Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW.

Our revenues and net income are derived primarily from investment advisory services provided to individual and institutional investors in U.S. mutual funds, separately managed accounts, subadvised funds, and other T. Rowe Price products. The other T. Rowe Price products include: 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 negatively 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, are providing our clients with strong investment management expertise and service both now and in the future.

In 2019, 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 our 2019 non-GAAP operating expenses to grow in the range of 4% to 7%. This expense growth range factors in continued investments in the business, our cost optimization efforts, and the incremental cost of paying for all third-party investment research as and when implemented. We could elect to adjust our expense growth should unforeseen circumstances arise, including significant market movements.

MARKET TRENDS.

U.S. stocks declined in 2018, the worst year for the U.S. equity market since 2008. Stocks rose for much of the year, but market volatility-stemming from rising short-term interest rates and heightened global trade tensions, especially between the U.S. and China-was relatively high. While most major U.S. stock indexes reached all-time highs around the end of the third quarter, equities plunged in the final months of the year, with several indexes falling into or close to bear market territory down at least 20% from recent highs by the end of the year. The market faltered amid forecasts for slowing corporate earnings growth in 2019 and fears that the Federal Reserve would continue to raise interest rates in 2019 even if indications of softness in the U.S. economy emerge.

Stocks in developed non-U.S. equity markets fared worse than U.S. shares. Japanese shares dropped almost 13%, as the export-oriented country was hurt by global trade tensions throughout the year and Japan’s economic contraction in the third quarter. European stocks declined over 14% in U.S. dollar terms amid political turmoil, slowing growth, and global trade tensions.

Emerging markets stocks performed slightly worse than shares in developed non-U.S. markets. In Asia, global trade tensions hurt several emerging markets significantly. In emerging Europe, Turkish stocks plummeted roughly 41% as the lira plunged due to factors such as elevated inflation and tensions with the U.S. In Latin America, Brazilian shares ended the year nearly flat after a fourth-quarter surge on optimism that Brazil’s newly elected president will pursue business-friendly policies and pension reform. Mexican stocks fell about 15% amid concerns about the governing style of the country’s new president.

Page 24

Results of several major equity market indexes for 2018 are as follows:

S&P 500 Index	(4.4)%
NASDAQ Composite Index(1)	(3.9)%
Russell 2000 Index	(11.0)%
MSCI EAFE (Europe, Australasia, and Far East) Index	(13.4)%
MSCI Emerging Markets Index	(14.3)%

(1) Returns exclude dividends

Global bond returns were generally negative for the year. U.S. fixed income performance was mostly flat to negative, as the Federal Reserve raised the federal funds target rate four times. Treasury yields increased across all maturities; the 10-year Treasury note yield increased from 2.40% to 2.69% during the year but decreased from seven-year highs above 3.20% in early October. In the investment-grade universe, asset- and mortgage-backed securities posted positive returns, while long-term corporate and Treasury securities declined. Municipal bonds easily outperformed taxable securities. High yield bonds fell as credit spreads-the yield differences between higher- and lower-quality bonds-widened due to late-year risk aversion.

Bond returns in developed non-U.S. markets were negative in U.S. dollar terms. While bond yields in some European markets declined and bond prices rose-especially late in the year-as investors fled equity market volatility, the stronger dollar versus the euro and the British pound hurt returns in dollar terms. Japanese government bond ("JGB") yields were little changed for the year, but a stronger yen versus the dollar lifted JGB returns to U.S. investors.

Dollar-denominated emerging markets debt declined amid poor performance stemming from rising long-term interest rates in some countries and currency weakness in most developing markets. In an attempt to defend their currencies, some emerging markets central banks were forced to raise short-term interest rates. Bonds denominated in local currencies performed worse than dollar-denominated debt.

Results of several major bond market indexes for 2018 are as follows:

Bloomberg Barclays U.S. Aggregate Bond Index	—%
JPMorgan Global High Yield Index	(2.4)%
Bloomberg Barclays Municipal Bond Index	1.3%
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index	(2.2)%
JPMorgan Emerging Markets Bond Index Plus	(5.3)%

Page 25

ASSETS UNDER MANAGEMENT.

Assets under management ended 2018 at $962.3 billion, a decrease of $28.8 billion from the end of 2017. We had net cash inflows of $13.2 billion for 2018, but market depreciation and losses, including distributions not reinvested, lowered our assets under management by $42.0 billion. The following table details changes in our assets under management by vehicle during the last three years:

(in billions)		U.S. mutual funds				Subadvised and separate accounts				Other investment products				Total
Assets under management at December 31, 2015		$	487.1			$	198.7			$	77.3			$	763.1
Net cash flows before client transfers		.3				(5.5		)		2.4				(2.8		)
Client transfers(1)		(4.9		)		.3				4.6				—
Net cash flows after client transfers		(4.6		)		(5.2		)		7.0				(2.8		)
Net market appreciation/(depreciation) and income/ (losses)		32.6				13.4				5.4				51.4
Distributions not reinvested		(.9		)		—				—				(.9		)
Change during the period		27.1				8.2				12.4				47.7
Assets under management at December 31, 2016		514.2				206.9				89.7				810.8
Net cash flows before client transfers		9.4				1.4				3.2				14.0
Client transfers(1)		(20.2		)		1.7				18.5				—
Net cash flows after client transfers		(10.8		)		3.1				21.7				14.0
Net market appreciation/(depreciation) and income/ (losses)		104.6				45.2				18.2				168.0
Distributions not reinvested		(1.7		)		—				—				(1.7		)
Change during the period		92.1				48.3				39.9				180.3
Assets under management at December 31, 2017		606.3				255.2				129.6				991.1
Net cash flows before client transfers		4.4				(.2		)		9.0				13.2
Client transfers(1)		(20.5		)		2.8				17.7				—
Net cash flows after client transfers		(16.1		)		2.6				26.7				13.2
Net market appreciation/(depreciation) and income/ (losses)		(22.7		)		(7.8		)		(8.4		)		(38.9		)
Distributions not reinvested		(3.0		)		—				(.1		)		(3.1		)
Change during the period		(41.8		)		(5.2		)		18.2				(28.8		)
Assets under management at December 31, 2018		$	564.5			$	250.0			$	147.8			$	962.3

(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.

Page 26

The following table details changes in our assets under management by asset class during the last three years:

(in billions)		Equity				Fixed income, including money market				Multi-asset(1)				Total
Assets under management at December 31, 2015		$	439.4			$	110.4			$	213.3			$	763.1
Net cash flows		(19.6		)		7.6				9.2				(2.8		)
Net market appreciation and income(2)		30.8				3.2				16.5				50.5
Change during the period		11.2				10.8				25.7				47.7
Assets under management at December 31, 2016		450.6				121.2				239.0				810.8
Net cash flows		(1.6		)		8.6				7.0				14.0
Net market appreciation and income(2)		115.1				4.6				46.6				166.3
Change during the period		113.5				13.2				53.6				180.3
Assets under management at December 31, 2017		564.1				134.4				292.6				991.1
Net cash flows		(1.4		)		2.9				11.7				13.2
Net market appreciation/(depreciation) and income/ (losses)(2)		(22.8		)		(1.2		)		(18.0		)		(42.0		)
Change during the period		(24.2		)		1.7				(6.3		)		(28.8		)
Assets under management at December 31, 2018		$	539.9			$	136.1			$	286.3			$	962.3

(1) The underlying assets under management of the multi-asset portfolios have been aggregated and presented in this category and not reported in the equity and fixed income columns.

(2) Reported net of distributions not reinvested.

Investment advisory clients outside the U.S. account for about 6% of our assets under management at 2018 and 2017 and about 5% at December 31, 2016.

Our net cash flows in 2018 and 2017 were driven by diversified inflows across distribution channels and geographies, the strength of our multi-asset franchise, and positive flows into international equity and fixed income. In 2016, subadvised and separate accounts and 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.

Our target date retirement products, which are included in the multi-asset totals shown above, continue to be a significant part of our assets under management. Net cash flows after client transfers shown above include $12.0 billion in 2018, $7.1 billion in 2017, and $8.1 billion in 2016 from target date products. Assets under management in these products are as follows:

(in billions)	12/31/18				12/31/17				12/31/16
Target date retirement U.S. mutual funds	$	144.8			$	168.4			$	150.9
Target date separately managed retirement accounts	5.9				1.7				—
Target date retirement trusts	79.7				63.7				38.3
	$	230.4			$	233.8			$	189.2

Page 27

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 U.S. mutual funds (across primary share classes) that outperformed their comparable Morningstar median on a total return basis and that are in the top Morningstar quartile for the one-, three-, five-, and 10-years ended December 31, 2018, were:

		1 year		3 years		5 years		10 years
Outperformed Morningstar median(1)
All funds		66%		75%		79%		83%
Multi-asset funds		71%		96%		88%		89%
Top Morningstar quartile(1)
All funds		31%		46%		51%		54%
Multi-asset funds		38%		62%		66%		79%

(1) Source: © 2018 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Historically, the firm has disclosed the percentage of U.S. mutual funds (across all share classes) that outperformed their comparable Lipper averages on a total return basis and that are in the top Lipper quartile for the same periods. Investment performance results using the new measures are similar to the Lipper results.

In addition, 86% of our rated U.S. mutual funds' assets under management ended the quarter with an overall rating of four or five stars from Morningstar. The performance of our institutional strategies against their benchmarks remains competitive, especially over longer time periods.

RESULTS OF OPERATIONS.

The following table and discussion sets forth information regarding our consolidated financial results for 2018, 2017 and 2016 on a U.S. GAAP basis as well as a non-GAAP basis. The non-GAAP basis adjusts for the impact of our consolidated T. Rowe Price investment products, the impact of market movements on the supplemental savings plan liability and related economic hedges, investment income related to certain other investments, and certain nonrecurring charges and gains.

Page 28

													2018 Compared with 2017							2017 Compared with 2016
(in millions, except per-share data)	2018				2017				2016				$ Change				% Change			$ Change				% Change
U.S. GAAP basis
Investment advisory fees	$	4,850.6			$	4,295.8			$	3,735.0			$	554.8			12.9	%		$	560.8			15.0	%
Net revenues	$	5,372.6			$	4,854.9			$	4,284.8			$	517.7			10.7	%		$	570.1			13.3	%
Operating expenses	$	3,011.2			$	2,746.1			$	2,551.4			$	265.1			9.7	%		$	194.7			7.6	%
Net operating income	$	2,361.4			$	2,108.8			$	1,733.4			$	252.6			12.0	%		$	375.4			21.7	%
Non-operating income(1)	$	23.2			$	396.3			$	227.1			$	(373.1	)		n/m			$	169.2			n/m
Net income attributable to T. Rowe Price Group	$	1,837.5			$	1,497.8			$	1,215.0			$	339.7			22.7	%		$	282.8			23.3	%
Diluted earnings per share on common share	$	7.27			$	5.97			$	4.75			$	1.30			21.8	%		$	1.22			25.7	%
Weighted average common shares outstanding assuming dilution	246.9				245.1				250.3				1.8				.7	%		(5.2		)		(2.1	)%
Adjusted non-GAAP basis(2)
Operating expenses	$	3,025.5			$	2,777.7			$	2,478.7			$	247.8			8.9	%		$	299.0			12.1	%
Net income attributable to T. Rowe Price Group	$	1,807.4			$	1,361.1			$	1,148.9			$	446.3			32.8	%		$	212.2			18.5	%
Diluted earnings per share on common share	$	7.15			$	5.43			$	4.49			$	1.72			31.7	%		$	.94			20.9	%
Assets under management (in billions)
Average assets under management	$	1,036.5			$	909.0			$	778.2			$	127.5			14.0	%		$	130.8			16.8	%
Ending assets under management	$	962.3			$	991.1			$	810.8			$	(28.8	)		(2.9	)%		$	180.3			22.2	%

(1) The percentage change in non-operating income is not meaningful (n/m).

(2) See the reconciliation to the comparable U.S. GAAP measures at the end of the Results of Operations section of this Management's Discussion and Analysis.

On January 1, 2018, we adopted new accounting guidance related to revenue recognition. We elected to adopt the new guidance on a retrospective basis, which requires 2017 and 2016 results to be recast to reflect the impact. Accordingly, the 2017 and 2016 net revenues and operating expenses presented in the table above and in the narrative that follows have been recast to reflect the impact of adopting this new accounting guidance. The new guidance requires certain revenue related expenses that are incurred in servicing our U.S. mutual funds to be recognized in operating expenses versus being presented net against the related revenues. As such, net revenues and operating expenses, primarily product-related, were recast to reflect an increase of $61.9 million in both 2017 and 2016.

Additionally, we modified our income statement presentation in 2018 to increase operating expense transparency and to align expenses that have similar cost drivers. Prior year amounts have been reclassified to conform to the new 2018 presentation. For more information, see Note 1 - Basis of Preparation and Summary of Significant Accounting Policies in our consolidated financial statements included later in this Annual Report on Form 10-K.

Page 29

Results Overview

Investment advisory revenues. Investment advisory revenues earned in 2018 increased 12.9% over the comparable 2017 period as average assets under our management increased $127.5 billion, or 14.0%, to $1,036.5 billion. The average annualized fee rate earned on our assets under management was 46.8 basis points in 2018, compared with 47.3 basis points earned in 2017. Our effective fee rate has declined in part due to client transfers to lower fee products or share classes and, to a lesser extent, fee reductions we made to certain mutual funds and other products during 2018. Further contributing to our lower effective fee rate in 2018 was a greater percentage of our assets under management in lower fee products due to lower equity valuations in the fourth quarter. We regularly assess the competitiveness of our investment advisory fees and will continue to make adjustments as deemed appropriate.

In 2017, investment advisory revenues 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 47.3 basis points in 2017, compared with 48.0 basis points earned in 2016. Our effective fee rate 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. This decline in effective fee rate was partially offset by higher equity valuations, which resulted in a greater percentage of our assets under management attributable to higher fee equity products. While we voluntarily waived $10.5 million in money market related fees, including advisory fees and fund expenses in order to maintain a positive yield for investors in 2016, our voluntary fee waivers were negligible for 2017.

Over time, our effective fee rate can be impacted by market or cash flow related shifts among asset and share classes, price changes in existing products, and asset changes in products with tiered-fee structures.

Operating expenses. Operating expenses were $3,011.2 million in 2018 compared with $2,746.1 million in the 2017 period. On a non-GAAP basis, our operating expenses in 2018 increased 8.9% to $3,025.5 million compared with 2017. The increase in operating expenses was primarily due to continued strategic investments and higher bonus and stock-based compensation, which were driven by our operating results.

For 2017, operating expenses were $2,746.1 million as compared with $2,551.4 million in the 2016 period. On a non-GAAP basis, our operating expenses in 2017 increased 12.1% to $2,777.7 million compared with 2016. About one-fourth of the increase is related to variable compensation and market-driven distribution and client servicing costs as a result of the strong market performance in 2017. The remaining change is due to our investments in the strategic initiatives announced in early 2017 and other growing operational and regulatory demands.

Our operating expenses in each of the last three years includes some financial impact related to the Dell appraisal rights matter. As further detailed in Note 13 to our consolidated financial statements, we incurred in 2016 a non-recurring charge, net of insurance recoveries, of $66.2 million, or $.15 per share after tax related to payments we made to our clients related to the matter. Additional insurance recoveries totaling $50.0 million, or $.12 per share after tax, were recognized in 2017. Finally, upon receipt of a non-appealable judgment in the fourth quarter of 2018, we recognized a reduction in operating expenses of $15.2 million, or $.05 per share after tax, related to the recovery of a portion of the payments we made to our clients in 2016. A summary of the financial impact of the Dell appraisal rights 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 (income)				Pre-tax operating cash inflows (outflows)
2016	$	66.2			$	(166.2	)
2017	(50.0		)		150.0
2018	(15.2		)		15.2
Total impact from Dell appraisal rights matter	$	1.0			$	(1.0	)

Operating margin. Our operating margin in 2018 was 44.0%, compared with 43.4% in 2017 and 40.5% in 2016. Excluding the impacts from the Dell appraisal rights matter, our operating margin was 43.7% in 2018, 42.4% in 2017 and 42.0% in 2016. The increase in our operating margins each year since 2016 is driven by the higher

Page 30

percentage growth in net revenue attributable primarily to increases in our average assets under management each year compared with the percentage growth in operating expenses.

Diluted earnings per share for 2018 was $7.27 compared with $5.97 in 2017. The 21.8% increase in diluted earnings per share in 2018 was driven by higher operating income and the benefit realized from a lower corporate tax rate under U.S. Tax Reform. The 25.7% increase in diluted earnings per share in 2017 compared with 2016 was driven primarily from our results of operations in 2017 and fewer weighted average outstanding shares assuming dilution.

Net revenues

													2018 Compared with 2017							2017 Compared with 2016
(in millions)	2018				2017				2016				$ Change				% Change			$ Change				% Change
Investment advisory fees
U.S. mutual funds	$	3,375.0			$	3,080.0			$	2,711.7			$	295.0			9.6	%		$	368.3			13.6	%
Subadvised and separate accounts and other investment products	1,475.6				1,215.8				1,023.3				259.8				21.4	%		192.5				18.8	%
	4,850.6				4,295.8				3,735.0				554.8				12.9	%		560.8				15.0	%
Administrative, distribution, and servicing fees
Administrative fees	384.0				412.1				408.1				(28.1		)		(6.8	)%		4.0				1.0	%
Distribution and servicing fees	138.0				147.0				141.7				(9.0		)		(6.1	)%		5.3				3.7	%
	522.0				559.1				549.8				(37.1		)		(6.6	)%		9.3				1.7	%
Net revenues	$	5,372.6			$	4,854.9			$	4,284.8			$	517.7			10.7	%		$	570.1			13.3	%

Investment advisory fees. Investment advisory fees are earned based on the value and composition of our assets under management, which change based on fluctuations in financial markets and net cash flows. As our average assets under management increase or decrease in a given period, the level of our investment advisory fee revenue for that same period generally fluctuates in a similar manner. The relationship between the change in our average assets under management for 2018, 2017 and 2016 and the change in our investment advisory fee revenue recognized during each of the same annual periods is presented below.

	2018 vs 2017						2017 vs 2016
	Increase in average assets under management			Increase in investment advisory fees			Increase in average assets under management			Increase in investment advisory fees
U.S. mutual funds	9.4	%		9.6	%		14.7	%		13.6	%
Subadvised and separate accounts and other investment products	21.8	%		21.4	%		20.4	%		18.8	%

Over the last three years, we have reduced the management fees of certain mutual funds and other investment products. This is a contributing factor in why investment advisory revenue has generally grown slower than average assets under management in each of these vehicles over the same period. Additionally, significant client transfers from mutual funds to lower fee vehicles or among product share classes in 2017 and 2018 have contributed to the investment advisory fees associated with subadvised and separate accounts and other investment products to grow slower than the related average assets under management. Market fluctuations and net cash flows over the annual time periods have also shifted the asset and share class mix among different fee rates and products with tiered-fee structures.

Administrative, distribution, and servicing fees. Administrative, distribution, and servicing fees represent fees earned from providing administrative and distribution services to our investment advisory clients, primarily U.S. mutual funds and their investors. For 2018, these fees were $522.0 million, a decrease of $37.1 million from the comparable 2017 period. The decrease was primarily attributable to lower assets under management in the U.S.

Page 31

mutual funds resulting from client transfers among vehicles and share classes and the sharp market decline at the end of 2018.

For 2017, administrative, distribution, and servicing fees were $559.1 million, an increase of $9.3 million from the comparable 2016 period. The increase was primarily attributable to higher transfer agent and distribution servicing revenue due to client transfers among vehicles and share classes.

The distribution and servicing fees we earn are related to 12b-1 plans of certain classes, including the Advisor and R classes, of our U.S. mutual funds and are entirely offset by the costs paid to third-party intermediaries who source these assets. These costs are reported in the distribution and servicing cost line in the consolidated income statements.

Net revenues include the elimination of $6.2 million for 2018, $5.6 million for 2017, and $6.5 million for 2016, earned from our consolidated T. Rowe Price investment products. The corresponding expenses recognized by these consolidated products were also eliminated from operating expenses.

Operating expenses

													2018 Compared with 2017							2017 Compared with 2016
(in millions)	2018				2017				2016				$ Change				% Change			$ Change				% Change
Compensation and related costs	$	1,808.6			$	1,664.9			$	1,494.0			$	143.7			8.6	%		$	170.9			11.4	%
Distribution and servicing costs	281.2				262.6				233.4				18.6				7.1	%		29.2				12.5	%
Advertising and promotion	99.6				92.4				80.2				7.2				7.8	%		12.2				15.2	%
Product-related costs	157.1				146.0				139.7				11.1				7.6	%		6.3				4.5	%
Technology, occupancy, and facility costs	383.9				350.5				319.8				33.4				9.5	%		30.7				9.6	%
General, administrative, and other	296.0				279.7				218.1				16.3				5.8	%		61.6				28.2	%
Nonrecurring net charges (recoveries) related to Dell appraisal rights matter(1)	(15.2		)		(50.0		)		66.2				34.8				n/m			(116.2		)		n/m
Total operating expenses	$	3,011.2			$	2,746.1			$	2,551.4			$	265.1			9.7	%		$	194.7			7.6	%

(1) The percentage change in nonrecurring net charges (recoveries) related to Dell appraisal rights matter is not meaningful (n/m).

Compensation and related costs. Compensation and related costs increased $143.7 million, or 8.6%, for 2018 as compared with 2017. The largest part of the increase was an increase in base salaries, benefits and related employee costs of $77.1 million, resulting from an increase of 6.2% in average headcount, combined with a modest increase in salaries at the beginning of 2018. Our operating results led to a $68.0 million increase in annual variable compensation and contributed to the $45.0 million increase in non-cash stock based compensation expense as the annual grant value was higher in 2018. Additionally, our 2018 equity grant reflected the adoption of more favorable post-retirement vesting provisions, which shifted a greater percentage of the expense related to the annual grant to be recognized for 2018. The 2018 period also includes $9.0 million in one-time bonuses paid to certain associates from U.S. tax reform benefits. These increases were partially offset by lower market-related expense of $30.3 million from our supplemental savings plan and higher labor capitalization related to internally developed software.

For 2017, compensation and related costs increased $170.9 million, or 11.4%, as compared with 2016. 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 expenses also includes increased health care costs as well as greater equity award-related payroll taxes due to the significant rise in our stock price during 2017. Higher average headcount also drove up recruiting costs for 2017 compared with the 2016 period. Our annual variable compensation for the 2017 period rose $59.8 million over the 2016 period. Stronger markets during 2017 increased the supplemental savings plan liability resulting in additional compensation expense of $21.1 million for 2017 compared with the 2016 period. The increases in these compensation and related costs were offset in part by higher labor capitalization related to internally developed software for 2017 compared with the 2016 period, as we continue to invest in our technology capabilities. We had a reduction in our non-cash stock based compensation expense for 2017, as we shifted our annual grant from twice a year to a single grant in December.

Page 32

Distribution and servicing costs. Distribution and servicing costs includes those costs incurred to distribute the T. Rowe Price products as well as client and shareholder servicing, recordkeeping, and administrative services. These costs were $281.2 million for 2018, $262.6 million for 2017, and $233.4 million for 2016. The increases for 2018 from 2017 and for 2017 from 2016 are primarily driven by strong markets and net cash flows from the end of 2016 through the third quarter of 2018, which grew the assets in those share classes and products for which we pay a related distribution and servicing fee. These costs include those distribution and servicing costs paid to third-party intermediaries that source the assets of certain share classes of our U.S. mutual funds and is offset entirely by the 12b-1 revenue we earn and report in administrative, distribution, and servicing fees.

Advertising and promotion. Advertising and promotion costs were $99.6 million for 2018, $92.4 million for 2017, and $80.2 million for 2016. The increases for 2018 from 2017 and for 2017 from 2016 are primarily driven by higher promotion and media costs as we seek to broaden our distribution efforts globally. The increase for 2018 was also impacted by the launch of a new media advertising campaign in 2018.

Product-related costs. Product-related costs consists of non-advisory related costs that we incur to service certain T. Rowe Price products. Product-related costs were $157.1 million for 2018, an increase of $11.1 million, or 7.6%, compared with 2017. The increase is primarily due to higher operating costs of our collective investment trusts as client transfers have increased the number of trusts and their average net assets over the last year. Also contributing to the increase were higher costs incurred to provide administrative services to the U.S. mutual funds.

Product-related costs were $146.0 million for 2017, an increase of $6.3 million, or 4.5%, compared with 2016. The increase is primarily due to higher costs incurred to provide administrative services to the U.S. mutual funds and recordkeeping services to defined contribution retirement plans.

Technology, occupancy, and facility costs. Technology, occupancy, and facility costs consists of depreciation expense, technology equipment and maintenance, software, and costs related to our facilities. These costs were $383.9 million for 2018, $350.5 million for 2017, and $319.8 million for 2016. The increases for 2018 from 2017 and for 2017 from 2016 are due primarily to incremental investment in our technology capabilities, including related depreciation, hosted solution licenses, and maintenance programs, as well as expanded office facilities and new locations.

General, administrative, and other costs. General, administrative, and other costs consist of costs associated with the overall management of the firm, including information services, professional services, travel and entertainment, research costs, and other general operating expenses. These costs were $296.0 million for 2018, $279.7 million for 2017, and $218.1 million for 2016. The increases for 2018 from 2017 and for 2017 from 2016 were a result of our continued investment in our strategic initiatives and other growing operational and regulatory demands on the business. Specifically, about two-thirds of the increase for 2017 as compared with 2016 was attributable to increased professional fees incurred to support these continued investments in our operational and regulatory business demands. The increased level of professional fees for 2017 did not recur for 2018.

Page 33

Non-operating income

Net non-operating investment income decreased $373.1 million for the year ended December 31, 2018 compared with 2017 and increased $169.2 million for the year ended December 31, 2017 compared with 2016. Net non-operating investment activity for the years ended December 31, 2018, 2017 and 2016 comprised the following:

													2018 Compared with 2017				2017 Compared with 2016
(in millions)	2018				2017				2016				$ Change				$ Change
Net gains from non-consolidated T. Rowe Price investment products
Net realized gains on dispositions of available-for-sale investments	$	—			$	83.1			$	53.0			$	(83.1	)		$	30.1
Ordinary and capital gain dividend distributions	52.7				22.2				16.1				30.5				6.1
Market gains (losses) on equity method and other investments at fair value	(38.5		)		32.5				—				(71.0		)		32.5
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				20.8				(23.6		)		2.8
Net gain recognized upon deconsolidation	3.6				.1				2.2				3.5				(2.1		)
Dividends and market gains (losses) on investment products used to hedge the supplemental savings plan liability	(6.1		)		12.3				—				(18.4		)		12.3
Total net gains from non-consolidated T. Rowe Price investment products	11.7				173.8				92.1				(162.1		)		81.7
Other investment income	107.5				24.5				15.9				83.0				8.6
Net gains on investments	119.2				198.3				108.0				(79.1		)		90.3
Net gains (losses) on consolidated sponsored investment portfolios	(92.9		)		193.9				121.1				(286.8		)		72.8
Other income (loss), including foreign currency gains and losses	(3.1		)		4.1				(2.0		)		(7.2		)		6.1
Non-operating income	$	23.2			$	396.3			$	227.1			$	(373.1	)		$	169.2

During 2018, non-operating income included the impact of sharp market declines in the later part of 2018, which resulted in unrealized losses on our investment portfolio, including our consolidated products, compared with unrealized gains recognized during 2017. Partially offsetting these losses was the recognition during 2018 of a realized gain in other investment income associated with the sale of our 10% holding in Daiwa SB Investments Ltd. Additionally, on January 1, 2018, we implemented new accounting guidance that eliminated the available-for-sale investment category for equity securities. As a result of this change, realized gains of $30.8 million from the sale of certain available-for-sale investments recognized in 2017 did not reoccur in 2018.

During 2017, non-operating income included $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 U.S. mutual funds as well as designated a mutual fund that was held as available-for-sale. The designation of the 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.

Page 34

The impact of consolidating certain T. Rowe Price investment products on the individual lines of our consolidated statements of income for 2018, 2017, and 2016 is as follows:

													2018 Compared with 2017							2017 Compared with 2016
(in millions)	2018				2017				2016				$ Change				% Change			$ Change				% Change
Operating expenses reflected in net operating income	$	(12.7	)		$	(12.3	)		$	(13.0	)		$	(.4	)		3.3	%		$	.7			(5.4	)%
Net investment income (loss) reflected in non-operating income	(92.9		)		193.9				121.1				(286.8		)		(147.9	)%		72.8				60.1	%
Impact on income before taxes	$	(105.6	)		$	181.6			$	108.1			$	(287.2	)		(158.1	)%		$	73.5			68.0	%
Net income (loss) attributable to our interest in the consolidated T. Rowe Price investment products	$	(36.8	)		$	98.2			$	69.1			$	(135.0	)		(137.5	)%		$	29.1			42.1	%
Net income (loss) attributable to redeemable non-controlling interests (unrelated third-party investors)	(68.8		)		83.4				39.0				(152.2		)		(182.5	)%		44.4				113.8	%
Impact on income before taxes	$	(105.6	)		$	181.6			$	108.1			$	(287.2	)		(158.1	)%		$	73.5			68.0	%

Provision for income taxes

Our effective tax rate for 2018 was 25.8%, compared with 36.9% for 2017 and 36.0% for the 2016. The decrease in our effective tax rate in 2018 from 2017 is primarily due to the reduction in the U.S. federal corporate tax rate from 35% to 21% on January 1, 2018 following the enactment on December 22, 2017, of a comprehensive U.S. tax reform bill known as the Tax Cuts and Jobs Act ("Tax Reform"). For 2018 and 2017, the income tax provision includes nonrecurring charges of $20.8 million and $71.1 million, respectively, related to the enactment of U.S. tax reform as we adjusted our deferred tax asset and liability estimates. The increase in tax rate in 2017 from 2016 was primarily due to the nonrecurring charges taken in 2017.

Our tax rate in 2017 and 2016 was reduced by 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.

On April 24, 2018, the state of Maryland enacted new state tax legislation. This new state tax legislation, effective in 2018, adopted a five-year phase-in of the single sales factor method of apportionment for calculating income tax for multi-state companies doing business in Maryland and is expected to result in a net benefit over time. Accordingly, we recognized a nonrecurring charge of $7.9 million during 2018 for the re-measurement of our deferred tax assets and liabilities to reflect the effect of this Maryland state tax legislation. Based on information currently available, we expect that the Maryland state tax legislation will reduce our effective state tax rate over the five-year phase-in period to less than 2.5%.

Page 35

The following table reconciles the statutory federal income tax rate to our effective tax rate for the years ended December 31, 2018, 2017, and 2016:

	2018			2017			2016
Statutory U.S. federal income tax rate	21.0	%		35.0	%		35.0	%
Impact of nonrecurring charge relating to U.S. tax reform	.8			2.9			—
Impact of nonrecurring charge related to Maryland state tax legislation	.3			—			—
State income taxes for current year, net of federal income tax benefits(1)	4.6			3.9			3.8
Net income attributable to redeemable non-controlling interests	.7			(1.3	)		(.7	)
Net excess tax benefits from stock-based compensation plans activity	(1.7	)		(3.0	)		(1.7	)
Other items	.1			(.6	)		(.4	)
Effective income tax rate	25.8	%		36.9	%		36.0	%

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

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 currently estimate our effective tax rate for the full-year 2019 will be in the range of 23.5% to 26.5%.

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. Beginning in 2018, our non-GAAP adjustments no longer include non-operating income related to our cash and discretionary investments. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results.

Page 36

The following schedule reconciles U.S. GAAP financial measures to non-GAAP financial measures for each of the last five years.

(in millions, except per-share amounts)	2018				2017				2016				2015				2014
Operating expenses, GAAP basis	$	3,011.2			$	2,746.1			$	2,551.4			$	2,301.7			$	2,091.2
Non-GAAP adjustments:
Expenses of consolidated T. Rowe Price investment products, net of elimination of our related management and administrative fees(1)	(6.5		)		(6.7		)		(6.5		)		—				—
Compensation expense related to market valuation changes in the supplemental savings plan liability(2)	5.6				(11.7		)		—				—				—
Recoveries (nonrecurring net charge) related to Dell appraisal rights matter(4)	15.2				50.0				(66.2		)		—				—
Adjusted operating expenses	$	3,025.5			$	2,777.7			$	2,478.7			$	2,301.7			$	2,091.2
Net income attributable to T. Rowe Price Group, GAAP basis	$	1,837.5			$	1,497.8			$	1,215.0			$	1,223.0			$	1,229.6
Non-GAAP adjustments:
Net loss (income) of consolidated T. Rowe Price investment products, net of redeemable non-controlling interests(1)	36.8				(98.2		)		(69.1		)		(1.5		)		—
Non-operating loss (income) of investments designated as an economic hedge of the supplemental savings plan liability less related compensation expense(2)	.5				(.6		)		—				—				—
Other non-operating income(3)	(93.7		)		(190.1		)		(106.0		)		(102.0		)		(112.2		)
Nonrecurring net charge (recoveries) related to Dell appraisal rights matter(4)	(15.2		)		(50.0		)		66.2				—				—
Income tax impacts of non-GAAP adjustments(5)	12.8				131.1				42.8				40.8				43.9
Nonrecurring charge related to enactment of U.S. tax reform(6)	20.8				71.1				—				—				—
Nonrecurring charge related to enactment of Maryland state tax legislation(7)	7.9				—				—				—				—
Adjusted net income attributable to T. Rowe Price Group	$	1,807.4			$	1,361.1			$	1,148.9			$	1,160.3			$	1,161.3
Diluted earnings per common share, GAAP basis	$	7.27			$	5.97			$	4.75			$	4.63			$	4.55
Non-GAAP adjustments:
Consolidated T. Rowe Price investment products(1)	.12				(.24		)		(.16		)		(.01		)		—
Other non-operating income(3)	(.30		)		(.46		)		(.25		)		(.23		)		(.26		)
Nonrecurring net charge (recoveries) related to Dell appraisal rights matter(4)	(.05		)		(.12		)		.15				—				—
Nonrecurring charge related to enactment of U.S. tax reform(6)	.08				.28				—				—				—
Nonrecurring charge related to enactment of Maryland state tax legislation(7)	.03				—				—				—				—
Adjusted diluted earnings per common share(8)	$	7.15			$	5.43			$	4.49			$	4.39			$	4.29

Page 37

(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 operating expenses of consolidated T. Rowe Price investment products, net of elimination of its related management and administrative fees.

	2018				2017				2016				2015				2014
Operating expenses before eliminations	$	12.7			$	12.3			$	13.0			$	—			$	—
Operating expenses eliminated in consolidation	(6.2		)		(5.6		)		(6.5		)		—				—
Total operating expenses, net of eliminations	$	6.5			$	6.7			$	6.5			$	—			$	—

The following table details the calculation of net income of consolidated T. Rowe Price investment products, net of redeemable non-controlling interests:

	2018				2017				2016				2015				2014
Net investment income (loss)	$	(92.9	)		$	193.9			$	121.1			$	1.5			$	—
Operating expenses	(12.7		)		(12.3		)		(13.0		)		—				—
Net income (loss)	(105.6		)		181.6				108.1				1.5				—
Less: net income attributable to redeemable non-controlling interests	(68.8		)		83.4				39.0				—				—
T. Rowe Price Group's portion of net income (loss)	$	(36.8	)		$	98.2			$	69.1			$	1.5			$	—

(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:

	2018				2017				2016				2015				2014
Non-operating income (loss) of investments designated as an economic hedge of supplemental savings plan liability	$	(6.1	)		$	12.3			$	—			$	—			$	—
Compensation expense from market valuation changes in supplemental savings plan liability	5.6				(11.7		)		—				—				—
Non-operating income (loss) of investments designated as an economic hedge of supplemental savings plan liability less compensation expense	$	(.5	)		$	.6			$	—			$	—			$	—

Page 38

(3) This non-GAAP adjustment removes the non-operating income that remains after backing out the portion related to the consolidated T. Rowe Price investment products and the investments designated as an economic hedge of our supplemental savings plan liability. Beginning in the second quarter of 2018, we modified the non-GAAP adjustment to no longer adjust for the investment gains recognized on our cash and discretionary investments as the income earned on these assets are considered part of our core operations. The impact on previously reported non-GAAP measures is immaterial. We believe adjusting for the remaining 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 the portion of non-operating income removed when managing and evaluating our performance.

	2018				2017				2016				2015				2014
Total non-operating income	$	23.2			$	396.3			$	227.1			$	103.5			$	112.2
Less: net investment gains (losses) of consolidated T. Rowe Price investment products	(92.9		)		193.9				121.1				1.5				—
Less: non-operating income (loss) from investments designated as an economic hedge of supplemental savings plan liability	(6.1		)		12.3				—				—				—
Less: investment gains earned on cash and discretionary investments	28.5				—				—				—				—
Total other non-operating income	$	93.7			$	190.1			$	106.0			$	102.0			$	112.2

(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. During 2018, we recognized an additional reduction in operating expenses of $15.2 million upon recovering a portion of the payments we made to our clients in 2016. We believe it is useful to readers of our consolidated statements of income to adjust for these charges and non-recurring recoveries in arriving at adjusted operating expenses and net income attributable to T. Rowe Price Group and diluted earnings per share.

(5) The income tax impacts were calculated in order to achieve an overall year-to-date non-GAAP effective tax rate of 24.1% for 2018, 34.7% for 2017, 36.6% for 2016, 38.9% for 2015, and 38.6% for 2014. We currently estimate our non-GAAP effective tax rate for the full-year 2019 will be in the range of 24% to 26%.

(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. During the second quarter of 2018, we also recognized a nonrecurring charge of $20.8 million for an adjustment made to the charge taken in 2017 related to the enactment of U.S. tax reform. We believe it is useful to readers of our consolidated statements of income to adjust for these nonrecurring charges in arriving at net income attributable to T. Rowe Price Group and diluted earnings per share.

(7) During the second quarter of 2018, we recognized a nonrecurring charge of $7.9 million for the remeasurement of the firm's deferred tax assets and liabilities to reflect the effect of Maryland state tax legislation enacted on April 24, 2018. We believe it is useful to readers of our consolidated statements of income to adjust for this nonrecurring charge in arriving at net income attributable to T. Rowe Price Group and diluted earnings per share.

(8) 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.

Page 39

CAPITAL RESOURCES AND LIQUIDITY.

During 2018, stockholders’ equity increased from $5.8 billion to $6.1 billion. Tangible book value increased to $5.5 billion at December 31, 2018.

Sources of Liquidity

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

(in millions)	12/31/2018				12/31/2017
Cash and cash equivalents	$	1,425.2			$	1,902.7
Discretionary investments	1,597.1				780.3
Total cash and discretionary investments	3,022.3				2,683.0
Redeemable seed capital investments	1,118.9				1,188.9
Investments used to hedge the supplemental savings plan liability	381.3				268.2
Total cash and investments in T. Rowe Price products	$	4,522.5			$	4,140.1

During 2018, we rebalanced our cash and discretionary investments portfolio resulting in the reallocation of some cash invested in T. Rowe Price money market funds to certain T. Rowe Price investment products. Given the availability of our financial resources and cash expected to be generated through future operations, we do not maintain an available external source of additional liquidity.

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 $425.3 million at December 31, 2018, and $424.5 million at December 31, 2017.

The cash and investment presentation on the consolidated balance sheet is based on how we account for the cash or investment. The following table details how T. Rowe Price Group’s interests in cash and T. Rowe Price investment products relate to where they are presented in the consolidated balance sheet as of December 31, 2018.

(in millions)		Cash and cash equivalents				Investments				Net assets of consolidated T. Rowe Price investment products				12/31/2018
Cash and discretionary investments		$	1,425.2			$	1,577.9			$	19.2			$	3,022.3
Seed capital investments		—				236.7				882.2				1,118.9
Investment products used to hedge supplemental savings plan		—				381.3				—				381.3
Total cash and investments in T. Rowe Price products attributable to T. Rowe Price Group		1,425.2				2,195.9				901.4				4,522.5
Investment in UTI and other investments		—				257.5				—				257.5
Total cash and investments attributable to T. Rowe Price Group		1,425.2				2,453.4				901.4				4,780.0
Redeemable non-controlling interests		—				—				740.3				740.3
As reported on unaudited condensed consolidated balance sheet at December 31, 2018		$	1,425.2			$	2,453.4			$	1,641.7			$	5,520.3

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 products 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, when it is determined by management that the seed capital is no

Page 40

longer needed, we will recategorize that investment in accordance with our cash and discretionary investment framework so as to not impact the investment product and, ultimately, the unrelated third-party investors.

Uses of Liquidity

We paid $2.80 per share in regular dividends in 2018, an increase of 22.8% over the $2.28 per share paid in 2017. Additionally, we expended $1,099.6 million in 2018 to repurchase 10.8 million shares, or 4.4%, of our outstanding common stock at an average price of $101.48 per share. 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.

Since the end of 2015, we have returned $4.0 billion to stockholders through stock repurchases and our regular quarterly dividends, as follows:

(in millions)	Recurring dividend				Stock repurchases				Total cash returned to stockholders
2016	$	541.2			$	676.9			$	1,218.1
2017	562.6				458.1				1,020.7
2018	694.7				1,099.6				1,794.3
Total	$	1,798.5			$	2,234.6			$	4,033.1

We anticipate property and equipment expenditures for the full-year 2019 to be up to $200 million, of which about 65% is planned for technology initiatives. We expect to fund our anticipated capital expenditures with operating cash flows and other available resources.

The following tables summarize the cash flows for 2018, 2017 and 2016, that are attributable to T. Rowe Price Group, our consolidated T. Rowe Price investment products, and the related eliminations required in preparing the statement.

	2018
	Cash flow attributable to:
(in millions)	T. Rowe Price Group				Consolidated T. Rowe Price investment products				Elims				As reported
Cash flows from operating activities
Net income	$	1,837.5			$	(105.6	)		$	36.8			$	1,768.7
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization of property and equipment	159.5				—				—				159.5
Stock-based compensation expense	197.1				—				—				197.1
Net gains recognized on investments	(13.7		)		—				(36.8		)		(50.5		)
Net investments in T. Rowe Price investment products to economically hedge supplemental savings plan liability	(129.5		)		—				—				(129.5		)
Net change in trading securities held by consolidated T. Rowe Price investment products	—				(437.0		)		—				(437.0		)
Changes in accounts receivable and accrued revenue	12.7				—				—				12.7
Changes in payables and accrued liabilities	130.9				(19.6		)		—				111.3
Other changes in assets and liabilities	(16.4		)		13.1				(9.1		)		(12.4		)
Net cash provided by (used in) operating activities	2,178.1				(549.1		)		(9.1		)		1,619.9
Net cash provided by (used in) investing activities	(945.7		)		(23.8		)		94.0				(875.5		)
Net cash provided by (used in) financing activities	(1,709.9		)		555.3				(84.9		)		(1,239.5		)
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products	—				(15.4		)		—				(15.4		)
Net change in cash and cash equivalents during period	(477.5		)		(33.0		)		—				(510.5		)
Cash and cash equivalents at beginning of year	1,902.7				103.1				—				2,005.8
Cash and cash equivalents at end of period	$	1,425.2			$	70.1			$	—			$	1,495.3

Page 41

	2017
	Cash flow attributable to:
(in millions)	T. Rowe Price Group				Consolidated T. Rowe Price investment products				Elims				As reported
Cash flows from operating activities
Net income	$	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	143.6				—				—				143.6
Stock-based compensation expense	152.0				—				—				152.0
Realized gains on dispositions of available-for-sale T. Rowe Price investment products	(83.1		)		—				—				(83.1		)
Gains recognized upon transfer of an investment in a T. Rowe Price mutual fund from available-for-sale to held as trading	(23.6		)		—				—				(23.6		)
Net gains recognized on investments	(147.9		)		—				98.2				(49.7		)
Net investments in T. Rowe Price investment products to economically hedge supplemental savings plan liability	(218.6		)		—				—				(218.6		)
Net change in trading securities held by consolidated T. Rowe Price investment products	—				(1,492.9		)		—				(1,492.9		)
Changes in accounts receivable and accrued revenue	(101.6		)		—				—				(101.6		)
Changes in payables and accrued liabilities	169.1				154.3				—				323.4
Other changes in assets and liabilities	164.1				(158.3		)		(7.0		)		(1.2		)
Net cash provided by (used in) operating activities	1,551.8				(1,315.3		)		(7.0		)		229.5
Net cash provided by (used in) investing activities	(33.9		)		(64.2		)		137.1				39.0
Net cash provided by (used in) financing activities	(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	—				5.3				—				5.3
Net change in cash and cash equivalents during period	697.8				37.5				—				735.3
Cash and cash equivalents at beginning of year	1,204.9				65.6				—				1,270.5
Cash and cash equivalents at end of period	$	1,902.7			$	103.1			$	—			$	2,005.8

	2016
	Cash flow attributable to:
(in millions)	T. Rowe Price Group				Consolidated T. Rowe Price investment products				Elims				As reported
Cash flows from operating activities
Net income	$	1,215.0			$	108.1			$	(69.1	)		$	1,254.0
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
Stock-based compensation expense	161.6				—				—				161.6
Realized gains on dispositions of available-for-sale T. Rowe Price investment products	(53.0		)		—				—				(53.0		)
Net gains recognized on investments	(100.1		)		—				69.1				(31.0		)
Net change in trading securities held by consolidated T. Rowe Price investment products					(1,297.9		)		—				(1,297.9		)
Changes in accounts receivable and accrued revenue	(10.5		)		—				—				(10.5		)
Changes in payables and accrued liabilities	102.1				37.1				—				139.2
Other changes in assets and liabilities	(104.8		)		(13.9		)		(6.6		)		(125.3		)
Net cash provided by (used in) operating activities	1,343.7				(1,166.6		)		(6.6		)		170.5
Net cash provided by (used in) investing activities	(219.7		)		41.4				284.5				106.2
Net cash provided by (used in) financing activities	(1,091.4		)		1,192.9				(277.9		)		(176.4		)
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products	—				(2.1		)		—				(2.1		)
Net change in cash and cash equivalents during period	32.6				65.6				—				98.2
Cash and cash equivalents at beginning of year	1,172.3				—				—				1,172.3
Cash and cash equivalents at end of period	$	1,204.9			$	65.6			$	—			$	1,270.5

Page 42

Operating activities

Operating activities attributable to T. Rowe Price Group during 2018 provided cash flows of $2.2 billion, an increase of $626.3 million from the 2017 period. The increase in these operating cash flows was driven by $641.6 million of higher net income after adjusting for significant non-cash activity including depreciation expense, stock-based compensation expense and market gains on investments. Adjustments for market gains on investments decreased during 2018 in part due to a change in accounting guidance that we adopted on January 1, 2018. See Note 1 to our consolidated financial statements for more information. The remaining decrease in investment gain activity is due to lower gains as a result of a weaker equity market in 2018 compared with 2017. Additionally, during 2017, we invested $218.6 million into certain investment products to establish an economic hedge of our supplemental savings plan liability and invested an additional $129.5 million in 2018 in order to maintain it. The remaining $104.4 million decrease in operating cash flows attributable to T. Rowe Price Group relates to timing differences on the cash settlement of our assets and liabilities, including the settlement of insurance receivables during 2017 related to the Dell appraisal rights matter. The remaining change in reported cash flows from operating activities was attributable to the net change in trading securities held in our consolidated investment products’ underlying portfolios.

Operating activities attributable to T. Rowe Price Group during 2017 provided cash flows of $1.6 billion, an increase of $208.1 million from the 2016 period. The increase was 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 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.

Investing activities

Net cash used in investing activities that are attributable to T. Rowe Price Group totaled $945.7 million in 2018, an increase of $911.8 million compared with 2017. During 2018, we rebalanced our cash and discretionary investments portfolio resulting in the reallocation of cash and cash equivalents of $1.0 billion to certain T. Rowe Price funds. Excluding these reallocations, net purchases of other discretionary investment products decreased $65.3 million during 2018 compared with 2017. These changes in investing cash flows during 2018 compared with 2017 were offset by a $43.1 million decrease in in seed capital provided, a $17.6 million decrease in property and equipment expenditures, and a $95.8 million change in other investing activity, primarily relating to the sale of our 10% interest in Daiwa SB Investments Ltd. during the third quarter. Since we consolidate the seed capital in T. Rowe Price investment products, our seed capital was eliminated in preparing our consolidated statement of cash flows. The remaining change in reported cash flows from investing activities was attributable to a $40.4 million decrease in net cash removed from our balance sheet from consolidating and deconsolidating investment products during 2018 compared with the 2017.

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 received net proceeds of $296.7 million upon the sale of certain T. Rowe Price investment products, an increase of $77.9 million compared with the 2016 period. A portion of the net proceeds received in 2017 were used to fund the newly established economic hedge of our supplemental savings liability mentioned above. This net increase in investing cash flows was offset by $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 in 2017 represented the aggregate net cash removed 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.

Financing activities

Net cash used in financing activities attributable to T. Rowe Price Group were $1,709.9 million in 2018 compared with $820.1 million in 2017. The increase was primarily driven by spending $632.3 million more in common stock repurchases in 2018 as market volatility provided an opportunity to buy back more shares. Additionally, a nearly 23% increase in our quarterly dividend per share resulted in paying $131.2 million more in dividends in 2018. The decline in our stock price in 2018 led to fewer stock options being exercised and a $126.3 million decrease in

Page 43

related cash proceeds compared with the 2017. The remaining change in reported cash flows from financing activities was primarily attributable to a $811.2 million decrease in net subscriptions received from redeemable non-controlling interest holders of our consolidated investment products during 2018 compared with the 2017.

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 was 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 was 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 with the 2016 period.

CONTRACTUAL OBLIGATIONS.

The following table presents a summary of our future obligations under the terms of our supplemental savings plan, existing operating leases, and other contractual cash purchase commitments at December 31, 2018. The information presented does not include operating expenses or capital expenditures that will be committed in the normal course of operations in 2019 and future years. The information also excludes the $16.1 million of unrecognized tax benefits discussed in Note 8 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				2019				2020-2021				2022-2023				Thereafter
(in millions)
Supplemental savings plan liability(1)	$	380			$	3			$	76			$	59			$	242
Noncancelable operating leases	168				32				50				33				53
Other purchase commitments(2)	285				202				42				13				28
Total	$	833			$	237			$	168			$	105			$	323

(1) These obligations represent the amount of future expected funding requirements related to our supplemental savings plan. Payment periods are based on deferral elections made by participants. If no deferral election has been made, the obligation has been included in the "Thereafter" column as the timing of distributions will be determined upon termination of employment. We economically hedge this liability and the related market exposure with investments in certain T. Rowe Price products. The carrying value of these investments at December 31, 2018, was $381.3 million and are reported within the Investments line on our consolidated balance sheet. Either available cash or these investments can be used to fund the future liability payments.

(2) 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.

We also have outstanding commitments to fund additional contributions to investment partnerships totaling $27.3 million at December 31, 2018. 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 the 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.

Page 44

We present those significant accounting policies used in the preparation of our consolidated financial statements as an integral part of those statements within this 2018 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, 2018, we consolidated VIEs with net assets of $1.4 billion.

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 as of December 31, 2018.

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

Page 45

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 Note 1 - Basis of Preparation and 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.

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; our tax rate; and our expectations regarding financial markets, future transactions, dividends, stock repurchases, 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 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 with 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; the timing of the assumption of all third party research payments, 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

Page 46

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.