10-Q 1 d363785d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2012

OR

 

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

For the transition period from              to             .

Commission file number 001-33099

 

 

 

LOGO

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.)

55 East 52nd Street, New York, NY 10055

(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. (Check one):

 

Large accelerated filer   x    Accelerated 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, 2012, there were 167,174,553 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

BlackRock, Inc.

Index to Form 10-Q

 

         Page  
PART I   
FINANCIAL INFORMATION   
Item 1.   Financial Statements (unaudited)   
 

Condensed Consolidated Statements of Financial Condition

     1   
 

Condensed Consolidated Statements of Income

     3   
 

Condensed Consolidated Statements of Comprehensive Income

     4   
 

Condensed Consolidated Statements of Changes in Equity

     5   
 

Condensed Consolidated Statements of Cash Flows

     7   
 

Notes to Condensed Consolidated Financial Statements

     9   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      45   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      88   
Item 4.   Controls and Procedures      90   
PART II   
OTHER INFORMATION   
Item 1.   Legal Proceedings      91   
Item 1A.   Risk Factors      91   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      93   
Item 5.   Other Information      93   
Item 6.   Exhibits      94   

 

- ii -


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(Dollar amounts in millions, except share data)

(unaudited)

 

     June 30,
2012
     December 31,
2011
 

Assets

     

Cash and cash equivalents

   $ 3,595       $ 3,506   

Accounts receivable

     2,084         1,960   

Due from related parties

     71         142   

Investments

     1,879         1,631   

Assets of consolidated variable interest entities:

     

Cash and cash equivalents

     44         54   

Bank loans and other investments

     1,508         1,639   

Separate account assets

     119,542         118,871   

Collateral held under securities lending agreements

     22,145         20,918   

Deferred sales commissions, net

     31         38   

Property and equipment (net of accumulated depreciation of $544 and $483 at June 30, 2012 and December 31, 2011, respectively)

     571         537   

Intangible assets (net of accumulated amortization of $829 and $751 at June 30, 2012 and December 31, 2011, respectively)

     17,441         17,356   

Goodwill

     12,888         12,792   

Other assets

     681         452   
  

 

 

    

 

 

 

Total assets

   $ 182,480       $ 179,896   
  

 

 

    

 

 

 

Liabilities

     

Accrued compensation and benefits

   $ 848       $ 1,383   

Accounts payable and accrued liabilities

     1,029         923   

Due to related parties

     13         22   

Short-term borrowings

     100         100   

Liabilities of consolidated variable interest entities:

     

Borrowings

     1,439         1,574   

Other liabilities

     9         9   

Long-term borrowings

     6,185         4,690   

Separate account liabilities

     119,542         118,871   

Collateral liabilities under securities lending agreements

     22,145         20,918   

Deferred income tax liabilities

     5,385         5,323   

Other liabilities

     863         721   
  

 

 

    

 

 

 

Total liabilities

     157,558         154,534   
  

 

 

    

 

 

 

Commitments and contingencies (Note 11)

     

Temporary equity

     

Redeemable non-controlling interests

     38         92   

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition (continued)

(Dollar amounts in millions, except share data)

(unaudited)

 

     June 30,
2012
    December 31,
2011
 

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     2        1   

Shares authorized: 500,000,000 at June 30, 2012 and December 31, 2011;

    

Shares issued: 168,067,932 and 139,880,380 at June 30, 2012 and December 31, 2011, respectively;

    

Shares outstanding: 167,372,756 and 138,463,135 at June 30, 2012 and December 31, 2011, respectively

    

Preferred stock (Note 15)

     —          —     

Additional paid-in capital

     19,224        20,275   

Retained earnings

     5,627        5,046   

Appropriated retained earnings

     70        72   

Accumulated other comprehensive loss

     (126     (127

Escrow shares, common, at cost (3,603 shares held at June 30, 2012 and December 31, 2011)

     (1     (1

Treasury stock, common, at cost (691,573 and 1,413,642 shares held at June 30, 2012 and December 31, 2011, respectively)

     (124     (218
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     24,672        25,048   

Nonredeemable non-controlling interests

     178        184   

Nonredeemable non-controlling interests of consolidated variable interest entities

     34        38   
  

 

 

   

 

 

 

Total permanent equity

     24,884        25,270   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

   $ 182,480      $ 179,896   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Income

(Dollar amounts in millions, except per share data)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Revenue

        

Investment advisory, administration fees and securities lending revenue

        

Related parties

   $ 1,272      $ 1,408      $ 2,586      $ 2,756   

Other third parties

     718        692        1,381        1,328   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment advisory, administration fees and securities lending revenue

     1,990        2,100        3,967        4,084   

Investment advisory performance fees

     41        50        121        133   

BlackRock Solutions and advisory

     131        116        254        244   

Distribution fees

     20        27        39        55   

Other revenue

     47        54        97        113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     2,229        2,347        4,478        4,629   

Expenses

        

Employee compensation and benefits

     786        824        1,611        1,654   

Distribution and servicing costs

     93        100        188        209   

Amortization of deferred sales commissions

     14        21        30        43   

Direct fund expenses

     144        153        296        296   

General and administration

     324        345        631        685   

Amortization of intangible assets

     39        38        78        78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,400        1,481        2,834        2,965   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     829        866        1,644        1,664   

Non-operating income (expense)

        

Net gain (loss) on investments

     (7     18        68        77   

Net gain (loss) on consolidated variable interest entities

     11        (5     (1     (20

Interest and dividend income

     8        4        17        13   

Interest expense

     (52     (41     (101     (79
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income (expense)

     (40     (24     (17     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     789        842        1,627        1,655   

Income tax expense

     229        220        492        469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     560        622        1,135        1,186   

Less:

        

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

     3        —          4        —     

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

     3        3        5        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

   $ 554      $ 619      $ 1,126      $ 1,187   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 3.13      $ 3.26      $ 6.32      $ 6.18   

Diluted

   $ 3.08      $ 3.21      $ 6.22      $ 6.10   

Cash dividends declared and paid per share

   $ 1.50      $ 1.375      $ 3.00      $ 2.75   

Weighted-average common shares outstanding:

        

Basic

     177,010,239        187,870,001        178,016,539        189,822,833   

Diluted

     179,590,702        190,579,963        180,753,515        192,429,367   

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Dollar amounts in millions)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Net income

   $ 560      $ 622      $ 1,135      $ 1,186   

Other comprehensive income:

        

Change in net unrealized gains (losses) from available-for-sale investments, net of tax:

        

Unrealized holding gains (losses), net of tax

     (4     (2     2        (1

Less: reclassification adjustment included in net income

     (2     1        (1     2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses) from available-for-sale investments, net of tax(1)

     (2     (3     3        (3

Minimum pension liability adjustment

     —          —          (1     —     

Foreign currency translation adjustments

     (34     15        (1     59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (36     12        1        56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     524        634        1,136        1,242   

Less: Comprehensive income (loss) attributable to non-controlling interests

     6        3        9        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to BlackRock, Inc.

   $ 518      $ 631      $ 1,127      $ 1,243   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

(1) 

The tax benefit (expense) on unrealized holding gains (losses) was $2 million and $1 million during the three months ended June 30, 2012 and 2011, respectively, and ($1) million and $1 million during the six months ended June 30, 2012 and 2011, respectively.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(Dollar amounts in millions)

(unaudited)

 

    Additional
Paid-in
Capital (1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Shares
Held in
Escrow
    Treasury
Stock
Common
    Total
Stockholders’
Equity
    Nonredeemable
Non-controlling
Interests
    Nonredeemable
Non-controlling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-
controlling
Interests /
Temporary
Equity
 

December 31, 2011

  $ 20,276      $ 5,046      $ 72      ($ 127   ($ 1   ($ 218   $ 25,048      $ 184      $ 38      $ 25,270      $ 92   

Net income

    —          1,126        —          —          —          —          1,126        6        (1     1,131        4   

Allocation of losses of consolidated collateralized loan obligations

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

Dividends paid

    —          (545     —          —          —          —          (545     —          —          (545     —     

Stock-based compensation

    235        —          —          —          —          —          235        —          —          235        —     

Merrill Lynch cash capital contribution

    7        —          —          —          —          —          7        —          —          7        —     

Issuance of common shares related to employee stock transactions

    (351     —          —          —          —          400        49        —          —          49        —     

Employee tax benefit withholdings related to employee stock transactions

    —          —          —          —          —          (139     (139     —          —          (139     —     

Shares repurchased

    (1,000     —          —          —          —          (167     (1,167     —          —          (1,167     —     

Net tax benefit (shortfall) from stock-based compensation

    59        —          —          —          —          —          59        —          —          59        —     

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

    —          —          —          —          —          —          —          (12     (5     (17     188   

Net consolidations (deconsolidations) of sponsored investment funds

    —          —          —          —          —          —          —          —          —          —          (246

Other comprehensive income (loss)

    —          —          —          1        —          —          1        —          —          1        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

  $ 19,226      $ 5,627      $ 70      ($ 126   ($ 1   ($ 124   $ 24,672      $ 178      $ 34      $ 24,884      $ 38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amount includes $2 million and $1 million of common stock at June 30, 2012 and December 31, 2011, respectively.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(Dollar amounts in millions)

(unaudited)

 

    Additional
Paid-in
Capital (1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Shares
Held in
Escrow
    Treasury
Stock
Common
    Total
Stockholders’
Equity
    Nonredeemable
Non-controlling
Interests
    Nonredeemable
Non-controlling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-
controlling
Interests /
Temporary
Equity
 

December 31, 2010

  $ 22,504      $ 3,723      $ 75      ($ 96   ($ 1   ($ 111   $ 26,094      $ 189      $ 45      $ 26,328      $ 6   

Net income

    —          1,187        —          —          —          —          1,187        19        (20     1,186        —     

Allocation of losses of consolidated collateralized loan obligations

    —          —          (24     —          —          —          (24     —          24        —          —     

Dividends paid, net of dividend expense for unvested RSUs

    —          (520     —          —          —          —          (520     —          —          (520     —     

Stock-based compensation

    240        —          —          —          —          2        242        —          —          242        —     

Merrill Lynch cash capital contribution

    8        —          —          —          —          —          8        —          —          8        —     

Issuance of common shares related to employee stock transactions

    (202     —          —          —          —          216        14        —          —          14        —     

Employee tax benefit withholdings related to employee stock transactions

    —          —          —          —          —          (108     (108     —          —          (108     —     

Shares repurchased

    (2,545     —          —          —          —          —          (2,545     —          —          (2,545     —     

Convertible debt conversions

    4        —          —          —          —          1        5        —          —          5     

Net tax benefit (shortfall) from stock-based compensation

    15        —          —          —          —          —          15        —          —          15        —     

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

    —          —          —          —          —          —          —          (12     (3     (15     —     

Net consolidations (deconsolidations) of sponsored investment funds

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

Other comprehensive income (loss)

    —          —          —          56            56        —          —          56        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2011

  $ 20,024      $ 4,390      $ 51      ($ 40   ($ 1   $ —        $ 24,424      $ 196      $ 46      $ 24,666      $ 4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $1 million of common stock at both June 30, 2011 and December 31, 2010 and $1 million of preferred stock at December 31, 2010.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollar amounts in millions)

(unaudited)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 1,135      $ 1,186   

Adjustments to reconcile net income to cash flows from operating activities:

    

Depreciation and amortization

     145        146   

Amortization of deferred sales commissions

     30        43   

Stock-based compensation

     235        242   

Deferred income tax expense (benefit)

     33        (38

Net (gains) losses on non-trading investments

     (18     (41

Purchases of investments within consolidated funds

     (70     (9

Proceeds from sales and maturities of investments within consolidated funds

     41        31   

Assets and liabilities of consolidated VIEs:

    

Change in cash and cash equivalents

     10        28   

Net (gains) losses within consolidated VIEs

     1        20   

Net (purchases) proceeds within consolidated VIEs

     169        (11

(Earnings) losses from equity method investees

     (59     (41

Distributions of earnings from equity method investees

     18        21   

Changes in operating assets and liabilities:

    

Accounts receivable

     (122     14   

Due from related parties

     71        (15

Deferred sales commissions

     (23     (31

Investments, trading

     (188     (29

Other assets

     (207     (196

Accrued compensation and benefits

     (557     (644

Accounts payable and accrued liabilities

     90        63   

Due to related parties

     (9     (34

Other liabilities

     140        12   
  

 

 

   

 

 

 

Cash flows from operating activities

     865        717   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (274     (91

Proceeds from sales and maturities of investments

     209        116   

Distributions of capital from equity method investees

     32        30   

Net consolidations (deconsolidations) of sponsored investment funds

     (204     —     

Acquisitions, net of cash acquired

     (212     —     

Purchases of property and equipment

     (98     (159
  

 

 

   

 

 

 

Cash flows from investing activities

     (547     (104
  

 

 

   

 

 

 

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Dollar amounts in millions)

(unaudited)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from financing activities

    

Repayments of short-term borrowings

     —          (100

Proceeds from short-term borrowings

     —          600   

Repayments of convertible debt

     —          (67

Proceeds from long-term borrowings

     1,495        1,496   

Cash dividends paid

     (545     (520

Proceeds from stock options exercised

     44        13   

Proceeds from issuance of common stock

     4        2   

Repurchases of common stock

     (1,305     (2,654

Merrill Lynch cash capital contribution

     7        8   

Repayments of borrowings by consolidated VIEs

     (174     (14

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

     171        (15

Excess tax benefit from stock-based compensation

     68        15   
  

 

 

   

 

 

 

Cash flows from financing activities

     (235     (1,236
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     6        52   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     89        (571

Cash and cash equivalents, beginning of period

     3,506        3,367   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 3,595      $ 2,796   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest

   $ 92      $ 74   

Interest on borrowings of consolidated VIEs

   $ 35      $ 30   

Income taxes

   $ 556      $ 649   

Supplemental schedule of non-cash investing and financing transactions:

    

Issuance of common stock

   $ 352      $ 207   

Increase (decrease) in non-controlling interests due to net consolidation (deconsolidation) of sponsored investment funds

   ($ 246   ($ 2

See accompanying notes to condensed consolidated financial statements.

 

8


Table of Contents

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Business Overview

BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) provides diversified investment management services to institutional clients, intermediary and individual investors through various investment vehicles. Investment management services primarily consist of the management of equity, fixed income, multi-asset class, alternative investment and cash management products. BlackRock offers its investment products in a variety of vehicles, including open-end and closed-end mutual funds, iShares® exchange-traded funds (“ETFs”), collective investment trusts and separate accounts. 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 services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

During the three months ended June 30, 2012, BlackRock completed a secondary offering of 26,211,335 shares of common stock held by Barclays Bank PLC (“Barclays”) at a price of $160.00 per share, which included 23,211,335 shares of common stock issued upon the conversion of Series B Convertible Participating Preferred Stock by a subsidiary of Barclays. Upon completion of this offering, BlackRock repurchased 6,377,552 shares directly from Barclays at a price of $156.80 per share (consisting of 6,346,036 of Series B Convertible Preferred Stock and 31,516 shares of common stock). The total transactions, including the full exercise of the underwriters’ option to purchase 2,621,134 additional shares in the secondary offering, amounted to 35,210,021 shares, resulting in Barclays exiting its entire ownership position in BlackRock.

On June 30, 2012, The PNC Financial Services Group, Inc. (“PNC”) held 21.0% of the Company’s voting common stock and 21.7% of the Company’s capital stock, which includes outstanding common and non-voting preferred stock.

 

2. 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 on the condensed consolidated statements of financial condition include the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Significant accounts and transactions between consolidated entities have been eliminated.

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 revenue 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, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2012 (“2011 Form 10-K”).

The interim financial information at June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 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.

 

9


Table of Contents
2. Significant Accounting Policies (continued)

 

Fair Value Measurements.

Hierarchy of Fair Value Inputs. The provisions of Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 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.

Assets and liabilities 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 may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”) which, in accordance with GAAP, are calculated under fair value measures and the changes are equal to the earnings of such funds), ETFs, equities and certain exchange-traded derivatives.

Level 2 Inputs:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company relies on the NAV (or its equivalent) of certain investments as their fair value.

 

   

Level 2 assets may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, securities held within consolidated hedge funds and certain equity method limited partnership interests in hedge funds valued based on NAV where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data.

Level 3 Inputs:

Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.

 

   

Level 3 assets may 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, direct private equity investments held within consolidated funds, bank loans and bonds.

Level 3 inputs may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices.

 

   

Level 3 liabilities include borrowings of consolidated collateralized loan obligations (“CLOs”) valued based upon non-binding single broker quotes.

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.

 

10


Table of Contents
2. Significant Accounting Policies (continued)

Fair Value Measurements (continued)

 

Valuation Techniques. The fair values of certain Level 3 assets and liabilities were determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. These inputs are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of current market environment and other analytical procedures.

As a practical expedient, the Company relies on NAV as the fair value for certain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. 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 funds 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 as an input to value these investments.

A significant amount of inputs used to value equity, debt securities and bank loans are sourced from well-recognized third-party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for identical securities traded in active markets and as Level 2 for other similar securities if the vendor uses observable inputs in determining the price. Annually, BlackRock’s internal valuation committee or other designated groups review both the valuation methodology, including the general assumptions and methods used to value various asset classes, and operational process with these vendors. In addition, on a quarterly basis, meetings are held with the vendors to identify any significant changes to the vendors’ processes.

In addition, quotes obtained from brokers generally are non-binding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.

Fair Value Option. ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies an irrevocable election to use fair value as the initial and subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are 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 is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method.

Derivative Instruments and Hedging Activities. ASC 815-10, Derivatives and Hedging (“ASC 815-10”), establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. ASC 815-10 generally requires an entity to recognize all derivatives as either assets or liabilities on the condensed consolidated statements of financial condition and to measure those investments at fair value.

The Company does not use derivative financial instruments for trading or speculative purposes. The Company uses derivative financial instruments primarily for purposes of hedging: (i) exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities, (ii) market exposures for certain seed investments and (iii) future cash flows on floating-rate notes. The Company may also use derivatives within its separate account assets, which are segregated funds held for purposes of funding individual and group pension contracts, or in connection with capital support agreements with affiliated investment companies. In addition, certain consolidated sponsored investment funds may also invest in derivatives as a part of their investment strategy.

Changes in the fair value of the Company’s derivative financial instruments generally are recognized in earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities or hedged investments, on the condensed consolidated statements of income.

 

11


Table of Contents
2. Significant Accounting Policies (continued)

 

Collateral Assets Held and Liabilities Under Securities Lending Agreements. The Company facilitates securities lending arrangements whereby securities held by separate account assets maintained by BlackRock’s registered life insurance company are lent to third parties. In exchange, the Company receives collateral, principally cash and securities, with minimum value generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. Under the Company’s securities lending arrangements, the Company can re-sell or re-pledge the collateral and the borrower can re-sell or re-pledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time. Therefore, these transactions are not reported as sales under ASC 860, Transfers and Servicing.

As a result of the Company’s ability to re-sell or re-pledge the collateral combined with the fact the activity is in a registered life insurance company, the Company records on its condensed consolidated statements of financial condition the collateral received under these arrangements as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. At June 30, 2012 and December 31, 2011, the fair value of loaned securities held by separate account assets was approximately $20.2 billion and $19.5 billion, respectively, and the value of collateral held under these securities lending agreements was approximately $22.1 billion and $20.9 billion, respectively. During the six months ended June 30, 2012 and 2011, the Company had not sold or re-pledged any of the collateral received under these arrangements.

Appropriated Retained Earnings. Upon adoption of Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), on January 1, 2010, BlackRock consolidated three CLOs and recorded a cumulative effect adjustment to appropriated retained earnings on the condensed consolidated statement of financial condition equal to the difference between the fair value of the CLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders, not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. Subsequent to the adoption of ASU 2009-17, the net change in the fair value of the CLOs’ assets and liabilities has been recorded as net income (loss) attributable to nonredeemable non-controlling interests and as an adjustment to appropriated retained earnings. In addition, on September 30, 2011, BlackRock consolidated one additional CLO, resulting in $19 million of additional appropriated retained earnings upon the initial consolidation.

Amendments to Fair Value Measurements and Disclosures. On January 1, 2012, the Company adopted the applicable provisions of ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 clarified existing fair value measurement guidance and changed certain principles or requirements for measuring fair value or disclosing information about fair value measurements. The adoption of ASU 2011-04 did not materially impact BlackRock’s condensed consolidated financial statements.

Amendments on Testing Indefinite-lived Intangible Assets for Impairment. On July 27, 2012, the Financial Accounting Standards Board (“FASB”) issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), which amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under ASU 2012-02, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset.

The amendments of ASU 2012-02 are effective for the Company for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The provisions of ASU 2012-02 are not expected to materially impact BlackRock’s condensed consolidated financial statements.

 

12


Table of Contents
3. Investments

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

 

(Dollar amounts in millions)    June 30,
2012
     December 31,
2011
 

Available-for-sale investments

   $ 190       $ 52   

Held-to-maturity investments

     95         105   

Trading investments:

     

Consolidated sponsored investment funds

     117         214   

Other equity securities and debt securities

     3         7   

Deferred compensation plan mutual funds

     49         46   
  

 

 

    

 

 

 

Total trading investments

     169         267   

Other investments:

     

Consolidated sponsored investment funds

     416         373   

Equity method investments

     589         457   

Deferred compensation plan hedge fund equity method investments

     10         19   

Cost method investments(1)

     339         337   

Carried interest

     71         21   
  

 

 

    

 

 

 

Total other investments

     1,425         1,207   
  

 

 

    

 

 

 

Total investments

   $ 1,879       $ 1,631   
  

 

 

    

 

 

 

 

(1) 

Amounts primarily include Federal Reserve Bank Stock

At June 30, 2012, the Company consolidated $533 million of investments held by consolidated sponsored investment funds (non-variable interest entities (“VIEs”)) of which $117 million and $416 million were classified as trading investments and other investments, respectively. At December 31, 2011, the Company consolidated $587 million of investments held by consolidated sponsored investment funds (non-VIEs) of which $214 million and $373 million were classified as trading investments and other investments, respectively.

 

13


Table of Contents
3. Investments (continued)

 

Available-for-Sale Investments

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

 

(Dollar amounts in millions)           Gross Unrealized     Carrying  

June 30, 2012

   Cost      Gains      Losses     Value  

Equity securities:

          

Sponsored investment funds

   $ 186       $ 4       ($ 3   $ 187   

Collateralized debt obligations (“CDOs”)

     1         —           —          1   

Debt securities:

          

Asset-backed debt

     1         1         —          2   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

   $ 188       $ 5       ($ 3   $ 190   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

             Gross Unrealized     Carrying  

December 31, 2011

   Cost      Gains      Losses     Value  

Equity securities:

          

Sponsored investment funds

   $ 52       $ —         ($ 2   $ 50   

CDOs

     1         —           —          1   

Debt securities:

          

Asset-backed debt

     1         —           —          1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

   $ 54       $ —         ($ 2   $ 52   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale investments included seed investments in BlackRock sponsored investment mutual funds.

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $95 million and $105 million at June 30, 2012 and December 31, 2011, respectively. Held-to-maturity investments included foreign government debt held for regulatory purposes and the amortized cost (carrying value) of these investments approximated fair value. The amortized cost of debt securities classified as held-to-maturity at June 30, 2012 by maturity date was as follows:

 

(Dollar amounts in millions)    1 Year or
less
     After 1
Year
through 5
Years
     After 5
Years
through 10
Years
     After 10
Years
     Total  

Foreign government debt

   $ 86       $ —         $ —         $ 9       $ 95   

 

14


Table of Contents
3. Investments (continued)

 

Trading Investments

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

 

     June 30, 2012      December 31, 2011  
(Dollar amounts in millions)    Cost      Carrying
Value
     Cost      Carrying
Value
 

Trading investments:

           

Deferred compensation plan mutual funds

   $ 46       $ 49       $ 45       $ 46   

Equity/Multi-asset class mutual funds

     112         112         174         169   

Debt securities:

           

Foreign debt

     —           —           12         12   

Corporate debt

     8         8         39         40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading investments

   $ 166       $ 169       $ 270       $ 267   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, trading investments included $109 million of equity securities and $8 million of debt securities held by consolidated sponsored investment funds, $49 million of certain deferred compensation plan mutual fund investments and $3 million of equity and debt securities held in separate investment accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.

Other Investments

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

 

     June 30, 2012      December 31, 2011  
(Dollar amounts in millions)    Cost      Carrying
Value
     Cost      Carrying
Value
 

Other investments:

           

Consolidated sponsored investment funds

   $ 380       $ 416       $ 345       $ 373   

Equity method

     574         589         487         457   

Deferred compensation plan hedge fund equity method investments

     15         10         17         19   

Cost method investments:

           

Federal Reserve Bank stock

     329         329         328         328   

Other

     10         10         9         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost method investments

     339         339         337         337   

Carried interest

     —           71         —           21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other investments

   $ 1,308       $ 1,425       $ 1,186       $ 1,207   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated sponsored investment funds include third-party private equity funds, direct investments in private companies and third-party hedge funds held by BlackRock sponsored investment funds.

Equity method investments include BlackRock’s direct investments in BlackRock sponsored investment funds.

Cost method investments include non-marketable securities, including Federal Reserve Bank stock, which is held for regulatory purposes and is restricted from sale. As of June 30, 2012, there were no indicators of impairments on these investments.

Carried interest represents allocations to BlackRock general partner capital accounts from certain funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds.

 

15


Table of Contents
4. Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds in accordance with GAAP. The investments owned by these consolidated sponsored investment funds are classified as trading or other investments. The following table presents the balances related to these consolidated funds that were included on the condensed consolidated statements of financial condition as well as BlackRock’s net interest in these funds:

 

(Dollar amounts in millions)    June 30,     December 31,  
     2012     2011  

Cash and cash equivalents

   $ 60      $ 196   

Investments:

    

Trading investments

     117        214   

Other investments

     416        373   

Other assets

     10        5   

Other liabilities

     (34     (37

Non-controlling interests

     (216     (276
  

 

 

   

 

 

 

BlackRock’s net interests in consolidated sponsored investment funds

   $ 353      $ 475   
  

 

 

   

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds of $353 million and $475 million at June 30, 2012 and December 31, 2011, respectively, represents the 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 partially offset in net income (loss) attributable to non-controlling interests for the portion not attributable to BlackRock.

In addition, at both June 30, 2012 and December 31, 2011, four consolidated CLOs and one other consolidated sponsored investment fund, which were deemed to be VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion on these consolidated funds.

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 the Company’s operations.

 

16


Table of Contents
5. Fair Value Disclosures

Fair Value Hierarchy

Total assets measured at fair value on a recurring basis of $143.7 billion at June 30, 2012 were as follows:

 

     Assets measured at fair value                
(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
Assets

Not
Held at
Fair
Value(1)
     June 30,
2012
 

Assets:

              

Investments

              

Available-for-sale:

              

Equity securities (funds and CDOs)

   $ 187       $ —         $ 1       $ —         $ 188   

Debt securities

     —           2         —           —           2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     187         2         1         —           190   

Held-to-maturity:

              

Debt securities

     —           —           —           95         95   

Trading:

              

Deferred compensation plan mutual funds

     49         —           —           —           49   

Equity/Multi-asset class mutual funds

     109         3         —           —           112   

Debt securities

     —           8         —           —           8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading

     158         11         —           —           169   

Other investments:

              

Consolidated sponsored investment funds:

              

Hedge funds / Funds of funds

     5         47         46         —           98   

Private / public equity(2)

     14         6         298         —           318   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated sponsored investment funds

     19         53         344         —           416   

Equity method:

              

Hedge funds / Funds of hedge funds

     —           65         187         18         270   

Private equity investments

     —           —           88         22         110   

Real estate funds

     —           —           101         16         117   

Fixed income mutual funds

     27         —           —           —           27   

Equity/Multi-asset class, alternative mutual funds

     65         —           —           —           65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity method

     92         65         376         56         589   

Deferred compensation plan hedge fund equity method investments

     —           10         —           —           10   

Cost method investments

     —           —           —           339         339   

Carried interest

     —           —           —           71         71   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     456         141         721         561         1,879   

Separate account assets:

              

Equity securities

     82,607         —           7         —           82,614   

Debt securities

     —           32,531         —           —           32,531   

Derivatives

     19         126         —           —           145   

Money market funds

     2,297         —           —           —           2,297   

Other

     —           1,119         —           836         1,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total separate account assets

     84,923         33,776         7         836         119,542   

Collateral held under securities lending agreements:

              

Equity securities

     16,420         —           —           —           16,420   

Debt securities

     —           5,725         —           —           5,725   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateral held under securities lending agreements

     16,420         5,725         —           —           22,145   

Other assets(3)

     —           11         —           —           11   

Assets of consolidated VIEs:

              

Bank loans

     —           1,263         85         —           1,348   

Bonds

     —           83         44         —           127   

Private / public equity(4)

     2         6         25         —           33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets of consolidated VIE

     2         1,352         154         —           1,508   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 101,801       $ 41,005       $ 882       $ 1,397       $ 145,085   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts comprised of investments held at cost, amortized cost, carried interest and 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 liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

(2) 

Amount within Level 3 included $240 million and $58 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

(3) 

Amount included company-owned and split-dollar life insurance policies.

(4) 

Amount within Level 3 included $23 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity fund, respectively.

 

17


Table of Contents
5. Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Liabilities measured at fair value on a recurring basis at June 30, 2012 were as follows:

 

(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)
     June 30,
2012
 

Liabilities:

           

Borrowings of consolidated VIEs

   $ —         $ —         $ 1,439       $ 1,439   

Collateral liabilities under securities lending agreements

     16,420         5,725         —           22,145   

Other liabilities(1)

     15         4         —           19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ 16,435       $ 5,729       $ 1,439       $ 23,603   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts included credit default swap (Pillars) (see Note 7, Derivatives and Hedging, for more information) and securities sold short within consolidated sponsored investment funds recorded within other liabilities on the condensed consolidated statement of financial condition.

 

18


Table of Contents
5. Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Total assets measured at fair value on a recurring basis of $141.6 billion at December 31, 2011 were as follows:

 

     Assets measured at fair value                
(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
Assets
Not
Held at
Fair

Value (1)
     December 31,
2011
 

Assets:

              

Investments

              

Available-for-sale:

              

Equity securities (funds and CDOs)

   $ 50       $ —         $ 1       $ —         $ 51   

Debt securities

     —           1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     50         1         1         —           52   

Held-to-maturity:

              

Debt securities

     —           —           —           105         105   

Trading:

              

Deferred compensation plan mutual funds

     46         —           —           —           46   

Equity securities

     163         6         —           —           169   

Debt securities

     —           52         —           —           52   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading

     209         58         —           —           267   

Other investments:

              

Consolidated sponsored investment funds:

              

Hedge funds / Funds of funds

     —           20         22         —           42   

Private / public equity

     18         —           313         —           331   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated sponsored investment funds

     18         20         335         —           373   

Equity method:

              

Hedge funds / Funds of hedge funds

     —           33         193         14         240   

Private equity investments

     —           —           85         21         106   

Real estate funds

     —           —           88         20         108   

Equity mutual funds

     3         —           —           —           3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity method

     3         33         366         55         457   

Deferred compensation plan hedge fund equity method investments

     —           19         —           —           19   

Cost method investments

     —           —           —           337         337   

Carried interest

     —           —           —           21         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     280         131         702         518         1,631   

Separate account assets:

              

Equity securities

     74,088         —           3         —           74,091   

Debt securities

     —           38,596         7         —           38,603   

Derivatives

     8         1,487         —           —           1,495   

Money market funds

     2,845         —           —           —           2,845   

Other

     —           920         —           917         1,837   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total separate account assets

     76,941         41,003         10         917         118,871   

Collateral held under securities lending agreements:

              

Equity securities

     14,092         —           —           —           14,092   

Debt securities

     —           6,826         —           —           6,826   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateral held under securities lending agreements

     14,092         6,826         —           —           20,918   

Other assets(2)

     —           11         —           —           11   

Assets of consolidated VIEs:

              

Bank loans

     —           1,376         83         —           1,459   

Bonds

     —           105         40         —           145   

Private / public equity

     4         4         27         —           35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets of consolidated VIEs

     4         1,485         150         —           1,639   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 91,317       $ 49,456       $ 862       $ 1,435       $ 143,070   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts comprised of investments held at cost, amortized cost, carried interest and 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 liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

(2)

Amount includes company-owned and split-dollar life insurance policies.

 

19


Table of Contents
5. Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Liabilities measured at fair value on a recurring basis at December 31, 2011 were as follows:

 

(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)
     December 31,
2011
 

Liabilities:

           

Borrowings of consolidated VIEs

   $ —         $ —         $ 1,574       $ 1,574   

Collateral liabilities under securities lending agreements

     14,092         6,826         —           20,918   

Other liabilities(1)

     15         11         —           26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ 14,107       $ 6,837       $ 1,574       $ 22,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts included credit default swap (Pillars) (see Note 7, Derivatives and Hedging, for more information) and securities sold short within consolidated sponsored investment funds recorded within other liabilities on the condensed consolidated statement of financial condition.

Separate Account Assets. The separate account assets are maintained by a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. In accordance with GAAP, the Company records equal and offsetting separate account liabilities. The separate account assets are not available to creditors of the Company and the holders of the pension contracts have no recourse to the Company’s assets. The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the Company’s condensed consolidated statements of income. While BlackRock has no economic interest in these assets or liabilities, BlackRock earns an investment advisory fee for the service of managing these assets on behalf of the clients.

Level 3 Assets. Level 3 assets recorded within investments of $721 million at June 30, 2012, primarily related to equity method investments and consolidated sponsored investment funds. Level 3 assets within investments, except for direct investments in private equity companies held by private equity funds described below, were primarily valued based upon NAVs received from internal as well as third-party fund managers.

Direct investments in private equity companies held by private equity funds totaled $60 million at June 30, 2012. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used are evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the cash flows to a single present amount using current market expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

 

20


Table of Contents
5. Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Level 3 assets recorded within separate account assets include single-broker non-binding quotes for fixed income securities and equity securities that have unobservable inputs due to certain corporate actions.

Level 3 assets of consolidated VIEs include bank loans and bonds valued based on single-broker non-binding quotes and direct private equity investments and private equity funds valued based upon valuations received from internal as well as third-party fund managers, which may be adjusted by using the returns of certain market indices.

Level 3 Liabilities. Level 3 liabilities recorded as borrowings of consolidated VIEs include CLO borrowings valued based upon single-broker non-binding quotes.

 

21


Table of Contents
5. Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2012

 

(Dollar amounts in millions)   March 31,
2012
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of

Level 3
    June 30,
2012
    Total net gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (CDOs)

  $ 1      $ —        $ —        $ —        $ —        $ —        $ —        $ 1      $ —     

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    53        (5     —          —          (2     —          —          46        (5

Private equity

    329        (8     4        (21     —          —          (6     298        (9

Equity method:

                 

Hedge funds / Funds of hedge funds

    197        3        —          —          (13     —          —          187        3   

Private equity investments

    89        2        1        —          (4     —          —          88        2   

Real estate funds

    95        2        6        —          (2     —          —          101        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 investments

    764        (6     11        (21     (21     —          (6     721        (7

Separate account assets:

                 

Equity securities

    13        (2     3        (2     —          3        (8     7        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    47        1        10        (1     —          47        (19     85     

Bonds

    44        —          —          —          —          —          —          44     

Private equity

    28        (1     —          (2     —          —          —          25     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

    119        —          10        (3     —          47        (19     154        n/a (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets

  $ 896      ($ 8   $ 24      ($ 26   ($ 21   $ 50      ($ 33   $ 882     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

  $ 1,547      $ 10      $ —        $ —        ($ 98   $ —        $ —        $ 1,439        n/a (4) 

 

n/a – not applicable

(1) 

Amount includes distributions from equity method investees and repayments of borrowings of consolidated VIEs.

(2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

(3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the Company’s condensed consolidated statements of income.

(4) 

The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s condensed consolidated statements of income.

 

22


Table of Contents
5. Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2012

 

(Dollar amounts in millions)   December 31,
2011
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of

Level 3
    June 30,
2012
    Total net gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (CDOs)

  $ 1      $ —        $ —        $ —        $ —        $ —        $ —        $ 1      $ —     

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    22        (4     27        —          (2     3        —          46        (4

Private equity

    313        21        9        (39     —          —          (6     298        18   

Equity method:

                 

Hedge funds / Funds of hedge funds

    193        19        —          —          (25     —          —          187        19   

Private equity investments

    85        6        3        —          (6     —          —          88        6   

Real estate funds

    88        2        13        —          (2     —          —          101        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 investments

    702        44        52        (39     (35     3        (6     721        41   

Separate account assets:

                 

Equity securities

    3        (1     4        (5     —          14        (8     7     

Debt securities

    7        —          —          (6     —          —          (1     —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 separate account assets

    10        (1     4        (11     —          14        (9     7        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    83        1        17        (7     —          52        (61     85     

Bonds

    40        2        2        —          —          —          —          44     

Private equity

    27        2        —          (4     —          —          —          25     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

    150        5        19        (11     —          52        (61     154        n/a (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets

  $ 862      $ 48      $ 75      ($ 61   ($ 35   $ 69      ($ 76   $ 882     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

  $ 1,574      ($ 39   $ —        $ —        ($ 174   $ —        $ —        $ 1,439        n/a (4) 

 

n/a – not applicable

 

(1) 

Amount includes distributions from equity method investees and repayments of borrowings of consolidated VIEs.

(2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

(3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the Company’s condensed consolidated statements of income.

(4) 

The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s condensed consolidated statements of income.

 

23


Table of Contents
5. Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2011

 

(Dollar amounts in millions)   March 31,
2011
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    June 30,
2011
    Total net gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments:

                 

Available-for-sale:

                 

Equity securities (funds and CDOs)

  $ 2      $ 1      $ —        $ —        ($ 1   $ —        $ —        $ 2      $ 1   

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    20        (2     —          (1     —          —          —          17        (2

Private equity

    305        18        7        (21     1        2        —          312        18   

Equity method:

                 

Hedge funds / Funds of hedge funds

    227        (3     3        —          (16     —          —          211        (3

Private equity investments

    70        7        2        —          (2     —          —          77        7   

Real estate funds

    41        1        8        —          (2     —          —          48        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 investments

    665        22        20        (22     (20     2        —          667        22   

Separate account assets:

                 

Equity securities

    41        3        4        (35     —          —          (9     4     

Debt securities

    108        (1     —          (97     —          —          —          10     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 separate account assets

    149        2        4        (132     —          —          (9     14        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    38        —          15        (13     —          9        (8     41     

Private equity

    32        1        —          (4     —          —          —          29     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

    70        1        15        (17     —          9        (8     70        n/a (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets

  $ 884      $ 25      $ 39      ($ 171   ($ 20   $ 11      ($ 17   $ 751     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

  $ 1,297      ($ 9   $ —        $ —        ($ 14   $ —        $ —        $ 1,292        n/a (4) 

n/a – not applicable

 

(1) 

Amount includes distributions from equity method investees and repayments of borrowings of consolidated VIEs.

(2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

(3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the Company’s condensed consolidated statements of income.

(4) 

The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s condensed consolidated statements of income.

 

24


Table of Contents
5. Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2011

 

(Dollar amounts in millions)   December 31,
2010
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales     Issuances  and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    June 30,
2011
    Total net gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments:

                 

Available-for-sale:

                 

Equity securities (funds and CDOs)

  $ 2      $ 1      $ —        $ —        ($ 1   $ —        $ —        $ 2      $ 1   

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    19        1        —          (2     —          —          (1     17        1   

Private equity

    299        30        8        (28     1        2        —          312        30   

Equity method:

                 

Hedge funds / Funds of hedge funds

    226        13        5        (1     (32     —          —          211        13   

Private equity investments

    68        8        3        —          (2     —          —          77        8   

Real estate funds

    36        2        12        —          (2     —          —          48        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 investments

    650        55        28        (31     (36     2        (1     667        55   

Separate account assets:

                 

Equity securities

    4        2        7        (38     —          38        (9     4     

Debt securities

    170        (2     96        (167     —          —          (87     10     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 separate account assets

    174        —          103        (205     —          38        (96     14        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    32        (2     20        (16     —          23        (16     41     

Private equity

    30        3        —          (4     —          —          —          29     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

    62        1        20        (20     —          23        (16     70        n/a (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets

  $ 886      $ 56      $ 151      ($ 256   ($ 36   $ 63      ($ 113   $ 751     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

  $ 1,278      ($ 28   $ —        $ —        ($ 14   $ —        $ —        $ 1,292        n/a (4) 

n/a – not applicable

 

(1) 

Amount includes distributions from equity method investees and repayments of borrowings of consolidated VIEs.

(2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

(3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the Company’s condensed consolidated statements of income.

(4) 

The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s condensed consolidated statements of income.

 

25


Table of Contents
5. Fair Value Disclosures (continued)

 

Realized and Unrealized Gains (Losses) for Level 3 Assets and Liabilities. Realized and unrealized gains (losses) recorded for Level 3 assets and liabilities are reported in non-operating income (expense) on the Company’s condensed consolidated statements of income. A portion of net income (loss) for consolidated investments and all of the net income (loss) for consolidated VIEs are allocated to non-controlling interests to reflect net income (loss) not attributable to the Company.

Transfers in and/or out of Levels. Transfers in and/or out of levels are reflected when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable / unobservable, or when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a NAV (or a capital account), or when the book value of certain equity method investments no longer represents fair value as determined under valuation methodologies.

Separate Account Assets. During the six months ended June 30, 2012, there were $14 million of transfers of equity securities into Level 3 from Level 1. These transfers into Level 3 were primarily due to market inputs no longer being considered observable.

During the three and six months ended June 30, 2012, there were $8 million of transfers out of Level 3 to Level 1 related to