BlackRock Reports Third Quarter Diluted EPS of $3.65, or $3.47 as adjusted
BlackRock Reports Third Quarter Diluted EPS of $3.65, or $3.47 as adjusted
Operating Margin of 37.7% (40.7% as adjusted) for Third Quarter 2012
$3.673 Trillion in assets under management at September 30, 2012, up 10% from Third Quarter 2011
Delivered record quarterly diluted EPS as adjusted of $3.47, up 23% and 12% from third quarter 2011 and second quarter 2012, respectively
Grew net income 8% (17% as adjusted) from third quarter 2011 with revenue of $2.3 billion
Generated strongest quarter of iShares® flows since 2009 with $25.2 billion of net inflows, including $20.5 billion of net inflows into equity products
Successfully launched the largest closed-end fund (Municipal Target Term Trust) in BlackRock history raising approximately $1.6 billion in assets
Continued strong repurchase activity buying 960,100 shares in the quarter with a total of 8.2 million shares year to date
NEW YORK--(BUSINESS WIRE)-- BlackRock, Inc. (NYS: BLK) today reported third quarter 2012 diluted EPS of $3.65, up 19% from second quarter 2012 and 13% from third quarter 2011. Revenue grew 4% from third quarter 2011 reflecting positive market factors, positive net new business, and strength in performance fees and BlackRock Solutions®. Operating income of $875 million and operating margin of 37.7% for third quarter 2012 included $25 million of launch costs for the Municipal Target Term Trust.
As adjusted(2)results . Third quarter 2012 operating income rose 3% and 5% to $876 million from third quarter 2011 and second quarter 2012, respectively. Diluted EPS totaled $3.47 and included operating income of $3.42 per diluted share and net non-operating income of $0.05 per diluted share. Adjusted operating margin of 40.7% in third quarter 2012 rose 60 bps from third quarter 2011 and 150 bps from second quarter 2012.
"We've built a broad and diverse platform at BlackRock focused on delivering strong investment performance and the solutions our clients need regardless of market environment. In the third quarter, we delivered record earnings per share up 23% from the prior year and margins over 40%," said Laurence D. Fink, Chairman and CEO of BlackRock. "We achieved these results through robust new business generation across each of our channels with particular strength in key growth areas on which we've focused, including Retail and iShares and our DC business, strong non-operating results and due to the benefits of share repurchases."
The table below presents AUM and a comparison of GAAP and as adjusted results for certain financial measures. | ||||||||||||||||||||||||||
Q3 2012 | Q3 2011 | % Change | Q2 2012 | % Change | YTD 2012 | YTD 2011 | % Change | |||||||||||||||||||
AUM | $3,673,274 | $3,345,067 | 10% | $3,559,934 | 3% | $3,673,274 | $3,345,067 | 10% | ||||||||||||||||||
GAAP basis: | ||||||||||||||||||||||||||
Revenue | $2,320 | $2,225 | 4% | $2,229 | 4% | $6,798 | $6,854 | (1%) | ||||||||||||||||||
Operating income | $875 | $777 | 13% | $829 | 6% | $2,519 | $2,441 | 3% | ||||||||||||||||||
Net income(1) | $642 | $595 | 8% | $554 | 16% | $1,768 | $1,782 | (1%) | ||||||||||||||||||
Diluted EPS | $3.65 | $3.23 | 13% | $3.08 | 19% | $9.87 | $9.33 | 6% | ||||||||||||||||||
Diluted shares | 175,450,532 | 181,825,329 | (4%) | 179,590,702 | (2%) | 178,956,699 | 188,792,952 | (5%) | ||||||||||||||||||
As Adjusted: | ||||||||||||||||||||||||||
Operating income(2) | $876 | $849 | 3% | $832 | 5% | $2,533 | $2,551 | (1%) | ||||||||||||||||||
Net income(1)(2) | $610 | $521 | 17% | $558 | 9% | $1,743 | $1,681 | 4% | ||||||||||||||||||
Diluted EPS(2) | $3.47 | $2.83 | 23% | $3.10 | 12% | $9.73 | $8.80 | 11% | ||||||||||||||||||
(1) Net income represents net income attributable to BlackRock, Inc.
(2) See notes (a) through (f) to the Condensed Consolidated Statements of Income and Supplemental Information in Attachment I on pages 10 through 13 for more information on as adjusted items and the reconciliation to GAAP.
"High performing fixed income products combined with continued demand for yield-oriented strategies drove strong results in our retail business, specifically in retail fixed income where we generated $6.2 billion in net new business, our highest retail fixed income flows in over 10 years. As retirement trends accelerate and assets continue to shift from defined benefit to defined contribution plans, the appetite for broader investment solutions continues to increase. I'm proud to say that BlackRock attracted net inflows of $10.4 billion in defined contribution AUM, with particular strength in outcome-oriented solutions such as our LifePath® portfolios. BlackRock Solutions, another key growth priority, continued its record of consistent year-over-year growth, with a 9% increase in revenue for the business overall and 18% in our industry leading trading and operating system, Aladdin.
"We achieved a milestone in our iShares business, with the highest net new business production since our merger with Barclays Global Investors in December 2009. iShares generated $25.2 billion in net flows, including $20.5 billion into our equity offerings. We hold the number one market share of year-to-date industry flows. This week, we introduced our new iShares Core series for buy-and-hold investors, launched a revitalized iShares brand campaign and began to integrate our U.S. iShares and BlackRock retail sales forces. These initiatives are the first phase of a broader, global strategy to drive enhanced growth in the iShares platform.
"During the year, we consistently demonstrated our commitment to strong capital management and driving enhanced shareholder value. We have returned over $2 billion of cash to shareholders in a combination of dividends and share repurchases supported by strong cash flow. We remain committed to actively returning cash to our shareholders while investing for future growth.
"Our ability to perform through a wide range of environments positions BlackRock to continue to deliver exceptional value for clients and shareholders. BlackRock's employees have remained intensely focused on serving our clients, and I want once again to express my gratitude and admiration for their commitment to our clients and the Firm."
Third Quarter Business Highlights
BlackRock had long-term net inflows of $31.3 billion in third quarter 2012 excluding the effect of a single, low-fee, institutional index fixed income outflow of $74.2 billion, which BlackRock declined to re-bid at extremely low fees.Net new business figures below exclude this redemption.See Attachment IV for further information on changes in assets under management.
Assets under management ("AUM") totaled $3.673 trillion at September 30, 2012, up 3% from June 30, 2012 and up 10% from a year ago. Net inflows in long-term products totaled $31.3 billion (excluding the previously mentioned $74.2 billion outflow), reflecting equity, fixed income and multi-asset class product net inflows of $21.9 billion, $8.7 billion and $2.6 billion, respectively, partially offset by alternatives net outflows of $1.9 billion. Total net inflows of $19.0 billion also included cash management net inflows of $7.1 billion and planned advisory distributions of $19.4 billion. AUM also reflected market valuation gains, investment performance and the acquisition in September 2012 of Swiss Re Private Equity Partners, the European private equity franchise of Swiss Re.
Long-term AUM: The following table presents long-term AUM and base fees by client type: | ||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | September 30, 2012 AUM | % of Total | Q3 2012 Base Fees | % of Total | YTD 2012 Base Fees | % of Total | June 30, 2012 AUM | % of Total | Q2 2012 Base Fees | % of Total | ||||||||||||||||||||||
Retail | $ 397,954 | 12% | $ 654 | 34% | $ 1,961 | 34% | $ 374,010 | 11% | $ 644 | 34% | ||||||||||||||||||||||
iShares | 705,765 | 21% | 625 | 32% | 1,815 | 32% | 644,909 | 20% | 596 | 31% | ||||||||||||||||||||||
Institutional: | ||||||||||||||||||||||||||||||||
Active | 880,726 | 26% | 452 | 23% | 1,343 | 23% | 849,991 | 26% | 440 | 23% | ||||||||||||||||||||||
Index | 1,393,928 | 41% | 203 | 11% | 605 | 11% | 1,386,508 | 43% | 222 | 12% | ||||||||||||||||||||||
Total institutional | 2,274,654 | 67% | 655 | 34% | 1,948 | 34% | 2,236,499 | 69% | 662 | 35% | ||||||||||||||||||||||
Total long-term | $ 3,378,373 | 100% | $ 1,934 | 100% | $5,724 | 100% | $ 3,255,418 | 100% | $ 1,902 | 100% | ||||||||||||||||||||||
Long-term net inflows from clients in the Americas and EMEA of $21.6 billion and $14.2 billion, respectively, were partially offset by net outflows of $4.5 billion from Asia-Pacific. At quarter end, BlackRock managed 61% of long-term AUM for investors in the Americas and 39% for international clients.
●Retail AUM of$398.0 billion reflected net inflows of $4.6 billion and market and investment performance gains of $19.3 billion.
U.S. retail and high net worth inflows of $3.5 billion showed diversification across asset classes and continued strength in income-oriented products, such as a high yield bond fund with net inflows of $1.4 billion. Net inflows of $0.2 billion into alternatives products demonstrated BlackRock's commitment to building a leading alternatives retail franchise. International retail net inflows of $1.1 billion marked a return to positive flows for the first time since the second quarter 2011, with fixed income net inflows of $1.7 billion partially offset by net outflows of $0.4 billion and $0.2 billion from alternatives and equities, respectively.
●iShares net inflows of $25.2 billion reflected positive net inflows across all asset classes, including net inflows of $20.5 billion into equity funds, demonstrating strong renewed investor demand for U.S. equity offerings. Fixed income and alternatives products included net inflows of $3.2 billion and $1.4 billion, respectively.
U.S. iShares net inflows into equity funds totaled $16.8 billion as domestic equity products benefited from a risk-on sentiment taking hold in the latter part of the quarter. International iShares similarly showed signs of building risk appetite with equity net inflows of $3.7 billion led by net inflows into emerging market and pan-European products.
● Institutional active AUMincreased 4%, or $30.7 billion, to $880.7 billion, including market and investment performance gains of $31.9 billion and $6.2 billion from the acquisition of Swiss Re Private Equity Partners. Multi-asset class products net inflows were $3.1 billion with continued growth from defined contribution plans generating strong inflows into target date and global asset allocation offerings.
Alternatives net outflows were $2.9 billion, with modest private equity fund of funds net inflows of $0.1 billion offset by net outflows of $1.9 billion across other core alternatives offerings and net outflows of $1.0 billion from active currency. Net outflows from core products included return of capital on closed-end funds of $0.6 billion. Equity net outflows totaled $5.0 billion, reflecting outflows from active fundamental and scientific active equity ("SAE"). Fixed income net outflows of $2.6 billion reflected outflows from U.S. sector specialty mandates as asset allocation shifted in the latter part of the quarter.
●Institutional index AUM totaled $1.394 trillion at September 30, 2012, reflecting net inflows of $8.8 billion and market and foreign exchange valuation gains of $72.7 billion. Equity net inflows of $7.8 billion showed signs of shifting investor sentiments, with flows of $6.1 billion into regional and country-specific mandates, including emerging markets. Fixed income net inflows of $1.9 billion primarily reflected net inflows into U.S. core mandates.
Cash management AUM increased 4%, or $8.9 billion, to $248.3 billion reflecting net inflows of $7.1 billion and market and foreign exchange gains of $1.8 billion.
Advisory AUM declined 28% to $46.6 billion, primarily due to disbursements of Maiden Lane residual assets, marking the further return of U.S. taxpayer funds.
Investment performance as of September 30, 2012 is presented in the following table: | |||||||||||||
One-year | Three-year | Five-year | |||||||||||
Fixed Income: | |||||||||||||
Actively managed products above benchmark or peer median | |||||||||||||
Taxable | 76% | 78% | 56% | ||||||||||
Tax-exempt | 60% | 67% | 68% | ||||||||||
Passively managed products within or above tolerance | 96% | 95% | 89% | ||||||||||
Equity: | |||||||||||||
Actively managed products above benchmark or peer median | |||||||||||||
Fundamental | 37% | 38% | 50% | ||||||||||
Scientific | 89% | 93% | 72% | ||||||||||
Passively managed products within or above tolerance | 96% | 96% | 96% | ||||||||||
Multi-Asset: | |||||||||||||
Actively managed products above benchmark or peer median | 75% | 33% | 95% | ||||||||||
BlackRock Solutions("BRS") added 18 net new assignments during the quarter, including 1 Aladdin assignment, 2 risk management mandates, 1 FMA assignment, and 14 non-recurring advisory engagements. BRS also completed 9 short-term advisory assignments during the quarter.
Net new business pipeline totaled $45.1 billion at October 11, 2012, including $33.1 billion in institutional index mandates and $7.9 billion in active mandates expected to fund in future quarters. In addition, the pipeline contains $10.4 billion of mandates funded since September 30, 2012. The unfunded portion of the pipeline primarily represents institutional assets, which account for approximately two-thirds of long-term AUM but only one-third of base fees. BlackRock Solutions pipeline of contracts and proposals remains robust.
Third Quarter Financial Highlights
Comparison to the Third Quarter 2011
Operating income: Third quarter 2012 operating income was $875 million compared with $777 million in third quarter 2011. Third quarter 2011 operating income included $63 million of U.K. lease exit costs related to the Company's exit from two London locations. Operating income, as adjusted, was $876 million compared with $849 million in third quarter 2011.
Third quarter 2012 revenue of $2.3 billion increased $95 million from $2.2 billion in third quarter 2011, primarily due to the following:
Investment advisory, administration fees and securities lending revenue of $2.0 billion in third quarter 2012 increased $75 million from $1.9 billion in third quarter 2011 due to higher fees from all products except for active equity and alternative products and an increase in securities lending revenue. Securities lending fees were $129 million in third quarter 2012 compared with $88 million in third quarter 2011.
Performance fees were $103 million in third quarter 2012 compared with $91 million in third quarter 2011, primarily reflecting higher performance fees from alternative products.
BlackRock Solutionsand advisory revenue totaled $128 million in third quarter 2012 compared with $117 million in third quarter 2011, primarily reflecting higher revenue from Aladdin mandates and higher one-time revenue from advisory assignments.
Third quarter 2012 total operating expenses of $1.4 billion decreased $3 million from third quarter 2011. Results were driven by the following:
Employee compensation and benefits increased $57 million, driven by higher incentive compensation, while maintaining a compensation-to-revenue ratio of approximately 35%.
Amortization of deferred sales commissions decreased $7 million, primarily related to lower sales of certain share classes of open-end funds.
General and administration expenses decreased $62 million, primarily due to U.K. lease exit costs incurred in the third quarter 2011, and lower occupancy costs and professional expenses. The decrease was partially offset by closed-end fund launch costs of $22 million (excluding $3 million included in employee compensation and benefits expense) associated with the August 2012 launch of the BlackRock Municipal Target Term Trust and an increase in foreign currency remeasurement costs.
Non-operating income (expense): Third quarter 2012 non-operating income, net of non-controlling interests, was $17 million compared with $87 million non-operating expense in third quarter 2011. Third quarter 2012 included $64 million of net positive marks, primarily on distressed credit/mortgage funds and private equity fund co-investments, and $47 million of net interest expense. Net interest expense increased $10 million from third quarter 2011, primarily due to long-term debt issuances in May 2012.
Income tax expense: Income tax expense totaled $250 million and $95 million for third quarter 2012 and 2011, respectively. The GAAP effective income tax rate for the third quarter 2012 was 28.1% compared with 13.7% for the third quarter 2011. The third quarter 2012 GAAP tax rate included a $30 million net non-cash benefit, related to the revaluation of certain deferred income tax liabilities, including tax legislation enacted in the United Kingdom. The third quarter 2011 GAAP tax rate included a $129 million non-cash benefit related to the revaluation of certain deferred income tax liabilities, including tax legislation enacted in the United Kingdom and a state tax election. The as adjusted effective income tax rate was 31.4% and 32.3% for third quarter 2012 and 2011, respectively.
See notes (a) through (f) in Attachment I for more information on as adjusted items and the reconciliation to GAAP.
Comparison to the Second Quarter 2012
Operating income: Third quarter 2012 operating income was $875 million compared with $829 million in second quarter 2012. Operating income, as adjusted, was $876 million compared with $832 million in second quarter 2012.
Third quarter 2012 revenue increased $91 million from second quarter 2012, primarily due to the following:
Investment advisory, administration fees and securities lending revenue in third quarter 2012 increased $34 million from second quarter 2012, driven by market effects on average AUM, the benefit of one additional revenue day in the current quarter and revenue associated with net inflows, partially offset by seasonally lower securities lending fees. Securities lending fees were $129 million in third quarter 2012 compared with $157 million in second quarter 2012.
Performance fees increased $62 million to $103 million in third quarter 2012 from $41 million in second quarter 2012. The current quarter reflected higher performance fees from alternative products primarily due to the greater number of products with performance measurement periods that end on September 30th as compared with June 30th.
BlackRock Solutionsand advisory revenue of $128 million in third quarter 2012 decreased from $131 million in second quarter 2012.
Third quarter 2012 total operating expenses of $1.4 billion increased $45 million from second quarter 2012. Results were driven by the following:
Employee compensation and benefits increased $42 million, primarily reflecting higher incentive compensation driven by higher operating income.
General and administration expenses increased $3 million, primarily related to the previously mentioned closed-end fund launch costs and an increase in foreign currency remeasurement costs, partially offset by lower marketing and promotional expenses, which were seasonally lower in the third quarter.
Non-operating income (expense): Third quarter 2012 non-operating income, net of non-controlling interests, was $17 million compared with $46 million non-operating expense in second quarter 2012. Third quarter 2012 included $64 million of net positive marks primarily on distressed credit/mortgage funds and private equity fund co-investments and $47 million of net interest expense. Net interest expense increased $3 million from second quarter 2012, primarily due to the $1.5 billion long-term debt issued in May 2012.
Income tax expense: Income tax expense of $250 million for third quarter 2012 increased $21 million from second quarter 2012. The GAAP effective income tax rate for the third quarter 2012 was 28.1% compared with 29.3% for second quarter 2012. The third quarter 2012 GAAP tax rate included a $30 million net non-cash benefit, related to revaluation of certain deferred income tax liabilities, including tax legislation enacted in the United Kingdom. The as adjusted effective income tax rate was 31.4% and 29.3% for third quarter 2012 and second quarter 2012, respectively.
See notes (a) through (f) in Attachment I for more information on as adjusted items and the reconciliation to GAAP.
Additional Events Related to Certain Cash Management Funds
As discussed in BlackRock's periodic reports, Barclays has provided capital support agreements to support certain cash management funds (bank-managed short-term investment funds or "STIFs") acquired by BlackRock in the Barclays Global Investors acquisition from Barclays. On October 9, 2012, BlackRock, on behalf of two of these funds negotiated amendments to these capital support agreements to release Barclays from coverage provided for defaults on 52 covered securities (with an estimated value of approximately $750 million) held in the funds in exchange for a payment by Barclays to the funds of $70 million. This payment is an amount in excess of the payments that were expected under the Barclays capital support agreements. The Barclays capital support agreements will continue in effect for the remaining covered securities in these two funds.
Separately, on October 9, 2012, the Office of the Comptroller of the Currency finalized amended rules governing STIFs to more closely align such funds with changes enacted in 2010 by the SEC for money market mutual funds. BlackRock is reviewing and evaluating its alternatives to ensure that the STIFs it manages are in compliance by the July 1, 2013 deadline.
Teleconference, Webcast and Presentation Information
Chairman and Chief Executive Officer, Laurence D. Fink, and Chief Financial Officer, Ann Marie Petach, will host a teleconference call for investors and analysts on Wednesday, October 17, 2012, at 9:00 a.m. (Eastern Time). Members of the public who are interested in participating in the teleconference should dial, from the United States, (800) 374-0176, or from outside the United States, (706) 679-8281, shortly before 9:00 a.m. and reference the BlackRock Conference Call (ID Number 36165909). A live, listen-only webcast will also be available via the investor relations section of www.blackrock.com.
Both the teleconference and webcast will be available for replay by 1:00 p.m. Eastern Time on Wednesday, October 17, 2012 and ending at midnight on Wednesday, October 31, 2012. To access the replay of the teleconference, callers from the United States should dial (800) 585-8367 and callers from outside the United States should dial (404) 537-3406 and enter the Conferenc
