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, 2005
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 001-15305)
BlackRock, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 51-0380803 | |
(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
(Registrants 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
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, 2005, there were 19,683,428 shares of the registrants class A common stock outstanding and 44,310,617 shares of the registrants class B common stock outstanding.
Index to Form 10-Q
Page | ||||
PART I | ||||
FINANCIAL INFORMATION | ||||
Item 1. |
||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
32 | ||
Item 3. |
66 | |||
Item 4. |
69 | |||
PART II
|
||||
Item 1. |
70 | |||
Item 2. |
71 | |||
Item 6. |
72 |
PART I - FINANCIAL INFORMATION
BlackRock, Inc.
Consolidated Statements of Financial Condition
(Dollar amounts in thousands)
September 30, 2005 |
December 31, 2004 |
|||||||
(unaudited) | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 396,514 | $ | 457,673 | ||||
Accounts receivable |
269,408 | 153,152 | ||||||
Receivable from affiliates |
5,264 | 4,692 | ||||||
Investments |
292,267 | 227,497 | ||||||
Property and equipment, net |
123,687 | 93,701 | ||||||
Intangible assets, net |
491,710 | 184,110 | ||||||
Deferred mutual fund commissions |
12,555 | | ||||||
Other assets |
81,699 | 24,410 | ||||||
Total assets |
$ | 1,673,104 | $ | 1,145,235 | ||||
Liabilities |
||||||||
Accrued compensation |
$ | 409,992 | $ | 311,351 | ||||
Accounts payable and accrued liabilities |
||||||||
Unaffiliated |
50,709 | 27,185 | ||||||
Affiliated |
29,769 | 3,632 | ||||||
Purchase price contingencies |
29,775 | | ||||||
Acquired management contract obligations |
3,791 | 4,810 | ||||||
Long-term borrowings |
250,000 | | ||||||
Other liabilities |
22,292 | 12,736 | ||||||
Total liabilities |
796,328 | 359,714 | ||||||
Minority interest |
9,586 | 17,169 | ||||||
Stockholders equity |
||||||||
Common stock, class A, 19,975,305 and 19,243,878 shares issued, respectively |
200 | 192 | ||||||
Common stock, class B, 45,117,284 and 45,499,510 shares issued, respectively |
453 | 455 | ||||||
Additional paid-in capital |
184,427 | 165,377 | ||||||
Retained earnings |
753,179 | 650,016 | ||||||
Unearned compensation |
(12,772 | ) | (4,588 | ) | ||||
Accumulated other comprehensive income |
4,490 | 8,254 | ||||||
Treasury stock, class A, at cost, 343,727 and 270,998 shares held, respectively |
(28,978 | ) | (17,545 | ) | ||||
Treasury stock, class B, at cost, 806,667 shares held |
(33,809 | ) | (33,809 | ) | ||||
Total stockholders equity |
867,190 | 768,352 | ||||||
Total liabilities and stockholders equity |
$ | 1,673,104 | $ | 1,145,235 | ||||
See accompanying notes to consolidated financial statements.
- 1 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
BlackRock, Inc.
Consolidated Statements of Operations
(Dollar amounts in thousands, except share data)
(unaudited)
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||||
Revenue |
||||||||||||||||
Investment advisory and administration fees |
||||||||||||||||
Separate accounts |
$ | 172,818 | $ | 93,482 | $ | 468,927 | $ | 304,386 | ||||||||
Mutual funds |
81,823 | 54,073 | 229,441 | 165,500 | ||||||||||||
Other income |
||||||||||||||||
Unaffiliated |
41,153 | 22,106 | 111,969 | 62,773 | ||||||||||||
Affiliated |
5,013 | 1,338 | 11,941 | 3,975 | ||||||||||||
Total revenue |
300,807 | 170,999 | 822,278 | 536,634 | ||||||||||||
Expense |
||||||||||||||||
Employee compensation and benefits |
155,077 | 155,556 | 413,036 | 303,243 | ||||||||||||
Fund administration and servicing costs |
||||||||||||||||
Unaffiliated |
7,747 | 4,050 | 19,169 | 10,412 | ||||||||||||
Affiliated |
4,250 | 4,227 | 12,362 | 14,243 | ||||||||||||
General and administration |
||||||||||||||||
Unaffiliated |
49,859 | 27,778 | 137,629 | 85,104 | ||||||||||||
Affiliated |
1,665 | 1,481 | 6,460 | 6,817 | ||||||||||||
Amortization of intangible assets |
2,540 | 283 | 5,477 | 746 | ||||||||||||
Impairment of intangible assets |
| | | 6,097 | ||||||||||||
Total expense |
221,138 | 193,375 | 594,133 | 426,662 | ||||||||||||
Operating income (loss) |
79,669 | (22,376 | ) | 228,145 | 109,972 | |||||||||||
Non-operating income (expense) |
||||||||||||||||
Investment income |
21,439 | 4,717 | 37,252 | 27,652 | ||||||||||||
Interest expense |
(2,008 | ) | 965 | (6,084 | ) | (669 | ) | |||||||||
Total non-operating income |
19,431 | 5,682 | 31,168 | 26,983 | ||||||||||||
Income (loss) before income taxes and minority interest |
99,100 | (16,694 | ) | 259,313 | 136,955 | |||||||||||
Income taxes |
37,077 | (7,265 | ) | 95,732 | 39,345 | |||||||||||
Income (loss) before minority interest |
62,023 | (9,429 | ) | 163,581 | 97,610 | |||||||||||
Minority interest |
904 | 385 | 2,591 | 4,221 | ||||||||||||
Net income (loss) |
$ | 61,119 | $ | (9,814 | ) | $ | 160,990 | $ | 93,389 | |||||||
Earnings (loss) per share |
||||||||||||||||
Basic |
$ | 0.95 | $ | (0.15 | ) | $ | 2.51 | $ | 1.47 | |||||||
Diluted |
$ | 0.92 | $ | (0.15 | ) | $ | 2.41 | $ | 1.42 | |||||||
Dividends paid per share |
$ | 0.30 | $ | 0.25 | $ | 0.90 | $ | 0.75 | ||||||||
Weighted-average shares outstanding |
||||||||||||||||
Basic |
64,087,871 | 63,676,776 | 64,243,408 | 63,693,281 | ||||||||||||
Diluted |
66,714,797 | 63,676,776 | 66,809,706 | 65,858,552 |
See accompanying notes to consolidated financial statements.
- 2 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
BlackRock, Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
Year to Date September 30, |
||||||||
2005 |
2004 |
|||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 160,990 | $ | 93,389 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
22,414 | 15,462 | ||||||
Impairment of intangible assets |
| 6,097 | ||||||
Minority interest |
2,591 | 4,221 | ||||||
Stock-based compensation |
52,963 | 9,518 | ||||||
Deferred income taxes |
(2,609 | ) | (20,908 | ) | ||||
Tax benefit from stock-based compensation |
4,040 | 1,690 | ||||||
Net gain on investments |
(15,580 | ) | (13,142 | ) | ||||
Amortization of bond issuance costs |
700 | | ||||||
Deferred mutual fund commissions |
8,269 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Increase in accounts receivable |
(78,326 | ) | (22,998 | ) | ||||
Increase in receivable from affiliates |
(572 | ) | (608 | ) | ||||
Increase in investments, trading |
(7,927 | ) | (10,600 | ) | ||||
Increase in other assets |
(39,676 | ) | (952 | ) | ||||
(Decrease) increase in accrued compensation |
(48,520 | ) | 85,620 | |||||
Increase (decrease) in accounts payable and accrued liabilities |
18,307 | (4,387 | ) | |||||
Increase in other liabilities |
7,756 | 1,060 | ||||||
Cash provided by operating activities |
84,820 | 143,462 | ||||||
Cash flows from investing activities |
||||||||
Purchase of property and equipment |
(42,930 | ) | (15,245 | ) | ||||
Purchase of investments |
(27,730 | ) | (90,121 | ) | ||||
Sale of investments |
44,464 | 145,737 | ||||||
Sale of real estate held for sale |
112,184 | | ||||||
Deemed cash contribution upon consolidation of VIE |
| 6,412 | ||||||
Consolidation of sponsored investment funds |
| (43,169 | ) | |||||
Acquisitions, net of cash acquired and purchase price contingencies |
(247,220 | ) | (74 | ) | ||||
Cash (used in) provided by investing activities |
(161,232 | ) | 3,540 | |||||
Cash flows from financing activities |
||||||||
Borrowings, net of issuance costs |
395,000 | | ||||||
Principal repayment of borrowings |
(150,000 | ) | | |||||
Repayment of short-term borrowings |
(111,840 | ) | | |||||
Subscriptions to consolidated sponsored investment funds |
7,996 | 5,152 | ||||||
Decrease in cash due to deconsolidated sponsored investment fund |
(5,509 | ) | | |||||
Distributions paid to minority interest holders |
| (5,794 | ) | |||||
Dividends paid |
(57,507 | ) | (47,685 | ) | ||||
Reissuance of treasury stock |
13,268 | 13,325 | ||||||
Purchase of treasury stock |
(72,775 | ) | (48,539 | ) | ||||
Issuance of class A common stock |
706 | | ||||||
Acquired management contract obligation payment |
(1,019 | ) | (926 | ) | ||||
Cash provided by (used in) financing activities |
18,320 | (84,467 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
(3,067 | ) | 955 | |||||
Net (decrease) increase in cash and cash equivalents |
(61,159 | ) | 63,490 | |||||
Cash and cash equivalents, beginning of period |
457,673 | 315,941 | ||||||
Cash and cash equivalents, end of period |
$ | 396,514 | $ | 379,431 | ||||
See accompanying notes to consolidated financial statements.
- 3 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
BlackRock, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share data)
(unaudited)
1. Significant Accounting Policies
Basis of Presentation
BlackRock, Inc., a Delaware corporation (together with its subsidiaries, BlackRock or the Company), is majority-owned indirectly by The PNC Financial Services Group, Inc. (PNC). The consolidated financial statements of BlackRock include the assets, liabilities and earnings of its wholly owned subsidiaries: BlackRock Advisors, Inc., BlackRock Institutional Management Corporation, BlackRock Financial Management, Inc., BlackRock Investments, Inc., BlackRock Funding, Inc., BlackRock Overseas Investment Corp. and BlackRock Portfolio Holdings, Inc. and each of their subsidiaries. The Company also consolidates entities in which it holds a majority of the outstanding equity or has been deemed the primary beneficiary. Intercompany accounts and transactions between consolidated entities have been eliminated. The consolidated interim financial statements of BlackRock included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004. The Company follows the same accounting policies in the preparation of interim reports as set forth in the annual report. In the opinion of management, the consolidated financial statements reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the financial position, results of operations and cash flows of BlackRock for the interim periods presented, and are not necessarily indicative of a full years results.
Use of Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.
Investments
Readily Marketable Securities
The accounting method used for the Companys readily marketable securities is dependent upon the Companys ownership level. If the Company does not possess significant influence over the issuers operations, the securities are classified as trading or available for sale, depending on the Companys intent to hold the security. Investments, trading primarily represent investments made by the Company in certain of the BlackRock Funds which are held in a Rabbi Trust with respect to senior employee elections under BlackRock deferred compensation plans and securities held by Company-sponsored investment funds which have been consolidated due to the Companys majority ownership. These securities are recorded at fair market value with unrealized gains and losses included in the accompanying consolidated statements of operations as investment income (expense). Investments, available for sale consist primarily of corporate investments in BlackRock funds and collateralized debt obligations. The resulting unrealized gains and losses on investments, available for sale are included in the accumulated other comprehensive income or loss component of stockholders equity, net of tax. If the Company holds significant influence over the issuer of a readily marketable equity security, the investment is accounted for under the equity method of accounting and included in investments, other. The Companys share of the investees net income is included in investment income on the consolidated statements of operations.
- 4 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
1. Significant Accounting Policies (continued)
Investments (continued)
Non-marketable Equity Securities
Items classified as investments, other consist primarily of certain institutional and private placement portfolios (alternative investment products) and are accounted for using the cost or equity methods of accounting. If the Company has significant influence over the investees operations, the equity method of accounting is used and the Companys share of the investees net income is recorded as investment income (expense). If the Company does not hold significant influence over the investees operations, the cost method of accounting is used.
Occasionally, the Company will acquire a controlling equity interest in a sponsored investment fund as a seed investment. The cash flows originating from consolidation of sponsored investment funds, as presented in the consolidated statements of cash flows, primarily represent the purchase of securities by such funds using proceeds from the Companys initial seed investments. All of the consolidated funds investments are carried at fair value, with corresponding changes in the securities fair values reflected in investment income (expense) in the Companys consolidated statement of operations. In the absence of a publicly-available market value, fair value for an investment is estimated in good faith by the Companys management based on such factors as the liquidity, financial condition and current and projected operating performance of the investment and, in the case of private investment fund investments, the net asset value as provided by the private investment funds investment manager. When the Companys interest in any of these funds falls below 50%, the funds will be deconsolidated and accounted for under the equity method or other methods, as appropriate. At September 30, 2005, investments subject to fair value accounting represented 19%, or approximately $54,100, of total investments.
Realized gains and losses on trading, available for sale and other investments are calculated on a specific identification basis and, along with interest and dividend income, are included in investment income (expense), in the accompanying consolidated statements of operations. The Companys management periodically assesses impairment on investments to determine if it is other than temporary. Several of the Companys available for sale investments represent interests in collateralized debt obligations in which the Company acts in the capacity of collateral manager. The Company reviews cash flow estimates throughout the life of each collateralized debt obligation. If the estimate of future cash flows (taking into account both timing and amount) is lower than the last estimate, an impairment is recognized based on the excess of the carrying amount of the investment over its fair value. In evaluating impairments on all other available for sale and other securities, the Company considers the length of time and the extent to which the securitys market value, if determinable, has been less than its cost, the financial condition and near-term prospects of the securitys issuer and the Companys intended holding period for the security. Any impairment on investments that is deemed other than temporary is recorded in non-operating income (expense) in the consolidated statements of operations as a realized loss.
- 5 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
1. Significant Accounting Policies (continued)
Stock-Based Compensation
Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards Statement (SFAS) No. 123, Accounting for Stock-Based Compensation, prospectively to all employee awards granted, modified or settled after January 1, 2003. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the periods ending September 30, 2005 and 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards issued prior to the effective date of SFAS No. 123. Awards under the Companys plans vest over periods ranging from two to four years.
The following table illustrates the effect on net income (loss) and earnings (loss) per share if the fair value based method had been applied to all outstanding and unvested awards in each period.
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||||
Net income (loss), as reported |
$ | 61,119 | $ | (9,814 | ) | $ | 160,990 | $ | 93,389 | |||||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
2,339 | 1,041 | 6,173 | 3,372 | ||||||||||||
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects |
(4,342 | ) | (3,497 | ) | (12,182 | ) | (11,162 | ) | ||||||||
Pro forma net income (loss) |
$ | 59,116 | $ | (12,270 | ) | $ | 154,981 | $ | 85,599 | |||||||
Earnings (loss) per share: |
||||||||||||||||
Basic - as reported |
$ | 0.95 | $ | (0.15 | ) | $ | 2.51 | $ | 1.47 | |||||||
Basic - pro forma |
$ | 0.92 | $ | (0.19 | ) | $ | 2.41 | $ | 1.34 | |||||||
Diluted - as reported |
$ | 0.92 | $ | (0.15 | ) | $ | 2.41 | $ | 1.42 | |||||||
Diluted - pro forma |
$ | 0.89 | $ | (0.19 | ) | $ | 2.32 | $ | 1.30 |
- 6 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
1. Significant Accounting Policies (continued)
Deferred Mutual Fund Commissions
Prior to the Companys acquisition of SSRM Holdings, Inc. (SSR) (see note 2), an indirect wholly-owned subsidiary of PNC paid the sales commissions and received the sales charges on back-end loaded shares of certain BlackRock Funds. Upon the closing of the SSR acquisition, the Company acquired approximately $20,800 in deferred mutual fund commissions, representing broker sales commissions related to SSRs mutual fund family. Concurrent with the closing of the SSR acquisition, these mutual funds were merged into BlackRock Funds. All commissions incurred subsequent to that date have been financed by the indirect wholly-owned subsidiary of PNC.
Deferred mutual fund commissions are amortized over an estimated useful life of six years from the date of issuance, based on the estimated recoverability of the asset through distribution fee payments or contingent deferred sales charges. Contingent deferred sales charges received from early shareholder withdrawals reduce the unamortized deferred mutual fund commissions balance.
The Company periodically will evaluate the recoverability of deferred mutual fund commissions by assessing whether the unamortized asset can be recovered over its remaining life through an analysis of net undiscounted future cash flows related to the asset. If such an assessment indicates that the undiscounted cash flows are not sufficient to recover the recorded carrying value, the assets will be adjusted to fair value with a corresponding impairment charge reflected in the consolidated statements of operations. No such impairments were recorded in the periods presented.
Revenue Recognition
Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market values of the assets under management or, in the case of certain real estate clients, net operating income generated by the underlying properties, and are affected by changes in assets under management, including market appreciation or depreciation and net subscriptions or redemptions. Investment advisory and administration fees for mutual funds are shown net of fees waived pursuant to expense limitations. Certain real estate fees are earned upon the acquisition or disposition of properties in accordance with applicable investment management agreements and are generally recognized at the closing of the respective real estate transactions.
The Company also receives performance fees or an incentive allocation from alternative investment products and certain separate accounts. These performance fees are earned upon attaining specified investment return thresholds. Such fees are recorded upon completion of the measurement period.
BlackRock provides a variety of risk management, investment analytic and investment system services to insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts, commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand name BlackRock Solutions® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned for BlackRock Solutions services are either based on predetermined percentages of the market value of assets subject to the services or on fixed monthly or quarterly payments. Certain client accounts can also be subject to performance fees at the clients discretion. The fees earned on risk management, investment analytics and investment system assignments are recorded as other income on the consolidated statements of operations.
- 7 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
1. Significant Accounting Policies (continued)
Recent Accounting Developments
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment. This statement is a revision to SFAS No. 123, Accounting for Stock-Based Compensation, and superceded Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service (usually the vesting period) in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. As amended by Rule 4-01(a) of Regulation S-X promulgated by the Securities and Exchange Commission (the SEC), this statement is effective as of the beginning of the first interim or annual reporting period of the Companys first fiscal year beginning on or after December 15, 2005. The Company will adopt SFAS No. 123R, as amended, effective January 1, 2006.
Upon adoption, the Company has two application methods from which to choose: the modified-prospective transition approach or the modified-retrospective transition approach. Under the modified-prospective transition method, the Company would be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied, as well as compensation cost for awards that were granted prior to, but not vested as of, the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the modified-retrospective transition method, the Company would restate prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under SFAS No. 123. Under this method, the Company is permitted to apply this presentation to all periods presented or to the start of the fiscal year in which SFAS No. 123R is adopted. The Company would follow the same guidelines as in the modified-prospective transition method for awards granted subsequent to adoption and those that were granted and not yet vested. The Company will adopt the modified-prospective transition approach, which will reduce the Companys net income by the grant-date fair value of all unvested stock options in the year of adoption. In addition, upon the adoption of SFAS No. 123R, diluted shares outstanding will be reduced for all shares reserved for unvested stock options expensed under SFAS No. 123R (approximately 1.9 million shares at September 30, 2005). The adoption of SFAS No. 123R is expected to reduce diluted earnings per share by approximately $0.02 in 2006.
- 8 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
1. Significant Accounting Policies (continued)
Recent Accounting Developments (continued)
In March 2005, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107 regarding the Staffs interpretation of share-based payments. This interpretation expresses the views of the Staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the Staffs views regarding the valuation of share-based payment arrangements for public companies. In particular, this SAB provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods, the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first time adoption of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R and disclosures in Managements Discussion and Analysis subsequent to the adoption of SFAS No. 123R. The Company adopted the disclosure provisions of SAB No. 107 during the first quarter of 2005. Upon adoption of these provisions, the Company discontinued separate disclosure of expenses, and the corresponding accrued amounts, related to the vesting of awards under the BlackRock, Inc. 2002 Long Term Retention and Incentive Plan (LTIP) in the Companys financial statements. The Company will adopt the remaining provisions of SAB No. 107 in connection with its adoption of SFAS No. 123R on January 1, 2006. The adoption of these provisions is not expected to have a significant impact on the Companys consolidated financial statements.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations. FIN No. 47 establishes a framework for liability recognition related to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. In addition, FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005 and will be adopted by the Company on December 31, 2005. The adoption of FIN No. 47 is not expected to have a significant impact on the Companys consolidated financial statements.
In March 2005, the FASB issued FASB Staff Position (FSP) FIN 46(R)-5, Implicit Variable Interests Under FIN 46. FSP FIN 46(R)-5 states that a reporting entity should consider whether it holds an implicit variable interest in a variable interest entity (VIE) or in a potential VIE. If the aggregate of the explicit and implicit variable interests held by the reporting entity and its related parties would, if held by a single party, identify that party as the primary beneficiary, the party within the group most closely associated with the VIE should be deemed the primary beneficiary. The effective date of FSP FIN 46(R)-5 was the first reporting period beginning after March 31, 2005. The adoption of FSP FIN 46(R)-5 did not have a significant impact on the Companys consolidated financial statements.
- 9 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
1. Significant Accounting Policies (continued)
Recent Accounting Developments (continued)
FSP No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, provides guidance under SFAS No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. Management has concluded that it is not in the Companys best interests to repatriate any earnings under the Jobs Act. Accordingly, the Company does not expect the adoption of FSP No. 109-2 to have a significant impact on the consolidated financial statements.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle. SFAS No. 154 also requires that a change in the method of depreciating or amortizing a long-lived non-financial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed restatements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementation of SFAS No. 154 is not expected to have a significant impact on the Companys consolidated financial statements.
Reclassification of Prior Periods Financial Statements
Certain items previously reported have been reclassified to conform with the current period presentation.
- 10 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
2. Acquisition
In January 2005, the Company closed the acquisition of SSR, the holding company of State Street Research & Management Company (SSRM) and SSR Realty Advisors, Inc. (renamed BlackRock Realty Advisors, Inc., Realty), from MetLife, Inc. (MetLife) for an adjusted purchase price of $237,356 in cash and approximately 550,000 shares of BlackRock restricted class A common stock. MetLife is precluded from selling these shares until the third anniversary of the closing, except in limited circumstances. In deriving a fair value for this common stock, the Company referred to a valuation discount recommendation that was compiled by an independent third party valuation services firm on the Companys behalf. This firm based its recommended discount range of 15% to 20% on Black Scholes and Longstaff valuations of the embedded put option on the Companys restricted shares and historical differentials between restricted stock and freely-marketable stock of publicly-traded companies.
The stock purchase agreement for the SSR transaction provides for an additional payment to MetLife on the first anniversary of the closing of the SSR transaction (January 31, 2006) of up to $75,000 based on the Company achieving specified retention levels of assets under management (AUM) and run-rate revenue as of the signing date of the stock purchase agreement. The first anniversary contingent payment has two components: directly-sourced revenue and MetLife-sourced revenue. The directly-sourced revenue payment is subject to a maximum of $30,000, provided one-year anniversary revenue exceeds 120% of signing date revenue. The MetLife-sourced revenue payment is subject to a maximum of $45,000, provided one year anniversary revenue exceeds 120% of signing date revenue. These payments decline to $20,000 and $30,000, respectively, if one-year anniversary revenue approximates 100% of signing date levels. No contingent payment is required if directly-sourced and MetLife-sourced revenue fall below 80% and 95%, respectively, of revenue on the signing date of the stock purchase agreement. In addition, the stock purchase agreement provides for two other contingent payments. On December 31, 2006, MetLife will receive 32.5% of any performance fees earned on a large institutional real estate client. As of September 30, 2005, no performance fees had been earned on this institutional real estate client. In addition, on the fifth anniversary of the closing of the SSR transaction, MetLife could receive an additional payment up to a maximum of $10,000 based on the Companys retained AUM associated with the MetLife defined benefit and defined contribution plans. The Company is unable to estimate the potential obligations under the contingent payments because it is unable to predict at this time what specific retention levels of run-rate revenue will be on the first anniversary of closing the SSR transaction, what the Companys retained AUM will be on the fifth anniversary of the closing date of the SSR transaction, or what performance fees will be earned on the institutional real estate client.
At closing, the Company recorded the excess of assets acquired and liabilities assumed over the cost of the acquired entity as a pro rata reduction of the amounts assigned to relevant fixed and intangible acquired assets. Subsequent to this determination, the Company recognized a contingent liability of $55,332 for potential additional payments to MetLife and increased the carrying value of acquired assets. The stock purchase agreement provided for a hold-back of the initial purchase price payable to MetLife primarily associated with the value of customer accounts which, as of the closing date, had not committed to maintaining their accounts with the Company. The amount of the payment due to MetLife is based on the status of these accounts as of July 31, 2005. The Company has estimated the amount of the payment to be approximately $20,000. The estimated payment has been recorded as a reduction in the contingent liability to MetLife. Any additional contingencies in excess of the amount recorded as a liability will be reflected as additional purchase price and recorded as goodwill when the contingency is resolved.
- 11 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
2. Acquisition (continued)
The Company initially financed $150,000 of the purchase price with a bridge promissory note at an annual rate of 2.875%. SSR, through its subsidiaries, actively managed approximately $49,700,000 in stock, bond, balanced and real estate portfolios for both institutional and individual investors at January 31, 2005. SSRs results have been included in the Companys results since February 1, 2005.
In preparation for a commingled fund launch, Realty acquired, during the fourth quarter of 2004 and January 2005, six properties having a total purchase price of $112,184 and assumed a $19,000 mortgage on one of these properties. Exclusive of the assumed mortgage, Realty financed the purchase price under a line of credit with an affiliated company. The closing of the fund occurred in March 2005 at which time the commingled fund purchased the six properties at Realtys cost in accordance with its contract with Realty. Accordingly, no gain or loss was recognized by Realty on these sales. Each property, prior to the launch of the aforementioned commingled fund, was carried at cost, which management concluded approximated fair value due to the length of Realtys holding period for each property. Realty accumulated these properties prior to closing to provide potential investors with a better understanding of the type and quality of assets to be purchased by the fund.
In February 2005, the Company issued $250,000 of convertible debentures (see note 15). The Company used a portion of the net proceeds from this issuance to retire the bridge promissory note.
A summary of the estimated fair values of the net assets acquired in this acquisition is as follows:
Accounts receivable |
$ | 37,930 | ||
Real estate assets held for sale |
112,184 | |||
Investments |
72,775 | |||
Property and equipment |
3,993 | |||
Deferred mutual fund commissions |
20,824 | |||
Other assets |
3,447 | |||
Assembled workforce |
12,891 | |||
Management contracts acquired |
298,365 | |||
Purchase price contingencies |
(29,775 | ) | ||
Liabilities assumed |
(258,066 | ) | ||
Total purchase price, including acquisition costs |
$ | 274,568 | ||
Summary of consideration, net of cash acquired |
||||
Cash |
$ | 237,356 | ||
Restricted class A common stock, at fair value |
37,212 | |||
$ | 274,568 | |||
The Company is completing its evaluation of the fair value of the assets and liabilities of SSR as of the acquisition date. As such, certain adjustments may be made to the fair value estimates presented above.
- 12 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
2. Acquisition (continued)
The following unaudited pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the combined results of operations for future periods or the results of operations that actually would have been realized had BlackRock and SSR been a combined company during the specified periods prior to the closing. The pro forma combined financial information is based on the respective historical unaudited interim financial statements of BlackRock and SSR and does not reflect acquisition-related compensation incurred by SSR during 2005 and is adjusted for benefits associated with the termination of a lease held by SSR in January 2005. In addition, the pro forma combined financial information has been adjusted to reflect a full quarters recognition of amortization expense of intangible assets related to SSR management contracts acquired, recognition of interest expense related to borrowings used to finance the acquisition, and reduced depreciation associated with the write-off of SSR property and equipment that will not be used in the Companys ongoing operations. Management has realized, and expects to continue to realize, net operating synergies from this transaction due to the related product expansion and scale benefits. The pro forma combined financial information does not reflect the potential impact of these net operating synergies.
Three months ended September 30, |
Nine months ended September 30, | ||||||||||||
2005 |
2004 |
2005 |
2004 | ||||||||||
Total revenue |
$ | 300,807 | $ | 235,508 | $ | 844,066 | $ | 743,249 | |||||
Operating income (loss) |
$ | 79,669 | $ | (12,700 | ) | $ | 234,420 | $ | 152,853 | ||||
Net income (loss) |
$ | 61,119 | $ | (5,198 | ) | $ | 162,985 | $ | 116,223 | ||||
Earnings (loss) per share: |
|||||||||||||
Basic |
$ | 0.95 | $ | (0.08 | ) | $ | 2.53 | $ | 1.81 | ||||
Diluted |
$ | 0.92 | $ | (0.08 | ) | $ | 2.44 | $ | 1.75 |
3. Investments
A summary of the cost and carrying value of investments, available for sale, is as follows:
Gross Unrealized |
Carrying Value | ||||||||||||
September 30, 2005 |
Cost |
Gains |
Losses |
||||||||||
Mutual funds |
$ | 11,427 | $ | 403 | $ | (97 | ) | $ | 11,733 | ||||
Collateralized debt obligations |
25,979 | 928 | (505 | ) | 26,402 | ||||||||
Total investments, available for sale |
$ | 37,406 | $ | 1,331 | $ | (602 | ) | $ | 38,135 | ||||
December 31, 2004 |
|||||||||||||
Mutual funds |
$ | 6,226 | $ | 70 | $ | (17 | ) | $ | 6,279 | ||||
Collateralized debt obligations |
10,576 | 2,184 | | 12,760 | |||||||||
Total investments, available for sale |
$ | 16,802 | $ | 2,254 | $ | (17 | ) | $ | 19,039 | ||||
- 13 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
3. Investments (continued)
A summary of the cost and carrying value of investments, trading and other, is as follows:
September 30, 2005 |
Cost |
Carrying Value | ||||
Mutual funds |
$ | 19,596 | $ | 21,789 | ||
Equity securities |
15,964 | 19,819 | ||||
Mortgage-backed securities |
14,018 | 13,790 | ||||
Corporate notes and bonds |
8,354 | 8,215 | ||||
Municipal debt securities |
119 | 124 | ||||
Total investments, trading |
58,051 | 63,737 | ||||
Other funds |
||||||
Equity method |
59,640 | 75,816 | ||||
Cost method |
53,335 | 54,573 | ||||
Fair value |
31,967 | 31,967 | ||||
Total other funds |
144,942 | 162,356 | ||||
Deferred compensation plans |
20,976 | 24,379 | ||||
Other |
2,693 | 3,660 | ||||
Total investments, other |
168,611 | 190,395 | ||||
Total investments, trading and other |
$ | 226,662 | $ | 254,132 | ||
December 31, 2004 |
||||||
U.S. government securities |
$ | 22,276 | $ | 22,275 | ||
Mutual funds |
13,869 | 15,688 | ||||
Mortgage-backed securities |
12,435 | 12,388 | ||||
Equity securities |
5,976 | 9,384 | ||||
Corporate notes and bonds |
9,373 | 9,371 | ||||
Municipal debt securities |
119 | 120 | ||||
Total investments, trading |
64,048 | 69,226 | ||||
Equity method |
48,725 | 49,528 | ||||
Cost method |
33,885 | 34,605 | ||||
Fair value |
30,321 | 30,321 | ||||
Total other funds |
112,931 | 114,454 | ||||
Deferred compensation plans |
22,148 | 24,720 | ||||
Other |
367 | 58 | ||||
Total investments, other |
135,446 | 139,232 | ||||
Total investments, trading and other |
$ | 199,494 | $ | 208,458 | ||
- 14 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
3. Investments (continued)
The carrying value of investments in debt securities by contractual maturity at September 30, 2005 is as follows:
Maturity Date |
Carrying Value | ||
1-5 years |
$ | 11,342 | |
5-10 years |
2,512 | ||
After 10 years |
8,275 | ||
Total |
$ | 22,129 | |
4. Other Income
Other income consists of the following:
Three months ended September 30, |
Nine months ended September 30, | |||||||||||
2005 |
2004 |
2005 |
2004 | |||||||||
BlackRock Solutions |
$ | 28,883 | $ | 21,488 | $ | 79,446 | $ | 59,165 | ||||
Real estate property management fees |
8,910 | | 23,250 | | ||||||||
Distribution fees |
3,533 | | 7,882 | | ||||||||
Investment accounting |
1,797 | 1,510 | 5,427 | 4,448 | ||||||||
Other |
3,043 | 446 | 7,905 | 3,135 | ||||||||
$ | 46,166 | $ | 23,444 | $ | 123,910 | $ | 66,748 | |||||
Real estate property management fees for the three and nine months ended September 30, 2005 include $6,485 and $16,783, respectively, for reimbursement of the cost of compensation and benefits related to certain Realty employees. The related compensation and benefits of these employees are included in the Companys employee compensation and benefits expense in the consolidated financial statements.
- 15 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
5. Derivative Instruments Held For Trading
SSRM acts as investment manager for a synthetic collateralized credit default swap obligation. A synthetic collateralized credit default swap obligation occurs when a counterparty provides credit protection through a series of credit default swaps to third parties. The counterparty further securitizes this credit protection by obtaining a super senior insurance policy and issuing several classes of credit default swaps to third parties. Losses in the counterpartys reference pool (i.e., asset-backed securities and corporate bonds) are first absorbed by the most subordinated class of the credit default swaps issued by the structure. As collateral manager for this specific synthetic collateralized credit default swap obligation (Pillars), the Company bears no risk beyond reputational risk contingent on the performance of the structure. In addition, the Company has entered into a credit default swap with Pillars affording the structure credit protection of approximately $16,700, representing the Companys maximum risk of loss. This swap represents seed capital invested by the Company in a new product and facilitated the issuance of credit default swaps to third parties. Under the terms of its credit default swap with Pillars, the Company is entitled to an annual coupon of 4% of its notional balance of $16,700 and 25% of the structures residual balance at its scheduled termination date of December 23, 2009. The Companys management has performed a control assessment of its variable interests in Pillars (a collateral management agreement and the credit default swap) under FIN 46R, Consolidation of Variable Interest Entities-an Interpretation of ARB 51, and has concluded the Company is not Pillars primary beneficiary. Pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement. At September 30, 2005, the fair value of the Pillars credit default swap was $3,138.
- 16 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
6. Intangible Assets
Intangible assets at September 30, 2005 and December 31, 2004 are summarized as follows:
Weighted-avg. estimated useful life |
September 30, 2005 | ||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Intangible Assets, Net | |||||||||
Goodwill and indefinite-life intangible assets |
|||||||||||
Goodwill |
N/A | $ | 255,656 | $ | 65,842 | $ | 189,814 | ||||
Management contracts acquired: |
|||||||||||
Mutual funds |
N/A | 195,586 | | 195,586 | |||||||
Private investment funds |
N/A | 44,242 | | 44,242 | |||||||
Other |
N/A | 23 | | 23 | |||||||
Total goodwill and indefinite-life intangible assets |
495,507 | 65,842 | 429,665 | ||||||||
Definite-life intangible assets |
|||||||||||
Management contracts acquired: |
|||||||||||
Institutional separate accounts |
10.7 | 56,900 | 4,314 | 52,586 | |||||||
Collateralized debt obligations |
9.0 | 6,200 | 546 | 5,654 | |||||||
Private investment funds |
9.9 | 8,140 | 4,335 | 3,805 | |||||||
Total definite-life intangible assets |
10.5 | 71,240 | 9,195 | 62,045 | |||||||
Total intangible assets |
$ | 566,747 | $ | 75,037 | $ | 491,710 | |||||
Weighted-avg. estimated useful life |
December 31, 2004 | ||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Intangible Assets, Net | |||||||||
Goodwill and indefinite-life intangible assets |
|||||||||||
Goodwill |
N/A | $ | 242,766 | $ | 65,842 | $ | 176,924 | ||||
Management contracts acquired: |
|||||||||||
Private investment funds |
N/A | 2,842 | | 2,842 | |||||||
Other |
N/A | 23 | | 23 | |||||||
Total goodwill and indefinite-life intangible assets |
245,631 | 65,842 | 179,789 | ||||||||
Definite-life intangible assets |
|||||||||||
Management contract acquired: |
|||||||||||
Private investment funds |
10.0 | 8,040 | 3,719 | 4,321 | |||||||
Total definite-life intangible assets |
10.0 | 8,040 | 3,719 | 4,321 | |||||||
Total intangible assets |
$ | 253,671 | $ | 69,561 | $ | 184,110 | |||||
- 17 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
6. Intangible Assets (continued)
Future expected amortization of intangible assets expense for the each of the five succeeding years is as follows:
2005 |
$ | 2,029 | |
2006 |
8,114 | ||
2007 |
8,114 | ||
2008 |
8,114 | ||
2009 |
8,114 | ||
7. BlackRock, Inc. 2002 Long Term Retention and Incentive Plan (LTIP)
The LTIP permits the grant of up to $240,000 in deferred compensation awards (the LTIP Awards), which were previously subject to the achievement of certain performance hurdles by the Company. Under the terms of the LTIP, grants of awards fully vest if BlackRocks average closing stock price is at least $62 for any 3-month period beginning on or after January 1, 2005 and ending on or prior to March 30, 2007. For the first nine months of 2005, the Companys average closing stock price exceeded the $62 threshold. In addition to the stock price threshold, the vesting of awards is contingent on the participants continued employment with the Company for periods ranging from two to five years. The Company has granted approximately $230,800 in LTIP awards, net of forfeitures. Quarterly expense attributable to LTIP awards during the period from October 1, 2005 through December 31, 2006 will be approximately $15,300 based on awards granted.
Up to $200,000 of the LTIP Awards will result in no economic cost to the Company as this amount will be funded with up to 4 million shares of BlackRock class A common stock to be surrendered by The PNC Financial Services Group, Inc. (PNC) and distributed to LTIP participants in 2007, less income tax withholding. Shares attributable to value in excess of PNCs $200,000 LTIP funding requirement will be available to support future long-term retention and incentive programs but are not subject to surrender by PNC until the programs are approved by the Compensation Committee of the Companys Board of Directors and PNC. In addition, shares distributed to LTIP participants in 2007 will include an option to put such distributed shares back to BlackRock at fair market value. The remaining $40,000 of awards are payable in cash by the Company with the corresponding expense fully reflected in both reported and adjusted earnings. On the payment date, the Company will record a $200,000 capital contribution from PNC. Since the stock based awards payable under the plan will consist of previously issued and outstanding shares of class A common stock currently owned by PNC, dilution would not result from the stock based awards. The put option was provided to LTIP participants for liquidity purposes due to the Companys small public float (over 80% of outstanding shares are owned by PNC and employees). The Companys average daily trading volume for the past four quarters approximated 70,000 shares of class A common stock as compared to approximately 2.5 million shares of class A common stock that will be distributed to employees in early 2007. Put elections made by employees will be accounted for as treasury stock repurchases and will be accretive to the Companys earnings per share.
- 18 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
8. Employee Benefit and Incentive Compensation Plans
In addition to the employee benefit plans described in the Companys annual report, the Company assumed certain employee benefit plans from SSR as a result of the acquisition.
Deferred Compensation Plans
SSRs deferred compensation plan (the SSR New Plan) allowed participants to elect to defer a portion of their annual incentive compensation for either a fixed term or until retirement. SSR has funded a portion of the obligation through the purchase of life insurance policies to the benefit of SSR. At September 30, 2005, obligations under the SSR New Plan totaled $15,215. Changes in the Companys obligations under the SSR New Plan, as a result of appreciation or depreciation of the underlying life insurance policies cash surrender value, are recorded as compensation and benefits in the consolidated statements of operations.
Prior to 2003, SSR sponsored a deferred compensation plan (the SSR Old Plan) under which eligible participants could defer annual incentive compensation and commissions for either a fixed term or upon retirement. Obligations under this plan were funded through insurance policies acquired by SSR to the benefit of the respective participant. SSR is entitled to the return of any premium paid and, as such, premiums paid are recorded by SSR as a receivable from the participant. At the end of a participants deferral period, all amounts advanced by SSR will be applied against SSRs obligation under the SSR Old Plan. All obligations under the SSR Old Plan are convertible to obligations under the SSR New Plan at the election of the participant at the respective insurance policys cash surrender value. At September 30, 2005, SSR advances to employees and obligations under the SSR Old Plan are each $3,124.
401(k) and Retirement Savings Plans
The Company assumed two 401(k) and Retirement Savings Plans covering employees of SSRM and Realty (the Research Plan and Realty Plan, respectively) as a result of the SSR acquisition.
Effective with the closing of the SSR acquisition, accrued benefits for all participants in the Research Plan and selected participants in the Realty Plan were frozen and the Research Plan was closed to new participants. All participants whose accrued benefits were frozen will participate in the PNC Incentive Savings Plan (ISP). The terms of the ISP are included in note 10 to the consolidated financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2004. For all employees who remain active participants in the Realty Plan, employee contributions of up to 3%, as well as an additional 50% of the next 2% of eligible compensation, subject to Internal Revenue Code limitations, are matched by the Company.
Defined Benefit Pension Plan
Through the SSR acquisition, the Company assumed a defined benefit pension plan. All accrued benefits under the defined benefit pension plan are currently frozen and the plan is closed to new participants. Participant benefits under the plan will not change with salary increases or additional years of service.
SSR pension benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension benefit costs may occur in the future due to changes in these assumptions, changes in the number of plan participants and changes in plan asset levels.
- 19 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
8. Employee Benefit and Incentive Compensation Plans (continued)
Defined Benefit Pension Plan (continued)
The measurement date used to determine pension benefit measures for the defined pension benefit plan is January 31, 2005, the closing date of the SSR acquisition. The measurement date on a going forward basis will be December 31 of each year.
Accrued pension costs are included in accrued compensation in the consolidated statement of financial condition. The following table presents the funded status of the plan:
January 31, 2005 |
||||
Funded status: |
||||
Benefit obligation at measurement date |
$ | (3,732 | ) | |
Fair value of plan assets |
2,339 | |||
Funded status at measurement date |
$ | (1,393 | ) | |
There are no reconciling items between the pension plans funded status and accrued pension costs reflected in the Companys consolidated statement of financial condition at the measurement date. Pension costs incurred from the measurement date through September 30, 2005 consist of the following:
Interest cost |
$ | 129 | ||
Expected return on plan assets |
(130 | ) | ||
Total period net pension income |
$ | (1 | ) | |
Weighted-average assumptions used to determine benefit obligations at January 31, 2005:
Discount rate |
5.25 | % | |
Expected long-term return on plan assets |
8.50 | % | |
Rate of compensation increase |
N/A |
- 20 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
8. Employee Benefit and Incentive Compensation Plans (continued)
Defined Benefit Pension Plan (continued)
The weighted-average allocation of pension plan assets is as follows:
January 31, 2005 |
|||
Asset Category |
|||
Equity |
54.0 | % | |
Debt |
41.0 | ||
Other |
5.0 | ||
Total |
100.0 | % | |
Plan assets consist primarily of listed domestic equity securities and U.S. government, agency and corporate debt securities held in two BlackRock Funds. Plan assets do not include any common stock or debt of BlackRock.
Target allocations of pension assets and investment options are currently being evaluated by the Companys Retirement Committee and will be revised from historical levels. The Companys Retirement Committee anticipates finalizing the pension plans revised target allocations by December 31, 2005 and does not expect this revision to have a material impact on the Companys consolidated financial statements.
The Company does not expect to make a contribution into the pension plan during 2005. The following benefit payments are expected to be paid:
Periods |
|||
October 1, 2005 - December 31, 2005 |
$ | 24 | |
January 1, 2006 - December 31, 2006 |
100 | ||
January 1, 2007 - December 31, 2007 |
112 | ||
January 1, 2008 - December 31, 2008 |
127 | ||
January 1, 2009 - December 31, 2009 |
142 | ||
January 1, 2010 - December 31, 2014 |
843 |
- 21 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
9. Common Stock
BlackRocks authorized class A common stock, $0.01 par value, was 250,000,000 shares as of September 30, 2005 and December 31, 2004. BlackRocks authorized class B common stock, $0.01 par value, was 100,000,000 shares as of September 30, 2005 and December 31, 2004.
The Companys issued and outstanding common stock and related activity during the nine month period ended September 30, 2005 consists of the following:
Shares issued |
|||||||||||||||||
Common shares | Treasury shares | Shares outstanding |
|||||||||||||||
Class |
Class |
Class |
|||||||||||||||
A |
B |
A |
B |
A |
B |
||||||||||||
December 31, 2004 |
19,243,878 | 45,499,510 | (270,998 | ) | (806,667 | ) | 18,972,880 | 44,692,843 | |||||||||
Conversion of class B stock to class A stock |
30,647 | (382,226 | ) | 351,579 | 382,226 | (382,226 | ) | ||||||||||
Issuance of class A common stock |
700,780 | | 487,031 | | 1,187,811 | | |||||||||||
Treasury stock transactions |
| | (911,339 | ) | | (911,339 | ) | | |||||||||
September 30, 2005 |
19,975,305 | 45,117,284 | (343,727 | ) | (806,667 | ) | 19,631,578 | 44,310,617 | |||||||||
10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended September 30, |
Nine months ended September 30, | ||||||||||||
2005 |
2004 |
2005 |
2004 | ||||||||||
Net income (loss) |
$ | 61,119 | $ | (9,814 | ) | $ | 160,990 | $ | 93,389 | ||||
Basic weighted-average shares outstanding |
64,087,871 | 63,676,776 | 64,243,408 | 63,693,281 | |||||||||
Dilutive potential shares from stock options |
2,626,926 | | 2,566,298 | 2,165,271 | |||||||||
Dilutive weighted-average shares outstanding |
66,714,797 | 63,676,776 | 66,809,706 | 65,858,552 | |||||||||
Basic earnings (loss) per share |
$ | 0.95 | $ | (0.15 | ) | $ | 2.51 | $ | 1.47 | ||||
Diluted earnings (loss) per share |
$ | 0.92 | $ | (0.15 | ) | $ | 2.41 | $ | 1.42 | ||||
- 22 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
11. Supplemental Statements of Cash Flow Information
Supplemental disclosure of cash flow information:
Nine months ended September 30, | ||||||
2005 |
2004 | |||||
Cash paid for interest |
$ | 3,936 | $ | 926 | ||
Cash paid for income taxes |
$ | 103,282 | $ | 65,856 | ||
Supplemental schedule of noncash transactions:
Nine months ended September 30, | ||||||
2005 |
2004 | |||||
Reissuance of treasury stock, class A, at a discount to its cost basis |
$ | 27,741 | $ | 16,596 | ||
Convertible debt issuance costs |
$ | 5,000 | $ | | ||
Decrease in investments due to deconsolidation of sponsored investment fund |
$ | 13,758 | $ | | ||
Decrease in minority interest due to deconsolidation of sponsored investment fund |
$ | 18,170 | $ | | ||
Stock issued in SSR acquisition |
$ | 37,212 | $ | | ||
Short term borrowings assumed in SSR acquisition |
$ | 111,840 | $ | | ||
12. Income Taxes
PNC and BlackRock have entered into a tax disaffiliation agreement that sets forth each partys rights and obligations with respect to income tax payments and refunds and addresses related matters such as the filing of tax returns and the conduct of audits or other proceedings involving claims made by taxing authorities.
- 23 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
12. Income Taxes (continued)
For the calendar year that includes the three months and nine months ended September 30, 2005, BlackRock will file its own consolidated federal income tax return and will file selected state and municipal income tax returns separately and selected state and municipal income tax returns with one or more PNC subsidiaries on a combined or unitary basis. When BlackRock is included in a groups combined or unitary state or municipal income tax filing with PNC subsidiaries, BlackRocks share of the liability generally will be based upon an allocation to BlackRock of a percentage of the total tax liability based upon BlackRocks level of activity in such state or municipality.
The Jobs Act created a one-time opportunity for U.S. companies to repatriate undistributed earnings from foreign subsidiaries at a substantially reduced federal tax rate. The reduced rate is achieved via an 85% dividends received deduction. In the Companys case, foreign earnings must be repatriated by December 31, 2005 in order to qualify for this benefit. The Companys management has concluded that it is not in the Companys best interest to repatriate any earnings under the Jobs Act. Under the provisions of Accounting Principles Board Opinion No. 23, Accounting for Income Taxes Special Areas, the Company has not recorded a provision for income taxes that would occur upon repatriation of foreign earnings.
The provision (benefit) for income taxes consists of the following:
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
2005 |
2004 |
2005 |
2004 |
||||||||||||
Current: |
|||||||||||||||
Federal |
$ | 26,187 | $ | 20,105 | $ | 84,831 | $ | 60,138 | |||||||
State and local |
3,946 | (292 | ) | 10,294 | 5,596 | ||||||||||
Foreign |
1,241 | 1,038 | 3,216 | 3,038 | |||||||||||
Release of reserves related to New |
|||||||||||||||
York State tax audits |
| | | (8,519 | ) | ||||||||||
Total current |
31,374 | 20,851 | 98,341 | 60,253 | |||||||||||
Deferred: |
|||||||||||||||
Federal |
5,397 | (23,724 | ) | (1,441 | ) | (16,274 | ) | ||||||||
State and local |
306 | (4,392 | ) | (1,168 | ) | (4,634 | ) | ||||||||
Total deferred |
5,703 | (28,116 | ) | (2,609 | ) | (20,908 | ) | ||||||||
Total |
$ | 37,077 | $ | (7,265 | ) | $ | 95,732 | $ | 39,345 | ||||||
- 24 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
12. Income Taxes (continued)
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities, which are presented net in other assets in the consolidated statements of financial condition, consist of the following:
September 30, 2005 |
December 31, 2004 | |||||
Deferred tax assets: |
||||||
Compensation and benefits |
$ | 86,942 | $ | 71,804 | ||
Deferred revenue |
1,422 | 1,321 | ||||
Other |
4,394 | 5,165 | ||||
Gross deferred tax asset |
92,758 | 78,290 | ||||
Deferred tax liabilities: |
||||||
Goodwill |
44,839 | 39,370 | ||||
Depreciation |
10,401 | 8,369 | ||||
Other |
7,705 | 4,311 | ||||
Gross deferred tax liability |
62,945 | 52,050 | ||||
Net deferred tax asset |
$ | 29,813 | $ | 26,240 | ||
A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||||||||||||||
2005 |
% |
2004 |
% |
2005 |
% |
2004 |
% |
|||||||||||||||||||||
Expected income tax expense (benefit) |
$ | 34,685 | 35.0 | % | $ | (5,843 | ) | 35.0 | % | $ | 90,759 | 35.0 | % | $ | 47,934 | 35.0 | % | |||||||||||
Increase (decrease) in income taxes resulting from: |
||||||||||||||||||||||||||||
State and local taxes |
2,764 | 2.8 | (2,892 | ) | 17.3 | 5,932 | 2.3 | 1,267 | 0.9 | |||||||||||||||||||
Foreign taxes |
35 | | 1,780 | (10.7 | ) | 411 | 0.2 | 2,253 | 1.6 | |||||||||||||||||||
Tax-exempt interest income |
(526 | ) | (0.5 | ) | (380 | ) | 2.3 | (1,085 | ) | (0.4 | ) | (1,093 | ) | (0.8 | ) | |||||||||||||
Minority interest |
(316 | ) | (0.3 | ) | (134 | ) | 0.8 | (907 | ) | (0.4 | ) | (1,477 | ) | (1.1 | ) | |||||||||||||
Release of reserves related to New York State Tax audits |
| | | | | | (8,519 | ) | (6.2 | ) | ||||||||||||||||||
Other |
435 | 0.4 | 204 | (1.2 | ) | 622 | 0.2 | (1,020 | ) | (0.7 | ) | |||||||||||||||||
Income tax expense (benefit) |
$ | 37,077 | 37.4 | % | $ | (7,265 | ) | 43.5 | % | $ | 95,732 | 36.9 | % | $ | 39,345 | 28.7 | % | |||||||||||
- 25 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
13. Variable Interest Entities Not Subject to Consolidation
The Company is involved with various entities in the normal course of business that may be deemed to be VIEs and the Company may have interests therein, including investment advisory agreements and equity securities, which may be considered variable interests. The Company engages in these transactions principally to address client needs through the launch of collateralized debt obligations and private investment funds. At September 30, 2005 and December 31, 2004, the aggregate assets and debt and BlackRocks risk of loss in VIEs in which BlackRock has not been deemed primary beneficiary are as follows:
Assets |
Debt |
BlackRock Risk of Loss | |||||||
September 30, 2005 |
|||||||||
Collaterized debt obligations |
$ | 5,787,600 | $ | 5,190,600 | $ | 43,068 | |||
Private investment funds |
4,486,600 | 1,284,500 | 8,950 | ||||||
Total |
$ | 10,274,200 | $ | 6,475,100 | $ | 52,018 | |||
December 31, 2004 |
|||||||||
Collaterized debt obligations |
$ | 3,152,000 | $ | 2,700,000 | $ | 13,800 | |||
Private investment funds |
1,872,000 | 125,000 | 33,000 | ||||||
Total |
$ | 5,024,000 | $ | 2,825,000 | $ | 46,800 | |||
14. Comprehensive Income
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||||
Net income (loss) |
$ | 61,119 | $ | (9,814 | ) | $ | 160,990 | $ | 93,389 | |||||||
Other comprehensive income (loss): |
||||||||||||||||
Unrealized gain (loss) on investments, available for sale, net |
265 | 840 | (697 | ) | (1,013 | ) | ||||||||||
Foreign currency translation gain (loss) |
(456 | ) | (76 | ) | (3,068 | ) | 953 | |||||||||
Comprehensive income (loss) |
$ | 60,928 | $ | (9,050 | ) | $ | 157,225 | $ | 93,329 | |||||||
- 26 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
15. Borrowings
Convertible Debt
In February 2005, the Company issued $250,000 aggregate principal amount of convertible debentures (the Debentures), which will be due in 2035 and bear interest at a rate of 2.625% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, commencing August 15, 2005. The Company used a portion of the net proceeds from this issuance to retire a $150,000 bridge promissory note, the proceeds of which were used to fund a portion of the purchase price for the SSR acquisition.
Prior to February 15, 2009, the Debentures will be convertible at the option of the holder at an initial conversion rate of 9.7282 shares of common stock per $1 principal amount of Debentures. The Debentures will be convertible into cash and, in some situations as described below, additional shares of the Companys class A common stock, if during the five business day period after any five consecutive trading day period in which the trading price per debenture for each day of such period is less than 103% of the product of the last reported sale price of the class A common stock of the Company and the conversion rate of the Debentures on each such day or upon the occurrence of certain other corporate events, such as a distribution to the holders of class A common stock of certain rights, assets or debt securities, if the Company becomes party to a merger, consolidation or transfer of all or substantially all of its assets or a change of control of the Company. On and after February 15, 2009, the Debentures will be convertible at any time prior to maturity at the option of the holder into cash and, in some situations as described below, additional shares of the Companys class A common stock at the above initial conversion rate, subject to adjustments.
At the time Debentures are tendered for conversion, for each $1 principal amount of Debentures converted, a holder will be entitled to receive cash and shares of class A common stock, if any, the aggregate value of which (the conversion value) will be determined by multiplying the applicable conversion rate by the average of the daily volume weighted average price of class A common stock for each of the ten consecutive trading days beginning on the second trading day immediately following the day the Debentures are tendered for conversion (the ten day weighted average price). The Company will deliver the conversion value to holders as follows: (1) an amount in cash (the principal return) equal to the lesser of (a) the aggregate conversion value of the Debentures to be converted and (b) the aggregate principal amount of the Debentures to be converted, and (2) if the aggregate conversion value of the Debentures to be converted is greater than the principal return, an amount in shares (the net shares), determined as set forth below, equal to such aggregate conversion value less the principal return (the net share amount). The number of net shares to be paid will be determined by dividing the net share amount by the ten day weighted average price. In lieu of delivering fractional shares, the Company will deliver cash based on the ten day weighted average price.
The conversion rate for the Debentures is subject to adjustments upon the occurrence of certain corporate events, such as a change of control of the Company, an increase in the Companys quarterly dividend greater than $0.30 per share, the issuance of certain rights or warrants to holders of, or subdivisions on, the class A common stock, a distribution of assets or indebtedness to holders of class A common stock or a tender offer on the class A common stock. The conversion rate adjustments vary depending upon the specific corporate event necessitating the adjustment and serve to ensure that any economic gains realized by the Companys stockholders are shared with the holders of the Debentures. The initial conversion rate of 9.7282 was determined by the underwriters based on market conditions. Management does not currently anticipate any such corporate events. However, the declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors. The Board of Directors will determine future dividend policy based on the Companys results of operations, financial condition, capital requirements and other circumstances.
- 27 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
15. Borrowings (continued)
Convertible Debt (continued)
If the effective date or anticipated effective date of certain transactions that constitute a change of control occurs on or prior to February 15, 2010, under certain circumstances, the Company will provide for a make whole amount by increasing, for a certain time period, the conversion rate by a number of additional shares of class A common stock for any conversion of Debentures in connection with such transactions. The amount of additional shares will be determined based on the price paid per share of class A common stock in the transaction constituting a change of control and the effective date of such transaction. However, if such transaction constitutes a public acquirer change of control, in lieu of increasing the conversion rate, the Company may elect to adjust its conversion obligation.
Beginning February 20, 2010, the Company may redeem any of the Debentures at a redemption price of 100% of their principal amount, plus accrued and unpaid interest, including contingent interest and accrued and unpaid liquidated damages, if any. Holders of Debentures have the right to require the Company to repurchase the Debentures for cash on February 15, 2010, 2015, 2020, 2025 and 2030. In addition, holders of the Debentures may require the Company to repurchase the Debentures for cash at a repurchase price equal to 100% of their principal amount plus accrued and unpaid interest, including contingent interest and accrued and unpaid liquidated damages, if any, (i) upon a change of control of the Company or (ii) if the class A common stock is neither listed for trading on the New York Stock Exchange nor approved for trading on the NASDAQ.
The Company is obligated to pay contingent interest, which is the amount of interest payable to holders of Debentures for any six-month period from February 15 to August 15 or from August 15 to February 15, with the initial six-month period commencing February 15, 2010, if the trading price of the Debentures for each of the ten trading days immediately preceding the first day of the applicable six-month period equals 120% or more of the principal amount of the Debentures. During any period when contingent interest is payable, the contingent interest payable per Debenture will equal 0.25% of the average trading price of the Debentures during the ten trading days immediately preceding the first day of the applicable six-month interest period.
The Company will pay liquidated damages to holders of the Debentures if the Company suspends the use of the SEC registration statement, pursuant to which holders of Debentures may resell their Debentures, and thereby prevents such holders from reselling their Debentures for a period that exceeds (i) 45 days in any three month period or (ii) an aggregate of 120 days in any 12 month period. During any period when liquidated damages are payable, the liquidated damages payable per Debenture will equal 0.25% of the outstanding principal amount of the Debentures for the first 90 days after the occurrence of the offending event and 0.50% of the outstanding principal amount of the Debentures after the first 90 days. The Company has not suspended the use of the registration statement.
The Company does not currently anticipate that any of the put and call rights, conversion rights, adjustments to the conversion rate, contingent interest and liquidated damages features will affect the Companys liquidity and capital resources. Since both the Companys call option and the holders put option are primarily based on the current interest rate environment, management concluded that this option is clearly and closely related to the debt host and did not require bifurcation under SFAS 133.
Line of Credit
Realty, a wholly owned subsidiary of the Company, has a $200,000 line of credit with MetLife (see note 17).
- 28 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
16. Lease Commitments
Future minimum commitments under BlackRocks operating leases, including leases assumed in the SSR acquisition and net of rental reimbursements of $433 through 2006 from sublease arrangements, are as follows:
2005 |
$ | 5,141 | |
2006 |
20,657 | ||
2007 |
20,525 | ||
2008 |
20,370 | ||
2009 |
20,651 | ||
Thereafter |
155,865 | ||
$ | 243,209 | ||
17. Related Party Transactions
The Company provides investment advisory and administration services to the BlackRock Funds, BlackRock Liquidity Funds, the BlackRock Closed-end Funds and other funds.
Revenues for services provided to these are as follows:
Three months ended September 30, |
Nine months ended September 30, | |||||||||||
2005 |
2004 |
2005 |
2004 | |||||||||
Investment advisory and administration fees: |
||||||||||||
BlackRock Open-end Funds: |
||||||||||||
PNC |
$ | 7,333 | $ | 7,185 | $ | 20,789 | $ | 25,347 | ||||
Other |
29,451 | 9,104 | 79,890 | 27,781 | ||||||||
BlackRock Closed-end Funds - Other |
23,127 | 17,978 | 64,120 | 52,252 | ||||||||
BlackRock Liquidity Funds |
||||||||||||
PNC |
4,598 | 3,817 | 12,536 | 10,025 | ||||||||
Other* |
16,573 | 15,691 | 50,171 | 49,256 | ||||||||
STIF - PNC |
222 | 264 | 660 | 796 | ||||||||
Other |
519 | 34 | 1,275 | 43 | ||||||||
$ | 81,823 | $ | 54,073 | $ | 229,441 | $ | 165,500 | |||||
* | Includes the International Dollar Reserve Fund I, Ltd., a Cayman Islands open-ended limited liability company. |
The Company provides investment advisory and administration services to certain PNC subsidiaries, MetLife-sponsored variable annuities and separate accounts, Nomura Asset Management Co., Ltd. (Nomura), a strategic joint venture partner, and affiliates of Nomura for a fee, based on assets under management. In addition, the Company provides risk management and private client services to PNC.
- 29 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
17. Related Party Transactions (continued)
Revenues for such services are as follows:
Three months ended September 30, |
Nine months ended September 30, | |||||||||||
2005 |
2004 |
2005 |
2004 | |||||||||
Separate accounts: |
||||||||||||
MetLife |
$ | 14,160 | $ | | $ | 37,527 | $ | | ||||
Nomura |
2,194 | 2,237 | 6,699 | 6,542 | ||||||||
PNC |
1,468 | 1,588 | 4,508 | 5,026 | ||||||||
Private client services - PNC |
1,383 | 1,387 | 4,149 | 4,271 | ||||||||
Alternative investments - PNC |
664 | 124 | 988 | 330 | ||||||||
Other income-risk management - PNC |
1,456 | 1,250 | 3,941 | 3,750 | ||||||||
$ | 21,325 | $ | 6,586 | $ | 57,812 | $ | 19,919 | |||||
Total revenue earned by BlackRock for providing asset management and other services to PNC subsidiaries or PNC-related accounts for the three months ended September 30, 2005 and 2004 totaled $17,124 and $15,615, respectively, and for the nine months ended September 30, 2005 and 2004 totaled approximately $47,571 and $49,545, respectively.
The Company has entered into various memoranda of understanding and co-administration agreements with affiliates of PNC pursuant to which the Company pays service fees for PNC Advisors (PNCs wealth management business) clients invested in BlackRock Funds. PNC also provides general and administration services to the Company. Charges for such services were based on actual usage or on defined formulas which, in managements view, resulted in reasonable allocations.
MetLife provided general and administration services to the Company, during a transition period, in support of SSR and its consolidated subsidiaries. These services ceased during the second quarter of 2005. In addition, BlackRock leases a portion of its office space under formal sublease agreements with MetLife.
Additionally, the Company has entered into subadvisory and consulting agreements with Nomura and an entity whose President and Chief Executive Officer serves on the Companys Board of Directors.
Realty maintains a $200,000 line of credit with a subsidiary of MetLife, which expires on January 31, 2006. Realty uses the line of credit to finance the acquisition of real estate prior to the closing of sponsored investment funds. During the quarter ended March 31, 2005, the Company repaid outstanding advances under the line of credit, which totaled $92,500, following the sale of related real estate to a newly formed investment fund. Borrowings under the affiliated line of credit bear interest at LIBOR plus 1.5%. At September 30, 2005, Realty had no advances outstanding under the line of credit.
- 30 -
PART I - FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
17. Related Party Transactions (continued)
Aggregate expenses included in the consolidated financial statements for transactions with related parties are as follows:
Three months ended September 30, |
Nine months ended September 30, | |||||||||||
2005 |
2004 |
2005 |
2004 | |||||||||
Fund administration and servicing costs |
$ | 4,250 | $ | 4,227 | $ | 12,362 | $ | 14,243 | ||||
General and administration |
2,300 | 1,082 | 6,577 | 3,332 | ||||||||
General and administration-consulting |
450 | 399 | 2,958 | 3,485 | ||||||||
$ | 7,000 | $ | 5,708 | $ | 21,897 | $ | 21,060 | |||||
Additionally, an indirect wholly owned subsidiary of PNC acts as a financial intermediary associated with the sale of back-end loaded shares of certain BlackRock funds. This entity finances broker sales commissions and receives all associated sales charges.
Included in accounts receivable was $15,423 and $2,983 at September 30, 2005 and December 31, 2004, respectively, primarily representing investment and administration services provided to MetLife, Nomura and PNC subsidiaries and affiliates.
Other assets include advances to employees under the SSR Old Plan and Company-owned life insurance policies, underwritten by MetLife, which are used to fund obligations under the SSR New Plan totaling $3,124 and $12,920, respectively.
Accounts payable and accrued liabilities-affiliate were $29,769 and $3,632 at September 30, 2005 and December 31, 2004, respectively. These amounts primarily represent settlements due on SSR acquisition-related costs and settlements due on income taxes payable to PNC and do not bear interest.
- 31 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
BlackRock, Inc., a Delaware corporation (together, with its subsidiaries, BlackRock or the Company), is one of the largest publicly traded investment management firms in the United States with approximately $427.8 billion of assets under management at September 30, 2005. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of equity, fixed income, cash management and alternative investment separate account and mutual fund products, including BlackRock Funds and the BlackRock Liquidity Funds. In addition, BlackRock provides risk management, investment system outsourcing and financial advisory services to institutional investors. BlackRock is a majority-owned indirect subsidiary of The PNC Financial Services Group, Inc. (PNC), one of the nations largest diversified financial services organizations providing consumer banking, institutional banking, asset management and global fund processing services. As of September 30, 2005, PNC indirectly owned approximately 70% of BlackRock.
The following table summarizes BlackRocks operating performance for the three months ended September 30, 2005, June 30, 2005 and September 30, 2004 and the nine months ended September 30, 2005 and 2004.
BlackRock, Inc.
Financial Highlights
(Dollar amounts in thousands, except share data)
(unaudited)
Three months ended |
Variance vs. |
|||||||||||||||||||||||||
September 30, |
June 30, 2005 |
September 30, 2004 |
June 30, 2005 |
|||||||||||||||||||||||
2005 |
2004 |
Amount |
% |
Amount |
% |
|||||||||||||||||||||
Total revenue |
$ | 300,807 | $ | 170,999 | $ | 271,389 | $ | 129,808 | 76 | % | $ | 29,418 | 11 | % | ||||||||||||
Total expense |
$ | 221,138 | $ | 193,375 | $ | 189,494 | $ | 27,763 | 14 | % | $ | 31,644 | 17 | % | ||||||||||||
Operating income (loss) |
$ | 79,669 | $ | (22,376 | ) | $ | 81,895 | $ | 102,045 | NM | $ | (2,226 | ) | -3 | % | |||||||||||
Operating income, as adjusted (b) |
$ | 100,160 | $ | 52,016 | 94,333 | $ | 48,144 | 93 | % | $ | 5,827 | 6 | % | |||||||||||||
Net income (loss) |
$ | 61,119 | $ | (9,814 | ) | $ | 53,335 | $ | 70,933 | NM | $ | 7,784 | 15 | % | ||||||||||||
Net income, as adjusted (a) |
$ | 68,876 | $ | 36,885 | $ | 60,565 | $ | 31,991 | 87 | % | $ | 8,311 | 14 | % | ||||||||||||
Diluted earnings (loss) per share |
$ | 0.92 | $ | (0.15 | ) | $ | 0.80 | $ | 1.07 | NM | $ | 0.12 | 15 | % | ||||||||||||
Diluted earnings per share, as adjusted (a) |
$ | 1.03 | $ | 0.56 | $ | 0.91 | $ | 0.47 | 84 | % | $ | 0.12 | 13 | % | ||||||||||||
Average diluted shares outstanding |
66,714,797 | 63,676,776 | 66,796,087 | 3,038,021 | 5 | % | (81,290 | ) | 0 | % | ||||||||||||||||
Operating margin |
26.5 | % | -13.1 | % | 30.2 | % | ||||||||||||||||||||
Operating margin, as adjusted (b) |
35.5 | % | 32.0 | % | 37.0 | % | ||||||||||||||||||||
Assets under management ($ in millions) |
$ | 427,837 | $ | 323,465 | $ | 414,411 | $ | 104,372 | 32 | % | $ | 13,426 | 3 | % | ||||||||||||
Nine months ended September 30, |
Variance |
|||||||||||||||||||||||||
2005 |
2004 |
Amount |
% |
|||||||||||||||||||||||
Total revenue |
$ | 822,278 | $ | 536,634 | $ | 285,644 | 53 | % | ||||||||||||||||||
Total expense |
$ | 594,133 | $ | 426,662 | $ | 167,471 | 39 | % | ||||||||||||||||||
Operating income |
$ | 228,145 | $ | 109,972 | $ | 118,173 | 107 | % | ||||||||||||||||||
Operating income, as adjusted (b) |
$ | 283,781 | $ | 193,500 | $ | 90,281 | 47 | % | ||||||||||||||||||
Net income |
$ | 160,990 | $ | 93,389 | $ | 67,601 | 72 | % | ||||||||||||||||||
Net income, as adjusted (a) |
$ | 188,960 | $ | 129,997 | $ | 58,963 | 45 | % | ||||||||||||||||||
Diluted earnings per share |
$ | 2.41 | $ | 1.42 | $ | 0.99 | 70 | % | ||||||||||||||||||
Diluted earnings per share, as adjusted (a) |
$ | 2.83 | $ | 1.98 | $ | 0.85 | 43 | % | ||||||||||||||||||
Average diluted shares outstanding |
66,809,706 | 65,858,552 | 951,154 | 1 | % | |||||||||||||||||||||
Operating margin |
27.7 | % | 20.5 | % | ||||||||||||||||||||||
Operating margin, as adjusted (b) |
36.7 | % | 37.8 | % | ||||||||||||||||||||||
Assets under management ($ in millions) |
$ | 427,837 | $ | 323,465 | $ | 104,372 | 32 | % |
- 32 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
BlackRock, Inc.
Financial Highlights
(continued)
(a) | While BlackRock reports its financial results using accounting principles generally accepted in the United States of America (GAAP), management believes that evaluating its 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 on-going operations, and for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRocks profitability and financial performance over time. Nevertheless, BlackRocks 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. |
Net income, as adjusted, and diluted earnings per share, as adjusted, have been derived from BlackRocks consolidated financial statements, as follows:
Three months ended |
Nine months ended | ||||||||||||||||||
September 30, |
June 30, 2005 |
September 30, |
|||||||||||||||||
2005 |
2004 |
2005 |
2004 |
||||||||||||||||
Net income, GAAP basis |
$ | 61,119 | $ | (9,814 | ) | $ | 53,335 | $ | 160,990 | $ | 93,389 | ||||||||
Add back: PNCs LTIP funding requirement |
7,757 | 46,699 | 7,716 | 22,866 | 46,699 | ||||||||||||||
SSR acquisition costs |
| | | 5,590 | | ||||||||||||||
Release of reserves related to the New York State tax audit |
| | | | (8,519 | ) | |||||||||||||
Impact of Trepp sale |
| | (486 | ) | (486 | ) | (1,572 | ) | |||||||||||
Net income, as adjusted |
68,876 | 36,885 | 60,565 | 188,960 | 129,997 | ||||||||||||||
Diluted earnings per share, GAAP basis |
$ | 0.92 | $ | (0.15 | ) | $ | 0.80 | $ | 2.41 | $ | 1.42 | ||||||||
Diluted earnings per share, as adjusted |
$ | 1.03 | $ | 0.56 | $ | 0.91 | $ | 2.83 | $ | 1.98 | |||||||||
Management believes that net income, as adjusted, and diluted earnings per share, as adjusted, are effective measurements of BlackRocks historical profitability and financial performance. The LTIP expense associated with awards to be met by PNCs funding requirement has 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 will not impact BlackRocks book value. SSR acquisition costs consist of certain compensation costs and professional fees. Compensation reflected in this amount represents direct incentives related to alternative product performance fees generated in 2004 by SSR employees, assumed in conjunction with the acquisition and settled by BlackRock with no future service requirement. Net income, as adjusted, and diluted earnings per share, as adjusted, exclude this amount because it does not relate to the current periods operations. Professional fees reflected in this amount, which have been deemed non-recurring by management, 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.
- 33 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
BlackRock, Inc.
Financial Highlights (continued)
(b) | Operating margin as adjusted, equals operating income, as adjusted, divided by revenue used for operating margin measurement, as indicated in the table below. Computations for all periods presented include affiliated and non-affiliated fund administration and servicing expense reported as a separate income statement line item and are derived from the Companys consolidated financial statements as follows: |
Three months ended |
Nine months ended | |||||||||||||||||||
September 30, |
June 30, 2005 |
September 30, |
||||||||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||||||||
Operating income, GAAP basis |
$ | 79,669 | $ | (22,376 | ) | $ | 81,895 | $ | 228,145 | $ | 109,972 | |||||||||
Add back: PNC LTIP funding obligation |
12,313 | 74,125 | 12,247 | 36,296 | 74,125 | |||||||||||||||
Appreciation on assets related to deferred compensation plans |
8,178 | 267 | 191 | 10,467 | 2,399 | |||||||||||||||
Trepp bonus |
| | | | 7,004 | |||||||||||||||
SSR acquisition costs |
| | | 8,873 | | |||||||||||||||
Operating income, as adjusted |
100,160 | 52,016 | 94,333 | 283,781 | 193,500 | |||||||||||||||
Revenue, as reported |
300,807 | 170,999 | 271,389 | 822,278 | 536,634 | |||||||||||||||
Less: fund administration and servicing costs |
(11,997 | ) | (8,277 | ) | (10,426 | ) | (31,531 | ) | (24,655 | ) | ||||||||||
Reimbursable property management compensation |
(6,485 | ) | | (6,239 | ) | (16,783 | ) | | ||||||||||||
Revenue used for operating margin measurement |
282,325 | 162,722 | 254,724 | 773,964 | 511,979 | |||||||||||||||
Operating margin, GAAP basis |
26.5 | % | -13.1 | % | 30.2 | % | 27.7 | % | 20.5 | % | ||||||||||
Operating margin, as adjusted |
35.5 | % | 32.0 | % | 37.0 | % | 36.7 | % | 37.8 | % | ||||||||||
Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of managements ability to, and useful to management in deciding how to, effectively employ BlackRocks resources. As such, management believes that operating income, as adjusted, and operating margin, as adjusted, provide useful disclosure to investors. Compensation expense associated with appreciation on assets related to BlackRocks deferred compensation plans has been excluded because investment returns on these assets reported in non-operating income results in a nominal impact on net income. Reimbursable property management compensation represents compensation and benefits paid to certain BlackRock Realty Advisors, Inc. (Realty) personnel. These employees are retained on Realtys payroll when properties are acquired by Realtys clients. The related compensation and benefits are fully reimbursed by Realtys clients and have been excluded from revenue used for operating margin measurement, as adjusted, because they bear no economic cost to BlackRock. Fund administration and servicing costs have been excluded from revenue used for operating margin measurement, as adjusted, because these costs fluctuate based on the discretion of a third party.
- 34 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
General
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 predetermined percentages of the market value of assets under management or, in the case of certain real estate clients, net operating income generated by the underlying properties, and are affected by changes in assets under management, including market appreciation or depreciation and net subscriptions or redemptions. Net subscriptions or redemptions represent the sum of new client assets, additional fundings from existing clients, withdrawals of assets from and termination of client accounts and purchases and redemptions of mutual fund shares. Market appreciation or depreciation typically 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 BlackRocks alternative investment products provide for performance fees in addition to fees based on assets under management. Performance fees are generally earned based on investment performance in excess of a contractual threshold and, accordingly, may increase the volatility of BlackRocks revenue and earnings.
BlackRock provides a variety of risk management, investment analytic and investment system services to its customers, which include insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts, commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand name BlackRock Solutions® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned for BlackRock Solutions services are 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 monthly or quarterly payments. Certain client accounts can also be subject to discretionary performance fees. The fees earned on risk management, investment analytic and investment system assignments are recorded as other income in the consolidated statements of operations. A subsidiary of BlackRock Realty Advisors, Inc. (Realty) earns management and performance fees for property management services associated with properties included in Realtys real estate equity portfolios.
Operating expense consists of employee compensation and benefits, fund administration and servicing costs, general and administration expense, amortization of intangible assets and impairment of intangible assets, if any. Employee compensation and benefits expense includes salaries, deferred and incentive compensation, vesting of awards granted under the BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan (LTIP) and related benefit costs. Fund administration and servicing costs includes payments made to PNC affiliated entities and third parties, primarily associated with the administration and servicing of client investments in BlackRock Funds and BlackRock Closed-end Funds. Intangible assets at September 30, 2005 and December 31, 2004 were approximately $491.7 million and $184.1 million, respectively, with amortization expense of approximately $2.5 million and $0.3 million for the three months ended September 30, 2005 and 2004, respectively, and approximately $5.5 million and $0.7 million for the nine months ended September 30, 2005 and 2004, respectively. Impairment of intangible assets represents a write-off of an acquired management contract due to liquidation of long-short equity hedge funds during the first quarter of 2004. Intangible assets primarily include management contracts and goodwill acquired in conjunction with the Companys acquisition of SSRM Holdings, Inc. (SSR) during the first quarter of 2005 and PNCs acquisition of BlackRock Financial Management, L.P. on February 28, 1995.
- 35 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Assets Under Management
Assets under management (AUM) increased approximately $104.4 billion, or 32%, to $427.8 billion at September 30, 2005, compared with $323.4 billion at September 30, 2004. The growth in assets under management was attributable to $50.0 billion of AUM acquired primarily in the Companys acquisition of SSR in combination with an increase of $39.1 billion, or 12%, in net subscriptions and $15.3 billion, or 5%, in market appreciation.
Separate accounts at September 30, 2005, increased $81.0 billion, or 33%, to $324.0 billion as compared with $243.0 billion at September 30, 2004, as a result of AUM acquired in the SSR acquisition of $40.2 billion, net subscriptions of $27.1 billion and market appreciation of $13.7 billion. Acquisitions primarily represented the transition of $23.1 billion in MetLife-sponsored variable annuity products and separate accounts to the Company and $10.6 billion in alternative investment products consisting of real estate products, collateralized debt obligations and energy hedge funds of $6.3 billion, $3.4 billion and $0.8 billion, respectively. Net subscriptions, exclusive of the SSR acquisition, were primarily attributable to fixed income new client sales and increased fundings from existing fixed income clients of $25.8 billion. Market appreciation of $13.7 billion in separate accounts largely reflected appreciation earned on fixed income assets of $7.9 billion due to current income and changes in market interest rates, market appreciation in equity assets of $3.3 billion as equity markets improved during the period and $2.5 billion of market appreciation on alternative investment products.
The $23.3 billion increase in mutual fund assets to $103.8 billion at September 30, 2005, compared with $80.5 billion at September 30, 2004, primarily reflected acquired assets of $9.8 billion and net subscriptions of $12.0 billion. Acquisitions primarily reflect the merger of the SSR mutual funds into BlackRock Funds, representing an increase of $9.5 billion in AUM. During the year, net subscriptions in BlackRock Liquidity Funds, other commingled funds and BlackRock Closed-end Funds totaled $9.1 billion, $2.2 billion and $2.0 billion, respectively, all of which was partially offset by net redemptions in BlackRock Funds, exclusive of the SSR fund mergers, of $1.0 billion. Net new business in the BlackRock Liquidity Funds was primarily due to $11.4 billion of net subscriptions during the fourth quarter of 2004, driven by strong relative investment performance and partially offset by outflows attributable to increases in the Federal Funds rate during the first quarter of 2005, resulting in a temporary yield advantage for direct investments in money market investments versus mutual funds during those periods. Net subscriptions in other commingled funds resulted from the successful launch of BlackRock Cash Strategies, LLC, an enhanced-yield cash management product, during 2004. The increase in AUM of the BlackRock Closed-end Funds reflects new funds launched since September 30, 2004 of $2.4 billion, partially offset by term trust maturities of $0.4 billion.
AUM at September 30, 2005 increased $13.4 billion, or 3%, as compared to June 30, 2005, representing $10.7 billion in net subscriptions, including $3.6 billion for international clients and $2.7 billion in market appreciation. The $10.7 billion in net subscriptions during the third quarter of 2005 reflected separate account net subscriptions of $6.8 billion attributable to new fixed income clients and increased fundings from existing fixed income clients, as well as net mutual fund subscriptions of $3.9 billion. Net mutual fund subscriptions primarily consisted of inflows in cash management and equity funds of $3.1 billion and $1.0 billion, respectively. Market appreciation during the third quarter of 2005 of $2.7 billion was primarily attributable to appreciation on equity assets of $2.5 billion as equity markets strengthened during the period and alternative products of $1.0 billion, partially offset by market depreciation of $0.9 billion on fixed income assets primarily due to increases in market interest rates.
- 36 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Assets Under Management (continued)
AUM as of September 30, 2005 and 2004 and December 31, 2004 are summarized below:
BlackRock, Inc.
Assets Under Management
(Dollar amounts in millions)
(unaudited)
September 30, |
December 31, 2004 | ||||||||
2005 |
2004 |
||||||||
All Accounts |
|||||||||
Fixed income |
$ | 290,041 | $ | 235,535 | $ | 240,709 | |||
Cash Management |
76,713 | 67,837 | 78,057 | ||||||
Equity |
35,600 | 12,675 | 14,792 | ||||||
Alternative investment products |
25,483 | 7,418 | 8,202 | ||||||
Total |
$ | 427,837 | $ | 323,465 | $ | 341,760 | |||
Separate Accounts |
|||||||||
Fixed income |
$ | 264,704 | $ | 211,075 | $ | 216,070 | |||
Cash Management |
8,357 | 7,703 | 7,360 | ||||||
Cash Management-Securities lending |
5,653 | 8,636 | 6,898 | ||||||
Equity |
19,789 | 8,129 | 9,397 | ||||||
Alternative investment products |
25,483 | 7,418 | 8,202 | ||||||
Subtotal |
323,986 | 242,961 | 247,927 | ||||||
Mutual Funds |
|||||||||
Fixed income |
25,337 | 24,460 | 24,639 | ||||||
Cash Management |
62,703 | 51,498 | 63,799 | ||||||
Equity |
15,811 | 4,546 | 5,395 | ||||||
Subtotal |
103,851 | 80,504 | 93,833 | ||||||
Total |
$ | 427,837 | $ | 323,465 | $ | 341,760 | |||
- 37 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Assets Under Management (continued)
The following tables present the component changes in BlackRocks AUM for the three and nine months ended September 30, 2005 and 2004, respectively. Prior period data reflects certain reclassifications to conform with the current periods presentation.
BlackRock, Inc.
Component Changes in Assets Under Management
(Dollar amounts in millions)
(unaudited)
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||
2005 |
2004 |
2005 |
2004 |
|||||||||||
All Accounts |
||||||||||||||
Beginning assets under management |
$ | 414,411 | $ | 309,654 | $ | 341,760 | $ | 309,356 | ||||||
Net subscriptions |
10,747 | 7,302 | 26,411 | 6,945 | ||||||||||
Acquisitions |
| | 49,966 | | ||||||||||
Market appreciation |
2,679 | 6,509 | 9,700 | 7,164 | ||||||||||
Ending assets under management |
$ | 427,837 | $ | 323,465 | $ | 427,837 | $ | 323,465 | ||||||
Separate Accounts |
||||||||||||||
Beginning assets under management |
$ | 315,236 | $ | 230,845 | $ | 247,927 | $ | 222,589 | ||||||
Net subscriptions |
6,818 | 5,956 | 27,409 | 13,200 | ||||||||||
Acquisitions |
| | 40,181 | | ||||||||||
Market appreciation |
1,932 | 6,160 | 8,469 | 7,172 | ||||||||||
Ending assets under management |
323,986 | 242,961 | 323,986 | 242,961 | ||||||||||
Mutual Funds |
||||||||||||||
Beginning assets under management |
99,175 | 78,809 | 93,833 | 86,767 | ||||||||||
Net subscriptions (redemptions) |
3,929 | 1,346 | (998 | ) | (6,255 | ) | ||||||||
Acquisitions |
| | 9,785 | | ||||||||||
Market appreciation (depreciation) |
747 | 349 | 1,231 | (8 | ) | |||||||||
Ending assets under management |
103,851 | 80,504 | 103,851 | 80,504 | ||||||||||
Total |
$ | 427,837 | $ | 323,465 | $ | 427,837 | $ | 323,465 | ||||||
- 38 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Assets Under Management (continued)
BlackRock, Inc.
Assets Under Management
Quarterly Trend
(Dollar amounts in millions)
(unaudited)
Three Months Ended |
Nine months September 30, |
|||||||||||||||||||||||
2004 |
2005 |
|||||||||||||||||||||||
September 30 |
December 31 |
March 31 |
June 30 |
September 30 |
||||||||||||||||||||
Separate Accounts |
||||||||||||||||||||||||
Fixed Income |
||||||||||||||||||||||||
Beginning assets under management |
$ | 199,762 | $ | 211,075 | $ | 216,070 | $ | 239,912 | $ | 258,411 | $ | 216,070 | ||||||||||||
Net subscriptions |
5,201 | 1,121 | 4,906 | 12,855 | 6,891 | 24,652 | ||||||||||||||||||
Acquisitions |
| | 20,005 | | | 20,005 | ||||||||||||||||||
Market appreciation (depreciation) |
6,112 | 3,874 | (1,069 | ) | 5,644 | (598 | ) | 3,977 | ||||||||||||||||
Ending assets under management |
211,075 | 216,070 | 239,912 | 258,411 | 264,704 | 264,704 | ||||||||||||||||||
Cash Management |
||||||||||||||||||||||||
Beginning assets under management |
6,896 | 7,703 | 7,360 | 7,307 | 8,164 | 7,360 | ||||||||||||||||||
Net subscriptions (redemptions) |
787 | (362 | ) | (632 | ) | 809 | 153 | 330 | ||||||||||||||||
Acquisitions |
| | 558 | | | 558 | ||||||||||||||||||
Market appreciation |
20 | 19 | 21 | 48 | 40 | 109 | ||||||||||||||||||
Ending assets under management |
7,703 | 7,360 | 7,307 | 8,164 | 8,357 | 8,357 | ||||||||||||||||||
Cash Management-Securities lending |
||||||||||||||||||||||||
Beginning assets under management |
8,771 | 8,636 | 6,898 | 6,791 | 7,368 | 6,898 | ||||||||||||||||||
Net subscriptions (redemptions) |
(135 | ) | (1,738 | ) | (107 | ) | 577 | (1,715 | ) | (1,245 | ) | |||||||||||||
Ending assets under management |
8,636 | 6,898 | 6,791 | 7,368 | 5,653 | 5,653 | ||||||||||||||||||
Equity |
||||||||||||||||||||||||
Beginning assets under management |
8,790 | 8,129 | 9,397 | 18,610 | 18,525 | 9,397 | ||||||||||||||||||
Net subscriptions (redemptions) |
(748 | ) | 31 | (107 | ) | (376 | ) | (203 | ) | (686 | ) | |||||||||||||
Acquisitions |
| | 9,061 | | | 9,061 | ||||||||||||||||||
Market appreciation |
87 | 1,237 | 259 | 291 | 1,467 | 2,017 | ||||||||||||||||||
Ending assets under management |
8,129 | 9,397 | 18,610 | 18,525 | 19,789 | 19,789 | ||||||||||||||||||
Alternative investment products |
||||||||||||||||||||||||
Beginning assets under management |
6,626 | 7,418 | 8,202 | 19,566 | 22,768 | 8,202 | ||||||||||||||||||
Net subscriptions |
851 | 666 | 462 | 2,204 | 1,692 | 4,358 | ||||||||||||||||||
Acquisitions |
| | 10,557 | | | 10,557 | ||||||||||||||||||
Market appreciation (depreciation) |
(59 | ) | 118 | 345 | 998 | 1,023 | 2,366 | |||||||||||||||||
Ending assets under management |
7,418 | 8,202 | 19,566 | 22,768 | 25,483 | 25,483 | ||||||||||||||||||
Total Separate Accounts |
||||||||||||||||||||||||
Beginning assets under management |
230,845 | 242,961 | 247,927 | 292,186 | 315,236 | 247,927 | ||||||||||||||||||
Net subscriptions (redemptions) |
5,956 | (282 | ) | 4,522 | 16,069 | 6,818 | 27,409 | |||||||||||||||||
Acquisitions |
| | 40,181 | | | 40,181 | ||||||||||||||||||
Market appreciation (depreciation) |
6,160 | 5,248 | (444 | ) | 6,981 | 1,932 | 8,469 | |||||||||||||||||
Ending assets under management |
$ | 242,961 | $ | 247,927 | $ | 292,186 | $ | 315,236 | $ | 323,986 | $ | 323,986 | ||||||||||||
- 39 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Assets Under Management (continued)
BlackRock, Inc.
Assets Under Management
Quarterly Trend (continued)
(Dollar amounts in millions)
(unaudited)
Three Months Ended |
Nine months September 30, |
|||||||||||||||||||||||
2004 |
2005 |
|||||||||||||||||||||||
September 30 |
December 31 |
March 31 |
June 30 |
September 30 |
||||||||||||||||||||
Mutual Funds |
||||||||||||||||||||||||
Fixed Income |
||||||||||||||||||||||||
Beginning assets under management |
$ | 23,780 | $ | 24,460 | $ | 24,639 | $ | 25,379 | $ | 25,671 | $ | 24,639 | ||||||||||||
Net subscriptions (redemptions) |
270 | 197 | (139 | ) | 68 | (82 | ) | (153 | ) | |||||||||||||||
Acquisitions |
| | 989 | 89 | | 1,078 | ||||||||||||||||||
Market appreciation (depreciation) |
410 | (18 | ) | (110 | ) | 135 | (252 | ) | (227 | ) | ||||||||||||||
Ending assets under management |
24,460 | 24,639 | 25,379 | 25,671 | 25,337 | 25,337 | ||||||||||||||||||
Cash Management |
||||||||||||||||||||||||
Beginning assets under management |
50,276 | 51,498 | 63,799 | 59,985 | 59,651 | 63,799 | ||||||||||||||||||
Net subscriptions (redemptions) |
1,222 | 12,309 | (4,023 | ) | (334 | ) | 3,052 | (1,305 | ) | |||||||||||||||
Acquisitions |
| | 210 | | | 210 | ||||||||||||||||||
Market depreciation |
| (8 | ) | (1 | ) | | | (1 | ) | |||||||||||||||
Ending assets under management |
51,498 | 63,799 | 59,985 | 59,651 | 62,703 | 62,703 | ||||||||||||||||||
Equity |
||||||||||||||||||||||||
Beginning assets under management |
4,753 | 4,546 | 5,395 | 13,778 | 13,853 | 5,395 | ||||||||||||||||||
Net subscriptions (redemptions) |
(146 | ) | 455 | (255 | ) | (244 | ) | 959 | 460 | |||||||||||||||
Acquisitions |
| | 8,497 | | | 8,497 | ||||||||||||||||||
Market appreciation (depreciation) |
(61 | ) | 394 | 141 | 319 | 999 | 1,459 | |||||||||||||||||
Ending assets under management |
4,546 | 5,395 | 13,778 | 13,853 | 15,811 | 15,811 | ||||||||||||||||||
Total Mutual Funds |
||||||||||||||||||||||||
Beginning assets under management |
78,809 | 80,504 | 93,833 | 99,142 | 99,175 | 93,833 | ||||||||||||||||||
Net subscriptions (redemptions) |
1,346 | 12,961 | (4,417 | ) | (510 | ) | 3,929 | (998 | ) | |||||||||||||||
Acquisitions |
| | 9,696 | 89 | | 9,785 | ||||||||||||||||||
Market appreciation |
349 | 368 | 30 | 454 | 747 | 1,231 | ||||||||||||||||||
Ending assets under management |
$ | 80,504 | $ | 93,833 | $ | 99,142 | $ | 99,175 | $ | 103,851 | $ | 103,851 | ||||||||||||
- 40 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Assets Under Management (continued)
BlackRock, Inc.
Assets Under Management
Quarterly Trend
(Dollar amounts in millions)
(unaudited)
Three Months Ended |
Nine months September 30, |
|||||||||||||||||||||||
2004 |
2005 |
|||||||||||||||||||||||
September 30 |
December 31 |
March 31 |
June 30 |
September 30 |
||||||||||||||||||||
Mutual Funds |
||||||||||||||||||||||||
BlackRock Funds |
||||||||||||||||||||||||
Beginning assets under management |
$ | 16,603 | $ | 16,305 | $ | 16,705 | $ | 25,755 | $ | 25,598 | $ | 16,705 | ||||||||||||
Net subscriptions (redemptions) |
(391 | ) | 60 | (430 | ) | (549 | ) | (122 | ) | (1,101 | ) | |||||||||||||
Acquisitions |
| | 9,476 | 89 | | 9,565 | ||||||||||||||||||
Market appreciation |
93 | 340 | 4 | 303 | 728 | 1,035 | ||||||||||||||||||
Ending assets under management |
16,305 | 16,705 | 25,755 | 25,598 | 26,204 | 26,204 | ||||||||||||||||||
BlackRock Global Series |
||||||||||||||||||||||||
Beginning assets under management |
1,293 | 1,299 | 1,223 | 1,115 | 1,023 | 1,223 | ||||||||||||||||||
Net subscriptions (redemptions) |
(21 | ) | (117 | ) | (104 | ) | (92 | ) | 69 | (127 | ) | |||||||||||||
Market appreciation (depreciation) |
27 | 41 | (4 | ) | | 1 | (3 | ) | ||||||||||||||||
Ending assets under management |
1,299 | 1,223 | 1,115 | 1,023 | 1,093 | 1,093 | ||||||||||||||||||
BlackRock Liquidity Funds |
||||||||||||||||||||||||
Beginning assets under management |
45,854 | 47,087 | 58,453 | 53,864 | 53,229 | 58,453 | ||||||||||||||||||
Net subscriptions (redemptions) |
1,233 | 11,374 | (4,589 | ) | (635 | ) | 2,921 | (2,303 | ) | |||||||||||||||
Market depreciation |
| (8 | ) | | | | | |||||||||||||||||
Ending assets under management |
47,087 | 58,453 | 53,864 | 53,229 | 56,150 | 56,150 | ||||||||||||||||||
Closed End |
||||||||||||||||||||||||
Beginning assets under management |
14,233 | 14,895 | 15,410 | 15,835 | 16,270 | 15,410 | ||||||||||||||||||
Net subscriptions |
433 | 520 | 175 | 284 | 993 | 1,452 | ||||||||||||||||||
Acquisitions |
| | 220 | | | 220 | ||||||||||||||||||
Market appreciation (depreciation) |
229 | (5 | ) | 30 | 151 | 18 | 199 | |||||||||||||||||
Ending assets under management |
14,895 | 15,410 | 15,835 | 16,270 | 17,281 | 17,281 | ||||||||||||||||||
Other Commingled Funds |
||||||||||||||||||||||||
Beginning assets under management |
826 | 918 | 2,042 | 2,573 | 3,055 | 2,042 | ||||||||||||||||||
Net subscriptions |
92 | 1,124 | 531 | 482 | 68 | 1,081 | ||||||||||||||||||
Ending assets under management |
918 | 2,042 | 2,573 | 3,055 | 3,123 | 3,123 | ||||||||||||||||||
Total Mutual Funds |
||||||||||||||||||||||||
Beginning assets under management |
78,809 | 80,504 | 93,833 | 99,142 | 99,175 | 93,833 | ||||||||||||||||||
Net subscriptions (redemptions) |
1,346 | 12,961 | (4,417 | ) | (510 | ) | 3,929 | (998 | ) | |||||||||||||||
Acquisitions |
| | 9,696 | 89 | | 9,785 | ||||||||||||||||||
Market appreciation |
349 | 368 | 30 | 454 | 747 | 1,231 | ||||||||||||||||||
Ending assets under management |
$ | 80,504 | $ | 93,833 | $ | 99,142 | $ | 99,175 | $ | 103,851 | $ | 103,851 | ||||||||||||
- 41 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Operating results for the three months ended September 30, 2005 as compared with the three months ended September 30, 2004.
Revenue
Total revenue for the three months ended September 30, 2005 increased $129.8 million, or 76%, to $300.8 million, compared with $171.0 million for the three months ended September 30, 2004. Investment advisory and administration fees increased $107.1 million, or 73%, to $254.6 million for the three months ended September 30, 2005, compared with $147.5 million for the three months ended September 30, 2004. The increase in investment advisory and administration fees was the result of increases in fees earned across all asset classes. Other income of $46.1 million increased $22.7 million, or 97%, for the three months ended September 30, 2005, compared with $23.4 million for the three months ended September 30, 2004, primarily due to property management fees earned on real estate accounts assumed in the SSR acquisition, increased sales of BlackRock Solutions products and services and higher distribution fees earned on BlackRock Funds.
Three months ended September 30, |
Variance |
|||||||||||
2005 |
2004 |
Amount |
% |
|||||||||
(Dollar amounts in thousands) | (unaudited) | |||||||||||
Investment advisory and administration fees: |
||||||||||||
Mutual funds |
$ | 81,823 | $ | 54,073 | $ | 27,750 | 51.3 | % | ||||
Separate accounts |
172,818 | 93,482 | 79,336 | 84.9 | ||||||||
Total investment advisory and administration fees |
254,641 | 147,555 | 107,086 | 72.6 | ||||||||
Other income |
46,166 | 23,444 | 22,722 | 96.9 | ||||||||
Total revenue |
$ | 300,807 | $ | 170,999 | $ | 129,808 | 75.9 | % | ||||
Mutual fund advisory and administration fees increased $27.7 million, or 51%, to $81.8 million for the three months ended September 30, 2005, compared with $54.1 million for the three months ended September 30, 2004. The increase in mutual fund revenue was primarily the result of increases in BlackRock Funds revenue and closed-end fund revenue of $20.5 million and $5.2 million, respectively. The increase in BlackRock Funds revenue was primarily due to the merger of SSRs mutual funds into BlackRock Funds, contributing to an increase of approximately $9.6 billion, or 59%, in average AUM in BlackRock Funds during the period as compared to the prior year. Closed-end fund revenue increased during the period as the result of a $2.4 billion increase in assets under management, which was primarily the result of closed-end fund launches since September 30, 2004.
Separate account revenue increased $79.3 million, or 85%, to $172.8 million for the three months ended September 30, 2005, compared with $93.5 million for the three months ended September 30, 2004. Separate account base fees increased $47.2 million, or 51%, to $140.1 million for the three months ended September 30, 2005, compared with $92.9 million for the three months ended September 30, 2004. Separate account base fees increased during the third quarter of 2005 primarily due to a $40.2 billion increase in AUM related to the SSR acquisition and an increase in AUM, exclusive of the SSR acquisition, of $40.8 billion, or 17%. Performance fees of $32.7 million for the three months ended September 30, 2005 increased $32.2 million compared with $0.5 million for the three months ended September 30, 2004. The increase in separate accounts performance fees reflected increased fees earned on the Companys equity and fixed income hedge funds and real estate alternative investment products.
- 42 -
PART I - FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
Operating results for the three months ended September 30, 2005 as compared with the three months ended September 30, 2004. (continued)
Revenue (continued)
Other income of $46.2 million for the three months ended September 30, 2005 primarily represents fees earned on BlackRock Solutions products and services of $28.9 million, property management fees of $8.9 million earned on real estate assets under management and distribution fees earned on BlackRock Funds of $3.5 million.
Three months ended September 30, |
Variance |
|||||||||||
2005 |
2004 |
Amount |
% |
|||||||||
(Dollar amounts in thousands) | (unaudited) | |||||||||||
Mutual fund revenue |
||||||||||||
BlackRock Funds |
$ | 36,784 | $ | 16,289 | $ | 20,495 | 125.8 | % | ||||
Closed-End Funds |
23,128 | 17,978 | 5,150 | 28.6 | ||||||||
BlackRock Liquidity Funds |
21,171 | 19,508 | 1,663 | 8.5 | ||||||||
Other commingled funds |
740 | 298 | 442 | 148.3 | ||||||||