| Item 1. | Item 1. Financial Statements (continued) | 3. | Derivatives and Hedging |
From time to time,3. Derivatives and Hedging
During 2007, the Company may consolidateentered into a sponsored investment product that holds freestanding derivative financial instruments for trading purposes. The Company recognizes derivative instruments at fair value and records the changes in fair value in non-operating income on the condensed consolidated statementsseries of income. BlackRock may also enter into derivative financial instrumentstotal return swaps to economically hedge market price exposures with respect to seed investments in sponsored products orinvestment products. At September 30, 2007, the outstanding total return swaps had an aggregate notional value of approximately $82,000 and net losses of approximately $210 and $3,880 for the three and nine months ended September 30, 2007, respectively, which were included in non-operating income in the Company’s condensed consolidated statements of income. During first quarter 2007, the Company entered into a forward contract to sell 1.2 billion yen in August 2007 as a hedge against the foreign currency exchange risk.risk associated with a sponsored investment product in Japan. The change in value of the forward contract substantially offsets the change in the value associated with foreign exchange related to the Company’s investment in the sponsored investment fund. In August 2007 and November 2007, the forward contract was extended through November 2007 and December 2007, respectively. For the three and nine months ended March 31,September 30, 2007, the change in fair value of the forward contracts were immaterial. For the nine months ended September 30, 2007 and 2006, the Company did not hold any derivatives designated in a formal hedge relationship under SFAS No. 133,Derivative Instruments and Hedging Activities., as amended. During first quarter 2007, the Company entered into a series of total return swaps to economically hedge against changes in fair value of its investments in certain sponsored investment products. At March 31, 2007, the outstanding total return swaps had an aggregate notional value of approximately $65,000 and resulted in a net loss of approximately $292 for the three months ended March 31, 2007.4. Earnings Per Share
During first quarter 2007, the Company also entered into a forward contract to sell 1.2 billion yen in August 2007 as a hedge against the foreign exchange risk associated with a consolidated sponsored investment product in Japan. The change in value in the forward contract is expected to offset the change in the value associated with foreign exchange, related to the Company’s investment in the sponsored investment fund. For the three months ended March 31, 2007, the change in fair value of the forward contract was immaterial to the Company’s condensed consolidated statement of income.
The following table sets forth the computation of basic and diluted earnings per share: | | | | Three Months Ended March 31, | | Three months ended
September 30, | | Nine months ended
September 30, | | | | 2007 | | 2006 | | 2007 | | 2006 | | 2007 | | 2006 | Net income | | $ | 195,388 | | $ | 70,862 | | $ | 255,200 | | $ | 18,914 | | $ | 672,832 | | $ | 153,179 | | | | | | | | | | | | | | | Basic weighted-average shares outstanding | | | 128,809,726 | | | 64,074,888 | | | 128,161,027 | | | 64,761,447 | | | 128,501,575 | | | 64,326,752 | | Dilutive potential shares from stock options and restricted stock units | | | 2,565,696 | | | 2,230,015 | | | 2,502,798 | | | 2,208,829 | | | 2,376,400 | | | 2,074,384 | Dilutive potential shares from convertible debt | | | 520,148 | | | 426,657 | | | 652,630 | | | 507,260 | | | 656,213 | | | 502,417 | | | | | | | | | | | | | | Dilutive weighted-average shares outstanding | | | 131,895,570 | | | 66,731,560 | | | 131,316,455 | | | 67,477,536 | | | 131,534,188 | | | 66,903,553 | | | | | | | | | | | | | | | Basic earnings per share | | $ | 1.52 | | $ | 1.11 | | $ | 1.99 | | $ | 0.29 | | $ | 5.24 | | $ | 2.38 | | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 1.48 | | $ | 1.06 | | $ | 1.94 | | $ | 0.28 | | $ | 5.12 | | $ | 2.29 | | | | | | | | | | | | | | |
During the three and nine months ended September 30, 2007, 1,545,735 stock options were excluded from the calculation of diluted earnings per share because to include them would have an anti-dilutive effect. - 12 -
PART I — FINANCIAL INFORMATION (continued) | Item 1. | Financial Statements (continued) |
4. Earnings Per Share (continued) Due to the similarities in terms between BlackRockthe Company’s series A non-voting participating preferred stock and the Company’s common stock, the Company considers the series A non-voting participating preferred stock to be common stock for purposes of earnings per share calculations. As such, the Company has included the outstanding series A non-voting participating preferred stock in the calculation of weighted average basic shares outstanding for the three and nine months ended March 31, 2007. - 11 -
PART I – FINANCIAL INFORMATION (continued)September 30, 2007 and September 30, 2006.
Item 1. Financial Statements (continued)5. Stock-Based Compensation
Share-Based Payment | 5. | Stock-Based Compensation |
The Company adopted SFAS No. 123R,Share-Based Payment, on January 1, 2006, using the modified-prospective transition approach, with no cumulative effect on net income. The total stock-based compensation expense associated with stock-based employee compensation plans was $142,329 and $78,567 for the nine months ended September 30, 2007 and 2006, respectively. BlackRock, Inc. Long-Term Incentive Plan (“LTIP”)Plans
The BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan (“LTIP”(the “2002 LTIP Awards”) permitted the grant of up to $240,000 in deferred compensation awards, (the “LTIP Awards”), of which the Company previously granted approximately $230,300. Approximately $210,000 of the 2002 LTIP awardsAwards were paid in January 2007. The awards2002 LTIP Awards were payable approximately 16.7% in cash and the remainder in BlackRock stock contributed by PNC and distributed to plan participants. Approximately $20,000 of previously issued 2002 LTIP participants. Under a related share surrender agreement, PNC committed to provide up to 4,000,000 sharesAwards will result in the settlement of BlackRock common stock to fund compensation programs. shares held by PNC through 2010 at a conversion price approximating the market price on the settlement date. The paymentsettlement of the 2002 LTIP Awards in January 2007 LTIP awards resulted in the surrender by PNC of approximately 1,000,000 shares of BlackRock common stock. The remaining approximately 3,000,000 shares which were committed and are available to support future long-term retention and incentive programs but are not subject to surrender by PNC until the programs are approved by the Management Development and Compensation Committee and awards are made in accordance with the share surrender agreement. The Company granted additional long-term incentive awards in January 2007 which included 1,540,050 restricted stock units that are intended to be settled using these shares. Under the terms of the 2002 LTIP Awards, employees elected to put approximately 95% of the stock portion of the awards back to the Company at a total fair market value of approximately $165,700. On the payment date, the Company recorded a capital contribution from PNC for the amount of shares funded by PNC. For the shares not put back to the Company, no dilution resulted from the delivery of stock pursuant to the awards since they were funded by shares held by PNC and were issued and outstanding at December 31, 2006. Put elections made by employees were accounted for as treasury stock repurchases and are accretive to the Company’s earnings per share. The shares repurchased have been retained as treasury stock. Share-Based Payment
Under a related share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock common stock to fund long term incentive programs. The Company adopted SFAS No. 123R,Share-Based Payment, ongranted additional long-term incentive awards in January 1, 2006,2007 which included 1,540,050 restricted stock units that are intended to be settled using BlackRock shares held by PNC in accordance with the modified-prospective transition approach,share surrender agreement. Of the committed shares available for future awards, BlackRock is able to grant up to approximately $11,000 in additional awards in the period prior to September 29, 2011 and additional awards to be settled with no cumulative effect on net income. The total stock-based compensation expense before taxes associated with stock-based employee compensation plans was $40,252 and $11,213 for the three months ended March 31, 2007 and 2006, respectively.remaining shares in periods subsequent to September 29, 2011. - 1213 -
PART I –— FINANCIAL INFORMATION (continued) | Item 1. | Item 1. Financial Statements (continued) |
5. Stock-Based Compensation (continued) | 5. | Stock-Based Compensation (continued) |
Stock Options Options outstanding as of March 31,at September 30, 2007 and changes during the threenine months ended March 31,September 30, 2007 were as follows: | | | | | | | | | | Outstanding at | | Shares Under Option | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | December 31, 2006 | | 4,457,669 | | | $ | 36.90 | | $ | 512,624 | Granted | | 1,545,735 | | | $ | 167.76 | | | — | Exercised | | (860,084 | ) | | $ | 37.42 | | $ | 102,255 | | | | | | | | | | | March 31, 2007 | | 5,143,320 | | | $ | 76.14 | | $ | 430,030 | | | | | | | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of fiscal 2007 of $159.75 and the exercise price, multiplied by the number of in-the-money options) that all option holders would have received had they exercised their options on March 31, 2007. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the three months ended March 31, 2007 and 2006 was $102,255 and $5,769, respectively.
| | | | | | | Outstanding at | | Number of
Options | | | Weighted
Average
Exercise
Price | December 31, 2006 | | 4,457,669 | | | $ | 36.90 | Granted | | 1,545,735 | | | $ | 167.76 | Exercised | | (1,192,335 | ) | | $ | 37.22 | | | | | | | | September 30, 2007 | | 4,811,069 | | | $ | 78.86 | | | | | | | |
As of March 31,September 30, 2007, the Company had 3,597,585 shares under option3,265,334 outstanding options which were exercisable.exercisable at a weighted average exercise price of $36.78. The weighted average remaining life of stock options outstanding as of September 30, 2007 was 6.1 years. The total intrinsic value of stock options exercised during the nine months ended September 30, 2007 was $155,428. As of September 30, 2007, the intrinsic value of in-the-money exercisable and outstanding options was $446,135 and $454,869, respectively. On January 31, 2007, the Company awarded options to purchase 1,545,735 shares of BlackRock common stock to certain executives as long-term incentive compensation. The options vest on September 29, 2011, provided that the Company has actual GAAP earnings per share of at least $5.20 in 2009, $5.52 in 2010 or $5.85 in 2011. An alternative performance hurdle provides for vesting of the awards based on specific targets for the Company’s earnings growth performance to peers over the term of the awards. The options have a strike price of $167.76, which was based upon the closing price of the shares on the grant date. Fair value, as calculated in accordance with a modified Black-Scholes model, was approximately $45.88 per option. The fair value of the options is being amortized over the vesting period as exceeding the performance hurdles werewas deemed to be probable of occurring. Assumptions used in calculating the calculation of grant-date fair value for the stock options issued in January 2007 were as follows: | | | | | Exercise Price
| | $167.76 | Expected Term (years)
| | 7.335 | Expected Volatility
| | 24.5% | Dividend Yield
| | 1.0%-4.44% | Risk Free Interest Rate
| | 4.8% | | | |
| | | | | Exercise Price | | $ | 167.76 | | Expected Term (years) | | | 7.335 | | Expected Volatility | | | 24. | 5% | Dividend Yield | | | 1.0%-4.4 | 4% | Risk Free Interest Rate | | | 4. | 8% |
- 1314 -
PART I –— FINANCIAL INFORMATION (continued) Item 1. Financial Statements (continued)
| 5.Item 1. | Stock-Based CompensationFinancial Statements (continued) |
5. Stock-Based Compensation (continued) Stock Options (continued) The Company’s expected option term was derived using the mathematical average between the earliest vesting date and the option expiration date in accordance with Securities and Exchange CommissionSEC Staff Accounting Bulletin No. 107. The Company’s expected stock volatility assumption was based upon historical stock price fluctuations of BlackRock’s common stock. The dividend yield assumption was derived using estimated dividends over the expected term and the stock price at the date of the grant. The risk free interest rate is based on the U.S. Treasury yield at date of grant. As of September 30, 2007, the Company had $60,841 in unrecognized stock-based compensation expense related to unvested stock options. The Company expects to recognize that cost over a remaining weighted-average period of 4.0 years. Restricted Stock and Stock Units Unvested restricted stock and stock unit awards at March 31,September 30, 2007 and changes during the threenine months then ended were as follows: | Outstanding at | | Unvested Restricted Stock and Units | | Weighted Average Grant Date Fair Value | | Unvested
Restricted
Stock and
Units | | Weighted
Average
Grant Date
Fair Value | December 31, 2006 | | 1,516,063 | | | $ | 133.44 | | 1,516,063 | | | $ | 133.44 | Granted | | 2,447,418 | | | $ | 168.48 | | 2,517,718 | | | $ | 168.12 | Forfeited | | | (80,441 | ) | | $ | 161.37 | Vested | | (105,036 | ) | | $ | 126.50 | | (136,955 | ) | | $ | 126.45 | | | | | | | | | | | | September 30, 2007 | | | 3,816,385 | | | $ | 155.98 | | | | | | | | March 31, 2007 | | 3,858,445 | | | $ | 155.84 | | | | | | | | | | | | | |
On January 25, 2007, the Company issued 901,609 restricted stock units (“RSUs”) to employees in conjunction with their annual service awards. The RSU awards vest 33.3% per yearover three years through January 2010. The value of the RSUs was calculated using BlackRock’s closing stock price on the date of grant, or $169.70. The grant date fair value of the RSUs is being amortized into earnings on the straight-line method over the requisite service period, net of expected forfeitures, for each separately vesting portion of the award as if the award was, in substance, multiple awards. On January 31, 2007, the Company issued 1,540,050 restricted stock units (“RSUs”)RSUs to employees as long-term incentive compensation. The RSU awards vest on September 29, 2011 provided that BlackRock has actual GAAP earnings per share of at least $5.20 in 2009, $5.52 in 2010 or $5.85 in 2011. An alternative performance hurdle provides for vesting of the awards based on specific targets for the Company’s earnings growth performance to peers over the term of the awards. The value of the RSUs was calculated using BlackRock’s closing stock price on the date of grant, or $167.76. The grant-date fair value of the RSUs is being amortized into earnings on the straight-line method over the vesting period, net of expected forfeitures. - 15 -
PART I — FINANCIAL INFORMATION (continued) | Item 1. | Financial Statements (continued) |
5. Stock-Based Compensation (continued) Restricted Stock and Stock Units (continued) At March 31,September 30, 2007, there was $487,299$434,875 in unrecognized stock-based compensation expense related to nonvested restricted stock and restricted stock unitunvested RSU awards. The Company expects to recognize that cost over a remaining weighted-average period of 4.03.6 years. - 14 -
PART I – FINANCIAL INFORMATION (continued)6. Goodwill
Item 1. Financial Statements (continued)
During the threefirst nine months ended March 31,of 2007, the Company increasedrecorded goodwill adjustments of $197,504 primarily related to the MLIM transaction as the result of the Company’s ongoing review of its purchase price allocation of the net assets acquired in the MLIM transaction. Additional net deferred tax liabilities acquiredtotaling $157,283 were recorded primarily as a result of $199,018 of adjustments to changes in expected applicable state tax rates, offset by $35,549 related to additional expected compensation deductions and $6,186 of other tax-related adjustments. Additionally, the Company established a reserve and the related deferred tax asset for an out-of-market lease assumed in the MLIM transaction in the net amount of $33,244 as the result of a $68,793 adjustment to the expected state tax rate applicable to such reserves, offset by $35,549 of additional federal income tax compensation deductions expected to be received in the future.$23,166.. 7. Borrowings Short Term Borrowing: In December 2006, the Company entered into aan unsecured revolving credit agreementfacility with a syndicate of banking institutions with an initial borrowing capacity of $600,000institutions. This facility, as amended in February 2007 (the “Credit Agreement”“2006 facility”). The term of the facility is five years and interest currently accrues at the applicable London Interbank Offer Rate (“LIBOR”) plus 0.20%. The Company pays a commitment fee of 0.04% per annum on the undrawn balance. Additionally, for each day that the total amount outstanding is greater than 50% of the total commitments by all lenders,, permitted the Company pays a utilization fee of 0.05% per annum on the total amount outstanding. Financial convenants in the Credit Agreement require BlackRock to maintain a maximum debt/EBITDA ratio of 3.0 and a minimum EBITDA/interest expense ratio of 4.0. As of March 31,borrow up to $800,000. In August 2007, the Company was in compliance with such covenants. Theterminated the 2006 facility is intended to fund various investment opportunities as well as BlackRock’s near-term operating cash requirements. In February 2007,and entered into a new five year $2,500,000 unsecured revolving credit facility (the “2007 facility”), which permits the Company increased the maximum capacity of the facility to $800,000. The Credit Agreement allows BlackRock to request an additional $200,000$500,000 of borrowing capacity, subject to lender credit approval, up to a maximum of $1,000,000.$3,000,000. The 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to EBITDA, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied at September 30, 2007.
The 2007 facility was used to refinance the 2006 facility and will provide back-up liquidity, fund ongoing working capital for general corporate purposes and fund various investment opportunities. At March 31,September 30, 2007, the Company had $550,000$450,000 outstanding under the 2007 facility with interest rates between 5.105% to 5.845% and maturity dates between October 2007 and September 2008. Long Term Borrowings: In September 2007, the Company issued $700,000 in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “Notes”). The Notes were issued at a discount of $5,628, which is being amortized over their ten-year term. The Company incurred approximately $4,000 in debt issuance costs, which are included in other assets on the facility. Duringcondensed consolidated statements of financial condition and are being amortized over the term of the Notes. A portion of the net proceeds of the Notes was used to fund the initial cash payment for its acquisition of the fund of funds business of Quellos Group, LLC (“Quellos”) and the remainder will be used for general corporate purposes. - 16 -
PART I — FINANCIAL INFORMATION (continued) | Item 1. | Financial Statements (continued) |
8. Deferred Mutual Fund Sales Commissions In April 2007, the Company repaid $80,000assumed from a subsidiary of PNC certain distribution financing arrangements to receive certain cash flows from sponsored open-ended mutual funds sold without a front-end sales charge (“back-end load shares”). The fair value of these assets was capitalized and is being amortized over periods up to six years. The Company also assumed the rights to related distribution and service fees from certain funds and contingent deferred sales commissions upon shareholder redemption of certain back-end load shares prior to the end of the contingent deferred sales period. The Company paid $33,996 in exchange for the above rights. 9. Termination of Fund Administration and Servicing Arrangements with Merrill Lynch Effective September 28, 2007, the Company insourced certain closed-end fund administration and servicing arrangements in place with Merrill Lynch & Co., Inc. (“Merrill Lynch”). In connection with this insourcing, the Company terminated 40 agreements with Merrill Lynch with original terms ranging from 30 to 40 years and made a one-time payment to Merrill Lynch of approximately $128,114 on October 31, 2007. The payment is reported as “termination of closed-end fund administration and servicing arrangements” on the facilitycondensed consolidated statements of income and extendedis recorded in “due to affiliates” on the remaining balance into Maycondensed consolidated statements of financial condition. As a result of these terminations, Merrill Lynch was discharged of any further duty to provide the services and BlackRock was discharged from any further payment obligations.. 10. Income Taxes In the third quarter of 2007, the United Kingdom and Germany enacted legislation which will reduce the corporate income tax in those jurisdictions, effective in April and January 2008, respectively. Accordingly, the Company revalued its deferred tax liabilities attributable to the two jurisdictions. The revaluation of deferred taxes resulted in a tax benefit of $51,400 in the third quarter of 2007. - 17 -
PART I — FINANCIAL INFORMATION (continued) | 8.Item 1. | SupplementalFinancial Statements of Cash Flow Information(continued) |
11. Supplemental Cash Flow Information Supplemental disclosure of cash flow information is as follows: | | | | Three Months Ended March 31, | | Nine Months Ended
September 30, | | | | 2007 | | 2006 | | 2007 | | 2006 | Cash paid for interest | | $ | 6,707 | | $ | 3,281 | | $ | 22,910 | | $ | 6,876 | | | | | | | | | | | Cash paid for income taxes | | $ | 50,315 | | $ | 29,305 | | $ | 257,410 | | $ | 127,364 | | | | | | | | | | | | | | | | |
Supplemental schedule of non-cash investing and financing transactions is as follows: | | | | | | | | | | Nine Months Ended
September 30, | | | | 2007 | | 2006 | Common and preferred stock issued in MLIM Transaction | | $ | — | | $ | 9,577,100 | Issuance of treasury stock | | $ | 102,735 | | $ | 13,278 | Decrease in investments due to net deconsolidations of sponsored investment funds | | $ | 183,442 | | $ | 7,638 | Decrease in non-controlling interest due to net deconsolidations of sponsored investment funds | | $ | 210,252 | | $ | 8,881 | PNC LTIP capital contribution | | $ | 174,932 | | $ | — |
- 1518 -
PART I –— FINANCIAL INFORMATION (continued) Item 1. Financial Statements (continued)
| 8.Item 1. | SupplementalFinancial Statements of Cash Flow Information (continued) |
Supplemental schedule of non-cash transactions is as follows:12. Commitments and Contingencies
| | | | | | | | | | Three Months Ended March 31, | | | | 2007 | | 2006 | Reissuance of treasury stock at a discount to its cost basis | | $ | 63,953 | | $ | 6,601 | Decrease in investments due to deconsolidation of sponsored investment funds | | $ | 225,600 | | $ | — | Increase in investments due to consolidation of sponsored investment funds | | $ | 146,953 | | $ | — | Decrease in non-controlling interest due to deconsolidation of sponsored investment funds | | $ | 248,389 | | $ | — | Increase in non-controlling interest due to consolidation of sponsored investment funds | | $ | 147,135 | | $ | — | PNC LTIP capital contribution | | $ | 173,497 | | $ | — | Accrued fee-sharing payment | | $ | — | | $ | 50,000 | | | | | | | | |
| 9. | Commitments and Contingencies |
Legal Proceedings BlackRock has received subpoenas from various U.S. federal and state governmental and regulatory authorities and various information requests from the SEC in connection with industry-wide investigations of U.S. mutual fund matters. BlackRock is continuing to cooperate fully in these matters. From time to time, BlackRock is subject to other regulatory inquiries and proceedings. The Company, including a number of the legal entities acquired in the MLIM transaction,Transaction, has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation and regulatory proceedings arising in connection with BlackRock’s activities. Additionally, the investment funds that the Company manages are subject to lawsuits, any of which could harm the investment returns of the applicable fund or result in managersthe Company being liable to the funds for any resulting damages. While Merrill Lynch has agreed to indemnify the Company for certain of the pre-closing liabilities related to legal and regulatory proceedings acquired in the MLIM transaction,Transaction, entities that BlackRock now owns may be named as defendants in these matters and the Company’s reputation may be negatively impacted. Management, after consultation with legal counsel, does not currently anticipate that the aggregate liability, if any, arising out of such regulatory matters or lawsuits will have a material adverse effect on BlackRock’s financial position, although at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations and cash flows in any future reporting period. - 16 -
PART I – FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
| 9. | Commitments and Contingencies (continued) |
Indemnifications In the ordinary course of business, BlackRock enters into contracts with clients and third parties pursuant to which the third parties provide services on behalf of BlackRock.party service providers. In many of the contracts, BlackRock agrees to indemnify the client or third party service provider underin certain circumstances. The terms of thesuch indemnity obligations vary from contract to contract and the amount of indemnification liability, if any, cannot be determined. Under the Transaction Agreement inIn conjunction with the MLIM transaction,Transaction, the Company has agreed to indemnify Merrill Lynch for losses it may incur arising from (1) inaccuracy in or breach of representations or warranties related to the Company’s SEC reports, absence of undisclosed liabilities, litigation and compliance with laws and government regulations, without giving effect to any materiality or material adverse effect qualifiers, (2) any alleged or actual breach, failure to comply, violation or other deficiency with respect to any regulatory or fiduciary requirements relating to the operation of BlackRock’s business, (3) any fees or expenses incurred or owed by BlackRock to any brokers, financial advisors or comparable other person retained or employed by BlackRock in connection with the transactions,transaction, and (4) certain specified tax covenants.
Merrill Lynch is not entitled to indemnification for any losses arising from the circumstances and events described in (1) above until the aggregate losses (other than individual losses less than $100) of Merrill Lynch exceed $100,000. In the event that such losses exceed $100,000, Merrill Lynch is entitled to be indemnified only for such losses (other than individual losses less than $100) in excess of $100,000. Merrill Lynch is not entitled to indemnification payments pursuant to (1) above in excess of $1,600,000 or for claims made more than 18 months from the closing of the MLIM Transaction. These limitations do not apply to losses arising from the circumstances and events described in (2), (3) and (4) above, which survive indefinitely. - 19 -
PART I — FINANCIAL INFORMATION (continued) | Item 1. | Financial Statements (continued) |
12. Commitments and Contingencies (continued) Indemnifications (continued) Management believes that the likelihood of any liability arising under these indemnification provisions to be remote and, as such, no liability has been recorded on the condensed consolidated statements of financial condition. Management cannot estimate any potential maximum exposure due both to the remoteness of any potential claims and the fact that items that would be included within any such calculated claim would be beyond the control of BlackRock. 13. Subsequent Events In AprilJune 2007, the Company purchased from a subsidiaryannounced that it had entered into an asset purchase agreement under which it would acquire certain assets of PNC rightsthe fund of funds business of Quellos for up to receive certain$1,720,000. This transaction closed on October 1, 2007, and BlackRock paid Quellos $562,500 in cash flows from sponsored mutual funds without a front-end sales charge (“back-end load shares”).and $187,500 in BlackRock common stock. The fair value of these assetscommon stock will be capitalizedheld in escrow for up to three years and subsequently amortizedis available to satisfy certain indemnification obligations of Quellos under the asset purchase agreement. In addition, Quellos may receive up to an additional $970,000 in cash and stock over periods between onethree and seven years. The Company also acquired the rights to related distribution and service fees froma half years contingent upon certain funds and contingent deferred sales commissions (“CDSCs”) upon shareholder redemption of certain back-end load shares. The purchase price of such rights was $33,996.operating measures. In April 2003, the Company acquired 80% of an investment manager of a fund of hedge funds. On October 1, 2007, the StateCompany paid $27,000 to purchase the remaining 20% of New York enacted income tax law changes which will impact BlackRock’s income tax expense. The Company is in the process of determining the impact of such changes, which could be material.investment manager. - 1720 -
PART I –— FINANCIAL INFORMATION (continued) Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
| 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 factors previously disclosed in BlackRock’s 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 in political, economic or industry conditions, the interest rate environment 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, including its separately managed accounts and the investments of the former MLIM business:products; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions or divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock, Merrill Lynch or PNC; (11) terrorist activities and international hostilities, which may adversely affect the general economy, domestic and local financial and capital markets, specific industries, and BlackRock; (12) the ability to attract and retain highly talented professionals; (13) fluctuations in the carrying value of BlackRock’s investments; (14) fluctuations in foreign currency exchange rates, which may adversely affect the value of advisory and administration fees earned by BlackRock and the carrying value of certain investments denominated in foreign currencies; (14)(15) the impact of changes to tax legislation and, generally, the tax position of the Company; (15)(16) BlackRock’s ability to successfully integrate the MLIM businessand Quellos businesses with its existing business; (16)(17) the ability of BlackRock to effectively manage the former MLIM and Quellos assets along with its historical assets under management; and (17)(18) BlackRock’s success in maintaining the distribution of its products. - 1821 -
PART I –— FINANCIAL INFORMATION (continued) | Item 2. | Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview BlackRock, Inc. (“BlackRock” or the “Company”) is one of the largest publicly traded investment management firms in the United States with $1.154$1.3 trillion of assets under management (“AUM”) at March 31,September 30, 2007. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of fixed income, cash management, equity and alternative investment separate accounts and mutual funds. In addition, BlackRock provides risk management, investment system outsourcing and financial advisory services to institutional investors. On September 29, 2006, BlackRock and Merrill Lynch & Co., Inc. (“Merrill Lynch”) closed a transaction pursuant to which Merrill Lynch contributed its investment management business, Merrill Lynch Investment Managers (“MLIM”), to BlackRock in exchange for an aggregate of 65 million shares of newly issued BlackRock common and non-voting participating preferred stock (the “MLIM Transaction”). Immediately following the closing,At September 30, 2007, Merrill Lynch owned 45%approximately 45.4% of the Company’s voting common stock and approximately 49.3%49.6% of the total capital stock on a fully diluted basis of the combined companyCompany and The PNC Financial Services Group, Inc. (“PNC”) owned approximately 34%33.7% of the combined company (as compared with 69% immediately prior to the closing).capital stock. - 22 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
BlackRock, Inc. Financial Highlights (Dollar amounts in thousands, except per share data) The following table summarizes BlackRock’s operating performance for each of the three months ended March 31,September 30, 2007, June 30, 2007 and September 30, 2006 and December 31,the nine months ended September 30, 2007 and September 30, 2006. Certain prior yearperiod amounts have been reclassified to conform to 2007 presentation: BlackRock, Inc.
Financial Highlights
(Dollar amounts in thousands, except share data)
(unaudited)the current presentation.
| | | | Three months ended | | Variance vs. | | Three months ended | | Variance vs. | | | | | March 31, | | December 31, | | March 31, 2006 | | December 31, 2006 | | September 30, | | June 30, | | September 30, 2006 | | June 30, 2007 | | | | | 2007 | | 2006 | | 2006 | | Amount | | % | | Amount | | % | | 2007 | | 2006 | | 2007 | | Amount | | % | | Amount | | % | | Total revenue | | $ | 1,005,374 | | $ | 395,660 | | $ | 1,018,525 | | $ | 609,714 | | 154.1% | | $ | (13,151) | | (1.3)% | | $ | 1,298,079 | | | $ | 323,058 | | | $ | 1,097,023 | | | $ | 975,021 | | 301.8 | % | | $ | 201,056 | | | 18.3 | % | Total expense | | $ | 733,143 | | $ | 295,633 | | $ | 772,443 | | $ | 437,510 | | 148.0% | | $ | (39,300) | | (5.1)% | | Total expenses | | | $ | 1,026,361 | | | $ | 294,050 | | | $ | 815,022 | | | $ | 732,311 | | 249.0 | % | | $ | 211,339 | | | 25.9 | % | Operating income(a) | | $ | 272,231 | | $ | 100,027 | | $ | 246,082 | | $ | 172,204 | | 172.2% | | $ | 26,149 | | 10.6% | | $ | 271,718 | | | $ | 29,008 | | | $ | 282,001 | | | $ | 242,710 | | NM | | | $ | (10,283 | ) | | (3.6 | )% | Operating income, as adjusted(a) | | $ | 296,360 | | $ | 157,274 | | $ | 318,345 | | $ | 139,086 | | 88.4% | | $ | (21,985) | | (6.9)% | | $ | 423,656 | | | $ | 115,266 | | | $ | 335,644 | | | $ | 308,390 | | 267.5 | % | | $ | 88,012 | | | 26.2 | % | Net income | | $ | 195,388 | | $ | 70,862 | | $ | 169,422 | | $ | 124,526 | | 175.7% | | $ | 25,966 | | 15.3% | | $ | 255,200 | | | $ | 18,914 | | | $ | 222,244 | | | $ | 236,286 | | NM | | | $ | 32,956 | | | 14.8 | % | Net income, as adjusted(b) | | $ | 209,240 | | $ | 82,363 | | $ | 211,733 | | $ | 126,877 | | 154.0% | | $ | (2,493) | | (1.2)% | | $ | 300,079 | | | $ | 71,519 | | | $ | 236,626 | | | $ | 228,560 | | 319.6 | % | | $ | 63,453 | | | 26.8 | % | Diluted earnings per share (c) | | $ | 1.48 | | $ | 1.06 | | $ | 1.28 | | $ | 0.42 | | 39.6% | | $ | 0.20 | | 15.6% | | $ | 1.94 | | | $ | 0.28 | | | $ | 1.69 | | | $ | 1.66 | | NM | | | $ | 0.25 | | | 14.8 | % | Diluted earnings per share, as adjusted(b) (c) | | $ | 1.59 | | $ | 1.23 | | $ | 1.61 | | $ | 0.36 | | 29.3% | | $ | (0.02) | | (1.2)% | | $ | 2.29 | | | $ | 1.06 | | | $ | 1.80 | | | $ | 1.23 | | 116.0 | % | | $ | 0.49 | | | 27.2 | % | Average diluted shares outstanding(c) | | | 131,895,570 | | | 66,731,560 | | | 131,853,835 | | | 65,164,010 | | 97.7% | | | 41,735 | | 0.0% | | | 131,316,455 | | | | 67,477,536 | | | | 131,383,470 | | | | 63,838,919 | | 94.6 | % | | | (67,015 | ) | | (0.1 | )% | Operating margin, GAAP basis | | | 27.1% | | | 25.3% | | | 24.2% | | | | | | | | | | | 20.9 | % | | | 9.0 | % | | | 25.7 | % | | | | | | | | | Operating margin, as adjusted (a) | | | 34.0% | | | 42.0% | | | 35.6% | | | | | | | | | | | 37.7 | % | | | 38.5 | % | | | 36.1 | % | | | | | | | | | | Assets under management ($ in millions) | | $ | 1,154,164 | | $ | 463,060 | | $ | 1,124,627 | | $ | 691,104 | | 149.2% | | $ | 29,537 | | 2.6% | | $ | 1,299,556 | | | $ | 1,075,016 | | | $ | 1,230,086 | | | $ | 224,540 | | 20.9 | % | | $ | 69,470 | | | 5.6 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Nine months ended
September 30, | | | Variance | | | | | 2007 | | | 2006 | | | Amount | | % | | Total revenue | | $ | 3,400,476 | | | $ | 1,079,451 | | | $ | 2,321,025 | | 215.0 | % | Total expenses | | $ | 2,574,528 | | | $ | 853,734 | | | $ | 1,720,794 | | 201.6 | % | Operating income | | $ | 825,948 | | | $ | 225,717 | | | $ | 600,231 | | 265.9 | % | Operating income, as adjusted(a) | | $ | 1,070,209 | | | $ | 361,653 | | | $ | 708,556 | | 195.9 | % | Net income | | $ | 672,832 | | | $ | 153,179 | | | $ | 519,653 | | 339.2 | % | Net income, as adjusted(b) | | $ | 745,945 | | | $ | 232,969 | | | $ | 512,976 | | 220.2 | % | Diluted earnings per share (c) | | $ | 5.12 | | | $ | 2.29 | | | $ | 2.83 | | 123.6 | % | Diluted earnings per share, as adjusted(b) (c) | | $ | 5.67 | | | $ | 3.48 | | | $ | 2.19 | | 62.9 | % | Average diluted shares outstanding(c) | | | 131,534,188 | | | | 66,903,553 | | | | 64,630,635 | | 96.6 | % | Operating margin, GAAP basis | | | 24.3 | % | | | 20.9 | % | | | | | | | Operating margin, as adjusted (a) | | | 36.9 | % | | | 35.9 | % | | | | | | | Assets under management ($ in millions) | | $ | 1,299,556 | | | $ | 1,075,016 | | | $ | 224,540 | | 20.9 | % |
NM – Not Meaningful - 1923 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued) BlackRock, Inc. Financial Highlights (continued) (a) While BlackRock reports its financial results on a GAAP basis, however management believes that evaluating the Company’s ongoing operating results may not be as useful if investors are limited to reviewing only GAAP 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. Certain prior year non-GAAP data has been restated to conform to current year presentation. Operating margin, as adjusted, equals operating income, as adjusted, divided by revenue used for operating margin measurement, as indicated in the table below. ComputationsAs a result of recent changes in BlackRock’s business, management has altered the way it views its operating margin, as adjusted. As such, the calculation of operating income, as adjusted, and operating margin, as adjusted, were modified in the second quarter 2007 primarily to adjust for costs associated with closed-end fund issuances and amortization of deferred sales costs, as shown below. Revenue used for operating margin, as adjusted, for all periods presented includeincludes affiliated and unaffiliated portfolio administration and servicing costs andcosts. Certain prior period non-GAAP data has been reclassified to conform to current presentation. Computations for all periods are derived from the Company’s condensed consolidated financial statements of income as follows: | | | | Three months ended | | | Three months ended | | Nine months ended
September 30, | | | | | March 31, | | December 31, | | | September 30, | | June 30, | | | | | 2007 | | 2006 | | 2006 | | | 2007 | | 2006 | | 2007 | | 2007 | | 2006 | | Operating income, GAAP basis | | $ | 272,231 | | | $ | 100,027 | | | $ | 246,082 | | | $ | 271,718 | | | $ | 29,008 | | | $ | 282,001 | | | $ | 825,948 | | | $ | 225,717 | | Non-GAAP adjustments: | | | | | | | | | | | | | | | | | Termination of closed-end fund administration and servicing arrangements | | | | 128,114 | | | | — | | | | — | | | | 128,114 | | | | — | | PNC LTIP funding obligation | | | | 13,613 | | | | 12,045 | | | | 13,933 | | | | 39,589 | | | | 36,068 | | Merrill Lynch compensation contribution | | | | 2,500 | | | | — | | | | 2,500 | | | | 7,500 | | | | — | | MLIM integration costs | | | 7,100 | | | | 6,579 | | | | 51,349 | | | | 6,139 | | | | 71,456 | | | | 6,039 | | | | 19,278 | | | | 90,580 | | PNC LTIP funding obligation | | | 12,043 | | | | 11,676 | | | | 13,964 | | | Fee sharing payment | | | — | | | | 34,450 | | | | — | | | Appreciation on assets related to deferred compensation plans | | | 2,486 | | | | 4,542 | | | | 5,102 | | | Merrill Lynch compensation contribution | | | 2,500 | | | | — | | | | 1,848 | | | Quellos integration costs | | | | 140 | | | | — | | | | — | | | | 140 | | | | — | | Closed-end fund launch costs | | | | 1,875 | | | | 4,933 | | | | 19,801 | | | | 34,828 | | | | 5,464 | | Closed-end fund launch commissions | | | | 264 | | | | 973 | | | | 4,297 | | | | 5,958 | | | | 1,387 | | Appreciation (depreciation) related to deferred compensation plans | | | | (707 | ) | | | (3,149 | ) | | | 7,073 | | | | 8,854 | | | | 2,437 | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income, as adjusted | | $ | 296,360 | | | $ | 157,274 | | | $ | 318,345 | | | $ | 423,656 | | | $ | 115,266 | | | $ | 335,644 | | | $ | 1,070,209 | | | $ | 361,653 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenue, GAAP basis | | $ | 1,005,374 | | | $ | 395,660 | | | $ | 1,018,525 | | | $ | 1,298,079 | | | $ | 323,058 | | | $ | 1,097,023 | | | $ | 3,400,476 | | | $ | 1,079,451 | | Non-GAAP adjustments: | | | | | | | | | | | | | | | | | Portfolio administration and servicing costs | | | (126,677 | ) | | | (15,159 | ) | | | (120,259 | ) | | | (138,850 | ) | | | (16,382 | ) | | | (131,077 | ) | | | (401,014 | ) | | | (48,529 | ) | Amortization of deferred sales costs | | | | (28,763 | ) | | | (1,341 | ) | | | (28,713 | ) | | | (79,034 | ) | | | (4,645 | ) | Reimbursable property management compensation | | | (6,642 | ) | | | (5,598 | ) | | | (4,922 | ) | | | (7,218 | ) | | | (6,219 | ) | | | (6,664 | ) | | | (20,525 | ) | | | (17,696 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Revenue used for operating margin measurement, as adjusted | | $ | 872,055 | | | $ | 374,903 | | | $ | 893,344 | | | $ | 1,123,248 | | | $ | 299,116 | | | $ | 930,569 | | | $ | 2,899,903 | | | $ | 1,008,581 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating margin, GAAP basis | | | 27.1 | % | | | 25.3 | % | | | 24.2 | % | | | 20.9 | % | | | 9.0 | % | | | 25.7 | % | | | 24.3 | % | | | 20.9 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Operating margin, as adjusted | | | 34.0 | % | | | 42.0 | % | | | 35.6 | % | | | 37.7 | % | | | 38.5 | % | | | 36.1 | % | | | 36.9 | % | | | 35.9 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
- 24 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued) BlackRock, Inc. Financial Highlights (continued) (a) (continued) Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of management’s ability to, and useful to management in deciding how to effectively employ BlackRock’s resources. As such, management believes that operating income, as adjusted, and operating margin, as adjusted, provide useful disclosure to investors. Non-GAAP Operating Income Adjustments: The expense related to the termination of the closed-end fund administration and servicing arrangements with Merrill Lynch has been excluded from operating income, as adjusted, as the termination of the arrangements is deemed non-recurring by management. The portion of the Long-Term Incentive Plan (“LTIP”) expense associated with awards funded through the distribution to participants of shares of BlackRock stock held by PNC and the anticipated Merrill Lynch compensation contribution have been excluded because, exclusive of the impact related to LTIP participants’ put options, these charges do not impact BlackRock’s book value. MLIM and Quellos integration costs consist principally of certain professional fees, rebranding costs and compensation costs related to the integration which were reflected in GAAP net income. MLIM integrationIntegration costs have been deemed non-recurring by management and have been excluded from operating income, as adjusted, and operating margin per share, as adjusted, to help ensure the comparability of this information to prior periods. The portionClosed-end fund launch costs and commissions have been excluded from operating income, as adjusted, because such costs can fluctuate considerably and revenues associated with the expenditure of such costs will not fully impact the Company’s results until future periods. As such, management believes that operating margins exclusive of these costs are more representative of the LTIP expense associated with awards met byoperating performance for the distribution to participants of shares of BlackRock stock held by PNC has been excluded because, exclusive of the impact related to LTIP participants’ put options, these charges do not impact BlackRock’s book value. A fee sharing payment made in the first quarter 2006 has been excluded because it represents a non-recurring payment (based upon a performance fee) pursuant to the SSRM Holdings, Inc. acquisition agreement.given period. Compensation expense associated with appreciation (depreciation) on assets related to certain BlackRock’s deferred compensation plans has been excluded because investment returns on these assets are reported in non-operating income, net of the related impact on compensation expense, result in a nominal impact to net income. The portion of the compensation expense related to incentive awards to be funded by Merrill Lynch has been excluded because it is not expected to impact BlackRock’s book value. - 20 -
PART I – FINANCIAL INFORMATION (continued)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)Non-GAAP Revenue Adjustments:
Overview (continued)
BlackRock, Inc.
Financial Highlights
(continued)
(a) (continued)
Portfolio administration and servicing costs have been excluded from revenue used for operating margin, as adjusted, because the Company receives offsetting revenue and expense for these services. Amortization of deferred sales costs are excluded from revenue used for operating margin measurement, as adjusted, because such costs offset distribution fee revenue earned by the Company. Reimbursable property management compensation represents compensation and benefits paid to certain BlackRock Realty Advisors, Inc. (“Realty”) personnel. These employees are retained on Realty’s payroll when certain properties are acquired by Realty’s clients. The related compensation and benefits are fully reimbursed by Realty’s clients and have been excluded from revenue used for operating margin, as adjusted, because they bear no economic cost to BlackRock. - 25 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued) BlackRock, Inc. Financial Highlights (continued) (b) While BlackRock reports its financial results on a GAAP basis, however management believes that evaluating the Company’s ongoing operating results may not be as useful if investors are limited to reviewing only 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. | | | | Three months ended | | Three months ended | | Nine months ended | | | | March 31, | | December 31, | | September 30, | | June 31, | | September 30, | | | | 2007 | | 2006 | | 2006 | | 2007 | | 2006 | | 2007 | | 2007 | | 2006 | Net income, GAAP basis | | $ | 195,388 | | $ | 70,862 | | $ | 169,422 | | $ | 255,200 | | | $ | 18,914 | | $ | 222,244 | | $ | 672,832 | | | $ | 153,179 | Non-GAAP adjustments, net of tax | | | | | | | | | | | | | | | | | MLIM integration costs | | | 4,544 | | | 4,145 | | | 32,350 | | Termination of closed-end fund administration and servicing arrangements | | | | 81,993 | | | | — | | | — | | | 81,993 | | | | — | PNC LTIP funding obligation | | | 7,708 | | | 7,356 | | | 8,797 | | | 8,712 | | | | 7,588 | | | 8,917 | | | 25,337 | | | | 22,723 | Merrill Lynch compensation contribution | | | 1,600 | | | — | | | 1,164 | | | 1,600 | | | | — | | | 1,600 | | | 4,800 | | | | — | MLIM integration costs | | | | 3,929 | | | | 45,017 | | | 3,865 | | | 12,338 | | | | 57,067 | Quellos integration costs | | | | 90 | | | | — | | | — | | | 90 | | | | — | Corporate income tax reductions | | | | (51,445 | ) | | | — | | | — | | | (51,445 | ) | | | — | | | | | | | | | | | | | | | | | | | | Net income, as adjusted | | $ | 209,240 | | $ | 82,363 | | $ | 211,733 | | $ | 300,079 | | | $ | 71,519 | | $ | 236,626 | | $ | 745,945 | | | $ | 232,969 | | | | | | | | | | | | | | | | | | | | | Diluted weighted average shares outstanding | | | 131,895,570 | | | 66,731,560 | | | 131,853,835 | | | 131,316,455 | | | | 67,477,536 | | | 131,383,470 | | | 131,534,188 | | | | 66,903,553 | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings per share, GAAP basis | | $ | 1.48 | | $ | 1.06 | | $ | 1.28 | | $ | 1.94 | | | $ | 0.28 | | $ | 1.69 | | $ | 5.12 | | | $ | 2.29 | | | | | | | | | | | | | | | | | | | | Diluted earnings per share, as adjusted | | $ | 1.59 | | $ | 1.23 | | $ | 1.61 | | $ | 2.29 | | | $ | 1.06 | | $ | 1.80 | | $ | 5.67 | | | $ | 3.48 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Management believes that net income, as adjusted, and diluted earnings per share, as adjusted, are effective measurements of BlackRock’s profitability and financial performance. The termination of the closed-end fund administration and servicing arrangements with Merrill Lynch has been excluded from net income, as adjusted, as the termination of the arrangements is deemed non-recurring by management. The portion of the LTIP expense associated with awards funded through the distribution to participants of shares of BlackRock stock held by PNC and the anticipated Merrill Lynch compensation contribution have been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, because, exclusive of the impact related to LTIP participants’ put options, these charges do not impact BlackRock’s book value. MLIM and Quellos integration costs reflected in GAAP net income have been deemed non-recurring by management and have been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, to help ensure the comparability of this information to prior reporting periods. MLIM integrationIntegration costs consist principally of compensation costs, professional fees and rebranding costs incurred in conjunction with the MLIM integration.integrations. The portionUnited Kingdom and Germany, during third quarter 2007, enacted legislation reducing corporate income taxes, effective in April and January of LTIP expense associated with awards funded by the distribution2008, respectively, which resulted in a revaluation of certain deferred tax liabilities. Currently, BlackRock does not anticipate a significant change to participants of shares of BlackRock stock held by PNCits overall tax rate in 2008. The resulting decrease in income taxes has been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, because these charges do not impact BlackRock’s book value. The portion of the current year compensation expense related to incentive awards to be funded by Merrill Lynch has been excluded because it is not expectednon-recurring and to impact BlackRock’s book value.ensure comparability to prior reporting periods. (c) Series A non-voting participating preferred stock is considered to be common stock for purposes of earnings per share calculations. - 2126 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued) BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, Thethe Netherlands, Japan, Australia and Hong Kong. The Company provides a wide array of taxable and tax-exempt fixed income, cash management, equity and balanced mutual funds and separate accounts, as well as a wide assortment of index-based equity and alternative investment products to a diverse global clientele. In addition, BlackRock provides global advisory services for mutual funds and other non-U.S. equivalent retail products. The Company’s non-U.S. mutual funds are based in a number of domiciles and cover a range of asset classes, including cash management, fixed income and equities. The primary retail fund group offered outside the United States is the Merrill Lynch International Investment Funds (“MLIIF”), which is authorized for distribution in more than 30 jurisdictions worldwide. In the United States, the primary retail offerings include a variety of open-end and closed-end funds, including the BlackRock Funds and the BlackRock Liquidity Funds. Additional fund offerings include structured products, real estate funds, hedge funds and funds of funds, private equity funds and fundsfund of funds, managed futures funds and exchange funds. These products are sold to both U.S. and non-U.S. high net worth, retail and institutional investors in active and passive strategies covering both equity and fixed income assets.strategies. BlackRock’s client base consists of financial institutions and other corporate clients, pension funds, high net worth individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presenceforce globally that is focused on acquiring and maintaining retailinstitutional and institutionalretail investment management relationships by marketing its services to retailinstitutional and institutionalretail investors directly and through financial professionals, pension consultants and third-party distribution relationships. BlackRock also distributes certain of its products and services through broker-dealer subsidiaries of Merrill Lynch.Lynch in addition to other distributors. 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, in the case of certain real estate equity separate accounts, net operating income generated by the underlying properties, and are affected by changes in AUM, including market appreciation or depreciation, foreign exchange gains or losses 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 purchases and redemptions of mutual fund shares. Market appreciation or depreciation includes current income earned on, and changes in the fair value of, securities held in client accounts. Investment advisory agreements for certain separate accounts and BlackRock’s alternative investment products may provide for performance fees or carried interest allocations in addition to fees based on AUM. Performance fees and carried interest allocations generally are earned after a given period of time or when investment performance exceeds a contractual threshold. As such, the recognition of carried interest and performance fees may increase the volatility of BlackRock’s revenue and earnings. The Company also receives distribution fees and contingent deferred sales commissions from certain sponsored mutual funds sold without a front-end sales charge (“back-end load shares”). Such fees and commissions are shown on the condensed consolidated statements of income as distribution fees. ThroughBlackRock Solutions®, the firm provides a variety of risk management, systems outsourcing, investment analyticaccounting services, advisory and investment systemtransition management services tothat combine capital markets expertise with proprietary systems and technology. BlackRock Solutions clients consist of financial institutions, pension funds, asset managers, foundations, consultants, mutual fund sponsors real estate investment trusts and government agencies. These services are provided under the brand nameBlackRock Solutions® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned forBlackRock Solutions services are typically based on a number of factors including pre-determined percentages of the market value of assets subject to the services and the number of individual investment accounts, or on fixed fees.fees based on project scope and complexity. Fees earned on risk management, system outsourcing, investment analyticaccounting services, advisory and investment system assignmentstransition management services are recorded as other revenue in the condensed consolidated statements of income. - 2227 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued) Operating expenseexpenses primarily consistsconsist of employee compensation and benefits, portfolio administration and servicing costs, amortization of deferred mutual fund sales commissions, general and administration expense and amortization of finite-lived intangible assets. Employee compensation and benefits expense includes salaries, deferred and incentive compensation, long-term retention and incentive plans and related benefit costs. Portfolio administration and servicing costs reflect payments made to Merrill Lynch-affiliated entities and PNC-affiliated entities, as well as third parties, primarily associated with the administration and servicing of client investments in certain BlackRock products. Assets Under Management BlackRock, Inc. Assets Under Management Summary (Dollar amounts in millions) (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | Variance | | | | March 31, | | December 31, * | | March 31, | | Quarter to Quarter | | Year to Year | | | | 2007 | | 2006 | | | Fixed income | | $ | 470,513 | | $ | 462,049 | | $ | 318,529 | | 1.8% | | 47.7% | Equity and balanced | | | 402,983 | | | 392,708 | | | 40,751 | | 2.6% | | NM | Cash management | | | 244,838 | | | 235,768 | | | 86,484 | | 3.8% | | 183.1% | Alternative investments products | | | 35,830 | | | 34,102 | | | 17,296 | | 5.1% | | 107.2% | | | | | | | | | | | | | | | Total | | $ | 1,154,164 | | $ | 1,124,627 | | $ | 463,060 | | 2.6% | | 149.2% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM – Not Meaningful | | | | | | | | | | | | | | | | | | | | | | | | | Variance | | | | | September 30, | | June 30, | | September 30,1 | | Quarter to | | | Year to | | | | | 2007 | | 2006 | | Quarter | | | Year | | Fixed income | | $ | 509,750 | | $ | 492,287 | | $ | 443,594 | | 3.5 | % | | 14.9 | % | Equity and balanced | | | 454,162 | | | 435,873 | | | 358,145 | | 4.2 | % | | 26.8 | % | Cash management | | | 290,748 | | | 259,840 | | | 229,416 | | 11.9 | % | | 26.7 | % | Alternative investments products | | | 44,896 | | | 42,086 | | | 43,861 | | 6.7 | % | | 2.4 | % | | | | | | | | | | | | | | | | | Total | | $ | 1,299,556 | | $ | 1,230,086 | | $ | 1,075,016 | | 5.6 | % | | 20.9 | % | | | | | | | | | | | | | | | | |
1 | September 30, 2006 AUM reflects a reclassification of certain MLIM acquired assets. Approximately $7.9 billion was reclassified from fixed income to cash management, relative to the AUM as reported in BlackRock’s third quarter 2006 Form 10-Q. |
AUM increased approximately $691.1$69.5 billion, or 149.2%5.6%, to $1.154$1.3 trillion at March 31,September 30, 2007, compared with $463.1 billionto $1.230 trillion at March 31, 2006.June 30, 2007. The growth in AUM was attributable to $589.2$41.0 billion acquired in the MLIM Transaction, $53.4net subscriptions, $20.3 billion in market appreciation $39.5 billion in net subscriptions and $9.0$8.2 billion in foreign exchange gains. Net subscriptions of $39.5$41.0 billion for the twelvethree months ended March 31,September 30, 2007 were primarily attributable tothe result of net new business of $20.3$30.2 billion in cash management products, $11.7$5.6 billion in fixed income products, $3.2 billion in equity and balanced products and $5.2$2.1 billion in alternative products. Market appreciation of $53.4$20.3 billion primarily reflected appreciation in equity and balanced assets of $9.9 billion, as equity markets ended positive for the three months ended September 30, 2007 and by market appreciation on fixed income products of $9.4 billion due to changes in market interest rates. Foreign exchange gains of $8.2 billion consisted primarily of $5.2 billion in equity and balanced assets and $2.5 billion in fixed income assets. AUM increased approximately $224.5 billion, or 20.9%, to $1.3 trillion at September 30, 2007, compared with $1.075 trillion at September 30, 2006. Net subscriptions of $124.0 billion for the twelve months ended September 30, 2007 were primarily the result of net new business of $59.2 billion in cash management products, $31.6 billion in fixed income products, $22.0 billion in equity and balanced products and $11.3 billion in alternative investment products. Market appreciation of $84.9 billion largely reflected appreciation in equity and balanced assets of $30.2$63.4 billion, as equity markets improved during the period ended March 31,September 30, 2007 and market appreciation on fixed income products of $19.3$15.5 billion due to current income and changes in market interest rates. Foreign exchange gains of $9.0$19.0 billion consisted primarily of $5.9$12.7 billion in equity and balanced assets and $2.7$5.1 billion in fixed income assets. AUM increased approximately $29.5 billion, or 2.6%, to $1.154 trillion at March 31, 2007, compared to $1.125 trillion at December 31, 2006. The growth in AUM was attributable to $14.4 billion in net subscriptions, $13.7 billion in market appreciation and $1.4 billion in foreign exchange gains. Net subscriptions of $14.4 billion for the three months ended March 31, 2007 were attributable to net new business of $8.4 billion in cash management products, $3.5 billion in fixed income products, $1.6 billion in equity and balanced products and $0.9 billion in alternative products. Market appreciation of $13.7 billion primarily reflected appreciation in equity and balanced assets of $7.8 billion, as equity markets improved during the period ended March 31, 2007 and market appreciation on fixed income products of $4.5 billion due to current income and changes in market interest rates. Foreign exchange gains of $1.4 billion consisted primarily of $0.9 billion in equity and balanced assets and $0.4 billion in fixed income assets.
* AUM reflects a reclassification of MLIM acquired assets of approximately $7.9 billion from fixed income to cash management.
- 2328 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Assets Under Management (continued) The following table presents the component changes in BlackRock’s AUM for the three months ended March 31,September 30, 2007. BlackRock, Inc. Component Changes in Assets Under Management For the Quarter Ended September 30, 2007 (Dollar amounts in millions) | BlackRock, Inc. Year to Date 2007 Component Changes in Assets Under Management (Dollar amounts in millions) (Unaudited) | | | | | December 31, 20061 | | Net subscriptions (redemptions) | | Foreign Exchange 3 | | Market appreciation (depreciation) | | March 31, 2007 | | June 30,
2007 | | Net
subscriptions
(redemptions) | | Foreign
exchange 2 | | Market
appreciation
(depreciation) | | September 30,
2007 | Fixed income | | $ | 462,049 | | $ | 3,546 | | $ | 424 | | $ | 4,494 | | $ | 470,513 | | $ | 492,287 | | $ | 5,592 | | $ | 2,504 | | $ | 9,367 | | $ | 509,750 | Equity and balanced | | | 392,708 | | | 1,612 | | | 912 | | | 7,751 | | | 402,983 | | | 435,873 | | | 3,194 | | | 5,204 | | | 9,891 | | | 454,162 | Cash management | | | 235,768 | | | 8,387 | | | 17 | | | 666 | | | 244,838 | | | 259,840 | | | 30,190 | | | 234 | | | 484 | | | 290,748 | Alternative investments products | | | 34,102 | | | 890 | | | 34 | | | 804 | | | 35,830 | | Alternative investment products | | | | 42,086 | | | 2,066 | | | 219 | | | 525 | | | 44,896 | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 1,124,627 | | $ | 14,435 | | $ | 1,387 | | $ | 13,715 | | $ | 1,154,164 | | $ | 1,230,086 | | $ | 41,042 | | $ | 8,161 | | $ | 20,267 | | $ | 1,299,556 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the component changes in BlackRock’s AUM for the nine months ended September 30, 2007. BlackRock, Inc. Component Changes in Assets Under Management For the Nine Months Ended September 30, 2007 (Dollar amounts in millions) | | | | | | | | | | | | | | | | | | | | | | | December 31,
2006 | | Net
subscriptions
(redemptions) | | Acquisitions/
reclassifications 1 | | | Foreign
exchange 2 | | Market
appreciation
(depreciation) | | September 30,
2007 | Fixed income | | $ | 448,012 | | $ | 33,174 | | $ | 14,037 | | | $ | 3,479 | | $ | 11,048 | | $ | 509,750 | Equity and balanced | | | 392,708 | | | 12,674 | | | — | | | | 8,018 | | | 40,762 | | | 454,162 | Cash management | | | 235,768 | | | 53,090 | | | — | | | | 342 | | | 1,548 | | | 290,748 | Alternative investment products | | | 48,139 | | | 7,975 | | | (14,037 | ) | | | 387 | | | 2,432 | | | 44,896 | | | | | | | | | | | | | | | | | | | | | Total | | $ | 1,124,627 | | $ | 106,913 | | $ | — | | | $ | 12,226 | | $ | 55,790 | | $ | 1,299,556 | | | | | | | | | | | | | | | | | | | | |
1 | Data reflects the reclassification of $14.0 billion of fixed income-oriented absolute return and structured products from alternative investment products to fixed income. |
2 | Foreign exchange reflects the impact of converting non-dollar denominated AUM into US dollars for reporting purposes. |
- 29 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Assets Under Management (continued) The following table presents the component changes in BlackRock’s AUM for the twelve months ended March 31,September 30, 2007. BlackRock, Inc. Component Changes in Assets Under Management For the Twelve Months Ended September 30, 2007 (Dollar amounts in millions) | | | | | | | | | | | | | | | | | | | BlackRock, Inc. Component Changes in Assets Under Management For the Twelve Months Ended March 31, 2007 (Dollar amounts in millions) (Unaudited) | | | | March 31, 2006 | | Net subscriptions (redemptions) | | Acquisitions/ Reclassifications 2 | | Foreign Exchange 3 | | Market appreciation (depreciation) | | March 31, 2007 | Fixed income | | $ | 318,529 | | $ | 2,338 | | $ | 127,654 | | $ | 2,664 | | $ | 19,328 | | $ | 470,513 | Equity and balanced | | | 40,751 | | | 11,682 | | | 314,419 | | | 5,885 | | | 30,246 | | | 402,983 | Cash management | | | 86,484 | | | 20,318 | | | 135,629 | | | 201 | | | 2,206 | | | 244,838 | Alternative investments products | | | 17,296 | | | 5,190 | | | 11,456 | | | 278 | | | 1,610 | | | 35,830 | | | | | | | | | | | | | | | | | | | | Total | | $ | 463,060 | | $ | 39,528 | | $ | 589,158 | | $ | 9,028 | | $ | 53,390 | | $ | 1,154,164 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | September 30,1
2006 | | Net
subscriptions
(redemptions) | | Acquisitions/
reclassifications 2,3 | | | Foreign
exchange 4 | | Market
appreciation
(depreciation) | | September 30,
2007 | Fixed income | | $ | 443,594 | | $ | 31,601 | | $ | 13,940 | | | $ | 5,119 | | $ | 15,496 | | $ | 509,750 | Equity and balanced | | | 358,145 | | | 21,968 | | | (2,028 | ) | | | 12,701 | | | 63,376 | | | 454,162 | Cash management | | | 229,416 | | | 59,184 | | | (1,260 | ) | | | 508 | | | 2,900 | | | 290,748 | Alternative investment products | | | 43,861 | | | 11,281 | | | (14,037 | ) | | | 646 | | | 3,145 | | | 44,896 | | | | | | | | | | | | | | | | | | | | | Total | | $ | 1,075,016 | | $ | 124,034 | | $ | (3,385 | ) | | $ | 18,974 | | $ | 84,917 | | $ | 1,299,556 | | | | | | | | | | | | | | | | | | | | |
| 1 | September 30, 2006 AUM reflects a reclassification of certain MLIM acquired assets of approximatelyassets. Approximately $7.9 billion was reclassified from fixed income to cash management.management, relative to the AUM as reported in BlackRock’s third quarter 2006 Form 10-Q. |
| 2 | Data reflects the reclassification of $14.0 billion of fixed income orientedincome-oriented absolute return and structured product alternativesproducts from alternative investment products to fixed income, as well as the net assets acquired from MLIM in the year-ended March 31, 2007.income. |
| 3 | Data reflects corrections to AUM records as of closing of the MLIM Transaction. |
4 | Foreign exchange reflects the impact of converting non-dollar denominated AUM into USDUS dollars for reporting.reporting purposes. |
- 2430 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended March 31,September 30, 2007 as compared with the three months ended March 31,September 30, 2006. Operating results for the three months ended March 31,September 30, 2007 reflect the impact of the MLIM Transaction, which closed on September 29, 2006. The magnitude of the acquired business is the primary driver of most line item variances in the analysis below which compares the three months ended March 31, 2007 to the three months ended March 31, 2006.below. Certain prior year amounts have been reclassified to conform to 2007 presentation:the current presentation. Revenue | | | | Three months ended March 31, | | Variance | | Three months ended
September 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | % | | 2007 | | 2006 | | Amount | | % | | Investment advisory and administration fees: | | | | | | | | | | | | | | | | | Equity and balanced | | | $ | 580,302 | | $ | 58,737 | | $ | 521,565 | | NM | | Fixed income | | $ | 233,907 | | $ | 111,861 | | $ | 122,046 | | | 109.1% | | | 230,373 | | | 125,102 | | | 105,271 | | 84.1 | % | Cash management | | | 115,389 | | | 29,815 | | | 85,574 | | | 287.0% | | | 128,381 | | | 32,110 | | | 96,271 | | 299.8 | % | Equity and balanced | | | 453,847 | | | 54,058 | | | 399,789 | | | NM | | Alternative investment products | | | 70,365 | | | 39,367 | | | 30,998 | | | 78.7% | | | 87,374 | | | 40,740 | | | 46,634 | | 114.5 | % | | | | | | | | | | | | | | | | | | | Investment advisory and administration base fees | | | 873,508 | | | 235,101 | | | 638,407 | | | 271.5% | | | 1,026,430 | | | 256,689 | | | 769,741 | | 299.9 | % | Investment advisory performance fees | | | 22,418 | | | 114,607 | | | (92,189 | ) | | (80.4)% | | | 149,382 | | | 17,817 | | | 131,565 | | NM | % | | | | | | | | | | | | | | | | | | | Total investment advisory and administration fees | | | 895,926 | | | 349,708 | | | 546,218 | | | 156.2% | | | 1,175,812 | | | 274,506 | | | 901,306 | | 328.3 | % | | | | | | | | | | | Distribution fees | | | | 32,310 | | | 2,263 | | | 30,047 | | NM | | | Other revenue: | | | | | | | | | | | | | | | | | BlackRock Solutions | | | 42,314 | | | 34,050 | | | 8,264 | | | 24.3% | | | 47,683 | | | 33,807 | | | 13,876 | | 41.0 | % | Other revenue | | | 67,134 | | | 11,902 | | | 55,232 | | | 464.1% | | | 42,274 | | | 12,482 | | | 29,792 | | 238.7 | % | | | | | | | | | | | | | | | | | | | Total other revenue | | | 109,448 | | | 45,952 | | | 63,496 | | | 138.2% | | | 89,957 | | | 46,289 | | | 43,668 | | 94.3 | % | | | | | | | | | | | | | | | | | | | Total revenue | | $ | 1,005,374 | | $ | 395,660 | | $ | 609,714 | | | 154.1% | | $ | 1,298,079 | | $ | 323,058 | | $ | 975,021 | | 301.8 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM – Not Meaningful Total revenue for the three months ended March 31,September 30, 2007 increased $609.7$975.0 million, or 154.1%301.8%, to $1,005.4$1,298.1 million, compared with $395.7$323.1 million for the three months ended March 31,September 30, 2006. InvestmentTotal investment advisory and administration fees increased $546.2$901.3 million, or 156.2328.3%,to $895.9$1,175.8 million for the three months ended March 31,September 30, 2007 compared with $349.7$274.5 million for the three months ended March 31,September 30, 2006. Other incomeDistribution fees increased by $63.5$30.0 million or 138.2%, to $109.4$32.3 million for the three months ended March 31,September 30, 2007 compared with $46.0$2.3 million for the three months ended March 31,September 30, 2006. Other revenue increased by $43.7 million, or 94.3%, to $90.0 million for the three months ended September 30, 2007 compared with $46.3 million for the three months ended September 30, 2006. - 2531 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended March 31,September 30, 2007 as compared with the three months ended March 31,September 30, 2006. (continued) Revenue (continued) Investment advisoryAdvisory and administration feesAdministration Fees The increase in investment advisory and administration fees of $546.2$901.3 million, or 156.2%328.3%, was the result of an increase in investment advisory and administration base fees of $638.4$769.7 million, or 271.5%299.9%, to $873.5$1,026.4 million for the three months ended March 31,September 30, 2007 compared with $235.1$256.7 million for the three months ended March 31,September 30, 2006 partially offset by a reductionand an increase of $131.6 million in performance fees of $92.2 million.fees. Investment advisory and administration base fees increased infor the three months ended March 31,September 30, 2007 primarily due to the MLIM Transaction which added $589.2 billion in AUM on September 29, 2006 and increased AUM of $691.1$224.5 billion including $589.2 billion of AUM acquired inover the MLIM Transaction.past twelve months. The increase in base investment advisory and administration fees of $638.4$769.7 million for the three months ended March 31,September 30, 2007 compared with the three months ended March 31,September 30, 2006 consisted of increases of $399.8$521.6 million in equity and balanced products, $122.0$105.3 million in fixed income products, $85.6$96.3 million in cash management products and $31.0$46.6 million in alternative investment products. The increase in investment advisory and administration fees for equity and balanced, fixed income, cash management and alternative investment products was driven by increases in AUM of $362.2 billion, $152.0 billion, $158.4 billion and $18.5 billion, respectively. The AUM growth in equity and balanced, fixed income, cash management and alternative products included assets acquired in the MLIM Transaction on September 29, 2006, as well as increases in AUM of $314.4$96.0 billion, $127.7$66.2 billion, $135.6$61.3 billion and $11.5$1.0 billion, respectively.respectively, over the past twelve months. Performance fees decreasedincreased by $92.2$131.6 million or 80.4%,to $149.4 million for the three months ended March 31,September 30, 2007 compared to $17.8 million for the three months ended September 30, 2006 primarily due to higher performance fees earned on a large institutionalequity and fixed income hedge funds, as well as real estate equity client accountproducts. Distribution Fees Distribution fees increased by $30.0 million to $32.3 million for the three months ended September 30, 2007 as compared to $2.3 million for the three months ended September 30, 2006. The increase in distribution fees is primarily the result of the assumption of distribution financing arrangements from the MLIM Transaction in the firstthird quarter of 2006.2006 and from PNC in the second quarter 2007. Other Revenue Other revenue of $109.4$90.0 million for the quarter ended March 31,September 30, 2007 increased $63.5$43.7 million, or 94.3%, compared with the quarter ended March 31,September 30, 2006 and primarily represents fees earned onBlackRock Solutions products and services of $42.3$47.7 million, distributionother advisory service fees earned onBlackRock Fundsof $24.8$13.6 million, fees for fund accounting services of $12.0 million and property management fees of $9.4$10.0 million earned on real estate AUMproperties (which representedprimarily represents direct reimbursement of the salaries of certain Realty employees).employees of Metric Properties Management, Inc., “Metric”) and $6.0 million of fees earned related to securities lending. The $43.7 million increase in other revenue of $63.5 million, or 138.2%, for the three months ended March 31,September 30, 2007 as compared to the three months ended March 31,September 30, 2006 was primarily the result of an increase of $22.3 million in distribution fees earned on mutual funds and $12.0 million in fund accounting services acquired during the MLIM Transaction and an increase of $8.3$13.9 million fromBlackRock Solutions products and services primarily driven by new assignments.assignments, $13.6 million related to other advisory services and $6.0 million on fees earned related to securities lending. - 2632 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended March 31,September 30, 2007 as compared with the three months ended March 31,September 30, 2006. (continued) ExpenseExpenses
| | | | Three months ended March 31, | | Variance | | Three months ended
September 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | % | | 2007 | | 2006 | | Amount | | % | | Expense: | | | | | | | | | | Expenses: | | | | | | | | | | Employee compensation and benefits | | $ | 352,398 | | $ | 191,796 | | $ | 160,602 | | | 83.7% | | $ | 505,107 | | $ | 198,099 | | $ | 307,008 | | 155.0 | % | Portfolio administration and servicing costs | | | 126,677 | | | 15,159 | | | 111,518 | | | NM | | | 138,850 | | | 16,382 | | | 122,468 | | NM | | Amortization of deferred sales commissions | | | | 28,763 | | | 1,341 | | | 27,422 | | NM | | General and administration | | | 223,036 | | | 52,199 | | | 170,837 | | | 327.3% | | | 194,442 | | | 75,834 | | | 118,608 | | 156.4 | % | Fee sharing payment | | | — | | | 34,450 | | | (34,450 | ) | | NM | | Termination of closed-end fund administration and servicing arrangements | | | | 128,114 | | | — | | | 128,114 | | NM | | Amortization of intangible assets | | | 31,032 | | | 2,029 | | | 29,003 | | | NM | | | 31,085 | | | 2,394 | | | 28,691 | | NM | | | | | | | | | | | | | | | | | | | | Total expense | | $ | 733,143 | | $ | 295,633 | | $ | 437,510 | | | 148.0% | | Total expenses | | | $ | 1,026,361 | | $ | 294,050 | | $ | 732,311 | | 249.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM – Not Meaningful Total expense,expenses, which reflectsreflect the impact of the MLIM Transaction onsince September 29, 2006, increased $437.5$732.3 million, or 148.0%249.0%, to $733.1$1,026.4 million for the three months ended March 31,September 30, 2007 compared with $295.6$294.1 million for the three months ended March 31,September 30, 2006. The increase was primarily attributable to increases in general and administrationTotal expenses and employee compensation and benefits and portfolio and administration and servicing costs. Integrationincluded integration charges related to the MLIM Transaction of $7.1$6.1 million and $6.6$71.5 million in the firstthird quarters 2007 and 2006, respectively. The third quarter of 2007 and first quarterincluded $6.1 million of 2006, respectively, were recordedMLIM integration charges in general and administration expense.expenses compared to $28.4 million and $43.1 of integration charges in general and administration and employee compensation and benefits, respectively, in the third quarter 2006. Employee Compensation and Benefits Employee compensation and benefits expense increased by $160.6$307.0 million, or 83.7%155.0%, to $352.4$505.1 million, at March 31,September 30, 2007, compared to $191.8$198.1 million for the three months ended March 31,September 30, 2006. The increase in employee compensation and benefits expense was primarily attributable to increases in incentive compensation, salaries and benefits and stock-based compensation of $162.8 million, $119.7 million and $18.9 million, respectively. The $162.8 million, or 188.9%, increase in incentive compensation was primarily attributable to higher operating income and higher incentive compensation associated with greater performance fees earned on the Company’s alternative investment products, offset by integration costs incurred in 2006. The increase of $119.7 million, or 129.3%, in salaries and benefits was primarily attributable to higher staffing levels associated with the MLIM Transaction and business growth. Employees (excluding employees of Metric) at September 30, 2007 totaled 5,125, as compared to 4,565 at September 30, 2006. Portfolio Administration and Servicing Costs Portfolio administration and servicing costs increased $122.5 million to $138.9 million for the three months ended September 30, 2007, compared to $16.4 million for the three months ended September 30, 2006. These costs include payments to third parties, including Merrill Lynch and PNC, primarily associated with the administration and servicing of client investments in certain BlackRock products. - 33 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended September 30, 2007 as compared with the three months ended September 30, 2006. (continued) Expenses (continued) Amortization of Deferred Sales Commissions Amortization of deferred sales commissions increased by $27.4 million to $28.8 million for the three months ended September 30, 2007, as compared to $1.3 million for the three months ended September 30, 2006. The increase in amortization of deferred sales commissions is primarily the result of the assumption of distribution financing arrangements from MLIM at the end of third quarter 2006 and from PNC in second quarter 2007. General and Administration Expense | | | | | | | | | | | | | | | | | Three months ended
September 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | | % | | General and administration expense: | | | | | | | | | | | | | | Portfolio services | | $ | 43,844 | | $ | 5,218 | | $ | 38,626 | | | NM | | Marketing and promotional | | | 35,146 | | | 20,203 | | | 14,943 | | | 74.0 | % | Occupancy | | | 34,506 | | | 12,794 | | | 21,712 | | | 169.7 | % | Technology | | | 28,547 | | | 15,731 | | | 12,816 | | | 81.5 | % | Closed-end fund launch costs | | | 1,875 | | | 4,933 | | | (3,058 | ) | | (62.0 | )% | Other general and administration | | | 50,524 | | | 16,955 | | | 33,569 | | | 198.0 | % | | | | | | | | | | | | | | | Total general and administration expense | | $ | 194,442 | | $ | 75,834 | | $ | 118,608 | | | 156.4 | % | | | | | | | | | | | | | | |
NM – Not Meaningful General and administration expense increased $118.6 million, or 156.4%, for the three months ended September 30, 2007 to $194.4 million, compared to $75.8 million for the three months ended September 30, 2006. The increase in general and administration expense was due to increases in portfolio services expense of $38.6 million, occupancy expense of $21.7 million, marketing and promotional expense of $14.9 million, technology expense of $12.8 million and other general and administration expense of $33.6 million, partially offset by a reduction in closed-end fund launch costs of $3.1 million. MLIM and Quellos integration expenses recorded in general and administration expense for the three months ended September 2007 and 2006 were $6.3 million and $28.4 million, respectively. - 34 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended September 30, 2007 as compared with the three months ended September 30, 2006. (continued) General and Administration Expense (continued) Portfolio services costs increased by $38.6 million to $43.8 million, compared to $5.2 million for the three months ended September 30, 2006, due to supporting higher AUM levels and market data services. Occupancy costs for the three months ended September 30, 2007 totaled $34.5 million, representing a $21.7 million, or 169.7%, increase from $12.8 million for the three months ended September 30, 2006. The increase in occupancy costs primarily reflects costs related to the expansion of corporate facilities as a result of the MLIM Transaction and business growth. Marketing and promotional expense increased $14.9 million to $35.1 million for the three months ended September 30, 2007, compared to $20.2 million for the three months ended September 30, 2006 primarily due to increased marketing activities, including $21.5 million related to domestic and international marketing efforts, partially offset by $6.5 million related to BlackRock’s advertising and rebranding campaign. Technology expenses increased $12.8 million, or 81.5%, to $28.5 million, compared to $15.7 million for the three months ended September 30, 2006 primarily as a result of a $5.1 million increase in software licensing and maintenance costs and a $4.8 million increase in depreciation expense. Other general and administration costs increased by $33.6 million to $50.5 million from $17.0 million, including higher subadvisory fees of $10.6 million and $6.0 million in capital contributions to sponsored investment funds. Closed-end fund launch costs decreased $3.1 million to $1.9 million for the three months ended September 30, 2007 relating to one new closed-end fund launched during the quarter, generating $235 million in AUM compared with one new closed-end fund launched during the three months ended September 30, 2006 generating $765 million in AUM. Termination of Closed-end Fund Administration and Servicing Arrangements For the three months ended September 30, 2007, BlackRock recorded a one-time expense of $128.1 million related to the termination of administration and servicing arrangements with Merrill Lynch on 40 closed-end funds with original terms of 30-40 years. Amortization of Intangible Assets The $28.7 million increase in amortization of intangible assets to $31.1 million for the three months ended September 30, 2007 compared to $2.4 million for the three months ended September 30, 2006 primarily reflects the amortization of finite-lived intangible assets acquired in the MLIM Transaction. Non-Operating Income, Net of Non-Controlling Interest Non-operating income, net of non-controlling interest, for the three months ended September 30, 2007 and 2006 was as follows: | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Variance | | (Dollar amounts in thousands) | | 2007 | | | 2006 | | | Amount | | | % | Total non-operating income | | $ | 128,189 | | | $ | 1,909 | | | $ | 126,280 | | | NM | Non-controlling interest | | | (81,539 | ) | | | (895 | ) | | | (80,644 | ) | | NM | | | | | | | | | | | | | | | | Total non-operating income, net of non-controlling interest | | $ | 46,650 | | | $ | 1,014 | | | $ | 45,636 | | | NM | | | | | | | | | | | | | | | |
NM – Not Meaningful - 35 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended September 30, 2007 as compared with the three months ended September 30, 2006. (continued) Non-Operating Income, Net of Non-Controlling Interest (continued) The components of non-operating income, net of non-controlling interest, for the three months ended September 30, 2007 and 2006 were as follows: | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Variance | | | (Dollar amounts in thousands) | | 2007 | | | 2006 | | | Amount | | | % | | Non-operating income, net of non-controlling interest: | | | | | | | | | | | | | | | | Net gain (loss) on investments, net of non-controlling interest: | | | | | | | | | | | | | | | | Private equity1 | | $ | 12,413 | | | $ | — | | | $ | 12,413 | | | NM | | Real estate | | | 26,915 | | | | (69 | ) | | | 26,984 | | | NM | | Other alternative products | | | (4,940 | ) | | | (4,248 | ) | | | (692 | ) | | (16.3 | )% | Other2 | | | 1,968 | | | | 1,685 | | | | 283 | | | 16.8 | % | | | | | | | | | | | | | | | | | Total net gain on investments, net of non-controlling interest | | | 36,356 | | | | (2,632 | ) | | | 38,988 | | | NM | | Interest and dividend income | | | 20,109 | | | | 5,668 | | | | 14,441 | | | 254.8 | % | Interest expense | | | (9,815 | ) | | | (2,022 | ) | | | (7,793 | ) | | 385.4 | % | | | | | | | | | | | | | | | | | Total non-operating income, net of non-controlling interest | | $ | 46,650 | | | $ | 1,014 | | | $ | 45,636 | | | NM | | | | | | | | | | | | | | | | | |
NM – Not Meaningful 1 | Includes earnings on BlackRock’s limited partnership investments in private equity funds. |
2 | Includes investments related to equity, fixed income, CDOs, deferred compensation arrangements and BlackRock’s seed capital hedging program. |
Non-operating income, net of non-controlling interest, increased $45.6 million to $46.7 million for the quarter ended September 30, 2007, as compared to $1.0 million for the quarter ended September 30, 2006 as a result of a $39.0 million increase in net gain on investments, net of non-controlling interest, and a $14.4 million increase in interest and dividend income, partially offset by an $7.8 million increase in interest expense primarily related to borrowings under BlackRock’s revolving credit agreement. The increase in the net gain on investments, net of non-controlling interest, was primarily due to investment gains on private equity and real estate investments. Income Taxes Income tax expense was $63.2 million and $11.1 million for the quarters ended September 30, 2007 and 2006, respectively, representing effective tax rates of 19.8% and 37.0%, respectively. The reduction in the tax rate was primarily the result of a one-time tax benefit of $51.4 million recognized due to recent tax legislation changes enacted in the third quarter 2007 in the United Kingdom and Germany, which resulted in a revaluation of certain deferred tax liabilities. - 36 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended September 30, 2007 as compared with the three months ended September 30, 2006. (continued) Net Income Net income totaled $255.2 million, or $1.94 per diluted share, for the three months ended September 30, 2007 an increase of $236.3 million, or $1.66 per diluted share, as compared to the three months ended September 30, 2006. Net income for the quarter ended September 30, 2007 includes the after-tax impacts of the termination of closed-end fund servicing and administration arrangements, the portion of certain LTIP awards to be funded through a capital contribution of BlackRock common stock held by PNC, integration costs primarily related to the MLIM Transaction and Quellos acquisition and an expected contribution by Merrill Lynch to fund certain compensation of former MLIM employees, of $82.0 million, $8.7 million, $4.0 million and $1.6 million, respectively. In addition, the United Kingdom and Germany enacted legislation reducing corporate income tax rates resulting in a one-time decrease of $51.4 million in income tax expense in the three months ended September 30, 2007. Integration costs primarily consist of compensation costs, professional fees and rebranding costs. Net income of $18.9 million during the three months ended September 30, 2006 included the after-tax impacts of the portion of LTIP awards funded in January 2007 by a capital contribution of BlackRock stock held by PNC of $7.6 million and MLIM integration costs of $45.0 million. Exclusive of these items, fully diluted earnings per share, as adjusted, for the three months ended September 30, 2007 increased $1.23, or 116.0%, compared to the three months ended September 30, 2006. Operating Margin The Company’s operating margin was 20.9% for the three months ended September 30, 2007, compared to 9.0% for the three months ended September 30, 2006. Operating margin for the three months ended September 30, 2007 includes the impacts of $128.1 million for the termination of closed-end fund administration and servicing arrangements and $6.3 million of integration costs. Operating margin for the three months ended September 30, 2006 includes the impact of $71.5 million of integration costs. The increase in margin primarily is due to the reduction of integration costs and well as operating leverage associated with the growth in revenue. Operating margin, as adjusted, was 37.7% and 38.5% for the three months ended September 30, 2007 and 2006, respectively. Operating margin, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations. - 37 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006. Operating results for the nine months ended September 30, 2007 reflect the impact of the MLIM Transaction, which closed on September 29, 2006. The magnitude of the acquired business is the primary driver of most line item variances in the analysis below. Certain prior year amounts have been reclassified to conform to the current presentation. Revenue | | | | | | | | | | | | | | | | | Nine months ended
September 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | | % | | Investment advisory and administration fees: | | | | | | | | | | | | | | Equity and balanced | | $ | 1,579,562 | | $ | 168,758 | | $ | 1,410,804 | | | NM | | Fixed income | | | 670,652 | | | 364,751 | | | 305,901 | | | 83.9 | % | Cash management | | | 363,152 | | | 92,104 | | | 271,048 | | | 294.3 | % | Alternative investment products | | | 237,184 | | | 110,162 | | | 127,022 | | | 115.3 | % | | | | | | | | | | | | | | | Investment advisory and administration base fees | | | 2,850,550 | | | 735,775 | | | 2,114,775 | | | 287.4 | % | Investment advisory performance fees | | | 197,518 | | | 202,368 | | | (4,850 | ) | | (2.4 | )% | | | | | | | | | | | | | | | Total investment advisory and administration fees | | | 3,048,068 | | | 938,143 | | | 2,109,925 | | | 224.9 | % | | | | | | | | | | | | | | | Distribution fees | | | 89,997 | | | 7,177 | | | 82,820 | | | NM | | | | | | | Other revenue: | | | | | | | | | | | | | | BlackRock Solutions | | | 136,293 | | | 102,514 | | | 33,779 | | | 33.0 | % | Other revenue | | | 126,118 | | | 31,617 | | | 94,501 | | | 298.9 | % | | | | | | | | | | | | | | | Total other revenue | | | 262,411 | | | 134,131 | | | 128,280 | | | 95.6 | % | | | | | | | | | | | | | | | Total revenue | | $ | 3,400,476 | | $ | 1,079,451 | | $ | 2,321,025 | | | 215.0 | % | | | | | | | | | | | | | | |
NM – Not Meaningful Total revenue for the nine months ended September 30, 2007 increased $2,321.0 million, or 215.0%, to $3,400.5 million, compared with $1,079.5 million for the nine months ended September 30, 2006. Investment advisory and administration fees increased $2,109.9 million, or 224.9%,to $3,048.1 million for the nine months ended September 30, 2007, compared with $938.1 million for the nine months ended September 30, 2006. Distribution fees increased by $82.8 million to $90.0 million for the nine months ended September 30, 2007, compared with $7.2 million for the nine months ended September 30, 2006. Other revenue increased by $128.3 million, or 95.6%, to $262.4 million for the nine months ended September 30, 2007, compared with $134.1 million for the nine months ended September 30, 2006. - 38 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006. (continued) Revenue (continued) Investment Advisory and Administration Fees The increase in investment advisory and administration fees of $2,109.9 million, or 224.9%, was the result of an increase in investment advisory and administration base fees of $2,114.8 million, or 287.4%, to $2,850.6 million for the nine months ended September 30, 2007, compared with $735.8 million for the nine months ended September 30, 2006, partially offset by a reduction in performance fees of $4.9 million. Investment advisory and administration base fees increased for the nine months ended September 30, 2007 primarily due to the MLIM Transaction which added $589.2 billion in AUM on September 29, 2006, and increased AUM of $224.5 billion over the past twelve months. The increase in base investment advisory and administration fees of $2,114.8 million for the nine months ended September 30, 2007, compared with the nine months ended September 30, 2006 consisted of increases of $1,410.8 million in equity and balanced products, $305.9 million in fixed income products, $271.0 million in cash management products and $127.0 million in alternative investment products. The increase in investment advisory and administration fees for equity and balanced, fixed income, cash management and alternative investment products was driven by AUM acquired in the MLIM Transaction on September 29, 2006, as well as increases in AUM of $96.0 billion, $66.2 billion, $61.3 billion and $1.0 billion, respectively, over the past twelve months. Performance fees decreased by $4.9 million, or 2.4%, to $197.5 million for the nine months ended September 30, 2007, compared with $202.4 million for the nine months ended September 30, 2006 primarily due to a decline in performance fees earned on a large institutional real estate equity client account and energy hedge funds in 2006, offset by higher performance fees earned on equity and fixed income hedge funds in 2007. Distribution Fees Distribution fees increased by $82.8 million to $90.0 million for the nine months ended September 30, 2007 as compared to $7.2 million for the nine months ended September 30, 2006. The increase in distribution fees is primarily the result of the assumption of distribution financing arrangements from the MLIM Transaction in the third quarter 2006 and from PNC in the second quarter 2007. Other Revenue Other revenue of $262.4 million for the nine months ended September 30, 2007 increased $128.3 million compared with the nine months ended September 30, 2006 and primarily represents fees earned onBlackRock Solutions products and services of $136.3 million, property management fees of $29.1 million earned on real estate properties (which primarily represents direct reimbursement of the salaries of certain Metric employees), fees for fund accounting services of $24.1 million, fees related to securities lending of $22.6 million and $13.6 million for other advisory service fees. The increase in other revenue of $128.3 million, or 95.6%, for the nine months ended September 30, 2007 as compared to $134.1 million for the nine months ended September 30, 2006 was primarily the result of an increase of $33.8 million fromBlackRock Solutions products and services primarily driven by new assignments, and increases of $24.1 million in fund accounting services, $22.6 million in fees earned related to securities lending and $13.6 million for other advisory service fees. - 39 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006. (continued) Expenses | | | | | | | | | | | | | | | | | Nine months ended
September 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | | % | | Expenses: | | | | | | | | | | | | | | Employee compensation and benefits | | $ | 1,270,883 | | $ | 566,993 | | $ | 703,890 | | | 124.1 | % | Portfolio administration and servicing costs | | | 401,014 | | | 48,529 | | | 352,485 | | | NM | | Amortization of deferred sales commissions | | | 79,034 | | | 4,645 | | | 74,389 | | | NM | | General and administration | | | 602,290 | | | 192,666 | | | 409,624 | | | 212.6 | % | Termination of closed-end fund administration and servicing arrangements | | | 128,114 | | | — | | | 128,114 | | | NM | | Fee sharing payment | | | — | | | 34,450 | | | (34,450 | ) | | (100.0 | )% | Amortization of intangible assets | | | 93,193 | | | 6,451 | | | 86,742 | | | NM | | | | | | | | | | | | | | | | Total expenses | | $ | 2,574,528 | | $ | 853,734 | | $ | 1,720,794 | | | 201.6 | % | | | | | | | | | | | | | | |
NM – Not Meaningful Total expenses, which reflect the impact of the MLIM Transaction since September 29, 2006, increased $1,720.8 million, or 201.6%, to $2,574.5 million for the nine months ended September 30, 2007, compared with $853.7 million for the nine months ended September 30, 2006. Total expense included integration charges related to the MLIM Transaction of $19.3 million and $90.6 million in the first nine months of 2007 and 2006, respectively. The nine months ended September 30, 2007 included $19.0 million and $0.3 million of MLIM integration charges in general and administration and employee compensation and benefits, respectively, compared to $43.1 million and $47.5 million of integration charges in general and administration and employee compensation and benefits, respectively in the nine months ended September 30, 2006. Employee Compensation and Benefits Employee compensation and benefits expense increased by $703.9 million, or 124.1%, to $1,270.9 million, at September 30, 2007 compared to $567.0 million for the nine months ended September 30, 2006. The increase in employee compensation and benefits expense was primarily attributable to increases in salaries and benefits, and incentive compensation and stock-based compensation of $135.2$366.7 million, $276.3 million and $25.9$51.3 million, respectively. The increase of $135.2$366.7 million, or 160.3%151.2%, in salaries and benefits was primarily attributable to higher staffing levels associated with business growth and the MLIM Transaction.Transaction and business growth. Employees (excluding employees of Metric Management Properties, Inc., “Metric”)Metric) at March 31,September 30, 2007 totaled 4,7665,125 as compared to 1,8324,565 at March 31,September 30, 2006. The $25.9$276.3 million increase in incentive compensation was primarily attributable to higher advisory fees and operating income offset by lower incentive compensationincome. Portfolio Administration and Servicing Costs Portfolio administration and servicing costs increased $352.5 million to $401.0 million for the nine months ended September 30, 2007, compared to $48.5 million for the nine months ended September 30, 2006. These costs include payments to third parties, including Merrill Lynch and PNC, primarily associated with lower performance fees earned on the Company’s alternative investmentadministration and servicing of client investments in certain BlackRock products. - 2740 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the threenine months ended March 31,September 30, 2007 as compared with the threenine months ended March 31,September 30, 2006. (continued) ExpenseExpenses (continued)
Amortization of Deferred Sales Commissions Amortization of deferred sales commissions increased by $74.4 million to $79.0 million for the nine months ended September 30, 2007 as compared to $4.6 million for the nine months ended September 30, 2006. The increase in amortization of deferred sales commissions is primarily the result of the assumption of distribution financing arrangements from MLIM at the end of third quarter 2006 and from PNC in second quarter 2007. General and Administration Expense | | | | Three months ended March 31, | | Variance | | Nine months ended
September 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | % | | 2007 | | 2006 | | Amount | | % | | General and administration expense: | | | | | | | | | | | | | | | | | Portfolio services | | | $ | 119,567 | | $ | 15,797 | | $ | 103,770 | | NM | | Marketing and promotional | | $ | 75,580 | | $ | 13,052 | | $ | 62,528 | | 479.1% | | | 118,340 | | | 44,170 | | | 74,170 | | 167.9 | % | Occupancy | | | 33,232 | | | 10,228 | | | 23,004 | | 224.9% | | | 96,175 | | | 34,414 | | | 61,761 | | 179.5 | % | Technology | | | 28,438 | | | 6,490 | | | 21,948 | | 338.2% | | | 90,189 | | | 29,404 | | | 60,785 | | 206.7 | % | Portfolio services | | | 37,729 | | | 4,671 | | | 33,058 | | NM | | Closed-end fund launch costs | | | | 34,828 | | | 5,464 | | | 29,364 | | NM | | Other general and administration | | | 48,057 | | | 17,758 | | | 30,299 | | 170.6% | | | 143,191 | | | 63,417 | | | 79,774 | | 125.8 | % | | | | | | | | | | | | | | | | | | Total general and administration expense | | $ | 223,036 | | $ | 52,199 | | $ | 170,837 | | 327.3% | | $ | 602,290 | | $ | 192,666 | | $ | 409,624 | | 212.6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM—NM – Not Meaningful
General and administration expense increased $170.8$409.6 million, or 327.3%212.6%, for the threenine months ended March 31,September 30, 2007 to $223.0$602.3 million compared to $52.2$192.7 million for the threenine months ended March 31,September 30, 2006. The increase in general and administration expense was due to increases in portfolio services expense of $103.8 million, marketing and promotional expense of $62.5 million, portfolio services expense of $33.1$74.2 million, occupancy expense of $23.0$61.8 million, technology expense of $21.9$60.8 million, closed-end fund launch costs of $29.4 million and other general and administration expense of $30.3$79.8 million. Marketing and promotional expense increased $62.5 million, or 479.1%, to $75.6 million
- 41 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the threenine months ended March 31,September 30, 2007 as compared to $13.1 million forwith the threenine months ended March 31, 2006 primarily due to increased marketing activities of $42.5 million (which included $23.2 million related to domesticSeptember 30, 2006. (continued) General and international marketing efforts, $13.2 million related to fund launch costs of a new closed-end fund in the first quarter, and $6.6 million related to BlackRock’s advertising and rebranding campaign) and $20.0 million of increased amortization of deferred mutual fund commissions assumed in the MLIM Transaction. Administration Expense (continued) Portfolio services costs increased by $33.1$103.8 million to $37.7$119.6 million, relatedrelating to supporting higher AUM levels and increased trading activities. Marketing and promotional expense increased $74.2 million, or 167.9%, to $118.3 million for the nine months ended September 30, 2007, compared to $44.2 million for the nine months ended September 30, 2006 primarily due to increased marketing activities, including $68.2 million related to domestic and international marketing efforts and $6.0 million related to BlackRock’s advertising and rebranding campaign. Occupancy costs for the threenine months ended March 31,September 30, 2007 totaled $33.2$96.2 million, representing a $23.0$61.8 million, or 224.9%179.5%, increase from $10.2$34.4 million for the threenine months ended March 31,September 30, 2006. The increase in occupancy costs primarily reflects costs related to the expansion of corporate facilities related toas a result of the MLIM Transactiontransaction and business growth. Technology expenses increased $21.9$60.8 million, or 338.2%206.7%, to $28.4$90.2 million compared to $6.5$29.4 million for the threenine months ended March 31,September 30, 2006 partially due to $8.6primarily result of a $19.1 million increase in technology consulting expenses associated with operating growth, and a $4.9$15.8 million increase in depreciation expense.expense and a $14.3 million increase in software licensing and maintenance costs. Closed-end fund launch costs totaled $34.8 million for the nine months ended September 30, 2007 relating to three new closed-end funds launched during the period, generating approximately $3.0 billion in AUM. Closed-end fund launch costs for the nine months ended September 30, 2006 totaled $5.5 million relating to one new closed-end fund launched during the period, generating $765 million in AUM. Other general and administration costs increased by $30.3$79.8 million to $48.1$143.2 million from $17.8$63.4 million, including $15.5a $23.4 million and $20.0 million increase in professional fees.fees and office related expenses, respectively, and a $6 million capital contribution to sponsored investment funds. - 28 -
PART I – FINANCIAL INFORMATION (continued)Termination of Closed-end Fund Administration and Servicing Arrangements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Operating results forFor the threenine months ended March 31,September 30, 2007, as comparedBlackRock recorded a one-time expense of $128.1 million, related to the termination of administration and servicing arrangements with the three months ended March 31, 2006. (continued)Merrill Lynch on 40 closed-end funds with original terms of 30-40 years.
Fee Sharing Payment For the quarternine months ended March 31,September 30, 2006, BlackRock expensedrecorded a one-time fee sharing paymentexpense of $34.5 million, representing a payment related to a large institutional real estate equity client account acquired in the SSRSSRM Holdings, Inc. acquisition in January 2005. Amortization of Intangible Assets The $29.0$86.7 million increase in amortization of intangible assets to $31.0$93.2 million for the threenine months ended March 31,September 30, 2007 compared to $2.0$6.5 million for the threenine months ended March 31,September 30, 2006 primarily reflects the amortization of finite-lived intangible assets acquired in the MLIM Transaction. - 42 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006. (continued) Non-Operating Income, andNet of Non-Controlling Interest Non-operating income, net of non-controlling interest, for the threenine months ended March 31,September 30, 2007 and 2006 werewas as follows: | | | | Three months ended March 31, | | Variance | | Nine months ended
September 30, | | Variance | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | % | | 2007 | | 2006 | | Amount | | % | Total non-operating income | | $ | 157,731 | | | $ | 13,095 | | | $ | 144,636 | | | NM | | $ | 499,639 | | | $ | 19,819 | | | $ | 479,820 | | | NM | Non-controlling interest | | | (124,668 | ) | | | (642 | ) | | | (124,026 | ) | | NM | | | (354,669 | ) | | | (2,394 | ) | | | (352,275 | ) | | NM | | | | | | | | | | | | | | | | | | | | | | | | Total non-operating income, net of non-controlling interest | | $ | 33,063 | | | $ | 12,453 | | | $ | 20,610 | | | 165.5% | | $ | 144,970 | | | $ | 17,425 | | | $ | 127,545 | | | NM | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM – Not Meaningful The components of non-operating income, net of non-controlling interest, for the threenine months ended March 31,September 30, 2007 and 2006 arewere as follows: | | | | Three months ended | | Variance | | | | | | | | | | | | March 31, | | | | | Nine months ended
September 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | % | | 2007 | | 2006 | | Amount | | % | | Non-operating income, net of non-controlling interest: | | | | | | | | | | | | | | | | | Net gain (loss) on investments, net of non-controlling interest: | | | | | | | | | | | | | | | | | Private equity1 | | $ | 10,267 | | | $ | — | | | $ | 10,267 | | | NM | | $ | 55,315 | | | $ | — | | | $ | 55,315 | | | NM | | Real estate2 | | | (1,164 | ) | | | 215 | | | | (1,379 | ) | | NM | | Real estate | | | | 29,372 | | | | 434 | | | | 28,938 | | | NM | | Other alternative products | | | 8,650 | | | | 4,398 | | | | 4,252 | | | 96.7% | | | 17,639 | | | | 2,184 | | | | 15,455 | | | NM | | Other3 | | | 7,939 | | | | 4,039 | | | | 3,900 | | | 96.6% | | Other2 | | | | 21,463 | | | | 4,152 | | | | 17,311 | | | 416.9 | % | | | | | | | | | | | | | | | | | | | | | | | | Total net gain on investments, net of non-controlling interest | | | 25,692 | | | | 8,652 | | | | 17,040 | | | 196.9% | | | 123,789 | | | | 6,770 | | | | 117,019 | | | NM | | Interest and dividend income | | | 18,357 | | | | 5,770 | | | | 12,587 | | | 218.1% | | | 52,204 | | | | 16,676 | | | | 35,528 | | | 213.0 | % | Interest expense | | | (10,986 | ) | | | (1,969 | ) | | | (9,017 | ) | | NM | | | (31,023 | ) | | | (6,021 | ) | | | (25,002 | ) | | 415.2 | % | | | | | | | | | | | | | | | | | | | | | | | | Total non-operating income, net of non-controlling interest | | $ | 33,063 | | | $ | 12,453 | | | $ | 20,610 | | | 165.5% | | $ | 144,970 | | | $ | 17,425 | | | $ | 127,545 | | | NM | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM – Not Meaningful | 1 | Includes earnings on BlackRock’s limited partnership investments in private equity funds. |
| 2
| Includes BlackRock’s share of one-time syndication costs related to a real estate investment fund established in 2006.
|
| 32
| Includes investments related to equity, fixed income, CDOs, deferred compensation arrangements and BlackRock’s seed capital hedging program. |
- 29 -
PART I – FINANCIAL INFORMATION (continued)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Operating results for the three months ended March 31, 2007 as compared with the three months ended March 31, 2006. (continued)
Non-Operating Income and Non-Controlling Interest (continued)
Non-operating income, net of non-controlling interest, increased primarily as the result of certain investments in BlackRock private equity funds and investments in other alternative products. Non-operating income increased $144.6$127.5 million to $157.7$145.0 million for the quarternine months ended March 31,September 30, 2007 as compared to $13.1$17.4 million for the quarternine months ended March 31,September 30, 2006 as a result of a $141.1$117.0 million increase in net gain on investments, net of non-controlling interest, and $12.6a $35.5 million increase in interest and dividend income, partially offset by a $9.0$25.0 million increase in interest expense primarily related to borrowings under BlackRock’s revolving credit agreement. The increase in the net gain on investments, in 2007net of non-controlling interest, was primarily due to market appreciation andan increase in net investment gains on consolidated private equity investments. Non-controlling interestall investments due to market conditions and significant growth of the Company’s investments in earnings of consolidated products increased $124.0 millionsponsored investment products. - 43 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the quarternine months ended March 31,September 30, 2007 due toas compared with the increase in consolidated investments.nine months ended September 30, 2006. (continued) Income Taxes Income tax expense was $109.9$298.1 million and $41.6$90.0 million for the quartersnine months ended March 31,September 30, 2007 and 2006, respectively, representing an effective tax raterates of 36.0%30.7% and 37.0%, respectively. The reduction in the tax rate is primarily the result of a one-time tax benefit of $51.4 million, recognized in the third quarter of 2007, due to tax legislation changes enacted in third quarter 2007 in the United Kingdom and Germany, which resulted in a revaluation of certain deferred tax liabilities. Net Income Net income totaled $195.4$672.8 million, or $1.48$5.12 per diluted share, for the threenine months ended March 31,September 30, 2007 and increased $124.5an increase of $519.7 million, or $0.42$2.83 per diluted share, as compared to the threenine months ended March 31,September 30, 2006. Net income for the quarternine months ended March 31,September 30, 2007 includes the after-tax impactimpacts of the termination of closed-end fund administration and servicing arrangements, the portion of certain LTIP awards to be funded in January 2007 bythrough a capital contribution of BlackRock common stock held by PNC, integration expensescosts related to the MLIM Transaction and aQuellos acquisition and an expected contribution by Merrill Lynch to fund certain compensation of former MLIM employees, of $7.7$82.0 million, $4.5$25.3 million, $12.4 million and $1.6$4.8 million, respectively. In addition, the United Kingdom and Germany enacted legislation reducing corporate income tax rates resulting in a one-time decrease of $51.4 million in income tax expense which is included in net income. MLIM and Quellos integration costs primarily include compensation costs, professional fees and other general and administration expenses.rebranding costs. Net income of $70.9$153.2 million during the threenine months ended March 31,September 30, 2006 included the after-tax impactimpacts of the portion of LTIP awards funded by a capital contribution of BlackRock stock held by PNC of $7.4$22.7 million and MLIM integration costs of $4.1$57.1 million. Exclusive of these items, fully diluted earnings per share, as adjusted, for the threenine months ended March 31,September 30, 2007 as adjusted, increased $0.36,$2.19, or 29.3%62.9%, compared to the threenine months ended March 31,September 30, 2006. - 30 -
PART I – FINANCIAL INFORMATION (continued)Operating Margin
Item 2.The Company’s operating margin was 24.3% for the nine months ended September 30, 2007 compared to 20.9% for the nine months ended September 30, 2006. Operating margin for the nine months ended September 30, 2007 includes the impacts of $128.1 million for the termination of closed-end fund administration and servicing arrangements, $40.8 million of closed-end fund launch costs and commissions and $19.4 million of integration costs. Operating margin for the nine months ended September 30, 2006 includes the impact of $6.9 million of closed-end fund launch costs and commission and $90.6 million of integration costs. The increase in operating margin is primarily due to the reduction of integration costs as well as operating leverage associated with the growth in revenue.
Operating margin, as adjusted, was 36.9% and 35.9% for the nine months ended September 30, 2007 and the nine months ended September 30, 2006, respectively. Operating margin, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations. - 44 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended March 31,September 30, 2007 as compared with the three months ended December 31, 2006.June 30, 2007. Revenue | | | | Three months ended | | | | | | Three months ended | | | | | | | March 31, | | December 31, | | Variance | | September 30, | | June 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | % | | 2007 | | Amount | | % | | Investment advisory and administration fees: | | | | | | | | | | | | | | | | | Equity and balanced | | | $ | 580,302 | | $ | 527,800 | | $ | 52,502 | | | 9.9 | % | Fixed income | | $ | 233,907 | | $ | 229,230 | | $ | 4,677 | | | 2.0% | | | 230,373 | | | 222,506 | | | 7,867 | | | 3.5 | % | Cash management | | | 115,389 | | | 110,754 | | | 4,635 | | | 4.2% | | | 128,381 | | | 120,859 | | | 7,522 | | | 6.2 | % | Equity and balanced | | | 453,847 | | | 451,247 | | | 2,600 | | | 0.6% | | Alternative investment products | | | 70,365 | | | 71,736 | | | (1,371 | ) | | (1.9)% | | | 87,374 | | | 79,445 | | | 7,929 | | | 10.0 | % | | | | | | | | | | | | | | | | | | | | Investment advisory and administration base fees | | | 873,508 | | | 862,967 | | | 10,541 | | | 1.2% | | | 1,026,430 | | | 950,610 | | | 75,820 | | | 8.0 | % | Investment advisory performance fees | | | 22,418 | | | 39,914 | | | (17,496 | ) | | (43.8)% | | | 149,382 | | | 25,720 | | | 123,662 | | | 480.8 | % | | | | | | | | | | | | | | | | | | | | Total investment advisory and administration fees | | | 895,926 | | | 902,881 | | | (6,955 | ) | | (0.8)% | | | 1,175,812 | | | 976,330 | | | 199,482 | | | 20.4 | % | | | | | | | | | | | | Distribution fees | | | | 32,310 | | | 32,867 | | | (557 | ) | | (1.7 | )% | | | | | | | | | | | | | | Other revenue: | | | | | | | | | | | | | | | | | BlackRock Solutions | | | 42,314 | | | 45,473 | | | (3,159 | ) | | (6.9)% | | | 47,683 | | | 46,296 | | | 1,387 | | | 3.0 | % | Other revenue | | | 67,134 | | | 70,171 | | | (3,037 | ) | | (4.3)% | | | 42,274 | | | 41,530 | | | 744 | | | 1.8 | % | | | | | | | | | | | | | | | | | | | | Total other revenue | | | 109,448 | | | 115,644 | | | (6,196 | ) | | (5.4)% | | | 89,957 | | | 87,826 | | | 2,131 | | | 2.4 | % | | | | | | | | | | | | | | | | | | | | Total revenue | | $ | 1,005,374 | | $ | 1,018,525 | | $ | (13,151 | ) | | (1.3)% | | $ | 1,298,079 | | $ | 1,097,023 | | $ | 201,056 | | | 18.3 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue for the three months ended March 31,September 30, 2007 decreased $13.2increased $201.1 million, or 1.3%18.3%, to $1,005.4$1,298.1 million, compared with $1,018.5$1,097.0 million for the three months ended December 31, 2006.June 30, 2007. Investment advisory and administration base fees increased $10.5$75.8 million, or 1.28.0%,to $873.5$1,026.4 million for the three months ended March 31,September 30, 2007, compared with $863.0$950.6 million for the three months ended December 31, 2006.June 30, 2007. Performance fees decreased $17.5increased $123.7 million, or 43.8%, to $22.4$149.4 million, compared with $39.9$25.7 million for the three months ended December 31, 2006. The decrease in performance fees was primarily the result of timing issues pertaining to annual performance lock periods for energy, fund of funds and fixed income products.June 30, 2007. Other income decreasedrevenue increased by $6.2$2.1 million, or 5.4%2.4%, to $109.4$90.0 million for the three months ended March 31,September 30, 2007, compared with $115.6$87.8 million for the three months ended December 31, 2006.June 30, 2007. ExpenseInvestment Advisory and Administration Fees
The increase in investment advisory and administration fees of $199.5 million, or 20.4%, was the result of an increase in investment advisory and administration base fees of $75.8 million, or 8.0%, to $1,026.4 million for the three months ended September 30, 2007 compared with $950.6 million for the three months ended June 30, 2007 and an increase in performance fees of $123.7 million, to $149.4 million for the three months ended September 30, 2007 compared with $25.7 million for the three months ended June 30, 2007. Investment advisory and administration base fees increased for the three months ended September 30, 2007 primarily due to increased AUM of $69.5 billion during third quarter 2007 resulting from net new business of $41.0 billion, market appreciation of $20.3 billion and foreign exchange gains of $8.2 billion, as well as one additional revenue day. | | | | | | | | | | | | | | | | Three months ended | | | | | | | | | March 31, | | December 31, | | Variance | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | | % | Expense: | | | | | | | | | | | | | Employee compensation and benefits | | $ | 352,398 | | $ | 378,594 | | $ | (26,196 | ) | | (6.9)% | Portfolio administration and servicing costs | | | 126,677 | | | 120,259 | | | 6,418 | | | 5.3% | General and administration | | | 223,036 | | | 242,526 | | | (19,490 | ) | | (8.0)% | Amortization of intangible assets | | | 31,032 | | | 31,064 | | | (32 | ) | | (0.1)% | | | | | | | | | | | | | | Total expense | | $ | 733,143 | | $ | 772,443 | | $ | (39,300 | ) | | (5.1)% | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The increase in base investment advisory and administration fees of $75.8 million for the three months ended September 30, 2007 compared with the three months ended June 30, 2007 consisted of increases of $52.5 million in equity and balanced products, $7.9 million in fixed income products, $7.9 million in alternative investment products and $7.5 million in cash management products. The increases in investment advisory and administration fees for equity and balanced products, fixed income products, alternative investment products and cash management products were driven by increases in AUM of $18.3 billion, $17.5 billion, $2.8 billion and $30.9 billion, respectively. - 3145 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended March 31,September 30, 2007 as compared with the three months ended December 31, 2006.June 30, 2007. (continued) Investment Advisory and Administration Fees (continued) Performance fees increased by $123.7 million to $149.4 million for the three months ended September 30, 2007 compared to $25.7 million for the three months ended June 30, 2007 primarily as a result of the timing of the completion of the measurement periods for various alternative products, including equity and fixed income hedge funds and real estate products. Other Revenue Other revenue of $90.0 million for the three months ended September 30, 2007 increased $2.1 million compared with the three months ended June 30, 2007. The increase in other revenue was primarily the result of a $13.6 million increase in advisory service fees andBlackRock Solutions products and services, partially offset by a decline in fees for fund accounting services of $6.8 million and fees related to securities lending of $4.2 million. Expenses | | | | | | | | | | | | | | | | | Three months ended | | | | | | | | | | September 30, | | June 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | Amount | | | % | | Expenses: | | | | | | | | | | | | | | Employee compensation and benefits | | $ | 505,107 | | $ | 413,377 | | $ | 91,730 | | | 22.2 | % | Portfolio administration and servicing costs | | | 138,850 | | | 131,077 | | | 7,773 | | | 5.9 | % | Amortization of deferred sales commissions | | | 28,763 | | | 28,713 | | | 50 | | | 0.2 | % | General and administration | | | 194,442 | | | 210,780 | | | (16,338 | ) | | (7.8 | )% | Termination of closed-end fund administration and servicing arrangements | | | 128,114 | | | — | | | 128,114 | | | NM | | Amortization of intangible assets | | | 31,085 | | | 31,075 | | | 10 | | | NM | | | | | | | | | | | | | | | | Total expenses | | $ | 1,026,361 | | $ | 815,022 | | $ | 211,339 | | | 25.9 | % | | | | | | | | | | | | | | |
Total expenses increased $211.3 million, or 25.9%, to $1,026.4 million for the three months ended September 30, 2007, compared with $815.0 million for the three months ended June 30, 2007. Integration charges related to the MLIM Transaction of $6.1 million and $6.0 million were recorded in general and administration expense for the three months ended September 30, 2007 and June 30, 2007, respectively. - 46 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended September 30, 2007 as compared with the three months ended June 30, 2007. (continued) Expense (continued) Total expense decreased $39.3 million, or 5.1%, to $733.1 million for the three months ended March 31, 2007, compared with $772.4 million for the three months ended December 31, 2006. The decrease was primarily attributable to decreases in employee compensation and benefits and general and administration expense, partially offset by increases in portfolio administration and servicing costs.
Employee Compensation and Benefits Employee compensation and benefits expense decreasedincreased by $26.2$91.7 million, or 6.9%22.2%, to $352.4$505.1 million at March 31,September 30, 2007 compared to $378.6$413.4 million for the three months ended December 31, 2006.June 30, 2007. The decreaseincrease in employee compensation and benefits expense was primarily attributable to decreasesincreases in LTIP expenseincentive compensation, and salaries and benefits of $18.3$84.9 million and a lower$9.8 million, respectively. The $84.9 million increase in incentive compensation costs which offsetwas primarily attributable to higher operating income and direct incentives associated with higher performance fees earned on the Company’s alternative investment products. The increase of $9.8 million, or 4.8%, in salaries and benefit expenses duebenefits was primarily attributable to merit raisesincreased payroll tax accruals on higher incentive compensation and increased headcount.higher staffing levels associated with business growth. Employees (excluding Metric) at September 30, 2007 totaled 5,125 as compared to 4,837 at June 30, 2007. Amortization of Deferred Sales Commissions Amortization of deferred sales commissions was relatively unchanged for the three months ended September 30, 2007 as compared to the three months ended June 30, 2007. General and Administration Expense | | | | Three months ended | | | | | | Three months ended | | | | | | | March 31, 2007 | | December 31, 2006 | | Variance | | September 30, | | June 30, | | Variance | | | (Dollar amounts in thousands) | | Amount | | % | | 2007 | | Amount | | % | | General and administration expense: | | | | | | | | | | | | | | | | | Portfolio services | | | $ | 43,844 | | $ | 37,994 | | $ | 5,850 | | | 15.4 | % | Marketing and promotional | | $ | 75,580 | | $ | 87,335 | | $ | (11,755 | ) | | (13.5)% | | | 35,146 | | | 42,324 | | | (7,178 | ) | | (17.0 | )% | Occupancy | | | 33,232 | | | 29,671 | | | 3,561 | | | 12.0% | | | 34,506 | | | 28,438 | | | 6,068 | | | 21.3 | | Technology | | | 28,438 | | | 33,982 | | | (5,544 | ) | | (16.3)% | | | 28,547 | | | 33,205 | | | (4,658 | ) | | (14.0 | )% | Portfolio services | | | 37,729 | | | 35,897 | | | 1,832 | | | 5.1% | | Closed-end fund launch costs | | | | 1,875 | | | 19,801 | | | (17,926 | ) | | (90.5 | )% | Other general and administration | | | 48,057 | | | 55,641 | | | (7,584 | ) | | (13.6)% | | | 50,524 | | | 49,018 | | | 1,506 | | | 3.1 | % | | | | | | | | | | | | | | | | | | | | Total general and administration expense | | $ | 223,036 | | $ | 242,526 | | $ | (19,490 | ) | | (8.0)% | | $ | 194,442 | | $ | 210,780 | | $ | (16,338 | ) | | (7.8 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
- 47 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended September 30, 2007 as compared with the three months ended June 30, 2007. (continued) General and Administration Expense (continued) General and administration expense, which included MLIM integration costs of $7.1$6.0 million and $45.3$6.1 million in the first quartersecond and third quarters of 2007, and the fourth quarter 2006, respectively, decreased $19.5$16.3 million, or 8.0%7.8%, for the three months ended March 31,September 30, 2007 to $223.0$194.4 million, compared to $242.5$210.8 million for the three months ended December 31, 2006.June 30, 2007. The decrease in general and administration expense was primarily due to decreases in closed-end fund launch costs of $17.9 million and marketing and promotional expense of $11.8 million, technology expense of $5.5 million, and other general and administration expense of $7.6$7.2 million, partially offset by an increase of $3.6 millionincreases in occupancy expenses.of $6.1 million and portfolio services of $5.9 million. MarketingClosed-end fund launch costs totaled $1.9 million and promotional expense decreased $11.8 million, or 13.5%, to $75.6$19.8 million for the three months ended March 31,September 30, 2007 and June 30, 2007, respectively. The decrease in closed-end fund launch costs for the three months ended September 30, 2007 as compared to $87.3the three months ended June 30, 2007 was the result of the larger size of the fund which was launched in the second quarter. Marketing and promotional expense decreased $7.2 million to $35.1 million for the three months ended December 31, 2006September 30, 2007 primarily due to decreased expenses of $18.2a $4.4 million decline related to BlackRock’s advertising and rebranding campaign partially offset by $7.0and a $2.8 million in higher fund launch costsdecline related to a new closed-end fund. Technology expenses decreased $5.5 million, or 16.3%, to $28.4 million, compared to $34.0domestic and international marketing efforts. Occupancy costs increased $6.1 million for the three months ended December 31, 2006September 30, 2007, as compared to the three months ended June 30, 2007 primarily due to $8.6 million in consulting expenses associated with the MLIM integration. Other general and administration expenses decreased by $7.6 million primarily related to lower MLIM integration costs in the first quarter 2007. The increase in occupancy costs primarily reflects costs related to the expansion of corporate facilities as a result of business growth. Portfolio services costs increased by $5.9 million to $43.8 million, related to business growth.supporting higher AUM levels and increased trading activities.
- 32 -
PART I – FINANCIAL INFORMATION (continued)Termination of Closed-end Fund Administration and Servicing Arrangements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Operating results forFor the three months ended March 31,September 30, 2007, as comparedBlackRock recorded a one-time expense of $128.1 million, related to the termination of administration and servicing arrangements with the three months ended December 31, 2006.Merrill Lynch on 40 closed-end funds with original terms of 30-40 years.
Non-Operating Income, andNet of Non-Controlling Interest Non-operating income, net of non-controlling interest, for the three months ended March 31,September 30, 2007 and December 31, 2006 wereJune 30, 2007 was as follows: | | | | Three months ended | | | | | | Three months ended | | | | | | | March 31, | | December 31, | | Variance | | September 30, | | June 30, | | Variance | | | (Dollar amounts in thousands) | | 2007 | | 2006 | | Amount | | % | | 2007 | | Amount | | % | | Total non-operating income | | $ | 157,731 | | | $ | 36,614 | | | $ | 121,117 | | | 330.8% | | $ | 128,189 | | | $ | 213,718 | | | $ | (85,529 | ) | | (40.0 | )% | Non-controlling interest | | | (124,668 | ) | | | (13,774 | ) | | | (110,894 | ) | | NM | | | (81,539 | ) | | | (148,463 | ) | | | 66,924 | | | 45.1 | % | | | | | | | | | | | | | | | | | | | | | | | | Total non-operating income, net of non-controlling interest | | $ | 33,063 | | | $ | 22,840 | | | $ | 10,223 | | | 44.8% | | $ | 46,650 | | | $ | 65,255 | | | $ | (18,605 | ) | | (28.5 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM – Not Meaningful
- 48 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended September 30, 2007 as compared with the three months ended June 30, 2007. (continued) Non-Operating Income, Net of Non-Controlling Interest (continued) The components of non-operating income, net of non-controlling interest, for the three months ended March 31,September 30, 2007 and 2006 areJune 30, 2007 were as follows: | | | | | | | | | | | | | | | | | | Three months ended | | | | | | | | | | March 31, | | | December 31, | | | Variance | | (Dollar amounts in thousands) | | 2007 | | | 2006 | | | Amount | | | % | Non-operating income, net of non-controlling interest: | | | | | | | | | | | | | | | Net gain (loss) on investments, net of non-controlling interest: | | | | | | | | | | | | | | | Private equity1 | | $ | 10,267 | | | $ | — | | | $ | 10,267 | | | NM | Real Estate2 | | | (1,164 | ) | | | 598 | | | | (1,762 | ) | | (294.6)% | Other alternative products | | | 8,650 | | | | 3,924 | | | | 4,726 | | | 120.4% | Other3 | | | 7,939 | | | | 9,470 | | | | (1,531 | ) | | (16.2)% | | | | | | | | | | | | | | | | Total net gain on investments, net of non-controlling interest | | | 25,692 | | | | 13,992 | | | | 11,700 | | | 83.6% | Interest and dividend income | | | 18,357 | | | | 12,743 | | | | 5,614 | | | 44.1% | Interest expense | | | (10,986 | ) | | | (3,895 | ) | | | (7,091 | ) | | 182.1% | | | | | | | | | | | | | | | | Total non-operating income, net of non-controlling interest | | $ | 33,063 | | | $ | 22,840 | | | $ | 10,223 | | | 44.8% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM – Not Meaningful
| | | | | | | | | | | | | | | | | | | Three months ended | | | | | | | | | | | September 30, | | | June 30, | | | Variance | | | (Dollar amounts in thousands) | | 2007 | | | Amount | | | % | | Non-operating income, net of non-controlling interest: | | | | | | | | | | | | | | | | Net gain (loss) on investments, net of non-controlling interest: | | | | | | | | | | | | | | | | Private equity1 | | $ | 12,413 | | | $ | 32,636 | | | $ | (20,223 | ) | | (62.0 | )% | Real estate | | | 26,915 | | | | 3,621 | | | | 23,294 | | | NM | | Other alternative products | | | (4,940 | ) | | | 13,929 | | | | (18,869 | ) | | (135.5 | )% | Other2 | | | 1,968 | | | | 11,554 | | | | (9,586 | ) | | (83.0 | )% | | | | | | | | | | | | | | | | | Total net gain on investments, net of non-controlling interest | | | 36,356 | | | | 61,740 | | | | (25,384 | ) | | (41.1 | )% | Interest and dividend income | | | 20,109 | | | | 13,738 | | | | 6,371 | | | 46.4 | % | Interest expense | | | (9,815 | ) | | | (10,223 | ) | | | 408 | | | 4.0 | % | | | | | | | | | | | | | | | | | Total non-operating income, net of non-controlling interest | | $ | 46,650 | | | $ | 65,255 | | | $ | (18,605 | ) | | (28.5 | )% | | | | | | | | | | | | | | | | |
1 | Includes earnings on BlackRock’s limited partnership investments in private equity funds. |
| 2
| Includes BlackRock’s share of one-time syndication costs related to a real estate investment fund established in 2006.
|
| 32
| Includes investments related to equity, fixed income, CDOs, deferred compensation arrangements and BlackRock’s seed capital hedging program. |
Non-operating income, net of non-controlling interest, increased primarily as the result of certain BlackRock private equity funds. Total non-operating income increased $121.1decreased $18.6 million to $157.7$46.7 million for the quarter ended March 31,September 30, 2007 as compared to $36.6$65.3 million for the quarter ended December 31, 2006June 30, 2007 primarily as a result of a $122.6$25.4 million increasedecrease in net gaingains on investments, andnet of non-controlling interest, partially offset by a $5.6$6.4 million increase in interest and dividend income, partially offset by a $7.1 million increase in interest expense related to a BlackRock’s revolving credit agreement.income. The increasedecrease in net gain on investments in third quarter 2007 was primarily due to market appreciation anda decline in net investment gains on consolidated private equity investments. Non-controlling interestinvestments and other alternative products, offset by an increase in earnings of consolidated products increased $110.9 million for the quarter ended March 31, 2007 primarily due to the impact of consolidated private equity investments.real estate products. - 3349 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended March 31,September 30, 2007 as compared with the three months ended December 31, 2006.June 30, 2007. (continued) Income Taxes Income tax expense was $109.9$63.2 million and $68.3$125.0 million for the quarters ended March 31,September 30, 2007 and December 31, 2006,June 30, 2007, respectively, representing an effective tax raterates of 36.0%19.8% and 37.0%36.0%, respectively. The reduction in the tax rate is primarily the result of a one-time tax benefit of $51.4 million recorded in the third quarter of 2007, due to recent tax legislation changes in the United Kingdom and Germany, which resulted in a revaluation of certain deferred tax liabilities. Net Income Net income totaled $195.4$255.2 million for the three months ended March 31,September 30, 2007 and increased $26.0an increase of $33.0 million, or 15.3%14.8%, as compared to the three months ended December 31, 2006.June 30, 2007. Net income for the quarter ended March 31, 2006,September 30, 2007 includes the after-tax impactimpacts of the termination of closed-end fund administration and servicing arrangements, the portion of certain LTIP awards to be funded through a capital contribution of BlackRock common stock held by PNC, integration costs related to the MLIM Transaction and Quellos acquisition and an expected contribution by Merrill Lynch to fund certain compensation of former MLIM employees, of $82.0 million, $8.7 million and $4.0 million and $1.6 million, respectively. In addition, net income for the three months ended September 30, 2007, includes a $51.4 million one-time reduction in Januarycorporate income taxes as a result of enacted legislation in the United Kingdom and Germany. MLIM and Quellos integration costs primarily consist of compensation costs, professional fees and rebranding costs. Net income of $222.2 million during the three months ended June 30, 2007 byincludes the after-tax impacts of certain LTIP awards to be funded through a capital contribution of BlackRock common stock held by PNC and integration expenses related to the MLIM transactionTransaction of $7.7$8.9 million and $4.5$3.9 million, respectively. MLIM integration costs primarily include professional fees and other general and administration expenses. Net income of $169.4 million during the three months ended December 31, 2006 included MLIM integration costs of $32.4 million and the after-tax impact of the portion of LTIP awards funded by a capital contribution of BlackRock stock held by PNC of $8.8 million. Exclusive of these items, and a contribution by Merrill Lynch to fund certain compensation of former MLIM employees of $1.6 million and $1.2 millionnet income, as adjusted, for the three months ended March 31,September 30, 2007 and December 31, 2006, respectively, net income for the three months ended March 31, 2007, as adjusted, decreased $2.5increased $63.5 million, or 1.2%26.8%, compared to the three months ended December 31, 2006.June 30, 2007. Operating Margin The Company’s operating margin was 20.9% for the three months ended September 30, 2007 compared to 25.7% for the three months ended June 30, 2007. Operating margin for the three months ended September 30, 2007 includes the impacts of $128.1 million for the termination of closed-end fund administration and servicing arrangements and $6.2 million of integration costs. Operating margin for the three months ended June 30, 2007 includes the impact of $24.1 million of closed-end fund launch costs and commissions and $6.0 million of integration costs. The decline in operating margin is primarily due to the impact of the termination of closed-end fund administration and servicing arrangements. Operating margin, as adjusted, was 37.7% and 36.1% for the three months ended September 30, 2007 and the three months ended June 30, 2007, respectively. Operating margin, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations. - 50 -
PART I — FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources The Company manages its consolidated financial condition and funding to maintain appropriate liquidity for the business. At September 30, 2007, the Company had total cash and cash equivalents on its condensed consolidated statement of financial condition of $2,320.6 million. This total was prior to the Company’s $562.5 million payment to Quellos on October 1, 2007, its $128.1 million payment to Merrill Lynch on October 31, 2007 (recorded as an expense in the third quarter) and its $27 million payment on October 1, 2007 to purchase the 20% interest in a fund of hedge funds manager. Cash and cash equivalents, net of amounts in consolidated sponsored investment funds ($191.5 million) and net of regulatory capital requirements ($215.7 million, not necessarily all cash requirements) was $1,913.4 million. In addition, as of September 30, 2007, the Company had committed access to $2,050 million of undrawn cash via its 2007 five-year credit facility, resulting in cash, net of the cash held by consolidated sponsored investment funds and regulatory capital requirements, plus credit capacity of $3,963.4 million. Sources of BlackRock’s operating cash include investment advisory and administration fees, revenues fromBlackRock Solutions’Solutionsproducts and services, property management fees, mutual fund distribution fees and realized earnings on certain of the Company’s investments. BlackRock primarily uses its operating cash to pay employee compensation and benefits, portfolio administration and servicing costs, general and administration expenses, interest on the Company’s debt, purchases of investments, capital expenditures and dividends on BlackRock’s stock. Management believes that the Company has sufficient access to cash through its operations and the revolving credit facility described below to fund its operations in the near term. Cash used in the Company’s operating activities totaled $296.9 million for the quarter ended March 31, 2007, and included payments of approximately $593.9 million related to the Company’s 2006 incentive compensation programs and approximately $35 million related to LTIP.
In December 2006, the Company entered into aan unsecured revolving credit agreement (the “Credit Agreement”)facility with a syndicate of banking institutions with an initial borrowing capacity of $600 million. The term of theinstitutions. This facility, is five years and interest currently accrues at the applicable London Interbank Offer Rate (“LIBOR”as amended in February 2007 (the “2006 facility”) plus 0.20%. The Company pays a commitment fee of 0.04% per annum on the undrawn balance. Additionally, for each day that the total amount outstanding is greater than 50% of the total commitments by all lenders,, permitted the Company pays a utilization fee of 0.05% per annum on the total amount outstanding. Financial covenants in the Credit Agreement require BlackRock to maintain a maximum debt/EBITDA ratio of 3.0 and a minimum EBITDA/interest expense ratio of 4.0. BlackRock is currently in compliance with these covenants. The facility is intendedborrow up to fund various investment opportunities as well as BlackRock’s near-term operating cash requirements.$800,000. In FebruaryAugust 2007, the Company increasedterminated the capacity of2006 facility and entered into a new five year $2.5 billion unsecured revolving credit facility (the “2007 facility”), which permits the facility to $800 million. The Credit Agreement allows BlackRockCompany to request an additional $200$500 million of borrowing capacity, subject to lender credit approval, up to a maximum of $1$3 billion. During AprilThe 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to EBITDA, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied at September 30, 2007. The 2007 facility was used to refinance the 2006 facility and will provide back-up liquidity, fund ongoing working capital for general corporate purposes and fund various investment opportunities. At September 30, 2007, the Company repaid $80had $450 million outstanding under the 2007 facility with interest rates between 5.105% to 5.845% and maturity dates between October 2007 and September 2008. In September 2007, the Company issued $700 million in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “Notes”). The Notes were issued at a discount of $5.6 million, which is being amortized over the facilityten-year term. A portion of the net proceeds of the Notes was used to fund the initial cash payment for the acquisition of the fund of funds business of Quellos and extended the remaining balanceremainder will be used for general corporate purposes. In June 2007, the Company announced that it had entered into May 2007.an asset purchase agreement under which it would acquire certain assets of the fund of funds business of Quellos for up to $1.7 billion. This transaction closed on October 1, 2007, and BlackRock paid Quellos $562.5 million in cash and $187.5 million in BlackRock common stock. The common stock will be held in escrow for up to three years and is available to satisfy certain indemnification obligations of Quellos under the asset purchase agreement. In addition, Quellos may receive up to an additional $970 million in cash and stock over three and a half years contingent upon certain operating measures. On October 31, 2007, BlackRock made a $128.1 million one-time payment to Merrill Lynch related to the termination of 40 closed-end fund administration and servicing arrangements. - 3451 -
PART I –— FINANCIAL INFORMATION (continued) Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued) As
Approximately $191.5 million in cash and cash equivalents and $1,872.8 million in investments included in the Company’s condensed consolidated statement of March 31,financial condition at September 30, 2007 are held by sponsored investment funds that are consolidated by BlackRock in accordance with GAAP. The Company may not be able to access such cash or investments to use in its operating activities. In addition, a significant portion of the Company’s equity method and cost method investments, as well as its portion of consolidated sponsored investment fund investments are illiquid in nature and, as such, are not readily convertible to cash. At September 30, 2007, long-term debt, including current maturities, was $946.9 million. Debt service and repayment requirements are $51.3 million in 2008, $51.3 million in 2009 and $298.0 million in 2010. At September 30, 2007, the Company has $389had $676.3 million of various capital commitments to fund sponsored investment funds in which it has an ownership stake and unfunded commitmentcommitments related to two private equity warehouse facilities. Generally, the timing of the funding of thesecapital commitments is uncertain. Net cash used in investing activities was $171.1 million during the quarter ended March 31, 2007, primarily consisting of $125.6 million in purchases of investments, $53.5 million in settlement payments relateduncertain and such commitments could expire before funding. The Company intends to the SSR and MLIM acquisitions and $27.9 million ofmake additional capital expenditures. Partially offsetting these cash outflows was $41.7 million in cash received on the sale of investments.
Net cash flowscommitments from financing activities was $324.3 million during the quarter ended March 31, 2007, primarily consisting of the drawdown of $550 million on the Company’s revolving line of credit, partially offset by $164.4 million in common stock repurchases relatedtime to the LTIP put obligation and the payment of $88.4 million in dividends.time.
On August 2, 2006, BlackRock announced that its Boardboard of directors had authorized a new share repurchase program to purchase an additional 2.1 million shares. Pursuant to this repurchase program, BlackRock may make repurchases from time to time, as market conditions warrant, in the open market or in privately negotiated transactions at the discretion of management. The Company had not repurchased any1,348,600 shares under the program in open market transactions under the current authorizationfor approximately $200.9 million through March 31,September 30, 2007. Through May 2, 2007,As a result, the Company had repurchased a total of 445,700is currently authorized to repurchase an additional 751,400 shares at an average price of $151.44 per share. At March 31, 2007, long-term debt, including current maturities, was $253.2 million. Debt service requirements are $6.9 million in 2007, $6.8 million in 2008 and $6.7 million in 2009 and 2010.
Approximately $98.7 million in cash and cash equivalents and $1.5 billion in investments included in the Company’s 2007 consolidated statement of financial condition is held by entities that are deemed to be controlled by BlackRock in accordance with GAAP. As such, the Company may not be able to access such cash or investments to use inunder its operating activities.share repurchase program.
The Company is required to maintain net capital in certain international jurisdictions, which is met in part by retaining cash and cash equivalent investments in those jurisdictions. As a result, the Company may be restricted in its ability to transfer cash between different jurisdictions. Additionally, transfer of cash between international jurisdictions, including repatriation to the United States, may have adverse tax consequences that could discourage such transfers. At March 31,September 30, 2007, the Company was required to maintain approximately $242.0$215.7 million in net capital at these subsidiaries and is in compliance with all regulatory minimum net capital requirements. - 3552 -
PART I –— FINANCIAL INFORMATION (continued) | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Item 3.QuantitativeContractual Obligations, Commitments and Qualitative Disclosures About Market RiskContingencies
The following table sets forth contractual obligations, commitments and contingencies by year of payments as of September 30, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | Payments Due In: | | (Dollar amounts in thousands) | | Remainder
of 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | Thereafter | | Total | Long-term borrowings2 | | | | | | | | | | | | | | | | | | | | | | Long-term notes | | $ | — | | $ | 43,750 | | $ | 43,750 | | $ | 43,750 | | $ | 43,750 | | $ | 962,500 | | $ | 1,137,500 | Convertible debentures3 | | | — | | | 6,563 | | | 6,563 | | | 253,278 | | | — | | | — | | | 266,404 | Acquired management contract | | | — | | | 1,000 | | | 1,000 | | | 1,000 | | | — | | | — | | | 3,000 | Short-term borrowings2 | | | 154,655 | | | 309,085 | | | — | | | — | | | — | | | — | | | 463,740 | Operating lease commitments | | | 20,042 | | | 69,289 | | | 64,248 | | | 58,502 | | | 55,824 | | | 266,751 | | | 534,656 | Purchase obligations | | | 96,063 | | | 368,605 | | | 271,816 | | | 3,305 | | | 3,300 | | | — | | | 743,089 | Investment commitments1 | | | 2,772 | | | 10,795 | | | — | | | 52,449 | | | 1,509 | | | 608,785 | | | 676,310 | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 273,532 | | $ | 809,087 | | $ | 387,377 | | $ | 412,284 | | $ | 104,383 | | $ | 1,838,036 | | $ | 3,824,699 | | | | | | | | | | | | | | | | | | | | | | |
1 | Generally, the timing of the funding of these commitments is unknown, therefore amounts are shown to be paid upon the expiration date of the commitment. Actual payments could be made at any time prior to such date and, if not called by that date, such commitments would expire. |
2 | Amounts include principal repayments and interest payments. |
3 | The principal balance of the convertible debentures is assumed to be repaid at BlackRock’s option in 2010, and the related interest has been included through the call date. However, beginning in February 2009 the debentures may be converted at the option of the holders. |
The table above does not include approximately $76 million of uncertain tax positions as the timing of the ultimate outcome is currently unknown. Excluded from the table is the Company’s obligations for the following: (i) a $562.5 million payment related to the acquisition of certain assets of the fund of funds business of Quellos, (ii) a $128.1 million payment to Merrill Lynch related to the termination of 40 closed-end fund administration and servicing arrangements, and (iii) a $27 million payment for the remaining 20% of an investment manager of a fund of hedge funds. Such payments have been made in October 2007. In addition, excluded from the normal course of its business, BlackRock is primarily exposed to equity market price risk, interest rate risk and foreign exchange rate risk. The tables below represent BlackRock’s total consolidated investment portfolio. Approximately $1.5 billion of BlackRock’s total investment portfolio is maintained in investments whichtable are deemed to be controlled by BlackRock in accordance with GAAP and are, therefore, consolidated even though BlackRock may or may not own a majority of such funds. Equity risk inherent in those funds, as displayed below, would be limitedadditional contingent payments related to its net exposureacquisitions of: (i) SSRM Holdings, Inc., (ii) an investment manager of $371.5 million on these investments.a fund of hedge funds, and (iii) certain assets of Quellos. As the remaining contingent obligations are primarily dependent upon performance of certain operating measures, the ultimate liabilities are not certain as of September 30, 2007. | Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a leading investment management firm, BlackRock devotes significant resources across all of its operations to identifying, measuring, monitoring, managing and analyzing market and operating risks, including in the management and oversight of its own investment portfolio. The Boardboard of Directorsdirectors of the Company has adopted guidelines for the review of investments to be made by the Company, requiring, among other things, that all investments be reviewed by the Company’s Investment Committee, which consists of senior officers of the Company, and that certain investments over prescribed thresholds receive prior approval from the Audit Committeeaudit committee or the Boardboard of Directorsdirectors depending on the circumstances. Equity Price Risk
BlackRock’s investments, including consolidated investments, expose BlackRock to equity price risk. The following table summarizes the fair values of the investments exposed to equity price risk and provides a sensitivity analysis of the estimated fair values of those investments, assuming a 10% increase or decrease in equity prices:
| | | | | | | | | | | | | Book Value | | Fair value assuming 10% increase | | Fair value assuming 10% decrease | March 31, 2007 | | | | | | | Equity securities | | $ | 95,579 | | $ | 105,137 | | $ | 86,021 | Commingled investments | | | 151,114 | | | 166,225 | | | 136,003 | | | | | | | | | | | Total investments, trading | | | 246,693 | | | 271,362 | | | 222,024 | | | | | | | | | | | Commingled investments | | | 70,322 | | | 77,354 | | | 63,290 | | | | | | | | | | | Total available-for-sale investments | | | 70,322 | | | 77,354 | | | 63,290 | | | | | | | | | | | Other fund investments | | | 1,511,305 | | | 1,662,436 | | | 1,360,175 | Deferred compensation plans | | | 21,714 | | | 23,885 | | | 19,543 | | | | | | | | | | | Total other investments | | | 1,533,019 | | | 1,686,321 | | | 1,379,718 | | | | | | | | | | | Total equity price risk on investments | | $ | 1,850,034 | | $ | 2,035,037 | | $ | 1,665,032 | | | | | | | | | | | | | | | December 31, 2006 | | | | | | | Equity securities | | $ | 155,930 | | $ | 171,523 | | $ | 140,337 | Commingled investments | | | 125,115 | | | 137,627 | | | 112,604 | | | | | | | | | | | Total investments, trading | | | 281,045 | | | 309,150 | | | 252,941 | | | | | | | | | | | Commingled investments | | | 77,272 | | | 84,999 | | | 69,545 | | | | | | | | | | | Total available-for-sale investments | | | 77,272 | | | 84,999 | | | 69,545 | | | | | | | | | | | Other fund investments | | | 1,377,541 | | | 1,515,295 | | | 1,239,787 | Deferred compensation plans | | | 18,146 | | | 19,961 | | | 16,331 | | | | | | | | | | | Total other investments | | | 1,395,687 | | | 1,535,256 | | | 1,256,118 | | | | | | | | | | | Total equity price risk on investments | | $ | 1,754,004 | | $ | 1,929,405 | | $ | 1,578,604 | | | | | | | | | | | | | | | | | | | | | |
- 3653 -
PART I –— FINANCIAL INFORMATION (continued) | Item 3. | Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued) |
EquityAUM Market Price Risk (continued)
BlackRock’s deferred compensation plans comprise $49.2 million and $31.3 million of total trading investments, and $21.7 million and $18.1 million of total other investments, at March 31, 2007 and December 31, 2006, respectively, and reflect investments held by BlackRock with respect to senior employee elections under BlackRock’s deferred compensation plans. Any change in the fair value of these investments is offset by a corresponding change in the related deferred compensation liability.
During 2007, the Company established a hedging program to hedge exposure to equity price risk in certain investments through the use of derivative instruments.
Interest Rate Risk
The following table summarizes the fair value of the Company’s investments in debt securities and funds that invest primarily in debt securities that expose BlackRock to interest rate risk at March 31, 2007 and December 31, 2006. The table also provides a sensitivity analysis of the estimated fair value of these financial instruments, assuming 100 basis point upward and downward parallel shifts in the yield curve:
| | | | | | | | | | | | | Book Value | | Fair market value assuming +100 basis point shift | | Fair market value assuming -100 basis point shift | March 31, 2007 | | | | | | | Municipal debt securities | | $ | 185,910 | | $ | 158,024 | | $ | 213,797 | U.S. government securities | | | 7,529 | | | 7,529 | | | 7,529 | Mortgage-backed securities | | | 6,797 | | | 6,797 | | | 6,797 | Corporate debt | | | 1,470 | | | 1,470 | | | 1,470 | Other debt securities | | | 5,215 | | | 5,215 | | | 5,215 | | | | | | | | | | | Total trading investments | | | 206,921 | | | 179,035 | | | 234,808 | | | | | | | | | | | Commingled investments | | | 59,477 | | | 57,721 | | | 61,233 | Collateralized debt obligations | | | 28,139 | | | 27,502 | | | 28,776 | Other | | | 2,820 | | | 2,538 | | | 3,102 | | | | | | | | | | | Total available-for-sale investments | | | 90,436 | | | 87,761 | | | 93,111 | | | | | | | | | | | Other fund investments | | | 47,472 | | | 46,286 | | | 48,658 | | | | | | | | | | | Total investments | | $ | 344,829 | | $ | 313,082 | | $ | 376,577 | | | | | | | | | | | | | | | December 31, 2006 | | | | | | | Municipal debt securities | | $ | 154,510 | | $ | 130,224 | | $ | 178,796 | Corporate notes and bonds | | | 13,656 | | | 13,192 | | | 14,120 | Commingled investments | | | 23,272 | | | 23,275 | | | 23,269 | | | | | | | | | | | Total trading investments | | | 191,438 | | | 166,691 | | | 216,185 | | | | | | | | | | | Commingled investments | | | 48,377 | | | 48,305 | | | 48,449 | Collateralized debt obligations | | | 29,362 | | | 29,346 | | | 29,378 | Other | | | 3,431 | | | 3,397 | | | 3,465 | | | | | | | | | | | Total available-for-sale investments | | | 81,170 | | | 81,048 | | | 81,292 | | | | | | | | | | | Other fund investments | | | 70,962 | | | 71,209 | | | 70,715 | | | | | | | | | | | Total investments | | $ | 343,570 | | $ | 318,948 | | $ | 368,192 | | | | | | | | | | | | | | | | | | | | | |
- 37 -
PART I – FINANCIAL INFORMATION (continued)
Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)
Foreign Exchange Rate Risk
The Company has increased its foreign exchange rate risk as a result of the MLIM transaction. The Company has investments totaling approximately $144 million that are denominated in foreign currencies, primarily the British pound sterling and the euro. A 10% increase or decrease in foreign exchange rates as of March 31, 2007 would result in an increase or a decline in value of the investment portfolio of approximately $14 million. In addition, the Company maintains certain foreign currency denominated cash accounts totaling approximately $496.0 million at March 31, 2007, primarily in British pounds sterling. A 10% increase or decrease in foreign exchange rates as of March 31, 2007 would result in an increase or decline in value of such cash accounts of approximately $49.6 million.
Other Market Risks
In February 2005, the Company issued $250 million aggregate principal amount of convertible debentures, which will be due in 2035 and bear interest at 2.625% per annum. Due to the Debentures’ conversion feature, these financial instruments are exposed to both interest rate risk and equity price risk. At March 31, 2007, the fair value of the debentures was $405.2 million. Assuming 100 basis point upward and downward parallel shifts in the yield curve, based on the fair value of the debentures on March 31, 2007, the fair value of the debentures would fluctuate to $398.6 million and $411.7 million, respectively. Assuming a 10% increase and 10% decrease in the Company’s stock price, based on the fair value of the debentures on March 31, 2007, the fair value of the Debentures would fluctuate to $437.2 million and $373.7 million, respectively.
In addition, BlackRock’s investment management revenues are primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns realized on AUM. DeclinesMovements in equity market prices, or interest rates, foreign exchange rates, or both,all three, could cause revenues to decline because of lower investment managementadvisory and administration fees by:
causing the value of AUM to decrease; causing the returns realized on AUM to decrease; causing clients to withdraw funds in favor of investmentsproducts in markets that they perceive to offer greater opportunity and that the CompanyBlackRock does not serve; and causing clients to rebalance assets away from investmentsproducts that BlackRock manages into investmentsproducts that BlackRock does not manage.manage; and causing clients to reallocate assets away from products that earn higher revenues into products that earn lower revenues. Item 4.ControlsCorporate Investments Portfolio Risks
In the normal course of its business, BlackRock is exposed to equity market price risk, interest rate risk and Proceduresforeign exchange rate risk associated with its corporate investments. BlackRock has investments primarily in sponsored investment products that invest in a variety of asset classes. Investments generally are made to establish a performance track record, for co-investment purposes or to hedge exposure to certain deferred compensation plans. Currently, the Company has a seed capital hedging program in which it enters into total return swaps to hedge exposure to certain equity investments. At September 30, 2007, the outstanding total return swaps had an aggregate notional value of approximately $82 million. At September 30, 2007, approximately $1,873 million of BlackRock’s total investments were maintained in sponsored investment funds that are deemed to be controlled by BlackRock in accordance with GAAP and are, therefore, consolidated even though BlackRock may not own a majority of such funds. The Company’s net economic exposure to its investment portfolio is as follows: | | | | | (Dollar amounts in millions) | | September 30, 2007 | | Total investments | | $ | 2,681 | | Consolidated investments | | | (1,873 | ) | Net exposure to consolidated investment funds | | | 347 | | | | | | | Total net “economic” investments | | $ | 1,155 | | | | | | |
Equity Market Price Risk At September 30, 2007, the Company’s net exposure to equity price risk is approximately $925 million (net of $82 million of certain equity investments that are hedged via total return swaps) of the Company’s net economic investments. The Company estimates that a 10% adverse change in equity prices would result in a decrease of approximately $92.5 million in the carrying value of such investments. Interest Rate Risk At September 30, 2007, the Company was exposed to interest-rate risk as a result of approximately $148 million of investments in debt securities and sponsored investment products that invest primarily in debt securities. Management considered a hypothetical 100 basis point fluctuation in interest rates and determined that the impact of such a fluctuation on these investments, individually and in the aggregate, would not have a material effect on BlackRock’s financial condition or results of operations. - 54 -
PART I — FINANCIAL INFORMATION (continued) | Item 3. | Quantitative and Qualitative Disclosures About Market Risk (continued) |
Foreign Exchange Rate Risk As discussed above, the Company invests in sponsored investment products that invest in a variety of asset classes. The carrying value of the net economic investments that are denominated in foreign currencies, primarily the British pound sterling and the euro, was $109 million. A 10% adverse change in foreign exchange rates would result in an $10.9 million decline in the investment portfolio. | Item 4. | Controls and Procedures |
Disclosure Controls and Procedures Under the direction of BlackRock’s Chief Executive Officer and Chief Financial Officer, BlackRock evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31,September 30, 2007. Based on this evaluation, BlackRock’s Chief Executive Officer and Chief Financial Officer have concluded that BlackRock’s disclosure controls and procedures were effective as of March 31,September 30, 2007. Internal Control andover Financial Reporting Other than system conversion activities related to the transition of support from Merrill Lynch to BlackRock, there have been no changes in internal control over financial reporting during the quarter ended March 31,September 30, 2007 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting. The Company is continuing to evaluate itshas substantially completed an evaluation of internal controlscontrol over financial reporting in light of the MLIM Transaction and expects to make additional modifications to its internal controls after completion of itsbased upon this review. - 3855 -
PART II –— OTHER INFORMATION Item 1.Legal Proceedings
BlackRock has received subpoenas from various U.S. federal and state governmental and regulatory authorities and various information requests from the SEC in connection with industry-wide investigations of U.S. mutual fund matters. BlackRock is continuing to cooperate fully in these matters. From time to time, BlackRock is subject to other regulatory inquiries and proceedings.
The Company, including a number of the legal entities acquired in the MLIM Transaction, has been named as a defendant in various legal actions, including arbitrations, class actions, and other litigation and regulatory proceedings arising in connection with BlackRock’s activities. Additionally, the investment funds that the Company manages are subject to lawsuits, any of which could harm the investment returns of the applicable fund or result in managers being liable to the funds for any resulting damages. While Merrill Lynch has agreed to indemnify the Company for certain of the pre-closing liabilities related to legal and regulatory proceedings acquired in the MLIM Transaction, entities that BlackRock now owns may be named as defendants in these matters and the Company’s reputation may be negatively impacted.
Management, after consultation with legal counsel, does not currently anticipate that the aggregate liability, if any, arising out of such regulatory matters or lawsuits will have a material adverse effect on BlackRock’s financial position, although at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations and cash flows in any future reporting period.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
| Item 1. | (c) | During the three months ended March 31, 2007, the Company made the following purchases of its common stock, which are registered pursuant to Section 12(b) of the Exchange Act.Legal Proceedings |
See footnote 12, Commitments and Contingencies, to the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filing. | | | | | | | | | | | | | | | Total Number of Shares Purchased | | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs1 | | January 1, 2007 through January 31, 2007 | | 967,703 | 2 | | $ | 169.15 | | — | | 2,100,000 | | February 1, 2007 through February 28, 2007 | | 4,196 | 3 | | $ | 169.17 | | — | | 2,100,000 | | March 1, 2007 through March 31, 2007 | | — | | | | — | | — | | 2,100,000 | 4 | | | | | | | | | | | | | Total | | 971,899 | | | $ | 169.15 | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(c) During the three months ended September 30, 2007, the Company made the following purchases of its common stock, which are registered pursuant to Section 12(b) of the Exchange Act. | | | | | | | | | | | | | | Total Number of Shares Purchased | | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | July 1, 2007 through July 31, 2007 | | 1,309 | 2 | | $ | 169.92 | | — | | 1,310,500 | | | | | | August 1, 2007 through August 31, 2007 | | 559,525 | 2 | | $ | 148.52 | | 559,100 | | 751,400 | | | | | | September 1, 2007 through September 30, 2007 | | — | | | | — | | — | | 751,400 | | | | | | | | | | | | Total | | 560,834 | | | $ | 148.57 | | 559,100 | | | | | | | | | | | | | |
1 | On August 2, 2006, the Company announced a 2.1 million share repurchase program with no stated expiration date. |
| 2 | Includes 966,512 shares purchased by the Company from employees on January 29, 2007 pursuant to a put feature available in connection with the payment of BlackRock’s LTIP awards on that date. This number also includes purchases made by the Company to satisfy income tax withholding obligations of employees related to the vesting ofwith certain restricted stock or restricted stock unit awards. All such purchases were made outside of the publicly announced share repurchase program.employees. |
| 3
| On February 8, 2007, the Company purchased 4,196 shares from employees pursuant to a put feature available in connection with the payment of BlackRock’s LTIP awards.
|
| 4
| During the second quarter 2007 through May 2, 2007, the Company had repurchased a total of 445,700 shares at an average price of $151.44 per share under the program.
|
- 3956 -
PART II –— OTHER INFORMATION (continued) Item 6.Exhibits
As used in this exhibit list, “BlackRock” refers to BlackRock, Inc. (formerly named New BlackRock, Inc. and previously, New Boise, Inc.) and “Old BlackRock” refers to BlackRock Holdco 2, Inc. (formerly named BlackRock, Inc.), which is the predecessor of BlackRock. | | | | Exhibit No. | | Description | | | | 2.1(1) | | Transaction Agreement and Plan of Merger, dated as of February 15, 2006, by and among Merrill Lynch & Co., Inc., BlackRock, Boise Merger Sub, Inc. and Old BlackRock. | | | | 3.1(2) | | Amended and Restated Certificate of Incorporation of BlackRock. | | | | 3.2(2) | | Amended and Restated Bylaws of BlackRock. | | | | 3.3(2) | | Certificate of Designations of Series A Convertible Participating Preferred Stock of BlackRock. | | | | 4.1(3) | | Specimen of Common Stock Certificate. | | | | 4.2(4) | | Indenture, dated as of February 23, 2005, between Old BlackRock and The Bank of New York (as successor-in-interest to JPMorgan Chase Bank, N.A.), as trustee, relating to the 2.625% Convertible Debentures due 2035. | | | | 4.3(4) | | Form of 2.625% Convertible Debenture due 2035 (included as Exhibit A in Exhibit 4.2). | | | | 4.4(2) | | First Supplemental Indenture, dated September 29, 2006.2006, relating to the 2.625% Convertible Debentures due 2035. | | | | 4.5(18) | | Indenture, dated September 17, 2007, between BlackRock and The Bank of New York, as trustee, relating to senior debt securities. | | | | 4.6(19) | | Form of 6.25% Notes due 2017. | | | | 10.1(5) | | Tax Disaffiliation Agreement, dated October 6, 1999, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | | | | 10.2(3) | | BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.3(3) | | Amendment No. 1 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.4(3) | | Amendment No. 2 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.5(3) | | Amendment No. 3 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.6(3) | | Amendment No. 4 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.7(3) | | BlackRock, Inc. 2002 Long-Term Retention and Incentive Program.+ | | | | 10.8(3) | | Amendment No. 1 to 2002 Long-Term Retention and Incentive Program.+ | | | | 10.9(3) | | Amendment No. 2 to 2002 Long-Term Retention and Incentive Program.+ | | | | 10.10(3) | | BlackRock, Inc. Nonemployee Directors Stock Compensation Plan.+ | | | | 10.11(3) | | BlackRock, Inc. Voluntary Deferred Compensation Plan.+ | | | | 10.12(3) | | BlackRock, Inc. Involuntary Deferred Compensation Plan.+ | | | | 10.13(2) | | Form of Stock Option Agreement expected to be used in connection with future grants of Stock Options under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ |
- 4057 -
PART II –— OTHER INFORMATION (continued) Item 6. Exhibits
| | | | | | 10.14(2) | | Form of Restricted Stock Agreement expected to be used in connection with future grants of Restricted Stock under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.15(2) | | Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.16(2) | | Form of Directors’ Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.17(6) | | BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+ | | | | 10.18(7) | | Amendment No. 1 to the BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+ | | | | 10.19(2) | | Registration Rights Agreement, dated as of September 29, 2006, among BlackRock, Merrill Lynch & Co., Inc. and the PNC Financial Service Group, Inc. | | | 10.20(5) | | Services Agreement, dated October 6, 1999, between Old BlackRock and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | | | 10.21(8)10.20(8) | | Agreement of Lease, dated May 3, 2000, between 40 East 52nd Street L.P. and Old BlackRock. | | | 10.22(9)10.21(9) | | Agreement of Lease, dated September 4, 2001, between 40 East 52nd Street L.P. and Old BlackRock. | | | 10.23(10)10.22(10) | | Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc., and The PNC Financial Services Group, Inc. | | | 10.24(1)10.23(1) | | First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement, dated as of October 10, 2002, among PNC Bancorp, Inc., The PNC Financial Services Group, Inc. and Old BlackRock. | | | 10.25(11)10.24(16) | | Amended and Restated 1999 Annual Incentive Performance Plan.+ | | | 10.26(12) | | Agreement of Lease, dated July 29, 2004, between Park Avenue Plaza Company L.P. and Old BlackRock. | | | 10.27(12) | | Letter Agreement, dated July 29, 2004, amending the Agreement of Lease between Park Avenue Plaza Company L.P. and Old BlackRock. | | | 10.28(13) | | Stock Purchase Agreement among MetLife, Inc., Metropolitan Life Insurance Company, SSRM Holdings, Inc. Old BlackRock and BlackRock Financial Management, Inc., dated August 25, 2004. | | | 10.29(4) | | Registration Rights AgreementSecond Amendment, dated as of February 23, 2005, between Old BlackRock and Morgan Stanley & Co. Incorporated, as representative of the initial purchasers named therein, relatingJune 11, 2007, to the 2.625% Convertible Debentures due 2035. |
- 41 -
PART II – OTHER INFORMATION (continued)
Item 6. Exhibits
| | | | | 10.30(1) | | Implementation and Stockholder Agreement, dated as of February 15, 2006, among The PNC Financial Services Group, Inc., BlackRock and Old BlackRock. | | | 10.31(1) | | Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and BlackRock. | | | 10.32(2) | | Letter to Robert C. Doll.+ | | | 10.33(14) | | Global Distribution Agreement, dated as of September 29, 2006, by and between BlackRock and Merrill Lynch & Co., Inc. | | | 10.34(14) | | Transition Services Agreement, dated as of September 29, 2006, by and between Merrill Lynch & Co., Inc. and BlackRock. | | | 10.35(15) | | Five-Year Revolving Credit Agreement dated as of December 19, 2006, by and among BlackRock, Wachovia Bank, National Association, as administrative agent, swingline lender and issuing lender, various lenders, Wachovia Capital Markets, LLC, as sole lead arranger and sole book manager, and ABN Amro Bank, N.V., HSBC Bank USA, National Association, JPMorgan Chase Bank and UBS Loan Finance LLC, as documentation agents. | | | 12.1 | | Ratio of Earnings to Fixed Charges. | | | 31.1 | | Section 302 Certification of Chief Executive Officer. | | | 31.2 | | Section 302 Certification of Chief Financial Officer. | | | 32.1 | | Section 906 Certification of Chief Executive Officer and Chief Financial Officer. |
(1) | Incorporated by Reference to Old BlackRock’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006. |
(2) | Incorporated by Reference to the Registrant’s Current Report on Form 8-K (Commission File No. 001-33099) filed with the Securities and Exchange Commission on October 5, 2006. |
(3) | Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-137708) filed with the Securities and Exchange Commission on September 29, 2006. |
(4) | Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K (Commission File No. 001-15305) for the year ended December 31, 2004. |
(5) | Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999. |
(6) | Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on March 14, 2000. |
(7) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2000. |
(8) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended March 31, 2000. |
(9) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2001. |
(10) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2002. |
(11) | Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K (Commission File No. 001-15305), for the year ended December 31, 2002. |
(12) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2004. |
(13) | Incorporated by Reference to Old BlackRock’s Current Report on Form 8-K (Commission File No. 001-15305) filed on August 30, 2004. |
- 42 -
EXHIBIT INDEX (continued)
(14) | Incorporated by Reference to BlackRock’s Registration Statement on Form S-4, as amended, originally filed with the Securities and Exchange Commission on June 9, 2006. |
(15) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 22, 2006. |
+ Denotes compensatory plans or arrangements.
- 43 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | BLACKROCK, INC.
(Registrant)
| | | | | Date: May 10, 2007 | | | | By: | | /s/ Paul L. Audet | | | | | | | Paul L. Audet
Managing Director &
Acting Chief Financial Officer
|
EXHIBIT INDEX
Exhibit No. Description
| | | Exhibit No. | | Description
| | | 2.1(1) | | Transaction Agreement and Plan of Merger, dated as of February 15, 2006, by and among Merrill Lynch & Co., Inc., BlackRock, Boise Merger Sub, Inc. and Old BlackRock. | | | 3.1(2) | | Amended and Restated Certificate of Incorporation of BlackRock. | | | 3.2(2) | | Amended and Restated Bylaws of BlackRock. | | | 3.3(2) | | Certificate of Designations of Series A Convertible Participating Preferred Stock of BlackRock. | | | 4.1(3) | | Specimen of Common Stock Certificate. | | | 4.2(4) | | Indenture, dated as of February 23, 2005, between Old BlackRock and The Bank of New York (as successor-in-interest to JPMorgan Chase Bank, N.A.), as trustee, relating to the 2.625% Convertible Debentures due 2035. | | | 4.3(4) | | Form of 2.625% Convertible Debenture due 2035 (included as Exhibit A in Exhibit 4.2). | | | 4.4(2) | | First Supplemental Indenture, dated September 29, 2006. | | | 10.1(5) | | Tax DisaffiliationShare Surrender Agreement, dated October 6, 1999,10, 2002, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | | | 10.2(3) | | BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | 10.3(3) | | Amendment No. 1 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | 10.4(3) | | Amendment No. 2 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | 10.5(3) | | Amendment No. 3 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | 10.6(3) | | Amendment No. 4 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | 10.7(3) | | BlackRock, Inc. 2002 Long-Term Retention and Incentive Program.+ | | | 10.8(3) | | Amendment No. 1 to 2002 Long-Term Retention and Incentive Program.+ | | | 10.9(3) | | Amendment No. 2 to 2002 Long-Term Retention and Incentive Program.+ | | | 10.10(3) | | BlackRock, Inc. Nonemployee Directors Stock Compensation Plan.+ | | | 10.11(3) | | BlackRock, Inc. Voluntary Deferred Compensation Plan.+ | | | 10.12(3) | | BlackRock, Inc. Involuntary Deferred Compensation Plan.+ | | | 10.13(2) | | Form of Stock Option Agreement expected to be used in connection with future grants of Stock Options under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ |
EXHIBIT INDEX (continued)
| | | 10.14(2) | | Form of Restricted Stock Agreement expected to be used in connection with future grants of Restricted Stock under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | 10.15(2) | | Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | 10.16(2) | | Form of Directors’ Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | 10.17(6) | | BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+ | | | 10.18(7) | | Amendment No. 1 to the BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+ | | | 10.19(2) | | Registration Rights Agreement, dated as of September 29, 2006, among BlackRock, Merrill Lynch & Co., Inc. and the PNC Financial Service Group, Inc. | | | 10.20(5) | | Services Agreement, dated October 6, 1999, between Old BlackRock and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | | | 10.21(8) | | Agreement of Lease, dated May 3, 2000, between 40 East 52nd Street L.P. and Old BlackRock. | | | 10.22(9) | | Agreement of Lease, dated September 4, 2001, between 40 East 52nd Street L.P. and Old BlackRock. | | | 10.23(10) | | Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc., and The PNC Financial Services Group, Inc. | | | 10.24(1) | | First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement, dated as of October 10, 2002, among PNC Bancorp, Inc., The PNC Financial Services Group, Inc. and Old BlackRock. | | | | 10.25(11) | | Amended and Restated 1999 Annual Incentive Performance Plan. + | | | | 10.26(12) | | Agreement of Lease, dated July 29, 2004, between Park Avenue Plaza Company L.P. and Old BlackRock. | | | | 10.27(12) | | Letter Agreement, dated July 29, 2004, amending the Agreement of Lease between Park Avenue Plaza Company L.P. and Old BlackRock. | | | | 10.28(13) | | Stock Purchase Agreement among MetLife, Inc., Metropolitan Life Insurance Company, SSRM Holdings, Inc. Old BlackRock and BlackRock Financial Management, Inc., dated August 25, 2004. | | | | 10.29(4) | | Registration Rights Agreement, dated as of February 23, 2005, between Old BlackRock and Morgan Stanley & Co. Incorporated, as representative of the initial purchasers named therein, relating to the 2.625% Convertible Debentures due 2035. |
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EXHIBIT INDEXPART II — OTHER INFORMATION (continued)
| | | | | | 10.30(1) | | Implementation and Stockholder Agreement, dated as of February 15, 2006, among The PNC Financial Services Group, Inc., BlackRock and Old BlackRock. | | | | 10.31(1) | | Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and BlackRock. | | | | 10.32(2) | | Letter to Robert C. Doll.+ | | | | 10.33(14) | | Global Distribution Agreement, dated as of September 29, 2006, by and between BlackRock and Merrill Lynch & Co., Inc. | | | | 10.34(14) | | Transition Services Agreement, dated as of September 29, 2006, by and between Merrill Lynch & Co., Inc. and BlackRock. | | | 10.35(15)10.35(17) | | Asset Purchase Agreement, dated as of June 26, 2007, by and among BlackRock, Inc., BAA Holdings, LLC and Quellos Holdings, LLC. | | | | 10.36(20) | | Five-Year Revolving Credit Agreement, dated as of December 19, 2006,August 22, 2007, by and among BlackRock, Inc., Wachovia Bank, National Association, as administrative agent, swingline lender and issuing lender, variousSumitomo Mitsui Banking Corporation, as Japanese Yen lender, a group of lenders, Wachovia Capital Markets, LLC and Citigroup Global Markets Inc., as solejoint lead arrangerarrangers and solejoint book manager,managers, Citigroup Global Markets Inc., as syndication agent, and ABN Amro Bank, N.V., HSBC Bank USA, National Association,N.A., JPMorgan Chase Bank, N.A., and UBS Loan Finance LLC,Morgan Stanley Bank, as documentation agents. | | | | 12.1 | | Computation of Ratio of Earnings to Fixed Charges. | | | | 18.1 | | Letter re: Change in Accounting Principles. | | | | 31.1 | | Section 302 Certification of Chief Executive Officer. | | | | 31.2 | | Section 302 Certification of Chief Financial Officer. | | | | 32.1 | | Section 906 Certification of Chief Executive Officer and Chief Financial Officer. |
| (1) | Incorporated by Reference to Old BlackRock’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006. |
| (2) | Incorporated by Reference to the Registrant’sBlackRock’s Current Report on Form 8-K (Commission File No. 001-33099) filed with the Securities and Exchange Commission on October 5, 2006. |
| (3) | Incorporated by Reference to the Registrant’sBlackRock’s Registration Statement on Form S-8 (Registration No. 333-137708) filed with the Securities and Exchange Commission on September 29, 2006. |
| (4) | Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K (Commission File No. 001-15305) for the year ended December 31, 2004. |
| (5) | Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999. |
| (6) | Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on March 14, 2000. |
| (7) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2000. |
| (8) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended March 31, 2000. |
| (9) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2001. |
| (10) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2002. |
| (11) | Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K (Commission File No. 001-15305), for the year ended December 31, 2002. |
| (12) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2004. |
| (13) | Incorporated by Reference to Old BlackRock’s Current Report on Form 8-K (Commission File No. 001-15305) filed on August 30, 2004. |
| (14) | Incorporated by Reference to BlackRock’s Registration Statement on Form S-4, as amended, originally filed with the Securities and Exchange Commission on June 9, 2006. |
| (15) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 22, 2006. |
| (16) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 15, 2007. |
| (17) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on July 2, 2007. |
| (18) | Incorporated by reference to BlackRock’s Registration Statement on Form S-3 (Registration No. 333-145976). |
+Denotes compensatory plans or arrangements.
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PART II — OTHER INFORMATION (continued) | (19) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on September 17, 2007. |
| (20) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on August 27, 2007. |
| + | Denotes compensatory plans or arrangements. |
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | BLACKROCK, INC. | | | (Registrant) | | | | | | By: | | /s/ Paul L. Audet | | Date: November 8, 2007 | | | | Paul L. Audet | | | | | Managing Director & Acting Chief Financial Officer |
EXHIBIT INDEX Exhibit No. Description | | | | Exhibit No. | | Description | | 2.1(1) | | Transaction Agreement and Plan of Merger, dated as of February 15, 2006, by and among Merrill Lynch & Co., Inc., BlackRock, Boise Merger Sub, Inc. and Old BlackRock. | | | | 3.1(2) | | Amended and Restated Certificate of Incorporation of BlackRock. | | | | 3.2(2) | | Amended and Restated Bylaws of BlackRock. | | | | 3.3(2) | | Certificate of Designations of Series A Convertible Participating Preferred Stock of BlackRock. | | | | 4.1(3) | | Specimen of Common Stock Certificate. | | | | 4.2(4) | | Indenture, dated as of February 23, 2005, between Old BlackRock and The Bank of New York (as successor-in-interest to JPMorgan Chase Bank, N.A.), as trustee, relating to the 2.625% Convertible Debentures due 2035. | | | | 4.3(4) | | Form of 2.625% Convertible Debenture due 2035 (included as Exhibit A in Exhibit 4.2). | | | | 4.4(2) | | First Supplemental Indenture, dated September 29, 2006, relating to the 2.625% Convertible Debentures due 2035. | | | | 4.5(18) | | Indenture, dated September 17, 2007, between BlackRock and The Bank of New York, as trustee, relating to senior debt securities. | | | | 4.6(19) | | Form of 6.25% Notes due 2017. | | | | 10.1(5) | | Tax Disaffiliation Agreement, dated October 6, 1999, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | | | | 10.2(3) | | BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.3(3) | | Amendment No. 1 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.4(3) | | Amendment No. 2 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.5(3) | | Amendment No. 3 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.6(3) | | Amendment No. 4 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.7(3) | | BlackRock, Inc. 2002 Long-Term Retention and Incentive Program.+ | | | | 10.8(3) | | Amendment No. 1 to 2002 Long-Term Retention and Incentive Program.+ | | | | 10.9(3) | | Amendment No. 2 to 2002 Long-Term Retention and Incentive Program.+ | | | | 10.10(3) | | BlackRock, Inc. Nonemployee Directors Stock Compensation Plan.+ | | | | 10.11(3) | | BlackRock, Inc. Voluntary Deferred Compensation Plan.+ | | | | 10.12(3) | | BlackRock, Inc. Involuntary Deferred Compensation Plan.+ | | | | 10.13(2) | | Form of Stock Option Agreement expected to be used in connection with future grants of Stock Options under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ |
EXHIBIT INDEX (continued) | | | | | | 10.14(2) | | Form of Restricted Stock Agreement expected to be used in connection with future grants of Restricted Stock under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.15(2) | | Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.16(2) | | Form of Directors’ Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | | | | 10.17(6) | | BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+ | | | | 10.18(7) | | Amendment No. 1 to the BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+ | | | | 10.19(2) | | Registration Rights Agreement, dated as of September 29, 2006, among BlackRock, Merrill Lynch & Co., Inc. and the PNC Financial Service Group, Inc. | | | | 10.20(8) | | Agreement of Lease, dated May 3, 2000, between 40 East 52nd Street L.P. and Old BlackRock. | | | | 10.21(9) | | Agreement of Lease, dated September 4, 2001, between 40 East 52nd Street L.P. and Old BlackRock. | | | | 10.22(10) | | Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc. | | | | 10.23(1) | | First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement, dated as of October 10, 2002, among PNC Bancorp, Inc., The PNC Financial Services Group, Inc. and Old BlackRock. | | | | 10.24(16) | | Second Amendment, dated as of June 11, 2007, to the Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc. | | | | 10.25(11) | | Amended and Restated 1999 Annual Incentive Performance Plan. + | | | | 10.26(12) | | Agreement of Lease, dated July 29, 2004, between Park Avenue Plaza Company L.P. and Old BlackRock. | | | | 10.27(12) | | Letter Agreement, dated July 29, 2004, amending the Agreement of Lease between Park Avenue Plaza Company L.P. and Old BlackRock. | | | | 10.28(13) | | Stock Purchase Agreement among MetLife, Inc., Metropolitan Life Insurance Company, SSRM Holdings, Inc. Old BlackRock and BlackRock Financial Management, Inc., dated August 25, 2004. | | | | 10.29(4) | | Registration Rights Agreement, dated as of February 23, 2005, between Old BlackRock and Morgan Stanley & Co. Incorporated, as representative of the initial purchasers named therein, relating to the 2.625% Convertible Debentures due 2035. |
EXHIBIT INDEX (continued) | | | | | | 10.30(1) | | Implementation and Stockholder Agreement, dated as of February 15, 2006, among The PNC Financial Services Group, Inc., BlackRock and Old BlackRock. | | | | 10.31(1) | | Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and BlackRock. | | | | 10.32(2) | | Letter to Robert C. Doll.+ | | | | 10.33(14) | | Global Distribution Agreement, dated as of September 29, 2006, by and between BlackRock and Merrill Lynch & Co., Inc. | | | | 10.34(14) | | Transition Services Agreement, dated as of September 29, 2006, by and between Merrill Lynch & Co., Inc. and BlackRock. | | | | 10.35(17) | | Asset Purchase Agreement, dated as of June 26, 2007, by and among BlackRock, Inc., BAA Holdings, LLC and Quellos Holdings, LLC. | | | | 10.36(20) | | Five-Year Revolving Credit Agreement, dated as of August 22, 2007, by and among BlackRock, Inc., Wachovia Bank, National Association, as administrative agent, swingline lender and issuing lender, Sumitomo Mitsui Banking Corporation, as Japanese Yen lender, a group of lenders, Wachovia Capital Markets, LLC and Citigroup Global Markets Inc., as joint lead arrangers and joint book managers, Citigroup Global Markets Inc., as syndication agent, and HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A., and Morgan Stanley Bank, as documentation agents. | | | | 12.1 | | Computation of Ratio of Earnings to Fixed Charges. | | | | 18.1 | | Letter re: Change in Accounting Principles. | | | | 31.1 | | Section 302 Certification of Chief Executive Officer. | | | | 31.2 | | Section 302 Certification of Chief Financial Officer. | | | | 32.1 | | Section 906 Certification of Chief Executive Officer and Chief Financial Officer. |
| (1) | Incorporated by Reference to Old BlackRock’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006. |
| (2) | Incorporated by Reference to BlackRock’s Current Report on Form 8-K (Commission File No. 001-33099) filed with the Securities and Exchange Commission on October 5, 2006. |
| (3) | Incorporated by Reference to BlackRock’s Registration Statement on Form S-8 (Registration No. 333-137708) filed with the Securities and Exchange Commission on September 29, 2006. |
| (4) | Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K (Commission File No. 001-15305) for the year ended December 31, 2004. |
| (5) | Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999. |
| (6) | Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on March 14, 2000. |
| (7) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2000. |
| (8) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended March 31, 2000. |
| (9) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2001. |
| (10) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2002. |
| (11) | Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K (Commission File No. 001-15305), for the year ended December 31, 2002. |
| (12) | Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2004. |
| (13) | Incorporated by Reference to Old BlackRock’s Current Report on Form 8-K (Commission File No. 001-15305) filed on August 30, 2004. |
| (14) | Incorporated by Reference to BlackRock’s Registration Statement on Form S-4, as amended, originally filed with the Securities and Exchange Commission on June 9, 2006. |
| (15) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 22, 2006. |
| (16) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 15, 2007. |
| (17) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on July 2, 2007. |
| (18) | Incorporated by reference to BlackRock’s Registration Statement on Form S-3 (Registration No. 333- 45976). |
| (19) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on September 17, 2007. |
| (20) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on August 27, 2007. |
| + | Denotes compensatory plans or arrangements. |
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