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BLK > SEC Filings for BLK > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for BLACKROCK INC.

Form 10-Q for BLACKROCK INC.


8-Nov-2013

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" and 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, information and cyber 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 potential 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. BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, the Netherlands, Japan, Hong Kong, Singapore, Australia and Germany. At September 30, 2013, the Company managed $4.096 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, 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. BlackRock also 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 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.

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 ("HNW") investors. iShares AUM totaled $856.9 billion at September 30, 2013. 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, and managed futures funds. These products are sold to both U.S. and non-U.S. HNW, retail and institutional investors in a wide variety of active and passive strategies covering equity, fixed income and alternative 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, HNW 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, including the distribution of BlackRock 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.

At September 30, 2013, PNC held 20.9% of the Company's voting common stock and 21.9% of the Company's capital stock, which includes outstanding common and nonvoting preferred stock.


Table of Contents

Executive Summary



                                                 Three Months Ended                   Nine Months Ended
                                                    September 30,                       September 30,
(in millions, except per share data)           2013              2012              2013              2012
GAAP basis:
Total revenue                              $     2,472       $     2,320       $     7,403       $     6,798
Total expenses                                   1,506             1,445             4,679             4,279

Operating income                           $       966       $       875       $     2,724       $     2,519
Operating margin                                   39.1%             37.7%             36.8%             37.1%
Nonoperating income (expense), less net
income (loss) attributable to
noncontrolling interests(1)                       (17)                17                82               (9)
Income tax expense                               (219)             (250)             (715)             (742)

Net income attributable to BlackRock       $       730       $       642       $     2,091       $     1,768

Diluted earnings per common share          $      4.21       $      3.65       $     12.02       $      9.87
Effective tax rate                                 23.1%             28.1%             25.5%             29.6%

As adjusted(2):
Total revenue                              $     2,472       $     2,320       $     7,403       $     6,798
Total expenses                                   1,494             1,444             4,522             4,265

Operating income                           $       978       $       876       $     2,881       $     2,533
Operating margin                                   41.2%             40.7%             40.8%             39.5%
Nonoperating income (expense), less net
income (loss) attributable to
noncontrolling interests(1)                       (21)                13               (6)              (15)
Income tax expense                               (285)             (279)             (844)             (775)

Net income attributable to BlackRock       $       672       $       610       $     2,031       $     1,743

Diluted earnings per common share          $      3.88       $      3.47       $     11.67       $      9.73
Effective tax rate                                 29.9%             31.4%             29.4%             30.8%

Other:
Assets under management (end of period)    $ 4,096,356       $ 3,673,274       $ 4,096,356       $ 3,673,274
Diluted weighted-average common shares
outstanding(3)                                   173.4             175.5             174.0             179.0
Shares outstanding (end of period)               169.4             172.0             169.4             172.0
Book value per share(4)                    $    153.32       $    145.32       $    153.32       $    145.32
Cash dividends declared and paid per
share                                      $      1.68       $      1.50       $      5.04       $      4.50

(1) Net of net income (loss) attributable to noncontrolling interests ("NCI") (redeemable and nonredeemable).

(2) As adjusted items are described in more detail in Non-GAAP Financial Measures.

(3) Nonvoting participating preferred stock is considered to be a common stock equivalent for purposes of determining basic and diluted earnings per share calculations.

(4) Total BlackRock stockholders' equity, excluding appropriated retained earnings, divided by total common and preferred stock outstanding at September 30, 2013 and 2012, respectively.


Table of Contents

Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012

GAAP. Operating income of $966 million increased $91 million from the three months ended September 30, 2012 driven by higher base fees, and higher BlackRock Solutions and advisory revenue. The third quarter 2012 included closed-end fund launch costs of $25 million. Nonoperating income (expense), less net income
(loss) attributable to NCI decreased $34 million primarily due to lower net positive marks on investments during the current quarter compared with the prior year quarter. Income tax expense included a $64 million net noncash benefit for the third quarter 2013 and a $30 million net noncash benefit for the third quarter 2012. The net noncash benefits for both periods primarily related to the revaluation of certain deferred income tax liabilities, including legislation enacted in the United Kingdom and domestic state and local income tax changes. Earnings per diluted common share rose $0.56, or 15%, compared with the quarter ended September 30, 2012 due to higher net income and the benefit of share repurchases.

As Adjusted. Operating income of $978 million and operating margin of 41.2% increased $102 million and 50 bps, respectively, from the third quarter 2012. Nonoperating income (expense) decreased $34 million primarily due to the items explained above. Income tax expense on an as adjusted basis for the current quarter and prior year quarter excluded the $64 million and $30 million noncash benefits, respectively. Earnings per diluted common share rose $0.41, or 12%, from the prior year quarter.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

GAAP. Operating income of $2,724 million increased $205 million from the nine months ended September 30, 2012. In the second quarter 2013, as a result of an initial public offering of PennyMac Financial Services, Inc. (the "PennyMac IPO"), the Company recorded a noncash, nonoperating pre-tax gain of $39 million related to the carrying value of its equity method investment. Subsequent to the PennyMac IPO, the Company made a charitable contribution of 6.1 million units of its equity method investment with a fair value of $124 million to a new donor advised fund (the "Charitable Contribution"). In connection with the Charitable Contribution, the Company also recorded a noncash, nonoperating pre-tax gain of $80 million related to the contributed investment. For further information, see Note 10, Other Assets, to the condensed consolidated financial statements.

Operating income reflects growth in base fees and strong performance fees, partially offset by higher expenses, primarily due to the $124 million expense related to the Charitable Contribution and higher revenue-related expenses. The results for the nine months ended September 30, 2013 also included $43 million of organizational alignment costs. Nonoperating income (expense), less net income (loss) attributable to NCI increased $91 million due to the $39 million pre-tax gain related to the PennyMac IPO and the $80 million gain related to the Charitable Contribution, partially offset by lower net positive marks on investments during the nine months ended September 30, 2013 compared with the prior year period. Income tax expense included the $64 million net noncash benefit for the nine months ended September 30, 2013 and the $30 million net noncash benefit for the nine months ended September 30, 2012 described above. In addition, the nine months ended September 30, 2013 included an approximately $57 million tax benefit recognized in connection with the Charitable Contribution and a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards. Earnings per diluted common share rose $2.15, or 22%, compared with the prior year period due to higher net income and the benefit of share repurchases.


Table of Contents

As Adjusted. Operating income of $2,881 million and operating margin of 40.8% increased $348 million and 130 bps, respectively, from the nine months ended September 30, 2012. The current period results included the previously mentioned organizational alignment costs of $43 million and the $39 million pre-tax gain related to the PennyMac IPO. Income tax expense on an as adjusted basis excluded the $64 million net noncash benefit for the nine months ended September 30, 2013 and the $30 million net noncash benefit for the nine months ended September 30, 2012 described above. Earnings per diluted common share rose $1.94, or 20%, from the nine months ended September 30, 2012. The financial impact related to the Charitable Contribution has been excluded from as adjusted results for the nine months ended September 30, 2013.

See Non-GAAP Financial Measures for further information on as adjusted items.

For further discussion of BlackRock's revenue, expenses, nonoperating results and income tax expense, see Discussion of Financial Results herein.

Non-GAAP Financial Measures

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 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 nonrecurring or transactions that ultimately will not impact BlackRock's book value, as indicated in the table below. 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

(a) (continued)

Operating income, as adjusted, and operating margin, as adjusted

                                          Three Months Ended                 Nine Months Ended
                                             September 30,                     September 30,
(Amounts in millions)                    2013             2012             2013             2012
Operating income, GAAP basis                $966             $875           $2,724           $2,519
Non-GAAP expense adjustments:
PNC LTIP funding obligation                    8                5               25               16
Charitable Contribution                        -                -              124                -
U.K. lease exit costs                          -              (8)                -              (8)
Compensation expense related to
appreciation (depreciation) on
deferred compensation plans                    4                4                8                6

Operating income, as adjusted                978              876            2,881            2,533
Closed-end fund launch costs                   -               22               16               22
Closed-end fund launch commissions             -                3                2                3

Operating income used for
operating margin measurement                $978             $901           $2,899           $2,558

Revenue, GAAP basis                       $2,472           $2,320           $7,403           $6,798
Non-GAAP adjustments:
Distribution and servicing costs            (85)             (94)            (266)            (282)
Amortization of deferred sales
commissions                                 (14)             (13)             (38)             (43)

Revenue used for operating margin
measurement                               $2,373           $2,213           $7,099           $6,473

Operating margin, GAAP basis               39.1%            37.7%            36.8%            37.1%

Operating margin, as adjusted              41.2%            40.7%            40.8%            39.5%

• Operating income, as adjusted, includes non-GAAP expense adjustments. In the third quarter 2012, non-GAAP adjustments included U.K. lease exit costs incurred in the third quarter 2012 that represent an adjustment related to the costs initially recorded in the third quarter 2011 related to costs to exit two locations in London. During the nine months ended September 30, 2013, the $124 million expense related to the Charitable Contribution has been excluded from operating income, as adjusted, due to its nonrecurring nature and because the noncash, nonoperating pre-tax gain of $80 million related to the contributed PennyMac investment is reported in nonoperating income (expense). 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 has been excluded because it ultimately does not impact BlackRock's book value. 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 nonoperating 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.


Table of Contents

(a) (continued)

• 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 nonoperating income (expense). 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 BlackRock's financial performance. The non-GAAP measure by itself may pose limitations because it does not include all of the Company's revenues and expenses.

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 related commissions. Management believes the exclusion of such costs and related 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.

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 the Company earns. 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.

(b) Nonoperating income (expense), less net income (loss) attributable to noncontrolling interests, as adjusted, is presented below. The compensation expense offset is recorded in operating income. This compensation expense has been included in nonoperating 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 nonoperating income (expense), GAAP basis.

Management believes nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, provides comparability of information among reporting periods and is an effective measure for reviewing BlackRock's nonoperating contribution to 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 nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, provides a useful measure, for both management and investors, of BlackRock's nonoperating results that impact book value. During the nine months ended September 30, 2013, the noncash, nonoperating pre-tax gain of $80 million related to the contributed PennyMac investment has been excluded from nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted due to its nonrecurring nature and because the more than offsetting associated Charitable Contribution expense of $124 million is reported in operating income.


Table of Contents

(b) (continued)

Nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted

                                            Three Months Ended                     Nine Months Ended
                                              September 30,                          September 30,
(Amounts in millions)                    2013                2012               2013               2012
Nonoperating income (expense),
GAAP basis                            ($       18 )        $      30         $       92          $      13
Less: Net income (loss)
attributable to NCI                            (1 )               13                 10                 22

Nonoperating income (expense),
net of NCI                                    (17 )               17                 82                 (9 )
Gain related to the
Charitable Contribution                        -                  -                 (80 )               -
Compensation expense related to
(appreciation) depreciation on
deferred compensation plans                    (4 )               (4 )               (8 )               (6 )

Nonoperating income (expense),
less net income (loss)
attributable to NCI, as
adjusted                              ($       21 )        $      13         ($       6 )        ($     15 )

(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 nonrecurring items, charges that ultimately will not impact BlackRock's book value or certain tax items that do not impact cash flow.

See note (a) Operating income, as adjusted, and operating margin, as adjusted, for information on the PNC LTIP funding obligation, Charitable Contribution and the U.K. lease exit costs.

The nine months ended September 30, 2013 included a tax benefit of approximately $57 million recognized in connection with the Charitable Contribution. The tax benefit has been excluded from net income attributable to BlackRock, as adjusted, due to the nonrecurring nature of the Charitable Contribution. The three and nine months ended September 30, 2013 and 2012 reflected adjustments related to the revaluation of certain deferred income tax liabilities, including legislation enacted in the United Kingdom and domestic state and local income tax changes. The resulting decrease in income taxes has been excluded from net income attributable to BlackRock, as adjusted, as these items will not have a cash flow impact and to ensure comparability among periods presented.

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