condensed consolidated statements of income as follows:

 
Three months ended
 
6/30/2016
 
6/30/2017
 
Voting
interest entities
 
Variable interest entities
 
Total
 
Voting
interest entities
 
Variable interest entities
 
Total
Operating expenses reflected in net operating income
$
(.3
)
 
$
(3.2
)
 
$
(3.5
)
 
$
(.2
)
 
$
(2.5
)
 
$
(2.7
)
Net investment income reflected in non-operating income
5.8

 
20.6

 
26.4

 
4.8

 
34.6

 
39.4

Impact on income before taxes
$
5.5

 
$
17.4

 
$
22.9

 
$
4.6

 
$
32.1

 
$
36.7

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to T. Rowe Price Group
$
3.9

 
$
11.1

 
$
15.0

 
$
3.4

 
$
17.2

 
$
20.6

Net income attributable to redeemable non-controlling interests
1.6

 
6.3

 
7.9

 
1.2

 
14.9

 
16.1

 
$
5.5

 
$
17.4

 
$
22.9

 
$
4.6

 
$
32.1

 
$
36.7


 
Six months ended
 
6/30/2016
 
6/30/2017
 
Voting
interest entities
 
Variable interest entities
 
Total
 
Voting
interest entities
 
Variable interest entities
 
Total
Operating expenses reflected in net operating income
$
(.8
)
 
$
(5.3
)
 
$
(6.1
)
 
$
(.5
)
 
$
(4.8
)
 
$
(5.3
)
Net investment income reflected in non-operating income
12.1

 
38.1

 
50.2

 
10.1

 
78.2

 
88.3

Impact on income before taxes
$
11.3

 
$
32.8

 
$
44.1

 
$
9.6

 
$
73.4

 
$
83.0

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to T. Rowe Price Group
$
7.7

 
$
19.3

 
$
27.0

 
$
7.3

 
$
45.1

 
$
52.4

Net income attributable to redeemable non-controlling interests
3.6

 
13.5

 
17.1

 
2.3

 
28.3

 
30.6

 
$
11.3

 
$
32.8

 
$
44.1

 
$
9.6

 
$
73.4

 
$
83.0


The operating expenses of these consolidated portfolios are reflected in other operating expenses. In preparing our condensed consolidated financial statements, we eliminated operating expenses of $1.8 million and $1.0 million for the three months ended June 30, 2016 and 2017 , respectively, against the investment advisory and administrative fees earned from these portfolios. Operating expenses eliminated for the six months ended June 30, 2016 and 2017 , were $3.1 million and $1.8 million , respectively. 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.










Page 13



The table below details the impact of these consolidated investment portfolios on the individual lines of our condensed consolidated statements of cash flows (in millions) for the six months ended June 30, 2016 and 2017 .
 
Six months ended
 
June 30, 2016
 
June 30, 2017
 
Voting
interest entities
 
Variable interest entities
 
Total
 
Voting
interest entities
 
Variable interest entities
 
Total
Net cash (used in) provided by operating activities
$
(40.9
)
 
$
(632.4
)
 
$
(673.3
)
 
$
(6.4
)
 
$
(727.8
)
 
$
(734.2
)
Net cash provided by investing activities
25.4

 
42.9

 
68.3

 
(6.2
)
 
(39.7
)
 
(45.9
)
Net cash provided by financing activities
27.6

 
706.1

 
733.7

 
8.9

 
775.5

 
784.4

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

 
(21.3
)
 
(21.3
)
 

 
3.8

 
3.8

Net change in cash and cash equivalents during period
12.1

 
95.3

 
107.4

 
(3.7
)
 
11.8

 
8.1

Cash and cash equivalents at beginning of year

 

 

 
10.3

 
55.3

 
65.6

Cash and cash equivalents at end of period
$
12.1

 
$
95.3

 
$
107.4

 
$
6.6

 
$
67.1

 
$
73.7


The net cash provided by financing activities during the first half of 2016 and 2017 includes 193.7 million and $66.7 million , respectively, of net subscriptions we made into the consolidated sponsored investment portfolios, net of dividends received. These cash flows were eliminated in consolidation.

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. The value of investments using Level 3 inputs is insignificant.

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, 2016
 
 
 
Assets
 
 
 
  Cash equivalents
$
8.8

 
$
.8

Equity securities
281.8

 
325.3

Fixed income securities

 
918.1

Other investments
.4

 
34.3

 
$
291.0

 
$
1,278.5

 
 
 
 
Liabilities
$
(.6
)
 
$
(13.6
)
 
 
 
 


Page 14



 
Level 1
 
Level 2
June 30, 2017
 
 
 
Assets
 
 
 
  Cash equivalents
$
6.2

 
$
.3

  Equity securities
406.0

 
356.2

  Fixed income securities

 
731.9

  Other investments
.3

 
11.0

 
$
412.5

 
$
1,099.4

 
 
 
 
Liabilities
$
(.2
)
 
$
(12.0
)

NOTE 6 – STOCKHOLDERS’ EQUITY.

Regular cash dividends declared per share during the first six months of 2016 and 2017 were $1.08 and $1.14 , respectively.

At June 30, 2017 , a liability of $.1 million is included in accounts payable and accrued expenses for common stock repurchases that settled by July 5, 2017.

NOTE 7
– STOCK-BASED COMPENSATION.

STOCK OPTIONS.

The following table summarizes the status of, and changes in, our stock options during the first half of 2017 .
 
 
Options
 
Weighted-
average
exercise
price
Outstanding at December 31, 2016
24,364,322

 
$
61.90

Exercised
(2,676,181
)
 
$
48.73

Forfeited
(29,237
)
 
$
73.88

Expired
(39,631
)
 
$
76.06

Outstanding at June 30, 2017
21,619,273

 
$
63.49

Exercisable at June 30, 2017
14,847,765

 
$
58.67


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 half of 2017 .
 
Restricted
shares
 
Restricted
stock
units
 
Weighted-average
fair value
Nonvested at December 31, 2016
931,508

 
4,634,461

 
$
72.19

Time-based grants
17,022

 
72,547

 
$
68.94

Vested
(9,018
)
 
(20,379
)
 
$
73.72

Forfeited
(4,406
)
 
(27,556
)
 
$
72.83

Nonvested at June 30, 2017
935,106

 
4,659,073

 
$
72.13


Nonvested at June 30, 2017 , includes 14,400 performance-based restricted shares and 401,138 performance-based restricted stock units. These performance-based restricted shares and units include 14,400 restricted shares and 342,049 restricted stock units for which the performance period has lapsed and the performance threshold has been met.



Page 15



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 June 30, 2017 . Estimated future compensation expense will change to reflect future awards of restricted stock awards and units, future option grants, changes in the probability of performance thresholds being met, and adjustments for actual forfeitures.
 
Third quarter 2017
$
38.4

Fourth quarter 2017
34.4

2018
86.6

2019 through 2022
73.4

Total
$
232.8


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
 
Six months ended
 
6/30/2016
 
6/30/2017
 
6/30/2016
 
6/30/2017
Net income attributable to T. Rowe Price Group
$
203.3

 
$
373.9

 
$
507.4

 
$
759.8

Less: net income allocated to outstanding restricted stock and stock unit holders
4.0

 
8.5

 
9.8

 
17.2

Net income allocated to common stockholders
$
199.3

 
$
365.4

 
$
497.6

 
$
742.6

 
 
 
 
 
 
 
 
Weighted-average common shares
 
 
 
 
 
 
 
Outstanding
246.9

 
239.8

 
246.8

 
240.9

Outstanding assuming dilution
252.6

 
243.0

 
252.2

 
244.2


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
 
Six months ended
 
6/30/2016
 
6/30/2017
 
6/30/2016
 
6/30/2017
Weighted-average outstanding stock options excluded
8.7

 
8.5

 
9.7

 
9.0





Page 16



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
 
Six months ended
 
6/30/2016
 
6/30/2017
 
6/30/2016
 
6/30/2017
Net deferred tax benefits (income taxes) on:
 
 
 
 
 
 
 
Net unrealized holding gains or losses
$
(2.1
)
 
$
(5.4
)
 
$
0.4

 
$
(12.5
)
Reclassification adjustments recognized in the provision for income taxes:
 
 
 
 
 
 
 
 Net gains realized on dispositions

 
11.9

 
20.6

 
30.5

 Net gains recognized upon transfer to trading
 investments

 
9.2

 

 
9.2

Net deferred tax benefits (income taxes) on net unrealized holding gains or losses
(2.1
)
 
15.7

 
21.0

 
27.2

Total deferred tax benefits (income taxes) on currency translation adjustments
3.9

 
(11.1
)
 
(2.8
)
 
(11.9
)
Total net deferred tax benefits
$
1.8

 
$
4.6

 
$
18.2

 
$
15.3

The changes (in millions) in each component of accumulated other comprehensive income (loss), including reclassification adjustments for the first half of 2017 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, 2016
$
52.2

 
$
(32.3
)
 
$
(8.4
)
 
$
(40.7
)
 
$
11.5

Other comprehensive income before reclassifications and income taxes
32.2

 
3.5

 
27.4

 
30.9

 
63.1

Reclassification adjustments recognized in non-operating income
(101.5
)
 

 

 

 
(101.5
)
 
(69.3
)
 
3.5

 
27.4

 
30.9

 
(38.4
)
Net deferred tax benefits (income taxes)
27.2

 
(1.2
)
 
(10.7
)
 
(11.9
)
 
15.3

Other comprehensive income (loss)
(42.1
)
 
2.3

 
16.7

 
19.0

 
(23.1
)
Balances at June 30, 2017
$
10.1

 
$
(30.0
)
 
$
8.3

 
$
(21.7
)
 
$
(11.6
)

NOTE 10 - DELL APPRAISAL RIGHTS MATTER.

In 2016, we paid $166.2 million to compensate certain T. Rowe Price mutual funds, trusts, separately managed accounts, and subadvised clients (collectively, Clients) for 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 w