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

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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, subadvised funds, separately managed accounts, and other T. Rowe Price products. The other T. Rowe Price products include: collective investment 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. Additionally, approximately one-third of our operating expenses are impacted by financial markets. 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, we provide our clients with strong investment management expertise and service both now and in the future.

MARKET TRENDS.

U.S. stocks surged in 2019, as equities bounced back strongly from deep losses in the fourth quarter of 2018. A major driver of market performance was the Federal Reserve’s decision to keep short-term interest rates steady in the first half of the year, then reduce rates three times starting in late July as a “midcycle adjustment” of its monetary policy. Many other central banks around the world also reduced rates in response to slowing economic growth. The trade conflict between the U.S. and China was another major driver of market sentiment. Markets wavered at times through much of the year as both sides announced new tariffs on the other’s goods. Speculation then arose in the fall that the U.S. and China were close to reaching an agreement, but a preliminary “phase one” trade deal was not reached until December.

Stocks in developed non-U.S. equity markets rose strongly but underperformed U.S. shares. European stocks were widely positive. UK shares advanced more than 21% but lagged the region as Brexit-related uncertainty persisted for most of the year. Boris Johnson succeeded Theresa May as Prime Minister during the summer, but the House of Commons did not vote in favor of the United Kingdom’s Withdrawal Agreement with the European Union until December, shortly after the Conservative Party decisively won a general election. Returns in developed Asian markets were broadly positive in U.S. dollar terms. Hong Kong underperformed the region with a 10% gain. Hong Kong’s economy and stock market have been hurt by ongoing protests that were triggered by a controversial extradition bill.

Emerging markets stocks underperformed shares in developed markets. Asian equities were mostly positive in U.S. dollar terms, but most markets significantly lagged strong returns in China and Taiwan. In emerging Europe, Russian stocks surged about 53%; Turkish stocks lagged with a 12% gain. In Latin America, stocks in Colombia and Brazil posted very strong returns, but shares in Argentina and Chile fell sharply.

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Results of several major equity market indexes for 2019 are as follows:

S&P 500 Index31.5%
NASDAQ Composite Index(1)35.2%
Russell 2000 Index25.5%
MSCI EAFE (Europe, Australasia, and Far East) Index22.7%
MSCI Emerging Markets Index18.9%

(1) Returns exclude dividends

Global bond returns were broadly positive, as longer-term government bond yields in developed markets declined and various central banks enacted new stimulus measures. In the U.S., the Federal Reserve reduced the federal funds target rate to a range of 1.50%-1.75% by the end of the year. The 10-year Treasury note yield decreased from 2.69% to 1.92% at year-end, though above its late-summer lows, which were around 1.50%.

In the U.S., the investment-grade bond market, long-term Treasuries and corporate bonds fared best. Mortgage-backed securities advanced to a lesser extent, hindered by an increase in mortgage prepayments and refinancing activity. Municipal bonds did well amid solid demand but slightly underperformed taxable securities. High yield bonds advanced strongly for the year as investors embraced riskier assets and searched for higher yields because of falling interest rates.

Bonds in developed non-U.S. markets produced positive returns in U.S. dollar terms, as the dollar weakened against most major currencies and government bond yields generally declined. In the eurozone, the European Central Bank decided to cut its short-term benchmark rate deeper into negative territory in September. On November 1, the European Central Bank resumed its quantitative easing program and began purchasing €20 billion of securities every month. Emerging markets debt appreciated strongly in dollar terms. Bonds denominated in U.S. dollars outperformed local currency debt, as a few key emerging markets currencies declined against the dollar.

Results of several major bond market indexes for 2019 are as follows:

Bloomberg Barclays U.S. Aggregate Bond Index8.7%
JPMorgan Global High Yield Index14.6%
Bloomberg Barclays Municipal Bond Index7.5%
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index5.1%
JPMorgan Emerging Markets Bond Index Plus12.6%

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ASSETS UNDER MANAGEMENT.

Assets under management ended 2019 at $1,206.8 billion, an increase of $244.5 billion from the end of 2018. Net cash inflows of $13.2 billion for 2019, combined with market appreciation and income, net of distributions not reinvested, increased our assets under management by $231.3 billion. The following table details changes in our assets under management by vehicle during the last three years:

(in billions)U.S. mutual fundsSubadvised and separate accountsOther investment productsTotal
Assets under management at December 31, 2016$514.2$206.9$89.7$810.8
Net cash flows before client transfers9.41.43.214.0
Client transfers(1)(20.2)1.718.5—
Net cash flows after client transfers(10.8)3.121.714.0
Net market appreciation and income104.645.218.2168.0
Distributions not reinvested(1.7)——(1.7)
Change during the period92.148.339.9180.3
Assets under management at December 31, 2017606.3255.2129.6991.1
Net cash flows before client transfers4.4(.2)9.013.2
Client transfers(1)(20.5)2.817.7—
Net cash flows after client transfers(16.1)2.626.713.2
Net market depreciation, net of income(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, 2018564.5250.0147.8962.3
Net cash flows before client transfers7.6(.3)5.913.2
Client transfers(1)(23.2)1.122.1—
Net cash flows after client transfers(15.6).828.013.2
Net market appreciation and income135.663.034.5233.1
Distributions not reinvested(1.8)——(1.8)
Change during the period118.263.862.5244.5
Assets under management at December 31, 2019$682.7$313.8$210.3$1,206.8

*(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.

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

(in billions)EquityFixed income, including money marketMulti-asset**(1)**Total
Assets under management at December 31, 2016$450.6$121.2$239.0$810.8
Net cash flows(1.6)8.67.014.0
Net market appreciation and income(2)115.14.646.6166.3
Change during the period113.513.253.6180.3
Assets under management at December 31, 2017564.1134.4292.6991.1
Net cash flows(1.4)2.911.713.2
Net market depreciation, net of income(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, 2018539.9136.1286.3962.3
Net cash flows(.2)3.59.913.2
Net market appreciation and income(2)159.28.363.8231.3
Change during the period159.011.873.7244.5
Assets under management at December 31, 2019$698.9$147.9$360.0$1,206.8

(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 6.9% of our assets under management at December 31, 2019, and 6.2% at December 31, 2018.

Our net cash flows in 2019, 2018, and 2017 were driven by diversified inflows across distribution channels and geographies, the strength of our multi-asset franchise, and positive flows into fixed income and international equity.

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 $9.8 billion in 2019, $12.0 billion in 2018, and $7.1 billion in 2017 from the target date retirement products. Assets under management in our target date retirement products, by vehicle, are as follows:

(in billions)12/31/1912/31/1812/31/17
U.S. mutual funds$164.8$144.8$168.4
Separately managed accounts8.45.91.7
Collective investment trusts119.279.763.7
$292.4$230.4$233.8

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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 funds1 (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, 2019, were:

1 year3 years5 years10 years
Outperformed Morningstar median(2)
All funds64%75%80%82%
Multi-asset funds69%85%94%95%
Top Morningstar quartile(2)
All funds32%45%50%55%
Multi-asset funds36%59%65%74%

(1) Excludes passive and fund categories not ranked by Morningstar.

(2) Source: © 2019 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, 84% 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 set forth information regarding our consolidated financial results for 2019, 2018 and 2017 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.

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2019 compared with 20182018 compared with 2017
(in millions, except per-share data)201920182017$ Change% Change$ Change% Change
U.S. GAAP basis
Investment advisory fees$5,112.5$4,850.6$4,295.8$261.95.4%$554.812.9%
Net revenues$5,617.9$5,372.6$4,854.9$245.34.6%$517.710.7%
Operating expenses$3,230.9$3,011.2$2,746.1$219.77.3%$265.19.7%
Net operating income$2,387.0$2,361.4$2,108.8$25.61.1%$252.612.0%
Non-operating income(1)$540.3$23.2$396.3$517.1n/m$(373.1)n/m
Net income attributable to T. Rowe Price Group$2,131.3$1,837.5$1,497.8$293.816.0%$339.722.7%
Diluted earnings per share on common share$8.70$7.27$5.97$1.4319.7%$1.3021.8%
Weighted average common shares outstanding assuming dilution238.6246.9245.1(8.3)(3.4)%1.8.7%
Adjusted non-GAAP basis**(2)**
Operating expenses$3,149.8$3,025.5$2,777.7$124.34.1%$247.88.9%
Net income attributable to T. Rowe Price Group$1,975.6$1,807.4$1,361.1$168.29.3%$446.332.8%
Diluted earnings per share on common share$8.07$7.15$5.43$.9212.9%$1.7231.7%
Assets under management (in billions)
Average assets under management$1,109.3$1,036.5$909.0$72.87.0%$127.514.0%
Ending assets under management$1,206.8$962.3$991.1$244.525.4%$(28.8)(2.9)%

(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.

Results Overview

Investment advisory revenues. 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. Our annualized effective fee rates can be impacted by market or cash flow related shifts among asset and share classes, price changes in existing products, and asset level changes in products with tiered-fee structures.

Investment advisory revenues earned in 2019 increased 5.4% over the comparable 2018 period as average assets under our management increased $72.8 billion, or 7.0%, to $1,109.3 billion. The average annualized fee rate earned on our assets under management was 46.1 basis points in 2019, compared with 46.8 basis points earned in 2018. Our effective fee rate has declined largely due to client transfers within the complex to lower fee vehicles or share classes over the last year and, to a lesser extent, fee reductions we made to certain mutual funds and other products since 2018. We regularly assess the competitiveness of our investment advisory fees and will continue to make adjustments as deemed appropriate.

In 2018, investment advisory revenues 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 declined in part due to client transfers within the complex to lower fee vehicles or share classes and, to a lesser extent, fee reductions we made to certain mutual funds and other products since 2017. Further

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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 of 2018.

Operating expenses. Operating expenses were $3,230.9 million in 2019, an increase of 7.3% over the comparable 2018 period. The increase in operating expenses was primarily due to greater market-related compensation expense related to the supplemental savings plan liability, higher salaries and benefits, higher bonus and stock-based compensation expense and the cost of our continued strategic investments. The 2018 period also includes the non-recurring $15.2 million reduction in operating expenses related to the conclusion of the Dell appraisal rights matter. The higher expense related to the supplemental savings plan in 2019 is partially offset by non-operating gains earned on the investments used to hedge the related liability.

For 2018, operating expenses were $3,011.2 million as compared with $2,746.1 million in the 2017 period. The increase in operating expenses was primarily due to our continued strategic investments and higher bonus and stock-based compensation, which were driven by our 2018 operating results.

On a non-GAAP basis, our operating expenses in 2019 increased 4.1% to $3,149.8 million compared with 2018. In 2018, our non-GAAP operating expenses increased 8.9% to $3,025.5 million compared with 2017. Our non-GAAP operating expenses exclude the impacts of our supplemental savings plan, investment income related to certain other investments, our consolidated T. Rowe Price investment products, and certain non-recurring items. See our non-GAAP reconciliations later in this Management's Discussion and Analysis section.

Our 2017 and 2018 operating expenses include certain financial impacts related to the Dell appraisal rights matter as further discussed in Note 14 to our consolidated financial statements. 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 in 2016 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)

There was no operating expense or cash flows impact related to the Dell appraisal rights matter in 2019.

In 2020, 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 2020 non-GAAP operating expenses to grow in the range of 6% to 9%. This expense growth guidance includes continued investments in the business and technology capabilities, our cost optimization efforts, and the final part of the phased implementation of paying for all third-party investment research. As such, 2020 operating expenses will reflect a full year of all third-party investment research costs globally. We could elect to adjust our expense growth should unforeseen circumstances arise, including significant market movements.

Operating margin. Our operating margin in 2019 was 42.5%, compared with 44.0% in 2018 and 43.4% in 2017. The decrease in our operating margin in 2019 compared with 2018 is primarily driven by the higher compensation expense growth related to our supplemental savings plan as compared with the percentage growth in net revenues during 2019. The increase in our operating margin in 2018 compared to 2017 was driven by the higher percentage growth in net revenue attributable primarily to increases in our average assets under management compared with the percentage growth in operating expenses.

Diluted earnings per share was $8.70 in 2019, $7.27 in 2018, and $5.97 in 2017. The 19.7% increase in diluted earnings per share in 2019 compared to 2018 was primarily driven by higher non-operating income, the benefit realized from increased share buybacks, which lowered the weighted-average shares outstanding, and a lower effective tax rate. The 21.8% increase in diluted earnings per share in 2018 compared with 2017 was driven by higher operating income and the benefit realized from a lower corporate tax rate under U.S. Tax Reform.

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On a non-GAAP basis, diluted earnings per share were $8.07 in 2019, $7.15 in 2018, and $5.43 in 2017. The 12.9% increase in non-GAAP diluted earnings per share in 2019 compared to 2018 was primarily driven by higher operating income, higher investment income earned on our cash and discretionary investment portfolio, and lower weighted-average shares outstanding. See our non-GAAP reconciliations later in this Management's Discussion and Analysis section.

Net revenues

2019 compared with 20182018 compared with 2017
(in millions)201920182017$ Change% Change$ Change% Change
Investment advisory fees
U.S. mutual funds$3,452.5$3,375.0$3,080.0$77.52.3%$295.09.6%
Subadvised and separate accounts and other investment products1,660.01,475.61,215.8184.412.5%259.821.4%
5,112.54,850.64,295.8261.95.4%554.812.9%
Administrative, distribution, and servicing fees
Administrative fees385.4384.0412.11.4.4%(28.1)(6.8)%
Distribution and servicing fees120.0138.0147.0(18.0)(13.0)%(9.0)(6.1)%
505.4522.0559.1(16.6)(3.2)%(37.1)(6.6)%
Net revenues$5,617.9$5,372.6$4,854.9$245.34.6%$517.710.7%

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 average assets under management and the change in investment advisory fee revenue for 2019, 2018 and 2017 are presented below.

2019 compared with 20182018 compared with 2017
Increase in average assets under managementIncrease in investment advisory feesIncrease in average assets under managementIncrease in investment advisory fees
U.S. mutual funds3.0%2.3%9.4%9.6%
Subadvised and separate accounts and other investment products13.1%12.5%21.8%21.4%
Total investment advisory fees7.0%5.4%14.0%12.9%

Market fluctuations and net cash flows can shift the asset and share class mix among different fee rates and products including those with tiered-fee structures. Over the last few years, we have also reduced the management fees of certain products.

While equity markets outperformed fixed income markets in 2019 and resulted in a shift of the U.S. mutual fund average asset mix to higher fee equity products over 2018, lower incremental fee tiered rates and certain fund price reductions created lower incremental revenues. Strong market returns in 2019 and U.S. mutual fund to trust transfers have primarily increased average assets under management for our subadvised and separate accounts and other products. However, lower incremental fee rates on higher average assets and growth in lower fee share classes resulted in slower revenue growth in 2019 over 2018.

In 2018, investment advisory fees earned on our subadvised and separate accounts and other investment products grew slower relative to average assets under management as a result of the significant client transfers from mutual funds to lower fee vehicles.

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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 2019, these fees were $505.4 million, a decrease of $16.6 million from the comparable 2018 period. The decrease was primarily attributable to lower 12b-1 revenue earned on certain share classes, including the Advisor and R classes, of the U.S. mutual funds as client transfers to lower fee vehicles and share classes has reduced assets under management in these share classes. The decrease in 12b-1 revenue is offset entirely by a reduction in the costs paid to third-party intermediaries that source these assets and is reported in distribution and servicing expense. In addition, higher recordkeeping fees and transaction fees were partially offset by lower mutual fund service revenues.

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

Net revenues include the elimination of $6.8 million for 2019, $6.2 million for 2018, and $5.6 million for 2017, 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

2019 compared with 20182018 compared with 2017
(in millions)201920182017$ Change% Change$ Change% Change
Compensation and related costs$1,969.2$1,808.6$1,664.9$160.68.9%$143.78.6%
Distribution and servicing costs262.5281.2262.6(18.7)(6.7)%18.67.1%
Advertising and promotion96.899.692.4(2.8)(2.8)%7.27.8%
Product-related costs153.2157.1146.0(3.9)(2.5)%11.17.6%
Technology, occupancy, and facility costs427.3383.9350.543.411.3%33.49.5%
General, administrative, and other321.9296.0279.725.98.8%16.35.8%
Nonrecurring net recoveries related to Dell appraisal rights matter(1)—(15.2)(50.0)15.2n/m34.8n/m
Total operating expenses$3,230.9$3,011.2$2,746.1$219.77.3%$265.19.7%

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

Compensation and related costs. Compensation and related costs increased $160.6 million, or 8.9%, for 2019 as compared with 2018. Nearly half of the increase in compensation and related costs is attributable to $78.8 million in higher expense related to our supplemental savings plan given the strong equity market returns experienced in 2019 compared with the sharp equity market declines in late 2018. The higher expense related to the supplemental savings plan is partially offset by the non-operating gains earned on the investments used to economically hedge the related liability. We also experienced increases in base salaries, benefits, and related employee costs, of $66.0 million as our average staff size grew 3.1% in 2019 and we modestly increased base salaries at the beginning of 2019. Our 2019 operating results led to a $28.8 million increase in annual variable compensation, primarily bonus compensation, as well as a $9.5 million increase in non-cash stock-based compensation expense. These increases in compensation and related costs were offset in part by the absence of the one-time $9.0 million bonus paid to certain associates in the second quarter of 2018 and $10.0 million in higher labor capitalization related to internally developed software in 2019.

For 2018, compensation and related costs increased $143.7 million, or 8.6%, as compared with 2017. The largest part of the increase was an increase 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 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

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period also included $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.

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. Distribution and servicing costs were $262.5 million for 2019, a decrease of $18.7 million, or 6.7%, compared to 2018. The decrease for 2019 from 2018 was primarily driven by client transfers, largely from Advisor and R classes, to lower fee vehicles or share classes during 2019, which resulted in lower assets under management in those mutual funds on which we pay distribution and servicing costs. 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.

Distribution and servicing costs were $281.2 million for 2018, an increase of $18.6 million, or 7.1%, compared with 2017. The increase was primarily driven by overall strong markets and net cash flows from the end of 2017 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.

Advertising and promotion. Advertising and promotion costs were $96.8 million for 2019, a decrease of $2.8 million, or 2.8%, compared with 2018. The decrease for 2019 from 2018 was primarily driven by the absence in 2019 of the creation and launch of a media advertising campaign in 2018.

Advertising and promotion costs were $99.6 million for 2018, an increase of $7.2 million, or 7.8%, compared with 2017. The increase in advertising and promotion costs for 2018 from 2017 is primarily driven by the creation and launch of a 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 $153.2 million for 2019, a decrease of $3.9 million, or 2.5%, compared with 2018. The decrease is primarily due to lower costs incurred to provide administrative services to the U.S. mutual funds, partially offset by 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.

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.

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 $427.3 million for 2019, $383.9 million for 2018, and $350.5 million for 2017. The increases over the last two years were due primarily to additional incremental investment in our technology capabilities, including related depreciation and hosted solution licenses, as well as office expansion costs. The 2019 year also included certain non-recurring office facility costs that were recognized in the fourth quarter.

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 $321.9 million for 2019, $296.0 million for 2018, and $279.7 million for 2017. The increases for 2019 from 2018 and for 2018 from 2017 were a result of our continued investment in our strategic initiatives, higher third-party investment research costs, and other growing operational and regulatory demands on the business.

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Non-operating income

Net non-operating investment income increased $517.1 million for the year ended December 31, 2019 compared with 2018 and decreased $373.1 million for the year ended December 31, 2018 compared with 2017. Net non-operating investment activity for the years ended December 31, 2019, 2018 and 2017 comprised the following:

2019 compared with 20182018 compared with 2017
(in millions)201920182017$ Change$ Change
Net gains (losses) from non-consolidated T. Rowe Price investment products
Cash and discretionary investments
Dividend income$67.6$48.8$15.2$18.8$33.6
Market related gains (losses) and equity in earnings58.4(16.0)1.374.4(17.3)
Seed capital investments
Dividend income2.33.97.0(1.6)(3.1)
Market related gains (losses) and equity in earnings42.7(22.5)54.865.2(77.3)
Net realized gains on dispositions of available-for-sale investments——83.1—(83.1)
Net gain (loss) recognized upon deconsolidation.13.6.1(3.5)3.5
Investments used to hedge the supplemental savings plan liability67.9(6.1)12.374.0(18.4)
Total net gains from non-consolidated T. Rowe Price investment products239.011.7173.8227.3(162.1)
Other investment income21.4107.524.5(86.1)83.0
Net gains on investments260.4119.2198.3141.2(79.1)
Net gains on consolidated sponsored investment portfolios272.9(92.9)193.9365.8(286.8)
Other income (loss), including foreign currency gains and losses7.0(3.1)4.110.1(7.2)
Non-operating income$540.3$23.2$396.3$517.1$(373.1)

During 2019, non-operating income reflected the sharp market returns which resulted in significant unrealized gains on our investment portfolio, including our consolidated investment portfolios, compared with losses in 2018. Partially offsetting the market increases was the absence in 2019 of the realized gain from the sale of our 10% holding in Daiwa SB Investments Ltd. that was recognized in 2018. Our cash and discretionary investments generated income of $126.0 million in 2019 as compared to $32.8 million in 2018.

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 $83.1 million from the sale of certain available-for-sale investments recognized in 2017 did not reoccur in 2018.

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The impact of consolidating certain T. Rowe Price investment products on the individual lines of our consolidated statements of income for 2019, 2018, and 2017 is as follows:

2019 compared with 20182018 compared with 2017
(in millions)201920182017$ Change$ Change
Operating expenses reflected in net operating income$(14.7)$(12.7)$(12.3)$(2.0)$(.4)
Net investment income (loss) reflected in non-operating income272.9(92.9)193.9365.8(286.8)
Impact on income before taxes$258.2$(105.6)$181.6$363.8$(287.2)
Net income (loss) attributable to our interest in the consolidated T. Rowe Price investment products$140.6$(36.8)$98.2$177.4$(135.0)
Net income (loss) attributable to redeemable non-controlling interests (unrelated third-party investors)117.6(68.8)83.4186.4(152.2)
Impact on income before taxes$258.2$(105.6)$181.6$363.8$(287.2)

Provision for income taxes

Our effective tax rate for 2019 was 23.2%, compared with 25.8% for 2018 and 36.9% for 2017. The decrease in our effective tax rate in 2019 from 2018 was primarily due to higher 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, as well as a lower state tax rate from the Maryland state legislation in 2018, and the absence in 2019 of the 2018 nonrecurring charges related to the enactment of U.S. tax reform. The decrease in our effective tax rate in 2018 from 2017 was 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.

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 3%.

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The following table reconciles the statutory federal income tax rate to our effective tax rate for the years ended December 31, 2019, 2018, and 2017:

201920182017
Statutory U.S. federal income tax rate21.0%21.0%35.0%
Impact of nonrecurring charge relating to U.S. tax reform—.82.9
Impact of nonrecurring charge related to Maryland state tax legislation—.3—
State income taxes for current year, net of federal income tax benefits(1)4.34.63.9
Net income attributable to redeemable non-controlling interests(1.0).7(1.3)
Net excess tax benefits from stock-based compensation plans activity(1.5)(1.7)(3.0)
Other items.4.1(.6)
Effective income tax rate23.2%25.8%36.9%

(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 2020 will be in the range of 23% to 26%.

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 a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies.

The following schedules reconcile certain U.S. GAAP financial measures for each of the last five years.

2019
(in millions)Operating expensesNet operating incomeNon-operating incomeProvision (benefit) for income taxes**(7)**Net income attributable to T. Rowe Price GroupDiluted earnings per share**(8)**
U.S. GAAP Basis$3,230.9$2,387.0$540.3$678.4$2,131.3$8.70
Non-GAAP adjustments:
Consolidated T. Rowe Price investment products(1)(7.9)14.7(272.9)(35.7)(104.9)(.42)
Supplemental savings plan liability(2)(73.2)73.2(67.9)1.34.0.02
Other non-operating income(3)——(73.5)(18.7)(54.8)(.23)
Adjusted Non-GAAP Basis$3,149.8$2,474.9$126.0$625.3$1,975.6$8.07

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2018
(in millions)Operating expensesNet operating incomeNon-operating incomeProvision (benefit) for income taxes**(7)**Net income attributable to T. Rowe Price GroupDiluted earnings per share**(8)**
U.S. GAAP Basis$3,011.2$2,361.4$23.2$615.9$1,837.5$7.27
Non-GAAP adjustments:
Consolidated T. Rowe Price investment products(1)(6.5)12.792.96.530.3.12
Supplemental savings plan liability(2)5.6(5.6)6.1.1.4—
Other non-operating income(3)——(93.7)(16.7)(77.0)(.30)
Nonrecurring charge related to enactment of U.S. tax reform(4)———(20.8)20.8.08
Nonrecurring charge related to enactment of Maryland state tax legislation(5)———(7.9)7.9.03
Nonrecurring net charge (recoveries) related to Dell appraisal rights matter(6)15.2(15.2)—(2.7)(12.5)(.05)
Adjusted Non-GAAP Basis$3,025.5$2,353.3$28.5$574.4$1,807.4$7.15
2017
(in millions)Operating expensesNet operating incomeNon-operating incomeProvision (benefit) for income taxes**(7)**Net income attributable to T. Rowe Price GroupDiluted earnings per share**(8)**
U.S. GAAP Basis$2,746.1$2,108.8$396.3$923.9$1,497.8$5.97
Non-GAAP adjustments:
Consolidated T. Rowe Price investment products(1)(6.7)12.3(193.9)(37.8)(60.3)(.24)
Supplemental savings plan liability(2)(11.7)11.7(12.3)(.3)(.4)—
Other non-operating income(3)——(190.1)(73.4)(116.7)(.46)
Nonrecurring charge related to enactment of U.S. tax reform(4)———(71.1)71.1.28
Nonrecurring net charge (recoveries) related to Dell appraisal rights matter(6)50.0(50.0)—(19.6)(30.4)(.12)
Adjusted Non-GAAP Basis$2,777.7$2,082.8$—$721.7$1,361.1$5.43
2016
(in millions)Operating expensesNet operating incomeNon-operating incomeProvision (benefit) for income taxes**(7)**Net income attributable to T. Rowe Price GroupDiluted earnings per share**(8)**
U.S. GAAP Basis$2,551.4$1,733.4$227.1$706.5$1,215.0$4.75
Non-GAAP adjustments:
Consolidated T. Rowe Price investment products(1)(6.5)13.0(121.1)(27.1)(42.0)(.16)
Other non-operating income(3)——(106.0)(41.7)(64.3)(.25)
Nonrecurring net charge (recoveries) related to Dell appraisal rights matter(6)(66.2)66.2—26.040.2.15
Adjusted Non-GAAP Basis$2,478.7$1,812.6$—$663.7$1,148.9$4.49

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2015
(in millions)Operating expensesNet operating incomeNon-operating incomeProvision (benefit) for income taxes**(7)**Net income attributable to T. Rowe Price GroupDiluted earnings per share**(8)**
U.S. GAAP Basis$2,301.7$1,898.9$103.5$779.4$1,223.0$4.63
Non-GAAP adjustments:
Consolidated T. Rowe Price investment products(1)——(1.5)(.6)(.9)(.01)
Other non-operating income(3)——(102.0)(40.2)(61.8)(.23)
Adjusted Non-GAAP Basis$2,301.7$1,898.9$—$738.6$1,160.3$4.39
(1)These non-GAAP adjustments remove the impact the consolidated T. Rowe Price investment products have on our U.S. GAAP consolidated statements of income. Specifically, we add back the operating expenses and subtract the investment income of the consolidated T. Rowe Price investment products. The adjustment to our operating expenses represents the operating expenses of the consolidated products, net of the elimination of related management and administrative fees. The adjustment to net income attributable to T. Rowe Price Group represents the net income of the consolidated products, net of redeemable non-controlling interest. We remove the impact of the consolidated

T. Rowe Price investment products as we believe they impact the reader’s ability to understand our core operating results.

(2)These non-GAAP adjustments remove the compensation expense from market valuation changes in the supplemental savings plan liability and the related net gains (losses) on investments designated as an economic hedge against the related liability. Amounts deferred under the supplemental savings plan are adjusted for appreciation (depreciation) of hypothetical investments chosen by participants. We use T. Rowe Price investment products to economically hedge the exposure to these market movements. We believe it is useful to offset the non-operating investment income (loss) realized on the hedges against the related compensation expense and remove the net impact to help the reader's ability to understand our core operating results and to increase comparability period to period.
(3)This non-GAAP adjustment represents the other non-operating income (loss) and the net gains (losses) earned on our non-consolidated investment portfolio that are not designated as economic hedges of the supplemental savings plan liability, and, beginning in the second quarter of 2018, non-consolidated seed investments and other investments that are not part of the cash and discretionary investment portfolio. In the second quarter of 2018, we decided to retain the investment gains recognized on our non-consolidated cash and discretionary investments as these assets and related income (loss) are considered part of our core operations. The impact on previously reported non-GAAP measures is immaterial. We believe adjusting for these non-operating income (loss) items 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 (loss) removed when managing and evaluating our core performance.
(4)During the second quarter of 2018, we 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 this nonrecurring charge in arriving at net income attributable to

T. Rowe Price Group and diluted earnings per share.

(5)During the second quarter of 2018, we recognized a nonrecurring charge of $7.9 million for the remeasurement of our 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.
(6)In 2016, we recognized a nonrecurring charge, net of insurance recoveries, of $66.2 million related to our decision to compensate certain clients in regard to the Dell appraisal rights matter. In 2017, we recognized additional insurance recoveries of $50 million as a reduction in operating expenses. 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 our readers of our consolidated statements of income to adjust for these charges and nonrecurring recoveries in arriving at adjusted operating expenses, net operating income, provision for income taxes, net income attributable to T. Rowe Price Group and diluted earnings per share.

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(7)The income tax impacts were calculated in order to achieve an overall non-GAAP effective tax rate of 24.0% for 2019, 24.1% for 2018, 34.7% for 2017, 36.6% for 2016, and 38.9% for 2015. We estimate that our effective tax rate for the full-year 2020 on a non-GAAP basis will be in the range of 23.5% to 25.5%.
(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. The calculation of net income allocated to common stockholders is as follows:

Year ended
(in millions)20192018201720162015
Adjusted net income attributable to T. Rowe Price Group$1,975.6$1,807.4$1,361.1$1,148.9$1,160.3
Less: net income allocated to outstanding restricted stock and stock unit holders50.942.530.524.215.2
Adjusted net income allocated to common stockholders$1,924.7$1,764.9$1,330.6$1,124.7$1,145.1

CAPITAL RESOURCES AND LIQUIDITY.

During 2019, stockholders’ equity increased from $6.1 billion to $7.1 billion. Tangible book value increased to $6.4 billion at December 31, 2019.

Sources of Liquidity

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

(in millions)12/31/201912/31/2018
Cash and cash equivalents$1,781.8$1,425.2
Discretionary investments1,899.61,597.1
Total cash and discretionary investments3,681.43,022.3
Redeemable seed capital investments1,325.61,118.9
Investments used to hedge the supplemental savings plan liability561.1381.3
Total cash and investments in T. Rowe Price products$5,568.1$4,522.5

Our discretionary investment portfolio is comprised primarily of short duration bond funds, which typically yield higher than money market rates, and asset allocation products. Cash and discretionary investments generated income of $126.0 million in 2019 as compared to $32.8 million in 2018. Cash and discretionary investments in T. Rowe Price products held by our subsidiaries outside the U.S. were $665.8 million at December 31, 2019, and $634.5 million at December 31, 2018. 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 for the products to build an investment performance history and until unrelated third-party investors substantially reduce our relative ownership percentage.

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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, 2019.

(in millions)Cash and cash equivalentsInvestments**Net assets of consolidated T. Rowe Price investment products ***12/31/2019
Cash and discretionary investments$1,781.8$1,831.8$67.8$3,681.4
Seed capital investments—276.71,048.91,325.6
Investments used to hedge the supplemental savings plan liability—561.1—561.1
Total cash and investments in T. Rowe Price products attributable to T. Rowe Price Group1,781.82,669.61,116.75,568.1
Investment in UTI and other investments—270.2—270.2
Total cash and investments attributable to T. Rowe Price Group1,781.82,939.81,116.75,838.3
Redeemable non-controlling interests——1,121.01,121.0
As reported on unaudited condensed consolidated balance sheet at December 31, 2019$1,781.8$2,939.8$2,237.7$6,959.3

** Net assets of consolidated T. Rowe Price investment products of* $2,237.7 million at December 31, 2019*, include assets of* $2,276.9 million less liabilities of

$39.2 million as reflected in the consolidated balance sheet in Item 8. Financial Statements and Supplementary Data of this Form 10-K.

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 is recategorized as discretionary when it is determined by management that the seed capital is no longer needed. We assess the discretionary products and, when we decide to liquidate our interest, we seek to do so in a way as to not impact the product and, ultimately, the unrelated third-party investors.

Uses of Liquidity

We paid $3.04 per share in regular dividends in 2019, an increase of 8.6% over the $2.80 per share paid in 2018. Additionally, we expended $708.8 million in 2019 to repurchase 7.0 million shares, or 2.9%, of our outstanding common stock at an average price of $101.65 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 2016, we have returned $4.3 billion to stockholders through stock repurchases and our regular quarterly dividends, as follows:

(in millions)Recurring dividendStock repurchasesTotal cash returned to stockholders
2017$562.6$458.1$1,020.7
2018694.71,099.61,794.3
2019733.6708.81,442.4
Total$1,990.9$2,266.5$4,257.4

We anticipate property and equipment expenditures for the full-year 2020 to be up to $210 million, of which about three-quarters is planned for technology initiatives. We expect to fund our anticipated capital expenditures with operating cash flows and other available resources.

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The following tables summarize the cash flows for 2019, 2018 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.

2019
Cash flow attributable to:
(in millions)T. Rowe Price GroupConsolidated T. Rowe Price investment productsElimsAs reported
Cash flows from operating activities
Net income$2,131.3$258.2$(140.6)$2,248.9
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation, amortization and impairments of property and equipment190.8——190.8
Stock-based compensation expense206.6——206.6
Net gains recognized on investments(316.9)—140.6(176.3)
Net investments in T. Rowe Price investment products used to economically hedge supplemental savings plan liability(126.0)——(126.0)
Net change in trading securities held by consolidated T. Rowe Price investment products(930.9)—(930.9)
Other changes in assets and liabilities116.51.9(8.8)109.6
Net cash provided by (used in) operating activities2,202.3(670.8)(8.8)1,522.7
Net cash provided by (used in) investing activities(489.3)(18.4)183.2(324.5)
Net cash provided by (used in) financing activities(1,356.4)698.1(174.4)(832.7)
Effect of exchange rate changes on cash and cash equivalents of consolidated T. Rowe Price investment products—(2.5)—(2.5)
Net change in cash and cash equivalents during period356.66.4—363.0
Cash and cash equivalents at beginning of year1,425.270.1—1,495.3
Cash and cash equivalents at end of period$1,781.8$76.5$—$1,858.3
2018
Cash flow attributable to:
(in millions)T. Rowe Price GroupConsolidated T. Rowe Price investment productsElimsAs 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, amortization and impairments of property and equipment159.5——159.5
Stock-based compensation expense197.1——197.1
Net gains recognized on investments(13.7)—(36.8)(50.5)
Net investments in T. Rowe Price investment products used 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)
Other changes in assets and liabilities127.2(6.5)(9.1)111.6
Net cash provided by (used in) operating activities2,178.1(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 year1,902.7103.1—2,005.8
Cash and cash equivalents at end of period$1,425.2$70.1$—$1,495.3

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2017
Cash flow attributable to:
(in millions)T. Rowe Price GroupConsolidated T. Rowe Price investment productsElimsAs 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, amortization and impairments of property and equipment143.6——143.6
Stock-based compensation expense152.0——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 used 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)
Other changes in assets and liabilities231.6(4.0)(7.0)220.6
Net cash provided by (used in) operating activities1,551.8(1,315.3)(7.0)229.5
Net cash provided by (used in) investing activities(33.9)(64.2)137.139.0
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 period697.837.5—735.3
Cash and cash equivalents at beginning of year1,204.965.6—1,270.5
Cash and cash equivalents at end of period$1,902.7$103.1$—$2,005.8

Operating activities

Operating activities attributable to T. Rowe Price Group during 2019 provided cash flows of $2,202.3 million, an increase of $24.2 million from the 2018 period. Operating cash flows increased by $334.6 million on higher net income after adjusting for significant non-cash activity including depreciation expense and stock-based compensation expense. This increase was offset in part by higher market gains on investments of $303.2 million due to stronger equity market returns compared to 2018. During 2019, we invested an additional $126.0 million in certain investment products that act as an economic hedge of our supplemental savings plan liability. This level of investment is comparable to the amount invested in 2018. Timing differences on the cash settlement of our assets and liabilities also increased operating cash flows by $10.7 million. 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 2018 provided cash flows of $2,178.1 million, 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. The remaining decrease in investment gain activity is due to lower gains as a result of weaker equity markets 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.

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Investing activities

Net cash used in investing activities that are attributable to T. Rowe Price Group totaled $489.3 million in 2019, a decrease of $456.4 million compared with 2018. 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 fixed income funds. Such rebalancing did not recur in 2019. Excluding the impact of the reallocation in 2018, there were net purchases of discretionary investment products of $108.3 million during 2019, compared to net proceeds of $228.4 million. Also contributing to the decrease in 2019 reported cash flows used in investing activities were higher property and equipment expenditures of $36.1 million, an $89.2 million increase in the level of seed capital provided, and the absence of the proceeds from the sale of our 10% interest in Daiwa SB Investments Ltd. received in 2018 and included in other investing activity. 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.

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 from the comparable 2017 period. 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 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 of 2018. 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 period.

Financing activities

Net cash used in financing activities attributable to T. Rowe Price Group were $1,356.4 million in 2019, a decrease of $353.5 million compared with $1,709.9 million in 2018. The decrease in cash used in financing activities was primarily driven by a $384.6 million decrease in the number of common stock repurchases we made in 2019 due to the stronger equity markets. This decrease was partially offset by a $39.6 million increase in dividends paid in 2019 as a result of an 8.6% increase in our quarterly dividend per share from 2018. The remaining change in reported cash flows from financing activities is primarily attributable to a $53.3 million increase in net subscriptions received from redeemable noncontrolling interest holders of our consolidated investment products during 2019 compared to 2018.

Net cash used in financing activities attributable to T. Rowe Price Group totaled $1,709.9 million in 2018 compared with $820.1 million in 2017. The increase was primarily driven by spending $632.2 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 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 period.

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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, 2019. The information presented does not include operating expenses or capital expenditures that will be committed in the normal course of operations in 2020 and future years. The information also excludes the $23.9 million of unrecognized tax benefits discussed in Note 9 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.

Total20202021-20222023-2024Thereafter
(in millions)
Supplemental savings plan liability(1)$563$7$88$103$365
Noncancelable operating leases16427504146
Other purchase commitments(2)320206692421
Total$1,047$240$207$168$432

(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, 2019 was $561.1 million and was reported within the Investments line on our consolidated balance sheet. Either these investments or future cash flows from operations are expected to 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 $18.1 million at December 31, 2019. 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.

We present those significant accounting policies used in the preparation of our consolidated financial statements as an integral part of those statements within this 2019 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.

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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, 2019, we consolidated VIEs with net assets of $1.9 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, 2019.

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.

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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 subadvised and separately managed accounts 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 T. Rowe Price 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 T. Rowe Price funds and could be adversely affected if the independent directors of one or more of the T. Rowe 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, our supplemental savings plan, 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 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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Previous: Item 6. Selected Financial Data. · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk.