BlackRock Inc.'s (BLK) second quarter 2012 adjusted earnings came in at $3.10 per share, substantially ahead of the Zacks Consensus Estimate of $3.03. The results compare unfavorably with the prior-quarter earnings of $3.16, but were higher than the prior-year quarter earnings of $3.00.

The year-over-year improvement in results was primarily attributable to lower operating expenses. However, declining top line and the reduced assets under management were the primary headwinds.

After considering PNC LTIP funding obligation, net income came in at $554 million or $3.08 per share, as against $572 million or $3.14 per share in the prior quarter and $619 million or $3.21 per share in the year-ago quarter.

Quarter in Detail

BlackRock’s total revenue in the reported quarter was $2.23 billion, down 0.9% from the prior quarter and 5.0% from the prior-year quarter. Total revenue was also below the Zacks Consensus Estimate of $2.27 billion.

Total expenses declined 2.4% sequentially and 5.5% year over year to $1.40 billion. The sequential fall was driven by lower employee compensation and benefits, distribution and service costs as well as direct fund expenses, partially offset by higher general and administration expenses.

On a year-over-year basis, the expenses declined due to lower employee compensation benefits, distribution and servicing costs as well as general and administration expenses along with amortization of deferred sales commissions.

Non-operating loss, net of non-controlling interests, amounted to $46 million compared with non-operating income of $20 million in the prior quarter and non-operating loss of $27 million in the previous year quarter.

Net interest expense came in at $44 million, growing 10% from the prior quarter and 19% from the prior-year quarter. Both increases were the results of long-term debt issuances.

BlackRock’s operating income, on a GAAP basis, stood at $829 million, rising 1.7% from $815 million in the prior quarter but dipping 4.3% from $866 million in the year-ago quarter.

Assets Under Management

Assets under management totaled $3.56 trillion as of June 30, 2012, down 3.4% sequentially and 2.7% from the year-ago period. The declines were mainly due to the declining product performances driven by market deterioration.

Recent Development

In July, BlackRock announced the acquisition of Swiss Re Private Equity Partners AG (SRPEP), the European arm of private equity fund Swiss Re. The terms of this all-cash deal have not been disclosed by either of the parties. However, the deal is expected to be completed by the end of the current quarter.

Apart from this deal, BlackRock and Swiss Re have made agreements to divert the latter’s investments in SRPEP to BlackRock Alternative Investors. The acquisition will merge SRPEP into BlackRock Private Equity Partners.

Further in May, BlackRock completed buyback of nearly 26 million shares of common stock held by Barclays PLC (BCS) for $160.0 per share. Additionally, the company announced the completion of the repurchase of additional 6 million shares, directly from Barclays at a price of $156.80 per share. Morgan Stanley ( MS - Analyst Report ) , BofA Merrill Lynch -- a unit of Bank of America Corporation ( BAC - Analyst Report ) , and Barclays Capital also repurchased approximately 2.6 million shares of BlackRock from Barclay’s.

With this buyback, Barclays is no longer a stakeholder in BlackRock. Following the closure of this sale, PNC Financial Services Group Inc. ( PNC - Analyst Report ) remains one of the largest institutional stakeholders in the company with a 21% stake.

Our Viewpoint

A reduced operating expense was the sole reason behind the improved financial results of BlackRock. Despite the weak economic recovery and increasing competition weighing down the company’s profitability, the recent acquisition of Swiss Re’s private equity unit as well as the growing need for risk management solutions within the financial industry are anticipated to benefit its financials in the long run.

Moreover, the exit of Barclays as a stakeholder will remove an overhang from the stock and would provide it with more financial flexibility.

BlackRock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.