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BlackRock Reports Third Quarter Diluted EPS Of $3.65, Or $3.47 As Adjusted

Institutional index AUM totaled $1.394 trillion at September 30, 2012, reflecting net inflows of $8.8 billion and market and foreign exchange valuation gains of $72.7 billion. Equity net inflows of $7.8 billion showed signs of shifting investor sentiments, with flows of $6.1 billion into regional and country-specific mandates, including emerging markets. Fixed income net inflows of $1.9 billion primarily reflected net inflows into U.S. core mandates.

Cash management AUM increased 4%, or $8.9 billion, to $248.3 billion reflecting net inflows of $7.1 billion and market and foreign exchange gains of $1.8 billion.

Advisory AUM declined 28% to $46.6 billion, primarily due to disbursements of Maiden Lane residual assets, marking the further return of U.S. taxpayer funds.
 

Investment performance as of September 30, 2012 is presented in the following table:
 
       

One-year period
     

Three-year period
     

Five-year period
Fixed Income:
Actively managed products above benchmark or peer median
Taxable 76% 78% 56%
Tax-exempt 60% 67% 68%
Passively managed products within or above tolerance         96%       95%       89%
Equity:
Actively managed products above benchmark or peer median
Fundamental 37% 38% 50%
Scientific 89% 93% 72%
Passively managed products within or above tolerance         96%       96%       96%
Multi-Asset:
Actively managed products above benchmark or peer median         75%       33%       95%
 

BlackRock Solutions (“BRS”) added 18 net new assignments during the quarter, including 1 Aladdin assignment, 2 risk management mandates, 1 FMA assignment, and 14 non-recurring advisory engagements. BRS also completed 9 short-term advisory assignments during the quarter.

Net new business pipeline totaled $45.1 billion at October 11, 2012, including $33.1 billion in institutional index mandates and $7.9 billion in active mandates expected to fund in future quarters. In addition, the pipeline contains $10.4 billion of mandates funded since September 30, 2012. The unfunded portion of the pipeline primarily represents institutional assets, which account for approximately two-thirds of long-term AUM but only one-third of base fees. BlackRock Solutions pipeline of contracts and proposals remains robust.

Third Quarter Financial Highlights

Comparison to the Third Quarter 2011

Operating income: Third quarter 2012 operating income was $875 million compared with $777 million in third quarter 2011. Third quarter 2011 operating income included $63 million of U.K. lease exit costs related to the Company’s exit from two London locations. Operating income, as adjusted, was $876 million compared with $849 million in third quarter 2011.

Third quarter 2012 revenue of $2.3 billion increased $95 million from $2.2 billion in third quarter 2011, primarily due to the following:
  • Investment advisory, administration fees and securities lending revenue of $2.0 billion in third quarter 2012 increased $75 million from $1.9 billion in third quarter 2011 due to higher fees from all products except for active equity and alternative products and an increase in securities lending revenue. Securities lending fees were $129 million in third quarter 2012 compared with $88 million in third quarter 2011.
  • Performance fees were $103 million in third quarter 2012 compared with $91 million in third quarter 2011, primarily reflecting higher performance fees from alternative products.
  • BlackRock Solutions and advisory revenue totaled $128 million in third quarter 2012 compared with $117 million in third quarter 2011, primarily reflecting higher revenue from Aladdin mandates and higher one-time revenue from advisory assignments.

Third quarter 2012 total operating expenses of $1.4 billion decreased $3 million from third quarter 2011. Results were driven by the following:
  • Employee compensation and benefits increased $57 million, driven by higher incentive compensation, while maintaining a compensation-to-revenue ratio of approximately 35%.
  • Amortization of deferred sales commissions decreased $7 million, primarily related to lower sales of certain share classes of open-end funds.
  • General and administration expenses decreased $62 million, primarily due to U.K. lease exit costs incurred in the third quarter 2011, and lower occupancy costs and professional expenses. The decrease was partially offset by closed-end fund launch costs of $22 million (excluding $3 million included in employee compensation and benefits expense) associated with the August 2012 launch of the BlackRock Municipal Target Term Trust and an increase in foreign currency remeasurement costs.

Non-operating income (expense): Third quarter 2012 non-operating income, net of non-controlling interests, was $17 million compared with $87 million non-operating expense in third quarter 2011. Third quarter 2012 included $64 million of net positive marks, primarily on distressed credit/mortgage funds and private equity fund co-investments, and $47 million of net interest expense. Net interest expense increased $10 million from third quarter 2011, primarily due to long-term debt issuances in May 2012.

Income tax expense: Income tax expense totaled $250 million and $95 million for third quarter 2012 and 2011, respectively. The GAAP effective income tax rate for the third quarter 2012 was 28.1% compared with 13.7% for the third quarter 2011. The third quarter 2012 GAAP tax rate included a $30 million net non-cash benefit, related to the revaluation of certain deferred income tax liabilities, including tax legislation enacted in the United Kingdom. The third quarter 2011 GAAP tax rate included a $129 million non-cash benefit related to the revaluation of certain deferred income tax liabilities, including tax legislation enacted in the United Kingdom and a state tax election. The as adjusted effective income tax rate was 31.4% and 32.3% for third quarter 2012 and 2011, respectively.

See notes (a) through (f) in Attachment I for more information on as adjusted items and the reconciliation to GAAP.

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