UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2007March 31, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number 001-33099
BlackRock, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 32-0174431 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
40 East 52nd Street, New York, NY 10022
(Address of principal executive offices)
(Zip Code)
(212) 810-5300
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “accelerated filer and large“large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Smaller reporting company ¨ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 31, 2007,April 30, 2008, there were 116,824,060117,807,051 shares of the registrant’s common stock outstanding.
Index to Form 10-Q
Page | ||||
PART I | ||||
FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements (unaudited) | |||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||
Item 4. | Controls and Procedures | |||
PART II | ||||
OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||
Item 6. | Exhibits |
- ii -
PART I —– FINANCIAL INFORMATION
Item 1. | Financial Statements |
Condensed Consolidated Statements of Financial Condition
(Dollar amounts in thousands)thousands, except per share data)
(unaudited)
September 30, 2007 | December 31, 2006 | |||||||||||||||
March 31, 2008 | December 31, 2007 | |||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 2,320,579 | $ | 1,160,304 | $ | 1,194,180 | $ | 1,656,200 | ||||||||
Accounts receivable | 1,155,996 | 964,366 | 1,490,837 | 1,235,940 | ||||||||||||
Due from affiliates | 96,606 | 113,184 | ||||||||||||||
Due from related parties | 254,337 | 174,853 | ||||||||||||||
Investments | 2,680,751 | 2,097,574 | 1,922,928 | 1,999,944 | ||||||||||||
Separate account assets | 4,829,861 | 4,299,879 | 4,147,981 | 4,669,874 | ||||||||||||
Deferred mutual fund sales commissions, net | 178,407 | 177,242 | 169,503 | 174,849 | ||||||||||||
Property and equipment, net | 250,481 | 214,784 | ||||||||||||||
Intangible assets, net | 5,789,240 | 5,882,430 | ||||||||||||||
Property and equipment (net of accumulated depreciation of $246,700 at March 31, 2008 and $225,645 at December 31, 2007) | 270,607 | 266,460 | ||||||||||||||
Intangible assets (net of accumulated amortization of $215,019 at March 31, 2008 and $178,450 at December 31, 2007) | 6,543,604 | 6,553,122 | ||||||||||||||
Goodwill | 5,454,521 | 5,257,017 | 5,500,414 | 5,519,714 | ||||||||||||
Other assets | 322,092 | 302,712 | 322,013 | 310,559 | ||||||||||||
Total assets | $ | 23,078,534 | $ | 20,469,492 | $ | 21,816,404 | $ | 22,561,515 | ||||||||
Liabilities | ||||||||||||||||
Accrued compensation | $ | 807,870 | $ | 1,051,273 | ||||||||||||
Accrued compensation and benefits | $ | 419,486 | $ | 1,086,590 | ||||||||||||
Accounts payable and accrued liabilities | 776,928 | 753,839 | 1,103,655 | 788,968 | ||||||||||||
Due to affiliates | 245,890 | 243,836 | ||||||||||||||
Due to related parties | 111,590 | 114,347 | ||||||||||||||
Short-term borrowings | 450,000 | — | 300,000 | 300,000 | ||||||||||||
Long-term borrowings | 946,879 | 253,167 | 947,162 | 947,021 | ||||||||||||
Separate account liabilities | 4,829,861 | 4,299,879 | 4,147,981 | 4,669,874 | ||||||||||||
Deferred taxes | 1,792,199 | 1,738,670 | ||||||||||||||
Deferred tax liabilities | 2,018,569 | 2,059,980 | ||||||||||||||
Other liabilities | 501,716 | 237,856 | 374,256 | 419,570 | ||||||||||||
Total liabilities | 10,351,343 | 8,578,520 | 9,422,699 | 10,386,350 | ||||||||||||
Non-controlling interest | 1,458,879 | 1,109,092 | ||||||||||||||
Non-controlling interests | 579,496 | 578,210 | ||||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||||
Stockholders’ equity | ||||||||||||||||
Common stock ($0.01 par value, 500,000,000 shares authorized, 117,381,582 shares issued at September 30, 2007 and December 31, 2006) | 1,174 | 1,174 | ||||||||||||||
Series A participating preferred stock ($0.01 par value, 500,000,000 shares authorized and 12,604,918 shares issued and outstanding) | 126 | 126 | ||||||||||||||
Common stock ($0.01 par value, 500,000,000 shares authorized, 118,573,367 shares issued, 116,432,527 and 116,059,560 shares outstanding at March 31, 2008 and December 31, 2007, respectively) | 1,186 | 1,186 | ||||||||||||||
Series A participating preferred stock ($0.01 par value, 500,000,000 shares authorized and 12,604,918 shares issued and outstanding at March 31, 2008 and December 31, 2007) | 126 | 126 | ||||||||||||||
Additional paid-in capital | 10,070,480 | 9,799,447 | 10,293,720 | 10,274,096 | ||||||||||||
Retained earnings | 1,387,478 | 993,821 | 1,759,534 | 1,622,041 | ||||||||||||
Accumulated other comprehensive income, net | 85,478 | 44,666 | ||||||||||||||
Treasury stock, common, at cost (2,025,045 and 972,685 shares held at September 30, 2007 and December 31, 2006, respectively) | (276,424 | ) | (57,354 | ) | ||||||||||||
Accumulated other comprehensive income | 91,620 | 71,020 | ||||||||||||||
Escrow shares, common, at cost (1,191,785 shares held at March 31, 2008 and December 31, 2007) | (187,500 | ) | (187,500 | ) | ||||||||||||
Treasury stock, common, at cost (949,055 and 1,322,022 shares held at March 31, 2008 and December 31, 2007, respectively) | (144,477 | ) | (184,014 | ) | ||||||||||||
Total stockholders’ equity | 11,268,312 | 10,781,880 | 11,814,209 | 11,596,955 | ||||||||||||
Total liabilities, non-controlling interest and stockholders’ equity | $ | 23,078,534 | $ | 20,469,492 | ||||||||||||
Total liabilities, non-controlling interests and stockholders’ equity | $ | 21,816,404 | $ | 22,561,515 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
- 1 -
PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Condensed Consolidated Statements of Income
(Dollar amounts in thousands, except per share data)
(unaudited)
Three months ended September 30, | Nine months ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2008 | 2007 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Investment advisory and administration base fees | ||||||||||||||||||||||||
Related parties | $ | 747,962 | $ | 574,780 | ||||||||||||||||||||
Other | 384,916 | 298,728 | ||||||||||||||||||||||
Investment advisory performance fees | 41,543 | 22,418 | ||||||||||||||||||||||
Investment advisory and administration fees | 1,174,421 | 895,926 | ||||||||||||||||||||||
Unaffiliated | $ | 495,127 | $ | 158,707 | $ | 1,169,760 | $ | 606,748 | ||||||||||||||||
Affiliated | 680,685 | 115,799 | 1,878,308 | 331,395 | ||||||||||||||||||||
Distribution fees | 32,310 | 2,263 | 89,997 | 7,177 | 35,319 | 24,820 | ||||||||||||||||||
Other revenue | 89,957 | 46,289 | 262,411 | 134,131 | ||||||||||||||||||||
Other | 85,541 | 80,231 | ||||||||||||||||||||||
Related parties | 4,857 | 4,397 | ||||||||||||||||||||||
Total revenue | 1,298,079 | 323,058 | 3,400,476 | 1,079,451 | 1,300,138 | 1,005,374 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Employee compensation and benefits | 505,107 | 198,099 | 1,270,883 | 566,993 | 468,949 | 347,302 | ||||||||||||||||||
Portfolio administration and servicing costs | ||||||||||||||||||||||||
Unaffiliated | 16,308 | 9,201 | 47,405 | 28,378 | ||||||||||||||||||||
Affiliated | 122,542 | 7,181 | 353,609 | 20,151 | ||||||||||||||||||||
Amortization of deferred sales commissions | 28,763 | 1,341 | 79,034 | 4,645 | ||||||||||||||||||||
Related parties | 130,246 | 117,516 | ||||||||||||||||||||||
Other | 25,493 | 13,570 | ||||||||||||||||||||||
Amortization of deferred mutual fund sales commissions | 30,208 | 21,558 | ||||||||||||||||||||||
General and administration | 194,442 | 75,834 | 602,290 | 192,666 | ||||||||||||||||||||
Termination of closed-end fund administration and servicing arrangements | 128,114 | — | 128,114 | — | ||||||||||||||||||||
Fee sharing payment | — | — | — | 34,450 | ||||||||||||||||||||
Other | 203,650 | 191,692 | ||||||||||||||||||||||
Related parties | 9,333 | 10,473 | ||||||||||||||||||||||
Amortization of intangible assets | 31,085 | 2,394 | 93,193 | 6,451 | 36,569 | 31,032 | ||||||||||||||||||
Total expenses | 1,026,361 | 294,050 | 2,574,528 | 853,734 | 904,448 | 733,143 | ||||||||||||||||||
Operating income | 271,718 | 29,008 | 825,948 | 225,717 | 395,690 | 272,231 | ||||||||||||||||||
Non-operating income (expense) | ||||||||||||||||||||||||
Net gain (loss) on investments | 117,895 | (1,737 | ) | 478,458 | 9,165 | (19,489 | ) | 150,360 | ||||||||||||||||
Interest and dividend income | 20,109 | 5,668 | 52,204 | 16,675 | 18,339 | 18,357 | ||||||||||||||||||
Interest expense | (9,815 | ) | (2,022 | ) | (31,023 | ) | (6,021 | ) | (17,378 | ) | (10,986 | ) | ||||||||||||
Total non-operating income | 128,189 | 1,909 | 499,639 | 19,819 | ||||||||||||||||||||
Total non-operating income (expense) | (18,528 | ) | 157,731 | |||||||||||||||||||||
Income before income taxes and non-controlling interest | 399,907 | 30,917 | 1,325,587 | 245,536 | 377,162 | 429,962 | ||||||||||||||||||
Income tax expense | 63,168 | 11,108 | 298,086 | 89,963 | 130,131 | 109,906 | ||||||||||||||||||
Income before non-controlling interest | 336,739 | 19,809 | 1,027,501 | 155,573 | 247,031 | 320,056 | ||||||||||||||||||
Non-controlling interest | 81,539 | 895 | 354,669 | 2,394 | 5,360 | 124,668 | ||||||||||||||||||
Net income | $ | 255,200 | $ | 18,914 | $ | 672,832 | $ | 153,179 | $ | 241,671 | $ | 195,388 | ||||||||||||
Earnings per share | ||||||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic | $ | 1.99 | $ | 0.29 | $ | 5.24 | $ | 2.38 | $ | 1.87 | $ | 1.52 | ||||||||||||
Diluted | $ | 1.94 | $ | 0.28 | $ | 5.12 | $ | 2.29 | $ | 1.82 | $ | 1.48 | ||||||||||||
Dividends declared and paid per share | $ | 0.67 | $ | 0.42 | $ | 2.01 | $ | 1.26 | ||||||||||||||||
Cash dividends declared and paid per share | $ | 0.78 | $ | 0.67 | ||||||||||||||||||||
Weighted-average shares outstanding | ||||||||||||||||||||||||
Weighted-average shares outstanding: | ||||||||||||||||||||||||
Basic | 128,161,027 | 64,761,447 | 128,501,575 | 64,326,752 | 128,904,253 | 128,809,726 | ||||||||||||||||||
Diluted | 131,316,455 | 67,477,536 | 131,534,188 | 66,903,553 | 132,876,553 | 131,895,570 |
See accompanying notes to condensed consolidated financial statements.
- 2 -
PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Condensed Consolidated Statements of Comprehensive Income
(Dollar amounts in thousands)
(unaudited)
Three months ended September 30, | Nine months ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2008 | 2007 | |||||||||||||||||
Net income | $ | 255,200 | $ | 18,914 | $ | 672,832 | $ | 153,179 | $ | 241,671 | $ | 195,388 | ||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||
Net unrealized gain (loss) from available-for-sale investments | (1,417 | ) | 456 | (2,288 | ) | 507 | ||||||||||||||||
Foreign currency translation adjustment | 24,527 | 467 | 43,100 | 3,793 | ||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||
Net unrealized loss from available-for-sale investments, net of tax | (5,165 | ) | (1,457 | ) | ||||||||||||||||||
Minimum pension liability adjustment | — | 379 | — | 379 | (542 | ) | — | |||||||||||||||
Foreign currency translation adjustments | 26,307 | 2,203 | ||||||||||||||||||||
Comprehensive income | $ | 278,310 | $ | 20,216 | $ | 713,644 | $ | 157,858 | $ | 262,271 | $ | 196,134 | ||||||||||
See accompanying notes to condensed consolidated financial statements.
- 3 -
PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Condensed Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
Nine months ended September 30, | ||||||||
2007 | 2006 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 672,832 | $ | 153,179 | ||||
Adjustments to reconcile net income to cash from operating activities: | ||||||||
Non-controlling interest | 354,669 | 2,394 | ||||||
Depreciation and amortization | 143,387 | 29,301 | ||||||
Amortization of deferred mutual fund sales commissions | 79,034 | 4,645 | ||||||
Stock-based compensation | 142,329 | 78,567 | ||||||
Deferred income taxes | (100,576 | ) | (32,965 | ) | ||||
Other net gains and net purchases of investments | (584,373 | ) | (3,976 | ) | ||||
Earnings from equity method investees | (55,783 | ) | (2,413 | ) | ||||
Distributions of earnings from equity method investees | 9,375 | 820 | ||||||
Other adjustments | (1,644 | ) | (2,828 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (195,236 | ) | (66,582 | ) | ||||
Due from affiliates | 16,578 | 9,397 | ||||||
Deferred mutual fund sales commissions | (46,203 | ) | 1,860 | |||||
Investments, trading | (20,518 | ) | (17,121 | ) | ||||
Other assets | (79,195 | ) | (9,051 | ) | ||||
Accrued compensation | (73,381 | ) | 21,950 | |||||
Accounts payable and accrued liabilities | (5,401 | ) | (5,417 | ) | ||||
Due to affiliates | (5,981 | ) | 67,214 | |||||
Other liabilities | 111,402 | 8,883 | ||||||
Cash flows from operating activities | 361,315 | 237,857 | ||||||
Cash flows from investing activities | ||||||||
Purchase of investments | (313,837 | ) | (62,046 | ) | ||||
Sale of investments | 193,731 | 18,022 | ||||||
Distributions of capital from equity method investees | 5,695 | — | ||||||
Net deconsolidations of sponsored investment funds | (7,703 | ) | — | |||||
Acquisitions, net of cash acquired | (42,272 | ) | 389,886 | |||||
Purchases of property and equipment | (84,940 | ) | (47,014 | ) | ||||
Cash flows from investing activities | (249,326 | ) | 298,848 | |||||
Cash flows from financing activities | ||||||||
Short-term borrowings, net | 450,000 | — | ||||||
Long-term borrowings, net | 694,372 | — | ||||||
Dividends paid | (265,587 | ) | (81,134 | ) | ||||
Reissuance of treasury stock | 47,987 | 7,464 | ||||||
Purchases of treasury stock | (370,103 | ) | (24,615 | ) | ||||
Issuance of common stock | — | 1,196 | ||||||
Subscriptions received from non-controlling interest holders, net of redemptions | 204,734 | 15,735 | ||||||
Excess tax benefits from stock-based compensation | 69,390 | 4,156 | ||||||
Debt held by consolidated sponsored investment funds | 180,383 | — | ||||||
Other financing activities | (5,990 | ) | (3,622 | ) | ||||
Cash flows from financing activities | 1,005,186 | (80,820 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 43,100 | 3,793 | ||||||
Net change in cash and cash equivalents | 1,160,275 | 459,678 | ||||||
Cash and cash equivalents, beginning of period | 1,160,304 | 484,223 | ||||||
Cash and cash equivalents, end of period | $ | 2,320,579 | $ | 943,901 | ||||
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 241,671 | $ | 195,388 | ||||
Adjustments to reconcile net income to cash from operating activities: | ||||||||
Depreciation and other amortization | 57,491 | 46,062 | ||||||
Amortization of deferred mutual fund sales commissions | 30,208 | 21,558 | ||||||
Non-controlling interest | 5,360 | 124,668 | ||||||
Stock-based compensation | 69,539 | 41,418 | ||||||
Deferred income tax expense (benefit) | (42,457 | ) | 103,426 | |||||
Other net gains and net proceeds (purchases) of investments | 31,231 | (174,101 | ) | |||||
Earnings from equity method investees | 9,909 | (2,406 | ) | |||||
Distributions of earnings from equity method investees | 9,929 | — | ||||||
Other adjustments | (429 | ) | 6,003 | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (245,204 | ) | (317,950 | ) | ||||
Due from related parties | (79,484 | ) | 40,693 | |||||
Deferred mutual fund sales commissions | (24,862 | ) | (5,255 | ) | ||||
Investments, trading | 110,460 | (20,653 | ) | |||||
Other assets | (19,891 | ) | (99,745 | ) | ||||
Accrued compensation and benefits | (666,763 | ) | (534,942 | ) | ||||
Accounts payable and accrued liabilities | 328,406 | 149,898 | ||||||
Due to related parties | (2,757 | ) | (85,127 | ) | ||||
Other liabilities | 57,310 | 25,865 | ||||||
Cash flows from operating activities | (130,333 | ) | (485,200 | ) | ||||
Cash flows from investing activities | ||||||||
Purchases of investments | (138,079 | ) | (125,629 | ) | ||||
Proceeds from sales of investments | 27,402 | 41,742 | ||||||
Distributions of capital from equity method investees | 1,570 | — | ||||||
Purchases of property and equipment | (24,594 | ) | (27,983 | ) | ||||
Net consolidations (deconsolidations) of sponsored investment funds | — | (5,709 | ) | |||||
Acquisitions, net of cash acquired | — | (53,501 | ) | |||||
Cash flows from investing activities | (133,701 | ) | (171,080 | ) | ||||
- 4 -
PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(Dollar amounts in thousands)
(unaudited)
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Cash flows from financing activities | ||||||||
Short-term borrowings | — | 550,000 | ||||||
Cash dividends paid | (104,178 | ) | (88,417 | ) | ||||
Proceeds from stock options exercised | 5,135 | 32,194 | ||||||
Reissuance of treasury stock | 1,241 | — | ||||||
Purchase of treasury stock | (35,692 | ) | (164,396 | ) | ||||
Subscriptions received from non-controlling interest holders, net of distributions | 1,685 | 54,615 | ||||||
Excess tax benefit from stock-based compensation | 19,868 | 43,609 | ||||||
Net borrowings by consolidated sponsored investments funds | (92,701 | ) | 84,996 | |||||
Cash flows from financing activities | (204,642 | ) | 512,601 | |||||
Effect of exchange rate changes on cash and cash equivalents | 6,656 | 2,203 | ||||||
Net decrease in cash and cash equivalents | (462,020 | ) | (141,476 | ) | ||||
Cash and cash equivalents, beginning of period | 1,656,200 | 1,160,304 | ||||||
Cash and cash equivalents, end of period | $ | 1,194,180 | $ | 1,018,828 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 29,139 | $ | 6,707 | ||||
Cash paid for income taxes | $ | 57,746 | $ | 50,315 | ||||
Supplemental non-cash flow information: | ||||||||
Issuance of treasury stock | $ | 73,594 | $ | 63,953 | ||||
Decrease in investments due to net deconsolidations of sponsored investment funds | $ | 5,759 | $ | 181,953 | ||||
Decrease in non-controlling interests due to net deconsolidations of sponsored investment funds | $ | 5,759 | $ | 203,923 | ||||
PNC LTIP capital contributions | $ | 4,503 | $ | 173,497 |
See accompanying notes to condensed consolidated financial statements.
- 45 -
PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
(unaudited)
BlackRock, Inc. and its subsidiaries (“BlackRock” or the “Company”) provide diversified investment management services to institutional clients and individual investors through various investment products.vehicles. Investment management services primarily consist of the active management of fixed income, cash management and equity client accounts, the management of a number of open-end and closed-end mutual fund families and other non-U.S. equivalent retail products serving the institutional and retail markets, and the management of alternative investment funds developed to serve various customer needs. ThroughIn addition, BlackRock Solutions®, the Company provides risk management, system outsourcing, investment accounting services,strategic advisory and transitionenterprise investment system services to a broad base of clients.
In October 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”), referred to as the “Quellos Transaction” and in September 2006, Merrill Lynch & Co., Inc (“Merrill Lynch”) contributed the entities and assets that constituted its investment management services that combinebusiness (the “MLIM Business”) to BlackRock via a capital markets expertise with proprietarily-developed systems and technology.contribution, referred to as the “MLIM Transaction”.
1. Significant Accounting Policies
1. | Significant Accounting Policies |
Basis of Presentation
These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries and other consolidated entities.subsidiaries. Non-controlling interest includes minority interest as well asinterests include the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. All significant accounts and transactions between consolidated entities have been eliminated.
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006,2007, which was filed with the Securities and Exchange Commission (“SEC”) on March 13, 2007.February 28, 2008.
The interim financial information as of September 30, 2007at March 31, 2008 and for the three and nine months ended September 30,March 31, 2008 and 2007 and 2006 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Certain amounts in the Company’s prior period condensed consolidated financial statements have been reclassified to conform to the current presentation.
- 56 -
PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
1. Significant Accounting Policies (continued)
1. | Significant Accounting Policies (continued) |
Income TaxesRecent Accounting Developments
Fair Value Measurements
In JulySeptember 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes and Related Implementation Issues. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,Accounting for Income Taxes. FIN No. 48 prescribes a threshold and measurement attribute for recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
BlackRock adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the adoption, the Company recognized approximately $15,200 in increased income tax reserves related to uncertain tax positions. Approximately $13,600 of this increase related to taxes that would affect the effective tax rate if recognized, and this portion was accounted for as a reduction to the January 1, 2007 balance in retained earnings. The remaining $1,600 balance, if disallowed, would not affect the annual effective tax rate. Total gross unrecognized tax benefits at December 31, 2006 were approximately $52,100. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2006 were approximately $25,700. As of September 30, 2007, the Company does not anticipate a significant change to the amount of unrecognized tax benefits within the next twelve months.
The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Interest accrued on uncertain tax positions was approximately $4,600 at December 31, 2006 and $7,100 at September 30, 2007. The Company has not accrued any tax-related penalties.
BlackRock is subject to U.S. federal income tax as well as income tax in multiple jurisdictions. The tax years after 2002 remain open to U.S. federal income tax examination, and the tax years after 2004 remain open to income tax examination in the United Kingdom. Prior to the closing of the Merrill Lynch Investments Managers (“MLIM”) transaction, BlackRock filed New York State and New York City income tax returns on a combined basis with The PNC Financial Services Group, Inc. (“PNC”) and the tax years after 2001 remain open to income tax examination in New York State and New York City.
Stock-based Compensation
The Company amortizes the grant-date fair value of stock-based compensation awards made to retirement eligible employees over the required service period. Upon notification of retirement, the Company accelerates the unamortized portion of the award over the contractually-required retirement notification period, if applicable.
Carried Interest
The Company receives carried interest from private equity funds upon exceeding performance thresholds. BlackRock may be required to return all, or part, of such carried interest depending upon future performance of the private equity funds. BlackRock records carried interest subject to such clawback provisions as revenue on its condensed consolidated statements of income upon the earlier of termination of each private equity fund or when the likelihood of clawback is mathematically improbable. At September 30, 2007, the Company had $17,399 of deferred carried interest recorded in other liabilities on the condensed consolidated statements of financial condition.
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PART I — FINANCIAL INFORMATION (continued)
1. Significant Accounting Policies (continued)
Goodwill and Intangible Assets
Prior to 2007, the Company performed its annual impairment tests for goodwill and indefinite-lived intangible assets, as required by SFAS No. 142,Goodwill and Other Intangible Assets, as of September 30th. During the quarter ended September 30, 2007, the Company changed its annual impairment test date to July 31st in order to provide additional time during the quarter for testing due to the significant increase in these assets as a result of recent acquisitions. Impairment tests performed as of July 31, 2007 and September 30, 2006 indicated that no impairment charges were required. The Company’s management believes that this change in the method of applying an accounting principle is preferable under the circumstances and does not result in adjustments to the Company’s consolidated financial statements when applied retrospectively, nor would it result in the delay, acceleration or avoidance of recording a potential future impairment. This change in the method of applying SFAS No. 142 had no impact on the condensed consolidated statements of income for the three or nine months ended September 30, 2007 or other prior periods.
Recent Accounting Developments
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements.Measurements, SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are required to provide enhanced disclosure regarding instruments in the level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.
In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13and FSP FAS 157-2,Effective Date of FASB Statement No. 157. FSP FAS 157-1 amends SFAS No. 157 isto exclude from its scope transactions accounted for in accordance with SFAS No. 13,Accounting for Leases, and its related interpretive accounting pronouncements. FSP FAS 157-2 delays the effective for financial statements issued fordate of the application of SFAS No. 157 to fiscal years beginning after November 15, 2007. 2008 for all non-financial assets and liabilities recognized or disclosed at fair value in the financial statements on a non-recurring basis. Non-recurring non-financial assets and liabilities include goodwill, indefinite-lived intangible assets, long-lived assets and finite-lived intangible assets each measured at fair value for purposes of impairment testing; asset retirement and guarantee obligations initially measured at fair value; and those assets and liabilities initially measured at fair value in a business combination or asset purchase.
The Company currently is evaluating the impact adoption will have to its consolidated financial statements.
In September 2006, the FASB issuedadopted SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans –an amendment of FASB Statements No. 87, 88, 106 and 132. SFAS No. 158 requires an employer to recognize157 on January 1, 2008, with the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur. The statement also requires actuarial valuations to be performed asexception of the balance sheet date.application of FSP FAS 157-2 related to non-recurring non-financial assets and liabilities. The balance sheet recognition provisionspartial adoption of SFAS No. 158 were effective for fiscal years ending after December 15, 2006. The valuation date provisions are effective for fiscal years ending after December 15, 2007.157 had no impact on the Company’s financial statements. The Company adopteddoes not expect that the balance sheet recognitionadoption of the provisions of SFAS No. 158for non-recurring non-financial assets and liabilities will have a material impact on December 31, 2006 and the impact of adoption was not material to its consolidated financial statements.
Fair Value Option
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure eligible financial assets and liabilities at fair value. The unrealized gains and losses on items for which the fair value option ishas been elected should be reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis, it should be applied to an entire instrument and it is irrevocable.irrevocable once elected. Assets and liabilities measured at fair value pursuant to the fair value option should be reported separately in the balance sheet from those instruments measured using another measurement attribute. The Company adopted SFAS No. 159 is effective ason January 1, 2008, however, elected not to apply the fair value option to any of its financial assets or liabilities. Therefore, the beginning of the first fiscal year that begins after November 15, 2007. The Company currently is analyzing the potential impact of adoption of SFAS No. 159 to itshad no impact on the Company’s condensed consolidated financial statements.
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PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
1. |
Recent Accounting Developments (continued)
Non-Controlling Interests
In JuneDecember 2007, the Emerging Issues Task Force (“EITF”) ratified EITF IssueFASB issued SFAS No. 06-11,160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. SFAS No. 160 amends Accounting Research Bulletin No. 51,Consolidated Financial Statements, to establish accounting and reporting standards for Income Tax Benefitsa non-controlling interest in a subsidiary and for the deconsolidation of Dividends on Share-Based Payment Awards (“EITF 06-11”). Undera subsidiary and clarifies that a non-controlling interest in a subsidiary is an ownership interest in the provisions of EITF 06-11 a realized income tax benefit from dividends or dividend equivalentsconsolidated entity that are charged to retained earnings and are paid to employees for equity classified as nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognizedreported as an increase to additional paid-in capital. The amount recognized in additional paid-in capital forequity, separate from the realized income tax benefit from dividends on those awards should be includedparent’s equity, in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared inconsolidated financial statements. SFAS No. 160 is effective for fiscal years, beginning after December 15, 2007, and interim periods within those fiscal years.years, beginning on or after December 15, 2008. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing non-controlling interests. All other requirements of SFAS No. 160 shall be applied prospectively. The Company currently is currently evaluating the potential impact of EITF 06-11 toSFAS No. 160 on its consolidated financial statements.
2.Business Combinations
In December 2007, the FASB issued SFAS No. 141 (revised),Business Combinations(“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141,Business Combinations, while retaining the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) further defines the acquirer, establishes the acquisition date and broadens the scope of transactions that qualify as a business combination. Additionally, SFAS No. 141(R) changes the fair value measurement provisions for assets acquired and liabilities assumed and any non-controlling interest in the acquiree, provides guidance for the measurement of fair value in a step acquisition, changes the requirements for recognizing assets acquired and liabilities assumed subject to contingencies, provides guidance on recognition and measurement of contingent consideration and requires that acquisition-related costs of the acquirer generally be expensed as incurred. In addition, if liabilities for unrecognized tax benefits related to tax positions assumed in a business combination are settled prior to the adoption of SFAS No. 141(R), the reversal of any remaining liability will affect goodwill. If such liabilities reverse subsequent to the adoption of SFAS No. 141(R), such reversals will affect the income tax provision in the period of reversal. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company currently is evaluating the impact of the adoption of SFAS No. 141(R) on its consolidated financial statements and on potential future business combinations.
Investment Companies
In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) No. 07-1,Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. SOP No. 07-1 provides guidance for determining whether the specialized accounting principles of the AICPAAudit and Accounting Guide for Investment Companies should be applied by an entity and whether those specialized accounting principles should be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. In February 2008, the FASB indefinitely deferred the effective date of SOP No. 07-1 to address implementation issues that have arisen and to possibly revise the SOP.
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PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
1. | Significant Accounting Policies (continued) |
Recent Accounting Developments (continued)
Disclosures about Derivative Instruments
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 specifically requires enhanced disclosures addressing: a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and its related interpretations and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 is not expected to impact BlackRock’s consolidated financial statements.
2. | Investments |
A summary of the carrying value of total investments is as follows:
Carrying Value | Carrying Value | |||||||||||
September 30, 2007 | December 31, 2006 | March 31, 2008 | December 31, 2007 | |||||||||
Available-for-sale investments | $ | 187,337 | $ | 158,442 | $ | 261,355 | $ | 263,795 | ||||
Trading investments | 361,631 | 370,718 | 278,572 | 395,006 | ||||||||
Other investments: | ||||||||||||
Consolidated sponsored investment funds | 1,606,296 | 1,198,422 | 728,536 | 760,378 | ||||||||
Equity method | 448,802 | 327,599 | 626,679 | 554,016 | ||||||||
Deferred compensation plan investments | 23,732 | 22,710 | ||||||||||
Cost method | 55,118 | 24,247 | 4,054 | 4,039 | ||||||||
Deferred compensation plan investments | 21,567 | 18,146 | ||||||||||
Total other investments | 2,131,783 | 1,568,414 | 1,383,001 | 1,341,143 | ||||||||
Total investments | $ | 2,680,751 | $ | 2,097,574 | $ | 1,922,928 | $ | 1,999,944 | ||||
At March 31, 2008, the Company had $907,562 of total investments held by consolidated sponsored investment funds of which $179,026 and $728,536 were classified as trading investments and other investments, respectively.
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PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
2. Investments (continued)
2. | Investments (continued) |
A summary of the cost and carrying value of investments classified as available-for-sale, is as follows:
Gross Unrealized | Carrying Value | Gross Unrealized | ||||||||||||||||||||||||
March 31, 2008 | Cost | Gains | Losses | Carrying Value | ||||||||||||||||||||||
Total available-for-sale investments: | ||||||||||||||||||||||||||
Sponsored investment funds | $ | 245,627 | $ | 3,464 | $ | (4,351 | ) | $ | 244,740 | |||||||||||||||||
Collateralized debt obligations (“CDOs”) | 7,110 | 668 | — | 7,778 | ||||||||||||||||||||||
Corporate debt | 8,273 | — | (2,336 | ) | 5,937 | |||||||||||||||||||||
Other | 2,811 | 89 | — | 2,900 | ||||||||||||||||||||||
Cost | Gains | Losses | Carrying Value | |||||||||||||||||||||||
September 30, 2007 | ||||||||||||||||||||||||||
Available-for-sale investments: | ||||||||||||||||||||||||||
Total available-for-sale investments | $ | 263,821 | $ | 4,221 | $ | (6,687 | ) | $ | 261,355 | |||||||||||||||||
December 31, 2007 | ||||||||||||||||||||||||||
Total available-for-sale investments: | ||||||||||||||||||||||||||
Sponsored investment funds | $ | 152,633 | $ | 10,596 | $ | (1,982 | ) | $ | 161,247 | $ | 245,677 | $ | 5,894 | $ | (1,217 | ) | $ | 250,354 | ||||||||
Collateralized debt obligations | 23,328 | 1,079 | (1,201 | ) | 23,206 | 10,458 | 53 | — | 10,511 | |||||||||||||||||
Other | 2,812 | 72 | — | 2,884 | 2,815 | 115 | — | 2,930 | ||||||||||||||||||
Total available-for-sale investments | $ | 178,773 | $ | 11,747 | $ | (3,183 | ) | $ | 187,337 | $ | 258,950 | $ | 6,062 | $ | (1,217 | ) | $ | 263,795 | ||||||||
December 31, 2006 | ||||||||||||||||||||||||||
Available-for-sale investments: | ||||||||||||||||||||||||||
Sponsored investment funds | $ | 118,147 | $ | 8,085 | $ | (583 | ) | $ | 125,649 | |||||||||||||||||
Collateralized debt obligations | 27,496 | 1,866 | — | 29,362 | ||||||||||||||||||||||
Other | 3,312 | 119 | — | 3,431 | ||||||||||||||||||||||
Total available-for-sale investments | $ | 148,955 | $ | 10,070 | $ | (583 | ) | $ | 158,442 | |||||||||||||||||
The Company has reviewed the gross unrealized losses of $3,183 at September 30, 2007, all$6,687 as of March 31, 2008, of which $6,516 had been in a loss position for less than twelve months, and determined that these losses were not other than temporaryother-than-temporary primarily because the Company has the ability and intent to hold the securities for a period of time sufficient to recover such losses. As a result, the Company recorded no impairments on such securities.
During the ninethree months ended September 30,March 31, 2008 and 2007, and 2006, the Company recorded realized impairments of $3,228$1,430 and $2,211, respectively, on certain collateralized debt obligations (“CDOs”).$393, to its CDO investments, respectively.
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PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
2. Investments (continued)
2. | Investments (continued) |
A summary of the cost and carrying value of trading and other investments is as follows:
Cost | Carrying Value | March 31, 2008 | December 31, 2007 | |||||||||||||||
September 30, 2007 | ||||||||||||||||||
Cost | Carrying Value | Cost | Carrying Value | |||||||||||||||
Trading investments: | ||||||||||||||||||
Deferred compensation plan investments | $ | 40,218 | $ | 43,196 | ||||||||||||||
Deferred compensation plan mutual fund investments | $ | 43,100 | $ | 42,929 | $ | 40,394 | $ | 44,680 | ||||||||||
Equity securities | 67,817 | 86,638 | 92,534 | 99,039 | 103,058 | 116,742 | ||||||||||||
Municipal debt securities | 235,646 | 231,797 | 141,848 | 126,764 | 239,398 | 233,584 | ||||||||||||
Foreign government debt securities | 8,608 | 8,470 | — | — | ||||||||||||||
U.S. government securities | 1,392 | 1,370 | — | — | ||||||||||||||
Total trading investments | $ | 343,681 | $ | 361,631 | $ | 287,482 | $ | 278,572 | $ | 382,850 | $ | 395,006 | ||||||
Other investments: | ||||||||||||||||||
Other fund investments | $ | 1,980,230 | $ | 2,110,216 | ||||||||||||||
Deferred compensation plan investments | 14,100 | 21,567 | ||||||||||||||||
Consolidated sponsored investment funds | $ | 610,883 | $ | 728,536 | $ | 721,300 | $ | 760,378 | ||||||||||
Equity method | 563,175 | 626,679 | 463,497 | 554,016 | ||||||||||||||
Deferred compensation plan hedge fund investments | 17,851 | 23,732 | 14,086 | 22,710 | ||||||||||||||
Cost method | 4,054 | 4,054 | 4,039 | 4,039 | ||||||||||||||
Total other investments | $ | 1,994,330 | $ | 2,131,783 | $ | 1,195,963 | $ | 1,383,001 | $ | 1,202,922 | $ | 1,341,143 | ||||||
December 31, 2006 | ||||||||||||||||||
Trading investments: | ||||||||||||||||||
Deferred compensation plan and other investments | $ | 53,306 | $ | 54,527 | ||||||||||||||
Equity securities | 139,874 | 148,025 | ||||||||||||||||
Municipal debt securities | 154,015 | 154,510 | ||||||||||||||||
Corporate notes and bonds | 13,779 | 13,656 | ||||||||||||||||
Total trading investments | $ | 360,974 | $ | 370,718 | ||||||||||||||
Other investments: | ||||||||||||||||||
Other fund investments | $ | 1,512,816 | $ | 1,550,268 | ||||||||||||||
Deferred compensation plan investments | 14,074 | 18,146 | ||||||||||||||||
Total other investments | $ | 1,526,890 | $ | 1,568,414 | ||||||||||||||
Management reviewed the carrying value of investments accounted for using the cost method at March 31, 2008 and estimated their aggregate fair value to be equal to their carrying value. No impairments were recorded on such investments during the three months ended March 31, 2008 or 2007.
Trading investments include deferred compensation plan mutual fund investments, equity and debt securities within certain consolidated sponsored investment funds and equity securities held in separate accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.
The carrying value of debt securities, classified as available-for-sale and trading investments, by contractual maturity at March 31, 2008 and December 31, 2007 is as follows:
Carrying Value | ||||||
Maturity date | March 31, 2008 | December 31, 2007 | ||||
<1 year | $ | 1,370 | $ | — | ||
1-5 years | 1,676 | 9,567 | ||||
5-10 years | 6,946 | 28,677 | ||||
After 10 years | 132,549 | 195,340 | ||||
Total | $ | 142,541 | $ | 233,584 | ||
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PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
2. Investments (continued)
2. | Investments (continued) |
Included in other investments at September 30, 2007 is $55,118 of investments accounted for using the cost method. FASB Statement of Position FAS 115-1/124-1 requires that a company review cost method investments for other-than-temporary impairment whenever management estimates a fair value for such investments or when events or changes in circumstances have occurred that may have a significant adverse effect on the fair value of the investment. As of September 30, 2007, management reviewed the carrying value of these investments and estimated their aggregate fair value to be $61,708. No impairments were recorded on such investments during the nine months ended September 30, 2007.
The carrying value of investments in debt securities by contractual maturity at September 30, 2007At March 31, 2008 and December 31, 2006 was as follows:2007, the debt securities in the table above primarily consist of municipal, U.S. and foreign government debt securities held by two funds that are consolidated in the Company’s condensed consolidated financial statements.
Carrying Value | ||||||
Maturity date | September 30, 2007 | December 31, 2006 | ||||
<1 year | $ | — | $ | 776 | ||
1-5 years | 10,061 | 7,989 | ||||
5-10 years | 30,010 | 2,772 | ||||
After 10 years | 191,726 | 156,629 | ||||
Total | $ | 231,797 | $ | 168,166 | ||
The Company consolidates certain sponsored investment funds primarily because it is deemed to control such investments in accordance with GAAP. The investments that are owned by these consolidated sponsored investment funds are classified as trading and other investments. At September 30, 2007March 31, 2008 and December 31, 2006,2007, the following balances related to these funds were consolidated in the condensed consolidated statements of financial position:condition:
September 30, 2007 | December 31, 2006 | March 31, 2008 | December 31, 2007 | |||||||||||||
Cash and cash equivalents | $ | 191,488 | $ | 90,919 | $ | 100,034 | $ | 66,971 | ||||||||
Investments | 1,872,782 | 1,469,930 | 907,562 | 1,054,208 | ||||||||||||
Other net liabilities | (258,881 | ) | (127,266 | ) | (119,433 | ) | (218,337 | ) | ||||||||
Non-controlling interest | (1,458,879 | ) | (1,109,092 | ) | ||||||||||||
Non-controlling interests | (579,496 | ) | (578,210 | ) | ||||||||||||
Total exposure to consolidated investment funds | $ | 346,510 | $ | 324,491 | $ | 308,667 | $ | 324,632 | ||||||||
BlackRock’s total exposure to consolidated sponsored investment funds of $346,510$308,667 and $324,491$324,632 at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively, represents the fair value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income and non-controlling interest. Other net liabilities includes $276,198Approximately $117,028 and $95,815$209,729 of debt heldborrowings by consolidated sponsored investment funds at September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively, which areis included in other liabilities on the condensed consolidated statements of financial condition.
The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in its operations.
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PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
3. Derivatives
3. | Fair Value Disclosures |
BlackRock adopted SFAS No. 157 as of January 1, 2008, which requires, among other things, enhanced disclosures about investments that are measured and Hedgingreported at fair value. SFAS No. 157 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs - Quoted prices in active markets for identical assets or liabilities at the reporting date. Level 1 assets include listed mutual funds, equities and debt securities.
Level 2 Inputs - Other than quoted prices included within Level 1 that are observable for substantially the full term of the asset or liability, either directly or indirectly. Level 2 assets include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. Investments which generally are included in this category include securities held within consolidated hedge funds as well as restricted public securities valued at a discount.
Level 3 Inputs - Unobservable inputs for the valuation of the asset or liability. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Investments included in this category generally include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
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PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
3. | Fair Value Disclosures (continued) |
Fair Value Measurements (continued)
DuringAssets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2008
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Investments Not Held at Fair Value (1) | Investments at March 31, 2008 | |||||||||||
Investments: | |||||||||||||||
Available-for-sale | $ | 159,146 | $ | 100,347 | $ | 1,862 | $ | — | $ | 261,355 | |||||
Trading | 151,808 | 126,764 | — | — | 278,572 | ||||||||||
Consolidated sponsored investment funds | — | 58,774 | 669,762 | — | 728,536 | ||||||||||
Equity method | — | — | 593,224 | 33,455 | 626,679 | ||||||||||
Deferred compensation plan investments | — | — | 23,732 | — | 23,732 | ||||||||||
Cost method | — | — | — | 4,054 | 4,054 | ||||||||||
Total Investments | $ | 310,954 | $ | 285,885 | $ | 1,288,580 | $ | 37,509 | $ | 1,922,928 | |||||
(1) | Includes investments in equity method investees which are not accounted for under a fair value measure in accordance with GAAP as well as certain investments held at cost. |
The Company has $4,147,981 of separate account assets, representing segregated funds held for purposes of funding individual and group pension contracts, and equal and offsetting separate account liabilities of which $52,000 is not held at fair value. Excluding approximately $52,000 not subject to SFAS No. 157, approximately 96%, 4% and less than 1% of the separate account assets and liabilities are classified as Level 1, Level 2 and Level 3, respectively. The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owner and are not reported as revenue in the condensed consolidated statements of income.
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PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
3. | Fair Value Disclosures (continued) |
Fair Value Measurements (continued)
Level 3 investments, such as investments in real estate, hedge funds, funds of hedge funds, private equity funds and funds of private equity funds are valued based upon valuations received from internal, as well as third party fund managers. Direct investments in private equity companies are valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third party financing, changes in valuations of comparable peer companies and the business environment of the company, among other factors.
Changes in Level 3 Investments Measured at Fair Value on a Recurring Basis for the three months ended March 31, 2008
Three Months Ended March 31, 2008 | ||||
December 31, 2007 | $ | 1,239,519 | ||
Realized and unrealized gains / (losses), net | 7,294 | |||
Purchases, sales, other settlements and issuances, net | 41,767 | |||
Net transfers in and/or out of Level 3 | — | |||
March 31, 2008 | $ | 1,288,580 | ||
Total net (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date | $ | (6,098 | ) |
Realized and unrealized gains and losses recorded for Level 3 investments are reported in Non-operating income (expense) on the condensed consolidated statements of income. Non-controlling interest expense is recorded for certain consolidated investments to reflect the portion of gains and losses not attributable to BlackRock.
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PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
4. | Derivatives and Hedging |
For the three months ended March 31, 2008 and 2007, the Company entered intodid not hold any derivatives designated in a formal hedge relationship under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended.
During first quarter 2008 and 2007, the Company was a counterparty to a series of total return swaps to economically hedge market price exposures with respect to seedagainst changes in fair value of certain investments in sponsored investment products. At September 30, 2007,March 31, 2008 the outstanding total return swaps had an aggregate notional value of approximately $82,000$79,084 and net lossesrealized and unrealized gains/(losses) of approximately $210$9,486 and $3,880($292) for the three and nine months ended September 30,March 31, 2008 and March 31, 2007, respectively, which were included in non-operating income in the Company’s condensed consolidated statements of income.
During first quarterIn December 2007, BlackRock entered into capital support agreements, up to $100,000, with two enhanced cash funds, backed by letters of credit (“LOCs”) in which BlackRock agreed to reimburse the bank for any amounts drawn on the LOCs. At March 31, 2008 and December 31, 2007, the Company entered into a forward contract to sell 1.2 billion yen in August 2007 as a hedge againstderivative liability for the foreign exchange 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 September 30, 2007, the change in fair value of the forward contracts were immaterial.capital support agreements for the two funds totaled approximately $9,300 and $12,000, respectively. The amount of the liability will increase or decrease as BlackRock’s obligation under the guarantee fluctuates based on the fair value of the derivative.
For
5. | Goodwill |
Goodwill at March 31, 2008 and changes during the ninethree 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,March 31, 2008 were as amended.
4. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||
Net income | $ | 255,200 | $ | 18,914 | $ | 672,832 | $ | 153,179 | ||||
Basic weighted-average shares outstanding | 128,161,027 | 64,761,447 | 128,501,575 | 64,326,752 | ||||||||
Dilutive potential shares from stock options and restricted stock units | 2,502,798 | 2,208,829 | 2,376,400 | 2,074,384 | ||||||||
Dilutive potential shares from convertible debt | 652,630 | 507,260 | 656,213 | 502,417 | ||||||||
Dilutive weighted-average shares outstanding | 131,316,455 | 67,477,536 | 131,534,188 | 66,903,553 | ||||||||
Basic earnings per share | $ | 1.99 | $ | 0.29 | $ | 5.24 | $ | 2.38 | ||||
Diluted earnings per share | $ | 1.94 | $ | 0.28 | $ | 5.12 | $ | 2.29 | ||||
December 31, 2007 | $ | 5,519,714 | ||
Goodwill adjustments related to: | ||||
Quellos | (20,881 | ) | ||
Fund of hedge funds manager | 1,581 | |||
Total goodwill adjustments | (19,300 | ) | ||
March 31, 2008 | $ | 5,500,414 | ||
During the three and nine months ended September 30, 2007, 1,545,735 stock options were excludedMarch 31, 2008, the Company reduced goodwill by $19,300. Approximately $15,800 of the reduction was as a result of the Company’s review of the Quellos purchase price allocation and $5,100 related to tax benefits realized from tax-deductible goodwill in excess of book goodwill. At March 31, 2008, the calculationbalance of diluted earnings per share becausethe Quellos tax-deductible goodwill in excess of book goodwill was $422,000. Goodwill will continue to include them would have an anti-dilutive effect.be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill.
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PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
4. Earnings Per Share (continued)
Due to the similarities in terms between the 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 September 30, 2007 and September 30, 2006.
5. Stock-Based Compensation
Share-Based Payment
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.
Long-Term Incentive Plans
The BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan (the “2002 LTIP Awards”) permitted the grant of up to $240,000 in deferred compensation awards, of which the Company previously granted approximately $230,300. Approximately $210,000 of the 2002 LTIP Awards were paid in January 2007. The 2002 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 Awards will result in the settlement of BlackRock shares held by PNC through 2010 at a conversion price approximating the market price on the settlement date.
The settlement of the 2002 LTIP Awards in January 2007 resulted in the surrender by PNC of approximately 1,000,000 shares of BlackRock common stock. 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.
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 granted additional long-term incentive awards in January 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 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 the remaining shares in periods subsequent to September 29, 2011.
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PART I — FINANCIAL INFORMATION (continued)
5. Stock-Based Compensation (continued)
Stock Options
Options outstanding at September 30, 2007 and changes during the nine months ended September 30, 2007 wereThe carrying amounts of identifiable intangible assets are summarized as follows:
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 | |||
Indefinite-lived intangible assets | Finite-lived intangible assets | Total | |||||||||
December 31, 2007 | $ | 5,351,132 | $ | 1,201,990 | $ | 6,553,122 | |||||
Purchase price adjustments | 27,000 | 51 | 27,051 | ||||||||
Amortization expense | — | (36,569 | ) | (36,569 | ) | ||||||
March 31, 2008 | $ | 5,378,132 | $ | 1,165,472 | $ | 6,543,604 | |||||
As of September 30, 2007, the Company had 3,265,334 outstanding options which were exercisable at a weighted average exerciseThe purchase 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 exercisedadjustments to intangible assets during the ninethree 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 JanuaryMarch 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 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 was deemed probable of occurring.
Assumptions used in calculating the 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%-4.4 | 4% | ||
Risk Free Interest Rate | 4. | 8% |
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PART I — FINANCIAL INFORMATION (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 SEC 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 September 30, 2007 and changes during the nine months then ended were as follows:
Outstanding at | Unvested Restricted Stock and Units | Weighted Average Grant Date Fair Value | ||||
December 31, 2006 | 1,516,063 | $ | 133.44 | |||
Granted | 2,517,718 | $ | 168.12 | |||
Forfeited | (80,441 | ) | $ | 161.37 | ||
Vested | (136,955 | ) | $ | 126.45 | ||
September 30, 2007 | 3,816,385 | $ | 155.98 | |||
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 over 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 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.
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PART I — FINANCIAL INFORMATION (continued)
5. Stock-Based Compensation (continued)
Restricted Stock and Stock Units (continued)
At September 30, 2007, there was $434,875 in unrecognized stock-based compensation expense related to unvested RSU awards. The Company expects to recognize that cost over a remaining weighted-average period of 3.6 years.
6. Goodwill
During the first nine months of 2007, the Company recorded goodwill adjustments of $197,5042008 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 totaling $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 $23,166..from Quellos.
7. Borrowings
7. | Borrowings |
Short Term Borrowing:Short-Term Borrowings
In December 2006, the Company entered into an unsecured revolving credit facility with a syndicate of banking institutions. This facility, as amended in February 2007 (the “2006 facility”), permitted the Company to borrow up to $800,000.
In August 2007, the Company terminated the 2006 facility and entered into a new five yearfive-year $2,500,000 unsecured revolving credit facility (the “2007(“the 2007 facility”), which permits the Company to request an additional $500,000 of borrowing capacity, subject to lender credit approval, up to a maximum of $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.March 31, 2008.
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,March 31, 2008, the Company had $450,000$300,000 outstanding under the 2007 facility with interest rates between 5.105%2.855% to 5.845%5.105% and maturity dates between October 2007April 2008 and September 2008. During April 2008, the Company repaid $100,000 of the balance outstanding at March 31, 2008.
Long Term Borrowings:Long-Term Borrowings
In September 2007,At March 31, 2008, the Company issued $700,000 inestimated fair value of the Company’s $249,997 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 condensed consolidated statements of financial condition and are being amortized over the term of the Notes. A portion of the net proceeds of the Notesconvertible debentures 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.
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PART I — FINANCIAL INFORMATION (continued)
8. Deferred Mutual Fund Sales Commissions
In April 2007, the Company assumed 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”).$556,700. The fair value of these assets was capitalized and is being amortized over periods up to six years. The Company also assumedestimated using market prices.
At March 31, 2008, 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 endestimated fair value of the contingent deferred sales period.Company’s $700,000 long-term notes was $731,353. 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 condensed consolidated statements of income and is recorded in “due to affiliates” on the condensed consolidated statements of financial condition. As a result of these terminations, Merrill Lynchfair value 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.estimated using an applicable bond index.
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PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
11. Supplemental Cash Flow Information
8. | Related Party Transaction |
Supplemental disclosureOn February 29, 2008, the Company committed to provide financing, if needed, of cash flow informationup to $60,000 to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that is as follows:
Nine Months Ended September 30, | ||||||
2007 | 2006 | |||||
Cash paid for interest | $ | 22,910 | $ | 6,876 | ||
Cash paid for income taxes | $ | 257,410 | $ | 127,364 | ||
Supplemental schedulemanaged by a subsidiary of non-cash investingBlackRock. Financing is collateralized by Anthracite pledging its ownership interest in an investment fund which is also managed by a subsidiary of BlackRock. At March 31, 2008, $52,500 of financing was outstanding with interest rates between 5.15% 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 | $ | — |
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PART I — FINANCIAL INFORMATION (continued)5.44%, which was included in due from affiliates on the Company’s condensed consolidated statement of financial condition, and was subsequently repaid in April 2008.
12. 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 SECSecurities and Exchange Commission (“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 numberand certain of the legal entities acquired in the MLIM Transaction, hasits subsidiaries have been named as a defendantdefendants 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 the 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, entities that BlackRock now owns may be named as defendants in these matters and the Company’s reputation may be negatively impacted. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.
Management, after consultation with legal counsel, currently 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 earnings, financial position, or cash flows 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.
Indemnifications
In the ordinary course of business, BlackRock enters into contracts with clients and third party service providers.parties pursuant to which the third parties provide services on behalf of BlackRock. In many of the contracts, BlackRock agrees to indemnify the client or third party service provider inunder certain circumstances. The terms of suchthe indemnity obligations vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.
In conjunction withUnder the Transaction Agreement in the MLIM 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 transaction, and (4) certain specified tax covenants.
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PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
9. | Commitments and Contingencies (continued) |
Indemnifications (continued)
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.
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PART I — FINANCIAL INFORMATION (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.
10. | Stock-Based Compensation |
The components of the Company’s stock-based compensation expense are comprised of the following:
Three Months Ended March 31, | ||||||
2008 | 2007 | |||||
Stock-based compensation: | ||||||
Restricted stock and restricted stock units (“RSUs”) | $ | 50,985 | $ | 27,019 | ||
Stock options | 3,533 | 2,356 | ||||
Long-term incentive plans (funded by PNC) | 15,021 | 12,043 | ||||
Total stock-based compensation | $ | 69,539 | $ | 41,418 | ||
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13. Subsequent EventsPART I – FINANCIAL INFORMATION (continued)
In June 2007,
Item 1. | Financial Statements (continued) |
10. | Stock-Based Compensation (continued) |
Stock Options
Options outstanding at March 31, 2008 and changes during the three months ended March 31, 2008 were as follows:
Outstanding at | Shares Under Option | Weighted Average Exercise Price | ||||
December 31, 2007 | 4,101,165 | $ | 86.19 | |||
Exercised | (134,150 | ) | $ | 38.28 | ||
March 31, 2008 | 3,967,015 | $ | 87.81 | |||
The aggregate intrinsic value of options exercised during the three months ended March 31, 2008 was $23,526.
At March 31, 2008, the Company announced that it had entered into an asset purchase agreement under which it would acquire certain assets$53,189 in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 3.5 years.
Restricted Stock and RSUs
Restricted stock and RSU activity at March 31, 2008 and changes during the fund of funds business of Quellos for up to $1,720,000. This transaction closed on October 1, 2007, and BlackRock paid Quellos $562,500 in cash and $187,500 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 $970,000 in cash and stock over three and a half years contingent upon certain operating measures.months then ended March 31, 2008 were as follows:
In April 2003, the Company acquired 80% of an investment manager of a fund of hedge funds. On October 1, 2007, the Company paid $27,000 to purchase the remaining 20% of the investment manager.
Outstanding at | Unvested Restricted Stock and Units | Weighted Average Grant Date Fair Value | ||||
December 31, 2007 | 3,709,008 | $ | 158.01 | |||
Granted | 1,505,286 | $ | 202.29 | |||
Converted | (394,199 | ) | $ | 155.20 | ||
Forfeited | (53,267 | ) | $ | 154.84 | ||
March 31, 2008 | 4,766,828 | $ | 172.26 | |||
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PART I —– FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
10. | Stock-Based Compensation (continued) |
Restricted Stock and RSUs (continued)
The Company values restricted stock and RSUs at their grant-date fair value as measured by BlackRock’s common stock price.
In January 2008, the Company granted 295,633 RSUs as long-term incentive compensation, which will be partially funded by shares currently held by PNC (seeLong-Term Incentive Plans Funded by PNCbelow). The awards cliff vest in five years.
In January 2008, the Company granted 1,186,306 RSUs to employees as part of annual incentive compensation under the BlackRock, Inc. 1999 Stock Award and Incentive Plan (the “Award Plan”) that vest evenly over three years.
At March 31, 2008, there was $630,940 in unrecognized compensation cost related to unvested restricted stock and RSUs. The unrecognized compensation cost is expected to be recognized over the remaining weighted average period of 2.9 years.
Long-Term Incentive Plans Funded by PNC
Under a share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock common stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”).
During 2007, the Company granted additional long-term incentive awards out of the Award Plan of approximately 1,600,000 RSUs that will be settled using BlackRock shares held by PNC in accordance with the share surrender agreement. 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 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain 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. The grant date fair value of the RSUs is being amortized as an expense on the straight-line method over the vesting period, net of expected forfeitures. The maximum value of awards that may be funded by PNC, prior to the earlier of September 29, 2011 or the date the performance criteria are met, is approximately $271,000, which has all been granted at March 31, 2008.
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PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
11. | Earnings Per Share |
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended March 31, | ||||||
2008 | 2007 | |||||
Net income | $ | 241,671 | $ | 195,388 | ||
Basic weighted-average shares outstanding | 128,904,253 | 128,809,726 | ||||
Dilutive potential shares from stock options and restricted stock units | 2,601,255 | 2,565,696 | ||||
Dilutive potential shares from convertible debt | 793,917 | 520,148 | ||||
Dilutive potential shares from acquisition-related contingent stock payments | 577,128 | — | ||||
Dilutive weighted-average shares outstanding | 132,876,553 | 131,895,570 | ||||
Basic earnings per share | $ | 1.87 | $ | 1.52 | ||
Diluted earnings per share | $ | 1.82 | $ | 1.48 | ||
Due to the similarities in terms between BlackRock 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 average basic and diluted shares outstanding for the three months ended March 31, 2008 and 2007.
Shares issued in acquisition
On October 1, 2007, the Company acquired the fund of funds business of Quellos. The Company issued 1,191,785 shares of newly-issued BlackRock common stock that were placed into an escrow account. The shares issued have no dilutive effect for the three months ended March 31, 2008. Such shares may have a dilutive effect in future periods based on the timing of the release of shares from the escrow account in accordance with the Quellos asset purchase agreement.
In April 2008, 280,519 shares were released to Quellos in accordance with the Quellos asset purchase agreement, which will result in an adjustment to the purchase price allocation.
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PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
12. | Segment Information |
The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company believes it operates in one business segment in accordance with SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information.
The following table illustrates investment advisory and administration base fee revenue by asset class for the three months ended March 31, 2008 and 2007, respectively.
Three Months Ended March 31, | ||||||
2008 | 2007 | |||||
Investment advisory and administration base fees (in thousands) | ||||||
Fixed income | $ | 221,503 | $ | 218,723 | ||
Equity and balanced | 602,627 | 469,031 | ||||
Cash management | 174,554 | 115,389 | ||||
Alternative investments | 134,194 | 70,365 | ||||
Total investment advisory and administration base fees | $ | 1,132,878 | $ | 873,508 | ||
The following chart shows the Company’s revenues for the three months ended March 31, 2008 and 2007.
Three Months Ended March 31, | ||||||||||||
Revenues (in millions) | 2008 | % of total | 2007 | % of total | ||||||||
North America | $ | 829.2 | 63.8 | % | $ | 656.9 | 65.3 | % | ||||
Europe | 417.0 | 32.1 | % | 312.2 | 31.1 | % | ||||||
Asia-Pacific | 53.9 | 4.1 | % | 36.3 | 3.6 | % | ||||||
Total revenues | $ | 1,300.1 | 100.0 | % | $ | 1,005.4 | 100.0 | % | ||||
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PART I – FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
12. | Segment Information (continued) |
The following chart shows the Company’s long-lived assets, including goodwill and property and equipment at March 31, 2008 and December 31, 2007.
Long-lived Assets (in millions) | March 31, 2008 | December 31, 2007 | ||||||||||
North America | $ | 5,674.8 | 98.3 | % | $ | 5,695.2 | 98.4 | % | ||||
Europe | 39.9 | 0.7 | % | 34.6 | 0.6 | % | ||||||
Asia-Pacific | 56.3 | 1.0 | % | 56.4 | 1.0 | % | ||||||
Total long-lived assets | $ | 5,771.0 | 100.0 | % | $ | 5,786.2 | 100.0 | % | ||||
Revenue and long-lived assets in North America are primarily comprised of the United States, while Europe is primarily comprised of the United Kingdom and Asia-Pacific is primarily comprised of Australia and Japan.
These amounts are aggregated on a legal entity jurisdiction basis and do not necessarily reflect where the customer is sourced or where the asset is physically located.
- 24 -
PART I – FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-looking Statements
This report, and other statements that BlackRock may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to BlackRock’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.
BlackRock cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
In addition to risk factors previously disclosed in BlackRock’s 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; (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 investmentsassets and liabilities denominated in foreign currencies; (15) the impact of changes to tax legislation and, generally, the tax position of the Company; (16) BlackRock’s ability to successfully integrate the MLIM and Quellos businessesBusinesses with its existing business; (17) the ability of BlackRock to effectively manage the former MLIM and Quellos assets along with its historical assets under management; and (18) BlackRock’s success in maintaining the distribution of its products.products; and (19) BlackRock may elect to provide support to its products from time to time.
- 2125 -
PART I —– FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview
BlackRock, Inc. (“BlackRock” or the “Company”) is one of the largest publicly traded investment management firms in the United States with $1.3$1.364 trillion of assets under management (“AUM”) at September 30, 2007.March 31, 2008. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of fixed income, cash management, equity and balanced and alternative investment separate accounts and funds. In addition, BlackRock provides risk management, strategic advisory and enterprise investment system outsourcing and financial advisory services to institutional investors.a broad base of clients.
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”). On October 1, 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”) for up to $1.719 billion in a combination of cash and common stock (the “Quellos Transaction”). At September 30, 2007,March 31, 2008, Merrill Lynch owned approximately 45.4%45.0% of the Company’s voting common stock and approximately 49.6%48.9% of the totalCompany’s capital stock on a fully diluted basis of the Company and The PNC Financial Services Group, Inc. (“PNC”) owned approximately 33.7%33.4% of the capital stock.
- 22 -
PART I — FINANCIAL INFORMATION (continued)
The following table summarizes BlackRock’s operating performance for each of the three months ended March 31, 2008 and 2007 and December 31, 2007. Certain prior year amounts have been reclassified to conform to 2008 presentation.
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 September 30, 2007, June 30, 2007 and September 30, 2006 and the nine months ended September 30, 2007 and September 30, 2006. Certain prior period amounts have been reclassified to conform to the current presentation.(unaudited)
Three months ended | Variance vs. | ||||||||||||||||||||||||
September 30, | June 30, | September 30, 2006 | June 30, 2007 | ||||||||||||||||||||||
2007 | 2006 | 2007 | Amount | % | Amount | % | |||||||||||||||||||
Total revenue | $ | 1,298,079 | $ | 323,058 | $ | 1,097,023 | $ | 975,021 | 301.8 | % | $ | 201,056 | 18.3 | % | |||||||||||
Total expenses | $ | 1,026,361 | $ | 294,050 | $ | 815,022 | $ | 732,311 | 249.0 | % | $ | 211,339 | 25.9 | % | |||||||||||
Operating income | $ | 271,718 | $ | 29,008 | $ | 282,001 | $ | 242,710 | NM | $ | (10,283 | ) | (3.6 | )% | |||||||||||
Operating income, as adjusted(a) | $ | 423,656 | $ | 115,266 | $ | 335,644 | $ | 308,390 | 267.5 | % | $ | 88,012 | 26.2 | % | |||||||||||
Net income | $ | 255,200 | $ | 18,914 | $ | 222,244 | $ | 236,286 | NM | $ | 32,956 | 14.8 | % | ||||||||||||
Net income, as adjusted(b) | $ | 300,079 | $ | 71,519 | $ | 236,626 | $ | 228,560 | 319.6 | % | $ | 63,453 | 26.8 | % | |||||||||||
Diluted earnings per share (c) | $ | 1.94 | $ | 0.28 | $ | 1.69 | $ | 1.66 | NM | $ | 0.25 | 14.8 | % | ||||||||||||
Diluted earnings per share, as adjusted(b) (c) | $ | 2.29 | $ | 1.06 | $ | 1.80 | $ | 1.23 | 116.0 | % | $ | 0.49 | 27.2 | % | |||||||||||
Average diluted shares outstanding(c) | 131,316,455 | 67,477,536 | 131,383,470 | 63,838,919 | 94.6 | % | (67,015 | ) | (0.1 | )% | |||||||||||||||
Operating margin, GAAP basis | 20.9 | % | 9.0 | % | 25.7 | % | |||||||||||||||||||
Operating margin, as adjusted (a) | 37.7 | % | 38.5 | % | 36.1 | % | |||||||||||||||||||
Assets under management ($ in millions) | $ | 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
Three Months Ended | Variance vs. | ||||||||||||||||||||||||
March 31, | December 31, | March 31, 2007 | December 31, 2007 | ||||||||||||||||||||||
2008 | 2007 | 2007 | Amount | % | Amount | % | |||||||||||||||||||
Total revenue | $ | 1,300,138 | $ | 1,005,374 | $ | 1,444,179 | $ | 294,764 | 29.3 | % | $ | (144,041 | ) | (10.0 | )% | ||||||||||
Total expenses | $ | 904,448 | $ | 733,143 | $ | 976,463 | $ | 171,305 | 23.4 | % | $ | (72,015 | ) | (7.4 | )% | ||||||||||
Operating income | $ | 395,690 | $ | 272,231 | $ | 467,716 | $ | 123,459 | 45.4 | % | $ | (72,026 | ) | (15.4 | )% | ||||||||||
Operating income, as adjusted (a) | $ | 416,319 | $ | 310,909 | $ | 489,212 | $ | 105,410 | 33.9 | % | $ | (72,893 | ) | (14.9 | )% | ||||||||||
Net income | $ | 241,671 | $ | 195,388 | $ | 322,439 | $ | 46,283 | 23.7 | % | $ | (80,768 | ) | (25.0 | )% | ||||||||||
Net income, as adjusted (b) | $ | 253,060 | $ | 209,240 | $ | 333,748 | $ | 43,820 | 20.9 | % | $ | (80,688 | ) | (24.2 | )% | ||||||||||
Diluted earnings per share (c) | $ | 1.82 | $ | 1.48 | $ | 2.43 | $ | 0.34 | 23.0 | % | $ | (0.61 | ) | (25.1 | )% | ||||||||||
Diluted earnings per share, as adjusted (b) (c) | $ | 1.90 | $ | 1.59 | $ | 2.52 | $ | 0.31 | 19.5 | % | $ | (0.62 | ) | (24.6 | )% | ||||||||||
Weighted average diluted shares outstanding (c) | 132,876,553 | 131,895,570 | 132,578,679 | 980,983 | 0.7 | % | 297,874 | 0.2 | % | ||||||||||||||||
Operating margin, GAAP basis | 30.4 | % | 27.1 | % | 32.4 | % | |||||||||||||||||||
Operating margin, as adjusted (a) | 37.6 | % | 36.7 | % | 38.8 | % | |||||||||||||||||||
Assets under management ($ in millions) | $ | 1,364,436 | $ | 1,154,164 | $ | 1,356,644 | $ | 210,272 | 18.2 | % | $ | 7,792 | 0.6 | % |
- 2326 -
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) 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.
(a) | 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. |
Operating margin, as adjusted, equals operating income, as adjusted, divided by revenue used for operating margin measurement, as indicated in the table below. As 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 includes affiliated and unaffiliated portfolio administration and servicing costs. 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 statements of income as follows:
Three months ended | Nine months ended September 30, | Three Months Ended | ||||||||||||||||||||||||||||||
September 30, | June 30, | March 31, | December 31, | |||||||||||||||||||||||||||||
2007 | 2006 | 2007 | 2007 | 2006 | 2008 | 2007 | 2007 | |||||||||||||||||||||||||
Operating income, GAAP basis | $ | 271,718 | $ | 29,008 | $ | 282,001 | $ | 825,948 | $ | 225,717 | $ | 395,690 | $ | 272,231 | $ | 467,716 | ||||||||||||||||
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 | 15,021 | 12,043 | 13,927 | ||||||||||||||||||||||||
Merrill Lynch compensation contribution | 2,500 | — | 2,500 | 7,500 | — | 2,500 | 2,500 | 2,500 | ||||||||||||||||||||||||
MLIM integration costs | 6,139 | 71,456 | 6,039 | 19,278 | 90,580 | — | 7,100 | 923 | ||||||||||||||||||||||||
Quellos integration costs | 140 | — | — | 140 | — | — | — | 320 | ||||||||||||||||||||||||
Closed-end fund launch costs | 1,875 | 4,933 | 19,801 | 34,828 | 5,464 | 3,739 | 13,152 | 766 | ||||||||||||||||||||||||
Closed-end fund launch commissions | 264 | 973 | 4,297 | 5,958 | 1,387 | 164 | 1,397 | 71 | ||||||||||||||||||||||||
Appreciation (depreciation) related to deferred compensation plans | (707 | ) | (3,149 | ) | 7,073 | 8,854 | 2,437 | |||||||||||||||||||||||||
Compensation expense related to (depreciation) appreciation on deferred compensation plans | (795 | ) | 2,486 | 2,989 | ||||||||||||||||||||||||||||
Operating income, as adjusted | $ | 423,656 | $ | 115,266 | $ | 335,644 | $ | 1,070,209 | $ | 361,653 | $ | 416,319 | $ | 310,909 | $ | 489,212 | ||||||||||||||||
Revenue, GAAP basis | $ | 1,298,079 | $ | 323,058 | $ | 1,097,023 | $ | 3,400,476 | $ | 1,079,451 | $ | 1,300,138 | $ | 1,005,374 | $ | 1,444,179 | ||||||||||||||||
Non-GAAP adjustments: | ||||||||||||||||||||||||||||||||
Portfolio administration and servicing costs | (138,850 | ) | (16,382 | ) | (131,077 | ) | (401,014 | ) | (48,529 | ) | (155,739 | ) | (131,086 | ) | (146,606 | ) | ||||||||||||||||
Amortization of deferred sales costs | (28,763 | ) | (1,341 | ) | (28,713 | ) | (79,034 | ) | (4,645 | ) | (30,208 | ) | (21,558 | ) | (29,057 | ) | ||||||||||||||||
Reimbursable property management compensation | (7,218 | ) | (6,219 | ) | (6,664 | ) | (20,525 | ) | (17,696 | ) | (6,119 | ) | (6,642 | ) | (6,287 | ) | ||||||||||||||||
Revenue used for operating margin measurement, as adjusted | $ | 1,123,248 | $ | 299,116 | $ | 930,569 | $ | 2,899,903 | $ | 1,008,581 | $ | 1,108,072 | $ | 846,088 | $ | 1,262,229 | ||||||||||||||||
Operating margin, GAAP basis | 20.9 | % | 9.0 | % | 25.7 | % | 24.3 | % | 20.9 | % | 30.4 | % | 27.1 | % | 32.4 | % | ||||||||||||||||
Operating margin, as adjusted | 37.7 | % | 38.5 | % | 36.1 | % | 36.9 | % | 35.9 | % | 37.6 | % | 36.7 | % | 38.8 | % | ||||||||||||||||
- 2427 -
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)
(a) | (continued) |
Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of management’s ability 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 AdjustmentsAdjustments::
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 common 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 compensationrebranding costs related to the integration which were reflected in GAAP netoperating income. Integration and acquisition costs have been deemed non-recurring by management and have been excluded from operating income, as adjusted, to help ensure the comparability of this information to prior periods. Closed-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 operating performance for the given period.respective periods. Compensation expense associated with appreciation (depreciation) on assets related to certain BlackRock’sBlackRock deferred compensation plans has been excluded because investmentas returns on investments for these assetsplans are reported in non-operating income.
Non-GAAP Revenue AdjustmentsAdjustments::
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.
- 2528 -
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) 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.
(b) | 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 | Nine months ended | Three Months Ended | ||||||||||||||||||||||||
September 30, | June 31, | September 30, | March 31, | December 31, | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2007 | 2006 | 2008 | 2007 | 2007 | |||||||||||||||||||
Net income, GAAP basis | $ | 255,200 | $ | 18,914 | $ | 222,244 | $ | 672,832 | $ | 153,179 | $ | 241,671 | $ | 195,388 | $ | 322,439 | ||||||||||
Non-GAAP adjustments, net of tax | ||||||||||||||||||||||||||
Termination of closed-end fund administration and servicing arrangements | 81,993 | — | — | 81,993 | — | |||||||||||||||||||||
Non-GAAP adjustments, net of tax: | ||||||||||||||||||||||||||
PNC LTIP funding obligation | 8,712 | 7,588 | 8,917 | 25,337 | 22,723 | 9,764 | 7,708 | 8,913 | ||||||||||||||||||
Merrill Lynch compensation contribution | 1,600 | — | 1,600 | 4,800 | — | 1,625 | 1,600 | 1,600 | ||||||||||||||||||
MLIM integration costs | 3,929 | 45,017 | 3,865 | 12,338 | 57,067 | — | 4,544 | 591 | ||||||||||||||||||
Quellos integration costs | 90 | — | — | 90 | — | — | — | 205 | ||||||||||||||||||
Corporate income tax reductions | (51,445 | ) | — | — | (51,445 | ) | — | |||||||||||||||||||
Net income, as adjusted | $ | 300,079 | $ | 71,519 | $ | 236,626 | $ | 745,945 | $ | 232,969 | $ | 253,060 | $ | 209,420 | $ | 333,748 | ||||||||||
Diluted weighted average shares outstanding | 131,316,455 | 67,477,536 | 131,383,470 | 131,534,188 | 66,903,553 | |||||||||||||||||||||
Diluted weighted average shares outstanding (c) | 132,876,553 | 131,895,570 | 132,578,679 | |||||||||||||||||||||||
Diluted earnings per share, GAAP basis | $ | 1.94 | $ | 0.28 | $ | 1.69 | $ | 5.12 | $ | 2.29 | ||||||||||||||||
Diluted earnings per share, GAAP basis(c) | $ | 1.82 | $ | 1.48 | $ | 2.43 | ||||||||||||||||||||
Diluted earnings per share, as adjusted | $ | 2.29 | $ | 1.06 | $ | 1.80 | $ | 5.67 | $ | 3.48 | ||||||||||||||||
Diluted earnings per share, as adjusted(c) | $ | 1.90 | $ | 1.59 | $ | 2.52 | ||||||||||||||||||||
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 common 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. Integration costs consist principally of compensation costs, professional fees and rebranding costs incurred in conjunction with the integrations. The United Kingdom and Germany, during third quarter 2007, enacted legislation reducing corporate income taxes, effective in April and January of 2008, respectively, which resulted in a revaluation of certain deferred tax liabilities. Currently, BlackRock does not anticipate a significant change to its overall tax rate in 2008. The resulting decrease in income taxes has been excluded from net income, as adjusted, as it is non-recurring and to 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.
(c) | Series A non-voting participating preferred stock is considered to be common stock for purposes of earnings per share calculations. |
- 2629 -
PART I —– FINANCIAL INFORMATION (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, AustraliaHong Kong and Hong Kong.Australia. 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 was rebranded in April 2008 and subsequently named BlackRock Global Funds (“BGF”), which is authorized for distribution in more than 3035 jurisdictions worldwide. In the United States, the primary retail offerings include a wide variety of open-end and closed-end funds, including the BlackRock Funds and the BlackRock Liquidity Funds.funds. Additional fund offerings include structured products, real estate funds, hedge funds, andhedge funds of funds, private equity fundfunds and funds 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 a wide variety of active and passive strategies.strategies covering both equity and fixed income assets.
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 force globallypresence both inside and outside the United States that is focused on acquiringestablishing and maintaining institutionalretail and retailinstitutional investment management relationships by marketing its services to institutionalretail and retailinstitutional investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships. BlackRock also distributes certain of its products and services through broker-dealer subsidiaries of Merrill Lynch in addition to other distributors.Lynch.
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, percentages of committed capital during investment periods of certain products, 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 timing of 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 withoutBlackRock provides a front-end sales charge (“back-end load shares”). Such fees and commissions are shown on the condensed consolidated statementsvariety of income as distribution fees.
ThroughBlackRock Solutions®, the firm provides risk management, systems outsourcing, investment accountinganalytic and investment system services advisory and transition management services that combine capital markets expertise with proprietary systems and technology. BlackRock Solutions clients consist ofto 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 based on project scope and complexity.fees. Fees earned on risk management, investment analytic and investment system outsourcing, investment accounting services, advisory and transition management servicesassignments are recorded as other revenue in the condensed consolidated statements of income.
- 2730 -
PART I —– FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
Operating expenses primarily consist ofreflect 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 includesreflects salaries, deferred and incentive compensation, long-term retention and incentive plansstock-based compensation 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)
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 | % | |||||
|
|
Variance | |||||||||||||||
March 31, 2008 | December 31, | March 31, | Quarter to Quarter | Year to Year | |||||||||||
2007 | |||||||||||||||
Fixed income | $ | 514,673 | $ | 513,020 | $ | 470,513 | 0.3 | % | 9.4 | % | |||||
Equity and balanced | 426,935 | 459,182 | 402,983 | (7.0 | )% | 5.9 | % | ||||||||
Cash management | 349,208 | 313,338 | 244,838 | 11.4 | % | 42.6 | % | ||||||||
Alternative investments | 73,620 | 71,104 | 35,830 | 3.5 | % | 105.5 | % | ||||||||
Total | $ | 1,364,436 | $ | 1,356,644 | $ | 1,154,164 | 0.6 | % | 18.2 | % | |||||
AUM increased approximately $69.5$7.8 billion, or 5.6%0.6%, to $1.3$1.364 trillion at September 30, 2007,March 31, 2008, compared to $1.230$1.357 trillion at June 30,December 31, 2007. The growth in AUM was attributable to $41.0$35.2 billion in net subscriptions $20.3 billion in market appreciation and $8.2$10.2 billion in foreign exchange gains.gains, offset by $37.6 billion in net market depreciation. Net subscriptions of $41.0$35.2 billion for the three months ended September 30, 2007 wereMarch 31, 2008 was the result of net new business of $30.2$35.1 billion in cash management products $5.6and $3.3 billion in alternative products, partially offset by net redemptions of $2.9 billion in fixed income products and $0.3 billion in equity and balanced products. Foreign exchange gains of $10.2 billion consisted primarily of $6.1 billion in equity and balanced assets, $3.2 billion in fixed income assets and $0.5 billion in alternative products. Market depreciation of $37.6 billion primarily reflected depreciation in equity and balanced assets of $38.1 billion, as equity markets declined during the three months ended March 31, 2008.
AUM increased approximately $210.3 billion, or 18.2%, to $1.364 trillion at March 31, 2008, compared with $1.154 trillion at March 31, 2007. The growth in AUM was attributable to $158.4 billion in net subscriptions, $21.9 billion acquired in the Quellos Transaction, $21.2 billion in foreign exchange gains and $8.8 billion in net market appreciation. Net subscriptions of $158.4 billion for the twelve months ended March 31, 2008 were attributable to net new business of $102.0 billion in cash management products, $21.6 billion in equity and balanced products, $20.7 billion in fixed income products and $2.1$14.1 billion in alternative investment products. Market appreciation of $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$21.2 billion consisted primarily of $5.2$13.2 billion in equity and balanced assets and $2.5$6.5 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$8.8 billion largely reflected appreciation in equity and balanced assets of $63.4 billion, as equity markets improved during the period ended September 30, 2007 and market appreciation on fixed income products of $15.5$16.9 billion due to current income and changes in market interest rates. Foreign exchange gains of $19.0 billion consisted primarily of $12.7 billionrates, partially offset by market depreciation in equity and balanced assets and $5.1of $10.8 billion, in fixed income assets.as equity markets declined during the three months ended March 31, 2008.
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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 three months ended September 30, 2007.March 31, 2008.
BlackRock, Inc.
Component Changes in Assets Under Management
For the Quarter Ended September 30, 2007March 31, 2008
(Dollar amounts in millions)
June 30, 2007 | Net subscriptions (redemptions) | Foreign exchange 2 | Market appreciation (depreciation) | September 30, 2007 | |||||||||||
Fixed income | $ | 492,287 | $ | 5,592 | $ | 2,504 | $ | 9,367 | $ | 509,750 | |||||
Equity and balanced | 435,873 | 3,194 | 5,204 | 9,891 | 454,162 | ||||||||||
Cash management | 259,840 | 30,190 | 234 | 484 | 290,748 | ||||||||||
Alternative investment products | 42,086 | 2,066 | 219 | 525 | 44,896 | ||||||||||
Total | $ | 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, 2007 | Net subscriptions (redemptions) | Market appreciation (depreciation) | Foreign Exchange 1 | March 31, 2008 | |||||||||||||
Fixed income | $ | 513,020 | $ | (2,935 | ) | $ | 1,347 | $ | 3,241 | $ | 514,673 | ||||||
Equity and balanced | 459,182 | (319 | ) | (38,054 | ) | 6,126 | 426,935 | ||||||||||
Cash management | 313,338 | 35,144 | 424 | 302 | 349,208 | ||||||||||||
Alternative investments | 71,104 | 3,323 | (1,332 | ) | 525 | 73,620 | |||||||||||
Total | $ | 1,356,644 | $ | 35,213 | $ | (37,615 | ) | $ | 10,194 | $ | 1,364,436 | ||||||
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 |
|
| Foreign exchange reflects the impact of converting non-dollar denominated AUM into |
- 29 -
PART I — FINANCIAL INFORMATION (continued)
Assets Under Management (continued)
The following table presents the component changes in BlackRock’s AUM for the twelve months ended September 30, 2007.March 31, 2008.
BlackRock, Inc.
Component Changes in Assets Under Management
For the Twelve Months Ended September 30, 2007March 31, 2008
(Dollar amounts in millions)
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 | ||||||
March 31, 2007 | Net subscriptions (redemptions) | Acquisition 1 | Market appreciation (depreciation) | Foreign Exchange 2 | March 31, 2008 | ||||||||||||||
Fixed income | $ | 470,513 | $ | 20,717 | $ | — | $ | 16,938 | $ | 6,505 | $ | 514,673 | |||||||
Equity and balanced | 402,983 | 21,558 | — | (10,796 | ) | 13,190 | 426,935 | ||||||||||||
Cash management | 244,838 | 102,028 | — | 1,693 | 649 | 349,208 | |||||||||||||
Alternative investments | 35,830 | 14,115 | 21,868 | 960 | 847 | 73,620 | |||||||||||||
Total | $ | 1,154,164 | $ | 158,418 | $ | 21,868 | $ | 8,795 | $ | 21,191 | $ | 1,364,436 | |||||||
1 |
|
| Data reflects net assets acquired in the |
|
|
| Foreign exchange reflects the impact of converting non-dollar denominated AUM into |
- 3032 -
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, 2007March 31, 2008, as compared with the three months ended September 30, 2006.March 31, 2007.
Operating results for the three 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
Three months ended September 30, | Variance | |||||||||||
(Dollar amounts in thousands) | 2007 | 2006 | Amount | % | ||||||||
Investment advisory and administration fees: | ||||||||||||
Equity and balanced | $ | 580,302 | $ | 58,737 | $ | 521,565 | NM | |||||
Fixed income | 230,373 | 125,102 | 105,271 | 84.1 | % | |||||||
Cash management | 128,381 | 32,110 | 96,271 | 299.8 | % | |||||||
Alternative investment products | 87,374 | 40,740 | 46,634 | 114.5 | % | |||||||
Investment advisory and administration base fees | 1,026,430 | 256,689 | 769,741 | 299.9 | % | |||||||
Investment advisory performance fees | 149,382 | 17,817 | 131,565 | NM | % | |||||||
Total investment advisory and administration fees | 1,175,812 | 274,506 | 901,306 | 328.3 | % | |||||||
Distribution fees | 32,310 | 2,263 | 30,047 | NM | ||||||||
Other revenue: | ||||||||||||
BlackRock Solutions | 47,683 | 33,807 | 13,876 | 41.0 | % | |||||||
Other revenue | 42,274 | 12,482 | 29,792 | 238.7 | % | |||||||
Total other revenue | 89,957 | 46,289 | 43,668 | 94.3 | % | |||||||
Total revenue | $ | 1,298,079 | $ | 323,058 | $ | 975,021 | 301.8 | % | ||||
NM – Not Meaningful
Three Months Ended March 31, | Variance | ||||||||||||
(Dollar amounts in thousands) | 2008 | 2007 | Amount | % | |||||||||
Investment advisory and administration fees: | |||||||||||||
Fixed income | $ | 221,503 | $ | 218,723 | $ | 2,780 | 1.3 | % | |||||
Equity and balanced | 602,627 | 469,031 | 133,596 | 28.5 | % | ||||||||
Cash management | 174,554 | 115,389 | 59,165 | 51.3 | % | ||||||||
Alternative investments | 134,194 | 70,365 | 63,829 | 90.7 | % | ||||||||
Investment advisory and administration base fees | 1,132,878 | 873,508 | 259,370 | 29.7 | % | ||||||||
Fixed income | 1,222 | 1,506 | (284 | ) | (18.9 | )% | |||||||
Equity and balanced | 38,011 | 9,105 | 28,906 | 317.5 | % | ||||||||
Alternative investments | 2,310 | 11,807 | (9,497 | ) | (80.4 | )% | |||||||
Investment advisory performance fees | 41,543 | 22,418 | 19,125 | 85.3 | % | ||||||||
Total investment advisory and administration fees | 1,174,421 | 895,926 | 278,495 | 31.1 | % | ||||||||
Distribution Fees | 35,319 | 24,820 | 10,499 | 42.3 | % | ||||||||
Other revenue: | |||||||||||||
BlackRock Solutions | 59,665 | 42,314 | 17,351 | 41.0 | % | ||||||||
Other revenue | 30,733 | 42,314 | (11,581 | ) | (27.4 | )% | |||||||
Total other revenue | 90,398 | 84,628 | 5,770 | 6.8 | % | ||||||||
Total revenue | $ | 1,300,138 | $ | 1,005,374 | $ | 294,764 | 29.3 | % | |||||
Total revenue for the three months ended September 30, 2007March 31, 2008 increased $975.0$294.8 million, or 301.8%29.3%, to $1,298.1$1,300.1 million, compared with $323.1$1,005.4 million for the three months ended September 30, 2006.March 31, 2007. Total investment advisory and administration fees increased $901.3$278.5 million, or 328.331.1%,to $1,175.8$1,174.4 million for the three months ended September 30, 2007March 31, 2008, compared with $274.5$895.9 million for the three months ended September 30, 2006.March 31, 2007. Distribution fees increased by $30.0$10.5 million to $32.3$35.3 million for the three months ended September 30, 2007March 31, 2008 compared with $2.3$24.8 million for the three months ended September 30, 2006.March 31, 2007. Other revenue increased by $43.7$5.8 million, or 94.3%6.8%, to $90.0$90.4 million for the three months ended September 30, 2007March 31, 2008, compared with $46.3$84.6 million for the three months ended September 30, 2006.March 31, 2007.
- 3133 -
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, 2007March 31, 2008, as compared with the three months ended September 30, 2006.March 31, 2007. (continued)
Revenue (continued)
Investment Advisory and Administration Fees
The increase in investment advisory and administration fees of $901.3$278.5 million, or 328.3%31.1%, was the result of an increase in investment advisory and administration base fees of $769.7$259.4 million, or 299.9%29.7%, to $1,026.4$1,132.9 million for the three months ended September 30, 2007March 31, 2008, compared with $256.7$873.5 million for the three months ended September 30, 2006March 31, 2007 and an increase of $131.6$19.1 million in performance fees. Investment advisory and administration base fees increased forin the three months ended September 30, 2007March 31, 2008 primarily due to the MLIM Transaction which added $589.2 billion in AUM on September 29, 2006 andas a result of increased AUM across all asset types of $224.5$210.3 billion over the past twelve months.
The increase in base investment advisory and administration base fees of $769.7$259.4 million for the three months ended September 30, 2007March 31, 2008, compared with the three months ended September 30, 2006March 31, 2007 consisted of increases of $521.6$133.6 million in equity and balanced products, $105.3$63.8 million in fixed incomealternative products, $96.3$59.2 million in cash management products and $46.6$2.8 million in alternative investmentfixed income products. The increase in investment advisory and administration fees for equity and balanced, fixed income,alternative products, cash management and alternative investment productsfixed income was driven by AUM acquired in the MLIM Transaction on September 29, 2006, as well as increases in AUM of $96.0$23.9 billion, $66.2$37.8 billion, $61.3$104.4 billion and $1.0$44.2 billion, respectively, over the past twelve months.
Performance fees increased by $131.6$19.1 million, or 85.3%, to $149.4$41.5 million for the three months ended September 30, 2007March 31, 2008, as compared to $17.8$22.4 million for the three months ended September 30, 2006March 31, 2007, primarily due toas a result of higher performance fees onin international equity and fixed income hedge funds, as well as real estate equity products.separate accounts.
Distribution Fees
Distribution fees increased by $30.0$10.5 million to $32.3$35.3 million for the three months ended September 30, 2007March 31, 2008, as compared to $2.3$24.8 million for the three months ended September 30, 2006.March 31, 2007. The increase in distribution fees is primarily the result of the assumptionacquisition 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 $90.0$90.4 million for the quarter ended September 30, 2007March 31, 2008 increased $43.7$5.8 million or 94.3%, compared with the quarter ended September 30, 2006 andMarch 31, 2007. Other revenue primarily represents fees earned onBlackRock Solutions products and services of $47.7 million, other advisory service fees of $13.6$59.7 million, property management fees of $10.0$9.1 million earned on real estate properties (which primarily represents directproducts (primarily related to reimbursement of the salaries and benefits of certain Realty employees from certain real estate products), unit trust sales fees of Metric Properties Management, Inc., “Metric”)$7.3 million and $6.0 million of fees earned related to securities lending.lending of $7.1 million.
The $43.7 million increase in other revenue of $5.8 million, or 6.8%, for the three months ended September 30, 2007March 31, 2008, as compared to the three months ended September 30, 2006March 31, 2007, was primarily the result of an increase of $13.9$17.4 million fromBlackRock Solutions products and services primarily driven by new Aladdin® and advisory assignments, $13.6 million related to other advisory services and $6.0 million onpartially offset by a decrease in fees earned related to securities lending.for fund accounting of $9.0 million and $4.5 million earned on unit trust sales.
- 3234 -
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, 2007March 31, 2008, as compared with the three months ended September 30, 2006.March 31, 2007. (continued)
Expenses
Three months ended September 30, | Variance | |||||||||||
(Dollar amounts in thousands) | 2007 | 2006 | Amount | % | ||||||||
Expenses: | ||||||||||||
Employee compensation and benefits | $ | 505,107 | $ | 198,099 | $ | 307,008 | 155.0 | % | ||||
Portfolio administration and servicing costs | 138,850 | 16,382 | 122,468 | NM | ||||||||
Amortization of deferred sales commissions | 28,763 | 1,341 | 27,422 | NM | ||||||||
General and administration | 194,442 | 75,834 | 118,608 | 156.4 | % | |||||||
Termination of closed-end fund administration and servicing arrangements | 128,114 | — | 128,114 | NM | ||||||||
Amortization of intangible assets | 31,085 | 2,394 | 28,691 | NM | ||||||||
Total expenses | $ | 1,026,361 | $ | 294,050 | $ | 732,311 | 249.0 | % | ||||
NM – Not Meaningful
Three Months Ended March 31, | Variance | |||||||||||
(Dollar amounts in thousands) | 2008 | 2007 | Amount | % | ||||||||
Expenses: | ||||||||||||
Employee compensation and benefits | $ | 468,949 | $ | 347,302 | $ | 121,647 | 35.0 | % | ||||
Portfolio administration and servicing costs | 155,739 | 131,086 | 24,653 | 18.8 | % | |||||||
Amortization of deferred sales commissions | 30,208 | 21,558 | 8,650 | 40.1 | % | |||||||
General and administration | 212,983 | 202,165 | 10,818 | 5.4 | % | |||||||
Amortization of intangible assets | 36,569 | 31,032 | 5,537 | 17.8 | % | |||||||
Total expenses | $ | 904,448 | $ | 733,143 | $ | 171,305 | 23.4 | % | ||||
Total expenses which reflect the impact of the MLIM Transaction since September 29, 2006, increased $732.3$171.3 million, or 249.0%23.4%, to $1,026.4$904.4 million for the three months ended September 30, 2007March 31, 2008, compared with $294.1$733.1 million for the three months ended September 30, 2006. Total expensesMarch 31, 2007. The increase was attributable to increases in employee compensation and benefits, portfolio and administration and servicing costs and general and administration expenses. The three months ended March 31, 2007, included $7.1 million of integration charges related to the MLIM Transaction of $6.1 million and $71.5 million in the third quarters 2007 and 2006, respectively. The third quarter of 2007 included $6.1 million of MLIM integrationTransaction. These charges were recorded in general and administration 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 2006.2007.
Employee Compensation and Benefits
Employee compensation and benefits expense increased by $307.0$121.6 million, or 155.0%35.0%, to $505.1$468.9 million, at September 30, 2007,March 31, 2008, compared to $198.1$347.3 million for the three months ended September 30, 2006.March 31, 2007. 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$57.8 million, $119.7$27.4 million and $18.9$28.5 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)
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)
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
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PART I — FINANCIAL INFORMATION (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
|
|
|
|
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)
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)
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)
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)
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, incentive compensation and stock-based compensation of $366.7 million, $276.3 million and $51.3 million, respectively. The increase of $366.7 million, or 151.2%, 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. The $276.3 million increase in incentive compensation was primarily attributable to higher advisory fees and operating income.
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 the administration and servicing of client investments in certain BlackRock products.
- 40 -
PART I — FINANCIAL INFORMATION (continued)
Operating results for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006. (continued)
Expenses (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
Nine months ended September 30, | Variance | |||||||||||
(Dollar amounts in thousands) | 2007 | 2006 | Amount | % | ||||||||
General and administration expense: | ||||||||||||
Portfolio services | $ | 119,567 | $ | 15,797 | $ | 103,770 | NM | |||||
Marketing and promotional | 118,340 | 44,170 | 74,170 | 167.9 | % | |||||||
Occupancy | 96,175 | 34,414 | 61,761 | 179.5 | % | |||||||
Technology | 90,189 | 29,404 | 60,785 | 206.7 | % | |||||||
Closed-end fund launch costs | 34,828 | 5,464 | 29,364 | NM | ||||||||
Other general and administration | 143,191 | 63,417 | 79,774 | 125.8 | % | |||||||
Total general and administration expense | $ | 602,290 | $ | 192,666 | $ | 409,624 | 212.6 | % | ||||
NM – Not Meaningful
General and administration expense increased $409.6 million, or 212.6%, for the nine months ended September 30, 2007 to $602.3 million compared to $192.7 million for the nine months ended 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 $74.2 million, occupancy expense of $61.8 million, technology expense of $60.8 million, closed-end fund launch costs of $29.4 million and other general and administration expense of $79.8 million.
- 41 -
PART I — FINANCIAL INFORMATION (continued)
Operating results for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006. (continued)
General and Administration Expense (continued)
Portfolio services increased by $103.8 million to $119.6 million, relating 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 nine months ended September 30, 2007 totaled $96.2 million, representing a $61.8 million, or 179.5%, increase from $34.4 million for the nine 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. Technology expenses increased $60.8 million, or 206.7%, to $90.2 million compared to $29.4 million for the nine months ended September 30, 2006 primarily result of a $19.1 million increase in technology consulting expenses associated with operating growth, a $15.8 million increase in depreciation 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 $79.8 million to $143.2 million from $63.4 million, including a $23.4 million and $20.0 million increase in professional fees and office related expenses, respectively, and a $6 million capital contribution to sponsored investment funds.
Termination of Closed-end Fund Administration and Servicing Arrangements
For the nine 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.
Fee Sharing Payment
For the nine months ended September 30, 2006, BlackRock recorded a one-time fee sharing expense of $34.5 million, representing a payment related to a large institutional real estate equity client account acquired in the SSRM Holdings, Inc. acquisition in January 2005.
Amortization of Intangible Assets
The $86.7 million increase in amortization of intangible assets to $93.2 million for the nine months ended September 30, 2007 compared to $6.5 million for the nine months ended September 30, 2006 primarily reflects the amortization of finite-lived intangible assets acquired in the MLIM Transaction.
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PART I — FINANCIAL INFORMATION (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, Net of Non-Controlling Interest
Non-operating income, net of non-controlling interest, for the nine months ended September 30, 2007 and 2006 was as follows:
Nine months ended September 30, | Variance | |||||||||||||
(Dollar amounts in thousands) | 2007 | 2006 | Amount | % | ||||||||||
Total non-operating income | $ | 499,639 | $ | 19,819 | $ | 479,820 | NM | |||||||
Non-controlling interest | (354,669 | ) | (2,394 | ) | (352,275 | ) | NM | |||||||
Total non-operating income, net of non-controlling interest | $ | 144,970 | $ | 17,425 | $ | 127,545 | NM | |||||||
NM – Not Meaningful
The components of non-operating income, net of non-controlling interest, for the nine months ended September 30, 2007 and 2006 were as follows:
Nine 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 | $ | 55,315 | $ | — | $ | 55,315 | NM | ||||||||
Real estate | 29,372 | 434 | 28,938 | NM | |||||||||||
Other alternative products | 17,639 | 2,184 | 15,455 | NM | |||||||||||
Other2 | 21,463 | 4,152 | 17,311 | 416.9 | % | ||||||||||
Total net gain on investments, net of non-controlling interest | 123,789 | 6,770 | 117,019 | NM | |||||||||||
Interest and dividend income | 52,204 | 16,676 | 35,528 | 213.0 | % | ||||||||||
Interest expense | (31,023 | ) | (6,021 | ) | (25,002 | ) | 415.2 | % | |||||||
Total non-operating income, net of non-controlling interest | $ | 144,970 | $ | 17,425 | $ | 127,545 | NM | ||||||||
NM – Not Meaningful
|
|
|
|
Non-operating income, net of non-controlling interest, increased $127.5 million to $145.0 million for the nine months ended September 30, 2007 compared to $17.4 million for the nine months ended September 30, 2006 as a result of a $117.0 million increase in net gain on investments, net of non-controlling interest, and a $35.5 million increase in interest and dividend income, partially offset by a $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, net of non-controlling interest, was primarily due to an increase in net investment gains on all investments due to market conditions and significant growth of the Company’s investments in sponsored investment products.
- 43 -
PART I — FINANCIAL INFORMATION (continued)
Operating results for the nine months ended September 30, 2007 as compared with the nine months ended September 30, 2006. (continued)
Income Taxes
Income tax expense was $298.1 million and $90.0 million for the nine months ended September 30, 2007 and 2006, respectively, representing effective tax rates of 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 $672.8 million, or $5.12 per diluted share, for the nine months ended September 30, 2007 an increase of $519.7 million, or $2.83 per diluted share, compared to the nine months ended September 30, 2006. Net income for the nine months ended September 30, 2007 includes the after-tax impacts 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, $25.3 million, $12.4 million and $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 rebranding costs. Net income of $153.2 million during the nine months ended September 30, 2006 included the after-tax impacts of the portion of LTIP awards funded by a capital contribution of BlackRock stock held by PNC of $22.7 million and MLIM integration costs of $57.1 million. Exclusive of these items, fully diluted earnings per share, as adjusted, for the nine months ended September 30, 2007 increased $2.19, or 62.9%, compared to the nine months ended September 30, 2006.
Operating Margin
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 Operations.
- 44 -
PART I — FINANCIAL INFORMATION (continued)
Operating results for the three months ended September 30, 2007 as compared with the three months ended June 30, 2007.
Revenue
Three months ended | |||||||||||||
September 30, | June 30, | Variance | |||||||||||
(Dollar amounts in thousands) | 2007 | Amount | % | ||||||||||
Investment advisory and administration fees: | |||||||||||||
Equity and balanced | $ | 580,302 | $ | 527,800 | $ | 52,502 | 9.9 | % | |||||
Fixed income | 230,373 | 222,506 | 7,867 | 3.5 | % | ||||||||
Cash management | 128,381 | 120,859 | 7,522 | 6.2 | % | ||||||||
Alternative investment products | 87,374 | 79,445 | 7,929 | 10.0 | % | ||||||||
Investment advisory and administration base fees | 1,026,430 | 950,610 | 75,820 | 8.0 | % | ||||||||
Investment advisory performance fees | 149,382 | 25,720 | 123,662 | 480.8 | % | ||||||||
Total investment advisory and administration fees | 1,175,812 | 976,330 | 199,482 | 20.4 | % | ||||||||
Distribution fees | 32,310 | 32,867 | (557 | ) | (1.7 | )% | |||||||
Other revenue: | |||||||||||||
BlackRock Solutions | 47,683 | 46,296 | 1,387 | 3.0 | % | ||||||||
Other revenue | 42,274 | 41,530 | 744 | 1.8 | % | ||||||||
Total other revenue | 89,957 | 87,826 | 2,131 | 2.4 | % | ||||||||
Total revenue | $ | 1,298,079 | $ | 1,097,023 | $ | 201,056 | 18.3 | % | |||||
Total revenue for the three months ended September 30, 2007 increased $201.1 million, or 18.3%, to $1,298.1 million, compared with $1,097.0 million for the three months ended June 30, 2007. Investment advisory and administration base fees increased $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. Performance fees increased $123.7 million, to $149.4 million, compared with $25.7 million for the three months ended June 30, 2007. Other revenue increased by $2.1 million, or 2.4%, to $90.0 million for the three months ended September 30, 2007, compared with $87.8 million for the three months ended June 30, 2007.
Investment 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.
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.
- 45 -
PART I — FINANCIAL INFORMATION (continued)
Operating results for the three months ended September 30, 2007 as compared with the three months ended 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)
Operating results for the three months ended September 30, 2007 as compared with the three months ended June 30, 2007. (continued)
Expense (continued)
Employee Compensation and Benefits
Employee compensation and benefits expense increased by $91.7 million, or 22.2%, to $505.1 million at September 30, 2007 compared to $413.4 million for the three months ended June 30, 2007. The increase in employee compensation and benefits expense was primarily attributable to increases in incentive compensation, and salaries and benefits of $84.9 million and $9.8 million, respectively. The $84.9$57.8 million increase in incentive compensation was 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$27.4 million or 4.8%, in salaries and benefits was primarily attributabledue to increased payroll tax accruals on higher incentive compensation and higher staffing levels associated with business growth.growth and the Quellos Transaction. Employees (excluding Metric)(including employees of Metric Property Management, Inc. (“Metric”)) at September 30, 2007March 31, 2008 totaled 5,1256,024 as compared to 4,8375,227 at June 30,March 31, 2007. Stock-based compensation increased $28.5 million primarily due to additional grants of stock awards in first quarter 2008.
Amortization of Deferred Sales CommissionsPortfolio Administration and Servicing Costs
Amortization of deferred sales commissions was relatively unchangedPortfolio administration and servicing costs increased $24.7 million to $155.7 million during the three months ended March 31, 2008, compared to $131.1 million for the three months ended September 30, 2007March 31, 2007. These costs include payments to third parties, as comparedwell as payments to Merrill Lynch and PNC, primarily associated with the administration and servicing of client investments in certain BlackRock products. Portfolio administration and servicing costs for the three months ended June 30, 2007.
GeneralMarch 31, 2008 included $121.9 million of costs payable to Merrill Lynch and Administration Expenseaffiliates and $8.2 million of costs payable to PNC and affiliates.
Three months ended | |||||||||||||
September 30, | June 30, | Variance | |||||||||||
(Dollar amounts in thousands) | 2007 | Amount | % | ||||||||||
General and administration expense: | |||||||||||||
Portfolio services | $ | 43,844 | $ | 37,994 | $ | 5,850 | 15.4 | % | |||||
Marketing and promotional | 35,146 | 42,324 | (7,178 | ) | (17.0 | )% | |||||||
Occupancy | 34,506 | 28,438 | 6,068 | 21.3 | |||||||||
Technology | 28,547 | 33,205 | (4,658 | ) | (14.0 | )% | |||||||
Closed-end fund launch costs | 1,875 | 19,801 | (17,926 | ) | (90.5 | )% | |||||||
Other general and administration | 50,524 | 49,018 | 1,506 | 3.1 | % | ||||||||
Total general and administration expense | $ | 194,442 | $ | 210,780 | $ | (16,338 | ) | (7.8 | )% | ||||
- 4735 -
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, 2007March 31, 2008, as compared with the three months ended June 30,March 31, 2007. (continued)
Expenses (continued)
Amortization of Deferred Sales Commissions
Amortization of deferred sales commissions increased by $8.7 million to $30.2 million for the three months ended March 31, 2008, as compared to $21.6 million for the three months ended March 31, 2007. The increase in amortization of deferred sales commissions was primarily the result of the acquisition of distribution financing arrangements from PNC in second quarter 2007.
General and Administration Expense (continued)
Three Months Ended March 31, | Variance | ||||||||||||
(Dollar amounts in thousands) | 2008 | 2007 | Amount | % | |||||||||
General and administration expense: | |||||||||||||
Marketing and promotional | $ | 41,454 | $ | 40,870 | $ | 584 | 1.4 | % | |||||
Portfolio services | 41,175 | 37,729 | 3,446 | 9.1 | % | ||||||||
Occupancy | 33,308 | 33,231 | 77 | 0.2 | % | ||||||||
Technology | 30,888 | 28,438 | 2,450 | 8.6 | % | ||||||||
Professional services | 22,401 | 23,527 | (1,126 | ) | (4.8 | )% | |||||||
Closed-end fund launch costs | 3,739 | 13,152 | (9,413 | ) | (71.6 | )% | |||||||
Other general and administration | 40,018 | 25,218 | 14,800 | 58.7 | % | ||||||||
Total general and administration expense | $ | 212,983 | $ | 202,165 | $ | 10,818 | 5.4 | % | |||||
General and administration expense which included MLIM integration costs of $6.0 million and $6.1 million in the second and third quarters of 2007, respectively, decreased $16.3increased $10.8 million, or 7.8%5.4%, for the three months ended September 30, 2007March 31, 2008 to $194.4$213.0 million, compared to $210.8$202.2 million for the three months ended June 30,March 31, 2007. The decreaseincrease in general and administration expense was primarily due to decreasesincreases in portfolio services costs of $3.4 million, technology expense of $2.5 million, marketing and promotional expense of $0.6 million and other general and administration costs of $14.8 million, partially offset by a reduction in closed-end fund launch costs of $17.9$9.4 million and marketing and promotional expense of $7.2 million, partially offset by increases in occupancy of $6.1 million and portfolioprofessional services of $5.9$1.1 million.
Closed-end fund launch costs totaled $1.9 million and $19.8 million for the three months ended 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 the 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 September 30, 2007 primarily due to a $4.4 million decline related to BlackRock’s advertising and rebranding campaign and a $2.8 million decline related to domestic and international marketing efforts. Occupancy costs increased $6.1 million for the three months ended September 30, 2007, as compared to the three months ended June 30, 2007 primarily due to 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 supporting higher AUM levels and increased trading activities.
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.
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 June 30, 2007 was as follows:
Three months ended | |||||||||||||||
September 30, | June 30, | Variance | |||||||||||||
(Dollar amounts in thousands) | 2007 | Amount | % | ||||||||||||
Total non-operating income | $ | 128,189 | $ | 213,718 | $ | (85,529 | ) | (40.0 | )% | ||||||
Non-controlling interest | (81,539 | ) | (148,463 | ) | 66,924 | 45.1 | % | ||||||||
Total non-operating income, net of non-controlling interest | $ | 46,650 | $ | 65,255 | $ | (18,605 | ) | (28.5 | )% | ||||||
- 4836 -
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, 2007March 31, 2008, as compared with the three months ended June 30,March 31, 2007. (continued)
Expenses (continued)
Portfolio services costs increased by $3.4 million to $41.2 million and relates to supporting higher AUM levels and increased trading activities. Technology expenses increased $2.5 million, or 8.6%, to $30.9 million compared to $28.4 million for the three months ended March 31, 2007 primarily due to a $6.6 million increase in hardware and software costs, which include licensing, maintenance and depreciation expense, partially offset by a $4.6 million decrease in technology consulting expenses. Other general and administration costs increased by $14.8 million to $40.0 million from $25.2 million, primarily related to $10.4 million of incremental foreign currency remeasurement costs and $2.8 million of incremental communication costs. Closed-end fund launch costs totaled $3.7 million for the three months ended March 31, 2008 relating to one new closed-end fund launched during the period, which raised approximately $127.4 million in AUM. Closed-end fund launch costs for the three months ended March 31, 2007 totaled $13.2 million relating to one new closed-end fund launched during the period, which generated $764.8 million in AUM. Professional services decreased $1.1 million, or 4.8%, to $22.4 million compared to $23.5 million for the three months ended March 31, 2007 primarily due to decreased consulting costs related to the MLIM integration in 2007.
Amortization of Intangible Assets
The $5.5 million increase in amortization of intangible assets to $36.6 million for the three months ended March 31, 2008, compared to $31.0 million for the three months ended March 31, 2007, primarily reflects amortization of finite-lived intangible assets acquired in the Quellos Transactions.
Non-Operating Income, Net of Non-Controlling Interest (continued)
The components of non-operatingNon-operating income, net of non-controlling interest for the three months ended September 30,March 31, 2008 and 2007 and June 30, 2007 werewas as follows:
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 | )% | ||||||
|
|
|
|
Non-operating income, net of non-controlling interest, decreased $18.6 million to $46.7 million for the quarter ended September 30, 2007 as compared to $65.3 million for the quarter ended June 30, 2007 primarily as a result of a $25.4 million decrease in net gains on investments, net of non-controlling interest, partially offset by a $6.4 million increase in interest and dividend income. The decrease in net gain on investments in third quarter 2007 was primarily due to a decline in net investment gains on private equity investments and other alternative products, offset by an increase in real estate products.
Three Months Ended March 31, | Variance | ||||||||||||||
(Dollar amounts in thousands) | 2008 | 2007 | Amount | % | |||||||||||
Total non-operating income | $ | (18,528 | ) | $ | 157,731 | $ | (176,259 | ) | (111.7 | )% | |||||
Non-controlling interest | (5,360 | ) | (124,668 | ) | 119,308 | (95.7 | )% | ||||||||
Total non-operating income, net of non-controlling interest | $ | (23,888 | ) | $ | 33,063 | $ | (56,951 | ) | (172.2 | )% | |||||
- 4937 -
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, 2007March 31, 2008, as compared with the three months ended June 30,March 31, 2007. (continued)
The components of non-operating income, net of non-controlling interest, for the three months ended March 31, 2008 and 2007 were as follows:
Three Months Ended March 31, | Variance | ||||||||||||||
(Dollar amounts in thousands) | 2008 | 2007 | Amount | % | |||||||||||
Non-operating income, net of non-controlling interest: | |||||||||||||||
Net gain (loss) on investments, net of non-controlling interest: | |||||||||||||||
Private equity | $ | 8,061 | $ | 10,267 | $ | (2,206 | ) | (21.5 | )% | ||||||
Real estate | (13,936 | ) | (1,164 | ) | (12,772 | ) | NM | ||||||||
Hedge funds/funds of hedge funds | (15,882 | ) | 8,650 | (24,532 | ) | (283.6 | )% | ||||||||
Other investments1 | (3,092 | ) | 7,939 | (11,031 | ) | (138.9 | )% | ||||||||
Total net gain (loss) on investments, net of non-controlling interest | (24,849 | ) | 25,692 | (50,541 | ) | (196.7 | )% | ||||||||
Interest and dividend income | 18,339 | 18,357 | (18 | ) | (0.1 | )% | |||||||||
Interest expense | (17,378 | ) | (10,986 | ) | (6,392 | ) | 58.2 | % | |||||||
Total non-operating income, net of non-controlling interest | $ | (23,888 | ) | $ | 33,063 | $ | (56,951 | ) | (172.2 | )% | |||||
NM – Not Meaningful
1 | Includes investment income related to equity and fixed income investments, collateralized debt obligations (“CDOs”), deferred compensation arrangements and BlackRock’s seed capital hedging program. |
Non-Operating Income, Net of Non-Controlling Interest (continued)
Non-operating income, net of non-controlling interest, decreased $57.0 million to a loss of $23.9 million for the quarter ended March 31, 2008, as compared to income of $33.1 million for the quarter ended March 31, 2007, as a result of a $24.8 million net loss on investments compared with a net gain on investments of $25.7 million in first quarter 2007 and a $6.4 million increase in interest expense related to the issuance of long-term debt in September 2007. The net loss on investments, net of non-controlling interest, in 2008 was primarily due to a decline in valuations from seed investments and co-investments in private equity products, real estate equity products, hedge funds/funds of hedge funds and other investments.
Income Taxes
Income tax expense was $63.2$130.1 million and $125.0$109.9 million for the quartersthree months ended September 30, 2007March 31, 2008 and June 30, 2007, respectively, representing effective income tax rates of 19.8%35.0% and 36.0%, respectively. The reduction in the effective tax rate is primarily due to the resultgeographic mix of a one-timeearnings and tax benefit of $51.4 million recordedlegislation changes enacted in the third quarter of 2007 due to recent tax legislation changes in the United Kingdom and Germany, which resultedthat reduced corporate income tax rates in a revaluation of certain deferred tax liabilities.2008.
- 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 three months ended March 31, 2008, as compared with the three months ended March 31, 2007. (continued)
Net Income
Net income totaled $255.2$241.7 million, or $1.82 per diluted share, for the three months ended September 30, 2007March 31, 2008, which was an increase of $33.0$46.3 million, or 14.8%, as$0.34 per diluted share, compared to the three months ended June 30,March 31, 2007. Net income for the quarter ended September 30, 2007March 31, 2008, includes the after-tax impactsimpact of the terminationportion of closed-endLTIP awards to be funded through a capital contribution of BlackRock common stock held by PNC and an expected contribution by Merrill Lynch to fund administrationcertain compensation of former MLIM employees, of $9.8 million and servicing arrangements,$1.6 million, respectively.
Net income of $195.4 million for the quarter ended March 31, 2007, included the after-tax impacts related to the portion of certain LTIP awards to be funded through a capital contribution of BlackRock common stock held by PNC of $7.7 million, MLIM integration costs related to the MLIM Transaction and Quellos acquisitionof $4.5 million and an expected contribution by Merrill Lynch of $1.6 million 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 corporate income taxes as a result of enacted legislation in the United Kingdom and Germany.
employees. MLIM and Quellos integration costs primarily consist of compensation costs,include professional fees and rebranding costs. Net income of $222.2 million during the three months ended June 30, 2007 includes the after-tax impacts of certain LTIP awards to be funded through a capital contribution of BlackRock common stock held by PNCother general and integration expenses related to the MLIM Transaction of $8.9 million and $3.9 million, respectively.administration expenses. Exclusive of these items, net income,GAAP expenses, fully diluted earnings per share, as adjusted, for the three months ended September 30, 2007March 31, 2008 increased $63.5 million,$0.31, or 26.8%19.5%, compared to the three months ended June 30,March 31, 2007.
Operating Margin
The Company’s operating margin was 20.9%30.4% for the three months ended September 30, 2007March 31, 2008, compared to 25.7%27.1% for the three months ended June 30,March, 31, 2007. Operating margin for the three months ended September 30,March 31, 2008 and 2007 includesincluded the impactsimpact of $128.1$3.9 million for the terminationand $14.5 million, respectively, of closed-end fund administrationlaunch costs and servicing arrangements and $6.2 million of integration costs. Operatingcommissions. In addition, operating margin for the three months ended June 30,March 31, 2007 includesincluded the impact of $24.1$7.1 million of closed-endMLIM integration costs. Operating margin improved 3.3% primarily due operating leverage associated with the growth in revenue, a reduction of close-end fund launch costs and commissions, and $6.0 millionthe reduction of MLIM integration costs. The declinecosts offset by an increase in operating margin is primarily due toamortization of intangible assets associated with the impact of the termination of closed-end fund administration and servicing arrangements.Quellos Transaction.
Operating margin, as adjusted, was 37.7%37.6% and 36.1%36.7% for the three months ended September 30, 2007March 31, 2008 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.
Other Operating Items
Support of Two Enhanced Cash Funds
During 2007, BlackRock made investments in two enhanced cash funds to enhance fund liquidity and to facilitate redemptions. At March 31, 2008, BlackRock’s total net investment in these two funds was approximately $88.5 million.
In December 2007, BlackRock entered into capital support agreements with the two funds, backed by letters of credit drawn under BlackRock’s existing credit facility. Pursuant to the capital support agreements, BlackRock has agreed to make subsequent capital contributions to the funds to cover realized losses, up to $100 million, related to specified securities held by the funds. BlackRock provided approximately $1 million of capital contributions to these two funds for the three months ended March 31, 2008 under the capital support agreements.
At March 31, 2008 and December 31, 2007, in applying the provisions of FASB Interpretation No. 46(R) (“FIN 46(R)”)Consolidation of Variable Interest Entities, BlackRock concluded that it is not the primary beneficiary of either fund.
- 5039 -
PART I —– FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Other Operating Items (continued)
Exposure to Collateralized Debt Obligations
In the normal course of business, BlackRock manages various CDOs. A CDO is a managed investment vehicle that purchases a portfolio of assets or enters into swaps. A CDO funds its activities through the issuance of several tranches of debt and equity, the repayment and return of which are linked to the performance of the assets in the CDO. Typically, BlackRock’s role is as collateral manager. The Company also may invest in a portion of the debt or equity issued. These entities meet the definition of a variable interest entity under FIN 46(R). BlackRock has concluded that it is not the primary beneficiary of these CDOs, and as a result it does not consolidate these CDOs in its condensed consolidated financial statements.
At March 31, 2008 and December 31, 2007, BlackRock’s maximum risk of loss related to CDOs was approximately $25.4 million and $32.1 million, respectively.
Liquidity and Capital Resources
The Company manages itsBlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds
In accordance with GAAP, certain BlackRock sponsored investment funds are consolidated into the condensed consolidated financial condition and funding to maintain appropriate liquidity forstatements of BlackRock, notwithstanding the business. At September 30, 2007, the Company had total cash and cash equivalents on itsfact that BlackRock may only have a minority economic interest in these funds. As a result, BlackRock’s condensed consolidated statementstatements of financial conditioncash flows include the cash flows of $2,320.6 million. This total was prior toconsolidated sponsored investment funds. We use an adjusted cash flow, which excludes 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 fundimpact of hedge funds manager. Cash and cash equivalents, net of amounts in consolidated sponsored investment funds, ($191.5 million)as a supplemental non-GAAP measure to assess liquidity and netcapital requirements. We believe that BlackRock’s cash flows, excluding the impact 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 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, interestprovide investors with useful information on the Company’s debt, purchasescash flows of investments, capital expenditures and dividends on BlackRock’s stock.
In December 2006, the Company entered into an unsecured revolving credit facility with a syndicate of banking institutions. This facility, as amended in February 2007 (the “2006 facility”), permitted the CompanyBlackRock relating to borrow up to $800,000.
In August 2007, the Company terminated the 2006 facility and entered into a new five year $2.5 billion unsecured revolving credit facility (the “2007 facility”), which permits the Company to request an additional $500 million of borrowing capacity, subject to lender credit approval, up to a maximum of $3 billion. 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 September 30, 2007, the Company had $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 ten-year term. A portion of the net proceeds of the Notes was usedour ability to fund the initialadditional operating, investing and financing activities. BlackRock’s management does not advocate that investors consider such non-GAAP measures in isolation from, or as a substitute for its cash payment for the acquisition of the fund of funds business of Quellos and the remainder will be used for general corporate purposes.
In June 2007, the Company announced that it had entered into 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 millionflow presented 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.accordance with GAAP.
- 5140 -
PART I —– FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued)
The following tables present a reconciliation of the Company’s condensed consolidated statements of cash flows presented on a GAAP basis to the Company’s condensed consolidated statements of cash flows excluding the impact of the cash flows of consolidated sponsored investment funds:
Three Months Ended March 31, 2008 | ||||||||||||
(Dollar amounts in millions) | GAAP Basis | Cash Flows of Consolidated Sponsored Investment Funds | Cash Flows Excluding Impact of Consolidated Sponsored Investment Funds | |||||||||
Cash flows from operating activities | $ | (130 | ) | $ | 135 | $ | (265 | ) | ||||
Cash flows from investing activities | (134 | ) | (11 | ) | (123 | ) | ||||||
Cash flows from financing activities | (205 | ) | (91 | ) | (114 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | 7 | — | 7 | |||||||||
Net change in cash and cash equivalents | (462 | ) | 33 | (495 | ) | |||||||
Cash and cash equivalents, beginning of period | 1,656 | 67 | 1,589 | |||||||||
Cash and cash equivalents, end of period | $ | 1,194 | $ | 100 | $ | 1,094 | ||||||
Operating Activities
Sources of BlackRock’s operating cash include investment advisory and administration fees, revenues fromBlackRock Solutions’ products and services, property management fees, mutual fund distribution fees and realized earnings and distributions on certain of the Company’s investments. BlackRock primarily uses its cash to pay compensation and benefits, portfolio administration and servicing costs, general and administration expenses, interest on the Company’s borrowings, purchases of investments, capital expenditures, income taxes and dividends on BlackRock’s capital stock.
Cash flows from operating activities in the first quarter includes cash payments related to year-end incentive compensation.
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PART I – FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued)
Capital Resources
The Company manages its consolidated financial condition and funding to maintain appropriate liquidity for the business. At March 31, 2008, the Company had total cash and cash equivalents on its condensed consolidated statements of financial condition of $1,194.2 million. Cash and cash equivalents, net of amounts in consolidated sponsored investment funds of $100.0 million and net of regulatory capital requirements of $239.7 million (partially met with cash and cash equivalents), was $854.5 million. In addition, at March 31, 2008, the Company had committed access to $2,100 million of undrawn cash (net of outstanding letters of credit totaling $100 million) via its 2007 five-year credit facility, resulting in cash, net of cash in consolidated sponsored investment funds and regulatory capital requirements, plus credit capacity of $2,954.5 million.
Approximately $191.5$100.0 million in cash and cash equivalents and $1,872.8$907.6 million in investments included in the Company’s condensed consolidated statement of financial condition at September 30, 2007March 31, 2008 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.Investment/Loan Commitments
At September 30, 2007,March 31, 2008, the Company had $676.3$498.7 million of various capital commitments to fund sponsored investment funds and unfunded commitments related to twoone private equity warehouse facilities.facility. Generally, the timing of the funding of capital commitments is uncertain and such commitments could expire before funding. The Company intends to make additional capital commitments from time to time.time to seed additional investment products for and with clients.
On August 2, 2006, BlackRock announced that its boardAt March 31, 2008, the Company had loaned approximately $99.5 million to certain funds of directorsfunds managed by the Company and warehouse entities established for such funds. At March 31, 2008, the Company had authorized a new share repurchase programcommitted to purchase anmake additional 2.1loans of approximately $76.1 million shares. Pursuant to this repurchase program, BlackRock may make repurchasesunder the agreements. The Company anticipates making additional commitments under these facilities from time to time, as market conditions warrant,but is not obligated to do so.
On February 29, 2008, the Company committed to provide financing, if needed, of up to $60.0 million to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that is managed by a subsidiary of BlackRock. Financing is collateralized by certain investments owned by Anthracite. At March 31, 2008, $52.5 million of financing was outstanding, which was included in due from affiliates on the open market orCompany’s condensed consolidated statement of financial condition, with interest rates between 5.15% and 5.44% and was subsequently repaid in privately negotiated transactionsApril 2008.
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PART I – FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued)
Borrowings
In August 2007, the Company entered into a five-year $2.5 billion unsecured revolving credit facility (the “2007 facility”), which permits the Company to request an additional $500 million of borrowing capacity, subject to lender credit approval, up to a maximum of $3.0 billion. 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 March 31, 2008.
At March 31, 2008, the discretion of management. The Company repurchased 1,348,600 shareshad $300.0 million outstanding under the program in open market transactions for approximately $200.9 million through2007 facility with interest rates between 2.855% to 5.105% and maturity dates between April 2008 and September 30, 2007. As a result,2008. During April 2008, the Company is currently authorizedrepaid $100.0 million of the balance outstanding at March 31, 2008.
In December 2007, in order to repurchase an additional 751,400 sharessupport two enhanced cash funds that BlackRock manages, BlackRock elected to procure two letters of credit under its share repurchase program.the existing 2007 facility totaling in aggregate $100 million.
At March 31, 2008, long-term borrowings were $947.2 million. Debt service and repayment requirements, assuming the convertible debentures are repaid at BlackRock’s option in 2010, are $25.8 million for the remainder of 2008, $51.0 million in 2009, $297.7 million in 2010 and $43.8 million in each of 2011 and 2012.
Net Capital Requirements
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 September 30, 2007,March 31, 2008, the Company was required to maintain approximately $215.7$239.7 million in net capital at these subsidiaries and is in compliance with all applicable regulatory minimum net capital requirements.
Critical Accounting Policies
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. In addition to Fair Value Measurements, discussed below, see Note 2 in BlackRock’s Annual Report on Form 10-K for detail on Significant Accounting Policies.
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PART I —– FINANCIAL INFORMATION (continued)
Liquidity and Capital Resources (continued)
Critical Accounting Policies (continued)
Contractual Obligations, CommitmentsFair Value Measurements
BlackRock adopted SFAS No. 157 as of January 1, 2008, which requires, among other things, enhanced disclosures about investments that are measured and Contingenciesreported at fair value. SFAS No. 157 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities at the reporting date. Level 1 assets include listed mutual funds, equities and debt securities.
Level 2 Inputs – Other than quoted prices included within Level 1 that are observable for substantially the full term of the asset or liability, either directly or indirectly. Level 2 assets include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. Investments which generally are included in this category include securities held within consolidated hedge funds as well as restricted public securities valued at a discount.
Level 3 Inputs – Unobservable inputs for the valuation of the asset or liability. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Investments included in this category generally include general and limited partnership interests in private equity, real estate, hedge funds, and funds of hedge funds.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
BlackRock reports its investments on a GAAP basis, which includes investment balances which are owned by sponsored investment funds that are deemed to be controlled by BlackRock in accordance with GAAP and therefore are consolidated even though BlackRock may not own a majority of such funds. As a result, management reviews its investments on an “economic” basis, which eliminates the portion of investments that do not impact BlackRock’s book value. BlackRock’s management does not advocate that investors consider such non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
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PART I – FINANCIAL INFORMATION (continued)
Critical Accounting Policies (continued)
Fair Value Disclosures (continued)
The following table sets forth contractual obligations, commitments and contingencies by year of payments as of September 30, 2007:represents investments measured at fair value on a recurring basis at March 31, 2008:
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 | |||||||
(in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Investments Not Held at Fair Value (3) | Investments at March 31, 2008 | ||||||||||||||
Total investments, GAAP | $ | 310.9 | $ | 285.9 | $ | 1,288.6 | $ | 37.5 | $ | 1,922.9 | |||||||||
Net assets for which the Company does not bear “economic” exposure (1) | (3.7 | ) | (160.1 | ) | (435.1 | ) | — | (598.9 | ) | ||||||||||
Net “economic” investment exposure(2) | $ | 307.2 | $ | 125.8 | $ | 853.5 | $ | 37.5 | $ | 1,324.0 | |||||||||
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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 table are additional contingent payments related to its acquisitions of: (i) SSRM Holdings, Inc., (ii) an investment manager of 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 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 InvestmentCapital 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.
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PART I — FINANCIAL INFORMATION (continued)
AUM Market Price Risk
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. At March 31, 2008, the majority of our investment advisory and administration fees were based on AUM of the applicable mutual funds or separate accounts. Movements in equity market prices, interest rates, foreign exchange rates, or all three could cause revenuesthe value of AUM to decline, because ofwhich would result in lower investment advisory and administration fees by:fees.
causing the value of AUM to decrease;- 45 -
PART I – FINANCIAL INFORMATION (continued)
causing the returns realized on AUM to decrease;
Item 3. | Quantitative and Qualitative Disclosures About Market Risk (continued) |
causing clients to withdraw funds in favor of products in markets that they perceive to offer greater opportunity and that BlackRock does not serve;
causing clients to rebalance assets away from products that BlackRock manages into products that BlackRock does not manage; and
causing clients to reallocate assets away from products that earn higher revenues into products that earn lower revenues.
Corporate Investments Portfolio Risks
In the normal course of its business, BlackRock is exposed to equity market price risk, interest rate risk and foreign 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,March 31, 2008, the outstanding total return swaps had an aggregate notional value of approximately $82$79 million.
Corporate Investments Portfolio Risks
At September 30, 2007,March 31, 2008, approximately $1,873$908 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 therefore 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 | March 31, 2008 | December 31, 2007 | |||||||||
Total investments | $ | 2,681 | $ | 1,923 | $ | 2,000 | ||||||
Consolidated investments | (1,873 | ) | ||||||||||
Consolidated sponsored investments funds | (908 | ) | (1,054 | ) | ||||||||
Net exposure to consolidated investment funds | 347 | 309 | 325 | |||||||||
Total net “economic” investments | $ | 1,155 | ||||||||||
Total net “economic” investment exposure | $ | 1,324 | $ | 1,271 | ||||||||
Equity Market Price Risk
At September 30, 2007,March 31, 2008, the Company’s net exposure to equity price risk is approximately $925$926 million (net of $82$79 million of certain equity investments that are hedged via total return swaps) of the Company’s net economic investments.investment exposure. The Company estimates that a 10% adverse change in equity prices would result in a decrease of approximately $92.5$92.6 million in the carrying value of such investments.
Interest Rate Risk
At September 30, 2007,March 31, 2008, the Company was exposed to interest-rate risk as a result of approximately $148$319 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 determinedestimates that the impact of such a fluctuation on these investments, individually and in the aggregate, would not haveresult in a material effect on BlackRock’s financial conditiondecrease, or resultsincrease, of operations.
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PART I — FINANCIAL INFORMATION (continued)
approximately $3.2 million in the carrying value of such investments.
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 areinvestment exposure denominated in foreign currencies, primarily the British pound sterling and the euro,Euro, was $109$91 million. A 10% adverse change in foreign exchange rates would result in an $10.9approximately a $9.1 million decline in the investment portfolio.carrying value of such investments.
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PART I – FINANCIAL INFORMATION (continued)
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)15d—15(e) under the Exchange Act) as of September 30, 2007.at March 31, 2008. 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 September 30, 2007.at March 31, 2008.
Internal Control overand Financial Reporting
Other than system conversion activities related to the transition of support from Merrill Lynch to BlackRock, thereThere have been no changes in internal control over financial reporting during the quarter ended September 30, 2007March 31, 2008 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting. The Company has substantially completed an evaluation of internal control over financial reporting in light of the MLIM Transaction and expects to make additional modifications based upon this review.
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Item 1. | Legal Proceedings |
See footnote 12,9, Commitments and Contingencies, to the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filing.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(c) During the three months ended September 30, 2007,March 31, 2008, 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 | ||||||
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, 2008 through January 31, 2008 | 31,097 | 2 | $ | 200.36 | — | 751,400 | ||||
February 1, 2008 through February 29, 2008 | 159,120 | 3 | $ | 215.82 | — | 751,400 | ||||
March 1, 2008 through March 31, 2008 | 922 | 3 | $ | 195.99 | — | 751,400 | ||||
Total | 191,139 | $ | 213.21 | — | ||||||
1 | On August 2, 2006, the Company announced a 2.1 million share repurchase program with no stated expiration date. An additional indeterminable number of shares may be repurchased under the 2002 Long-Term Incentive Plan (“2002 LTIP”). |
2 | Includes 25,072 shares purchased by the Company from employees in January pursuant to a put feature available in connection with the payment of certain 2002 LTIP awards. This number also includes purchases made by the Company to satisfy income tax withholding obligations |
3 | Reflects purchases made by the Company primarily to satisfy income tax withholding obligations of employees related to the vesting of certain restricted stock or restricted stock unit awards. All such purchases were made outside of the publicly announced share repurchase program. |
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PART II —– OTHER INFORMATION (continued)
Item 6. |
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.
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PART II — OTHER INFORMATION (continued)
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PART II — OTHER INFORMATION (continued)
Exhibits |
Exhibit No. | Description | |
12.1 | Computation of 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. |
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PART II — OTHER INFORMATION (continued)
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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) | ||||
Date: May 9, 2008 | By: | /s/ Paul L. Audet | ||
Paul L. Audet | ||||
Managing Director & |
EXHIBIT INDEX
Exhibit No.Description
Exhibit No. | Description | |
12.1
EXHIBIT INDEX (continued)
EXHIBIT INDEX (continued)
Computation of 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. |