UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 20082009

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period fromto.

Commission file number 001-33099

 

 

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 32-0174431

(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

(Registrant’s 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer or, a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filerx xAccelerated filer¨
Non-accelerated filer¨  (Do not check if a smaller reporting company)  Smaller reporting company¨

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 July 31, 2008,2009, there were 118,059,86650,931,608 shares of the registrant’s common stock outstanding.

 

 

 


BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

      Page

Item 1.

  

Financial Statements (unaudited)

  
  

Condensed Consolidated Statements of Financial Condition

  1
  

Condensed Consolidated Statements of Income

2
Condensed Consolidated Statements of Comprehensive Income

  3
  

Condensed Consolidated Statements of Cash FlowsComprehensive Income

  4
  

Condensed Consolidated Statements of Changes in Equity

5

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

  69

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  2747

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  5484

Item 4.

  

Controls and Procedures

55

PART II

OTHER INFORMATION

Item 1.

  86
Legal ProceedingsPART II
56OTHER INFORMATION

Item 2.1.

Legal Proceedings

  86
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  5686

Item 4.

  

Submission of Matters to a Vote of Security Holders

  5787

Item 6.

Exhibits

  Exhibits5888

- ii -


PART I - FINANCIAL INFORMATION

 

Item 1.Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

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

(unaudited)

 

  June 30,
2008
 December 31,
2007
   June 30,
2009
  December 31,
2008

Assets

       

Cash and cash equivalents

  $1,427,522  $1,656,200   $2,305  $2,032

Accounts receivable

   1,569,116   1,235,940    1,067   901

Due from related parties

   204,476   174,853    104   309

Investments

   1,941,525   1,999,944    957   1,429

Separate account assets

   4,026,713   4,669,874    3,131   2,623

Deferred mutual fund sales commissions, net

   168,271   174,849    111   135

Property and equipment (net of accumulated depreciation of $267,074 at June 30, 2008 and $225,645 at December 31, 2007)

   265,399   266,460 

Intangible assets (net of accumulated amortization of $251,591 at June 30, 2008 and $178,450 at December 31, 2007)

   6,507,087   6,553,122 

Property and equipment (net of accumulated depreciation of $295 at June 30, 2009 and $259 at December 31, 2008)

   252   260

Intangible assets (net of accumulated amortization of $396 at June 30, 2009 and $324 at December 31, 2008)

   6,371   6,441

Goodwill

   5,535,174   5,519,714    5,723   5,533

Other assets

   371,969   310,559    388   261
             

Total assets

  $22,017,252  $22,561,515    20,409   19,924
             

Liabilities

       

Accrued compensation and benefits

  $666,190  $1,086,590   $386  $826

Accounts payable and accrued liabilities

   1,029,636   788,968    628   545

Due to related parties

   93,972   114,347    119   103

Short-term borrowings

   300,000   300,000    200   200

Convertible debentures

   247   245

Long-term borrowings

   946,552   947,021    695   697

Separate account liabilities

   4,026,713   4,669,874    3,131   2,623

Deferred tax liabilities

   1,993,398   2,059,980    1,767   1,826

Other liabilities

   286,694   419,570    263   299
             

Total liabilities

   9,343,155   10,386,350    7,436   7,364
             

Non-controlling interests

   544,388   578,210 
       

Commitments and contingencies (Note 12)

    

Commitments and contingencies (Note 9)

   

Temporary equity

    

Redeemable non-controlling interests

   13   266

Convertible debentures

   2   —  
      

Stockholders’ equity

   

Common stock ($0.01 par value, 500,000,000 shares authorized, 118,573,367 shares issued, 117,071,411 and 116,059,560 shares outstanding at June 30, 2008 and December 31, 2007, respectively)

   1,186   1,186 

Series A participating preferred stock ($0.01 par value, 500,000,000 shares authorized and 12,604,918 shares issued and outstanding at June 30, 2008 and December 31, 2007)

   126   126 

Additional paid-in capital

   10,342,601   10,274,096 

Retained earnings

   1,929,726   1,622,041 

Accumulated other comprehensive income

   91,504   71,020 

Escrow shares, common, at cost (911,266 and 1,191,785 held at June 30, 2008 and December 31, 2007, respectively)

   (143,367)  (187,500)

Treasury stock, common, at cost (590,690 and 1,322,022 shares held at June 30, 2008 and December 31, 2007, respectively)

   (92,067)  (184,014)

Total temporary equity

   15   266
             

Total stockholders’ equity

   12,129,709   11,596,955 
       

Total liabilities, non-controlling interests and stockholders’ equity

  $22,017,252  $22,561,515 
       

- 1 -


PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition (continued)

(Dollar amounts in millions, except per share data)

(unaudited)

   June 30,
2009
  December 31,
2008
 

Permanent Equity

   

BlackRock, Inc. stockholders’ equity

   

Common stock, $0.01 par value;

   1    1  

Shares authorized: 500,000,000 at June 30, 2009 and December 31, 2008;

   

Shares issued: 50,826,457 at June 30, 2009 and 118,573,367 at December 31, 2008;

   

Shares outstanding: 49,915,191 at June 30, 2009 and 117,291,110 at December 31, 2008

   

Preferred stock (Note 11)

   1    —    

Additional paid-in capital

   10,891    10,473  

Retained earnings

   2,076    1,982  

Accumulated other comprehensive (loss)

   (81  (186

Escrow shares, common, at cost (911,266 shares held at June 30, 2009 and December 31, 2008)

   (143  (143

Treasury stock, common, at cost (0 and 370,991 shares held at June 30, 2009 and December 31, 2008, respectively)

   —      (58
         

Total BlackRock, Inc. stockholders’ equity

   12,745    12,069  

Nonredeemable non-controlling interests

   213    225  
      ��  

Total permanent equity

   12,958    12,294  
         

Total liabilities, temporary equity and permanent equity

  $20,409   $19,924  
         

See accompanying notes to condensed consolidated financial statements.

 

- 12 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Income

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

(unaudited)

 

  Three Months Ended
June 30,
 Six Months Ended
June 30,
   Three Months Ended
June 30,
 Six Months Ended
June 30,
 
  2008 2007 2008 2007   2009 2008 2009 2008 

Revenue

          

Investment advisory and administration base fees

          

Related parties

  $773,477  $625,424  $1,521,439  $1,200,204   $589   $830   $1,138   $1,632  

Other third parties

   387,880   325,186   772,796   623,914    261    331    511    661  

Investment advisory performance fees

   57,079   25,720   98,622   48,138    17    57    28    99  
                          

Investment advisory and administration base and performance fees

   1,218,436   976,330   2,392,857   1,872,256    867    1,218    1,677    2,392  

BlackRock Solutions and advisory

   116    100    256    160  

Distribution fees

   33,683   32,867   69,002   57,687    23    34    48    69  

Other revenue

        23    35    35    66  

Other third parties

   125,777   80,780   211,318   161,011 

Related parties

   9,055   7,046   13,912   11,443 
                          

Total revenue

   1,386,951   1,097,023   2,687,089   2,102,397    1,029    1,387    2,016    2,687  
             
             

Expenses

          

Employee compensation and benefits

   551,954   408,773   1,020,903   756,075    390    552    741    1,021  

Portfolio administration and servicing costs

          

Related parties

   126,968   115,452   257,214   232,969    96    127    199    257  

Other third parties

   26,650   15,625   52,143   29,194    29    25    53    49  

Amortization of deferred mutual fund sales commissions

   33,422   28,713   63,630   50,271    26    33    53    63  

General and administration

        191    208    344    422  

Other third parties

   203,794   190,752   407,576   382,445 

Related parties

   2,601   24,632   11,802   35,104 

Restructuring charges

   —      —      22    —    

Amortization of intangible assets

   36,572   31,075   73,141   62,107    36    37    72    74  
                          

Total expenses

   981,961   815,022   1,886,409   1,548,165    768    982    1,484    1,886  
             
             

Operating income

   404,990   282,001   800,680   554,232    261    405    532    801  
             

Non-operating income (expense)

          

Net gain (loss) on investments

   (467)  210,203   (19,956)  360,563    88    —      (84  (20

Interest and dividend income

   13,924   13,738   32,263   32,095    4    14    12    32  

Interest expense

   (16,720)  (10,223)  (34,098)  (21,209)   (15  (18  (30  (36
                          

Total non-operating income (expense)

   (3,263)  213,718   (21,791)  371,449    77    (4  (102  (24
                          

Income before income taxes and non-controlling interests

   401,727   495,719   778,889   925,681 

Income before income taxes

   338    401    430    777  

Income tax expense

   147,569   125,012   277,700   234,918    94    147    124    277  
                          

Income before non-controlling interests

   254,158   370,707   501,189   690,763 

Non-controlling interests

   (19,900)  148,463   (14,540)  273,131 

Net income

   244    254    306    500  

Less:

     

Net income (loss) attributable to redeemable non-controlling interests

   1    —      1    (3

Net income (loss) attributable to nonredeemable non-controlling interests

   25    (20  3    (12
                          

Net income

  $274,058  $222,244  $515,729  $417,632 

Net income attributable to BlackRock, Inc.

  $218   $274   $302   $515  
                          

Earnings per share:

     

Earnings per share attributable to BlackRock, Inc. common stockholders:

     

Basic

  $2.12  $1.73  $3.99  $3.25   $1.62   $2.04   $2.25   $3.85  

Diluted

  $2.05  $1.69  $3.87  $3.17   $1.59   $2.00   $2.22   $3.78  

Cash dividends declared and paid per share

  $0.78  $0.67  $1.56  $1.34   $0.78   $0.78   $1.56   $1.56  

Weighted-average shares outstanding:

     

Weighted-average common shares outstanding:

     

Basic

   129,569,325   128,544,894   129,242,591   128,676,577    130,928,926    129,569,325    130,574,535    129,242,591  

Diluted

   133,526,713   131,383,470   133,189,957   131,580,121    133,364,611    132,032,538    132,668,695    131,812,500  

See accompanying notes to condensed consolidated financial statements.

 

- 23 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Dollar amounts in thousands)millions)

(unaudited)

 

  Three Months Ended
June 30,
 Six Months Ended
June 30,
 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
   2009  2008 2009  2008 
  2008 2007  2008 2007 

Net income

  $274,058  $222,244  $515,729  $417,632   $244  $254   $306  $500  

Other comprehensive income:

             

Net unrealized gain (loss) from available-for-sale investments, net of tax

   1,228   586   (3,937)  (871)

Change in net unrealized gain (loss) from available-for-sale investments, net of tax(1)

   8   1    15   (4

Minimum pension liability adjustment

   —     —     (542)  —      —     —      1   (1

Foreign currency translation adjustments

   (1,344)  16,371   24,963   18,574    103   (1  89   25  
                          

Comprehensive income

  $273,942  $239,201  $536,213  $435,335 

Comprehensive income attributable to BlackRock, Inc.

  $355  $254   $411  $520  
                          

(1)

The tax benefit (expense) on the change in net unrealized gain (loss) from available-for-sale investments was ($2) and ($1) during the three months ended June 30, 2009 and 2008, respectively, and ($5) and $1 during the six months ended June 30, 2009 and 2008, respectively.

See accompanying notes to condensed consolidated financial statements.

 

- 34 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

BlackRock, Inc.

Condensed Consolidated Statement of Changes in Equity

(Dollar amounts in millions)

(unaudited)

   Common
And
Preferred
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (loss)
  Common
Shares
Held

In
Escrow
  Treasury
Stock
Common
  Total
Stockholders’
Equity
  Nonredeemable
Non-controlling
Interests
  Total
Permanent
Equity
  Redeemable
Non-controlling
Interests
(Temporary
Equity)
 

December 31, 2008, as reported

  $1  $10,461   $1,991   $(186 $(143 $(58 $12,066   $—     $12,066   $—    

January 1, 2009 initial recognition of APB 14-1, SFAS No. 160 and EITF Topic No. D-98

   —     12    (9  —      —      —      3    225    228    266  
                                         

December 31, 2008, as adjusted

   1   10,473    1,982    (186  (143  (58  12,069    225    12,294    266  
                                         

Reclass to temporary equity – convertible debt

   —     (2  —      —      —      —      (2  —      (2  2  

Net income

   —     —      302    —      —      —      302    3    305    1  

Dividends paid, net of dividend expense for unvested RSUs

   —     —      (208  —      —      —      (208  —      (208  —    

Stock-based compensation

   —     159    —      —      —      —      159    —      159    —    

Issuance of common shares to institutional investor

   1   299    —      —      —      —      300    —      300    —    

Issuance of common shares for contingent consideration

   —     43    —      —      —      —      43    —      43    —    

Net issuance of common shares related to employee stock transactions

   —     (83  —      —      —      58    (25  —      (25  —    

PNC capital contribution

   —     6    —      —      —      —      6    —      6    —    

Net tax shortfall from stock-based awards

   —     (4  —      —      —      —      (4  —      (4  —    

Minimum pension liability adjustment

   —     —      —      1    —      —      1    —      1    —    

Subscriptions/(redemptions/distributions) – non-controlling interest holders

   —     —      —      —      —      —      —      (4  (4  (254

Deconsolidation of sponsored investment funds

   —     —      —      —      —      —      —      (9  (9  —    

Foreign currency translation adjustments

   —     —      —      89    —      —      89    —      89    —    

Other changes in non-controlling interests

   —     —      —      —      —      —      —      (2  (2  —    

Change in net unrealized gain (loss) from available-for sale investments, net of tax

   —     —      —      15    —      —      15    —      15    —    
                                         

June 30, 2009

  $2  $10,891   $2,076   $(81 $(143 $—     $12,745   $213   $12,958   $15  
                                         

See accompanying notes to condensed consolidated financial statements

- 5 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

BlackRock, Inc.

Condensed Consolidated Statement of Changes in Equity

(Dollar amounts in millions)

(unaudited)

   BlackRock, Inc. Stockholders’ Equity          
   Common
And
Preferred
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income
  Common
Shares
Held

In
Escrow
  Treasury
Stock
Common
  Total
Stockholders’
Equity
  Nonredeemable
Non-controlling
Interests
  Total
Permanent
Equity
  Redeemable
Non-controlling
Interests
(Temporary
Equity)
 

December 31, 2007, as reported

  $1  $10,274   $1,622   $71   $(188 $(184 $11,596   $—     $11,596   $—    

Retrospective adoption of APB 14-1, SFAS No. 160 and EITF Topic No. D-98

   —     12    (6  —      —      —      6    549    555    29  
                                         

December 31, 2007, as adjusted

   1   10,286    1,616    71    (188  (184  11,602    549    12,151    29  

Net income

   —     —      515    —      —      —      515    (12  503    (3

Dividends paid, net of dividend expense for unvested RSUs

   —     —      (208  —      —      —      (208  —      (208  —    

Release of common stock from escrow agent in connection with Quellos Transaction

   —     —      —      —      45    —      45    —      45    —    

Stock-based compensation

   —     132    —      —      —      1    133    —      133    —    

Net issuance of common shares related to employee stock transactions

   —     (114  —      —      —      91    (23  —      (23  —    

PNC capital contribution

   —     4    —      —      —      —      4    —      4    —    

Net tax benefit from stock-based awards

   —     47    —      —      —      —      47    —      47    —    

Minimum pension liability adjustment

   —     —      —      (1  —      —      (1  —      (1  —    

Subscriptions/(redemptions/distributions) – non-controlling interest holders

   —     —      —      —      —      —      —      5    5    (15

Net deconsolidations of sponsored investment funds

   —     —      —      —      —      —      —      —      —      (6

Other changes in non-controlling interests

   —     —      —      —      —      —      —      (3  (3  —    

Foreign currency translation adjustments

   —     —      —      25    —      —      25    —      25    —    

Change in net unrealized gain (loss) from available-for sale investments, net of tax

   —     —      —      (4  —      —      (4  —      (4  —    
                                         

June 30, 2008

  $1  $10,355   $1,923   $91   $(143 $(92 $12,135   $539   $12,674   $5  
                                         

See accompanying notes to condensed consolidated financial statements

- 6 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollar amounts in thousands)millions)

(unaudited)

 

  Six Months Ended
June 30,
   Six Months Ended
June 30,
 
  2008 2007   2009 2008 

Cash flows from operating activities

      

Net income

  $515,729  $417,632   $306   $500  

Adjustments to reconcile net income to cash from operating activities:

      

Depreciation and other amortization

   115,346   94,686    115    117  

Amortization of deferred mutual fund sales commissions

   63,630   50,271    53    63  

Non-controlling interests

   (14,540)  273,131 

Stock-based compensation

   133,071   91,430    159    133  

Deferred income tax expense (benefit)

   (66,323)  41,462    (59  (67

Other net gains and net proceeds (purchases) of investments

   16,185   (329,149)

Earnings from equity method investees

   (10,410)  (22,475)

Net gains (losses) on non-trading investments

   9    19  

Purchases of other investments within consolidated funds

   (17  (86

Proceeds from sales and maturities of other investments within consolidated funds

   245    83  

(Earnings) losses from equity method investees

   74    (10

Distributions of earnings from equity method investees

   13,946   5,118    6    14  

Other adjustments

   (757)  (1,669)   2    (1

Changes in operating assets and liabilities:

      

Accounts receivable

   (323,765)  (113,288)   (164  (324

Due from related parties

   (29,623)  35,095    170    (30

Deferred mutual fund sales commissions

   (57,052)  (26,948)   (29  (57

Investments, trading

   221,682   (134,615)   (97  222  

Other assets

   59,879   (219,485)   (137  60  

Accrued compensation and benefits

   (415,186)  (362,267)   (434  (415

Accounts payable and accrued liabilities

   255,659   150,583    69    256  

Due to related parties

   (20,375)  (158,788)   16    (20

Other liabilities

   24,377   131,667    (13  24  
              

Cash flows from operating activities

   481,473   (77,609)   274    481  
              

Cash flows from investing activities

      

Purchases of investments

   (285,221)  (214,786)   (14  (285

Purchases of assets held for sale

   (58,719)  —      (1  (59

Proceeds from sales of investments

   52,231   128,311 

Distributions of capital from equity method investees

   7,995   —   

Proceeds from sales and maturities of investments

   198    52  

Return of capital from equity method investees

   20    8  

Net consolidations (deconsolidations) of sponsored investment funds

   6    —    

Contingent/other acquisition payments

   (158  —    

Purchases of property and equipment

   (39,903)  (62,305)   (33  (40

Net consolidations (deconsolidations) of sponsored investment funds

   —     (5,709)

Acquisitions, net of cash acquired

   —     (42,198)

Proceeds from other investing activities

   4,361   —      —      5  
              

Cash flows from investing activities

   (319,256)  (196,687)   18    (319
              

 

- 47 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Dollar amounts in thousands)millions)

(unaudited)

 

  Six Months Ended
June 30,
 
  Six Months Ended
June 30,
   2009 2008 
  2008 2007 

Cash flows from financing activities

      

Repayment of long-term borrowings

   (751)  —      (1  (1

Repayment of short-term borrowings

   (100,000)  —      —      (100

Proceeds from short-term borrowings

   100,000   360,000    —      100  

Cash dividends paid

   (208,044)  (176,766)   (208  (208

Proceeds from stock options exercised

   17,712   36,737    11    18  

Reissuance of treasury stock

   2,873   3,810 

Purchase of treasury stock

   (43,236)  (286,758)

Subscriptions received from non-controlling interest holders, net of distributions

   (9,874)  192,864 

Proceeds from issuance of common stock

   304    3  

Repurchases of common stock

   (40  (43

Net (redemptions/distributions paid)/ subscriptions received from non-controlling interest holders

   (257  (10

Excess tax benefit from stock-based compensation

   46,750   61,348    16    47  

Net proceeds/(repayments) of borrowings by consolidated sponsored investment funds

   (202,393)  261,616 

Other financing activities

   —     (1,183)

Net borrowings/ (repayment of borrowings) by consolidated sponsored investment funds

   70    (202
              

Cash flows from financing activities

   (396,963)  451,668    (105  (396
       
       

Effect of exchange rate changes on cash and cash equivalents

   6,068   18,574    86    6  
              

Net increase (decrease) in cash and cash equivalents

   (228,678)  195,946    273    (228

Cash and cash equivalents, beginning of period

   1,656,200   1,160,304    2,032    1,656  
              

Cash and cash equivalents, end of period

  $1,427,522  $1,356,250   $2,305   $1,428  
              

Supplemental cash flow information:

      

Cash paid for interest

  $32,537  $13,684   $26   $33  

Cash paid for income taxes

  $294,575  $102,758   $340   $295  

Supplemental non-cash flow information:

   

Issuance of treasury stock

  $109,481  $81,390 

Decrease in investments due to net deconsolidations of sponsored investment funds

  $5,935  $181,953 

Decrease in non-controlling interests due to net deconsolidations of sponsored investment funds

  $5,935  $167,016 

PNC LTIP capital contributions

  $5,090  $174,932 

Supplemental non-cash investing and financing activities:

   

Issuance of common stock

  $77   $109  

Contingent common stock payment related to Quellos transaction

  $43   $—    

See accompanying notes to condensed consolidated financial statements.

 

- 58 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

BlackRock, Inc. and its subsidiaries (“BlackRock” or the “Company”) provide diversified investment management services to institutional clients and individual investors through various investment vehicles. Investment management services primarily consist of the active management of fixed income, cash management and equity client accounts, the management of a number of open-end and closed-end mutual fund families and other non-U.S. equivalent retail products serving the institutional and retail markets, and the management of alternative funds developed to serve various customer needs. In addition, BlackRock provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation ofservices relating to illiquid securities, dispositions and workouts,workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

In September 2006, Merrill Lynch & Co., Inc. (“Merrill Lynch”) contributed the entities and net assets that constituted its investment management business (the “MLIM Business”) to BlackRock via a capital contribution, referred to as the “MLIM Transaction”, and in October 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”), referred to as the “Quellos Transaction” and in September 2006,.

On January 1, 2009, Bank of America Corporation (“Bank of America”) acquired Merrill Lynch, & Co.,which continues as a subsidiary of Bank of America. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and The PNC Financial Services Group, Inc. (“Merrill Lynch”PNC”) contributedpursuant to which on February 27, 2009 each exchanged a portion of the entities and assetsBlackRock common stock it held for an equal number of shares of non-voting preferred stock. See Note 11, Capital Stock, for more details on these transactions.

In June 2009, BlackRock announced that constituted its investment management businessit entered into a definitive purchase agreement (the “MLIM Business”“Barclays Purchase Agreement”) to BlackRock via a capital contribution, referred to as the “MLIMacquire Barclays Global Investors (“BGI”) from Barclays Bank PLC (“Barclays”). See Note 16, Pending Transaction.

 

1.Significant Accounting Policies

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Non-controlling interests include the portion of consolidated sponsored investment funds in which the Company does not have a direct equity ownership. All significantSignificant accounts and transactions between consolidated entities have been eliminated.

- 9 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Basis of Presentation (continued)

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007,2008, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2008.March 2, 2009.

The interim financial information at June 30, 20082009 and for the three and six months ended June 30, 20082009 and 20072008 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Certain amounts in the Company’s prior period financial statementsyear amounts have been revised or reclassified to conform to the current presentation.

- 6 -


PART I - FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Basis2009 presentation including those required by the retrospective adoption of PresentationFinancial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion(continued) (Including Partial Cash Settlement) (“FSP APB 14-1”) (Accounting Standards Codification (“ASC”) 470-20,Debt with Conversion and Other Options), FSP Emerging Issues Task Force (“EITF”) 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) (ASC 260-10,Earnings per Share) and Statement of Financial Accounting Standards (“SFAS”) No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (ASC 810-10,Consolidation).

Fair Value Measurements

BlackRock adopted Statement of Financial Accounting Standards (“SFAS”)SFAS No. 157,Fair Value Measurements (“(“SFAS No. 157”) (ASC 820-10,Fair Value Measurements and Disclosures) as of January 1, 2008, which requires, among other things, enhanced disclosures about investmentsassets and liabilities that are measured and reported at fair value. SFAS No. 157 establishes a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., levelsLevel 1, 2, and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide enhanced disclosure regarding instruments in the levelLevel 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.

Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 Inputs - Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date. Level 1 assets include listed mutual funds, equities and certain debt securities.

- 10 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Basis of Presentation (continued)

Fair Value Measurements (continued)

Level 2 Inputs - Other than quoted prices included within Level 1 that are observable for substantially the full term of the asset or liability, either directly or indirectly. Level 2 inputs include quoted– Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. InvestmentsAssets which generally are included in this category may include short-term floating rate notes and asset-backed securities held by consolidated sponsored cash management funds, securities held within consolidated hedge funds, certain limited partnership interests in hedge funds in which the valuationvaluations for substantially all of the investments within the fund isare based upon Level 1 or Level 2 inputs, as well as restricted public securities valued at a discount.

Level 3 Inputs - Unobservable inputs for the valuation of the asset or liability. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. InvestmentsAssets included in this category generally include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds and certain held for sale real estate assets.

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds. The various partnerships are investment companies which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, including independent appraisals, from third party sources, however, in some instances current valuation information, for illiquid securities or securities in markets that are not active, may not be available from any third party source or fund management may conclude that the valuations that are available from third party sources are not reliable. In these instances fund management may perform model-based analytical valuations that may be used to value these investments.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

 

- 711 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

1.Significant Accounting Policies (continued)

Basis of Presentation (continued) (continued)

 

Classification and Measurement of Redeemable Securities

EITF Topic No. D-98,Classification and Measurement of Redeemable Securities (ASC 480-10,Distinguishing Liabilities from Equity), requires temporary equity classification for instruments that are currently redeemable or convertible for cash or other assets at the option of the holder. At June 30, 2009 and December 31, 2008 the Company determined that $13 and $266, respectively, of non-controlling interests related to certain consolidated sponsored investment funds were redeemable for cash or other assets, resulting in temporary equity classification on the condensed consolidated statements of financial condition. The amount of temporary equity related to convertible instruments is measured as the excess of the amount of cash required to be exchanged in a hypothetical settlement, as of the balance sheet date, over the current carrying amount of the liability component. During the six months ended June 30, 2009, the 2.625% convertible debentures became convertible at the option of the holders into cash and shares of the Company’s common stock. The amount of cash required to be paid out in a hypothetical settlement exceeded the current carrying amount of the liability component by $2, which was classified as temporary equity–convertible debentures on the condensed consolidated statement of financial condition.

Assets and Liabilities to be Disposed of by Sale

In the course of the business of establishing real estate and private equity sponsored investment funds, the Company may purchase land, properties and third party private equity funds while incurring liabilities directly associated with the assets, together a disposal group, with the intention to sell the disposal group to sponsored investment funds upon their launch. In accordance with the provisions of SFAS No. 144,Accounting for the Impairment or Disposal of Long-lived Assets, (ASC 360-10,Property, Plant and Equipment) the Company treats these assets and liabilities as a “disposal group”, measured at the lower of the carrying amount or fair value. Losses are recognized for any initial or subsequent write-down to fair value and gains are recognized for any subsequent increase in fair value, but not in excess of the cumulative loss previously recognized.

At June 30, 2008,2009, the Company held disposal group assets of $129,598$50 and related liabilities of $71,150$49 in other assets and other liabilities, respectively, on its condensed consolidated statementsstatement of financial condition. Disposal group liabilities include approximately $56,900$47 of borrowings directly associated with the disposal group assets. During the three and six months ended June 30, 2008,2009, the Company recorded lossesa net loss of $3,276$0 and $1, respectively within non-operating income (expense) on its condensed consolidated statementsstatement of income related to the disposal group.

Recent Accounting Developments

Fair Value Measurements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13(“FSP FAS 157-1”) and FSP FAS 157-2,Effective Date of FASB Statement No. 157. (“FSP FAS 157-2”). FSP FAS 157-1 amends SFAS No. 157 to exclude from its scope transactions accounted for in accordance with SFAS No. 13,Accounting for Leases, and its related interpretive accounting pronouncements. FSP FAS 157-2 delays the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and liabilities recognized or disclosed at fair value in the financial statements on a non-recurring basis. Non-recurring non-financial assets and liabilities include goodwill, indefinite-lived intangible assets, long-lived assets and finite-lived intangible assets each measured at fair value for purposes of impairment testing; asset retirement and guarantee obligations initially measured at fair value; and those assets and liabilities initially measured at fair value in a business combination or asset purchase.

The Company adopted SFAS No. 157 on January 1, 2008, with the exception of the application of FSP FAS 157-2 related to non-recurring non-financial assets and liabilities. The partial adoption of SFAS No. 157 had no material impact on the Company’s consolidated financial statements. The Company does not expect that the adoption of the provisions of FSP FAS 157-2 for non-recurring non-financial assets and liabilities will have a material impact on its condensed consolidated financial statements.

 

- 812 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

1.Significant Accounting Policies (continued)

 

Recent Accounting Developments (continued)

Fair Value Option

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure eligible financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis, must be applied to an entire instrument and it is irrevocable once elected. Assets and liabilities measured at fair value pursuant to SFAS No. 159 would be reported separatelyPolicies Adopted in the statement of financial condition from those instruments measured using another accounting method. The Company adopted SFAS No. 159 on January 1, 2008, however, elected not to apply the fair value option to any of its eligible financial assets or liabilities at that date. Therefore, the adoption of SFAS No. 159 had no impact on the Company’s condensed consolidated financial statements. The Company may elect the fair value option for any future eligible financial assets or liabilities upon their initial recognition.Six Months Ended June 30, 2009

Non-Controlling Interests

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. (“SFAS No. 160”).160. SFAS No. 160 establishes accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity, separate from the parent’s equity, in the consolidated financial statements. In addition, consolidated net income should be adjusted to include the net income attributed to the non-controlling interests. The Company adopted SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.January 1, 2009. SFAS No. 160 requiresrequired retrospective adoption of the presentation and disclosure requirements for existing non-controlling interests. All other requirements of SFAS No. 160 shall beare applied prospectively. The Company is currently evaluating the potential impact of SFAS No. 160 on its consolidated financial statements.

- 9 -


PART I - FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Recent Accounting Developments(continued)

Business Combinations

In December 2007, the FASB issued SFAS No. 141 (revised),Business Combinations(“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141,Business Combinations, while retaining the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) further defines the acquirer, establishes the acquisition date and broadens the scope of transactions that qualify as business combinations. Additionally, SFAS No. 141(R) changes the fair value measurement provisions for assets acquired, liabilities assumed and any non-controlling interest in the acquiree, provides guidance for the measurement of fair value in a step acquisition, changes the requirements for recognizing assets acquired and liabilities assumed subject to contingencies, provides guidance on recognition and measurement of contingent consideration and requires that acquisition-related costs of the acquirer generally be expensed as incurred. In addition, if liabilities for unrecognized tax benefits related to tax positions assumed in a business combination are settled prior to the adoption of SFAS No. 141(R), the reversal of any remaining liability will affect goodwill. If such liabilities reverse subsequent to the adoption of SFAS No. 141(R), such reversals will affect the income tax provision in the period of reversal. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company currently is evaluating the impact of the adoption of SFAS No. 141(R) on its consolidated financial statements and on potential future business combinations.

Disclosures about Derivative Instruments

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133 (“SFAS No. 161”). SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 specifically requires enhanced disclosures addressing: a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), and its related interpretations and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods within those fiscal years beginning after November 15, 2008. The adoption of SFAS No. 161 is160 did not expected to impact BlackRock’s stockholders’ equity on the condensed consolidated statements of financial statements.

Useful Life of Intangible Assets

In April 2008, the FASB issued FSP FAS 142-3,Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS No. 142”). FSP FAS 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of FSP FAS 142-3 on its consolidated financial statements.

- 10 -


PART I - FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Recent Accounting Developments(continued)

condition.

Convertible Debt Instruments

In May 2008, the FASB issued FSP APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”).14-1. FSP APB 14-1 specifies that for convertible debt instruments that may be settled in cash upon conversion, issuers of such instruments should separately account for the liability and equity components in the statement of financial condition. The excess of the initial proceeds of the convertible debt instrument over the amount allocated to the liability component creates a debt discount which should be amortized as interest expense over the expected life of the liability. FSP APB 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and is to be applied retrospectively. At June 30,December 31, 2008, the Company had $249,997$249 principal amount of convertible debentures outstanding, which were issued in February 2005, bear interest at a rate of 2.625%, and are due in 2035. The Company is currently evaluating the impact of the adoption ofretrospectively adopted FSP APB 14-1 on its consolidated financial statements.January 1, 2009 resulting in a total cumulative impact of a $9 reduction to retained earnings at December 31, 2008. The effective borrowing rate for nonconvertible debt at the time of issuance of the 2.625% convertible debentures was estimated to be 4.3%, which resulted in $18 of the $250 aggregate principal amount of the debentures issued, or $12 after tax, being attributable to equity. At December 31, 2008 and June 30, 2009, $4 and $2, respectively, of the initial $18 debt discount remained unamortized, and is expected to be amortized to the first put date of the convertible debentures in February 2010. The Company recognized approximately $1 of additional interest expense in each of the three months ended June 30, 2009 and 2008 and $2 of additional interest expense in each of the six months ended June 30, 2009 and 2008.

See below for retrospective EPS impact of adopting FSP APB 14-1 for the three and six months ended June 30, 2008.

- 13 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)

Earnings Per Share

In June 2008, the FASB issued FSP EITF 03-6-1Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(“FSP EITF 03-6-1”). FSP EITF 03-6-1 which specifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents are considered participating securities and shallshould be included in the computation of earnings per share (“EPS”)EPS pursuant to the two-class method.method as defined in SFAS No. 128,Earnings per Share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. All prior period EPS data presented shallmust be adjusted retrospectively. ThePrior to 2009, the Company has awarded restricted stock and restricted stock units with nonforfeitable dividend equivalent rightsrights. Restricted stock and is currently evaluating the impactrestricted stock units awarded in 2009 are not considered participating securities as dividend equivalents are subject to forfeiture prior to vesting of the adoption ofaward. The Company adopted FSP EITF 03-6-1 on January 1, 2009. See below for the Company’s EPS.retrospective EPS impact of adopting FSP EITF 03-6-1 for the three and six months ended June 30, 2008.

EPS Impact of Adoption of FSP APB 14-1, FSP EITF 03-6-1 and SFAS No. 160

The following table illustrates the effect on net income attributable to BlackRock, Inc. and earnings per share upon retrospective application of FSP APB 14-1, FSP EITF 03-6-1 and SFAS No. 160 during the three and six months ended June 30, 2008.

   Three Months
Ended
June 30, 2008
  Six Months
Ended
June 30, 2008
 

Net income, as previously reported

  $274  $516  

Impact of FSP APB 14-1

   —     (1
         

Net income attributable to BlackRock, Inc., as currently reported

  $274  $515  
         

Earnings per share attributable to BlackRock, Inc. common stockholders:

    

Basic earnings per common share, as previously reported

  $2.12  $3.99  

Basic earnings per common share, as currently reported

  $2.04  $3.85  

Diluted earnings per common share, as previously reported

  $2.05  $3.87  

Diluted earnings per common share, as currently reported

  $2.00  $3.78  

 

- 1114 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

1.Significant Accounting Policies (continued)

Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)

Fair Value Measurements

In February 2008, the FASB issued FSP FAS 157-2,Effective Date of FASB Statement No157 (“FSP FAS 157-2”) (ASC 820-10,Fair Value Measurements and Disclosures). FSP FAS 157-2 delayed the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and liabilities recognized or disclosed at fair value in the financial statements on a non-recurring basis. Non-recurring non-financial assets and liabilities include goodwill, indefinite-lived and finite-lived intangible assets and long-lived assets each measured at fair value for purposes of impairment testing, asset retirement and guarantee obligations initially measured at fair value, and those assets and liabilities initially measured at fair value in a business combination or asset purchase. The adoption of the provisions of FSP FAS 157-2 on January 1, 2009 for non-recurring non-financial assets and liabilities did not have a material impact on Company’s condensed consolidated financial statements.

Fair Value Measurements Disclosures and Impairments of Securities:

In April 2009, the FASB issued the following three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”) (ASC 320-10,Investments – Debt and Equity Securities) amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. Under FSP FAS 115-2 and FAS 124-2, an other-than-temporary impairment is triggered if (1) an entity has the intent to sell the security, (2) it is more likely than not that an entity will be required to sell the security before recovery, or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity does not intend to sell a security and it is not more likely than not that the entity will be required to sell the security, but the security has suffered a credit loss, the impairment charge will be separated into the credit loss component, which is recorded in earnings, and the remainder is recorded in other comprehensive income. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.

FSP FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”) (ASC 820-10,Fair Value Measurements and Disclosures), provides additional guidance on determining when the volume and level of activity for an asset or liability has significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly.

- 15 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)

Fair Value Measurements Disclosures and Impairments of Securities (continued):

FSP FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”) (ASC 825-10,Financial Instruments), amends SFAS No. 107,Disclosures about Fair Value of Financial Instruments, to expand the required qualitative and quantitative disclosures about fair value of financial instruments to interim reporting periods for publicly traded entities. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28,Interim Financial Reporting (ASC 270-10,Interim Reporting), to require those disclosures in summarized financial information at interim reporting periods.

The adoption of all three FSPs as of April 1, 2009, did not materially impact the Company’s condensed consolidated financial statements.

Business Combinations

In December 2007, the FASB issued SFAS No. 141 (revised),Business Combinations (ASC 805,Business Combinations), and in April 2009, the FASB issued FSP 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise From Contingencies, together (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141,Business Combinations (“SFAS No. 141”), while retaining the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) further defines the acquirer, establishes the acquisition date and broadens the scope of transactions that qualify as business combinations.

Additionally, SFAS No. 141(R) changes the fair value measurement provisions for assets acquired, liabilities assumed and any non-controlling interest in the acquiree, provides guidance for the measurement of fair value in a step acquisition, changes the requirements for recognizing assets acquired and liabilities assumed subject to contingencies, provides guidance on recognition and measurement of contingent consideration and requires that acquisition-related costs of the acquirer generally be expensed as incurred. Liabilities for unrecognized tax benefits related to tax positions assumed in business combinations that settled prior to the adoption of SFAS No. 141(R) affected goodwill. If such liabilities reverse subsequent to the adoption of SFAS No. 141(R), such reversals will affect the income tax provision in the period of reversal. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted SFAS No. 141(R) on January 1, 2009. The adoption of SFAS No. 141(R) impacted the Company’s condensed consolidated financial statements in the six months ended June 30, 2009 as certain acquisition related costs in connection with the Barclays Global Investors Transaction have been expensed as incurred. See Note 16, Pending Transaction.

- 16 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)

Useful Life of Intangible Assets

In April 2008, the FASB issued FSP FAS 142-3,Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”) (ASC 350-30,IntangiblesGoodwill and Other). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS No. 142”) (ASC 350-30,Intangibles – Goodwill and Other). FSP FAS 142-3 requires that an entity shall consider its own experience in renewing similar arrangements. FSP FAS 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption on January 1, 2009 of FSP FAS 142-3 did not materially impact the Company’s condensed consolidated financial statements.

Disclosures about Derivative Instruments

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133 (“SFAS No. 161”) (ASC 815-10,Derivatives and Hedging). SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 specifically requires enhanced disclosures addressing: a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption on January 1, 2009 of the additional disclosure requirements of SFAS No. 161 did not materially impact the Company’s condensed consolidated financial statements.

Meaning of Indexed to a Company’s Own Stock

In June 2008, the FASB issued EITF No. 07-5,Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”) (ASC 815-40,Derivatives and Hedging: Contracts in Entity’s Own Entity). EITF 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. To meet the definition of “indexed to its own stock,” an instrument's contingent exercise provisions must not be based on an observable market other than the market for the issuer’s stock, and its settlement amount must be based only on those variables that are inputs to the fair value of a “fixed-for-fixed” forward or option on an entity’s equity shares. EITF 07-5 was adopted on January 1, 2009 and did not change the classification or measurement of the Company’s financial instruments.

- 17 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

1.Significant Accounting Policies (continued)

Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)

Subsequent Events

In May 2009, the FASB issued SFAS No. 165,Subsequent Events (“SFAS No. 165”) (ASC 855-10,Subsequent Events), which provides guidance to establish general standards of accounting for and disclosures of events that occur after balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is effective for interim or fiscal periods ending after June 15, 2009. The Company adopted SFAS No. 165 on June 30, 2009. The adoption of SFAS No. 165 did not materially impact the Company’s condensed consolidated financial statements. See Note 17, Subsequent Events, for further discussion.

Recent Accounting Developments

New Consolidation Guidance for Variable Interest Entities:

In June 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends the consolidation guidance for variable interest entities under FIN 46(R). The amendments include: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the primary beneficiary of a variable interest entity (“VIE”), which requires that the primary beneficiary have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, and (3) the requirement to continually reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.

The Company does not expect the adoption of SFAS No. 167 to impact net income attributable to BlackRock, Inc. or its stockholders’ equity, however, it is currently evaluating the impact to its condensed consolidated financial statements, as a result of consolidating the assets and liabilities and net income (loss) of certain VIEs in addition to a corresponding non-controlling interest liability and allocation of net income (loss) to non-controlling interests.

- 18 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

2.Investments

A summary of the carrying value of total investments is as follows:

 

  Carrying Value  June 30,
2009
  December 31,
2008
  June 30,
2008
  December 31,
2007

Available-for-sale investments

  $244,354  $263,795  $70  $101

Trading investments

   167,350   395,006   134   122

Other investments:

        

Consolidated sponsored investment funds

   730,042   760,378

Equity method

   776,462   554,016

Deferred compensation plan investments

   23,218   22,710

Cost method

   99   4,039

Consolidated sponsored investment funds (non cash management funds)

   342   349

Consolidated sponsored cash management funds

   —     326

Equity method investments

   387   501

Deferred compensation plan hedge fund equity method investments

   24   30
            

Total other investments

   1,529,821   1,341,143   753   1,206
            

Total investments

  $1,941,525  $1,999,944  $957  $1,429
            

At June 30, 2008,2009, the Company had $792,219$418 of total investments held by consolidated sponsored investment funds of which $62,177$76 and $730,042$342 were classified as trading investments and other investments, respectively.

At December 31, 2008, the Company had $728 of total investments held by consolidated sponsored investment funds of which $53 and $675 were classified as trading investments and other investments, respectively.

- 19 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

2.Investments (continued)

Available-for-sale investments

A summary of the cost and carrying value of investments classified as available-for-sale, is as follows:

 

June 30, 2009

  Cost  Gross Unrealized Carrying
Value
  Gains  Losses 
     Gross Unrealized Carrying

June 30, 2008

  Cost  Gains  Losses Value

Total available-for-sale investments:

       

Available-for-sale investments:

       

Equity securities:

       

Sponsored investment funds

  $229,894  $3,459  $(2,893) $230,460  $8  $—    $(2 $6

Collateralized debt obligations (“CDOs”)

   7,913   143   —     8,056   3   —     —      3

Other debt securities

   4,365   —     (1,256)  3,109

Other

   2,815   —     (86)  2,729

Debt securities:

       

Mortgage debt

   40   —     —      40

Asset-backed debt

   14   1   —      15

Corporate debt

   3   —     —      3

Foreign government debt

   2   1   —      3
            
            

Total available-for-sale investments

  $244,987  $3,602  $(4,235) $244,354  $70  $2  $(2 $70
                        

December 31, 2007

           

Total available-for-sale investments:

       

December 31, 2008

  Cost  Gross Unrealized Carrying
Value
  Gains  Losses 

Available-for-sale investments:

       

Sponsored investment funds

  $245,677  $5,894  $(1,217) $250,354  $109  $—    $(16 $93

Collateralized debt obligations

   10,458   53   —     10,511   6   —     (2  4

Other

   2,815   115   —     2,930

Other debt securities

   4   —     —      4
            
            

Total available-for-sale investments

  $258,950  $6,062  $(1,217) $263,795  $119  $—    $(18 $101
                        

- 12 -


PART I - FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

2.Investments (continued)

Available-for-sale investments includes debt securities received upon closure of an enhanced cash fund, in lieu of the Company’s remaining investment in the fund and securities purchased from another enhanced cash fund.

During the six months ended June 30, 20082009 and 2007,2008, the Company recorded other-than-temporary impairments of $4,853 and $1,831, respectively,$4, including $2 related to othercredit loss impairments on debt securities, and CDO available-for-sale investments.$5, respectively which was recorded in non-operating income (expense) on the condensed consolidated statements of income. The $2 credit loss impairment was determined by comparing the estimated discounted cash flows versus the amortized cost for each individual security.

The Company has reviewed the gross unrealized losses of $4,235 at$2 as of June 30, 20082009 related to available-for-sale investments,equity securities, of which $291$1 had been in a loss position for greater than twelve months, and determined that these unrealized losses were not other-than-temporary primarily because the Company has the ability and intent to hold the securities for a period of time sufficient to recoverallow for recovery of such unrealized losses. As a result, the Company recorded nodid not record additional impairments on such equity securities.

- 20 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

2.Investments (continued)

Available-for-sale investments (continued)

The Company has reviewed the gross unrealized losses of less than $1 as of June 30, 2009 related to available-for-sale debt securities, of which less than $1 has been in a loss position of greater than twelve months, and determined that these unrealized losses were not other-than-temporary primarily because the Company did not have the intent to sell the securities and it was not more likely than not that the Company would be required to sell the security prior to recovery of its amortized costs basis. As a result, the Company did not record additional impairments on such debt securities.

Trading and Other Investments

A summary of the cost and carrying value of trading and other investments is as follows:

 

   June 30, 2008  December 31, 2007
   Cost  Carrying
Value
  Cost  Carrying
Value

Trading investments:

        

Deferred compensation plan mutual fund investments

  $37,324  $44,399  $40,394  $44,680

Equity securities

   96,182   102,596   103,058   116,742

Municipal debt securities

   10,302   10,266   239,398   233,584

Foreign government debt securities

   8,311   7,945   —     —  

Corporate debt securities

   1,285   1,250   —     —  

U.S. government debt securities

   898   894   —     —  
                

Total trading investments

  $154,302  $167,350  $382,850  $395,006
                

Other investments:

        

Consolidated sponsored investment funds

  $645,583  $730,042  $721,300  $760,378

Equity method

   694,291   776,462   463,497   554,016

Deferred compensation plan hedge fund investments

   23,629   23,218   14,086   22,710

Cost method

   99   99   4,039   4,039
                

Total other investments

  $1,363,602  $1,529,821  $1,202,922  $1,341,143
                

- 13 -


PART I - FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

2.Investments (continued)

   June 30, 2009  December 31, 2008
   Cost  Carrying
Value
  Cost  Carrying
Value

Trading investments:

        

Deferred compensation plan mutual fund investments

  $39  $37  $32  $29

Equity securities

   108   76   109   75

Debt securities:

        

Municipal debt

   11   10   9   7

Foreign government debt

   9   9   8   7

Corporate debt

   1   1   1   1

U.S. government debt

   1   1   3   3
                

Total trading investments

  $169  $134  $162  $122
                

Other investments:

        

Consolidated sponsored investment funds (non cash management)

  $383  $342  $376  $349

Consolidated sponsored cash management funds

   —     —     333   326

Equity method

   705   387   752   501

Deferred compensation plan hedge fund equity method investments

   40   24   39   30
                

Total other investments

  $1,128  $753  $1,500  $1,206
                

Trading investments include certain deferred compensation plan mutual fund investments, equity and debt securities within certain consolidated sponsored investment funds and equity and debt securities held in separate accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.

- 21 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

2.Investments (continued)

Maturity Dates

The carrying value of debt securities, classified as available-for-sale, and trading or other investments, by contractual maturity at June 30, 20082009 and December 31, 20072008 is as follows:

 

  Carrying Value

Maturity date

  June 30,
2008
  December 31,
2007
  June 30,
2009
  December 31,
2008

<1 year

  $1,762  $—    $39  $329

1-5 years

   1,470   9,567

5-10 years

   3,955   28,677

After 10 years

   16,277   195,340

>1-5 years

   7   2

>5-10 years

   7   3

> 10 years

   29   14
      
      

Total

  $23,464  $233,584  $82  $348
            

At June 30, 2008 and December 31, 2007,2009, the debt securities in the table above primarily consisted of mortgage, asset-backed, municipal, corporate, U.S. and foreign government debt securities a portion of which are held by severalconsolidated sponsored investment funds thatwhich are consolidated in the Company’s condensed consolidated statements of financial condition. In addition, at December 31, 2008, the debt securities in the table above included floating rate notes and asset backed securities held by consolidated sponsored cash management funds.

Impact of Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such investments in accordance with GAAP. The investments that are owned by these consolidated sponsored investment funds are classified as other or trading investments. At June 30, 20082009 and December 31, 2007,2008, the following balances related to these funds were consolidated in the condensed consolidated statements of financial condition:

 

  June 30,
2008
 December 31,
2007
   June 30,
2009
 December 31,
2008
 

Cash and cash equivalents

  $56,317  $66,971   $49   $61  

Investments

   792,219   1,054,208    418    728  

Other net liabilities

   (7,326)  (218,337)

Other net assets (liabilities)

   (7  12  

Non-controlling interests

   (544,388)  (578,210)   (226  (491
              

Total exposure to consolidated investment funds

  $296,822  $324,632 
       

Total net interests in consolidated investment funds

  $234   $310  
       

 

- 1422 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

2.Investments (continued)

Impact of Consolidated Sponsored Investment Funds (continued)

 

BlackRock’s total exposure to consolidated sponsored investment funds of $296,822$234 and $324,632$310 at June 30, 20082009 and December 31, 2007,2008, respectively, represents the fair value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income (expense) and net income (loss) attributable to non-controlling interests. During the three months ended June 30, 2009, BlackRock took necessary steps to grant additional rights to the unaffiliated investors in one consolidated sponsored investment fund, which resulted in deconsolidation of this fund and the elimination of $85, $76, and $9 of investments, borrowings, and nonredeemable non-controlling interests, respectively. Approximately $7,336$0 and $209,729$6 of borrowings by consolidated sponsored investment funds at June 30, 20082009 and December 31, 2007,2008, respectively, iswere included in other liabilities on the condensed consolidated statements of financial condition.

The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in its operations.

 

3.Fair Value Disclosures

Assets and liabilities measured at fair value on a recurring basis at June 30, 2008 were as follows:

   Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs

(Level 3)
  Other
Investments
Not Held at
Fair Value (1)
  Investments at
June 30, 2008

Investments:

          

Available-for-sale

  $144,695  $97,994  $1,665  $   $244,354

Trading

   167,350   —     —     —     167,350

Other investments:

          

Consolidated sponsored investment funds

   —     49,654   680,388   —     730,042

Equity method

   —     56,946   681,151   38,365   776,462

Deferred compensation plan investments

   —     —     23,218   —     23,218

Cost method

   —     —     —     99   99
                    

Total investments

  $312,045  $204,594  $1,386,422  $38,464  $1,941,525
                    

(1)

Includes investments in equity method investees which are not accounted for under a fair value measure in accordance with GAAP as well as investments held at cost.

- 1523 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

3.Fair Value Disclosures

Assets measured at fair value on a recurring basis at June 30, 2009 were as follows:

   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs

(Level 3)
  Other Assets
Not Held at
Fair Value(1)
  June 30,
2009

Assets:

          

Investments:

          

Available-for-sale

  $8  $59  $3  $—    $70

Trading

   124   10   —     —     134

Other investments:

          

Consolidated sponsored investment funds (non cash management funds)

   10   1   331   —     342

Equity method

   10   —     348   29   387

Deferred compensation plan hedge fund equity method investments

   —     10   14   —     24
                    

Total investments

   152   80   696   29   957

Separate account assets

   3,020   88   3   20   3,131

Other assets(2)

   —     11   50   —     61
                    

Total assets measured at fair value

  $3,172  $179  $749  $49  $4,149
                    

(1)

Comprised of equity method investments, which include investment companies, and other assets which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investee may not represent fair value.

(2)

Includes disposal group assets and company-owned and split-dollar life insurance policies.

- 24 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

3.Fair Value Disclosures (continued)

 

TheAssets measured at fair value on a recurring basis at December 31, 2008 were as follows:

   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs

(Level 3)
  Other Assets
Not Held at
Fair Value(1)
  December 31,
2008

Assets:

          

Investments:

          

Available-for-sale

  $63  $34  $4  $—    $101

Trading

   113   9   —     —     122

Other investments:

          

Consolidated sponsored investment funds (non cash management funds)

   —     21   328   —     349

Consolidated sponsored cash management funds

   —     326   —     —     326

Equity method

   —     —     461   40   501

Deferred compensation plan hedge fund investments

   —     10   20   —     30
                    

Total investments

   176   400   813   40   1,429

Separate account assets

   2,461   85   4   73   2,623

Other assets(2)

   —     9   64   —     73
                    

Total assets measured at fair value

  $2,637  $494  $881  $113  $4,125
                    

(1)

Comprised of equity method investments, which include investment companies, and other assets which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investee may not represent fair value.

(2)

Includes disposal group assets and company-owned and split-dollar life insurance policies.

- 25 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

3.Fair Value Disclosures (continued)

Fair Value Measurements (continued)

BlackRock Pensions Limited, a wholly-owned subsidiary of the Company has $4,026,713 ofis a registered life insurance company that maintains separate account assets, representing segregated funds held for purposes of funding individual and group pension contracts, and equal and offsetting separate account liabilities of which approximately $60,000 is not held at fair value. Excluding approximately $60,000 not subject to SFAS No. 157, approximately 97%, 3%liabilities. At June 30, 2009 and less than 1% ofDecember 31, 2008, the Level 3 separate account assets were approximately $3 and liabilities are classified as Level 1, Level 2 and$4, respectively. The changes in Level 3 respectively.assets primarily relate to purchases, sales and gains/(losses). The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owner and are not reported as revenuenon-operating income (expense) on the condensed consolidated statements of income.

Level 3 assets, which include equity method investments such asand consolidated investments inof real estate funds, hedge funds, funds of hedge funds, private equity funds and funds of private equity funds, are valued based upon valuations received from internal as well as third party fund managers. Fair valuations at the underlying funds are based on a combination of methods, which may include third-party independent appraisals and discounted cash flow techniques. Direct investments in private equity companies held by funds of private equity funds are valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third party financing, changes in valuations of comparable peer companies, and the business environment of the companies and market indices, among other factors.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2009

   Investments  Other
Assets
  Other
Liabilities
 

March 31, 2009

  $666   $51   $76  

Realized and unrealized gains / (losses), net

   78    (1  —    

Purchases, sales, other settlements and issuances, net

   (48  —      (76

Net transfers in and/or out of Level 3

   —      —      —    
             

June 30, 2009

  $696   $50   $—    
             

Total net gains (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date

  $76   $(1 $—    

- 26 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

3.Fair Value Disclosures (continued)

Fair Value Measurements (continued)

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2009

   Investments  Other
Assets
 

December 31, 2008

  $813   $64  

Realized and unrealized gains / (losses), net

   (40  (15

Purchases, sales, other settlements and issuances, net

   (58  1  

Net transfers in and/or out of Level 3

   (19  —    
         

June 30, 2009

  $696   $50  
         

Total net (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date

  $(40 $(15

Changes in Level 3 Investments Measured at Fair Value on a Recurring Basis for the Three and Six Months Ended June 30, 2008

 

  Three Months
Ended
June 30, 2008
 Six Months
Ended

June 30,
2008
   Three
Months
Ended
June 30,
2008
 Six
Months
Ended
June 30,
2008
 

Beginning of period

  $1,288,580  $1,239,519   $1,289   $1,240  

Realized and unrealized gains / (losses), net

   (7,794)  (500)   (8  (1

Purchases, sales, other settlements and issuances, net

   137,269   179,036    137    179  

Net transfers in and/or out of Level 3

   (31,633)  (31,633)   (32  (32
              

June 30, 2008

  $1,386,422  $1,386,422   $1,386   $1,386  
              

Total net (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to investments still held at the reporting date

  $(12,761) $(18,859)

Total net (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date

  $(13 $(19

Realized and unrealized gains and losses recorded for Level 3 investments are reported in non-operating income (expense) on the condensed consolidated statements of income. Non-controlling interest expense is recordedA portion of net income (loss) for certain consolidated investments is allocated to non-controlling interests to reflect the portion of gains and lossesnet income (loss) not attributable to the Company.

The Company transfers assets in and/or out of Level 3 as of the beginning of the period when significant inputs, including performance attributes, used for the fair value measurement become observable or when the book value of certain equity method investments no longer represent fair value as determined under fair value methodologies.

 

- 1627 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

4.Variable Interest Entities (“VIEs”)

In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debt obligations and sponsored investment funds, which may be considered VIEs. The Company receives management fees or other incentive related fees for its services and may from time to time own equity or debt securities or enter into derivatives with the vehicles, each of which are considered variable interests. The Company enters into these variable interests principally to address client needs through the launch of such investment vehicles. The VIEs are primarily financed via capital contributed by equity and debt holders. The Company’s involvement in financing the operations of the VIEs is limited to its equity interests, unfunded capital commitments for certain sponsored investment funds and two capital support agreements for two enhanced cash funds at December 31, 2008 both of which have been terminated in 2009, due to closure of the funds.

The primary beneficiary of a VIE is the enterprise that has a variable interest (or combination of variable interests, including those of related parties) that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns or both. In order to determine whether the Company is the primary beneficiary of a VIE, management must make significant estimates and assumptions of probable future cash flows and assign probabilities to different cash flow scenarios. Assumptions made in such analyses include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.

VIEs in which BlackRock is the Primary Beneficiary

As a result of consolidating one VIE, a private sponsored investment fund, at June 30, 2009, the Company recorded $52 of net assets, primarily investments and cash and cash equivalents. These net assets were offset by $52 of nonredeemable non-controlling interests which reflect the equity ownership of third parties, on the Company’s condensed consolidated statements of financial condition. For the period ended June 30, 2009, the Company recorded a non-operating expense of $6 offset by a $6 net loss attributable to nonredeemable non-controlling interests on its condensed consolidated statements of income. The Company has no risk of loss with its involvement with this VIE.

- 28 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

 

4.Variable Interest Entities (continued)

As of December 31, 2008

      Maximum Risk of Loss
  VIE Net
Assets That
the
Company
Consolidates
  Equity
Interests
  Capital
Support
Agreements
  Total

Sponsored enhanced cash management funds

  $328  $88  $45  $133

Other sponsored investment funds

   55   —     —     —  
                

Total

  $383  $88  $45  $133
                

As a result of consolidating three private investment funds at December 31, 2008, the Company recorded $383 of net assets, primarily investments and cash and cash equivalents. These net assets were offset by $319 of non-controlling interests which reflect the equity ownership of third parties, on its condensed consolidated statements of financial condition.

The maximum risk of loss related to the capital support agreements in the table above reflect the Company’s total obligation under the capital support agreements with the two enhanced cash funds. The fair value of the Company’s obligation related to the two capital support agreements recorded at December 31, 2008 was $18.

- 29 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

4.Variable Interest Entities (continued)

VIEs in which BlackRock holds significant variable interests or is the sponsor that holds a variable interest but is not the Primary Beneficiary of the VIE

At June 30, 2009 and December 31, 2008, the Company’s carrying value of assets and liabilities and its maximum risk of loss related to VIEs in which it holds a significant variable interest or is the sponsor that holds a variable interest, but for which it was not the primary beneficiary, was as follows:

As of June 30, 2009

         Variable Interests on the Condensed
Statement of Financial Condition
   
   VIE Assets
That the
Company
Does Not
Consolidate
  VIE
Liabilities
That the
Company
Does Not
Consolidate
  Investments  Receivables  Other Net
Assets
(Liabilities)
  Maximum
Risk of
Loss

CDOs

  $6,348  $14,276  $3  $3  $(1 $22

Sponsored cash management fund

   1,333   —     —     —     —      —  

Other sponsored investment funds

   10,163   2,010   11   11   7    22
                        

Total

  $17,844  $16,286  $14  $14  $6   $44
                        

The assets of the VIEs are primarily comprised of cash and cash equivalents and investments and the liabilities are primarily comprised of debt obligations (CDO debt holders) and various accruals.

At June 30, 2009, BlackRock’s maximum risk of loss associated with these VIEs primarily relates to: (i) BlackRock’s equity investments, (ii) management fee receivables and (iii) credit protection sold by BlackRock to a third party in a synthetic CDO transaction.

- 30 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

4.Variable Interest Entities (continued)

As of December 31, 2008

         Variable Interests on the Condensed
Statement of Financial Condition
   
   VIE Assets
That the
Company
Does Not
Consolidate
  VIE
Liabilities
That the
Company
Does Not
Consolidate
  Investments  Receivables  Other Net
Assets
(Liabilities)
  Maximum
Risk of
Loss

CDOs

  $6,660  $14,487  $4  $5  $(1 $25

Sponsored cash management fund

   733   —     —     —     —      —  

Other sponsored investment funds

   5,813   440   9   9   (6  18
                        

Total

  $13,206  $14,927  $13  $14  $(7 $43
                        

The assets of the VIEs are primarily comprised of cash and cash equivalents and investments and the liabilities are primarily comprised of debt obligations (CDO debt holders) and various accruals.

At December 31, 2008, BlackRock’s maximum risk of loss associated with these VIEs primarily relates to: (i) BlackRock’s equity investments, (ii) management fee receivables and (iii) credit protection sold by BlackRock to a third party in a synthetic CDO transaction.

5.Derivatives and Hedging

For the six months ended June 30, 20082009 and 2007,2008, the Company did not hold any derivatives designated in a formal hedge relationship under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(ASC 815, Derivatives and Hedging), as amended.

During the six months ended June 30, 20082009 and 2007,2008, the Company was a counterparty to a series of total return swaps to economically hedge against changes in fair value of certain seed investments in sponsored investment products. At June 30, 20082009, the outstanding total return swaps had an aggregate notional value of approximately $73,628$36 and net realized and change in unrealized gains/(losses)losses of approximately $11,521($2) and ($3,670)$12 for the six months ended June 30, 20082009 and 2007,2008, respectively, which were included in non-operating income (expense) onin the Company’s condensed consolidated statements of income. At June 30, 2009, an unrealized gain of less than $1 was included in other assets on the condensed consolidated statement of financial condition.

- 31 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

5.Derivatives and Hedging (continued)

In December 2007, BlackRock entered into capital support agreements, up to $100,000,$100, with two enhanced cash funds. These capital support agreements arewere backed by letters of credit (“LOCs”) issued under BlackRock’s revolving credit facility (see Note 7 for further discussion).facility. In December 2008, the capital support agreements were modified to be up to $45 and were no longer backed by the letters of credit. In January and May 2009, the capital support agreements were terminated, due to the closure of the related funds. During the six months ended June 30, 2008,2009, the Company provided approximately $1,000$4 of capital contributions to these twothe funds under the capital support agreements. BlackRock determined that the capital support agreements qualified as derivatives under SFAS No. 133. At June 30, 2008 and December 31, 2007,2008, the derivative liabilitiesliability for the fair value of the capital support agreements for the two funds totaled approximately $9,100 and $12,000, respectively, which are recorded in other liabilities on the condensed consolidated statements of financial condition.$18. The amountfair value of these liabilities will increase or decreaseincreased and decreased as BlackRock’s obligationsobligation under the capital support agreements fluctuateguarantee fluctuated based on the fair value of the derivatives.derivative. Upon closure of the funds, the liability decreased $11, while the change in the liability was included in general and administration expenses.

 

5.6.Goodwill

Goodwill at June 30, 20082009 and changes during the six months ended June 30, 20082009 were as follows:

 

December 31, 2007

  $5,519,714 

Goodwill adjustments related to:

  

Quellos

   18,297 

Other

   (2,837)
     

Total goodwill adjustments

   15,460 
     

June 30, 2008

  $5,535,174 
     

December 31, 2008

  $5,533

Net additions related to:

  

Quellos

   189

Other

   1
    

June 30, 2009

  $5,723
    

During the six months ended June 30, 2008 goodwill of2009, the Company increased goodwill by $15,460. Approximately $44,100 was recorded as additional goodwill due$190. The increase relates primarily to a $156 cash payment and a common stock issuance of $43 related to the release of 280,519 common shares to Quellos, which were heldfirst contingent payment in escrow in accordanceconnection with the Quellos asset purchase agreement. This increase was partiallyTransaction, offset by a $10 decline in goodwill of approximately $15,900 as a result of the Company’s review of the Quellos purchase price allocation in the three months ended March 31, 2008 and a decrease of approximately $10,200 related to tax benefits realized from tax-deductible goodwill in excess of book goodwill.

At June 30, 2008,2009, the balance of the Quellos tax-deductible goodwill in excess of book goodwill was approximately $427,500.$391. Goodwill related to the Quellos Transaction will continue to be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill.

 

- 1732 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

6.7.Intangible Assets

The carrying amounts of identifiable intangible assets are summarized as follows:

 

   Indefinite-lived
intangible assets
  Finite-lived
intangible assets
  Total 

December 31, 2007

  $5,351,132  $1,201,990  $6,553,122 

Purchase price adjustments

   27,000   106   27,106 

Amortization expense

   —     (73,141)  (73,141)
             

June 30, 2008

  $5,378,132  $1,128,955  $6,507,087 
             
   Indefinite-lived
intangible assets
  Finite-lived
intangible assets
  Total 

December 31, 2008

  $5,378  $1,063   $6,441  

Addition

   —     2    2  

Amortization expense

   —     (72  (72
             

June 30, 2009

  $5,378  $993   $6,371  
             

The purchase price adjustments to intangible assets duringIn April 2009, the six months ended June 30, 2008 primarily related toCompany acquired $2 of finite-life management contracts with a five-year estimated useful life associated with the Company’s reviewacquisition of its purchase price allocation in the three months ended March 31, 2008 related to the net assets acquired from Quellos.R3 Capital Partners funds.

 

7.8.Borrowings

Short-Term Borrowings

In August 2007, the Company entered into a five-year $2,500,000$2,500 unsecured revolving credit facility (“the (the “2007 Facility”2007 facility”), which permits the Company to request an additional $500,000 of borrowing capacity, subject to lender credit approval, up to a maximum of $3,000,000.. The 2007 Facilityfacility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to EBITDA,earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied at June 30, 2008.2009.

At June 30, 2008,2009, the Company had $300,000$200 outstanding under the 2007 Facilityfacility with an interest rates between 2.655% to 5.105%rate of 0.49% and a maturity dates betweendate during July 2008 and September 2008.2009. During July 20082009, the Company repaid $100,000rolled over the $200 in borrowings with an interest rate of the balance outstanding.0.47% and a maturity date in August 2009.

In addition, in December 2007, in order to support two enhanced cash funds that BlackRock manages, BlackRock elected to procure two LOCsLehman Commercial Paper, Inc. has a $140 participation under the 2007 Facility totaling in aggregate $100,000.facility; however, BlackRock does not expect that Lehman Commercial Paper, Inc. will honor its commitment to fund additional amounts.

Bank of America, a related party, has a $140 participation under the 2007 facility.

In June 2008,2009, BlackRock Japan Co., Ltd., a wholly owned subsidiary of the Company, entered into arenewed its five billion Japanese yen commitment-line agreement with a banking institution (the “Japan Commitment-line”). The for a term of the Japan Commitment-line is one year and interest will accrue at the applicable Japanese short-term prime rate.year. The Japan Commitment-line is intended to provide liquidity flexibility for operating requirements in Japan. At June 30, 2008,2009, the Company had no borrowings outstanding onunder the Japan Commitment-line.

Long-Term Borrowings

At June 30, 2008, the estimated fair value of the Company’s $249,997 aggregate principal amount of convertible debentures was $447,225. The fair value was estimated using a market price as of the end of June 2008.

At June 30, 2008, the carrying value and the estimated fair value of the Company’s $700,000 long-term notes was $694,819 and $695,926, respectively. The fair value was estimated using an applicable bond index as of the end of June 2008.

 

- 1833 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

8.Borrowings (continued)

Convertible Debentures

The carrying value of the convertible debentures included the following:

   June 30,
2009
  December 31,
2008
 

2.625% Convertible debentures due in 2035

   

Maturity amount

  $249   $249  

Unamortized discount

   (2  (4
         

Total

  $247   $245  
         

The Company recognized $6 in each of the six months ended June 30, 2009 and 2008 of interest expense, comprised in both periods of $4 related to the coupon and $2 related to amortization of the discount. At June 30, 2009, the estimated fair value of the convertible debentures was $442, which was estimated using a market price at June 30, 2009.

Long-Term Borrowings

The carrying value of long-term borrowings included the following:

   June 30,
2009
  December 31,
2008
 

6.25% Senior notes due in 2017

   

Maturity amount

  $700   $700  

Unamortized discount

   (5  (5
         

Total long-term senior notes

   695    695  

Other long-term borrowings

   —      2  
         

Total long-term borrowings

  $695   $697  
         

At June 30, 2009, the estimated fair value of the senior notes was $699, which was estimated using an applicable bond index at June 30, 2009.

- 34 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

9.Related Party TransactionTransactions

On February 29, 2008,At June 30, 2009, the Company was committed to provide financing if needed, of up to $60,000$60, until March 2010, to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that is managed by a subsidiary of BlackRock. FinancingThe financing is collateralized by Anthracite pledging its ownership interest in an investment fund which is also managed by a subsidiary of BlackRock. Borrowings of $52,500, which were outstanding at March 31, 2008, were repaid in April 2008. Subsequent toAt June 30, 2009, $33.5 of financing was outstanding which matured in July 2009. Upon maturity Anthracite rolled over the borrowings with a new maturity date of October 2009. As of June 2009, the value of the collateral was estimated to be $28.5, which resulted in the Company reducing the outstanding balance included in due from related parties on the Company’s condensed consolidated statement of financial condition by $5 and recorded a charge to general and administration expense. Based on the value of the collateral and the borrowings outstanding of such date, the Company has no obligation to loan new amounts to Anthracite under this facility. The Company has granted waivers for certain breaches of financial covenants of Anthracite’s credit facility.

In July 2008, Anthracite borrowed $30,000the Company entered into an amended and restated stockholder agreement and an amended and restated global distribution agreement with Merrill Lynch.

These changes to the stockholder agreement with Merrill Lynch, among other items, (i) provide Merrill Lynch with additional flexibility to form or acquire asset managers substantially all of the business of which is devoted to non-traditional investment management strategies such as short selling, leverage, arbitrage, specialty finance and quantitatively-driven structured trades; (ii) expand the definition of change in control of Merrill Lynch to include the disposition of two-thirds or more of its Global Private Client business; (iii) extend the general termination date to the later of July 16, 2013 or the date Merrill Lynch's beneficial ownership of BlackRock voting securities falls below 20%; and (iv) clarify certain other provisions in the agreement.

The changes in the global distribution agreement in relation to the prior agreement, among other things, (i) provide for an extension of the term to five years from the date of a change in control of Merrill Lynch (to January 1, 2014 following Bank of America’s acquisition of Merrill Lynch) and one automatic 3-year extension if certain conditions are satisfied; (ii) strengthen the obligations of Merrill Lynch to achieve revenue neutrality across the range of BlackRock products distributed by Merrill Lynch if the pricing or structure of particular products is required to be changed; (iii) obligate Merrill Lynch to seek to obtain distribution arrangements for BlackRock products from buyers of any portion of its distribution business on the same terms as the global distribution agreement for a period of at least 3 years; and (iv) restrict the manner in which products managed by alternative asset managers in which Merrill Lynch has an interest rate of 5.295%.may be distributed by Merrill Lynch.

In connection with the closings under the exchange agreements, (see Note 11, Capital Stock), on February 27, 2009 BlackRock entered into a second amended and restated stockholder agreement with Merrill Lynch and an amended and restated implementation and stockholder agreement with PNC, and a third amendment to the share surrender agreement with PNC.

- 35 -


PART I – FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

9.Related Party Transactions (continued)

The changes contained in the amended and restated stockholder agreement with Merrill Lynch, in relation to the prior agreement, among other things, (i) revised the definitions of “Fair Market Value,” “Ownership Cap” and “Significant Stockholder”; and (ii) amended or supplemented certain other definitions and provisions therein to incorporate series B preferred stock and series C preferred stock, respectively. The changes contained in the amended and restated stockholder agreement with PNC, in relation to the prior agreement, among other things, (i) revised the definitions of “Fair Market Value,” “Ownership Cap,” “Ownership Percentage,” “Ownership Threshold” and “Significant Stockholder”; and (ii) amended or supplemented certain other provisions therein to incorporate series B preferred stock and series C preferred stock, respectively.

The amendment to the share surrender agreement provided for the substitution of series C preferred stock for the shares of common stock subject to the share surrender agreement.

10.Restructuring Charges

During the three months ended March 31, 2009, the Company continued to reduce its workforce globally. This action was the result of business reengineering efforts designed to streamline operations, enhance competitiveness and better position the Company in the asset management marketplace. The Company recorded a pre-tax restructuring charge of $22 ($14 after-tax) for the three months ended March 31, 2009. This charge was comprised of $15 of severance and associated outplacement costs, $4 of property costs associated with the lease payments for the remaining term in excess of the estimated sublease proceeds and $3 of expenses related to the accelerated amortization of previously granted stock-based compensation awards.

The following table presents a rollforward of the Company’s restructuring liability, which is included within other liabilities on the Company’s condensed consolidated statements of financial condition.

Liability as of December 31, 2008

  $21  

Additions

   22  

Cash payments

   (30

Non-cash charges

   (3
     

Liability as of June 30, 2009

  $10  
     

- 36 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

11.Capital Stock

On January 1, 2009, Bank of America acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and PNC pursuant to which each agreed to exchange a portion of the BlackRock common stock it held for an equal number of shares of non-voting participating preferred stock. On February 27, 2009, Merrill Lynch exchanged (i) 49,865,000 shares of BlackRock’s common stock for a like number of shares of BlackRock’s series B non-voting participating preferred stock, and (ii) 12,604,918 shares of BlackRock’s series A preferred stock for a like number of shares of series B preferred stock, and PNC exchanged (i) 17,872,000 shares of BlackRock’s common stock for a like number of shares of series B preferred stock and (ii) 2,889,467 shares of BlackRock’s common stock for a like number of shares of BlackRock’s series C non-voting participating preferred stock. On June 30, 2009, Bank of America/Merrill Lynch owned approximately 4.6% of BlackRock’s voting common stock and 46.3% of BlackRock’s capital stock on a fully diluted basis, and PNC owned approximately 43.9% of BlackRock’s voting common stock and 30.8% of BlackRock’s capital stock on a fully diluted basis.

Below is a summary description of the series B and C preferred stock issued in the exchanges.

The series B non-voting participating preferred stock:

is non-voting except as otherwise provided by applicable law;

participates in dividends on a basis generally equal to the common stock;

benefits from a liquidation preference of $0.01 per share; and

is mandatorily convertible to BlackRock common stock upon transfer to an unrelated party.

The series C non-voting participating preferred stock:

is non-voting except as otherwise provided by applicable law;

participates in dividends on a basis generally equal to the common stock;

benefits from a liquidation preference of $40.00 per share; and

is only convertible to BlackRock common stock upon the termination of the obligations of PNC under its share surrender agreement with BlackRock.

In June 2009, the Company issued 2,133,713 shares of BlackRock's common stock at $140.60 per share. The proceeds of the issuance will be used to fund the purchase of Barclays Global Investors (see Note 16, Pending Transaction).

- 37 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

11.Capital Stock (continued)

At June 30, 2009 and December 31, 2008, BlackRock had 20,000,000 series A non-voting participating preferred shares, $0.01 par value, authorized. At June 30, 2009, BlackRock had 150,000,000 and 6,000,000 series B and series C, respectively non-voting participating preferred shares, $0.01 par value, authorized.

The Company’s common and preferred shares issued and outstanding and activity for the six months ended June 30, 2009 was as follows:

  Shares Issued Shares Outstanding
  Common
Shares
  Escrow
Common
Shares
  Treasury
Common
Shares
  Preferred
Shares

Series A
  Preferred
Shares
Series B
 Preferred
Shares
Series C
 Common
Shares
  Preferred
Shares

Series A
  Preferred
Shares
Series B
 Preferred
Shares
Series C

December 31, 2008

 118,573,367   (911,266 (370,991 12,604,918   —   —   117,291,110   12,604,918   —   —  

Issuance of common shares to institutional investor

 2,133,713   —     —     —     —   —   2,133,713   —     —   —  

Issuance of common shares for contingent consideration

 330,341   —     —     —     —   —   330,341   —     —   —  

Net issuance of common shares related to employee stock transactions

 415,503   —     422,390   —     —   —   837,893   —     —   —  

Exchange of preferred shares series A for preferred shares series B

 —     —     —     (12,604,918 12,604,918 —   —     (12,604,918 12,604,918 —  

Exchange of common shares for preferred shares series B

 (67,737,000 —     —     —     67,737,000 —   (67,737,000 —     67,737,000 —  

Exchange of common shares for preferred shares series C

 (2,889,467 —     —     —     —   2,889,467 (2,889,467 —     —   2,889,467

PNC capital contribution

 —     —     (51,399 —     —   —   (51,399 —     —   —  
                          

June 30, 2009

 50,826,457   (911,266 —     —     80,341,918 2,889,467 49,915,191   —     80,341,918 2,889,467
                          

- 38 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

12.Commitments and Contingencies

Commitments

Investment / Loan Commitments

At June 30, 2008,2009, the Company had approximately $692,275$277 of certain investment and loan commitments relating primarily to real estate funds, hedge funds, funds of private equity funds, real estate funds and a warehouse entity established for certain private equity funds ofhedge funds. Amounts to be funded generally are callable at any point prior to the expiration of the commitment.

Contingencies

Legal Proceedings

From time to time, BlackRock has receivedreceives subpoenas or other requests for information from various U.S. federal, and state governmental and regulatory authorities and various information requests from the SEC in connection with certain industry-wide or other investigations of U.S. mutual fund matters. BlackRockor proceedings. It is continuingBlackRock’s policy to cooperate fully in these matters. From time to time, BlackRock is subject to other regulatory inquiries and proceedings.

with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations class actions, and other litigation and regulatory proceedings arising in connection with BlackRock’s activities. While Merrill Lynch has agreed to indemnify the Company for certain of the pre-closing liabilities related to legal and regulatory proceedings acquired in the MLIM Transaction, entities that BlackRock now owns may be named as defendants in these matters and the Company’s reputation may be negatively impacted. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which potentially could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.

Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits will have a material adverse effect on BlackRock’s earnings, financial position, or cash flows although, at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations in any future reporting period.

- 19 -


PART I - FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

9.Commitments and Contingencies (continued)

Contingencies (continued)

Indemnifications

In the ordinary course of business, BlackRock enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.

Under the Transaction Agreement in the MLIM Transaction, the Company has agreed to indemnify Merrill Lynch for losses it may incur arising from (1) any alleged or actual breach, failure to comply, violation or other deficiency with respect to any regulatory or fiduciary requirements relating to the operation of BlackRock’s business, (2) any fees or expenses incurred or owed by BlackRock to any brokers, financial advisors or comparable other personpersons retained or employed by BlackRock in connection with the MLIM Transaction, and (3) certain specified tax covenants.

Management believes that the likelihood of any liability arising under these indemnification provisions is remote. Management cannot estimate any potential maximum exposure due both to the remoteness of any potential claims and the fact that items that would be included within any such calculated claim would be beyond the control of BlackRock. Consequently, no liability has been recorded on the condensed consolidated statements of financial condition.

 

- 2039 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

10.12.Commitments and Contingencies (continued)

Contingent Payments Related to Quellos Transaction

On October 1, 2007, the Company acquired the fund of funds business of Quellos. As part of this transaction Quellos is entitled to receive two contingent payments upon achieving certain investment advisory revenue measures through December 31, 2010, totaling up to an additional $969 in a combination of cash and stock. The first contingent payment, of up to $374, was payable in second quarter 2009 and the second contingent payment, of up to $595 is payable in cash in 2011.

During second quarter 2009, the Company determined the first contingent payment to be $219, of which $11 was previously paid in cash during 2008. Of the remaining $208, $156 was paid in cash and $52 was paid in common stock, or approximately 330,000 shares converted at a price of $157.33. Quellos may also be entitled to a “catch-up” payment if certain performance measures are met in 2011 as the value of the first contingent payment was less than $374.

13.Stock-Based Compensation

The components of the Company’s stock-based compensation expense are comprised of the following:

 

  Three Months Ended
June 30,
  Six Months Ended
June 30,
  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2008  2007  2008  2007  2009  2008  2009  2008

Stock-based compensation:

                

Restricted stock and restricted stock units (“RSUs”)

  $47,780  $32,463  $98,927  $59,565  $59  $48  $123  $99

Stock options

   839   3,533   4,372   5,889   3   —     6   4

Long-term incentive plans (funded by PNC1)

   14,751   13,933   29,772   25,976

Long-term incentive plans funded by PNC

   15   15   30   30
                        

Total stock-based compensation

  $63,370  $49,929  $133,071  $91,430  $77  $63  $159  $133
                        

- 40 -


PART I – FINANCIAL INFORMATION (continued)

 

1

Item 1.

The PNC Financial Services Group, Inc.Statements (continued)

13.Stock-Based Compensation (continued)

Stock Options

Options outstanding at June 30, 20082009 and changes during the six months ended June 30, 20082009 were as follows:

 

Outstanding at

  Shares
Under
Option
  Weighted
Average
Exercise
Price

December 31, 2007

  4,101,165  $86.19

Exercised

  (474,798) $37.30

Forfeited

  (298,635) $169.07
     

June 30, 2008

  3,327,732  $85.73
     

Outstanding at

  Shares
Under
Option
  Weighted
Average
Exercise
Price

December 31, 2008

  3,140,517   $88.82

Exercised

  (310,846 $36.64
     

June 30, 2009

  2,829,671   $94.55
     

The aggregate intrinsic value of options exercised during the six months ended June 30, 20082009 was $82,543.

- 21 -


PART I - FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

10.Stock-Based Compensation (continued)

Stock Options (continued)

The three and six months ended June 30, 2008 included a cumulative adjustment to the estimated forfeiture rate for unvested stock options as a result of additional data on actual forfeiture activity.$33.

At June 30, 2008,2009, the Company had $39,752$27 in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 3.32.3 years.

Restricted Stock and RSUs

Restricted stock and RSUs outstandingRSU activity at June 30, 20082009 and changes during the six months ended June 30, 20082009 were as follows:

 

Outstanding at

  Unvested
Restricted
Stock and
RSUs
 Weighted
Average
Grant Date
Fair Value
  Unvested
Restricted
Stock and
Units
 Weighted
Average
Grant Date
Fair Value

December 31, 2007

  3,709,008  $158.01

December 31, 2008

  4,603,953   $174.24

Granted

  1,551,502  $202.48  1,855,077   $117.73

Converted

  (433,055) $149.05  (818,013 $179.46

Forfeited

  (183,239) $160.03  (192,807 $156.37
          

June 30, 2008

  4,644,216  $173.62

June 30, 2009

  5,448,210   $154.85
          

- 41 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

13.Stock-Based Compensation (continued)

The Company values restricted stock and RSUs at their grant-date fair value as measured by BlackRock’s common stock price.

In January 2008,2009, the Company granted 295,63323,417 RSUs as long-term incentive compensation, which will be partially funded by shares currently held by PNC (seeLong-Term Incentive Plans Funded by PNC below). The awards cliff vest five years from the date of grant.

In January 2008,2009, the Company granted 1,212,7591,789,685 RSUs to employees as part of annual incentive compensation under the BlackRock, Inc. 1999 Stock Award and Incentive Plan (the “Award Plan”) that vest ratably over three years from the date of grant.

At June 30, 2008,2009, there was $565,459$442 in total unrecognized compensation cost related to unvested restricted stock and RSUs. The unrecognized compensation cost is expected to be recognized over the remaining weighted average period of 2.72.1 years.

- 22 -


PART I - FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

10.Stock-Based Compensation (continued)

Long-Term Incentive Plans Funded by PNC

Under a share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock common stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”).

During 2007, the Company granted additional long-term incentive awards, out of the Award Plan of approximately 1,600,000 RSUs that will be settled using BlackRock shares held by PNC in accordance with the share surrender agreement. The RSU awards vest on September 29, 2011 provided that BlackRock has actual GAAP earnings per share of at least $5.20 in 2009, $5.52 in 2010 or $5.85 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards. The value of the RSUs was calculated using BlackRock’s closing stock price on the date of grant. The grant date fair value of the RSUs is being amortized as an expense on the straight-line method over the vesting period, net of expected forfeitures. The maximum value of awards that may be funded by PNC, prior to the earlier of September 29, 2011 or the date the performance criteria are met is approximately $271,000,$271, all of which has been granted as of June 30, 2008.2009.

 

- 2342 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

11.14.Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:share for the three months ended June 30, 2009 and 2008:

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
   2008  2007  2008  2007

Net income

  $274,058  $222,244  $515,729  $417,632
                

Basic weighted-average shares outstanding

   129,569,325   128,544,894   129,242,591   128,676,577

Dilutive potential shares from stock options and restricted stock units

   2,725,447   2,275,810   2,702,458   2,363,035

Dilutive potential shares from convertible debt

   655,806   562,766   668,773   540,509

Dilutive potential shares from acquisition-related contingent stock payments

   576,135   —     576,135   —  
                

Dilutive weighted-average shares outstanding

   133,526,713   131,383,470   133,189,957   131,580,121
                

Basic earnings per share

  $2.12  $1.73  $3.99  $3.25
                

Diluted earnings per share

  $2.05  $1.69  $3.87  $3.17
                
   Three Months Ended
June 30,
   2009  2008
   Basic  Diluted  Basic  Diluted

Net income attributable to BlackRock, Inc. allocated to:

        

Common shares

  $212  $212  $264  $264

Participating RSUs

   6   6   10   10
                

Total net income attributable to BlackRock, Inc.

  $218  $218  $274  $274
                

Weighted-average common shares outstanding

   130,928,916   130,928,916   129,569,325   129,569,325

Dilutive effect of stock options and non-participating restricted stock units

     1,392,767     1,231,272

Dilutive effect of convertible debt

     1,042,928     655,806

Dilutive effect of acquisition-related contingent stock payments

     —       576,135
            

Total weighted-average shares outstanding

     133,364,611     132,032,538
            

Earnings per share attributable to BlackRock, Inc., common stockholders:

  $1.62  $1.59  $2.04  $2.00

- 43 -


PART I – FINANCIAL INFORMATION (continued)

Item 1.Financial Statements (continued)

14.Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the six months ended June 30, 2009 and 2008:

   Six Months Ended
June 30,
   2009  2008
   Basic  Diluted  Basic  Diluted

Net income attributable to BlackRock, Inc. allocated to:

        

Common shares

  $294  $294  $498  $498

Participating RSUs

   8   8   17   17
                

Total net income attributable to BlackRock, Inc.

  $302  $302  $515  $515
                

Weighted-average common shares outstanding

   130,574,535   130,574,535   129,242,591   129,242,591

Dilutive potential shares from stock options and non-participating restricted stock units

     1,154,851     1,325,001

Dilutive potential shares from convertible debt

     939,309     668,773

Dilutive potential shares from acquisition-related contingent stock payments

     —       576,135
            

Total weighted-average shares outstanding

     132,668,695     131,812,500
            

Earnings per share attributable to BlackRock, Inc., common stockholders:

  $2.25  $2.22  $3.85  $3.78

Due to the similarities in terms between BlackRock series A, B and C non-voting participating preferred stock and the Company’s common stock, the Company considers the series A, B and C non-voting participating preferred stock to be common stock equivalents for purposes of earnings per share calculations. As such, the Company has included the outstanding series A, B and C non-voting participating preferred stock in the calculation of average basic and diluted shares outstanding for the three and six months ended June 30, 20082009 and 2007.2008.

For the three and six months ended June 30, 2009, 1,244,100 stock options and 1,249,792 RSUs and stock options, respectively, were excluded from the calculation of diluted earnings per share because to include them would have an anti-dilutive effect.

Shares issued in acquisition

On October 1, 2007, the Company acquired the fund of funds business of Quellos andQuellos. The Company issued 1,191,785 shares of newly-issued BlackRock common stock that were placed into an escrow account. In April 2008, 280,519 common shares were released to Quellos in accordance with the Quellos asset purchase agreement, which resulted in an adjustment to the recognized purchase price and had a dilutive effect in the three and six months ended June 30, 2008. AdditionalThe remaining 911,266 common shares may have a dilutive effect in future periods based on the timing of the release of shares from the escrow account in accordance with the Quellos asset purchase agreement. The release of the remaining escrow shares could begin to occur in 2009 and be completed in 2010.

 

- 2444 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

12.15.Segment Information

The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company believes it operates in one business segment in accordance with SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information (ASC 280-10,Segment Reporting).

The following table illustrates investment advisory and administration base and performance feefees,BlackRock Solutions and advisory, distribution fees and other revenue by asset class for the three and six months ended June 30, 2009 and 2008, and 2007, respectively.

 

  Three Months Ended
June 30,
  Six Months Ended
June 30,
  Three Months Ended
June 30,
  Six Months Ended
June 30,

Investment advisory and administration fees

  2008  2007  2008  2007
  2009  2008  2009  2008

Fixed income

  $234,542  $223,041  $457,267  $442,659  $212  $234  $414  $457

Cash management

   166   184   341   359

Equity and balanced

   630,805   535,986   1,271,443   1,015,525   384   631   727   1,271

Cash management

   183,505   120,189   358,059   234,786

Alternative investments

   169,584   97,114   306,088   179,286

Alternative investment products

   105   169   195   305
                        

Total investment advisory and administration fees

  $1,218,436  $976,330  $2,392,857  $1,872,256

Total investment advisory and administration base and performance fees

   867   1,218   1,677   2,392

BlackRock Solutions and advisory

   116   100   256   160

Distribution fees

   23   34   48   69

Other revenue

   23   35   35   66
                        

Total revenue

  $1,029  $1,387  $2,016  $2,687
            

In addition, distribution and otherThe following tables illustrate the Company’s total revenue which includesBlackRock Solutions, totaled $168,515 and $294,232 for the three and six months ended June 30, 2008, as compared to $120,6932009 and $230,141 for the three and six months ended June 30, 2007.

The following table illustrates the Company’s total revenue2008 by geographic region for the three and six months ended June 30, 2008 and 2007.region. These amounts are aggregated on a legal entity jurisdiction basis and do not necessarily reflect where the customer is sourced.

 

  Three Months Ended
June 30,
   Three Months Ended
June 30,
 

Revenue

  2008  % of
total
 2007  % of
total
 

Revenues

  2009  % of
total
 2008  % of
total
 

North America

  $915,093  66.0% $716,099  65.3%  $764  74 $915  66

Europe

   389,113  28.1%  340,354  31.0%   223  22  389  28

Asia-Pacific

   82,745  5.9%  40,570  3.7%   42  4  83  6
                          

Total revenue

  $1,386,951  100.0% $1,097,023  100.0%

Total revenues

  $1,029  100 $1,387  100
                          
  Six Months Ended
June 30,
 

Revenue

  2008  % of
total
 2007  % of
total
 

North America

  $1,744,277  64.9% $1,372,961  65.3%

Europe

   806,166  30.0%  652,542  31.0%

Asia-Pacific

   136,646  5.1%  76,894  3.7%
             

Total revenue

  $2,687,089  100.0% $2,102,397  100.0%
             

   Six Months Ended
June 30,
 

Revenues

  2009  % of
total
  2008  % of
total
 

North America

  $1,531  75 $1,744  65

Europe

   414  21  806  30

Asia-Pacific

   71  4  137  5
               

Total revenues

  $2,016  100 $2,687  100
               

 

- 2545 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 1.Financial Statements (continued)

 

12.15.Segment Information (continued)

 

The following table illustratesshows the Company’s long-lived assets, including goodwill and property and equipment at June 30, 20082009 and December 31, 2007 by geographic region. These amounts are aggregated on a legal entity jurisdiction basis.2008 and does not necessarily reflect where the asset is physically located.

 

Long-lived Assets

  June 30,
2008
 December 31,
2007
 

Long-Lived Assets

  June 30,
2009
 December 31,
2008
 

North America

  $5,707,511  98.4% $5,695,172  98.4%  $5,899  99 $5,714  99

Europe

   38,597  0.7%  34,584  0.6%   28  0  27  0

Asia-Pacific

   54,466  0.9%  56,418  1.0%   48  1  52  1
                          

Total long-lived assets

  $5,800,574  100.0% $5,786,174  100.0%  $5,975  100 $5,793  100
                          

Revenue and long-lived assets in North America are primarily is comprised of the United States, while Europe primarily is primarily comprised of the United Kingdom and Asia-Pacific primarily is primarily comprised of Japan, Australia and Japan.Hong Kong.

 

13.16.Pending Transaction

BlackRock will acquire from Barclays all of the outstanding equity interests of subsidiaries of Barclays conducting the business of BGI in exchange for an aggregate of approximately 37.8 million shares of BlackRock common stock and participating preferred stock, subject to certain adjustments, and $6,600 in cash, subject to certain adjustments (the “BGI Transaction”). The value of the 37.8 million shares will be determined at the time of closing, which is expected in December 2009, or early 2010, pending regulatory approvals and satisfaction of other customary closing conditions.

The shares of common stock issued to Barclays pursuant to the BGI Transaction will represent approximately 4.9% of the outstanding shares of common stock of BlackRock immediately following the closing of the transaction, and the total equity consideration will represent approximately an aggregate 19.9% economic interest in BlackRock immediately following the closing of the transaction.

The cash portion of the purchase price will be funded through a combination of existing cash, committed debt facilities and proceeds from the issuance of 19.9 million capital shares to a group of institutional investors, including PNC. Both the debt facilities and the issuance of capital shares are 100% committed subject to the closing of the BGI Transaction.

17.Subsequent Events

Material Definitive Agreements

In July 2008, theThe Company entered into an Amended and Restated Stockholder Agreement (“Stockholder Agreement”) and an Amended and Restated Global Distribution Agreement (“Global Distribution Agreement”) with Merrill Lynch.

The changes in the Stockholder Agreement in relation to the prior agreement, among other things, (i) provide Merrill Lynch with some additional flexibility to form or acquire asset managers substantially all of the business of which is devoted to nontraditional investment management strategies such as short selling, leverage, arbitrage, specialty finance and quantitatively-driven structured trades; (ii) expand the definition of change in control of Merrill Lynch to include the disposition of two-thirds or more of its Global Private Client business; (iii) extend the general termination date to the later of July 16, 2013 orhas reviewed subsequent events occurring through August 7, 2009, the date Merrill Lynch’s beneficial ownership of BlackRock falls below 20%;that these financial statements were issued and (iv) clarify certain other provisions in the agreement.

The changes in the Global Distribution Agreement in relation to the prior agreement, among other things, (i) provide for an extension to September 29, 2013, andetermined that no subsequent events occurred that would require accrual or additional 5-year extension after the date of a change in control of Merrill Lynch and one automatic 3-year extension if certain conditions are satisfied; (ii) strengthen the obligations of Merrill Lynch to achieve revenue neutrality across the range of BlackRock products distributed by Merrill Lynch if the pricing or structure of particular products is required to be changed; (iii) obligate Merrill Lynch to seek to obtain distribution arrangements for BlackRock products from buyers of any portion of its distribution business on the same terms as the Global Distribution Agreement for a period of at least 3 years; and (iv) restrict the manner in which products managed by alternative asset managers in which Merrill Lynch has an interest may be distributed by Merrill Lynch.

Acquisition of Impact Investing

On August 1, 2008, the Company acquired Impact Investing, a Sydney, Australia based software development company specializing in equity portfolio management and analytical software tools. The total consideration to be paid in the acquisition is not expected to be material to the Company’s condensed consolidated financial statements.disclosure.

 

- 2646 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This report, and other statements that BlackRock may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to BlackRock’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

BlackRock cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to risk factors previously disclosed in BlackRock’s SECSecurities and Exchange Commission (“SEC”) reports and those identified elsewhere in this report the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes and volatility in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock’s investment products; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions or divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock, Barclays PLC, Bank of America Corporation, Merrill Lynch & Co., Inc. or PNC;The PNC Financial Services Group, Inc.; (11) terrorist activities and international hostilities, which may adversely affect the general economy, domestic and local financial and capital markets, specific industries or BlackRock; (12) the ability to attract and retain highly talented professionals; (13) fluctuations in the carrying value of BlackRock’s investments; (14) fluctuations in foreign currency exchange rates, which may adversely affect the value of investment advisory and administration fees earned by BlackRock or the carrying value of certain assets and liabilities denominated in foreign currencies; (15) the impact of changes to tax legislation and, generally, the tax position of the Company; (16) BlackRock’s ability to successfully integrate the MLIM and Quellos Businesses with its existing business; (17) the ability of BlackRock to effectively manage the former MLIM and Quellos assets along with its historical assets under management; (18) BlackRock’s success in maintaining the distribution of its products; and (19)(17) the impact of BlackRock electing to provide support to its products from time to time.time; (18) the impact of problems at other financial institutions or the failure or negative performance of products at other financial institutions; and (19) the ability of BlackRock to complete the transaction with Barclays Bank PLC and integrate the operations of Barclays Global Investors.

 

- 2747 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Overview

BlackRock, Inc. (“BlackRock” or the “Company”) is one of the largest publicly traded investment management firms in the United Statesworld with $1.428$1.373 trillion of assets under management (“AUM”) at June 30, 2008.2009. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of fixed income, cash management, equity and balanced and alternative investment separate accounts and funds. In addition,BlackRock Solutions®provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation of illiquid securities, dispositions and workouts,workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

On September 29, 2006, BlackRock andJanuary 1, 2009, Bank of America Corporation (“Bank of America”) acquired Merrill Lynch & Co., Inc. (“Merrill Lynch”) closed a. In connection with this transaction, pursuant to whichBlackRock entered into exchange agreements with each of Merrill Lynch contributed its investment management business, Merrill Lynch Investment Managers (“MLIM”), to BlackRock in exchange for an aggregate of 65 million shares of newly issued BlackRock common and non-voting participating preferred stock (the “MLIM Transaction”). On October 1, 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”) for up to $1.719 billion in a combination of cash and common stock (the “Quellos Transaction”). At June 30, 2008, Merrill Lynch owned approximately 44.8% of the Company’s voting common stock and approximately 48.7% of the Company’s capital stock on a fully diluted basis and The PNC Financial Services Group, Inc. (“PNC”) pursuant to which each agreed to exchange a portion of the BlackRock voting common stock they held for non-voting preferred stock. On June 30, 2009, Bank of America/Merrill Lynch owned approximately 33.3%4.6% of BlackRock’s voting common stock and 46.3% of BlackRock’s capital stock on a fully diluted basis, and PNC owned approximately 43.9% of BlackRock’s voting common stock and 30.8% of BlackRock’s capital stock on a fully diluted basis.

On June 16, 2009, BlackRock announced that Barclays Bank PLC (“Barclays”) accepted its offer to acquire all of the outstanding equity interests of subsidiaries of Barclays conducting the business of Barclays Global Investors (“BGI”) and entered into a definitive purchase agreement to acquire BGI from Barclays (the “BGI Transaction”). The price consideration consists of $6.6 billion in cash, subject to certain adjustments, and approximately 37.8 million shares of common and participating preferred stock, subject to certain adjustments. The cash portion of the transaction will be financed by $800 million from BlackRock’s cash position, a new $2 billion credit facility, which is expected to eventually be replaced with term debt, $1 billion of additional short-term debt, and $2.8 billion of capital stock.from a group of institutional investors. The shares of common stock issued to Barclays pursuant to the BGI Transaction will represent approximately 4.9% of the outstanding shares of common stock of BlackRock immediately following the closing of the BGI Transaction, and the total equity consideration will represent approximately an aggregate 19.9% economic interest in BlackRock immediately following the closing of the transaction.

In connection with the execution by BlackRock of the Barclays Purchase Agreement, on June 11, 2009, BlackRock entered into Amendment No. 1 (the “Merrill Lynch Amendment”) to the Second Amended and Restated Stockholder Agreement, by and among Merrill Lynch & Co., Inc., Merrill Lynch Group, Inc. and BlackRock (the “Merrill Lynch Stockholder Agreement”) and Amendment No. 1 (the “PNC Amendment”) to the Amended and Restated Implementation and Stockholder Agreement between PNC and BlackRock (the “PNC Stockholder Agreement”). The Merrill Lynch Amendment and the PNC Amendment will become effective only upon the closing of the BGI Transaction.

 

- 2848 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

 

BlackRock, Inc.

Financial Highlights

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

(unaudited)

The following table summarizes BlackRock’s operating performance for each of the three months ended June 30, 2008,2009, March 31, 20082009 and June 30, 20072008 and the six months ended June 30, 20082009 and 2007.2008. Certain prior year amounts have been revised or reclassified to conform to 2009 presentation including those required by the retrospective adoption of FASB Staff Position (“FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”) (Accounting Standards Codification (“ASC”) 470-20,Debt with Conversion and Other Options), FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) (ASC 260-10,Earnings per Share) and Statement of Financial Accounting Standards (“SFAS”) No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (ASC 810-10, Consolidation). For more information please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, presentation.which was filed with the Securities and Exchange Commission on March 2, 2009.

 

   Three Months Ended  Variance vs. 
   June 30,  March 31,  June 30, 2007  March 31, 2008 
   2008  2007  2008  Amount  %  Amount  % 

Total revenue

  $1,386,951  $1,097,023  $1,300,138  $289,928  26.4% $86,813  6.7%

Total expenses

  $981,961  $815,022  $904,448  $166,939  20.5% $77,513  8.6%

Operating income

  $404,990  $282,001  $395,690  $122,989  43.6% $9,300  2.4%

Net income

  $274,058  $222,244  $241,671  $51,814  23.3% $32,387  13.4%

Net income, as adjusted(b)

  $285,271  $236,626  $253,060  $48,645  20.6% $32,211  12.7%

Diluted earnings per share (c)

  $2.05  $1.69  $1.82  $0.36  21.3% $0.23  12.6%

Diluted earnings per share, as
adjusted 
(b) (c)

  $2.14  $1.80  $1.90  $0.34  18.9% $0.24  12.6%

Weighted average diluted shares outstanding(c)

   133,526,713   131,383,470   132,876,553   2,143,243  1.6%  650,160  0.5%

Operating margin, GAAP basis

   29.2%  25.7%  30.4%      

Operating margin, as adjusted (a)

   37.9%  36.1%  37.6%      

Assets under management ($ in millions)

  $1,427,543  $1,230,086  $1,364,436  $197,457  16.1% $63,107  4.6%
  Three Months Ended  Variance vs. Three Months Ended 
  June 30,  March 31,
2009
  June 30, 2008  March 31, 2009 
  2009  2008   Amount  %
Change
  Amount  %
Change
 

GAAP basis:

       

Total revenue

 $1,029   $1,387   $987   $(358 (26)%  $42   4

Total expenses

 $768   $982   $716   $(214 (22)%  $52   7

Operating income

 $261   $405   $271   $(144 (36)%  $(10 (4)% 

Operating margin

  25.4  29.2  27.5  (4)%  (13)%   (2)%  (8)% 

Non-operating income (expense), less net income (loss) attributable to non-controlling interests

 $51   $16   $(157 $35   219 $208   132

Net income attributable to BlackRock, Inc.

 $218   $274   $84   $(56 (20)%  $134   160

Diluted earnings per common share(e)

 $1.59   $2.00   $0.62   $(0.41 (21)%  $0.97   156

As adjusted:

       

Operating income(a)

 $302   $447   $307   $(145 (32)%  $(5 (2)% 

Operating margin(a)

  34.4  37.8  37.2  (3)%  (9)%   (3)%  (8)% 

Non-operating income (expense), less net income (loss) attributable to non-controlling interests(b)

 $42   $(9 $(153 $51   NM   $195   127

Net income attributable to BlackRock, Inc.(c),(d)

 $239   $285   $110   $(46 (16)%  $129   117

Diluted earnings per common share(c),d),(e)

 $1.75   $2.08   $0.81   $(0.33 (16)%  $0.94   116

Other:

       

Diluted weighted-average common shares outstanding(e)

  133,364,611    132,032,538    131,797,189    1,332,073   1  1,567,422   1

Assets under management

 $1,373,160   $1,427,543   $1,283,355   $(54,383 (4)%  $89,805   7

 

NM – Not Meaningful

   Six Months Ended
June 30,
  Variance 
   2008  2007  Amount  % 

Total revenue

  $2,687,089  $2,102,397  $584,692  27.8%

Total expenses

  $1,886,409  $1,548,165  $338,244  21.8%

Operating income

  $800,680  $554,232  $246,448  44.5%

Net income

  $515,729  $417,632  $98,097  23.5%

Net income, as adjusted(b)

  $538,331  $445,866  $92,465  20.7%

Diluted earnings per share (c)

  $3.87  $3.17  $0.70  22.1%

Diluted earnings per share, as adjusted(b) (c)

  $4.04  $3.39  $0.65  19.2%

Weighted average diluted shares outstanding(c)

   133,189,957   131,580,121   1,609,836  1.2%

Operating margin, GAAP basis

   29.8%  26.4%   

Operating margin, as adjusted (a)

   37.8%  36.4%   

Assets under management ($ in millions)

  $1,427,543  $1,230,086  $197,457  16.1%

 

- 2949 -


PART I - FINANCIAL INFORMATION (continued)

Item 2.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

 

BlackRock, Inc.

Financial Highlights (continued)

(Dollar amounts in millions, except per share data)

(unaudited)

   Six Months Ended
June 30,
  Variance vs. Six
Months Ended
June 30, 2008
 
   2009  2008  Amount  %
Change
 

GAAP basis:

     

Total revenue

  $2,016   $2,687   $(671 (25)% 

Total expenses

  $1,484   $1,886   $(402 (21)% 

Operating income

  $532   $801   $(269 (34)% 

Operating margin

   26.4  29.8  (3)%  (11)% 

Non-operating income (expense), less net income (loss) attributable to non-controlling interests

  $(106 $(9 $(97 NM  

Net income attributable to BlackRock, Inc.

  $302   $515   $(213 (41)% 

Diluted earnings per common share(e)

  $2.22   $3.78   $(1.56 (41)% 

As adjusted:

     

Operating income(a)

  $609   $860   $(251 (29)% 

Operating margin(a)

   35.8  37.7  (2)%  (5)% 

Non-operating income (expense), less net income (loss) attributable to non-controlling interests(b)

  $(111 $(33 $(78 (236)% 

Net income attributable to BlackRock, Inc.(c),(d)

  $349   $537   $(188 (35)% 

Diluted earnings per common share(c),d),(e)

  $2.56   $3.94   $(1.38 (35)% 

Other:

     

Diluted weighted-average common shares outstanding(e)

   132,668,695    131,812,500    856,195   1

Assets under management

  $1,373,160   $1,427,543   $(54,383 (4)% 

 

NM – Not Meaningful

- 50 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

 

BlackRock, Inc.

Financial Highlights

(continued)

(a) BlackRock reports its financial results on a GAAP basis; however, management believes that evaluating the Company’s ongoing operating results may not be as usefulenhanced if investors are limited to reviewing only GAAPhave additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s 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.

Operating margin, as adjusted, equals operating income used for operating margin measurement, divided by revenue used for operating margin measurement, as indicated in the table below. Certain prior period non-GAAP data has been reclassified to conform to the current presentation. Computations for all periods are derived from the Company’s condensed consolidated statements of income as follows:

   Three Months Ended  Six Months Ended
June 30,
 
   June 30,  March 31,  
   2008  2007  2008  2008  2007 

Operating income, GAAP basis

  $404,990  $282,001  $395,690  $800,680  $554,232 

Non-GAAP adjustments:

      

PNC LTIP funding obligation

   14,751   13,933   15,021   29,772   25,976 

Merrill Lynch compensation contribution

   2,500   2,500   2,500   5,000   5,000 

MLIM integration costs

   —     6,039   —     —     13,139 

Closed-end fund launch costs

   5,388   19,801   3,739   9,127   32,953 

Closed-end fund commissions

   —     4,297   164   164   5,694 

Compensation expense related to (depreciation) appreciation on deferred compensation plans

   24,925   7,073   (795)  24,129   9,559 
                     

Operating income used for operating margin measurement

  $452,554  $335,644  $416,319  $868,872  $646,553 
                     

Revenue, GAAP basis

  $1,386,951  $1,097,023  $1,300,138  $2,687,089  $2,102,397 

Non-GAAP adjustments:

      

Portfolio administration and servicing costs

   (153,618)  (131,077)  (155,739)  (309,357)  (262,163)

Amortization of deferred mutual fund sales commissions

   (33,422)  (28,713)  (30,208)  (63,630)  (50,271)

Reimbursable property management compensation

   (6,341)  (6,664)  (6,119)  (12,460)  (13,306)
                     

Revenue used for operating margin measurement

  $1,193,570  $930,569  $1,108,072  $2,301,642  $1,776,657 
                     

Operating margin, GAAP basis

   29.2%  25.7%  30.4%  29.8%  26.4%
                     

Operating margin, as adjusted

   37.9%  36.1%  37.6%  37.8%  36.4%
                     

Management believes that(a) Operating income, as adjusted, and operating margin, as adjusted:

Operating income, as adjusted, is an effective indicatorequals operating income, GAAP basis, excluding certain items deemed non-recurring by management or transactions that ultimately will not impact BlackRock’s book value, as indicated in the table below. Operating income used for operating margin measurement equals operating income, as adjusted, excluding the impact of management’s ability to effectively employ BlackRock’s resources. As such, management believes that operatingclosed-end fund launch costs and commissions. Operating margin, as adjusted, provides useful disclosure to investors.equals operating income used for operating margin measurement, divided by revenue used for operating margin measurement, as indicated in the table below.

   Three Months Ended  Six Months Ended
June 30,
 
  June 30,  March 31,  
   2009  2008  2009  2009  2008 

Operating income, GAAP basis

  $261   $405   $271   $532   $801  

Non-GAAP adjustments:

      

Restructuring charges

   —      —      22    22    —    

PNC LTIP funding obligation

   15    15    15    30    30  

Merrill Lynch compensation contribution

   2    2    3    5    5  

Barclays Global Investors (“BGI”) transaction/integration costs

   15    —      —      15    —    

Compensation expense related to (depreciation) appreciation on deferred compensation plans

   9    25    (4  5    24  
                     

Operating income, as adjusted

   302    447    307    609    860  

Closed-end fund launch costs

   —      5    2    2    9  

Closed-end fund launch commissions

   —      —      1    1    —    
                     

Operating income used for operating margin measurement

  $302   $452   $310   $612   $869  
                     

Revenue, GAAP basis

  $1,029   $1,387   $987   $2,016   $2,687  

Non-GAAP adjustments:

      

Portfolio administration and servicing costs

   (125  (152  (127  (252  (306

Amortization of deferred mutual fund sales commissions

   (26  (33  (27  (53  (63

Reimbursable property management compensation

   —      (6  —      —      (12
                     

Revenue used for operating margin measurement

  $878   $1,196   $833   $1,711   $2,306  
                     

Operating margin, GAAP basis

   25.4  29.2  27.5  26.4  29.8
                     

Operating margin, as adjusted

   34.4  37.8  37.2  35.8  37.7
                     

 

- 3051 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

 

BlackRock, Inc.

Financial Highlights

(continued)

(a) (continued)

Non-GAAPManagement believes that operating income, adjustments used foras adjusted, and operating margin, as adjusted, are effective indicators of BlackRock’s performance over time. As such, management believes that operating income, as adjusted, and operating margin, as adjusted, provide useful disclosure to investors.

Operating income, as adjusted:

The portionRestructuring charges recorded in 2009 consist of expense associated with certain Long-Term Incentive Plans (“LTIP”) that will be funded through the distribution to participants of shares of BlackRock common stock held by PNCcompensation costs, occupancy costs and the anticipated Merrill Lynch compensation contribution have been excluded because, exclusive of the impact related to the exercise of LTIP participants’ put options primarily in the three months ended March 31, 2007, these charges do not impact BlackRock’s book value. MLIM integration costs consist principally of certain professional fees rebranding costs and compensation costs incurred in conjunction with the integration which were reflected in GAAP operating income. Integration costs have been deemed non-recurring by management and thus have been excluded from operating income, as adjusted, to help ensure the comparability of this information to prior periods. Closed-end fund launchBGI transaction/integration costs recorded in 2009 consist principally of certain advisory and commissions have been excluded from operating income, as adjusted, because such costs can fluctuate considerably and revenues associatedlegal fees incurred in conjunction with the expenditure of such costs will not fully impact the Company’s results until future periods.announced transaction. As such, management believes that operating margins exclusive of these costs are more representative of theuseful measures in evaluating BlackRock’s operating performance for the respective periods.

The portion of compensation expense associated with certain long-term incentive plans (“LTIP”) that will be funded through the distribution to participants of shares of BlackRock stock held by PNC and the anticipated Merrill Lynch compensation contribution have been excluded because these charges ultimately do not impact BlackRock’s book value.

Compensation expense associated with appreciation (depreciation) on assets related to certain BlackRock deferred compensation plans has been excluded as returns on investments set aside for these plans, which substantially offset this expense, are reported in non-operating income.

Non-GAAP revenue adjustmentsOperating margin, as adjusted:

Operating income used for measuring operating margin, as adjusted, is equal to operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Management believes that excluding such costs and commissions is useful because these costs can fluctuate considerably and revenues associated with the expenditure of these costs will not fully impact the Company’s results until future periods.

Operating margin, as adjusted, allows the Company to compare performance from year-to-year by adjusting for items that may not recur, recur infrequently or may fluctuate based on market movement, such as restructuring charges, transaction/integration costs, closed-end fund launch costs and fluctuations in compensation expense based on mark-to-market movements in investments held to fund certain compensation plans. The Company also uses operating margin, as adjusted, to monitor corporate performance and efficiency and as a benchmark to compare its performance to other companies. Management uses both the GAAP and non-GAAP financial measures. The non-GAAP measure by itself may pose limitations because it does not include all of the Company’s revenues and expenses.

Revenue used for operating margin, as adjusted:

Portfolioadjusted, excludes portfolio administration and servicing costs paid to related parties and to other third parties, have been excluded from revenue used for operating margin, as adjusted,parties. Management believes that excluding such costs is useful because the Company receives offsetting revenue and expense for these services. Amortization of deferred mutual fund sales commissions areis excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, offset distribution fee revenue earned by the Company. Reimbursable property management compensation representsrepresented compensation and benefits paid to personnel of Metric Property Management, Inc. (“Metric”), a subsidiary of BlackRock Realty Advisors, Inc. (“Realty”). These employees arewere retained on Metric’s payroll when certain properties arewere acquired by Realty’s clients. The related compensation and benefits arewere fully reimbursed by Realty’s clients and have been excluded from revenue used for operating margin, as adjusted, because they bear no economic cost to BlackRock. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such revenues.

- 52 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

BlackRock, Inc.

Financial Highlights

(continued)

(b) Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted:

Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, equals non-operating income (expense), GAAP basis, less net income (loss) attributable to non-controlling interests, GAAP basis, adjusted for compensation expense associated with depreciation (appreciation) on assets related to certain BlackRock reportsdeferred compensation plans. The compensation expense offset is recorded in operating income. This compensation expense has been included in non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, to offset returns on investments set aside for these plans, which are reported in non-operating income (expense), GAAP basis.

   Three Months Ended  Six Months Ended
June 30,
 
  June 30,  March 31,  
   2009  2008  2009  2009  2008 

Non-operating income (expense), GAAP basis

  $77   $(4 $(179 $(102 $(24

Net income (loss) attributable to non-controlling interests, GAAP basis

   26    (20  (22  4    (15
                     

Non-operating income (expense), less net income (loss) attributable to non-controlling interests

   51    16    (157  (106  (9

Compensation expense related to (appreciation) depreciation on deferred compensation plans

   (9  (25  4    (5  (24
                     

Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted

  $42   $(9 $(153 $(111 $(33
                     

Management believes that non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, provides for comparability of this information to prior periods and is an effective measure for reviewing BlackRock’s non-operating contribution to its financial resultsresults. As compensation expense on a GAAP basis; however,the deferred compensation plans, which is included in operating income, offsets the gain/(loss) on the investments set aside for these plans, management believes that evaluating the Company’s ongoing operating results may not benon-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, provides useful if investors are limited to reviewing only GAAP-basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and for the reasons described below, considers them to be effective indicators, for both management and investors of BlackRock’s financial performance over time. BlackRock’s 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.non-operating results.

 

   Three Months Ended  Six Months Ended
   June 30,  March 31,  June 30,
   2008  2007  2008  2008  2007

Net income, GAAP basis

  $274,058  $222,244  $241,671  $515,729  $417,632

Non-GAAP adjustments, net of tax:

          

PNC LTIP funding obligation

   9,588   8,917   9,764   19,352   16,625

Merrill Lynch compensation contribution

   1,625   1,600   1,625   3,250   3,200

MLIM integration costs

   —     3,865   —     —     8,409
                    

Net income, as adjusted

  $285,271  $236,626  $253,060  $538,331  $445,866
                    

Diluted weighted average shares outstanding(c)

   133,526,713   131,383,470   132,876,553   133,189,957   131,580,121
                    

Diluted earnings per share, GAAP basis(c)

  $2.05  $1.69  $1.82  $3.87  $3.17
                    

Diluted earnings per share, as adjusted(c)

  $2.14  $1.80  $1.90  $4.04  $3.39
                    

- 53 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

BlackRock, Inc.

Financial Highlights

(continued)

(c) Net income attributable to BlackRock, Inc., as adjusted:

Management believes that net income attributable to BlackRock, Inc., as adjusted, and diluted common earnings per share, as adjusted, are effective measurementsuseful measures of BlackRock’s profitability and financial performance. Net income attributable to BlackRock, Inc., as adjusted, equals net income attributable to BlackRock, Inc., GAAP basis, adjusted for significant non-recurring items as well as charges that ultimately will not impact BlackRock’s book value.

   Three Months Ended  Six Months Ended
June 30,
  June 30,  March 31,  
   2009  2008  2009  2009  2008

Net income attributable to BlackRock, Inc., GAAP basis

  $218  $274  $84  $302  $515

Non-GAAP adjustments, net of tax:(d)

          

Restructuring charges

   —     —     14   14   —  

PNC LTIP funding obligation

   10   10   10   20   19

Merrill Lynch compensation contribution

   1   1   2   3   3

BGI transaction/integration costs

   10   —     —     10   —  
                    

Net income attributable to BlackRock, Inc., as adjusted

  $239  $285  $110  $349  $537
                    

Allocation of net income attributable to BlackRock, Inc., as adjusted:(f)

          

Common shares(e)

  $233  $275  $107  $339  $520

Participating RSUs

   6   10   3   10   17
                    

Net income attributable to BlackRock, Inc., as adjusted

  $239  $285  $110  $349  $537
                    

Diluted weighted average common shares outstanding(e)

   133,364,611   132,032,538   131,797,189   132,668,695   131,812,500
                    

Diluted earnings per common share, GAAP basis(e)

  $1.59  $2.00  $0.62  $2.22  $3.78
                    

Diluted earnings per common share, as adjusted(e)

  $1.75  $2.08  $0.81  $2.56  $3.94
                    

The restructuring charges and BGI transaction/integration costs reflected in GAAP net income attributable to BlackRock, Inc. have been deemed non-recurring by management and have been excluded from net income attributable to BlackRock, Inc., as adjusted, to help ensure the comparability of this information to prior reporting periods.

The portion of the LTIPcompensation expense associated with LTIP awards that will be funded through the distribution to participants of shares of BlackRock common stock held by PNC and the anticipated Merrill Lynch compensation contribution have been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, because exclusive of the impact related to the exercise of LTIP participants’ put options, primarily in the three months ended March 31, 2007, these charges ultimately do not impact BlackRock’s book value. MLIM integration costs reflected

(d) The tax rates used represent BlackRock’s corporate effective tax rates in GAAP net income have been deemed non-recurring by managementthe respective periods, which exclude certain adjustments that were recorded. For each of the quarters ended June 30, 2009, June 30, 2008 and have been excluded from net income, as adjusted,March 31, 2009, non-GAAP adjustments were tax effected at 35%. For each of the six months ended June 30, 2009 and 2008, non-GAAP adjustments were tax effected at 35%.

(e) Series A, B and C non-voting participating preferred stock are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations. Certain unvested restricted stock units are not included in this number as they are deemed participating securities in accordance with FSP EITF 03-6-1 (ASC 260-10,Earnings per Share).

(f) Allocation of net income attributable to BlackRock, Inc., as adjusted, to help ensurecommon shares and participating RSUs is calculated pursuant to the comparability of this information to prior reporting periods. Integration costs consist principally of certain professional fees, rebranding costs and compensation costs incurredtwo-class method as defined in conjunction with the integration.SFAS No. 128,Earnings per Share (ASC 260-10,Earnings per Share).

(c)Series A non-voting participating preferred stock is considered to be common stock for purposes of earnings per share calculations.

 

- 3154 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

 

BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, Thethe Netherlands, Japan, Hong Kong and Australia. The Company provides a wide array of taxable and tax-exempt fixed income, equity and balanced mutual funds and separate accounts, as well as a wide assortment of index-based equity and alternative investment products tofor a diverse global clientele. BlackRock provides global advisory services for mutual funds and other non-U.S. equivalent retail products. The Company’s non-U.S. mutual funds are based in a number of domiciles and cover a range of asset classes, including cash management, fixed income and equities. The BlackRock Global Funds, the Company’s primary retail fund group offered outside the United States, is the BlackRock Global Funds (“BGF”), which was formerly the Merrill Lynch International Investment Funds (“MLIIF”) and was rebranded in April 2008. BGF isare authorized for distribution in more than 35 jurisdictions worldwide. In the United States, the primary retail offerings include various open-end and closed-end funds. Additional fund offerings include structured products, real estate funds, hedge funds, hedge funds of funds, private equity funds and funds of funds, managed futures funds and exchange funds. These products are sold to both U.S. and non-U.S. high net worth, retail and institutional investors in a wide variety of active and passive strategies covering both equity and fixed income assets.

BlackRock’s client base consists of financial institutions and other corporate clients, pension funds, high net worth individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presence both inside and outside the United States that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to retail and institutional investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships. BlackRock also distributes a significant amount of its products and services through Merrill Lynch under a Global Distribution Agreement,the global distribution agreement, which, was amended and restated in July 2008, to among other things provide for an extension whichfollowing Bank of America’s acquisition of Merrill Lynch, runs through September 29, 2013. See Note 13, Subsequent Events, toJanuary 2014. After such term, the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filingagreement will renew for further discussion.one automatic three-year extension if certain conditions are met.

BlackRock derives a substantial portion of its revenue from investment advisory and administration base fees, which are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of AUM, percentages of committed capital during investment periods of certain products, or, in the case of certain real estate equity separate accounts, net operating income generated by the underlying properties, and are affected by changes in AUM, including market appreciation or depreciation, foreign exchange gains or losses and net subscriptions or redemptions. Net subscriptions or redemptions represent the sum of new client assets, additional fundings from existing clients (including dividend reinvestment), withdrawals of assets from, and termination of, client accounts and purchases and redemptions of mutual fund shares. Market appreciation or depreciation 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 BlackRock’s alternative investment products provide for performance fees, based upon relative and/or absolute investment performance, in addition to base fees based on AUM. Investment advisory performance fees generally are earned after a given period of time or when investment performance exceeds certaina contractual thresholds.threshold. As such, the timing of recognition of performance fees may increase the volatility of BlackRock’s revenue and earnings.

BlackRock provides a variety of risk management, investment analytic and investment system and financial markets advisory services to financial institutions, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts and government agencies. These services are provided under the brand nameBlackRock Solutions® and include a wide array of risk management services, valuation ofservices related to illiquid securities, disposition and workouts,workout assignments (including long-term portfolio liquidation assignments), strategic planning and execution, and enterprise investment system outsourcing forto clients. Fees earned forBlackRock Solutions services, which include financial marketand advisory services are based ondetermined using some, or all, of the following methods: (i) fixed fees, (ii) percentages of various attributes of advisory assets under management and (iii) performance fees if contractual thresholds are met.BlackRock Solutions fees are recorded as other revenue in the condensed consolidated statements of income.

 

- 3255 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview (continued)

 

Operating expenses reflect employee compensation and benefits, portfolio administration and servicing costs, amortization of deferred mutual fund sales commissions, general and administration expenseexpenses and amortization of intangible assets. Employee compensation and benefits expense reflects salaries, commissions, deferred and incentive compensation, stock-based compensation and related benefit costs. Portfolio administration and servicing costs reflectinclude payments made to Merrill Lynch-affiliated entities under the Global Distribution Agreementa global distribution agreement and to PNC-affiliated entities, as well as third parties, primarily associated with the administration and servicing of client investments in certain BlackRock products.

BlackRock holds investments primarily in sponsored investment products that invest in a variety of asset classes, including real estate, private equity, and hedge funds. Investments generally are made for co-investment purposes, to establish a performance track record or to hedge exposure to certain deferred compensation plans. Non-operating income (expense) includes the impact of changes in the valuations of these investments.

Assets Under Management

AUM for reporting purposes is generally based upon how investment advisory and administration fees are calculated for each portfolio. Net asset values, total assets, committed assets or other measures may be used to determine portfolio AUM.

BlackRock, Inc.

Assets Under Management Summary

(Dollar amounts in millions)

 

   June 30,  March 31,  June 30,
2007
  Variance 
        Quarter to
Quarter
  Year to
Year
 
   2008     

Fixed income

  $527,186  $514,673  $492,287  2.4% 7.1%

Equity and balanced

   435,676   426,935   435,873  2.0% 0.0%

Cash management

   344,944   349,208   259,840  (1.2)% 32.8%

Alternative investments products

   76,103   73,620   42,086  3.4% 80.8%
               

Sub Total

   1,383,909   1,364,436   1,230,086  1.4% 12.5%

Advisory1

   43,634   —     —    NM  NM 
               

Total

  $1,427,543  $1,364,436  $1,230,086  4.6% 16.1%
               

            Variance vs. 
   June 30,  March 31,  June 30,
2008
  March 31,
2009
  June 30,
2008
 
  2009     

Fixed income

  $509,656  $474,299  $527,186  7 (3)% 

Cash management

   316,702   322,485   344,944  (2)%  (8)% 

Equity and balanced

   329,622   265,733   435,676  24 (24)% 

Alternative investment products

   51,562   51,693   76,103  —     (32)% 
               

Sub Total

   1,207,542   1,114,210   1,383,909  8 (13)% 

Advisory AUM1

   165,618   169,145   43,634  (2)%  280
               

Total

  $1,373,160  $1,283,355  $1,427,543  7 (4)% 
               

 

1

Advisory AUM represents long-term portfolio liquidation assignments.

NM – Not Meaningful

 

- 3356 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Assets Under Management (continued)

 

AUM increased approximately $63.1 billion, or 4.6%, to $1.428 trillion at June 30, 2008, compared to $1.364 trillion at March 31, 2008. The growth in AUM was attributable to $63.2 billion in net subscriptions and $1.5 billion in net market appreciation, partially offset by $1.7 billion in foreign exchange losses. Net subscriptions of $63.2 billion for the three months ended June 30, 2008 was the result of net new business of $43.6 billion in advisory assignments, $16.7 billion in fixed income products primarily related to targeted duration products, $6.0 billion in equity and balanced products primarily related to global allocation products and $1.5 billion in alternative products, partially offset by net redemptions of $4.6 billion in cash management products at quarter-end. Net market appreciation of $1.5 billion included $3.7 billion of appreciation in equity and balanced assets primarily in sector funds, including natural resources funds. Foreign exchange losses of $1.7 billion consisted primarily of $0.9 billion in equity and balanced assets, $0.6 billion in fixed income assets and $0.1 billion in alternative products.

AUM increased approximately $197.5 billion, or 16.1%, to $1.428 trillion at June 30, 2008, compared with $1.230 trillion at June 30, 2007. The growth in AUM was attributable to $170.2 billion in net subscriptions, of which $21.9 billion was acquired in the Quellos Transaction and $16.9 billion represents foreign exchange gains, partially offset by $11.5 billion in net market depreciation. Net subscriptions of $170.2 billion for the twelve months ended June 30, 2008 were attributable to net new business of $82.9 billion in cash management products, $43.6 billion in advisory assets, $19.7 billion in equity and balanced products, $13.4 billion in fixed income products and $10.6 billion in alternative investment products. Foreign exchange gains of $16.9 billion consisted primarily of $10.4 billion in equity and balanced assets and $5.3 billion in fixed income assets. Market depreciation of $11.5 billion was more than explained by the depreciation in equity and balanced assets of $30.2 billion, as equity markets declined during the twelve months ended June 30, 2008, partially offset by appreciation on fixed income products of $16.1 billion due to current income and changes in market interest rates.

The following table presents the component changes in BlackRock’s AUM for the three months ended June 30, 2008.2009.

BlackRock, Inc.

Component Changes in Assets Under Management

For the QuarterThree Months Ended June 30, 20082009

(Dollar amounts in millions)

 

   March 31,
2008
  Net
subscriptions

(redemptions)
  Market
appreciation

(depreciation)
  Foreign
exchange 1
  June 30,
2008
       

Fixed income

  $514,673  $16,732  $(3,610) $(609) $527,186

Equity and balanced

   426,935   5,963   3,701   (923)  435,676

Cash management

   349,208   (4,601)  338   (1)  344,944

Alternative investment products

   73,620   1,508   1,095   (120)  76,103
                    

Sub Total

   1,364,436   19,602   1,524   (1,653)  1,383,909

Advisory2

   —     43,634   —     —     43,634
                    

Total

  $1,364,436  $63,236  $1,524  $(1,653) $1,427,543
                    

   March 31,
2009
  Net
subscriptions
(redemptions)1
  Acquisition2  Market
Appreciation
  Foreign
exchange3
  June 30,
2009

Fixed income

  $474,299  $15,471   $—    $15,159  $4,727  $509,656

Cash management

   322,485   (7,504  —     237   1,484   316,702

Equity and balanced

   265,733   15,609    —     39,270   9,010   329,622

Alternative investment products

   51,693   (2,651  1,344   520   656   51,562
                        

Sub Total

   1,114,210   20,925    1,344   55,186   15,877   1,207,542

Advisory AUM4

   169,145   (5,766  —     291   1,948   165,618
                        

Total

  $1,283,355  $15,159   $1,344  $55,477  $17,825  $1,373,160
                        

 

1

Includes distributions representing return of capital and return on investment to investors.

2

Net assets acquired from R3 Capital Management, LLC in April 2009.

3

Foreign exchange reflects the impact of converting non-dollar denominated AUM into U.S. dollars for reporting.

24

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased approximately $90 billion, or 7%, to $1.373 trillion at June 30, 2009, compared to $1.283 trillion at March 31, 2009. The growth in AUM was attributable to $55 billion in net market appreciation, $18 billion in foreign exchange translation, $15 billion in net subscriptions and $1 billion as a result of the acquisition of the R3 Capital Partners funds. Net market appreciation of $55 billion included $39 billion of appreciation in equity and balanced assets due to an increase in global equity markets and $15 billion in fixed income products due to current income and changes in interest rate spreads. The $18 billion increase in AUM from foreign exchange was across all asset classes due to the weakening of the U.S. dollar primarily against the British pound, which resulted in an increase in AUM from converting non-dollar denominated AUM into U.S. dollars.

Net subscriptions of $10 billion from institutional clients and $5 billion from retail and high net worth clients for the three months ended June 30, 2009 were the result of net subscriptions of $16 billion in equity and balanced products including $8 billion in passive index strategies and $3 billion in global allocation and balanced products; $15 billion in fixed income products spread across all major product categories, partially offset by $8 billion in cash management net outflows primarily in government and tax exempt funds, $6 billion of distributions in long-term advisory liquidation assignments and $3 billion of net outflows in alternative investment products primarily in funds of funds and hedge funds.

 

- 3457 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Assets Under Management (continued)

 

The following table presents the component changes in BlackRock’s AUM for the six months ended June 30, 2008.2009.

BlackRock, Inc.

Component Changes in Assets Under Management

For the Six Months Ended June 30, 20082009

(Dollar amounts in millions)

 

   December 31,
2007
  Net
subscriptions

(redemptions)
  Market
appreciation

(depreciation)
  Foreign
exchange 1
  June 30,
2008
         

Fixed income

  $513,020  $13,797  $(2,264) $2,633  $527,186

Equity and balanced

   459,182   5,644   (34,353)  5,203   435,676

Cash management

   313,338   30,543   762   301   344,944

Alternative investment products

   71,104   4,830   (236)  405   76,103
                    

Sub Total

   1,356,644   54,814   (36,091)  8,542   1,383,909

Advisory2

   —     43,634   —     —     43,634
                    

Total

  $1,356,644  $98,448  $(36,091) $8,542  $1,427,543
                    

   December 31,
2008
  Net
subscriptions
(redemptions)1
  Acquisition2  Market
appreciation
(depreciation)
  Foreign
exchange3
  June 30,
2009

Fixed income

  $483,173  $9,081   $—    $14,864   $2,538  $509,656

Cash management

   338,439   (23,146  —     85    1,324   316,702

Equity and balanced

   280,821   21,364    —     22,150    5,287   329,622

Alternative investment products

   59,723   (5,247  1,344   (4,678  420   51,562
                        

Sub Total

   1,162,156   2,052    1,344   32,421    9,569   1,207,542

Advisory AUM4

   144,995   18,754    —     180    1,689   165,618
                        

Total

  $1,307,151  $20,806   $1,344  $32,601   $11,258  $1,373,160
                        

 

1

Includes distributions representing return of capital and return on investment to investors.

2

Net assets acquired from R3 Capital Management, LLC in April 2009.

3

Foreign exchange reflects the impact of converting non-dollar denominated AUM into U.S. dollars for reporting.

24

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased approximately $66 billion, or 5%, to $1.373 trillion at June 30, 2009, compared with $1.307 trillion at December 31, 2008. The increase in AUM was attributable to $33 billion in net market appreciation, $21 billion in net subscriptions and $1 billion as a result of the acquisition of the R3 Capital Partners funds, and $11 billion in AUM from foreign exchange translation. Net market appreciation of $33 billion included $22 billion of appreciation in equity and balanced and $15 billion in fixed income products due to significant improvements in the second quarter in both the equity and fixed income markets, partially offset by $5 billion of market depreciation in alternative investment products primarily in real estate products. The $11 billion increase in AUM from foreign exchange was across all asset classes due to the weakening of the U.S. dollar primarily against the British pound, which resulted in an increase in AUM from converting non-dollar denominated AUM into U.S. dollars.

Net subscriptions of $14 billion from institutional clients and $7 billion from retail and high net worth clients for the six months ended June 30, 2009 were attributable to net new business of $19 billion in long-term advisory liquidation assignments, $21 billion in equity and balanced products including $12 billion in passive index strategies and $9 billion in fixed income products partially offset by $23 billion of net outflows in cash management products primarily in government and tax exempt funds, and $5 billion in alternative products.

- 58 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Assets Under Management (continued)

The following table presents the component changes in BlackRock’s AUM for the twelve months ended June 30, 2008.2009.

BlackRock, Inc.

Component Changes in Assets Under Management

For the Twelve Months Ended June 30, 20082009

(Dollar amounts in millions)

 

   June 30,
2007
  Net
subscriptions

(redemptions)
  Acquisition 1  Market
appreciation

(depreciation)
  Foreign
exchange 2
  June 30,
2008
           

Fixed income

  $492,287  $13,411  $—    $16,147  $5,341  $527,186

Equity and balanced

   435,873   19,653   —     (30,209)  10,359   435,676

Cash management

   259,840   82,914   —     1,632   558   344,944

Alternative investment products

   42,086   10,603   21,868   949   597   76,103
                        

Sub Total

   1,230,086   126,581   21,868   (11,481)  16,855   1,383,909

Advisory3

   —     43,634   —     —     —     43,634
                        

Total

  $1,230,086  $170,215  $21,868  $(11,481) $16,855  $1,427,543
                        

   June 30,
2008
  Net
subscriptions
(redemptions)1
  Acquisition2  Market
appreciation
(depreciation)
  Foreign
exchange3
  June 30,
2009

Fixed income

  $527,186  $(11,310 $—    $97   $(6,317 $509,656

Cash management

   344,944   (28,019  —     661    (884  316,702

Equity and balanced

   435,676   16,588    —     (103,944  (18,698  329,622

Alternative investment products

   76,103   (7,174  1,344   (17,492  (1,219  51,562
                        

Sub Total

   1,383,909   (29,915  1,344   (120,678  (27,118  1,207,542

Advisory AUM4

   43,634   119,876    —     419    1,689    165,618
                        

Total

  $1,427,543  $89,961   $1,344  $(120,259 $(25,429 $1,373,160
                        

 

1

Data reflects net assets acquired in the Quellos TransactionIncludes distributions representing return of capital and return on October 1, 2007.investment to investors.

2

Net assets acquired from R3 Capital Management, LLC in April 2009.

3

Foreign exchange reflects the impact of converting non-dollar denominated AUM into U.S. dollars for reporting.

34

Advisory AUM represents long-term portfolio liquidation assignments.

AUM decreased approximately $54 billion, or 4%, to $1.373 trillion at June 30, 2009, compared with $1.428 trillion at June 30, 2008. The decline in AUM was attributable to $120 billion in net market depreciation and $25 billion in foreign exchange translation, partially offset by $90 billion in net subscriptions and $1 billion as a result of an acquisition of the R3 Capital Partners funds. Net market depreciation of $121 billion was primarily due to the depreciation in equity and balanced assets of $104 billion, as equity markets declined during the twelve months ended June 30, 2009 and $17 billion in alternative products. The $25 billion reduction in AUM from foreign exchange was across all asset classes other than advisory due to the strengthening of the U.S. dollar, which resulted in foreign exchange translation from converting non-dollar denominated AUM into U.S. dollars.

Net subscriptions of $90 billion for the twelve months ended June 30, 2009 were attributable to net new business of $120 billion in long-term advisory liquidation assignments, $17 billion in equity and balanced products primarily related to U.S. index products, partially offset by $28 billion of net outflows in cash management products primarily related to prime funds, securities lending portfolios, and tax exempt products, $11 billion in fixed income products and $7 billion in alternative products.

 

- 3559 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Operating results for the three months ended June 30, 2008,2009, as compared with the three months ended June 30, 2007.2008.

Revenue

 

  Three Months Ended
June 30,
  Variance   Three Months Ended
June 30,
  Variance 
(Dollar amounts in thousands)  2008  2007  Amount % 
(Dollar amounts in millions)  2009  2008  Amount % Change 

Investment advisory and administration fees:

              

Fixed income

  $234,048  $221,931  $12,117  5.5%  $207  $234  $(27 (12)% 

Cash management

   166   184   (18 (10)% 

Equity and balanced

   601,311   529,046   72,265  13.7%   382   601   (219 (36)% 

Cash management

   183,505   120,189   63,316  52.7%

Alternative investment products

   142,493   79,444   63,049  79.4%   95   142   (47 (33)% 
                      

Investment advisory and administration base fees

   1,161,357   950,610   210,747  22.2%   850   1,161   (311 (27)% 

Fixed income

   494   1,110   (616) (55.5)%   5   —     5   NM  

Equity and balanced

   29,494   6,940   22,554  325.0%   2   30   (28 (93)% 

Alternative investment products

   27,091   17,670   9,421  53.3%   10   27   (17 (63)% 
                      

Investment advisory performance fees

   57,079   25,720   31,359  121.9%   17   57   (40 (70)% 
                      

Total investment advisory and administration fees

   1,218,436   976,330   242,106  24.8%

Total investment advisory and administration base and performance fees

   867   1,218   (351 (29)% 

BlackRock Solutions and advisory

   116   100   16   16
Distribution fees   33,683   32,867   816  2.5%   23   34   (11 (32)% 

Other revenue:

       

BlackRock Solutions

   99,701   46,296   53,405  115.4%

Other revenue

   35,131   41,530   (6,399) (15.4)%   23   35   (12 (34)% 
           

Total other revenue

   134,832   87,826   47,006  53.5%
                      

Total revenue

  $1,386,951  $1,097,023  $289,928  26.4%  $1,029  $1,387  $(358 (26)% 
                      

NM – Not Meaningful

NM – Not Meaningful

  

Total revenue for the three months ended June 30, 2008 increased $289.92009 decreased $358 million, or 26.4%26%, to $1,387.0$1,029 million, compared with $1,097.0$1,387 million for the three months ended June 30, 2007.2008. The $289.9$358 million decrease was the result of a $351 million decrease in total investment advisory and administration base and performance fees, a $12 million decrease in other revenue and an $11 million decrease in distribution fees, partially offset by a $16 million increase inBlackRock Solutions and advisory revenue.

Investment Advisory and Administration Fees

The decrease in investment advisory and administration fees of $351 million, or 29%, was the result of a decrease in investment advisory and administration base fees of $311 million, or 27%, to $850 million for the three months ended June 30, 2009, compared with $1,161 million for the three months ended June 30, 2008 and a decrease of $40 million in performance fees.

The decrease in investment advisory and administration base fees of $311 million for the three months ended June 30, 2009, compared with the three months ended June 30, 2008 consisted of decreases in base fees of $219 million in equity and balanced products, $47 million in alternative products, $27 million in fixed income products and $18 million in cash management products as a result of decreased average AUM in 2009 compared to 2008 for all asset classes.

- 60 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the three months endedJune 30, 2009, as compared with the three months endedJune 30, 2008. (continued)

Revenue (continued)

Investment Advisory and Administration Fees (continued)

Investment advisory performance fees decreased $40 million, or 70%, to $17 million for the three months ended June 30, 2009, as compared to $57 million for the three months ended June 30, 2008, primarily due to a reduction in performance fees in international equity separate accounts and equity and fixed income hedge funds.

BlackRock Solutions and Advisory

BlackRock Solutions and advisory revenue for the three months ended June 30, 2009 increased $16 million, or 16%, compared with the three months ended June 30, 2008. The increase inBlackRock Solutions and advisory revenue was primarily due to additional advisory assignments with fees based on advisory AUM as well as additional Aladdin mandates. Revenue earned on advisory assignments was comprised of advisory and portfolio structuring assignment fees and ongoing fees based on AUM of the respective portfolio assignments.

Distribution Fees

Distribution fees decreased $11 million to $23 million for the three months ended June 30, 2009, as compared to $34 million for the three months ended June 30, 2008. The decrease in distribution fees was primarily the result of lower sales, redemptions and AUM in certain share classes of open-end funds.

Other Revenue

Other revenue of $23 million for the three months ended June 30, 2009 decreased $12 million compared with the three months ended June 30, 2008. Other revenue for the three months ended June 30, 2009 included $7 million of net interest related to securities lending, $5 million of unit trust sales commissions and $11 million of other revenue.

The decrease in other revenue of $12 million, or 34%, for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily the result of a $242.1$9 million increasedecline in investment advisory and administrationreal estate property management fees primarily related to the outsourcing in the fourth quarter of 2008 of Metric contracts with BlackRock real estate clients, a $3 million decrease in net interest earned related to securities lending and a $47.0$2 million increasedecline in total other revenue.unit trust sales commissions.

 

- 3661 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the three months endedJune 30, 2009, as compared with the three months endedJune 30, 2008. (continued)

Expenses

   Three Months Ended
June 30,
  Variance 
(Dollar amounts in millions)  2009  2008  Amount  % Change 

Expenses:

       

Employee compensation and benefits

  $390  $552  $(162 (29)% 

Portfolio administration and servicing costs

   125   152   (27 (18)% 

Amortization of deferred mutual fund sales commissions

   26   33   (7 (21)% 

General and administration

   191   208   (17 (8)% 

Amortization of intangible assets

   36   37   (1 (3)% 
              

Total expenses

  $768  $982  $(214 (22)% 
              

Total expenses decreased $214 million, or 22%, to $768 million for the three months ended June 30, 2009, compared with $982 million for the three months ended June 30, 2008. The decrease is primarily attributable to decreases in employee compensation and benefits, portfolio administration and servicing costs and general and administration expenses.

Employee Compensation and Benefits

Employee compensation and benefits expense decreased $162 million, or 29%, to $390 million, at June 30, 2009, compared to $552 million for the three months ended June 30, 2008. The decrease in employee compensation and benefits expense was primarily attributable to a $87 million decline in incentive compensation associated with the decrease in operating income and performance fees, a $61 million decrease in salaries, benefits and commissions primarily due to lower headcount as a result of the BlackRock’s cost control efforts and a $14 million decrease in deferred compensation expense, which is primarily linked to a decrease in appreciation on assets related to certain deferred compensation plans. Employees at June 30, 2009 totaled 4,984 as compared to 6,069 (including 410 Metric employees) and 5,659 (excluding Metric employees) at June 30, 2008.

Portfolio Administration and Servicing Costs

Portfolio administration and servicing costs decreased $27 million to $125 million during the three months ended June 30, 2009, compared to $152 million for the three months ended June 30, 2008. These costs include payments to Bank of America/Merrill Lynch under a global distribution agreement, and payments to PNC as well as other third parties, primarily associated with the administration and servicing of client investments in certain BlackRock products. The $27 million decrease primarily related to lower levels of average AUM serviced by third parties across all asset classes.

- 62 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the three months ended June 30, 2009, as compared with the three months ended June 30, 2008. (continued)

Expenses (continued)

Portfolio Administration and Servicing Costs (continued)

Portfolio administration and servicing costs for the three months ended June 30, 2009 included $91 million of costs attributable to Bank of America/Merrill Lynch and affiliates and $5 million of costs attributable to PNC and affiliates as compared to $118 million and $9 million, respectively, in the three months ended June 30, 2008. Portfolio administration and servicing costs related to other non-related parties increased $4 million to $29 million for the three months ended June 30, 2009, as compared to $25 million for the three months ended June 30, 2008 due to an expansion of distribution platforms.

Amortization of Deferred Mutual Fund Sales Commissions

Amortization of deferred mutual fund sales commissions decreased to $26 million for the three months ended June 30, 2009, as compared to $33 million for the three months ended June 30, 2008. The decrease in amortization of deferred mutual fund sales commissions was primarily the result of lower sales and redemptions in certain share classes of open-end funds.

General and Administration Expenses

   Three Months Ended
June 30,
  Variance 
(Dollar amounts in millions)  2009  2008  Amount  % Change 

General and administration expenses:

       

Marketing and promotional

  $18  $45  $(27 (60)% 

Professional services

   29   18   11   61

Portfolio services

   37   48   (11 (23)% 

Technology

   26   30   (4 (13)% 

Closed-end fund launch costs

   —     5   (5 (100)% 

Occupancy

   35   34   1   3

Other general and administration

   46   28   18   64
              

Total general and administration expenses

  $191  $208  $(17 (8)% 
              

- 63 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating results for the three months ended June 30, 2009, as compared with the three months ended June 30, 2008. (continued)

Expenses (continued)

General and Administration Expenses (continued)

General and administration expenses decreased $17 million, or 8%, for the three months ended June 30, 2009 compared with the three months ended June 30, 2008. Marketing and promotional expenses decreased $27 million, or 60%, primarily due to a decline in travel and promotional expenses. Portfolio service costs decreased $11 million, or 23%, to $37 million. Closed-end funds launch costs decreased $5 million as compared to the three months ended June 30, 2008 as a result of one alternative asset fund launched on the London Stock Exchange in the three months ended June 30, 2008 which generated $300 million in AUM. Technology expenses decreased $4 million, or 13%, to $26 million compared to $30 million for the three months ended June 30, 2008 primarily due to a decrease in technology consulting. Professional services increased $11 million, or 61%, to $29 million compared to $18 million for the three months ended June 30, 2008 primarily related to legal and advisory costs in connection with the BGI Transaction. Other general and administration expenses increased $18 million, or 64%, to $46 million from $28 million, primarily related to a $16 million increase in expense due to balance sheet related foreign currency effects, expenses for potentially uncollectible receivables, offset by a reduction of various expenses primarily the result of cost control efforts.

Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests

Non-operating income (expense), less net income (loss) attributable to non-controlling interests for the three months ended June 30, 2009 and 2008 was as follows:

   Three Months Ended
June 30,
  Variance 
(Dollar amounts in millions)  2009  2008  Amount  % Change 

Total non-operating income (expense)

  $77  $(4 $81  NM  

Net income (loss) attributable to non-controlling interests

   26   (20  46  230
              

Total non-operating income (expense), less net income (loss) attributable to non-controlling interests

  $51  $16   $35  219
              

 

NM – Not Meaningful

- 64 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the three months endedJune 30, 2009, as compared with the three months endedJune 30, 2008. (continued)

Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests (continued)

The components of non-operating income (expense), less net income (loss) attributable to non-controlling interests, for the three months ended June 30, 2009 and 2008 were as follows:

   Three Months Ended
June 30,
  Variance 
(Dollar amounts in millions)  2009  2008  Amount  % Change 

Net gain (loss) on investments1

     

Private equity

  $11   $2   $9   450

Real estate

   (12  (8  (4 (50)% 

Distressed hedge funds

   44    7    37   NM  

Hedge funds/funds of hedge funds

   8    5    3   60

Other investments2

   2    (10  12   120
              

Sub-total

   53    (4  57   NM  

Investments related to deferred compensation plans

   9    25    (16 (64)% 
              

Total net gain (loss) on investments1

   62    21    41   195

Net income (loss) attributable to other non-controlling interests3

   —      (1  1   100

Interest and dividend income

   4    14    (10 (71)% 

Interest expense

   (15  (18  3   17
              

Total non-operating income (expense)1

   51    16    35   219

Compensation expense related to (appreciation) on deferred compensation plans

   (9  (25  16   64
              

Non-operating income (expense), as adjusted1

  $42   $(9 $51   NM  
              

 

NM – Not Meaningful

1

Includes net income (loss) attributable to non-controlling interests (redeemable and nonredeemable) related to investment activities.

2

Includes net gains/(losses) related to equity and fixed income investments and BlackRock’s seed capital hedging program.

3

Includes non-controlling interests related to operating entities (non-investment activities).

Non-operating income, net of non-controlling interests, increased $35 million to $51 million for the three months ended June 30, 2009, as compared to $16 million for the three months ended June 30, 2008. The $51 million non-operating income, net of non-controlling interests, related to the Company’s co-investments and seed investments included, net gains in distressed hedge funds of $44 million, private equity products of $11 million, hedge funds/funds of hedge funds of $8 million, fixed income and equity investments of $2 million, and investments related to deferred compensation plans of $9 million, offset by a decrease in valuations from real estate equity/debt products of $12 million. In addition, net interest expense was $11 million, an increase of $7 million primarily due to a decline in interest rates.

- 65 -


PART I – FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the three months ended June 30, 2008,2009, as compared with the three months ended June 30, 2007.2008. (continued)

 

Revenue (continued)

Net Economic Investment Advisory and Administration FeesPortfolio

The increaseCompany reviews its net economic exposure to its investment portfolio by reducing its GAAP investments by the net assets attributable to non-controlling interests of consolidated sponsored investment funds. Changes in the investment advisoryportfolio are due to purchases, sales, maturities, distributions as well as the impact of valuations. The following table represents the percentage ranges, by asset type, of the net “economic” investment portfolio, excluding investments related to deferred compensation plans, at June 30, 2009 and administration fees of $242.12008:

June 30, 2009
% Ranges

June 30, 2008
% Ranges

Private equity

25 -35%15 – 25%

Real estate

<10%15 – 25%

Distressed hedge funds

20 – 30%15 – 25%

Hedge funds/funds of hedge funds

10 – 20%15 – 25%

Other investments

15 – 25%20 – 30%

Income Tax Expense

Income tax expense was $94 million was the result of an increase in investment advisory and administration base fees of $210.7 million, or 22.2%, to $1,161.4$147 million for the three months ended June 30, 2009 and 2008, respectively. The effective income tax rate for the three months ended June 30, 2009 was 30.1%, as compared with $950.6to 34.9% for the three months ended June 30, 2008. Excluding approximately $15 million of tax benefits, primarily from favorable tax rulings received during the quarter, the effective income tax rate was 35.0%.

Operating Income and Operating Margin

GAAP

Operating income totaled $261 million for the three months ended June 30, 2007, and an increase2009, which was a decrease of $31.4$144 million in performance fees. Investment advisory and administration base fees increased for the three months ended June 30, 2008 primarily as a result of increased average AUM across all asset types over the past twelve months.

The increase in investment advisory and administration base fees of $210.7 million for the three months ended June 30, 2008, compared with the three months ended June 30, 2007 consisted of increases of $72.3 million in equity and balanced products, $63.3 million in cash management products, $63.0 million in alternative investment products and $12.1 million in fixed income products. The increase in investment advisory and administration base fees was driven by increases in average AUM in each asset class, which includes the impact of the AUM acquired in the Quellos Transaction, for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007.

Investment advisory performance fees increased by $31.4 million, or 121.9%, to $57.1 million2008. The Company’s operating margin was 25.4% for the three months ended June 30, 2008,2009, compared to $25.7 million29.2% for the three months ended June 30, 2007, primarily as a result of higher investment advisory performance fees in international equity separate accounts2008. Operating income and other investment products including equity hedge funds and real estate debt funds.

Other Revenue

Total other revenue of $134.8 million for the quarter ended June 30, 2008 increased $47.0 million, or 53.5%, compared with the quarter ended June 30, 2007. Total other revenue primarily represents fees earned onBlackRock Solutions products and services of $99.7 million, net interest related to securities lending of $10.5 million, property management fees of $9.1 million earned on real estate products (primarily related to reimbursement of the salaries and benefits of certain Metric employees from certain real estate products) and unit trust sales commissions of $6.7 million.

The increase in other revenue of $47.0 millionoperating margin for the three months ended June 30, 2008, as compared to2009 included the three months ended June 30, 2007, was primarily the resultimpact of an increase of $53.4a $311 million fromBlackRock Solutions products and services driven by additionaldecrease in investment advisory and Aladdin® assignments,administration base fees, associated with a market driven reduction in AUM over the past twelve months and a $40 million decrease in performance fee revenue. The decrease in revenue is partially offset by a $214 million decrease in fees earned foroperating expenses primarily due to declines in employee compensation and benefits, portfolio administration and servicing costs, general and administration expenses and amortization of deferred mutual fund accounting of $6.5 million. A portion of the revenue earned on advisory assignments was comprised of both ongoing fees based on AUM of the respective portfolio assignments and one-time advisory and portfolio structuring fees.sales commissions.

 

- 3766 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the three months ended June 30, 2008,2009, as compared with the three months ended June 30, 2007.2008. (continued)

Operating Income and Operating Margin (continued)

 

As Adjusted

Operating income, as adjusted, totaled $302 million for the three months ended June 30, 2009, which was a decrease of $145 million compared to the three months ended June 30, 2008. Operating margin, as adjusted, was 34.4% and 37.8% for the three months ended June 30, 2009 and 2008, respectively. The decline of operating income, as adjusted, for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008 is primarily related to the impact of the $358 million decrease in revenue offset by a $213 million decrease in operating expenses primarily due to employee compensation and benefits and general and administration. The 34.4% operating margin, as adjusted, for the three months ended June 30, 2009 includes approximately a two percentage point reduction attributable to balance sheet related foreign currency effects.

Operating income, as adjusted, and operating margin, as adjusted, are described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.

- 67 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

ExpensesOperating results for the three months endedJune 30, 2009, as compared with the three months endedJune 30, 2008. (continued)

 

   Three Months Ended
June 30,
  Variance 
(Dollar amounts in thousands)  2008  2007  Amount  % 

Expenses:

       

Employee compensation and benefits

  $551,954  $408,773  $143,181  35.0%

Portfolio administration and servicing costs

   153,618   131,077   22,541  17.2%

Amortization of deferred mutual fund sales commissions

   33,422   28,713   4,709  16.4%

General and administration

   206,395   215,384   (8,989) (4.2)%

Amortization of intangible assets

   36,572   31,075   5,497  17.7%
              

Total expenses

  $981,961  $815,022  $166,939  20.5%
              

Total expenses increased $166.9Net Income Attributable to BlackRock, Inc.

The components of net income attributable to BlackRock, Inc. and net income attributable to BlackRock, Inc., as adjusted, for the three months ended June 30, 2009 and 2008 are as follows:

   Three Months Ended
June 30,
     Three Months Ended
June 30,
    
   2009  2008     2009  2008    
(Dollar amounts in millions,
except per share data)
  GAAP  GAAP  %
Change
  As adjusted  As adjusted  %
Change
 

Operating income

  $261   $405   (36)%  $302   $447   (32)% 

Non-operating income (expense), less net income (loss) attributable to non-controlling interests

   51    16   219  42    (9 NM  

Income tax expense

   (94  (147 (36)%   (105  (153 (31)% 
                   

Net income attributable to BlackRock, Inc.

  $218   $274   (20)%  $239   $285   (16)% 
                   

Net income allocated to:

       

Common shares

  $212   $264   (20)%  $233   $275   (15)% 

Participating RSUs

   6    10   (40)%   6    10   (40)% 
                   

Net income attributable to BlackRock, Inc.

  $218   $274   (20)%  $239   $285   (16)% 
                   

Total weighted-average common shares outstanding

   133,364,611    132,032,538   1  133,364,611    132,032,538   1

Diluted earnings attributable to BlackRock, Inc. shareholders per common share

  $1.59   $2.00   (21)%  $1.75   $2.08   (16)% 

 

NM – Not Meaningful  

- 68 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the three months endedJune 30, 2009, as compared with the three months endedJune 30, 2008. (continued)

Net Income Attributable to BlackRock, Inc. (continued)

Net income attributable to BlackRock, Inc. for the three months ended June 30, 2009 included operating income of $261 million, or 20.5%,$1.24 per diluted common share, non-operating income, less net income (loss) attributable to $982.0non-controlling interests, of $51 million, or $0.24 per diluted common share and an $0.11 per diluted common share benefit primarily related to a favorable tax ruling received during the quarter. Net income attributable to BlackRock, Inc. totaled $218 million, or $1.59 per diluted common share, for the three months ended June 30, 2009, which was a decrease of $56 million, or $0.41 per diluted common share, compared to the three months ended June 30, 2008.

Net income attributable to BlackRock, Inc. for the three months ended June 30, 2009 included the after-tax impact of the portion of LTIP awards which will be funded through a capital contribution of BlackRock stock held by PNC of $10 million, BGI transaction/integration costs of $10 million and an expected contribution by Merrill Lynch of $1 million to fund certain compensation of former Merrill Lynch Investment Managers (“MLIM”) employees.

Net income attributable to BlackRock, Inc. of $274 million for the three months ended June 30, 2008 compared with $815.0included the after-tax impact of the portion of certain LTIP awards which will be funded through a capital contribution of BlackRock stock held by PNC of $10 million and an expected contribution by Merrill Lynch of $1 million to fund certain compensation of former MLIM employees.

Exclusive of these items in both periods, diluted earnings per common share, as adjusted, for the three months ended June 30, 2007.2009 decreased $0.33, or 16%, to $1.75 compared to the three months ended June 30, 2008. Diluted earnings per common share, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.

- 69 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the six months endedJune 30, 2009, as compared with the six months endedJune 30, 2008. (continued)

Revenue

   Six Months Ended
June 30,
  Variance 
(Dollar amounts in millions)  2009  2008  Amount  % Change 

Investment advisory and administration fees:

       

Fixed income

  $406  $455  $(49 (11)% 

Cash management

   341   359   (18 (5)% 

Equity and balanced

   719   1,203   (484 (40)% 

Alternative investment products

   183   276   (93 (34)% 
              

Investment advisory and administration base fees

   1,649   2,293   (644 (28)% 

Fixed income

   8   2   6   300

Equity and balanced

   8   68   (60 (88)% 

Alternative investment products

   12   29   (17 (59)% 
              

Investment advisory performance fees

   28   99   (71 (72)% 
              

Total investment advisory and administration base and performance fees

   1,677   2,392   (715 (30)% 

BlackRock Solutions and advisory

   256   160   96   60

Distribution fees

   48   69   (21 (30)% 

Other revenue

   35   66   (31 (47)% 
              

Total revenue

  $2,016  $2,687  $(671 (25)% 
              

Total revenue for the six months ended June 30, 2009 decreased $671 million, or 25%, to $2,016 million, compared with $2,687 million for the six months ended June 30, 2008. The $671 million decrease was the result of a $715 million decrease in total investment advisory and administration base and performance fees, a $31 million decrease in other revenue and a $21 million decrease in distribution fees, partially offset by a $96 million increase inBlackRock Solutions and advisory revenue.

Investment Advisory and Administration Fees

The decrease in investment advisory and administration fees of $715 million, or 30%, was the result of a decrease in investment advisory and administration base fees of $644 million, or 28%, to $1,649 million for the six months ended June 30, 2009, compared with $2,293 million for the six months ended June 30, 2008 and a decrease of $71 million in performance fees.

The decrease in investment advisory and administration base fees of $644 million for the six months ended June 30, 2009, compared with the six months ended June 30, 2008 consisted of decreases in base fees of $484 million in equity and balanced products, $93 million in alternative products, $49 million in fixed income products and $18 million in cash management products as a result of decreased AUM in 2009 compared to 2008 for all asset classes.

- 70 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)

Revenue (continued)

Investment Advisory and Administration Fees (continued)

Investment advisory performance fees decreased $71 million, or 72%, to $28 million for the six months ended June 30, 2009, as compared to $99 million for the six months ended June 30, 2008, primarily due to a reduction in performance fees in international equity separate accounts and equity hedge funds.

BlackRock Solutions and Advisory

BlackRock Solutions and advisory revenue for the six months ended June 30, 2009 increased $96 million, or 60%, compared with the six months ended June 30, 2008. The increase in BlackRock Solutions and advisory revenue was primarily the result of additional advisory assignments during the period, as well as additional Aladdin mandates. Revenue earned on advisory assignments was comprised of advisory and portfolio structuring assignment fees and ongoing fees based on AUM of the respective portfolio assignments.

Distribution Fees

Distribution fees decreased $21 million to $48 million for the six months ended June 30, 2009, as compared to $69 million for the six months ended June 30, 2008. The decrease in distribution fees was primarily the result of lower sales, redemptions and AUM in certain share classes of open-end funds.

Other Revenue

Other revenue of $35 million for the six months ended June 30, 2009 decreased $31 million compared with the six months ended June 30, 2008. Other revenue for the six months ended June 30, 2009 included $9 million of unit trust sales commissions, $9 million of net interest related to securities lending and $17 million of other revenue.

The decrease in other revenue of $31 million, or 47%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, was primarily the result of a $17 million decline in property management fees primarily related to the outsourcing in the fourth quarter of 2008 of Metric contracts with BlackRock real estate clients, a $9 million decrease in net interest earned related to securities lending and a $5 million decline in unit trust sales commissions.

- 71 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)

Expenses

   Six Months Ended
June 30,
  Variance 
(Dollar amounts in millions)  2009  2008  Amount  % Change 

Expenses:

       

Employee compensation and benefits

  $741  $1,021  $(280 (27)% 

Portfolio administration and servicing costs

   252   306   (54 (18)% 

Amortization of deferred mutual fund sales commissions

   53   63   (10 (16)% 

General and administration

   344   422   (78 (18)% 

Restructuring charges

   22   —     22   NM  

Amortization of intangible assets

   72   74   (2 (3)% 
              

Total expenses

  $1,484  $1,886  $(402 (21)% 
              

NM – Not Meaningful

Total expenses decreased $402 million, or 21%, to $1,484 million for the six months ended June 30, 2009, compared to $1,886 million for the six months ended June 30, 2008. Excluding the restructuring charges of $22 million, expenses decreased $424 million, or 22%, primarily attributable to increasesdecreases in employee compensation and benefits, general and administration expenses and portfolio and administration and servicing costs, amortization of finite-lived intangible assets and amortization of deferred mutual fund sales commissions, partially offset by a decrease in general and administration expenses. The three months ended June 30, 2007 included $6.0 million of integration charges related to the MLIM Transaction, which were primarily recorded in general and administration expense.costs.

Employee Compensation and Benefits

Employee compensation and benefits expense increased by $143.2decreased $280 million, or 35.0%27%, to $552.0$741 million, at June 30, 2009, compared to $1,021 million for the threesix months ended June 30, 2008, compared to $408.8 million for the three months ended June 30, 2007.2008. The increasedecrease in employee compensation and benefits expense was attributable to increasesa $158 million reduction in incentive compensation salaries and benefits, deferred compensation and stock-based compensation of $68.4 million, $38.4 million, $23.1 million and $13.3 million, respectively. The $68.4 million increaseprimarily associated with the decrease in incentive compensation was primarily attributable to higher operating income and direct incentives associated with higher performance fees, earned ona $105 million decrease in salaries, benefits and commissions due to lower headcount as a result of the Company’s alternative investment products. The increasecost control efforts and outsourcing of $38.4Metric services and a $17 million decrease in salaries and benefits was primarily duedeferred compensation which is linked to higher staffing levels associated with business growth and the Quellos Transaction. Full time employees (including employees of Metric) at June 30, 2008 totaled 6,069 as compared to 5,315 at June 30, 2007. Deferred compensation increased $23.1 million primarily due toa decrease in appreciation on assets related to certain deferred compensation plans, which is substantially offset by gains on certain investments included in non-operating income. Stock-based compensation increased $13.3 million primarily dueplans. Employees at June 30, 2009 totaled 4,984 as compared to additional grants of stock awards in the first quarter6,069 (including 410 Metric employees) and 5,659 (excluding Metric employees) at June 30, 2008.

Portfolio Administration and Servicing Costs

Portfolio administration and servicing costs increased $22.5decreased $54 million to $153.6$252 million forduring the threesix months ended June 30, 2008,2009, compared to $131.1$306 million for the threesix months ended June 30, 2007.2008. These costs include payments to Bank of America/Merrill Lynch under the Global Distribution Agreement,a global distribution agreement, and payments to PNC as well as other third parties, primarily associated with the administration and servicing of client investments in certain BlackRock products. The $22.5$54 million increase relatesdecrease primarily related to higherlower levels of average AUM in open-end funds, cash management products, as well as alternative products. Portfolio administration and servicing costs for the three months ended June 30, 2008 included $118.1 million of costs attributable to Merrill Lynch and affiliates and $8.6 million of costs attributable to PNC and affiliates as compared to $107.7 million and $6.9 million, respectively, in the three months ended June 30, 2007.serviced by related parties across all asset classes.

 

- 3872 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the threesix months endedJune 30 2008,, 2009, as compared with the threesix months endedJune 30 2007., 2008. (continued)

Expenses (continued)

Portfolio Administration and Servicing Costs (continued)

Portfolio administration and servicing costs for the six months ended June 30, 2009 included $189 million of costs attributable to Bank of America/Merrill Lynch and affiliates and $10 million of costs attributable to PNC and affiliates as compared to $240 million and $17 million, respectively, in the six months ended June 30, 2008. Portfolio administration and servicing costs related to other non-related parties increased $4 million to $53 million for the six months ended June 30, 2009, as compared to $49 million for the six months ended June 30, 2008 due to an expansion of distribution platforms.

Amortization of Deferred Mutual Fund Sales Commissions

Amortization of deferred mutual fund sales commissions increased by $4.7decreased $10 million to $33.4$53 million for the threesix months ended June 30, 2008,2009, as compared to $28.7$63 million for the threesix months ended June 30, 2007.2008. The increasedecrease in amortization of deferred mutual fund sales commissions was primarily the result of higherlower sales ofand redemptions in certain share classes of open-endedU.S. open-end funds.

General and Administration ExpenseExpenses

 

  Three Months Ended
June 30,
  Variance   Six Months Ended
June 30,
  Variance 
(Dollar amounts in thousands)  2008  2007  Amount % 

General and administration expense:

       
(Dollar amounts in millions)  2009  2008  Amount % Change 

General and administration expenses:

       

Marketing and promotional

  $45,053  $42,324  $2,729  6.4%  $32  $87  $(55 (63)% 

Professional services

   42   41   1   2

Portfolio services

   46,323   37,994   8,329  21.9%   70   87   (17 (20)% 

Technology

   51   61   (10 (16)% 

Closed-end fund launch costs

   2   9   (7 (78)% 

Occupancy

   34,425   28,438   5,987  21.1%   70   68   2   3

Technology

   30,266   33,205   (2,939) (8.9)%

Professional services

   18,469   21,944   (3,475) (15.8)%

Closed-end fund launch costs

   5,388   19,801   (14,413) (72.8)%

Other general and administration

   26,471   31,678   (5,207) (16.4)%   77   69   8   12
                      

Total general and administration expense

  $206,395  $215,384  $(8,989) (4.2)%

Total general and administration expenses

  $344  $422  $(78 (18)% 
                      

General and administration expenses decreased $9.0$78 million, or 4.2%18%, for the threesix months ended June 30, 2009 compared with the six months ended June 30, 2008. Marketing and promotional expenses decreased $55 million, or 63%, primarily due to a decline in travel and promotional expenses. Portfolio service costs decreased $17 million, or 20%, to $70 million, partially due to a decline in AUM. Technology expenses decreased $10 million, or 16%, to $51 million compared to $61 million for the six months ended June 30, 2008 compared with the three months ended June 30, 2007. Closed-end fund launch costs decreased $14.4 million as compared to the three months ended June 30, 2007primarily due to a closed-end fund launched during the second quarter 2007, which generated $2.0 billiondecrease in AUM as compared to one alternative asset fund launched on the London Stock Exchange in the three months ended June 30, 2008, which generated approximately $300 million in AUM.software licensing/maintenance costs and technology consulting. Other general and administration expense decreased $5.2expenses increased $8 million, or 16.4%12%, to $26.5$77 million from $69 million, primarily related to a $6.4 million declineexpenses for potentially uncollectible receivables and an increase in expense due to balance sheet related foreign currency remeasurement losses. Professional services decreased $3.5 million, or 15.8%, to $18.5 million compared to $21.9 million foreffects, partially offset by a reduction of various expenses primarily the three months ended June 30, 2007 primarily due to decreased consulting costs related to the MLIM integration in 2007. Portfolio services costs increased by $8.3 million, or 21.9%, to $46.3 million primarily as a result of the Company incurring additional portfolio service expenses related to certain funds. The increase in this fund-related expense is more than offset by higher administration fee revenue earned on the funds. Occupancy expenses increased by $6.0 million, or 21.1%, to $34.4 million, as a result of an increase of offices worldwide, including the impact of the Quellos Transaction.cost control efforts.

 

- 3973 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the threesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)

Expenses (continued)

Restructuring Charges

For the six months ended June 30, 2008, as compared with the three months ended June 30, 2007. (continued)

Amortization2009 BlackRock recorded pre-tax restructuring charges of Intangible Assets

The $5.5$22 million, increase inprimarily related to severance, outplacement costs, occupancy costs and accelerated amortization of intangible assetscertain previously granted stock awards associated with a reduction in work force and reengineering efforts. See Note 10, Restructuring Charges, to $36.6 million for the three months ended June 30, 2008, compared to $31.1 million for the three months ended June 30, 2007, primarily reflects amortizationCompany’s condensed consolidated financial statements contained in Part I, Item 1 of finite-lived intangible assets acquired in the Quellos Transaction.this filing.

Non-Operating Income (Expense), Less Net ofIncome (Loss) Attributable to Non-Controlling Interests

Non-operating income (expense), less net ofincome (loss) attributable to non-controlling interests for the threesix months ended June 30, 20082009 and 20072008 was as follows:

 

   Three Months Ended
June 30,
  Variance 
(Dollar amounts in thousands)  2008  2007  Amount  % 

Total non-operating income

  $(3,263) $213,718  $(216,981) (101.5)%

Non-controlling interests

   19,900   (148,463)  168,363  113.4%
              

Total non-operating income, net of non-controlling interests

  $16,637  $65,255  $(48,618) (74.5)%
              

The components of non-operating income, net of non-controlling interests, for the three months ended June 30, 2008 and 2007 were as follows:

   Three Months Ended
June 30,
  Variance 
(Dollar amounts in thousands)  2008  2007  Amount  % 

Non-operating income, net of non-controlling interests:

     

Net gain (loss) on investments, net of non-controlling interests:

     

Private equity

  $1,696  $32,636  $(30,940) (94.8)%

Real estate

   (8,455)  3,621   (12,076) (333.5)%

Hedge funds/funds of hedge funds

   11,664   8,785   2,879  32.8%

Other investments1

   15,190   16,698   (1,508) (9.0)%
              

Total net gain on investments, net of non-controlling interests

   20,095   61,740   (41,645) (67.5)%

Other non-controlling interest2

   (662)  —     (662) NM 

Interest and dividend income

   13,924   13,738   186  1.4%

Interest expense

   (16,720)  (10,223)  (6,497) 63.6%
              

Total non-operating income, net of non-controlling interests

  $16,637  $65,255  $(48,618) (74.5)%
              

   Six Months Ended
June 30,
  Variance 
(Dollar amounts in millions)  2009  2008  Amount  % Change 

Total non-operating income (expense)

  $(102 $(24 $(78 (325)% 

Net income (loss) attributable to non-controlling interests

   4    (15  19   127
              

Total non-operating income (expense), less net income (loss) attributable to non-controlling interests

  $(106 $(9 $(97 NM  
              

NM – Not Meaningful

1

Includes investment income related to equity and fixed income investments, collateralized debt obligations (“CDOs”), deferred compensation arrangements and BlackRock’s seed capital hedging program.

2

Includes non-controlling interest related to operating entities (non-investment activities).

 

- 4074 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the threesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)

Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests (continued)

The components of non-operating income (expense), less net income (loss) attributable to non-controlling interests, for the six months ended June 30, 2009 and 2008 were as compared withfollows:

   Six Months Ended
June 30,
  Variance 
(Dollar amounts in millions)  2009  2008  Amount  % Change 

Net gain (loss) on investments1

     

Private equity

  $(9 $10   $(19 (190)% 

Real estate

   (105  (22  (83 (377)% 

Distressed hedge funds

   32    4    28   NM  

Hedge funds/funds of hedge funds

   2    (8  10   125

Other investments2

   (13  (12  (1 (8)% 
              

Sub-total

   (93  (28  (65 (232)% 

Investments related to deferred compensation plans

   5    24    (19 (79)% 
              

Total net gain (loss) on investments1

   (88  (4  (84 NM  

Net income (loss) attributable to other non-controlling interests3

   —      (1  1   100

Interest and dividend income

   12    32    (20 (63)% 

Interest expense

   (30  (36  6   17
              

Total non-operating income (expense)1

   (106  (9  (97 NM  

Compensation expense related to (appreciation) on deferred compensation plans

   (5  (24  19   79
              

Non-operating expense, as adjusted1

  $(111 $(33 $(78 (236)% 
              

NM – Not Meaningful

1

Includes net income (loss) attributable to non-controlling interests (redeemable and nonredeemable) related to investment activities.

2

Includes net gains/(losses) related to equity and fixed income investments and BlackRock’s seed capital hedging program.

3

Includes non-controlling interests related to operating entities (non-investment activities).

Non-operating expense, less net income (loss) attributable to non-controlling interests, decreased $97 million to $106 million for the threesix months ended June 30, 2007. (continued)

Non-Operating Income, Net of Non-Controlling Interests (continued)

Non-operating income, net of non-controlling interests, decreased $48.6 million2009, as compared to $16.6$9 million for the quartersix months ended June 30, 2008, compared2008. The $106 million non-operating expense, less non-controlling interests, related to $65.3the Company’s co-investment and seed investments, included net losses in real estate products of $105 million, for the quarter ended June 30, 2007. The decrease in net non-operating income of $48.6 million primarily reflects a $30.9 million decline in net investment gains from co-investments in private equity products of $9 million and $12.1other investments of $13 million, partially offset by valuation gains in distressed hedge funds of $32 million, investments related to declines in valuations on co-investments in real estate products.deferred compensation plans of $5 million and hedge funds/funds of hedge funds of $2 million. In addition, net interest expense increased $6.3was $18 million, compared to second quarter 2007 due primarily to the issuancea decline of long-term debt in September 2007.

Income Taxes

Income tax expense was $147.6$14 million and $125.0 million for the three months ended June 30, 2008 and 2007, respectively. The effective income tax rate was 35.0% for the three months ended June 30, 2008 as compared to 36.0% for the three months ended June 30, 2007. The decrease was primarily due to the mix of pre-tax income and tax legislation changes enacteda decline in the third quarter 2007 in the United Kingdom that reduced corporate income tax rates in 2008.

Net Income

Net income totaled $274.1 million, or $2.05 per diluted share, for the three months ended June 30, 2008, which was an increase of $51.8 million, or $0.36 per diluted share, compared to the three months ended June 30, 2007. Net income for the quarter ended June 30, 2008 includes the after-tax impact of the portion of LTIP awards that will be funded through a capital contribution of BlackRock common stock held by PNC and an expected contribution by Merrill Lynch to fund certain compensation of former MLIM employees of $9.6 million and $1.6 million, respectively.

Net income of $222.2 million for the quarter ended June 30, 2007 included the after-tax impacts related to the portion of certain LTIP awards which will be funded through a capital contribution of BlackRock common stock held by PNC of $8.9 million, MLIM integration costs of $3.9 million and an expected contribution by Merrill Lynch of $1.6 million to fund certain compensation of former MLIM employees. MLIM integration costs primarily include professional fees and marketing and promotional expenses. Exclusive of these GAAP expenses in both periods, fully diluted earnings per share, as adjusted, for the three months ended June 30, 2008 increased $0.34, or 18.9%, to $2.14 compared to the three months ended June 30, 2007.interest rates.

 

- 4175 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the threesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)

Income Tax Expense

Income tax expense was $124 million and $277 million for the six months ended June 30, 2009 and 2008, respectively. The effective income tax rate for the six months ended June 30, 2009 was 29.1%, as compared to 35.0% for the six months ended June 30, 2008. Excluding $25 million of tax benefits primarily related to a favorable tax ruling and the final resolution of outstanding tax matters in the six months ended June 30, 2009, the effective income tax rate was 35.0%.

Operating Income and Operating Margin

GAAP

Operating income totaled $532 million for the six months ended June 30, 2009, which was a decrease of $269 million compared to the six months ended June 30, 2008. The Company’s operating margin was 26.4% for the six months ended June 30, 2009, compared to 29.8% for the six months ended June 30, 2008. Operating income and operating margin for the six months ended June 30, 2009 included the impact of a $644 million decrease in investment advisory and administration base fees, associated with a market driven reduction in AUM, a $71 million decrease in performance fees revenue, and a $52 million reduction in other revenue and distribution fees, partially offset by a $96 million increase inBlackRock Solutions and advisory revenue. The decrease in revenue is partially offset by a $402 million decrease in operating expenses primarily due to declines in employee compensation and benefits, general and administration expenses and portfolio administration and servicing costs offset by $22 million of restructuring charges.

As Adjusted

Operating income, as adjusted, totaled $609 million for the six months ended June 30, 2009, which was a decrease of $251 million compared to the six months ended June 30, 2008. Operating margin, as adjusted, was 35.8% and 37.7% for the six months ended June 30, 2009 and 2008, respectively. The decline of operating income, as adjusted, for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 is primarily related to the impact of the $671 million decrease in revenue offset by a $420 million decrease in operating expenses primarily due to decreases in employee compensation and benefits, general and administration expenses and portfolio administration and servicing costs.

Operating income, as adjusted, and operating margin, as adjusted, are described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.

- 76 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for thesix months endedJune 30, 2009,as compared with the threesix months endedJune 30, 2008. (continued)

Net Income Attributable to BlackRock, Inc.

The components of net income attributable to BlackRock, Inc. and net income attributable to BlackRock, Inc., as adjusted, for the six months ended June 30, 2007.2009 and 2008 are as follows:

  Six Months Ended
June 30,
     Six Months Ended
June 30,
    
  2009  2008     2009  2008    
(Dollar amounts in millions, except per share
data)
 GAAP  GAAP  % Change  As adjusted  As adjusted  % Change 

Operating income

 $532   $801   (34)%  $609   $860   (29)% 

Non-operating income (expense), less net income (loss) attributable to non-controlling interests

  (106  (9 NM    (111  (33 (236)% 

Income tax expense

  (124  (277 (55)%   (149  (290 (49)% 
                  

Net income attributable to BlackRock, Inc.

 $302   $515   (41)%  $349   $537   (35)% 
                  

Net income allocated to:

      

Common shares

 $294   $498   (41)%  $339   $520   (35)% 

Participating RSUs

  8    17   (53)%   10    17   (41)% 
                  

Net income attributable to BlackRock, Inc.

 $302   $515   (41)%  $349   $537   (35)% 
                  

Total weighted-average common shares outstanding

  132,668,695    131,812,500   1  132,668,695    131,812,500   1

Diluted earnings attributable to BlackRock, Inc. shareholders per common share

 $2.22   $3.78   (41)%  $2.56   $3.94   (35)% 

 

NM – Not Meaningful

  

- 77 -


PART I – FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating Marginresults for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)

The Company’s operating margin was 29.2%Net Income Attributable to BlackRock, Inc. (continued)

Net income attributable to BlackRock, Inc. for the threesix months ended June 30, 2009 includes operating income of $532 million, or $2.54 per diluted common share, non-operating losses, less net income (loss) attributable to non-controlling interests, of $106 million, or $0.50 per diluted common share and an $0.18 per diluted common share benefit related to a favorable tax ruling and the final resolution of outstanding tax matters. Net income attributable to BlackRock, Inc. totaled $302 million, or $2.22 per diluted common share, for the six months ended June 30, 2009, which was a decrease of $213 million, or $1.56 per diluted common share, compared to the six months ended June 30, 2008.

Net income attributable to BlackRock, Inc. for the six months ended June 30, 2009 included the after-tax impact portion of LTIP awards which will be funded through a capital contribution of BlackRock stock held by PNC of $20 million, restructuring charges of $14 million, BGI transaction/integration costs of $10 million and an expected contribution by Merrill Lynch of $3 million to fund certain compensation of former MLIM employees.

Net income attributable to BlackRock, Inc. of $515 million for the six months ended June 30, 2008 comparedincluded the after-tax impact of the portion of certain LTIP awards which will be funded through a capital contribution of BlackRock stock held by PNC of $19 million and an expected contribution by Merrill Lynch of $3 million to 25.7%fund certain compensation of former MLIM employees.

Exclusive of these items in both periods, diluted earnings per common share, as adjusted, for the threesix months ended June 30, 2007. Operating margin for2009 decreased $1.38, or 35%, to $2.56 compared to the threesix months ended June 30, 2008 and 2007 included the impact of $5.4 million and $24.1 million, respectively, of closed-end fund launch costs and commissions. In addition, operating margin for the three months ended June 30, 2007 included the impact of $6.0 million of MLIM integration costs. Operating margin improved 13.6% primarily due to operating leverage associated with the growth in revenue, an $18.7 million reduction in closed-end fund launch costs and commissions and the reduction of MLIM integration costs partially offset by a $17.8 million increase in compensation expense related to appreciation on certain deferred compensation plans and a $5.5 million increase in amortization of finite-lived intangible assets associated with the Quellos Transaction.

Operating margin, as adjusted, which excludes from operating income the impact of certain GAAP operating expenses and adjusts GAAP operating revenue was 37.9% and 36.1% for the three months ended June 30, 2008 and 2007, respectively. The improvement in margin primarily reflects operating leverage associated with growth in revenue. Operating margin,2008. Diluted earnings per common share, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.

- 42 -


PART I - FINANCIAL INFORMATION (continued)Liquidity and Capital Resources

Item 2.Operating ActivitiesManagement’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the six months ended June 30, 2008, as compared with the six months ended June 30, 2007. (continued)

Revenue

   Six Months Ended
June 30,
  Variance 
(Dollar amounts in thousands)  2008  2007  Amount  % 

Investment advisory and administration fees:

       

Fixed income

  $455,551  $440,038  $15,513  3.5%

Equity and balanced

   1,203,938   999,484   204,454  20.5%

Cash management

   358,059   234,786   123,273  52.5%

Alternative investment products

   276,687   149,810   126,877  84.7%
              

Investment advisory and administration base fees

   2,294,235   1,824,118   470,117  25.8%

Fixed income

   1,716   2,621   (905) (34.5)%

Equity and balanced

   67,505   16,041   51,464  320.8%

Alternative investment products

   29,401   29,476   (75) (0.3)%
              

Investment advisory performance fees

   98,622   48,138   50,484  104.9%
              

Total investment advisory and administration fees

   2,392,857   1,872,256   520,601  27.8%

Distribution Fees

   69,002   57,687   11,315  19.6%

Other revenue:

       

BlackRock Solutions

   159,366   88,610   70,756  79.9%

Other revenue

   65,864   83,844   (17,980) (21.4)%
              

Total other revenue

   225,230   172,454   52,776  30.6%
              

Total revenue

  $2,687,089  $2,102,397  $584,692  27.8%
              

Total revenue for the six months ended June 30, 2008 increased $584.7 million, or 27.8%, to $2,687.1 million, compared with $2,102.4 million for the six months ended June 30, 2007. The $584.7 million increase was primarily the resultSources of a $520.6 million increase in totalBlackRock’s operating cash include investment advisory and administration fees, and a $52.8 million increase in total other revenue.

- 43 -


PART I - FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the six months ended June 30, 2008, as compared with the six months ended June 30, 2007. (continued)

Revenue (continued)

Investment Advisory and Administration Fees

The increase in investment advisory and administration fees of $520.6 million, or 27.8%, was the result of an increase in investment advisory and administration base fees of $470.1 million, or 25.8%, to $2,294.2 million for the six months ended June 30, 2008, compared with $1,824.1 million for the six months ended June 30, 2007 and an increase of $50.4 million in investment advisory performance fees.

The increase in investment advisory and administration base fees of $470.1 million for the six months ended June 30, 2008, compared with the six months ended June 30, 2007, consisted of increases of $204.5 million in equity and balanced products, $126.9 million in alternative investment products, $123.3 million in cash management products and $15.5 million in fixed income products. The increase in investment advisory and administration fees for all asset types was driven by increased average AUM across all asset types, which includes the impact of the AUM acquired in the Quellos Transaction, for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007.

Investment advisory performance fees increased by $50.5 million, or 104.9%, to $98.6 million for the six months ended June 30, 2008, as compared to $48.1 million for the six months ended June 30, 2007, primarily as a result of higher investment advisory performance fees in international equity separate accounts.

Distribution Fees

Distribution fees increased by $11.3 million to $69.0 million for the six months ended June 30, 2008, as compared to $57.7 million for the six months ended June 30, 2007. The increase in distribution fees is primarily the result of the acquisition of distribution financing arrangementsrevenues from PNC in second quarter 2007.

Other Revenue

Total other revenue of $225.2 million for the six months ended June 30, 2008 increased $52.8 million, or 30.6%, compared with the six months ended June 30, 2007. Total other revenue primarily represents fees earned onBlackRock Solutionsand advisory products and services, of $159.4 million, net interest relatedmutual fund distribution fees and realized earnings and distributions on the Company’s investments. BlackRock primarily uses its cash to securities lending of $17.6 million, property management fees of $18.2 million earned on real estate products (primarily related to reimbursement of the salaries and benefits of certain Metric employees from certain real estate products), and unit trust sales commissions of $13.9 million.

The increase in other revenue of $52.8 million for the six months ended June 30, 2008, as compared to $172.5 million for the six months ended June 30, 2007, was primarily the result of an increase of $70.8 million fromBlackRock Solutions products and services driven by additional advisory and Aladdin® assignments, partially offset by a decrease in fees earned for fund accounting services of $15.5 million and $4.9 million earned on unit trust sales commissions. A portion of the revenue earned on advisory assignments was comprised of both ongoing fees based on AUM of the respective portfolio assignments and one-time advisory and portfolio structuring fees.

- 44 -


PART I - FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the six months ended June 30, 2008, as compared with the six months ended June 30, 2007. (continued)

Expenses

   Six Months Ended       
   June 30,  Variance 
(Dollar amounts in thousands)  2008  2007  Amount  % 

Expenses:

        

Employee compensation and benefits

  $1,020,903  $756,075  $264,828  35.0%

Portfolio administration and servicing costs

   309,357   262,163   47,194  18.0%

Amortization of deferred mutual fund sales commissions

   63,630   50,271   13,359  26.6%

General and administration

   419,378   417,549   1,829  0.4%

Amortization of intangible assets

   73,141   62,107   11,034  17.8%
              

Total expenses

  $1,886,409  $1,548,165  $338,244  21.8%
              

Total expenses increased $338.2 million, or 21.8%, to $1,886.4 million for the six months ended June 30, 2008, compared with $1,548.2 million for the six months ended June 30, 2007. The increase was attributable to increases in employeepay compensation and benefits, portfolio administration and servicing costs, amortization of deferred mutual fund sales commissions, amortization of intangible assets and general and administration expenses. The six months ended June 30, 2007, included $13.1 million of integration charges related to the MLIM Transaction, which were primarily recorded in general and administration expense.

Employee Compensation and Benefits

Employee compensation and benefits expense increased by $264.8 million, or 35.0%, to $1,020.9 million, at June 30, 2008, compared to $756.1 million for the six months ended June 30, 2007. The increase in employee compensation and benefits expense was attributable to increases in incentive compensation, salaries and benefits, stock-based compensation and deferred compensation of $126.4 million, $77.3 million, $41.3 million and $19.8 million, respectively. The $126.4 million increase in incentive compensation was primarily attributable to higher operating income and direct incentives associated with higher base and performance fees. The increase of $77.3 million, or 20.9%, in salaries and benefits was primarily due to higher staffing levels associated with business growth and the Quellos Transaction. Full time employees (including employees of Metric) at June 30, 2008 totaled 6,069 as compared to 5,315 at June 30, 2007. Stock-based compensation increased $41.3 million, or 45.6%, primarily due to additional grants of stock awards in the six months ended June 30, 2008. Deferred compensation increased $19.8 million primarily due to appreciation on assets related to certain deferred compensation plans, which is primarily offset by gains on certain investments included in non-operating income.

Portfolio Administration and Servicing Costs

Portfolio administration and servicing costs increased $47.2 million, or 18.0%, to $309.4 million for the six months ended June 30, 2008, compared to $262.2 million for the six months ended June 30, 2007. These costs include payments to Merrill Lynch under the Global Distribution Agreement, and payments to PNC as well as other third parties, primarily associated with the administration and servicing of client investments in certain BlackRock products. The $47.2 million increase related primarily to higher levels of average AUM in open-end funds, cash management products, as well as alternative products. Portfolio administration and servicing costs for the six months ended June 30, 2008 included $240.0 million of costs attributable to Merrill Lynch and affiliates and $16.8 million of costs attributable to PNC and affiliates as compared to $217.2 million and $14.1 million, respectively, in the six months ended June 30, 2007.

- 45 -


PART I - FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the six months ended June 30, 2008, as compared with the six months ended June 30, 2007. (continued)

Expenses (continued)

Amortization of Deferred Mutual Fund Sales Commissions

Amortization of deferred mutual fund sales commissions increased by $13.3 million to $63.6 million for the three months ended June 30, 2008, as compared to $50.3 million for the three months ended June 30, 2007. The increase in amortization of deferred mutual fund sales commissions was primarily the result of the acquisition of distribution financing arrangements from PNC in second quarter 2007 as well as higher sales in certain share classes of open-ended funds.

General and Administration Expense

   Six Months Ended       
   June 30,  Variance 
(Dollar amounts in thousands)  2008  2007  Amount  % 

General and administration expense:

       

Marketing and promotional

  $86,508  $83,194  $3,314  4.0%

Portfolio services

   87,498   75,723   11,775  15.6%

Occupancy

   67,733   61,670   6,063  9.8%

Technology

   61,154   61,642   (488) (0.8)%

Professional services

   40,870   45,471   (4,601) (10.1)%

Closed-end fund launch costs

   9,127   32,953   (23,826) (72.3)%

Other general and administration

   66,488   56,896   9,592  16.9%
              

Total general and administration expense

  $419,378  $417,549  $1,829  0.4%
              

General and administration expenses, increased $1.8 million, or 0.4%, for the six months ended June 30, 2008 compared with the six months ended June 30, 2007. Portfolio services costs increased by $11.8 million to $87.5 million, or 15.6%, primarily as a result of the Company incurring additional portfolio service expenses related to certain funds. The increase in this fund-related expense is more than offset by higher administration fee revenue earnedinterest on the funds. Other generalCompany’s borrowings, purchase co-investments and administration costs increased by $9.6 million, or 16.9%, to $66.5 million from $56.9 million, primarily related to an increase in foreign currency remeasurement expenses of $4.0 million and $3.3 million of incremental communication costs. Occupancy expenses increased $6.1 million, or 9.8%, to $67.7 million compared to $61.7 million for the six months ended June 30, 2007 as a result of expansion of offices worldwide (including the impact of the Quellos Transaction). Closed-end funds launch costs decreased $23.8 million as compared to the six months ended June 30, 2007 due to two closed-end funds launched during the six months ended June 30, 2007, which generated $2.8 billion in AUM as compared to two funds launched in the six months ended June 30, 2008 which generated $402.4 million in AUM. Professional services decreased $4.6 million, or 10.1%, to $40.9 million compared to $45.5 million for the six months ended June 30, 2007 primarily due to decreased consulting and legal costs related to the MLIM integration in 2007.

- 46 -


PART I - FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the six months ended June 30, 2008, as compared with the six months ended June 30, 2007. (continued)

Amortization of Intangible Assets

The $11.0 million increase in amortization of intangible assets to $73.1 million for the six months ended June 30, 2008, compared to $62.1 million for the six months ended June 30, 2007, primarily reflects amortization of finite-lived intangible assets acquired in the Quellos Transaction.

Non-Operating Income, Net of Non-Controlling Interests

Non-operating income, net of non-controlling interests, for the six months ended June 30, 2008 and 2007 was as follows:

   Six Months Ended       
   June 30,  Variance 
(Dollar amounts in thousands)  2008  2007  Amount  % 

Total non-operating income

  $(21,791) $371,449  $(393,240) (105.9)%

Non-controlling interests

   14,540   (273,131)  287,671  105.3%
              

Total non-operating income, net of non-controlling interests

  $(7,251) $98,318  $(105,569) (107.4)%
              

The components of non-operating income, net of non-controlling interests, for the six months ended June 30, 2008 and 2007 were as follows:

   Six Months Ended       
   June 30,  Variance 
(Dollar amounts in thousands)  2008  2007  Amount  % 

Non-operating income, net of non-controlling interests:

     

Net gain (loss) on investments, net of non-controlling interests:

     

Private equity

  $9,757  $42,903  $(33,146) (77.3)%

Real estate

   (22,391)  2,457   (24,848) NM 

Hedge funds/hedge funds of funds

   (3,922)  16,720   (20,642) (123.5)%

Other investments1

   11,802   25,352   (13,550) (53.4)%
              

Total net gain (loss) on investments, net of non-controlling interests

   (4,754)  87,432   (92,186) (105.4)%

Other non-controlling interest2

   (662)  —     (662) NM 

Interest and dividend income

   32,263   32,095   168  0.5%

Interest expense

   (34,098)  (21,209)  (12,889) 60.8%
              

Total non-operating income, net of non-controlling interests

  $(7,251) $98,318  $(105,569) (107.4)%
              

NM – Not Meaningful

1

Includes investment income related to equity and fixed income investments, CDOs, deferred compensation arrangements and BlackRock’s seed capital hedging program.

2

Includes non-controlling interest related to operating entities (non-investment activities).

- 47 -


PART I - FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the six months ended June 30, 2008, as compared with the six months ended June 30, 2007. (continued)

Non-Operating Income, Net of Non-Controlling Interests (continued)

Non-operating income, net of non-controlling interests, decreased $105.6 million to a loss of $7.3 million for the six months ended June 30, 2008, as compared to income of $98.3 million for the six months ended June 30, 2007. The decrease was primarily the result of a $4.8 million net loss on investments compared with a net gain on investments in the six months ended June 30, 2007 and a $12.9 million increase in interest expense related to the issuance of long-term debt in September 2007. The net loss on investments, net of non-controlling interests, in 2008 was primarily due to a decline in valuations from seed investments, capital expenditures, income taxes and co-investments in real estate equity products and hedge funds/funds of hedge funds offset by net gains in private equity and other investments.

Income Taxes

Income tax expense was $277.7 million and $234.9 million for the six months ended June 30, 2008 and 2007, respectively. The effective income tax rate for the six months ended June 30, 2008 was 35.0%, as compared to 36.0% for the six months ended June 30, 2007. The decrease was primarily due to the mix of pre-tax income and tax legislation changes enacted in the third quarter 2007 in the United Kingdom that reduced corporate income tax rates in 2008.

Net Income

Net income totaled $515.7 million, or $3.87 per diluted share, for the six months ended June 30, 2008, which was an increase of $98.1 million, or $0.70 per diluted share, compared to the six months ended June 30, 2007. Net income for the six months ended June 30, 2008 includes the after-tax impact of the portion of LTIP awards which will be funded through adividends on BlackRock’s capital contribution of BlackRock common stock held by PNC and an expected contribution by Merrill Lynch to fund certain compensation of former MLIM employees of $19.4 million and $3.3 million, respectively.

Net income of $417.6 million for the six months ended June 30, 2007 included the after-tax impacts related to the portion of certain LTIP awards which will be funded through a capital contribution of BlackRock common stock held by PNC of $16.6 million, MLIM integration costs of $8.4 million and an expected contribution by Merrill Lynch of $3.2 million to fund certain compensation of former MLIM employees. MLIM integration costs primarily include professional fees and marketing and promotional expenses. Exclusive of these GAAP expenses in both periods, fully diluted earnings per share, as adjusted, for the six months ended June 30, 2008 increased $0.65, or 19.2%, to $4.04 compared to the six months ended June 30, 2007.

- 48 -


PART I - FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating results for the six months ended June 30, 2008, as compared with the six months ended June 30, 2007. (continued)

Operating Margin

The Company’s operating margin was 29.8% for the six months ended June 30, 2008, compared to 26.4% for the six months ended June 30, 2007. Operating margin for the six months ended June 30, 2008 and 2007 included the impact of $9.3 million and $38.6 million, respectively, of closed-end fund launch costs and commissions. In addition, operating margin for the six months ended June 30, 2007 included the impact of $13.1 million of MLIM integration costs. Operating margin improved 12.9% primarily due to operating leverage associated with the growth in revenue, a $29.4 million reduction of closed-end fund launch costs and commissions and the reduction of MLIM integration costs partially offset by a $14.6 million increase in compensation expense related to appreciation on certain deferred compensation plans and a $11.0 million increase in amortization of intangible assets associated with the Quellos Transaction.

Operating margin, as adjusted, which excludes from operating income the impact of certain GAAP operating expenses and adjusts GAAP operating revenue, was 37.8% and 36.4% for the six months ended June 30, 2008 and 2007, respectively. The six months ended June 30, 2008 operating margin, as adjusted, which included the impact of an $11 million increase in amortization of intangible assets primarily associated with the Quellos Transaction, rose 1.4% to 37.8%. Operating margin, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.

- 49 -


PART I - FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resourcesstock.

BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds

In accordance with GAAP, certain BlackRock sponsored investment funds are consolidated into the condensed consolidated financial statements of BlackRock, notwithstanding the fact that BlackRock may only have a minority economic interest in these funds. As a result, BlackRock’s condensed consolidated statements of cash flows include the cash flows of consolidated sponsored investment funds. The Company uses an adjusted cash flow statement, which excludes the impact of consolidated sponsored investment funds, as a supplemental non-GAAP measure to assess liquidity and capital requirements. The Company believes that its cash flows, excluding the impact of the consolidated sponsored investment funds, provide investors with useful information on the cash flows of BlackRock relating to our ability to fund additional operating, investing and financing activities. BlackRock’s management does not advocate that investors consider such non-GAAP measures in isolation from, or as a substitute for its cash flowsflow presented in accordance with GAAP.

- 78 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources (continued)

BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds (continued)

The following table presents a reconciliation of the Company’s condensed consolidated statements of cash flows presented on a GAAP basis to the Company’s condensed consolidated statements of cash flows, excluding the impact onof the cash flows of consolidated sponsored investment funds:

 

  Six Months Ended 
(Dollar amounts in millions)  June 30, 2008   Six Months Ended
June 30, 2009
  GAAP
Basis
 Impact on
Cash Flows of
Consolidated
Sponsored
Investment
Funds
 Cash Flows
Excluding
Impact of
Consolidated
Sponsored
Investment
Funds
   GAAP Basis Impact on
Cash Flows of
Consolidated
Sponsored
Investment
Funds
 Cash Flows
Excluding
Impact of
Consolidated
Sponsored
Investment
Funds

Cash flows from operating activities

  $481  $206  $275   $274   $162   $112

Cash flows from investing activities

   (318)  (5)  (313)   18    13    5

Cash flows from financing activities

   (397)  (212)  (185)   (105  (187  82

Effect of exchange rate changes on cash and cash equivalents

   6   —     6    86    —      86
                   

Net change in cash and cash equivalents

   (228)  (11)  (217)   273    (12  285

Cash and cash equivalents, beginning of period

   1,656   67   1,589    2,032    61    1,971
                   

Cash and cash equivalents, end of period

  $1,428  $56  $1,372   $2,305   $49   $2,256
                   

Cash and cash equivalents, excluding cash held by consolidated sponsored investment funds, at June 30, 2009 increased $285 million from December 31, 2008, primarily resulting from $112 million of cash inflows from operating activities, $82 million of cash inflows from financing activities, $5 million of cash inflows from investing activities and an $86 million increase due to the effect of foreign exchange rate changes.

Net cash inflows from operating activities, excluding the impact of consolidated sponsored investment funds, for the six months ended June 30, 2009, primarily included the receipt of investment advisory and administration fees and other revenue offset by the payment of operating expenses incurred in the normal course of business. Cash inflows from operating activities, excluding the impact of consolidated sponsored investment funds, in the six months ended June 30, 2009 included cash payments related to year end incentive compensation that was paid in the first quarter. Cash inflows from investing activities, excluding the impact of consolidated sponsored investment funds, for the six months ended June 30, 2009 primarily included $198 million of net proceeds from sales and maturities of investments, partially offset by a $156 million contingent consideration payment to Quellos and $33 million of purchases of property and equipment. Cash inflows from financing activities, excluding the impact of consolidated sponsored investment funds, for the six months ended June 30, 2009 primarily included the receipt of $300 million from equity raised in connection with the BGI Transaction, partially offset by $208 million of payments for cash dividends.

 

- 5079 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources (continued)

 

Operating Activities

Sources of BlackRock’s operating cash include investment advisory and administration fees, revenues fromBlackRock Solutions’ products and services, property management fees, mutual fund distribution fees and realized earnings and distributions on the Company’s investments. BlackRock primarily uses its cash to pay compensation and benefits, portfolio administration and servicing costs, general and administration expenses, interest on the Company’s borrowings, purchases of investments, capital expenditures, income taxes and dividends on BlackRock’s capital stock.

Cash flows from operating activities in the six months ended June 30, 2008 included cash payments related to year end incentive compensation.

Capital Resources

The Company manages its consolidated financial condition and funding to maintain appropriate liquidity for the business. At June 30, 2008, the Company had total cash and cash equivalents on its condensed consolidated statements of financial condition of $1,427.5 million. Cash and cash equivalents, net of amounts in consolidated sponsored investment funds of $56.3 million and net of regulatory capital requirements of $203.8 million (partially met with cash and cash equivalents), was $1,167.4 million. In addition,Capital resources at June 30, 2009 and December 31, 2008 the Company had committed access to $2,100.0 million of undrawn cash (net of outstanding letters of credit totaling $100 million) via its 2007 five-year credit facility, resulting in cash, net of cash in consolidated sponsored investment funds and regulatory capital requirements, plus credit capacity of $3,267.4 million.were as follows:

Approximately $56.3 million in cash and cash equivalents and $792.2 million in investments included in the Company’s condensed consolidated statement of financial condition at June 30, 2008 are held by sponsored investment funds that are consolidated by BlackRock in accordance with GAAP.

(Dollar amounts in millions)  June 30,
2009
  December 31,
2008
 

Cash and cash equivalents

  $2,305   $2,032  

Cash and cash equivalents held by consolidated sponsored investment funds1

   (49  (61

Regulatory capital2

   (193  (172

2007 credit facility - undrawn3

   2,171    2,171  
         

Committed access

  $4,234   $3,970  
         

1

The Company may not be able to access such cash or investments to use in its operating activities.

2

Partially met with cash and cash equivalents.

3

Excludes $129 million of undrawn amounts at June 30, 2009 and December 31, 2008 related to Lehman Commercial Paper, Inc.

In addition, a significant portion of the Company’s $773 million of net economic investments are illiquid in nature and, as such, may not be readily convertible to cash.

Investment/Loan Commitments

At June 30, 2008,2009, the Company had $487.8$277 million of various capital commitments to fund sponsored investment funds and unfunded commitments related to one private equity warehouse facility.primarily for co-investment purposes. Generally, the timing of the funding of capital commitments is uncertain and such commitments could expire before funding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.

AtDuring the six months ended June 30, 2008, the Company had loaned2009, approximately $97.2$174 million toof loans outstanding were repaid from a warehouse entity established for certain private equity funds of funds.

At June 30, 2008,2009, the Company had committed to make additional loans of approximately $144.5 million under the agreement. The Company anticipates making additional commitments under this facility from time to time, but is not obligated to do so.

On February 29, 2008, the Companywas committed to provide financing if needed, of up to $60.0$60 million, until March 2010, to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that is managed by a subsidiary of BlackRock. FinancingThe financing is collateralized by Anthracite pledging its ownership interest in an investment fund which is also managed by a subsidiary of BlackRock. BorrowingsAt June 30, 2009, $33.5 million of $52.5financing was outstanding which matured in July 2009. Upon maturity Anthracite rolled over the borrowings with a new maturity date of October 2009. As of June 2009, the value of the collateral was estimated to be $28.5 million, which wereresulted in the Company reducing the outstanding at March 31, 2008, were repaidbalance included in April 2008. Subsequentdue from related parties on the Company’s condensed consolidated statement of financial condition by $5 million and recording a general and administration expense. Based on the value of the collateral and the borrowings outstanding of such date, the Company has no obligation to June 30, 2008,loan new amounts to Anthracite borrowed $30.0 million at an interest rateunder this facility. The Company has granted waivers for certain breaches of 5.295%.financial covenants of Anthracite’s credit facility.

 

- 5180 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources (continued)

 

Short-Term Borrowings

In August 2007, the Company entered into a five-year $2.5 billion unsecured revolving credit facility (the “2007 Facility”facility”), which permits the Company to request an additional $500 million of borrowing capacity, subject to lender credit approval, up to a maximum of $3.0 billion.. The 2007 Facilityfacility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to EBITDA, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 0.5 to 1 at June 30, 2008.2009.

At June 30, 2008,2009, the Company had $300.0$200 million outstanding under the 2007 Facilityfacility with an interest rates between 2.655% to 5.105%rate of 0.49% and a maturity dates betweendate during July 2008 and September 2008.2009. During July 2008,2009, the Company repaid $100.0rolled over the $200 million in borrowings with an interest rate of the balance outstanding.0.47% and a maturity date in August 2009.

In addition, in December 2007, in order to support two enhanced cash funds that BlackRock manages, BlackRock elected to procure two letters of creditLehman Commercial Paper, Inc. has a $140 million participation under the existing 2007 Facility totaling in aggregate $100 million.facility; however, BlackRock does not expect that Lehman Commercial Paper, Inc. will honor its commitment to fund additional amounts.

In June 2008,2009, BlackRock Japan Co., Ltd., a wholly owned subsidiary of the Company, entered into arenewed its five billion Japanese yen commitment-line agreement with a banking institution (the “Japan Commitment-line”). The for a term of the Japan Commitment-line is one year and interest will accrue at the applicable Japanese short-term prime rate.year. The Japan Commitment-line is intended to provide liquidity flexibility for operating requirements in Japan. At June 30, 2008,2009, the Company had no borrowings outstanding onunder the Japan Commitment-line.

Convertible Debentures and Long-Term Borrowings

At June 30, 2008,2009, convertible debentures and long-term borrowings were $946.6$942 million. Debt service and repayment requirements, assuming the Company’s 2.625% convertible debentures due 2035 (the “convertible debentures”) are repaidconverted for cash equal to the principal at BlackRock’sthe option of the holders in 2010,third quarter 2009, are $25.2$275 million for the remainder of 2008, $51.0 million in 2009, $297.7$45 million in 2010 and $43.8$44 million in each of 2011, 2012 and 2012.2013.

Contingent Payments Related to Quellos Transaction

On October 1, 2007, the Company acquired the fund of funds business of Quellos. As part of this transaction Quellos is entitled to receive two contingent payments upon achieving certain investment advisory revenue measures through December 31, 2010, totaling up to an additional $969 million in a combination of cash and stock. The first contingent payment, of up to $374 million, was payable in second quarter 2009 and the second payment, of up to $595 million is payable in cash in 2011.

During second quarter 2009, the Company determined the first contingent payment to be $219 million, of which $11 million was previously paid in cash during 2008. Of the remaining $208 million, $156 million was paid in cash and $52 million was paid in common stock, or approximately 330,000 shares converted at a price of $157.33. Quellos may also be entitled to a “catch-up” payment if certain performance measures are met in 2011 as the value of the first contingent payment was less than $374 million.

BGI Transaction

In June 2009, BlackRock announced that Barclays PLC accepted its offer to acquire BGI from Barclays. The price consideration consists of $6.6 billion in cash, subject to certain adjustments, and a capital stock sale of approximately 37.8 million common and participating preferred shares to Barclays, subject to certain adjustments, which would give Barclays approximately a 19.9% economic stake in BlackRock. The cash portion of the deal will be financed by $800 million from cash currently held by BlackRock, a new $2 billion credit facility, which is expected to ultimately be replaced with term debt, $1 billion of additional short term debt, and $2.8 billion of capital proceeds from the sale of 19.9 million common shares and participating preferred shares to a group of institutional investors, of which $300 million from the sale of 2.1 million common shares was received prior to June 30, 2009. The transaction is expected to close in December 2009, or early 2010, pending regulatory approvals and the satisfaction of other customary closing conditions.

- 81 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources (continued)

Support of Two Enhanced Cash Funds

During 2007, BlackRock made investments in two enhanced cash funds to enhance liquidity of the funds and to facilitate redemptions. At June 30, 2008, BlackRock’s total net investment in these two funds was approximately $88.5 million.

In December 2007, BlackRock entered into capital support agreements with the two funds. These credit support agreements arefunds, backed by letters of credit drawn under BlackRock’s existing credit facility. Pursuant to the capital support agreements, BlackRock has agreed to make subsequent capital contributions to the funds to cover realized losses, up to $100 million, related to specified securities held by the funds. In December 2008, BlackRock’s maximum potential obligation under the capital support agreements was reduced to $45 million, and in 2009, both capital support agreements were terminated, due to the closure of the related funds. BlackRock provided approximately $1$3 million of capital contributions to these two funds for the six months ended June 30, 20082009 under the capital support agreements.

At June 30, 20082009, BlackRock’s remaining exposure from its support of the two enhanced cash funds, which were both liquidated and December 31, 2007,closed prior to June 30, 2009, is $45 million, which represents securities it received in lieu of it’s remaining investment in one fund and securities it directly purchased from the funds prior to closure of the funds of which $15 million matured in July 2009 and an additional $15 million is expected to mature at par in fourth quarter 2009.

In applying the provisions of FASBFinancial Accounting Standards Board (“FASB”) Interpretation No. 46(R),Consolidation of Variable Interest Entities(“ (“FIN 46(R)”), BlackRock concluded that it is notwas the primary beneficiary of either fund.

Exposure to Collateralized Debt Obligations

In the normal course of business, BlackRock act as a collateral manager to various CDOs. A CDO is a managed investment vehicle that purchases a portfolio of assets or enters into swaps. A CDOtwo enhanced cash funds its activities through the issuance of several tranches of debt and equity, the repayment and return ofat December 31, 2008, which are linked to the performanceresulted in consolidation of the assets in the CDO. The Company also may invest in a portion of the debt or equity issued. These entities meet the definition of a variable interest entity under FIN 46(R). BlackRock has concluded that it is not the primary beneficiary of these CDOs, and as a result it does not consolidate these CDOsfunds on its condensed consolidated statements of financial statements.

At June 30, 2008 and December 31, 2007, BlackRock’s maximum risk of loss related to CDOs was approximately $25.5 million and $32.1 million, respectively.

- 52 -


PART I - FINANCIAL INFORMATION (continued)condition.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources (continued)

Net Capital Requirements

The Company is required to maintain net capital in certain jurisdictions, which is met in part by retaining cash and cash equivalent investmentsequivalents in those jurisdictions. As a result, the Company may be restricted in its ability to transfer cash between different jurisdictions. Additionally, transfertransfers of cash between international jurisdictions, including repatriation to the United States, may have adverse tax consequences that could discourage such transfers. At June 30, 2008,2009, the Company was required to maintain approximately $203.8$193 million in net capital at these subsidiaries and is in compliance with all applicable regulatory minimum net capital requirements.

- 82 -


PART I – FINANCIAL INFORMATION (continued)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Critical Accounting Policies

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. In addition to Fair Value Measurements, discussed below, see Note 2 and the Company’s CriticalSignificant Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in BlackRock’s 20072008 Annual Report on Form 10-K filed with the SEC on February 28, 2008March 2, 2009 for details on Significant Accounting Policies.

Fair Value Measurements

BlackRock adopted the Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements (“SFAS No. 157”), as of January 1, 2008. See Note 1, Significant Accounting Policies to the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filing.

BlackRock reports its investments on a GAAP basis, which includes investment balances which are owned by sponsored investment funds that are deemed to be controlled by BlackRock in accordance with GAAP and therefore are consolidated even though BlackRock may not own a majority of such funds. As a result, management reviews its investments on an “economic” basis, which eliminates the portion of investments that do not impact BlackRock’s book value. BlackRock’s management does not advocate that investors consider such non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

The following table represents investments measured at fair value on a recurring basis at June 30, 2008:2009:

 

(Dollar amounts in millions)  Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs

(Level 3)
 Other
Investments
Not Held at
Fair Value (3)
  Investments at
June 30, 2008
   Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)
 Significant
Unobservable
Inputs

(Level 3)
 Other
Investments
Not Held at
Fair
Value(3)
  Investments
at June 30,
2009
 

Total investments, GAAP

  $312  $205  $1,386  $39  $1,942   $152   $80   $696   $29  $957  

Net assets for which the Company does not bear “economic” exposure(1)

   (6)  (36)  (454)  —     (496)   (19  (1  (164  —     (184
                                

Net “economic” investment exposure(2)

  $306  $169  $932  $39  $1,446 
                

Net “economic” investments(2)

  $133   $79   $532   $29  $773  
                

 

(1)

Consists of net assets attributable to non-controlling investors of consolidated sponsored investment funds.

(2)

Includes BlackRock’s portion of cash and cash equivalents, other assets, accounts payable and accrued liabilities, and other liabilities that are consolidated from sponsored investment funds.

(3)

Includes investments inComprised of equity method investeesinvestments, which include investment companies, and other assets which in accordance with GAAP are not accounted for under a fair value measure inmeasure. In accordance with GAAP, as well as investments held at cost.certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures, therefore the Company’s investment in such equity method investee may not represent fair value.

 

- 5383 -


PART I - FINANCIAL INFORMATION (continued)

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

As a leading investment management firm, BlackRock devotes significant resources across all of its operations to identifying, measuring, monitoring, managing and analyzing market and operating risks, including the management and oversight of its own investment portfolio. The Board of Directors of the Company has adopted guidelines for the review of investments to be made by the Company, requiring, among other things, that all investments be reviewed by the Company’s Capital Committee, which consists of senior officers of the Company, and that certain investments over prescribed thresholds receive prior approval frommay be referred to the Audit Committee or the Board of Directors depending on the circumstances.circumstances for approval.

AUM Market Price Risk

BlackRock’s investment management revenues are primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns realized on AUM. At June 30, 2008,2009, the majority of our investment advisory and administration fees were based on average or period end AUM of the applicable mutual funds or separate accounts. Movements in equity market prices, interest rates,rates/credit spreads, foreign exchange rates, or all three could cause the value of AUM to decline, which couldwould result in lower investment advisory and administration fees.

- 84 -


PART I – FINANCIAL INFORMATION (continued)

Item 3.Quantitative and Qualitative Disclosures About Market Risk (continued)

Corporate InvestmentInvestments Portfolio Risks

In the normal course of its business, BlackRock is exposed to equity market price risk, interest raterate/credit spread risk and foreign exchange rate risk associated with its corporate investments.

BlackRock has investments primarily in sponsored investment products that invest in a variety of asset classes.classes including real estate, private equity and hedge funds. Investments generally are made for co-investment purposes, to establish a performance track record for co-investment purposes or to hedge exposure to certain deferred compensation plans. Currently, the Company has a seed capital hedging program in which it enters into total return swaps to hedge exposure to certain equity investments. At June 30, 2008,2009, the outstanding total return swaps had an aggregate notional value of approximately $74$36 million.

At June 30, 2008,2009, approximately $792$418 million of BlackRock’s total investments were maintained in sponsored investment funds that are deemed to be controlled by BlackRock in accordance with GAAP and therefore are consolidated even though BlackRock may not own a majority of such funds. Prior toExcluding the impact of investments made to hedge exposure to certain deferred compensation plans and certain equity investments that are hedged via the seed capital hedging program, the Company’s net economic exposure to its investment portfolio is as follows:

 

  June 30, December 31, 
(Dollar amounts in millions)  2008 2007   June 30,
2009
 December 31,
2008
 

Total investments

  $1,942  $2,000   $957   $1,429  

Consolidated sponsored investments funds

   (792)  (1,054)   (418  (728

Net exposure to consolidated investment funds

   296   325    234    310  
              

Total net “economic” investments

   773    1,011  

Deferred compensation investments

   (61  (59

Hedged investments

   (36  (49
       

Total net “economic” investment exposure

  $1,446  $1,271   $676   $903  
              

The net “economic” investment exposure of the portfolio is presented in either the market price or the interest rate/credit spread risk disclosures below:

Equity Market Price Risk

At June 30, 2008,2009, the Company’s net exposure to equity price risk isin its investment portfolio was approximately $945$363 million (net of $74 million of certain equity investments that are hedged via total return swaps) of the Company’s net economic investment exposure. Investments that are subject to market price risk include public equity and real estate investments as well as certain hedge funds. The Company estimates that a 10% adverse change in equitymarket prices would result in a decrease of approximately $94.5$36 million in the carrying value of such investments.

- 54 -


PART I - FINANCIAL INFORMATION (continued)

Item 3.Quantitative and Qualitative Disclosures About Market Risk (continued)

Interest RateRate/Credit Spread Risk

At June 30, 2008,2009, the Company was exposed to interest-rate risk and credit spread risks as a result of approximately $427$313 million of investments in debt securities and sponsored investment products that invest primarily in debt securities. Management considered a hypothetical 100 basis point fluctuation in interest rates or credit spreads and estimates that the impact of such a fluctuation on these investments, in the aggregate, would result in a decrease, or increase, of approximately $5.6$3 million in the carrying value of such investments.

Foreign Exchange Rate Risk

As discussed above, the Company invests in sponsored investment products that invest in a variety of asset classes. The carrying value of the net economic investment exposure denominated in foreign currencies, primarily the British pound sterling, Australian dollars and the Euro, was $84$37 million. A 10% adverse change in foreign exchange rates would result in approximately an $8.4a $3.7 million decline in the carrying value of such investments.

 

- 85 -


PART I – FINANCIAL INFORMATION (continued)

Item 4.Controls and Procedures

Disclosure Controls and Procedures

Under the direction of BlackRock’sBlackRock's Chief Executive Officer and Chief Financial Officer, BlackRock evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)15d—15(e) under the Exchange Act) at June 30, 2008.2009. Based on this evaluation, BlackRock’s Chief Executive Officer and Chief Financial Officer have concluded that BlackRock’s disclosure controls and procedures were effective at June 30, 2008.2009.

Internal Control and Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended June 30, 20082009 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

- 55 -


PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

See Note 9,12, Commitments and Contingencies, to the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filing.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

In June 2009, the Company issued 2,133,713 shares of common stock to an institutional investor at a price of $140.60 per share. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the purchaser has represented to us that it is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, and that the common stock was being acquired for investment. We did not engage in a general solicitation or advertising with regard to the issuance of the common stock and have not offered securities to the public in connection with this issuance.

(c)During the three months ended June 30, 2008, the Company made the following purchases of its common stock, which is registered pursuant to Section 12(b) of the Exchange Act.

During the three months ended June 30, 2009, the Company made the following purchases of its common stock, which are registered pursuant to Section 12(b) of the Exchange Act.

 

   Total Number of
Shares

Purchased
  Average Price
Paid per Share
  Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
of Programs
  Maximum
Number of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs1

April 1, 2008 through April 30, 2008

  5,270 2 $204.77  —    751,400

May 1, 2008 through May 31, 2008

  9,719 2 $219.02  —    751,400

June 1, 2008 through June 30, 2008

  2,795 2 $212.09  —    751,400
            

Total

  17,784  $213.71  —    
            
   Total
Number
of Shares
Purchased
  Average
Price
Paid per
Share
  Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans Of
Programs
  Maximum
Number
of Shares
that May
Yet Be
Purchased
Under the
Plans or
Programs1

April 1, 2009 through April 30, 2009

  3,4262  $127.25  —    751,400

May 1, 2009 through May 31, 2009

  7162  $145.21  —    751,400

June 1, 2009 through June 30, 2009

  3,4642  $166.14  —    751,400
            

Total

  7,606   $146.65  —    
            

 

1

On August 2, 2006, the Company announced a 2.1 million share repurchase program with no stated expiration date. An additional indeterminable number of shares may be repurchased under the 2002 Long-Term Retention and Incentive Plan (“2002 LTIP”).

2

Reflects purchases made by the Company primarily to satisfy income tax withholding obligations of employees related to the vesting of certain restricted stock or restricted stock unit awards. All such purchases were made outside of the publicly announced share repurchase program.

 

- 5686 -


PART II - OTHER INFORMATION ( continued)(continued)

 

Item 4.Submission of Matters to a Vote of Security Holders

The annual meeting of stockholders of BlackRock was held on May 27, 2008,21, 2009, for the purpose of considering and acting upon the following:

(1)Election of DirectorsDirectors.. Six Class IIII directors were elected and the votes cast for or against/withheld were as follows:

 

   Aggregate Votes
   For  Withheld

Nominees for Class III

    

Robert C. Doll

  113,331,184  1,465,653

Gregory J. Fleming

  112,330,984  1,465,853

Murry S. Gerber

  113,405,853  390,984

James Grosfeld

  112,961,117  835,720

Sir Deryck Maughan

  112,961,480  835,357

Linda Gosden Robinson

  113,117,594  679,243
   Aggregate Votes
   For  Withheld

Nominees for Class I

    

William S. Demchak

  44,227,370  1,425,723

Kenneth B. Dunn

  45,452,168  200,925

Laurence D. Fink

  44,338,328  1,314,765

Robert S. Kapito

  44,331,982  1,321,111

Brian T. Moynihan

  44,319,038  1,334,056

Thomas H. O’Brien

  45,438,410  214,684

As of August 7, 20086, 2009 the other continuing directors of BlackRock are Laurence D. Fink,Abdlatif Yousef Al-Hamad, Mathis Cabiallavetta, Dennis D. Dammerman, WilliamMurry S. Demchak, Kenneth B. Dunn, Robert S. Kapito,Gerber, James Grosfield, David H. Komansky, Thomas H. O’Brien,Sir Deryck Maughan, Linda Gosden Robinson, James E. Rohr and John A. Thain.Daniel C. Sontag.

(2)Ratification of AuditorAuditor.. The appointment of Deloitte & Touche LLP as BlackRock’s independent registered public accounting firm for the year 20082009 was ratified.

 

   Aggregate Votes
   For  Against  Abstain

Ratification of Appointment

  113,789,219  5,639  1,979
   Aggregate Votes
   For  Against  Abstain

Ratification of Appointment

  45,501,503  141,754  9,834

There were no broker non-votes for any of the items.

 

- 5787 -


PART II - OTHER INFORMATION ( continued)(continued)

 

Item 6.Exhibits

 

Exhibit No.

 

Description

10.1(1)+

  10.1

 Letter to Ann Marie Petach.Stock Purchase Agreement, dated as of June 11, 2009, between The PNC Financial Services Group, Inc. and BlackRock, Inc.

  10.2(1)

Amendment No. 1, dated as of June 11, 2009, to the Second Amended and Restated Stockholder Agreement, by and among BlackRock, Inc., Merrill Lynch & Co., Inc. and Merrill Lynch Group, Inc.

  10.3(1)

Amendment No. 1, dated as of June 11, 2009, to the Amended and Restated Implementation and Stockholder Agreement, between BlackRock, Inc. and The PNC Financial Group, Inc.

  10.4(1)

Stock Purchase Agreement, dated as of June 16, 2009, by and among Barclays Blank PLC, Barclays PLC (solely for the purposes of Section 6.16, Section 6.18 and Section 6.24) and BlackRock, Inc.

12.1

 Computation of Ratio of Earnings to Fixed Charges.

31.1

 Section 302 Certification of Chief Executive Officer.

31.2

 Section 302 Certification of Chief Financial Officer.

32.1

 Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)Filed herewith.
+Denotes compensatory arrangement.Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 17, 2009.

 

- 5888 -


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 BLACKROCK, INC.
 (Registrant)
 By: 

/s/ Ann Marie Petach

Date: August 8, 20087, 2009

  Ann Marie Petach
  Managing Director & Chief Financial Officer

- 89 -


EXHIBIT INDEX

 

Exhibit No.

 

Description

10.1(1)+

  10.1

 Letter to Ann Marie Petach.Stock Purchase Agreement, dated as of June 11, 2009, between The PNC Financial Services Group, Inc. and BlackRock, Inc.

  10.2(1)

Amendment No. 1, dated as of June 11, 2009, to the Second Amended and Restated Stockholder Agreement, by and among BlackRock, Inc., Merrill Lynch & Co., Inc. and Merrill Lynch Group, Inc.

  10.3(1)

Amendment No. 1, dated as of June 11, 2009, to the Amended and Restated Implementation and Stockholder Agreement, between BlackRock, Inc. and The PNC Financial Group, Inc.

  10.4(1)

Stock Purchase Agreement, dated as of June 16, 2009, by and among Barclays Blank PLC, Barclays PLC (solely for the purposes of Section 6.16, Section 6.18 and Section 6.24) and BlackRock, Inc.

12.1

 Computation of Ratio of Earnings to Fixed Charges.

31.1

 Section 302 Certification of Chief Executive Officer.

31.2

 Section 302 Certification of Chief Financial Officer.

32.1

 Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)Filed herewith.
+Denotes compensatory arrangement.Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 17, 2009.