BlackRock Reports Quarterly Diluted EPS of $4.19, or $4.15 as Adjusted

BlackRock Reports Quarterly Diluted EPS of $4.19, or $4.15 as Adjusted

$3.857 Trillion in assets under management at June 30, 2013, up 8% year over year

• Record base fees of $2.2 billion for the quarter


• Operating income growth of 2% from 2012, or 18% as adjusted, drove adjusted operating margin expansion

• Continued commitment to sound capital management with $250 million of quarterly share repurchases

• Funded new charitable foundation to focus on giving back to communities where BlackRock operates, including, among other things, helping to promote financial education for low-income families and individuals

NEW YORK--(BUSINESS WIRE)-- BlackRock, Inc. (NYS: BLK) today reported second quarter 2013 diluted EPS of $4.19, up 36% from a year ago. Revenue increased 11% from the second quarter 2012, reflecting growth in markets, long-dated net new business and higher performance fees. Operating income for the second quarter 2013 was $849 million with an operating margin of 34.2%. In connection with the PennyMac IPO during the second quarter 2013, the Company recorded a non-cash, non-operating pre-tax gain of $39 million related to the carrying value of the Company's equity method investment. Subsequent to the PennyMac IPO, the Company contributed 6.1 million units of its PennyMac investment to a new Donor Advised Fund ("DAF") (the "Charitable Contribution"). The Charitable Contribution resulted in an operating expense of $124 million, offset by an $80 million non-cash, non-operating pre-tax gain on the contributed units and a tax benefit of approximately $57 million.

As adjusted results (1) : Second quarter 2013 diluted EPS of $4.15 improved 34% and operating income of $982 million rose 18% compared with the second quarter 2012. Diluted EPS included operating income of $4.10 per diluted share and net non-operating income of $0.05 per diluted share, including the $39 million non-cash, pre-tax gain related to the PennyMac IPO. The financial impact related to the Charitable Contribution has been excluded from as adjusted results. Operating margin of 41.3% in the second quarter 2013 rose 210 bps from the second quarter 2012. Compared with the first quarter 2013, operating margin rose 130 bps, reflecting growth in base fees, lower payroll taxes and lower organizational costs, partially offset by lower performance fees and higher brand campaign costs.

"Our second quarter results, which reflect adjusted operating income up 18% year-over-year, once again highlight the strength of our globally diversified multi-client platform that was built to deliver in all market environments," commented Laurence D. Fink, Chairman and CEO of BlackRock. "During the quarter we generated record base fees and $11.9 billion in long-dated net new business across a broad range of products, including 11 funds that each raised more than $1 billion. These funds showcased the diversity of our offering, with representation across all major asset classes, client segments and geographies. Results were driven by global demand from retail and institutional clients for multi-asset class, unconstrained fixed income and retail alternative products. Our strong product capabilities in the retail alternative mutual fund space, coupled with our broad distribution platform, uniquely position us in this high growth segment, where second quarter net flows of $1.1 billion drove sequential quarter AUM growth of 72%."

The table below presents AUM and a comparison of GAAP and as adjusted results for certain financial measures:

AUM, GAAP and as adjusted results
                        Six Months Ended

June 30,

   
(Dollar amounts in millions, except per share data) Q2

2013

    Q2

2012

    Change     Q1

2013

    Change       2013       2012     Change
AUM $ 3,857,007 $ 3,559,934 8% $ 3,936,409 (2%) $ 3,857,007     $ 3,559,934 8%
 

GAAP basis:

Revenue $ 2,482 $ 2,229 11% $ 2,449 1% $ 4,931 $ 4,478 10%
 
Operating income $ 849 $ 829 2% $ 909 (7%) $ 1,758 $ 1,644 7%
 
Operating margin 34.2% 37.2% (300 bps) 37.1% (290 bps) 35.7% 36.7% (100 bps)
 
Net income (2) $ 729 $ 554 32% $ 632 15% $ 1,361 $ 1,126 21%
 
Diluted EPS $ 4.19 $ 3.08 36% $ 3.62 16% $ 7.81 $ 6.22 26%
 
Weighted average diluted shares 173,873,583 179,590,702 (3%) 174,561,132 -% 174,268,870 180,753,515 (4%)
 

As Adjusted:

Operating income (1) $ 982 $ 832 18% $ 921 7% $ 1,903 $ 1,657 15%
 
Operating margin (1) 41.3% 39.2% 210 bps 40.0% 130 bps 40.6% 38.9% 170 bps
 
Net income (1)(2) $ 722 $ 558 29% $ 637 13% $ 1,359 $ 1,133 20%
 
Diluted EPS (1)     $ 4.15     $ 3.10     34%     $ 3.65     14%     $ 7.80     $ 6.26     25%
(1)   See notes (a) through (f) to the Condensed Consolidated Statements of Income and Supplemental Information on pages 13 through 16 for more information on as adjusted items and the reconciliation to GAAP.
(2) Net income represents net income attributable to BlackRock, Inc.

"While markets were volatile this quarter, not all investor behavior was uniform. Our largest institutional investors remain committed to their long-term investment strategies, while trading-oriented clients once again turned to iShares as a highly effective tool to quickly and efficiently adjust their market exposures. iShares flows were driven by clients stepping back from emerging markets equities and long duration fixed income, though outflows in those products were largely offset by flows into the Core Series and our Minimum Volatility suite, resulting in net outflows from iShares of $1 billion for the quarter. Our products provided liquidity and transparency for our clients worldwide, and the record volume of trading in certain of our products reflects our position as the premier provider of highly liquid ETFs.

"We are also seeing the early stages of a rotation within fixed income as investors increasingly focus on the duration of their fixed income portfolios, with flows moving into actively managed, unconstrained products. We have top quartile performance in these areas, with flagship funds like Multi-Asset Income and Strategic Income Opportunities each gathering more than $1 billion in new assets. We continue to leverage our diverse distribution capabilities to deliver superior products to our retail clients, and deepen and develop institutional relationships, as clients look to us to evaluate risk and provide solutions.

"As we highlighted at our inaugural Investor Day, we see a number of exciting growth opportunities across the firm and are continuing our commitment to finding innovative solutions to serve our clients' needs in changing market conditions. This commitment to innovation is illustrated by the launch of our new iSharesBonds series in April combining the advantages of traditional bonds and ETFs and providing our clients a tool to simplify their fixed income portfolio while managing duration risk. In the second quarter, we also provided funding for a new charitable initiative that will launch in 2014 and deepen our commitment to public responsibility that has always been fundamental to our business.

"We have built a unique platform at BlackRock that is differentiated by the diversity of our clients, geographies and investment strategies, all underpinned with risk management powered by Aladdin.  That platform drove more than $51 billion in long-dated net new business in the first half of the year, and we believe it positions us to continue to deliver both for our clients and our shareholders across market cycles."

Second Quarter Business Highlights

The following table presents net inflows, AUM, base fees and business mix by client and product type:

Net inflows, AUM, base fees and business mix, by client type

(Dollar amounts in millions)               Q2 2013

Net Inflows

    June 30, 2013

AUM

    Q2 2013

Base Fees

    June 30, 2013

AUM

% of Total

    Q2 2013

Base Fees

% of Total

Retail $ 5,076     $ 414,379     $ 697     12 %     33 %
iShares (963 ) 774,397 723 22 % 35 %
Institutional:
Active 1,317 861,231 450 24 % 21 %
Index   6,477         1,514,448       224     42 %     11 %
Total institutional   7,794         2,375,679       674     66 %     32 %
Total long-term $ 11,907       $ 3,564,455     $ 2,094     100 %     100 %
 

Net inflows, AUM, base fees and business mix, by product type

(Dollar amounts in millions)               Q2 2013

Net Inflows

    June 30, 2013

AUM

    Q2 2013

Base Fees

    June 30, 2013

AUM

% of Total

    Q2 2013

Base Fees

% of Total

Equity ($348 )     $ 1,973,115     $ 1,177     55 %     56 %
Fixed income 5,101 1,205,359 503 34 % 24 %
Multi-asset 11,051 289,305 253 8 % 12 %
Alternatives   (3,897 )       96,676       161     3 %     8 %
Total long-term $ 11,907       $ 3,564,455     $ 2,094     100 %     100 %
 

Net long-term inflows of $10.5 billion and $3.7 billion from clients in EMEA and Asia-Pacific, respectively, were offset by net outflows of $2.3 billion from Americas (defined as the United States, Caribbean, Canada, Latin America and Iberia) clients. At June 30, 2013, BlackRock managed 61% of long-term AUM for investors in the Americas and 39% for international clients.

  • Retail net long-term inflows of $5.1 billion globally included net inflows of $3.5 billion in the United States and $1.4 billion in EMEA. Growth was largely driven by a strong interest in unconstrained fixed income and multi-asset income offerings. Flagship funds in these areas include our Strategic Income Opportunities and Multi-Asset Income funds, each of which raised over $1 billion in assets during the quarter. Alternative mutual funds also had a strong quarter, with $1.1 billion of net inflows, representing 72% AUM growth over the prior quarter.
  • iShares net long-term outflows of $1.0 billion included U.S. iShares net long-term outflows of $3.6 billion due to outflows of $7.2 billion, $2.0 billion and $2.1 billion from our flagship emerging markets equity, fixed income and commodities funds, respectively. These outflows more than offset positive flows of $3.6 billion into the Core Series and $2.0 billion into Minimum Volatility equity funds in the United States and $2.2 billion of equity inflows into European iShares.
  • Institutional active net long-term inflows of $1.3 billion reflected strong flows of $8.8 billion into multi-asset class products, driven by continued demand for our LifePath target date suite, which had net inflows of $4.0 billion. Flows were partially offset by combined equity and fixed income net outflows of $4.2 billion, and active currency redemptions of $2.0 billion.
  • Institutional index net long-term inflows of $6.5 billion were primarily driven by demand for local currency fixed income products in EMEA and for global bond mandates in Asia-Pacific.

Cash management AUM decreased 3%, or $8.8 billion, to $252.6 billion.

Advisory AUM decreased 13% to $40.0 billion due to planned portfolio liquidations.

Investment performance as of June 30, 2013 is presented in the following table:

Investment performance
  One-year period   Three-year period   Five-year period
Fixed Income:
Actively managed products above benchmark or peer median
Taxable 76% 80% 70%
Tax-exempt 57% 66% 74%
Passively managed products within or above tolerance   94%   95%   87%
Equity:
Actively managed products above benchmark or peer median
Fundamental 42% 37% 42%
Scientific 82% 94% 60%
Passively managed products within or above tolerance   95%   97%   95%
 

Second Quarter Financial Highlights

PennyMac IPO. At March 31, 2013, BlackRock held an approximately one-third economic equity interest in Private National Mortgage Acceptance Company, LLC ("PNMAC"), which is accounted for as an equity method investment. On May 8, 2013, PennyMac Financial Services, Inc. ("PennyMac") became the sole managing member of PNMAC in connection with an initial public offering of PennyMac (the "PennyMac IPO"). As a result of the PennyMac IPO, BlackRock recorded a non-cash, non-operating pre-tax gain of $39 million related to the carrying value of its equity method investment. BlackRock was not a seller in the PennyMac IPO.

Charitable Contribution. Subsequent to the PennyMac IPO, the Company made a Charitable Contribution of approximately six million units of its PennyMac investment to a new DAF in the second quarter. The fair value of the Charitable Contribution was $124 million and is included in general and administration expenses on the condensed consolidated statement of income. In connection with the Charitable Contribution, the Company also recorded a non-cash, non-operating pre-tax gain of $80 million related to the contributed investment and a tax benefit of approximately $57 million.

The Company will continue to account for its remaining approximately 20% interest (approximately 16 million units) in PennyMac as an equity method investment.

The general and administration expenses, non-operating gain and associated tax benefit related to the Charitable Contribution have been excluded from as adjusted results, among other items. For more information on as adjusted items and the reconciliation to GAAP, see notes to the Condensed Consolidated Statements of Income.


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