BlackRock Solutions (“BRS”) added 13 net new assignments during the quarter, including one Aladdin assignment, four Financial Markets Advisory assignments, and 10 non-recurring advisory engagements. BRS also completed 11 short-term advisory assignments during the quarter.
Net new business pipeline
totaled $48.7 billion at January 10, 2013, including $25.4 billion in institutional index mandates and $7.8 billion in active mandates expected to fund in future quarters. In addition, the pipeline contains $13.9 billion of mandates funded since December 31, 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.
pipeline of contracts and proposals remains robust.
Fourth Quarter Financial Highlights
Comparison to the Fourth Quarter 2011
Fourth quarter 2012 operating income was $1.0 billion compared with $808 million in fourth quarter 2011. Operating income for fourth quarter 2012 included a one-time $30 million charge related to a contribution to certain of the Company’s bank-managed short-term investment funds (“STIFs”). This contribution resulted from actions to ensure compliance with new regulations from the Office of the Comptroller of the Currency (“OCC”) taking effect in July 2013 that further limit a STIF’s weighted-average portfolio life maturity. BlackRock chose to sell certain securities held within STIFs and to make a one-time contribution to the STIFs to maintain the value of the funds while ensuring compliance with the new OCC rules. The securities sold were held in funds managed by Barclays Global Investors (“BGI”) prior to BlackRock’s acquisition of BGI. Until adoption of the new STIF regulations, BlackRock had been pursuing a strategy to hold these securities as market values improved over time. When BlackRock acquired BGI, Barclays provided capital support agreements to the STIFs that covered certain losses in the aggregate of up to $2.2 billion from December 1, 2009 through December 1, 2013 or until certain criteria are met. Barclays recently exercised its termination option on the support agreements for two of the STIFs. Last quarter, BlackRock, on behalf of two of these STIFs, negotiated amendments to their capital support agreements to remove certain assets from coverage (with an estimated value of approximately $750 million) in exchange for a payment by Barclays to the STIFs of $70 million. This payment was an amount in excess of the payments that were expected under the Barclays capital support agreements. As a result of the fourth quarter security sales, these STIFs are currently in compliance with the new OCC rules. The $30 million charge related to this contribution has been excluded from as adjusted results. Fourth quarter 2011 operating income included $32 million of restructuring charges. Operating income, as adjusted, was $1.0 billion compared with $841 million in fourth quarter 2011.
Fourth quarter 2012 revenue of $2.5 billion increased $312 million from $2.2 billion in fourth quarter 2011, primarily due to the following:
- Investment advisory, administration fees and securities lending revenue of $2.1 billion in fourth quarter 2012 increased $218 million from $1.9 billion in fourth quarter 2011 due to growth in base fees and higher securities lending revenue. Securities lending fees were $113 million in fourth quarter 2012 compared with $103 million in fourth quarter 2011.
- Performance fees were $239 million in fourth quarter 2012 compared with $147 million in fourth quarter 2011, primarily reflecting higher fees from alternative products, including fees from a disposition-related opportunistic fund.
- BlackRock Solutions and advisory revenue totaled $136 million in fourth quarter 2012 compared with $149 million in fourth quarter 2011, primarily reflecting higher revenue from Aladdin mandates more than offset by the run off of revenues associated with a lower level of advisory assets and lower one-time revenue from advisory assignments.
- Other revenue increased $24 million, largely reflecting higher earnings from certain operating advisory company investments.
Fourth quarter 2012 total operating expenses of $1.5 billion increased $115 million from fourth quarter 2011. Fourth quarter 2012 and fourth quarter 2011 operating expenses included the previously mentioned one-time $30 million contribution to STIFs and $32 million of restructuring charges, respectively. Operating expenses, as adjusted, of $1.5 billion increased $112 million from fourth quarter 2011. Results were primarily driven by the following:
Non-operating income (expense):
- Employee compensation and benefits increased $74 million, primarily reflecting higher incentive compensation driven by higher operating income, including higher performance fees.
- Direct fund expenses increased $23 million primarily related to an increase in average iShares AUM where BlackRock pays certain non-advisory expenses of the funds.
- General and administration expenses increased $60 million, primarily due to the previously mentioned contribution to STIFs and higher marketing and promotional expenses in connection with the brand campaign, partially offset by lower occupancy and consulting costs.
Fourth quarter 2012 non-operating expense, net of non-controlling interests, was $27 million compared with $21 million non-operating expense in fourth quarter 2011. Fourth quarter 2012 included $21 million of net positive marks, primarily on distressed credit/mortgage fund co-investments offset by $48 million of net interest expense. Net interest expense increased $9 million from fourth quarter 2011, primarily due to long-term debt issuances in May 2012.
Income tax expense:
Income tax expense totaled $288 million and $232 million for fourth quarter 2012 and 2011, respectively. The GAAP effective income tax rate for the fourth quarter 2012 was 29.4% compared with 29.5% for the fourth quarter 2011. The fourth quarter 2012 GAAP tax rate included $20 million of non-cash benefits primarily associated with revaluation of certain deferred tax liabilities, which have been excluded from the as adjusted results. The fourth quarter 2011 GAAP tax rate included $20 million of non-cash benefits associated with revaluation of certain deferred tax liabilities primarily due to tax legislation enacted in Japan, which have been excluded from the as adjusted results. The as adjusted effective income tax rate was 31.4% and 32.0% for fourth 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.