Item 7. 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 T. Rowe Price U.S. mutual funds and other investment products. The other investment products include: separately managed accounts, subadvised funds, and other T. Rowe Price products including collective investment trusts, target date retirement trusts, open-ended investment products offered to investors outside the U.S., and products offered through variable annuity life insurance plans in the U.S.

We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and other investment products, 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.

The general trend to passive investing has been persistent and accelerated in recent years, which has impacted our new client inflows. However, over the long term we expect well-executed active management to play an important role for investors. In this regard, we remain debt-free with ample liquidity and resources that allow us to take advantage of attractive growth opportunities. We are investing in key capabilities, including investment professionals, technologies, and new product offerings; and, most importantly, providing our clients with strong investment management expertise and service both now and in the future.

In 2018, we expect to advance our strategic priorities to sustain and deepen our investment talent, add investment capabilities both in terms of new strategies and new investment vehicles, expand capabilities through enhanced technology, and broaden our distribution reach globally. We currently expect 2018 non-GAAP operating expense growth to lessen relative to 2017, even as growth in market driven expenses and investments in the business continue. However, we could elect to adjust our expense growth should markets increase or decline significantly. In addition, other events not currently planned or expected could impact our expense level in 2018. We are carefully evaluating the impact the U.S. tax reform will have, and factoring in the potential investment, operating expense, and capital management implications.

BACKGROUND.

Lifted by favorable corporate earnings and economic growth, U.S. stocks posted excellent returns in 2017. In fact, it was the ninth consecutive year of positive total returns for the S&P 500 Index. Equities were also buoyed at times by hopes that President Trump’s proposals for lower tax rates, reduced regulation, and increased infrastructure spending would be enacted. The Federal Reserve raised short-term interest rates three times in 2017, but the central bank’s moves were widely expected and did not disrupt the equity markets. In the closing weeks of the year, Congress passed and President Trump signed legislation that reduces tax rates for corporations and closely held businesses and reduces marginal tax rates for individuals at most income levels. Most major stock indexes finished the year near record levels amid expectations that the new tax law would lift corporate profits and add to U.S. economic growth in 2018.

Developed non-U.S. equity markets outperformed the broad U.S. market, as a weaker dollar enhanced returns to U.S. investors. As measured by the MSCI Japan Index, Japanese stocks rose more than 24%, aided by an economic recovery and by the re-election of the reform-minded Prime Minister. European equity markets also generated strong returns, lifted in part by an economic recovery and continued European Central Bank stimulus. Shares in the UK rose, but lagged other markets, as Brexit-related uncertainty lingered for most of the year, growth remained sluggish, and elevated inflation prompted the Bank of England to raise short-term interest rates in November.

Emerging equity markets significantly outperformed developed markets. Most major regions featured several countries with very strong returns in dollar terms.

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Results of several major equity market indexes for 2017 are as follows:

S&P 500 Index	21.8%
NASDAQ Composite Index (excluding dividends)	28.2%
Russell 2000 Index	14.7%
MSCI EAFE (Europe, Australasia, and Far East) Index	25.6%
MSCI Emerging Markets Index	37.8%

Global bond returns were mostly positive in 2017. In the U.S., shorter-term Treasury yields increased while the 10-year Treasury note yield, which dipped as low as about 2.0% in early September, decreased from about 2.5% to 2.4% for the year. In the investment-grade universe, corporate bonds performed well as credit spreads tightened during the year. Long-term Treasuries produced gains, but shorter-term Treasuries struggled. Municipal bonds outperformed taxable bonds. High yield bonds outperformed high-quality issues, helped by their lower interest rate sensitivity and investors’ demand for securities with attractive yields.

Bonds in developed non-U.S. markets performed well in U.S. dollar terms in 2017, as the weaker dollar lifted returns to U.S. investors. In the UK, the 10-year government bond yield was little changed for the year. Late in the year, rising inflation prompted the Central Bank to raise short-term interest rates. In the eurozone, bond yields generally rose, as the economic recovery gained traction. Late in the year, the European Central Bank announced that it will continue its bond-buying program until September 2018, but that it will halve the size of its monthly purchases starting in January. In Japan, the Central Bank sought to keep the 10-year government bond yield around 0%. Bonds in developing markets produced good returns in dollar terms, as growth in the emerging markets universe generally improved. Local currency bonds outperformed dollar-denominated issues, thanks to strength in many emerging markets currencies versus the U.S. dollar.

Results of several major bond market indexes for 2017 are as follows:

Bloomberg Barclays U.S. Aggregate Bond Index	3.5%
JPMorgan Global High Yield Index	8.3%
Bloomberg Barclays Municipal Bond Index	5.5%
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index	10.5%
JPMorgan Emerging Markets Bond Index Plus	8.3%

ASSETS UNDER MANAGEMENT.

Our assets under management ended 2017 at $991.1 billion, an increase of $180.3 billion from the end of 2016. During 2017, investors entrusted net inflows of $14.0 billion to our management, and market appreciation and income, net of distributions not reinvested, added $166.3 billion. Investment advisory clients outside the U.S. account for about 6% of our assets under management at December 31, 2017, up from about 5% at December 31, 2016.

Assets under management by investment product (in billions)		2016				2017
T. Rowe Price U.S. mutual funds		$	514.2			$	606.3
Other investment products		296.6				384.8
Total assets under management		$	810.8			$	991.1

Assets under management by asset class (in billions)		2016				2017
Equity		$	450.6			$	564.1
Fixed income		121.2				134.4
Asset allocation		239.0				292.6
Total assets under management		$	810.8			$	991.1

Our target date retirement products, which are included in the asset totals shown above, continue to be a significant part of our assets under management. These products invest in a broadly diversified portfolio of other T. Rowe Price funds or T. Rowe Price collective investment trusts and automatically rebalance to maintain their specific asset allocation weightings. Assets in

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these products at December 31, 2017, totaled $232.1 billion, including $168.4 billion in target date retirement funds and $63.7 billion in target date retirement trusts.

The following table presents the component changes in assets under management for 2015, 2016, and 2017.

(in billions)		T. Rowe Price U.S. mutual funds				Other investment products				Total
Assets under management at December 31, 2014		$	477.6			$	269.2			$	746.8
Net cash flows before client transfers		7.9				(6.3		)		1.6
Client transfers		(6.5		)		6.5				—
Net cash flows after client transfers		1.4				.2				1.6
Net market appreciation and income		9.6				6.7				16.3
Distributions not reinvested		(1.5		)		(.1		)		(1.6		)
Change during the period		9.5				6.8				16.3
Assets under management at December 31, 2015		487.1				276				763.1
Net cash flows before client transfers		.3				(3.1		)		(2.8		)
Client transfers		(4.9		)		4.9				—
Net cash flows after client transfers		(4.6		)		1.8				(2.8		)
Net market appreciation and income		31.7				18.8				50.5
Distributions not reinvested		—				—				—
Change during the period		27.1				20.6				47.7
Assets under management at December 31, 2016		514.2				296.6				810.8
Net cash flows before client transfers		9.4				4.6				14.0
Client transfers		(20.2		)		20.2				—
Net cash flows after client transfers		(10.8		)		24.8				14.0
Net market appreciation and income		104.6				63.4				168.0
Distributions not reinvested		(1.7		)		—				(1.7		)
Change during the period		92.1				88.2				180.3
Assets under management at December 31, 2017		$	606.3			$	384.8			$	991.1

In all three years, the majority of the client transfers were from the T. Rowe Price U.S. mutual funds to the T. Rowe Price collective investment trusts, which are included in other investment products.

The cash flows include, in addition to net client flows, rebalancing within our proprietary target date mutual fund and trust products in order to maintain their targeted asset allocation. Net cash flows after client transfers shown above include $16.2 billion in 2015, $8.1 billion in 2016, and $7.1 billion in 2017 from target date products.

Net cash inflows into T. Rowe Price U.S. mutual funds before transfers over the last three years were sourced primarily from third-party financial intermediaries across various mandates. In each of the last three years, the net inflows in our other investment products resulted primarily from the client transfers received from the mutual funds. In 2015, the net outflows prior to the client transfers into these portfolios were largely concentrated among a small number of institutional clients who redeemed primarily from large-cap U.S. equity strategies. In 2016, other investment products' net cash outflows prior to client transfers were largely attributable to institutional and intermediary clients reallocating to passive investments and the impact of our closed investment strategies. In 2017, other investment products' net inflows prior to client transfers resulted primarily from flows into our subadvised accounts and Luxembourg domiciled investment products.

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Net cash flows after client transfers, by investment product and by asset class, over the last three years are as follows:

(in billions)		2015				2016				2017
Net cash flows after client transfers by investment product
T. Rowe Price U.S. mutual funds
Stock and blended asset funds		$	1.5			$	(9.9	)		$	(18.9	)
Bond funds		.3				4.7				6.9
Money market funds		(.4		)		.6				1.2
		1.4				(4.6		)		(10.8		)
Other investment products
Stock and blended assets		(3.8		)		(4.9		)		12.1
Fixed income, money market, and stable value		4.0				6.7				12.7
		.2				1.8				24.8
Total net cash flows after client transfers		$	1.6			$	(2.8	)		$	14.0
Net cash flows after client transfers by asset class
Stock and blended asset		$	(2.3	)		$	(14.8	)		$	(6.8	)
Bond, money market, and stable value		3.9				12.0				20.8
Total net cash flows		$	1.6			$	(2.8	)		$	14.0

INVESTMENT PERFORMANCE.

Strong investment performance and brand awareness is a key driver to attracting and retaining assets—and to our long-term success. The percentage of our Price Funds across their share classes that outperformed their comparable Lipper averages on a total return basis, and percentage in top Lipper quartile for the one-, three-, five- and 10-years ended December 31, 2017, were:

	One year	Three years	Five years	10 years
Outperformed Lipper averages
All Price Funds	72%	84%	82%	81%
Asset allocation	86%	97%	93%	93%
Top Lipper quartile
All Price Funds	38%	50%	55%	57%
Asset allocation	59%	60%	82%	86%

In addition, 88% of the T. Rowe Price U.S. mutual funds' assets under management ended December 31, 2017 with an overall rating of four or five stars from Morningstar. The performance of our institutional strategies against their benchmarks remains very competitive, especially over longer time periods.

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RESULTS OF OPERATIONS.

The table below presents financial results on a U.S. GAAP basis as well as a non-GAAP basis that adjusts for the impact of the Dell appraisal rights matter, the consolidated T. Rowe Price investment products, the supplemental savings plan, other non-operating income, and the non-recurring charge recognized in 2017 related to the enactment of U.S. tax reform. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results.

(in millions, except per-share data)		2016				2017				Dollar change				Percentage change
U.S. GAAP basis
Investment advisory fees		$	3,728.7			$	4,287.7			$	559.0			15.0	%
Net revenues		$	4,222.9			$	4,793.0			$	570.1			13.5	%
Operating expenses		$	2,489.5			$	2,684.2			$	194.7			7.8	%
Net operating income		$	1,733.4			$	2,108.8			$	375.4			21.7	%
Non-operating income		$	227.1			$	396.3			$	169.2			74.5	%
Net income attributable to T. Rowe Price Group		$	1,215.0			$	1,497.8			$	282.8			23.3	%
Diluted earnings per share on common stock of T. Rowe Price Group		$	4.75			$	5.97			$	1.22			25.7	%
Weighted average common shares outstanding assuming dilution		250.3				245.1				(5.2		)		(2.1	)%
Adjusted non-GAAP basis(1)
Operating expenses		$	2,416.8			$	2,715.8			$	299.0			12.4	%
Net income attributable to T. Rowe Price Group		$	1,148.9			$	1,361.1			$	212.2			18.5	%
Diluted earnings per share on common stock of T. Rowe Price Group		$	4.49			$	5.43			$	.94			20.9	%
Assets under management (in billions)
Average assets under management		$	778.2			$	909.0			$	130.8			16.8	%
Ending assets under management		$	810.8			$	991.1			$	180.3			22.2	%

(1) See the reconciliation to the comparable U.S. GAAP measures at the end of the results of operations sections of this management's discussion and analysis.

Investment advisory revenues earned in 2017 increased 15.0% over the comparable 2016 period, as average assets under our management increased $130.8 billion, or 16.8%, to $909.0 billion. The average annualized fee rate earned on our assets under management was 47.2 basis points in 2017, compared with 47.9 basis points earned in the 2016 period. Our effective fee rate has declined primarily due to fee rate reductions we made to certain T. Rowe Price investment products since the end of 2015, and higher equity valuations in funds with tiered individual rates which decrease as assets under management grow. The impact of the fee reductions was offset in part by higher equity valuations, which resulted in a greater percentage of our assets under management being attributable to higher fee equity products. In addition, there were negligible money market fee waivers in 2017, versus waivers in 2016 of $10.5 million.

Our operating expenses in 2016 include a non-recurring operating charge, net of insurance recovery, of $66.2 million, or $.15 per share after tax, related to the Dell appraisal rights matter. During 2017, we recognized additional insurance recoveries totaling $50 million, or $.12 per share after tax, from claims filed in 2016 related to this matter. A summary of the financial impact of the Dell matter on our annual pre-tax operating expenses and pre-tax operating cash flows since the matter arose is as follows:

(in millions)	Pre-tax operating expense				Pre-tax operating cash flow
2016	$	66.2			$	(166.2	)
2017	(50.0		)		150.0
Total impact from Dell appraisal rights matter	$	16.2			$	(16.2	)

On a non-GAAP basis, our operating expenses increased $299.0 million, or 12.4%, over the comparable 2016 period. About one-fourth of the increase is related to certain expenses, such as variable compensation and market-driven distribution and

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client servicing costs, that are higher in 2017 as a result of the strong market performance. The remaining change is attributable to our investments in the strategic initiatives announced in early 2017 and other growing operational and regulatory demands.

Our operating margin in 2017 was 44.0% compared to 41.0% in the 2016 period. Excluding the impact of the Dell appraisal rights matter, our operating margin in 2017 and 2016 would have been 43.0% and 42.6%, respectively. The increase in our operating margin is driven by the higher percentage growth in net revenue from strong market performance compared with the growth in operating expenses.

Net revenues

Investment advisory revenues earned from the T. Rowe Price U.S. mutual funds increased 13.5%, or $366.5 million, to $3.1 billion. Average mutual fund assets in 2017 were $568.5 billion, an increase of 14.7% from the average for the comparable 2016 period. Fee rate reductions of certain mutual funds were a factor in why advisory revenue grew slower than average assets under management during 2017.

Investment advisory revenues earned on the other investment products for 2017 were $1,215.8 million, an increase of $192.5 million, or 18.8%, from the $1,023.3 million earned in 2016. Average assets in these products were $340.5 billion during 2017, up 20.4% from the comparable 2016 period.

We have reduced the management fees of certain mutual funds and other investment products since the end of 2015. These reductions were a factor in why investment advisory revenue grew slower than average assets under management during 2017. We regularly assess the competitiveness of our fees and will continue to make adjustments as deemed appropriate.

Administrative fee revenues increased $5.8 million to $358.3 million in 2017. The increase is primarily attributable to transfer agent and other administrative servicing activities provided to the T. Rowe Price U.S. mutual funds and their investors. Changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their investors.

In 2017 and 2016, our advisory and administrative fees are presented net of $5.6 million and $6.5 million, respectively, related to the elimination of management fee and administrative fees earned from our consolidated T. Rowe Price investment products.

Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor, R, and Variable Annuity II Class shares of certain T. Rowe Price investment products were $147.0 million in 2017, an increase of $5.3 million from the comparable 2016 period, on higher average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs in the consolidated income statements.

Operating expenses

Compensation and related costs were $1,664.9 million in 2017, an increase of $170.9 million, or 11.4%, compared to the 2016 period. The largest part of the change is attributable to a $116.9 million increase in salaries and related benefit expenses, which resulted primarily from a modest increase in salaries at the beginning of 2017, combined with a 6.4% increase in average headcount from 2016. The higher employee benefit costs also includes greater payroll taxes associated with option exercises and restricted stock vesting that results from the significant rise in our stock price in 2017, as well as increased health care costs. Higher average headcount also drove recruiting costs to be up in 2017, compared with the 2016 period. Our annual variable compensation in the 2017 period rose $59.8 million over the 2016 period. Stronger markets in 2017 increased the supplemental savings plan liability resulting in additional compensation expense of $21.1 million in 2017 compared with the 2016 period. The changes in these compensation and related costs were offset in part by higher labor capitalization related to internally developed software in 2017 compared with the 2016 period, as we continue to invest in our technology capabilities. We had a reduction in our noncash stock based compensation expense in 2017, as we shifted our annual grant from twice a year to a single grant in December.

Advertising and promotion costs were $92.0 million in 2017, an increase of $12.1 million, or 15.1%, compared to 2016. We increased our spend in 2017 in support of efforts to broaden our distribution reach and in response to investor sentiment and the strong market environment.

Occupancy and facility costs, together with depreciation expense, increased $32.3 million, or 10.5%, compared to 2016. The increase is due primarily to added costs to update and enhance technology capabilities, including related maintenance programs, as well as expanded office facilities and new locations.

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Other operating expenses were $491.8 million in 2017, an increase of $90.3 million from 2016. About half of this increase is attributable to professional fees incurred to support our continued investment in our operating capabilities and growth in regulatory demands. The remainder of the change from 2016 results from higher distribution and client servicing costs that were driven by the strong market performance in 2017, as well as increased operational and regulatory business demands.

Non-operating income

Net non-operating investment activity during 2017 resulted in income of $396.3 million compared with $227.1 million in 2016. The following table details the components of non-operating income (in millions) during 2016 and 2017.

	2016				2017				Dollar Change
Net investment income on non-consolidated T. Rowe Price investment products
Net realized gains on dispositions of available-for-sale investments	$	53.0			$	83.1			$	30.1
Ordinary and capital gain dividend distributions	16.1				22.2				6.1
Dividends and unrealized gains on investment products used to hedge the supplemental savings plan liability	—				12.3				12.3
Unrealized gains on equity method and other trading investments	20.8				32.5				11.7
Gains reclassified from accumulated other comprehensive income upon transfer of an available-for-sale sponsored investment portfolio to sponsored investment portfolios held as trading	—				23.6				23.6
Net gain recognized upon deconsolidation	2.2				.1				(2.1		)
Total investment income from non-consolidated T. Rowe Price investment products	92.1				173.8				81.7
Net investment income on consolidated T. Rowe Price investment products	121.1				193.9				72.8
Other investment income	15.9				24.5				8.6
Other income (expenses), including foreign currency gains and losses	(2.0		)		4.1				6.1
Net non-operating income	$	227.1			$	396.3			$	169.2

During 2017, non-operating income includes $30.8 million in gains realized from the disposition of certain available-for-sale investments and $23.6 million in unrealized gains recognized on T. Rowe Price trading investments that result from our decision to economically hedge the market exposure associated with our supplemental savings plan liability. In order to fund the hedge portfolio, we used the proceeds from the sale of certain available-for-sale investments in certain T. Rowe Price U.S. mutual funds as well as designated a mutual fund that was held as available-for-sale. The designation of the T. Rowe Price mutual fund as an economic hedge transferred its accounting classification from an available-for-sale security to a trading security, and resulted in the reclassification of the investment's unrealized holding gain at the date of designation to the income statement from the balance sheet where it was previously recognized.

The impact of consolidating certain T. Rowe Price investment products on the individual lines of our consolidated statements of income for 2016 and 2017 is as follows:

(in millions)	2016				2017
Operating expenses reflected in net operating income	$	(13.0	)		$	(12.3	)
Net investment income reflected in non-operating income	121.1				193.9
Impact on income before taxes	$	108.1			$	181.6
Net income attributable to our interest in the consolidated T. Rowe Price investment products	$	69.1			$	98.2
Net income attributable to redeemable non-controlling interests (unrelated third-party investors)	39.0				83.4
Impact on income before taxes	$	108.1			$	181.6

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Provision for income taxes

Our 2017 income tax provision includes a non-recurring charge of $71.1 million to reflect the estimated effect of the U.S. tax law changes enacted on December 22, 2017, in a comprehensive U.S. tax reform bill originally known as the Tax Cuts and Jobs Act ("Tax Reform"). The recognized charge is based on current interpretation of the tax law changes, and includes $18.9 million for the remeasurement of our deferred tax assets and liabilities, and a $52.2 million tax liability for the mandatory deemed repatriation of foreign sourced net earnings. The increase in our 2017 effective tax rate resulting from this charge was offset in part by higher than expected tax benefits related to the exercise of stock options, vesting of restricted stock, and net income attributable to redeemable non-controlling interests related to our consolidated T. Rowe Price investment products, as these earnings are not taxable to us. The following reconciles the statutory federal income tax rate to our effective tax rate for 2017:

Statutory U.S. federal income tax rate		35.0	%
Impact of U.S. Tax Reform		2.9	%
State income taxes for current year, net of federal income tax benefits(1)		3.9	%
Net income attributable to redeemable non-controlling interests		(1.3	)%
Net excess tax benefits from stock-based compensation plans activity		(3.0	)%
Other items		(.6	)%
Effective income tax rate		36.9	%

(1)State income benefits totaling (.4)% are reflected in the total benefits for net income attributable to redeemable non-controlling interests and stock-based compensation plans activity.

We currently estimate that the reduction in the U.S. corporate tax rate (from 35% to 21%) in 2018, combined with other miscellaneous tax changes that effect certain tax deductions, will reduce our 2018 effective tax rate to a range of 24.0% to 27.0%. Our effective tax rate will continue to experience volatility in future periods as the tax benefits recognized from stock based compensation are impacted by market fluctuations in our stock price and timing of option exercises. The rate will also be impacted by changes in our consolidated investment products that are driven by market fluctuations and changes in the proportion of their net income that is attributable to non-controlling interests.

We continue to evaluate the impact of the Tax Reform on our estimates and expectations due to changes in our interpretations of the law, assumptions used in applying the law, and additional guidance concerning the law that may be issued.

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2016 versus 2015

The table below presents financial results on a U.S. GAAP basis, as well as a non-GAAP basis to adjust for the non-recurring charge related to the Dell appraisal rights matter, the impact of the consolidated T. Rowe Price investment products, and other non-operating income. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results.

(in millions, except per-share data)		2015				2016				Dollar change				Percentage change
U.S. GAAP Basis
Investment advisory fees		$	3,687.3			$	3,728.7			$	41.4			1.1	%
Net revenues		$	4,200.6			$	4,222.9			$	22.3			.5	%
Operating expenses		$	2,301.7			$	2,489.5			$	187.8			8.2	%
Net operating income		$	1,898.9			$	1,733.4			$	(165.5	)		(8.7	)%
Non-operating income(1)		$	103.5			$	227.1			$	123.6			n/m
Net income attributable to T. Rowe Price Group		$	1,223.0			$	1,215.0			$	(8.0	)		(.7	)%
Diluted earnings per common share		$	4.63			$	4.75			$	.12			2.6	%
Weighted average common shares outstanding assuming dilution		260.9				250.3				(10.6		)		(4.1	)%
Adjusted(2)
Operating expenses		$	2,301.7			$	2,416.8			$	115.1			5.0	%
Net income attributable to T. Rowe Price Group		$	1,160.3			$	1,148.9			$	(11.4	)		(1.0	)%
Diluted earnings per common share		$	4.39			$	4.49			$	.10			2.3	%
Assets under management (in billions)
Average assets under management		$	767.9			$	778.2			$	10.3			1.3	%
Ending assets under management		$	763.1			$	810.8			$	47.7			6.3	%

(1) Non-operating income varies from year to year due to a number of factors; accordingly the percentage change in non-operating income is not believed to be meaningful.

(2) See the reconciliation to the comparable U.S. GAAP measures at the end of the results of operations sections of this management's discussion and analysis.

As detailed in the table above, the percentage increase in investment advisory revenues in 2016 was in line with the increase in our average assets under management. We waived $10.5 million in money market-related fees (including advisory fees and fund expenses) in 2016, a decrease of $37.1 million from the $47.6 million waived in the 2015 period. The fee waivers in 2016 represent less than .5% of total investment advisory revenues earned during the same period. These fees were waived from certain of our money market mutual funds and trusts, which had combined net assets of $15.7 billion at December 31, 2016. The annual fee rate earned on our assets under management was 47.9 basis points in 2016, virtually unchanged from the 48.0 basis points earned in 2015. The impact on our effective fee rate from the reduction in money market waivers in 2016 was offset by effective fee rate reductions in certain of T. Rowe Price U.S. mutual funds.

Our 2016 operating expenses include a non-recurring charge, net of insurance recovery, of $66.2 million, or $.15 per share after tax related to the Dell appraisal rights matter. In 2016, we paid our clients $166.2 million to compensate them for the denial of their appraisal rights in connection with the 2013 leveraged buyout of Dell. We made claims to our insurance carriers and, on December 30, 2016, entered into an agreement with our primary insurance carrier to recover $100 million from the claim. The insurance proceeds were recognized as an offset to the related $166.2 million charge recognized in the second quarter of 2016. Remaining insurance claims pending as of December 31, 2016, resulted in an additional recovery of $50 million in the first quarter of 2017.

Our operating margin in 2016 was 41.0% compared to 45.2% in the 2015 period. Without the impact of the non-recurring charge relating to the Dell appraisal rights matter, our operating margin in 2016 would have been 42.6%. The additional decline in our 2016 operating margin resulted primarily from the investments we have been making to broaden and deepen our investment management, distribution, and service capabilities around the world.

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Our 2016 results were significantly impacted by the adoption of new accounting guidance related to consolidation and stock-based compensation. The impact (in millions) the consolidated T. Rowe Price investment products had on the individual lines of our 2016 consolidated statement of income was as follows:

Operating expenses reflected in net operating income	$	(13.0	)
Net investment income reflected in non-operating income	121.1
Impact on income before taxes	$	108.1
Net income attributable to our interest in the consolidated T. Rowe Price investment products	$	69.1
Net income attributable to redeemable non-controlling interests (unrelated third-party investors)	39.0
Impact on income before taxes	$	108.1

Net revenues

Investment advisory revenues earned from T. Rowe Price U.S. mutual funds increased 1.4%, or $37.5 million, to $2.7 billion. Average mutual fund assets in 2016 were $495.5 billion, an increase of .4% from the average for the comparable 2015 period. The increase in advisory revenues was due in part to the reduction in money market fee waivers realized in 2016 compared with 2015.

Investment advisory revenues earned on the other investment products for 2016 were $1,023.3 million, an increase of $3.9 million, or .4%, from the $1,019.4 million earned in 2015. Average assets in these products were $282.7 billion during 2016, up 3.1% from the comparable 2015 period. In 2016, our advisory revenues are presented net of $7.0 million related to the elimination of management fees earned on the net assets of certain of our consolidated T. Rowe Price investment products. We eliminated these advisory fees in preparing our consolidated financial statements.

Administrative fee revenues decreased $9.3 million to $352.5 million in 2016. The decrease was primarily attributable to transfer agent servicing activities provided to the mutual funds and their investors, as well as the shift of fund accounting and portfolio recordkeeping operations to BNY Mellon that, prior to August 2015, we provided to the T. Rowe Price U.S. mutual funds. Changes in administrative fee revenues were generally offset by similar changes in related operating expenses that were incurred to provide services to the funds and their investors.

Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor, R, and Variable Annuity II Class shares of the T. Rowe Price U.S. mutual funds were $141.7 million in 2016, a decrease of $9.8 million from the comparable 2015 period on lower average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third- party intermediaries who source these assets. These costs are reported as distribution and servicing costs in the consolidated income statements.

Operating expenses

Compensation and related costs were $1,494.0 million in 2016, an increase of $50.4 million, or 3.5%, compared to the 2015 period. The largest part of the increase was attributable to a $56.7 million increase in salaries and related benefits, which resulted from a modest increase in salaries at the beginning of 2016 combined with a 3.2% increase in average headcount from 2015. Noncash stock-based compensation expense and annual variable compensation were up $12.6 million and $4.9 million, respectively. These increases were offset by a higher level of technology labor capitalized in 2016 compared with 2015 and a reduction in temporary labor cost as the 2016 projects used more professional service resources. The overall increase in compensation and related costs and our average staff size from 2015 were muted by lower compensation costs resulting from shifting 210 associates in August 2015 to BNY Mellon and for the ongoing transition support we provide to them. However, these lower compensation costs were generally offset by increases in costs paid to BNY Mellon to provide these administrative services and other transition-related activities, which are reflected in other operating expenses.

Advertising and promotion costs were $79.9 million in 2016 compared with $79.7 million in 2015.

Occupancy and facility costs, together with depreciation expense, increased $20.7 million, or 7.3%, compared to 2015. The increase was primarily attributable to the added costs to update and enhance technology capabilities, including related maintenance programs.

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Other operating expenses were $401.5 million in 2016, an increase of $60.1 million from 2015. About half of this increase was attributable to costs paid to BNY Mellon since August 2015 for the performance of certain administrative services, as mentioned above. The increase also included $6.5 million in operating expenses, net of investment advisory fees earned by us, of those T. Rowe Price investment products that we began consolidating at the beginning of 2016. The remaining balance of the change was due to increased business demands and our continued investment in capabilities.

Non-operating income

Net non-operating investment activity during 2016 resulted in income of $227.1 million compared with $103.5 million in 2015. The following table details the components of non-operating income (in millions) during 2015 and 2016.

	2015				2016				Dollar Change
Net investment income on non-consolidated T. Rowe Price investment products
Net realized gains on dispositions of available-for-sale investments	$	56.5			$	53.0			$	(3.5	)
Ordinary and capital gain dividend distributions	39.7				16.1				(23.6		)
Other-than-temporary impairment	(4.8		)		—				4.8
Unrealized gains (losses) on equity method and other trading investments	(2.6		)		20.8				23.4
Net gain (losses) recognized upon deconsolidation	(5.8		)		2.2				8.0
Total investment income from non-consolidated T. Rowe Price investment products	83.0				92.1				9.1
Net investment income on consolidated T. Rowe Price investment products	1.5				121.1				119.6
Other investment income	22.3				15.9				(6.4		)
Other expenses, including foreign currency gains and losses	(3.3		)		(2.0		)		1.3
Net non-operating income	$	103.5			$	227.1			$	123.6

The increase in investment gains on T. Rowe Price products that are accounted for as an equity method or trading investments was driven by an increase in the number of equity method investments as well as market gains. The investment income on consolidated T. Rowe Price investment products increased in 2016 as the number of products we consolidated increased significantly upon the adoption of the new consolidation accounting guidance.

Provision for income taxes

Our effective tax rate for 2016 was 36.0% compared to 38.9% in 2015. The decrease in the effective tax rate was related in part to the increase in net income attributable to redeemable non-controlling interest related to our consolidated T. Rowe Price investment products, as we do not recognize taxes associated with these earnings. Additionally, the estimated effective tax rate declined as a result of adopting the new stock-based compensation accounting guidance. Under the new guidance, tax benefits and shortfalls on exercised options and vested restricted stock relative to the stock-based compensation expense recognized are included in the provision for income taxes rather than as additional paid in capital on the consolidated balance sheet. Our effective income tax rate also reflected the relative contribution of pretax income generated by our foreign subsidiaries that are subject to tax rates lower than our U.S. rates.

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Non-GAAP information and reconciliation

We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing current results with prior period results, and to enable more appropriate comparison with industry peers. However, non-GAAP financial measures should not be considered as a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies. The following schedule reconciles (in millions, except for per-share amounts) U.S. GAAP financial measures to non-GAAP measures for each of the last five years.

	2013				2014				2015				2016				2017
Operating expenses, GAAP basis	$	1,846.8			$	2,091.2			$	2,301.7			$	2,489.5			$	2,684.2
Non-GAAP adjustments:
Expenses of consolidated T. Rowe Price investment products, net of elimination of its related management fee(1)	—				—				—				(6.5		)		(6.7		)
Compensation expense related to market valuation changes in supplemental savings plan liability(2)	—				—				—				—				(11.7		)
Insurance recoveries (nonrecurring charge) related to Dell appraisal rights matter(4)	—				—				—				(66.2		)		50.0
Adjusted operating expenses	$	1,846.8			$	2,091.2			$	2,301.7			$	2,416.8			$	2,715.8
Net income attributable to T. Rowe Price Group, GAAP basis	$	1,047.7			$	1,229.6			$	1,223.0			$	1,215.0			$	1,497.8
Non-GAAP adjustments:
Net income of consolidated T. Rowe Price investment products, net of redeemable non-controlling interests(1)	(4.5		)		—				(1.5		)		(69.1		)		(98.2		)
Non-operating income of investments designated as an economic hedge of supplemental savings plan liability less related compensation expense(2)	—				—				—				—				(.6		)
Non-operating income, excluding impacts of consolidated T. Rowe Price investment products and investments designated as an economic hedge of supplemental savings plan liability(3)	(58.5		)		(112.2		)		(102.0		)		(106.0		)		(190.1		)
Nonrecurring charge (insurance recoveries) related to Dell appraisal rights matter(4)	—				—				—				66.2				(50.0		)
Income tax impacts of non-GAAP adjustments before tax reform(5)	24.5				43.9				40.8				42.8				131.1
Impact of U.S. tax reform(6)	—				—				—				—				71.1
Adjusted net income attributable to T. Rowe Price Group	$	1,009.2			$	1,161.3			$	1,160.3			$	1,148.9			$	1,361.1
Diluted earnings per common share, GAAP basis	$	3.90			$	4.55			$	4.63			$	4.75			$	5.97
Non-GAAP adjustments:
Consolidated T. Rowe Price investment products(1)	(.01		)		—				(.01		)		(.16		)		(.24		)
Non-operating income, excluding impacts of consolidated T. Rowe Price investment products and investments designated as an economic hedge of supplemental savings plan liability(3)	(.13		)		(.26		)		(.23		)		(.25		)		(.46		)
Nonrecurring charge (insurance recoveries) related to Dell appraisal rights matter(4)	—				—				—				.15				(.12		)
Impact of U.S. tax reform(6)	—				—				—				—				.28
Adjusted diluted earnings per common share(7)	$	3.76			$	4.29			$	4.39			$	4.49			$	5.43

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(1)The non-GAAP adjustments add back the management fees that we earn from the consolidated T. Rowe Price investment products and subtract the investment income and operating expenses of these products that have been included in our U.S. GAAP consolidated statements of income. We believe the consolidated T. Rowe Price investment products may impact the reader's ability to understand our core operating results. The following table details the calculation of net income of consolidated T. Rowe Price investment products, net of redeemable non-controlling interests:

	2013				2014				2015				2016				2017
Net investment income	$	4.5			$	—			$	1.5			$	121.1			$	193.9
Operating expenses	—				—				—				(13.0		)		(12.3		)
Net income	4.5				—				1.5				108.1				181.6
Less: net income attributable to redeemable non-controlling interests	—				—				—				39.0				83.4
T. Rowe Price Group's portion of net income	$	4.5			$	—			$	1.5			$	69.1			$	98.2

(2) This non-GAAP adjustment removes the impact of market movements on the supplemental savings plan liability and related investments designated as economic hedges of the liability beginning July 1, 2017. Amounts deferred under the supplemental savings plan are adjusted for appreciation (depreciation) of hypothetical investments chosen by the employees. Since we economically hedge the exposure to these market movements, we believe it is useful to offset the non-operating investment income earned on the hedges against the related compensation expense to increase comparability period to period. The following table details the supplemental savings plan related items:

	2013				2014				2015				2016				2017
Non-operating income of investments designated as an economic hedge of supplemental savings plan liability	$	—			$	—			$	—			$	—			$	12.3
Compensation expense from market valuation changes in supplemental savings plan liability	—				—				—				—				(11.7		)
Non-operating income of investments designated as an economic hedge of supplemental savings plan liability less compensation expense	$	—			$	—			$	—			$	—			$	.6

(3) This non-GAAP adjustment removes the non-operating income that remains after eliminating the portion related to the consolidated T. Rowe Price investment products and investments designated as an economic hedge of our supplemental savings plan liability. We believe excluding non-operating income helps the reader's ability to understand our core operating results and increases comparability to prior years. Additionally, we do not emphasize the impact of non-operating income when managing our firm and evaluating our performance. The following table details the calculation of other non-operating income:

	2013				2014				2015				2016				2017
Total non-operating income	$	63.0			$	112.2			$	103.5			$	227.1			$	396.3
Less: net investment income of consolidated T. Rowe Price investment products	4.5				—				1.5				121.1				193.9
Less: non-operating income from investments designated as an economic hedge of supplemental savings plan liability	—				—				—				—				12.3
Total other non-operating income	$	58.5			$	112.2			$	102.0			$	106.0			$	190.1

(4) In the second quarter of 2016, we recognized a nonrecurring charge of $166.2 million related to our decision to compensate certain clients in regard to the Dell appraisal rights matter. We also recognized an offset to this charge during the fourth quarter of 2016 for related insurance recoveries totaling $100 million. In the first quarter of 2017, we recognized additional insurance recoveries of $50 million as a reduction in operating expenses from claims that were filed in relation to the matter. We believe it is useful to readers of our consolidated statements of income to adjust for these charges and non-recurring insurance recoveries in arriving at adjusted operating expenses and net income attributable to T. Rowe Price Group and diluted earnings per share.

(5) These were calculated using the effective tax rate applicable to each non-GAAP adjustment before tax reform.

(6)In the fourth quarter of 2017, we recognized a nonrecurring charge of $71.1 million to reflect the effect of the U.S. tax law changes enacted on December 22, 2017. We believe it is useful to readers of our consolidated statements of income to adjust

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for this nonrecurring charge in arriving at net income attributable to T. Rowe Price Group and diluted earnings per share.

(7) This non-GAAP measure was calculated by applying the two-class method to adjusted net income attributable to T. Rowe Price Group, divided by the weighted-average common shares outstanding assuming dilution.

CAPITAL RESOURCES AND LIQUIDITY.

During 2017, stockholders’ equity increased from $5.0 billion to $5.8 billion. Tangible book value increased to $5.2 billion at December 31, 2017. We paid $2.28 per share in regular dividends in 2017, an increase of 5.6% over the $2.16 per share paid in 2016. Additionally, we expended $458.1 million to repurchase 6.6 million shares, or 2.7%, of our outstanding common stock in 2017. These dividends and repurchases were expended using existing cash balances and cash generated from operations. We will generally repurchase our common stock over time to offset the dilution created by our equity-based compensation plans.

As detailed below, we have returned $4.3 billion to stockholders over the last three years through stock repurchases, our regular quarterly dividends, and a special dividend in 2015.

(in millions)	Recurring dividend				Special dividend				Stock repurchases				Total cash returned to stockholders
2015	$	534.5			$	524.5			$	987.8			$	2,046.8
2016	541.2				—				676.9				1,218.1
2017	562.6				—				458.1				1,020.7
Total	$	1,638.3			$	524.5			$	2,122.8			$	4,285.6

We remain debt-free with ample liquidity, including cash and investments in T. Rowe Price products as follows:

(in millions)		2016				2017
Cash and cash equivalents		$	1,204.9			$	1,902.7
Discretionary investments		700.6				780.3
Total cash and discretionary investments		1,905.5				2,683.0
Redeemable seed capital investments		1,263.8				1,188.9
Investments used to hedge the supplemental savings plan liability		—				268.2
Total cash and investments in T. Rowe Price products		$	3,169.3			$	4,140.1

Our seed capital investments are redeemable, although we generally expect to be invested for several years until unrelated third-party investors substantially reduce our relative ownership percentage. Cash and discretionary investments in T. Rowe Price products held by our subsidiaries outside the U.S. were $365.9 million at December 31, 2016, and $424.5 million at December 31, 2017.

The following table details the line items of the consolidated balance sheet as of December 31, 2017, where our cash and investments are presented. The investment presentation on the consolidated balance sheet is based on the type of investment, as well as how we account for the investment.

	Interest Held by T. Rowe Price Group
(in millions)	Cash and discretionary investments in T. Rowe Price products				Redeemable seed capital investments in T. Rowe Price products				Investments in T. Rowe Price products used to hedge supplemental savings plan				Total cash and investments in T. Rowe Price products				Investment in UTI and other investments				Total				Redeemable non-controlling interests				As reported on consolidated balance sheet 12/31/2017
Cash and cash equivalents	$	1,902.7			$	—			$	—			$	1,902.7			$	—			$	1,902.7			$	—			$	1,902.7
Investments	669.7				299.8				268.2				1,237.7				239.6				1,477.3				—				1,477.3
Net assets of consolidated T. Rowe Price investment products	110.6				889.1				—				999.7				—				999.7				992.8				1,992.5
	$	2,683.0			$	1,188.9			$	268.2			$	4,140.1			$	239.6			$	4,379.7			$	992.8			$	5,372.5

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Our consolidated balance sheet reflects the cash and cash equivalents, investments, other assets and liabilities of those T. Rowe Price investment products we consolidate, as well as redeemable non-controlling interests for the portion of these T. Rowe Price investment products that are held by unrelated third-party investors. Although we can redeem our net interest in these T. Rowe Price investment products 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 T. Rowe Price investment products are not available to our general creditors. Our interest in these T. Rowe Price investment products was used as initial seed capital and is recategorized as discretionary when it is determined by management that the seed capital is no longer needed. We assess the discretionary investment portfolio and when we liquidate our interest, we attempt to do so in a way as to not impact the portfolio, and, ultimately the unrelated third-party investors.

We anticipate property and equipment expenditures in 2018 to be up to $180 million, of which about two-thirds is planned for technology initiatives. Given the availability of our financial resources, we expect to fund our anticipated capital expenditures with operating resources.

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The following table summarizes the cash flows (in millions) for 2016 and 2017, that are attributable to T. Rowe Price Group, our consolidated T. Rowe Price investment products, and the related eliminations required in preparing the statement.

	2016																2017
	Cash flow attributable to T. Rowe Price Group				Cash flow attributable to consolidated T. Rowe Price investment products				Eliminations				As reported				Cash flow attributable to T. Rowe Price Group				Cash flow attributable to consolidated T. Rowe Price investment products				Eliminations				As reported
Cash flows from operating activities
Net income	$	1,215.0			$	108.1			$	(69.1	)		$	1,254.0			$	1,497.8			$	181.6			$	(98.2	)		$	1,581.2
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization of property and equipment	133.4				—				—				133.4				143.6				—				—				143.6
Stock-based compensation expense	161.6				—				—				161.6				152.0				—				—				152.0
Realized gains on dispositions of available-for-sale T. Rowe Price investment products	(53.0		)		—				—				(53.0		)		(83.1		)		—				—				(83.1		)
Gains recognized upon transfer of an available-for-sale T. Rowe Price investment products to T. Rowe Price investment products held as trading	—				—				—				—				(23.6		)		—				—				(23.6		)
Net gains recognized on investments	(100.1		)		—				69.1				(31.0		)		(147.9		)		—				98.2				(49.7		)
Investments in T. Rowe Price mutual funds held as trading to economically hedge supplemental savings plan liability	—				—				—				—				(218.6		)		—				—				(218.6		)
Net change in trading securities held by consolidated T. Rowe Price investment products	—				(1,297.9		)		—				(1,297.9		)		—				(1,492.9		)		—				(1,492.9		)
Changes in accounts receivable and accrued revenue	(9.3		)		—				—				(9.3		)		(100.8		)		—				—				(100.8		)
Changes in payables and accrued liabilities	101.5				37.1				—				138.6				169.1				154.3				—				323.4
Other changes in assets and liabilities	(105.4		)		(13.9		)		(6.6		)		(125.9		)		163.3				(158.3		)		(7.0		)		(2.0		)
Net cash provided by (used in) operating activities	1,343.7				(1,166.6		)		(6.6		)		170.5				1,551.8				(1,315.3		)		(7.0		)		229.5
Net cash provided by (used in) investing activities	(219.7		)		41.4				284.5				106.2				(33.9		)		(64.2		)		137.1				39.0
Net cash used in financing activities attributable to T. Rowe Price Group	(1,091.4		)		—				—				(1,091.4		)		(820.1		)		—				—				(820.1		)
Net subscriptions received from redeemable non-controlling interest holders	—				1,192.9				(277.9		)		915.0				—				1,411.7				(130.1		)		1,281.6
Net cash provided by (used in) financing activities	(1,091.4		)		1,192.9				(277.9		)		(176.4		)		(820.1		)		1,411.7				(130.1		)		461.5
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products	—				(2.1		)		—				(2.1		)		—				5.3				—				5.3
Net change in cash and cash equivalents during period	32.6				65.6				—				98.2				697.8				37.5				—				735.3
Cash and cash equivalents at beginning of year	1,172.3				—				—				1,172.3				1,204.9				65.6				—				1,270.5
Cash and cash equivalents at end of period	$	1,204.9			$	65.6			$	—			$	1,270.5			$	1,902.7			$	103.1			$	—			$	2,005.8

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2017 versus 2016.

Operating activities attributable to T. Rowe Price Group during 2017 provided cash flows of $1,551.8 million, an increase of $208.1 million from the 2016 period. The increase is largely attributable to higher net income attributable to T. Rowe Price Group as well as the timing differences of cash flows related to the Dell appraisal rights matter. We paid $166.2 million to certain T. Rowe Price clients during 2016 and received related insurance recoveries of $150.0 million during 2017 relating to this matter. These changes in cash flows were offset by cash outflows in the 2017 period for new investments made into T. Rowe Price investment products held as trading totaling $218.6 million in order to economically hedge our supplemental savings plan liability. The net cash provided by operating activities attributable to T. Rowe Price Group was offset in part by the net change in trading securities held in T. Rowe Price consolidated investment products’ underlying investment products.

Net cash used in investing activities that are attributable to T. Rowe Price Group totaled $33.9 million in 2017, an increase of $185.8 million from the comparable 2016 period. During 2017, we realized $184.2 million more net proceeds from the purchases and sales of our available-for-sale investments compared with 2016. This net increase in investing cash flows was offset by an $83.5 million decrease in proceeds from the sales of equity method investments and a $37.8 million increase in property and equipment expenditures during 2017 compared with the 2016 period. Additionally, the amount of seed capital investments we provided in 2017 decreased by $147.4 million compared with the 2016 period. Since we consolidate these T. Rowe Price investment products, our investment was eliminated in preparing our consolidated statement of cash flow. The cash flow attributable to consolidated T. Rowe Price investment products of $64.2 million represents the aggregate net cash removed during 2017 from our balance sheet upon consolidating and deconsolidating products. During the 2016 period, the comparable cash flow activity added $41.4 million to our balance sheet.

Net cash used in financing activities attributable to T. Rowe Price Group totaled $820.1 million in 2017 compared with $1,091.4 million in 2016. The decrease in cash used in financing activities is related in part to a reduction of $218.8 million expended in common stock repurchases as the sharp increase in our stock price led us to repurchase fewer shares in 2017. This decrease in cash flows was offset by a $74.8 million increase in proceeds from option exercises, as a greater number of options were exercised due to the sharp increase in our stock price in 2017. The remaining change in reported cash flows from financing activities is primarily attributable to a $366.6 million increase in net subscriptions received from redeemable non-controlling interest holders of our consolidated T. Rowe Price investment products during 2017 compared to the 2016 period.

2016 versus 2015.

Operating activities attributable to T. Rowe Price Group during 2016 provided cash flows of $1,343.7 million, a decrease of $186.8 million from the 2015 period. The decline was primarily related to the payments totaling $166.2 million we made in 2016 to compensate certain clients in regard to the Dell appraisal rights matter. We entered into an agreement on December 30, 2016, for a $100 million insurance recovery that we received in January 2017. The net cash provided by operating activities attributable to T. Rowe Price Group was offset in part by the net change in trading securities held in T. Rowe Price consolidated investment products’ underlying investment products.

Net cash used in investing activities that are attributable to T. Rowe Price Group totaled $219.7 million in 2016. In 2016, we provided $284.5 million in seed capital to new and existing T. Rowe Price investment products. We utilized a portion of the $219.5 million in proceeds from the sale of certain available-for-sale investments and equity method investments in 2016 to fund these seed capital investments. Since we consolidate these T. Rowe Price investment products, the seed capital that we provided was eliminated in preparing our consolidated statement of cash flow. In 2015, cash proceeds from the sale of certain T. Rowe Price U.S. mutual funds holdings, net of new investments, resulted in investing cash flows of $269.7 million. Additionally, our net property and equipment additions were $148.3 million in 2016 compared to $151.3 million in the 2015 period. The cash flow attributable to consolidated T. Rowe Price investment products of $41.4 million represents the net cash added to our consolidated balance sheet from consolidating and deconsolidating products in 2016.

Net cash used in financing activities attributable to T. Rowe Price Group was $1,091.4 million in 2016 compared with $1,973.3 million in the 2015 period. The decline in cash used in financing activities is largely related to the $2.00 per share, or $524 million, special dividend we paid in April 2015. We also expended $310.9 million less in common stock purchases in 2016 compared to the 2015 period. The cash proceeds received from stock option exercises were higher in 2016 by $52.8 million compared with the 2015 period. The net cash used in financing activities attributable to T. Rowe Price Group was largely offset by the $915.0 million of net subscriptions into the consolidated T. Rowe Price investment products.

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CONTRACTUAL OBLIGATIONS.

The following table presents a summary of our future obligations (in millions) under the terms of existing operating leases and other contractual cash purchase commitments at December 31, 2017. Other purchase commitments include contractual amounts that will be due for the purchase of goods or services to be used in our operations and may be cancelable at earlier times than those indicated, under certain conditions that may involve termination fees. Because these obligations are generally of a normal recurring nature, we expect that we will fund them from future cash flows from operations. The information presented does not include operating expenses or capital expenditures that will be committed in the normal course of operations in 2018 and future years. The information also excludes the $7.6 million of unrecognized tax benefits discussed in Note 7 to our consolidated financial statements because it is not possible to estimate the time period in which a payment might be made to the tax authorities.

	Total				2018				2019-2020				2021-2022				Later
Noncancelable operating leases	$	263			$	38			$	70			$	54			$	101
Other purchase commitments	252				212				35				4				1
Total	$	515			$	250			$	105			$	58			$	102

We also have outstanding commitments to fund additional contributions to investment partnerships totaling $38.8 million at December 31, 2017. The vast majority of these additional contributions will be made 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.

CRITICAL ACCOUNTING POLICIES.

The preparation of financial statements often requires the selection of specific accounting methods and policies from among several acceptable alternatives. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in our consolidated balance sheets, the revenues and expenses in our consolidated statements of income, and the information that is contained in our significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that we include currently in our consolidated financial statements, significant accounting policies, and notes.

We present those significant accounting policies used in the preparation of our consolidated financial statements as an integral part of those statements within this 2017 Annual Report. In the following discussion, we highlight and explain further certain of those policies that are most critical to the preparation and understanding of our financial statements.

Consolidation. We consolidate all subsidiaries and T. Rowe Price investment products 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 variable interest entity (VIE). VIEs are entities that lack sufficient equity to finance its activities or the equity holders do not have defined power to direct the activities of the entity normally associated with an equity investment. Our analysis to determine whether an entity is a VIE or a voting interest entity (VOE) 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. Our VIEs are primarily T. Rowe Price investment products and our variable interest consists of our equity ownership in and investment management fees earned from these entities.

We are the primary beneficiary if we have the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the VIE that could potentially be significant. Our SICAV funds and other T. Rowe Price investment products regulated outside the U.S. are determined to be VIEs. At December 31, 2017, we consolidated VIEs with net assets of $1,800.1 million.

Other-than-temporary impairments of available-for-sale securities. We generally classify our investment holdings in T. Rowe Price investment products as available-for-sale if we are not deemed to a have a controlling financial interest nor exercise significant influence over its operating and financial policies. At the end of each quarter, we mark the carrying amount of each

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investment to fair value and recognize an unrealized gain or loss as a component of comprehensive income within the consolidated statements of comprehensive income. We review each individual security position that has an unrealized loss or impairment to determine if that impairment is other than temporary.

In determining whether a mutual fund holding is other-than-temporarily impaired, we consider many factors, including the duration of time the impairment has existed, the severity of the impairment, any subsequent changes in value, and our intent and ability to hold the security for a period of time sufficient for an anticipated recovery in fair value. Subject to the other considerations noted above, we believe a fund holding with an unrealized loss that has persisted daily throughout the six months between quarter-ends is generally presumed to have an other-than-temporary impairment. We may also recognize an other-than-temporary impairment for losses that have existed for less than six months in our consolidated statements of income if the particular circumstances of the underlying investment do not warrant our belief that a near-term recovery is possible.

Other-than-temporary impairments of equity method investments. We evaluate our equity method investments, including our investment in UTI and certain investments in T. Rowe Price investment products, for impairment when events or changes in circumstances indicate that the carrying value of the investment exceeds its fair value, and the decline in fair value is other than temporary.

Goodwill. We internally conduct, manage, and report our operations as one investment advisory business. We do not have distinct operating segments or components that separately constitute a business. Accordingly, we attribute goodwill to a single reportable business segment and reporting unit—our investment advisory business.

We evaluate the carrying amount of goodwill in our consolidated balance sheets for possible impairment on an annual basis in the third quarter of each year using a fair value approach. Goodwill would be considered impaired whenever our historical carrying amount exceeds the fair value of our investment advisory business. Our annual testing has demonstrated that the fair value of our investment advisory business (our market capitalization) exceeds our carrying amount (our stockholders’ equity) and, therefore, no impairment exists. Should we reach a different conclusion in the future, additional work would be performed to ascertain the amount of the noncash impairment charge to be recognized. We must also perform impairment testing at other times if an event or circumstance occurs indicating that it is more likely than not that an impairment has been incurred. The maximum future impairment of goodwill that we could incur is the amount recognized in our consolidated balance sheets, $665.7 million.

Stock options. We recognize stock option-based compensation expense in our consolidated statements of income using a fair value-based method. Fair value methods use a valuation model for shorter-term, market-traded financial instruments to theoretically value stock option grants even though they are not available for trading and are of longer duration. The Black-Scholes option-pricing model that we use includes the input of certain variables that are dependent on future expectations, including the expected lives of our options from grant date to exercise date; the volatility of our underlying common shares in the market over that time period; and the rate of dividends that we will pay during that time. Our estimates of these variables are made for the purpose of using the valuation model to determine an expense for each reporting period and are not subsequently adjusted. Unlike most of our expenses, the resulting charge to earnings using a fair value-based method is a noncash charge that is never measured by, or adjusted based on, a cash outflow.

Provision for income taxes. After compensation and related costs, our provision for income taxes on our earnings is our largest annual expense. We operate in numerous states and countries through our various subsidiaries and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Annually, we file tax returns that represent our filing positions with each jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable earnings determinations. From time to time, we may also provide for estimated liabilities associated with uncertain tax return filing positions that are subject to, or in the process of, being audited by various tax authorities. Because the determination of our annual provision is subject to judgments and estimates, it is likely that actual results will vary from those recognized in our financial statements. As a result, we recognize additions to, or reductions of, income tax expense during a reporting period that pertain to prior period provisions as our estimated liabilities are revised and actual tax returns and tax audits are settled. We recognize any such prior period adjustment in the discrete quarterly period in which it is determined.

NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.

See the summary of significant accounting policies within Item 8, Financial Statements and Supplementary Data for a discussion of newly issued but not yet adopted accounting guidance.

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FORWARD-LOOKING INFORMATION.

From time to time, information or statements provided by or on behalf of T. Rowe Price, including those within this report, may contain certain forward-looking information, including information or anticipated information relating to: our revenues, net income, and earnings per share on common stock; changes in the amount and composition of our assets under management; our expense levels; the impact of U.S. tax reform enacted in December 2017, including on our estimated effective income tax rate; and our expectations regarding financial markets, future transactions, dividends, investments, capital expenditures, and other conditions. Readers are cautioned that any forward-looking information provided by or on behalf of T. Rowe Price is not a guarantee of future performance. Actual results may differ materially from those in forward-looking information because of various factors including, but not limited to, those discussed below and in Item 1A, Risk Factors, of this Form 10-K Annual Report. Further, forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events.

Our future revenues and results of operations will fluctuate primarily due to changes in the total value and composition of assets under our management. Such changes result from many factors, including, among other things: cash inflows and outflows in the T. Rowe Price U.S. mutual funds and other investment products, fluctuations in global financial markets that result in appreciation or depreciation of the assets under our management, our introduction of new mutual funds and investment products, and changes in retirement savings trends relative to participant-directed investments and defined contribution plans. The ability to attract and retain investors’ assets under our management is dependent on investor sentiment and confidence; the relative investment performance of the Price mutual funds and other managed investment products as compared to competing offerings and market indexes; the ability to maintain our investment management and administrative fees at appropriate levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; and our level of success in implementing our strategy to expand our business. Our revenues are substantially dependent on fees earned under contracts with the Price funds and could be adversely affected if the independent directors of one or more of the Price funds terminated or significantly altered the terms of the investment management or related administrative services agreements. Non-operating investment income will also fluctuate primarily due to the size of our investments, changes in their market valuations, and any other-than-temporary impairments that may arise or, in the case of our equity method investments, our proportionate share of the investees' net income.

Our future results are also dependent upon the level of our expenses, which are subject to fluctuation for the following or other reasons: changes in the level of our advertising and promotion expenses in response to market conditions, including our efforts to expand our investment advisory business to investors outside the U.S. and to further penetrate our distribution channels within the U.S.; the pace and level of spending to support key strategic priorities; variations in the level of total compensation expense due to, among other things, bonuses, restricted stock units and other equity grants, other incentive awards, changes in our employee count and mix, and competitive factors; any goodwill or other asset impairment that may arise; fluctuation in foreign currency exchange rates applicable to the costs of our international operations; expenses and capital costs, such as technology assets, depreciation, amortization, and research and development, incurred to maintain and enhance our administrative and operating services infrastructure; unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; and disruptions of services, including those provided by third parties, such as fund and product recordkeeping, facilities, communications, power, and the mutual fund transfer agent and accounting systems.

Our business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on our operations and results, including, but not limited to, effects on costs that we incur and effects on investor interest in T. Rowe Price investment products and investing in general or in particular classes of mutual funds or other investments.

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