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BLK > SEC Filings for BLK > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BLACKROCK INC.

Form 10-Q for BLACKROCK INC.


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This report, and other statements that BlackRock may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to BlackRock's future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as "trend," "potential," "opportunity," "pipeline," "believe," "comfortable," "expect," "anticipate," "current," "intention," "estimate," "position," "assume," "outlook," "continue," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" or similar expressions.

BlackRock cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to risk factors previously disclosed in BlackRock's Securities and Exchange Commission ("SEC") reports and those identified elsewhere in this report the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes and volatility in political, economic or industry conditions, the interest rate environment, foreign exchange rates or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock's investment products; (4) the impact of increased competition; (5) the impact of future acquisitions or divestitures; (6) the unfavorable resolution of legal proceedings; (7) the extent and timing of any share repurchases; (8) the impact, extent and timing of technological changes and the adequacy of intellectual property and information security protection; (9) the impact of legislative and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock or The PNC Financial Services Group, Inc. ("PNC");
(10) terrorist activities, international hostilities and natural disasters, which may adversely affect the general economy, domestic and local financial and capital markets, specific industries or BlackRock; (11) the ability to attract and retain highly talented professionals; (12) fluctuations in the carrying value of BlackRock's economic investments; (13) the impact of changes to tax legislation, including income, payroll and transaction taxes, and taxation on products or transactions, which could affect the value proposition to clients and, generally, the tax position of the Company; (14) BlackRock's success in maintaining the distribution of its products; (15) the impact of BlackRock electing to provide support to its products from time to time and any liabilities related to securities lending or other indemnification obligations; and (16) the impact of problems at other financial institutions or the failure or negative performance of products at other financial institutions.


Table of Contents

Overview

BlackRock, Inc. ("BlackRock" or the "Company") is the world's largest publicly-traded investment management firm. At September 30, 2012, the Company managed $3.673 trillion of assets under management ("AUM") on behalf of institutional and individual investors worldwide. The Company provides a wide array of products, including passively and actively managed products in various equity, fixed income, multi-asset class, alternative investment and cash management products. BlackRock offers clients diversified access to global markets through separate accounts, collective investment trusts, open-end and closed-end mutual funds, exchange-traded products, hedge funds and funds of funds. In addition, BlackRock Solutions® provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

On May 29, 2012, BlackRock completed a secondary offering of 26,211,335 shares of common stock held by Barclays Bank PLC ("Barclays") at a price of $160.00 per share, which included 23,211,335 shares of common stock issued upon the conversion of Series B Convertible Participating Preferred Stock by a subsidiary of Barclays. Upon completion of this offering, BlackRock repurchased 6,377,552 shares directly from Barclays at a price of $156.80 per share (consisting of 6,346,036 of Series B Convertible Preferred Stock and 31,516 shares of common stock). The total transactions, including the full exercise of the underwriters' option to purchase 2,621,134 additional shares in the secondary offering, amounted to 35,210,021 shares, resulting in Barclays exiting its entire ownership position in BlackRock.

On September 30, 2012, PNC held 21.0% of the Company's voting common stock and 21.8% of the Company's capital stock, which includes outstanding common and non-voting preferred stock.


Table of Contents

Financial Highlights

(Dollar amounts in millions, except per share data)

(unaudited)

The following tables summarize BlackRock's operating performance for each of the three and nine months ended September 30, 2012 and 2011.

                                           Three Months Ended                          Nine Months Ended
                                              September 30,                              September 30,
                                       2012                  2011                  2012                  2011
GAAP basis:
Total revenue                      $       2,320        $        2,225        $        6,798        $        6,854
Total expenses                             1,445                 1,448                 4,279                 4,413

Operating income                   $         875        $          777        $        2,519        $        2,441
Operating margin                            37.7 %                34.9 %                37.1 %                35.6 %
Non-operating income
(expense), less net income
(loss) attributable to
non-controlling interests          $          17        ($          87 )      ($           9 )      ($          95 )
Net income attributable to
BlackRock                          $         642        $          595        $        1,768        $        1,782
Diluted earnings per common
share(e)(f)                        $        3.65        $         3.23        $         9.87        $         9.33

Effective tax rate                          28.1 %                13.7 %                29.6 %                24.0 %

As adjusted:
Operating income(a)                $         876        $          849        $        2,533        $        2,551
Operating margin(a)                         40.7 %                40.1 %                39.5 %                39.6 %
Non-operating income
(expense), less net income
(loss) attributable to
non-controlling interests(b)       $          13        ($          79 )      ($          15 )      ($          92 )
Net income attributable to
BlackRock(c)(d)                    $         610        $          521        $        1,743        $        1,681
Diluted earnings per common
share(c)(d)(e)(f)                  $        3.47        $         2.83        $         9.73        $         8.80

Effective tax rate(d)                       31.4 %                32.3 %                30.8 %                31.6 %

Other:
Assets under management (end
of period)                         $   3,673,274        $    3,345,067        $    3,673,274        $    3,345,067
Diluted weighted-average
common shares outstanding(f)         175,450,532           181,825,329           178,956,699           188,792,952
Shares outstanding excluding
escrow shares (end of period)        172,037,373           178,861,410           172,037,373           178,861,410
Book value per share*              $      145.32        $       137.81        $       145.32        $       137.81
Cash dividends declared and
paid per share                     $        1.50        $        1.375        $         4.50        $        4.125

* - Total BlackRock stockholders' equity, excluding appropriated retained earnings, divided by total common and preferred shares outstanding at quarter-end.


Table of Contents

Financial Highlights

(continued)

BlackRock reports its financial results in accordance with accounting principles generally accepted in the United States ("GAAP"); however, management believes evaluating the Company's ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock's financial performance over time. BlackRock's management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Computations for all periods are derived from the Company's condensed consolidated statements of income as follows:

(a) Operating income, as adjusted, and operating margin, as adjusted:

Operating income, as adjusted, equals operating income, GAAP basis, excluding certain items management deems non-recurring, or transactions that ultimately will not impact BlackRock's book value, as indicated in the table below. Operating income used for operating margin measurement equals operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Operating margin, as adjusted, equals operating income used for operating margin measurement, divided by revenue used for operating margin measurement, as indicated in the table below.

                                                  Three Months Ended             Nine Months Ended
                                                    September 30,                  September 30,
(Dollar amounts in millions)                     2012            2011           2012           2011
Operating income, GAAP basis                   $     875        $   777       $   2,519       $ 2,441
Non-GAAP expense adjustments:
U.K. lease exit costs                                 (8 )           63              (8 )          63
PNC LTIP funding obligation                            5             15              16            43
Merrill Lynch compensation contribution               -               2              -              7
Compensation expense related to
appreciation (depreciation) on deferred
compensation plans                                     4             (8 )             6            (3 )

Operating income, as adjusted                        876            849           2,533         2,551
Closed-end fund launch costs                          22             -               22            19
Closed-end fund launch commissions                     3             -                3             2

Operating income used for operating margin
measurement                                    $     901        $   849       $   2,558       $ 2,572


Revenue, GAAP basis                            $   2,320        $ 2,225       $   6,798       $ 6,854
Non-GAAP adjustments:
Distribution and servicing costs                     (94 )          (90 )          (282 )        (299 )
Amortization of deferred sales commissions           (13 )          (20 )           (43 )         (63 )

Revenue used for operating margin
measurement                                    $   2,213        $ 2,115       $   6,473       $ 6,492


Operating margin, GAAP basis                        37.7 %         34.9 %          37.1 %        35.6 %


Operating margin, as adjusted                       40.7 %         40.1 %          39.5 %        39.6 %

Management believes operating income, as adjusted, and operating margin, as adjusted, are effective indicators of BlackRock's financial performance over time and, therefore, provide useful disclosure to investors.


Table of Contents

Financial Highlights

(continued)

(a) (continued)

Operating income, as adjusted:

U.K. lease exit costs represent costs to exit two locations in London in the third quarter 2011. The amount in third quarter 2012 represents an adjustment to the estimated costs initially recorded in third quarter 2011.

The portion of compensation expense associated with certain long-term incentive plans ("LTIP") funded or to be funded through share distributions to participants of BlackRock stock held by PNC and a Merrill Lynch & Co., Inc. ("Merrill Lynch") cash compensation contribution, has been excluded because it ultimately does not impact BlackRock's book value. The expense related to the Merrill Lynch cash compensation contribution ceased at the end of third quarter 2011. As of first quarter 2012, all of the Merrill Lynch contributions had been received.

Compensation expense associated with appreciation (depreciation) on investments related to certain BlackRock deferred compensation plans has been excluded as returns on investments set aside for these plans, which substantially offset this expense, are reported in non-operating income (expense).

Management believes operating income exclusive of these items is a useful measure in evaluating BlackRock's operating performance and helps enhance the comparability of this information for the reporting periods presented.

Operating margin, as adjusted:

Operating income used for measuring operating margin, as adjusted, is equal to operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Management believes the exclusion of such costs and commissions is useful because these costs can fluctuate considerably and revenues associated with the expenditure of these costs will not fully impact the Company's results until future periods.

Operating margin, as adjusted, allows the Company to compare performance from period-to-period by adjusting for items that may not recur, recur infrequently or may have an economic offset in non-operating income (expense). Examples of such adjustments include U.K. lease exit costs, closed-end fund launch costs, commissions paid to certain employees as compensation and fluctuations in compensation expense based on mark-to-market movements in investments held to fund certain compensation plans. The Company also uses operating margin, as adjusted, to monitor corporate performance and efficiency and as a benchmark to compare its performance with other companies. Management uses both GAAP and non-GAAP financial measures in evaluating the financial performance of BlackRock. The non-GAAP measure by itself may pose limitations because it does not include all of the Company's revenues and expenses.

Revenue used for operating margin, as adjusted, excludes distribution and servicing costs paid to related parties and other third parties. Management believes the exclusion of such costs is useful because it creates consistency in the treatment for certain contracts for similar services, which due to the terms of the contracts, are accounted for under GAAP on a net basis within investment advisory, administration fees and securities lending revenue. Amortization of deferred sales commissions is excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, substantially offset distribution fee revenue earned by the Company. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such offsetting revenues.


Table of Contents

Financial Highlights

(continued)

(b) Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted:

Non-operating income (expense), less net income (loss) attributable to non-controlling interests ("NCI"), as adjusted, is presented below. The compensation expense offset is recorded in operating income. This compensation expense has been included in non-operating income (expense), less net income
(loss) attributable to NCI, as adjusted, to offset returns on investments set aside for these plans, which are reported in non-operating income (expense), GAAP basis.

                                                  Three Months Ended               Nine Months Ended
                                                     September 30,                   September 30,
(Dollar amounts in millions)                    2012              2011           2012            2011

Non-operating income (expense), GAAP basis     $    30          ($   112 )      $    13         ($  121 )
Less: Net income (loss) attributable to
NCI                                                 13               (25 )           22             (26 )

Non-operating income (expense)(1)                   17               (87 )           (9 )           (95 )
Compensation expense related to
(appreciation) depreciation on deferred
compensation plans                                  (4 )               8             (6 )             3


Non-operating income (expense), less net
income (loss) attributable to NCI, as
adjusted                                       $    13          ($    79 )      ($   15 )       ($   92 )

(1) Net of net income (loss) attributable to NCI.

Management believes non-operating income (expense), less net income (loss) attributable to NCI, as adjusted, provides comparability of this information among reporting periods and is an effective measure for reviewing BlackRock's non-operating contribution to its results. As compensation expense associated with (appreciation) depreciation on investments related to certain deferred compensation plans, which is included in operating income, substantially offsets the gain (loss) on the investments set aside for these plans, management believes non-operating income (expense), less net income (loss) attributable to NCI, as adjusted, provides a useful measure, for both management and investors, of BlackRock's non-operating results that impact book value.


Table of Contents

Financial Highlights

(continued)

(c) Net income attributable to BlackRock, as adjusted:

Management believes net income attributable to BlackRock, as adjusted, and diluted earnings per common share, as adjusted, are useful measures of BlackRock's profitability and financial performance. Net income attributable to BlackRock, as adjusted, equals net income attributable to BlackRock, GAAP basis, adjusted for significant non-recurring items, charges that ultimately will not impact BlackRock's book value or certain tax items that do not impact cash flow.

                                             Three Months Ended                        Nine Months Ended
(Dollar amounts in millions,                   September 30,                             September 30,
except per share data)                   2012                 2011                 2012                 2011
Net income attributable to
BlackRock, GAAP basis                $         642        $         595        $       1,768        $       1,782
Non-GAAP adjustments, net of
tax:(d)
U.K. lease exit costs                           (5 )                 43                   (5 )                 43
PNC LTIP funding obligation                      3                   10                   10                   29
Merrill Lynch compensation
contribution                                    -                     2                   -                     5
Income tax changes                             (30 )               (129 )                (30 )               (178 )

Net income attributable to
BlackRock, as adjusted               $         610        $         521        $       1,743        $       1,681

Allocation of net income, as
adjusted, to common shares(e)        $         609        $         515        $       1,741        $       1,661
Diluted weighted-average common
shares outstanding(f)                  175,450,532          181,825,329          178,956,699          188,792,952
Diluted earnings per common
share, GAAP basis(f)                 $        3.65        $        3.23        $        9.87        $        9.33
Diluted earnings per common
share, as adjusted(f)                $        3.47        $        2.83        $        9.73        $        8.80

See note (a) Operating income, as adjusted, and operating margin, as adjusted, for information on U.K. lease exit costs, PNC LTIP funding obligation and Merrill Lynch compensation contribution.

During the quarter and nine months ended September 30, 2012 and 2011, income tax changes included adjustments related to the revaluation of certain deferred income tax liabilities due to tax legislation enacted in the United Kingdom and the state and local income tax effect resulting from changes in the Company's organizational structure. The resulting decrease in income taxes has been excluded from net income attributable to BlackRock, Inc., as adjusted, as these items do not have a cash flow impact and to ensure comparability among periods presented.

(d) For the quarters ended September 30, 2012 and 2011, non-GAAP adjustments were tax effected at 32.3% and 31.7%, respectively, reflecting a blended rate applicable to the adjustments. For the nine months ended September 30, 2012 and 2011, non-GAAP adjustments were tax effected at 31.4% and 32.0%, respectively.

(e) Amounts exclude net income attributable to participating securities (see below).

(f) Non-voting participating preferred shares are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations. In addition, certain unvested restricted stock units are not included in this number as they are deemed participating securities in accordance with required provisions of Accounting Standards Codification ("ASC") 260-10, Earnings per Share. For the quarters ended September 30, 2012 and 2011, average outstanding participating securities were 0.2 million and 2.2 million, respectively. For the nine months ended September 30, 2012 and 2011, average outstanding participating securities were 0.2 million and 2.3 million, respectively.


Table of Contents

Financial Highlights

(continued)

BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, the Netherlands, Japan, Hong Kong, Singapore, Australia and Germany. The Company provides a wide array of products, including passively and actively managed equities, fixed income, multi-asset class, cash management and alternatives. BlackRock offers clients diversified access to global markets through separate accounts, collective investment trusts, open-end and closed-end mutual funds, exchange-traded products, hedge funds and funds of funds. BlackRock provides global advisory services for private investment funds and retail products. The Company's non-U.S. investment funds are based in a number of domiciles and cover a range of asset classes, including equities, fixed income, cash management and alternatives.

In the United States, retail offerings include various open-end and closed-end funds, including iShares®, the global product leader in exchange-traded products for institutional, retail and high net worth investors. There were 641 iShares products at September 30, 2012 compared with 504 at December 31, 2011 globally across equities, fixed income and commodities, which trade like common stocks on 20 exchanges worldwide. iShares AUM totaled $705.8 billion at September 30, 2012. The BlackRock Global Funds, the Company's primary retail fund group offered outside the United States, are authorized for distribution in 35 jurisdictions worldwide. Additional fund offerings include structured products, real estate funds, hedge funds, hedge funds of funds, private equity funds and funds of funds, managed futures funds and exchange-traded products. These products are sold to both U.S. and non-U.S. high net worth, retail and institutional investors in a wide variety of active and passive strategies covering both equity and fixed income assets.

BlackRock's client base consists of financial institutions and other corporate clients, pension plans, charities, official institutions, such as central banks, sovereign wealth funds, supranational authorities and other government entities, high net worth individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presence both inside and outside the United States that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships. BlackRock also distributes its products and services through Merrill Lynch under a global distribution agreement in effect until January 2014. After such term, the agreement will renew for one automatic three-year extension if certain conditions are met.

BlackRock derives a substantial portion of its revenue from investment advisory and administration fees, which are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of AUM or percentages of committed capital during investment periods of certain alternative products and are affected by changes in AUM, including market appreciation or depreciation, foreign exchange translation and net subscriptions or redemptions. Net subscriptions or redemptions represent the sum of new client assets, additional fundings from existing clients (including dividend reinvestment), withdrawals of assets from, and termination of, client accounts and distributions to investors representing return of capital and return on . . .

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