10-Q 1 d406649d10q.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 September 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 October 31, 2012, there were 169,537,195 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

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

     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      44   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      84   

Item 4.

  Controls and Procedures      86   
PART II   
OTHER INFORMATION   

Item 1.

  Legal Proceedings      87   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      88   

Item 6.

  Exhibits      89   

 

- 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)

 

     September 30,
2012
     December 31,
2011
 

Assets

     

Cash and cash equivalents

   $ 4,223       $ 3,506   

Accounts receivable

     2,464         1,960   

Due from related parties

     121         142   

Investments

     1,864         1,631   

Assets of consolidated variable interest entities:

     

Cash and cash equivalents

     292         54   

Bank loans and other investments

     1,683         1,639   

Separate account assets

     128,013         118,871   

Collateral held under securities lending agreements

     22,562         20,918   

Deferred sales commissions, net

     26         38   

Property and equipment (net of accumulated depreciation of $564 and $483 at September 30, 2012 and December 31, 2011, respectively)

     560         537   

Intangible assets (net of accumulated amortization of $859 and $751 at September 30, 2012 and December 31, 2011, respectively)

     17,442         17,356   

Goodwill

     12,908         12,792   

Other assets

     670         452   
  

 

 

    

 

 

 

Total assets

   $ 192,828       $ 179,896   
  

 

 

    

 

 

 

Liabilities

     

Accrued compensation and benefits

   $ 1,204       $ 1,383   

Accounts payable and accrued liabilities

     1,427         923   

Due to related parties

     15         22   

Short-term borrowings

     100         100   

Liabilities of consolidated variable interest entities:

     

Borrowings

     1,843         1,574   

Other liabilities

     9         9   

Long-term borrowings

     6,186         4,690   

Separate account liabilities

     128,013         118,871   

Collateral liabilities under securities lending agreements

     22,562         20,918   

Deferred income tax liabilities

     5,311         5,323   

Other liabilities

     849         721   
  

 

 

    

 

 

 

Total liabilities

     167,519         154,534   
  

 

 

    

 

 

 

Commitments and contingencies (Note 11)

     

Temporary equity

     

Redeemable non-controlling interests

     28         92   

Redeemable non-controlling interests of consolidated variable interest entities

     20         —     

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition (continued)

(Dollar amounts in millions, except share data)

(unaudited)

 

     September 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 September 30, 2012 and December 31, 2011;

    

Shares issued: 168,661,718 and 139,880,380 at September 30, 2012 and December 31, 2011, respectively;

    

Shares outstanding: 167,102,878 and 138,463,135 at September 30, 2012 and December 31, 2011, respectively

    

Preferred stock (Note 15)

     —          —     

Additional paid-in capital

     19,322        20,275   

Retained earnings

     6,010        5,046   

Appropriated retained earnings

     56        72   

Accumulated other comprehensive loss

     (58     (127

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

     (1     (1

Treasury stock, common, at cost (1,555,237 and 1,413,642 shares held at September 30, 2012 and December 31, 2011, respectively)

     (274     (218
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     25,057        25,048   

Nonredeemable non-controlling interests

     170        184   

Nonredeemable non-controlling interests of consolidated variable interest entities

     34        38   
  

 

 

   

 

 

 

Total permanent equity

     25,261        25,270   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

   $ 192,828      $ 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
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Revenue

        

Investment advisory, administration fees and securities lending revenue

        

Related parties

   $ 1,319      $ 1,320      $ 3,900      $ 4,075   

Other third parties

     705        629        2,091        1,958   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment advisory, administration fees and securities lending revenue

     2,024        1,949        5,991        6,033   

Investment advisory performance fees

     103        91        224        224   

BlackRock Solutions and advisory

     128        117        382        361   

Distribution fees

     19        23        58        78   

Other revenue

     46        45        143        158   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     2,320        2,225        6,798        6,854   

Expenses

        

Employee compensation and benefits

     828        771        2,439        2,425   

Distribution and servicing costs

     94        90        282        299   

Amortization of deferred sales commissions

     13        20        43        63   

Direct fund expenses

     144        139        440        435   

General and administration

     327        389        958        1,074   

Amortization of intangible assets

     39        39        117        117   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,445        1,448        4,279        4,413   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     875        777        2,519        2,441   

Non-operating income (expense)

        

Net gain (loss) on investments

     75        (59     143        18   

Net gain (loss) on consolidated variable interest entities

     2        (16     1        (36

Interest and dividend income

     10        12        27        25   

Interest expense

     (57     (49     (158     (128
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income (expense)

     30        (112     13        (121
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     905        665        2,532        2,320   

Income tax expense

     250        95        742        564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     655        570        1,790        1,756   

Less:

        

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

     3        —          7        —     

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

     10        (25     15        (26
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

   $ 642      $ 595      $ 1,768      $ 1,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 3.72      $ 3.28      $ 10.02      $ 9.46   

Diluted

   $ 3.65      $ 3.23      $ 9.87      $ 9.33   

Cash dividends declared and paid per share

   $ 1.50      $ 1.375      $ 4.50      $ 4.125   

Weighted-average common shares outstanding:

        

Basic

     172,359,141        179,034,837        176,116,975        186,187,318   

Diluted

     175,450,532        181,825,329        178,956,699        188,792,952   

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
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Net income

   $ 655      $ 570      $ 1,790      $ 1,756   

Other comprehensive income:

        

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

        

Unrealized holding gains (losses), net of tax

     10        (5     12        (6

Less: reclassification adjustment included in net income

     (4     (2     (5     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     14        (3     17        (6

Minimum pension liability adjustment

     —          —          (1     —     

Foreign currency translation adjustments

     54        (67     53        (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     68        (70     69        (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     723        500        1,859        1,742   

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

     13        (25     22        (26
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to BlackRock, Inc.

   $ 710      $ 525      $ 1,837      $ 1,768   
  

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) 

The tax benefit (expense) on unrealized holding gains (losses) was ($7) million and $2 million during the three months ended September 30, 2012 and 2011, respectively, and ($8) million and $3 million during the nine months ended September 30, 2012 and 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
BlackRock
Stockholders’
Equity
    Nonredeemable
Non-controlling
Interests
    Nonredeemable
Non-controlling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-
controlling
Interests /
Temporary
Equity(3)
 

December 31, 2011

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

Net income

    —          1,768        —          —          —          —          1,768        14        1        1,783        7   

Consolidation of a collateralized loan obligation(2)

    —          —          (13     —          —          —          (13     —          —          (13     —     

Allocation of losses of consolidated collateralized loan obligations

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

Dividends paid

    —          (804     —          —          —          —          (804     —          —          (804     —     

Stock-based compensation

    344        —          —          —          —          —          344        —          —          344        —     

Merrill Lynch cash capital contribution

    7        —          —          —          —          —          7        —          —          7        —     

Issuance of common shares related to employee stock transactions

    (366     —          —          —          —          419        53        —          —          53        —     

Employee tax benefit withholdings related to employee stock transactions

    —          —          —          —          —          (141     (141     —          —          (141     —     

Shares repurchased

    (1,000     —          —          —          —          (334     (1,334     —          —          (1,334     —     

Net tax benefit (shortfall) from stock-based compensation

    63        —          —          —          —          —          63        —          —          63        —     

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

    —          —          —          —          —          —          —          (20     (8     (28     221   

Net consolidations (deconsolidations) of sponsored investment funds

    —          —          —          —          —          —          —          (8     —          (8     (272

Other comprehensive income (loss)

    —          —          —          69        —          —          69        —          —          69        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

  $ 19,324      $ 6,010      $ 56      ($ 58   ($ 1   ($ 274   $ 25,057      $ 170      $ 34      $ 25,261      $ 48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) 

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

(2) 

Consolidated during the three months ended September 30, 2012.

(3) 

Amount at September 30, 2012 includes $20 million related to variable interest entities.

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
BlackRock
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

    —          1,782        —          —          —          —          1,782        10        (36     1,756        —     

Consolidation of a collateralized loan obligation(2)

    —          —          41        —          —          —          41        —          —          41        —     

Allocation of losses of consolidated collateralized loan obligations

    —          —          (37     —          —          —          (37     —          37        —          —     

Dividends paid

    —          (769     —          —          —          —          (769     —          —          (769     —     

Stock-based compensation

    373        —          —          —          —          2        375        —          —          375        —     

PNC preferred stock capital contribution

    200        —          —          —          —          —          200        —          —          200        —     

Retirement of preferred stock

    (200     —          —          —          —          —          (200     —          —          (200     —     

Merrill Lynch cash capital contribution

    8        —          —          —          —          —          8        —          —          8        —     

Issuance of common shares related to employee stock transactions

    (202     —          —          —          —          217        15        —          —          15        —     

Employee tax benefit withholdings related to employee stock transactions

    —          —          —          —          —          (237     (237     —          —          (237     —     

Shares repurchased

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

Convertible debt conversions

    4        —          —          —          —          1        5        —          —          5     

Net tax benefit (shortfall) from stock-based compensation

    9        —          —          —          —          —          9        —          —          9        —     

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

    —          —          —          —          —          —          —          (24     (10     (34     7   

Net consolidations (deconsolidations) of sponsored investment funds

    —          —          —          —          —          —          —          —          —          —          (12

Other comprehensive income (loss)

    —          —          —          (14         (14     —          —          (14     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2011

  $ 20,151      $ 4,736      $ 79      ($ 110   ($ 1   ($ 128   $ 24,727      $ 175      $ 36      $ 24,938      $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amount includes $1 million of common stock at both September 30, 2011 and December 31, 2010 and $1 million of preferred stock at December 31, 2010.

(2) 

Consolidated during the three months ended September 30, 2011.

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollar amounts in millions)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 1,790      $ 1,756   

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

    

Depreciation and amortization

     219        222   

Amortization of deferred sales commissions

     43        63   

Stock-based compensation

     344        375   

Deferred income tax expense (benefit)

     (42     (108

Net (gains) losses on non-trading investments

     (32     (17

Purchases of investments within consolidated funds

     (83     (8

Proceeds from sales and maturities of investments within consolidated funds

     48        41   

Assets and liabilities of consolidated VIEs:

    

Change in cash and cash equivalents

     (32     38   

Net (gains) losses within consolidated VIEs

     (1     36   

Net (purchases) proceeds within consolidated VIEs

     233        44   

(Earnings) losses from equity method investees

     (124     (13

Distributions of earnings from equity method investees

     29        26   

Changes in operating assets and liabilities:

    

Accounts receivable

     (493     6   

Due from related parties

     21        (9

Deferred sales commissions

     (31     (42

Investments, trading

     (197     (31

Other assets

     (194     (156

Accrued compensation and benefits

     (199     (420

Accounts payable and accrued liabilities

     489        90   

Due to related parties

     (7     (34

Other liabilities

     105        94   
  

 

 

   

 

 

 

Cash flows from operating activities

     1,886        1,953   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (397     (142

Proceeds from sales and maturities of investments

     391        142   

Distributions of capital from equity method investees

     51        32   

Net consolidations (deconsolidations) of sponsored investment funds

     (208     —     

Acquisitions, net of cash acquired

     (267     —     

Purchases of property and equipment

     (121     (218
  

 

 

   

 

 

 

Cash flows from investing activities

     (551     (186
  

 

 

   

 

 

 

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Dollar amounts in millions)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2012     2011  

Cash flows from financing activities

    

Repayments of short-term borrowings

     —          (600

Proceeds from short-term borrowings

     —          600   

Repayments of convertible debt

     —          (67

Proceeds from long-term borrowings

     1,495        1,496   

Cash dividends paid

     (804     (769

Proceeds from stock options exercised

     47        13   

Proceeds from issuance of common stock

     6        3   

Repurchases of common stock

     (1,475     (2,783

Merrill Lynch cash capital contribution

     7        8   

Repayments of borrowings by consolidated VIEs

     (203     (72

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

     193        (27

Excess tax benefit from stock-based compensation

     73        23   
  

 

 

   

 

 

 

Cash flows from financing activities

     (661     (2,175
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     43        24   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     717        (384

Cash and cash equivalents, beginning of period

     3,506        3,367   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 4,223      $ 2,983   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest

   $ 116      $ 98   

Interest on borrowings of consolidated VIEs

   $ 52      $ 43   

Income taxes

   $ 837      $ 819   

Supplemental schedule of non-cash investing and financing transactions:

    

Issuance of common stock

   $ 366      $ 207   

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

   ($ 280   ($ 12

Increase (decrease) in borrowings due to consolidation of VIEs

   $ 406      $ 390   

PNC preferred stock capital contribution

   $ —        $ 200   

See accompanying notes to condensed consolidated financial statements.

 

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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.

On May 29, 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 September 30, 2012, The PNC Financial Services Group, Inc. (“PNC”) held 21.0% of the Company’s voting common stock and 21.8% 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 September 30, 2012 and for the three and nine months ended September 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.

 

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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 may 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.

 

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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 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 as an input to value these investments.

A significant amount of inputs used to value equity, debt securities and bank loans is 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. 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.

 

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Table of Contents

2. Significant Accounting Policies (continued)

 

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.

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 September 30, 2012 and December 31, 2011, the fair value of loaned securities held by separate account assets was approximately $20.8 billion and $19.5 billion, respectively, and the value of collateral held under these securities lending agreements was approximately $22.6 billion and $20.9 billion, respectively. During the nine months ended September 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”), 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, 2012 and September 30, 2011, BlackRock consolidated additional CLOs, resulting in ($13) million and $19 million of additional appropriated retained earnings upon the initial consolidation, respectively.

Accounting Pronouncements Adopted in the Nine Months Ended September 30, 2012

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 for 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 Company’s adoption of ASU 2012-02 during the quarter ended September 30, 2012 did not impact its condensed consolidated financial statements.

 

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Table of Contents

2. Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements Not Yet Adopted

Disclosures About Offsetting Assets and Liabilities. On December 16, 2011, the FASB issued ASU 2011-11, Disclosures About Offsetting Assets and Liabilities (“ASU 2011-11”), which creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The provisions of ASU 2011-11 are effective for the Company for annual reporting period beginning on January 1, 2013, and interim periods therein, with retrospective application required. The adoption of ASU 2011-11 is not expected to materially impact BlackRock’s condensed consolidated financial statements.

 

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Table of Contents

3. Investments

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

 

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

Available-for-sale investments

   $ 192       $ 52   

Held-to-maturity investments

     103         105   

Trading investments:

     

Consolidated sponsored investment funds

     67         214   

Other equity securities and debt securities

     4         7   

Deferred compensation plan mutual funds

     53         46   
  

 

 

    

 

 

 

Total trading investments

     124         267   

Other investments:

     

Consolidated sponsored investment funds

     436         373   

Equity method investments

     509         457   

Deferred compensation plan hedge fund equity method investments

     10         19   

Cost method investments(1)

     365         337   

Carried interest

     125         21   
  

 

 

    

 

 

 

Total other investments

     1,445         1,207   
  

 

 

    

 

 

 

Total investments

   $ 1,864       $ 1,631   
  

 

 

    

 

 

 

 

(1) 

Amounts primarily include Federal Reserve Bank Stock

At September 30, 2012, the Company consolidated $503 million of investments held by consolidated sponsored investment funds (non-variable interest entities (“VIEs”)) of which $67 million and $436 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.

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)    Cost      Gross Unrealized     Carrying
Value
 

September 30, 2012

      Gains      Losses    

Equity securities:

          

Sponsored investment funds

   $ 180       $ 10       ($ 1   $ 189   

Collateralized debt obligations (“CDOs”)

     1         —           —          1   

Debt securities:

          

Asset-backed debt

     1         1         —          2   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

   $ 182       $ 11       ($ 1   $ 192   
  

 

 

    

 

 

    

 

 

   

 

 

 
      Cost      Gross Unrealized     Carrying
Value
 

December 31, 2011

      Gains      Losses    

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.

 

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Table of Contents

3. Investments (continued)

 

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $103 million and $105 million at September 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 September 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

   $ 88       $ 4       $ —         $ 11       $ 103   

Trading Investments

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

 

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

Trading investments:

           

Deferred compensation plan mutual funds

   $ 46       $ 53       $ 45       $ 46   

Equity/Multi-asset class mutual funds

     62         65         174         169   

Debt securities:

           

Foreign debt

     —           —           12         12   

Corporate debt

     6         6         39         40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading investments

   $ 114       $ 124       $ 270       $ 267   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2012, trading investments included $61 million of equity securities and $6 million of debt securities held by consolidated sponsored investment funds, $53 million of certain deferred compensation plan mutual fund investments and $4 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:

 

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

Other investments:

           

Consolidated sponsored investment funds

   $ 396       $ 436       $ 345       $ 373   

Equity method

     465         509         487         457   

Deferred compensation plan hedge fund equity method investments

     15         10         17         19   

Cost method investments:

           

Federal Reserve Bank stock

     330         330         328         328   

Other

     35         35         9         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost method investments

     365         365         337         337   

Carried interest

     —           125         —           21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other investments

   $ 1,241       $ 1,445       $ 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 primarily include BlackRock’s direct investments in certain BlackRock sponsored investment funds.

 

15


Table of Contents

3. Investments (continued)

 

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

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 amounts 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)    September 30,
2012
    December 31,
2011
 

Cash and cash equivalents

   $ 46      $ 196   

Investments:

    

Trading investments

     67        214   

Other investments

     436        373   

Other assets

     5        5   

Other liabilities

     (36     (37

Non-controlling interests

     (198     (276
  

 

 

   

 

 

 

BlackRock’s net interests in consolidated sponsored investment funds

   $ 320      $ 475   
  

 

 

   

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds of $320 million and $475 million at September 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 September 30, 2012 and December 31, 2011, five and four, respectively, consolidated CLOs and several investment funds, which were deemed to be VIEs, were excluded from the balances in the table above as the amounts 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.

 

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Table of Contents

5. Fair Value Disclosures

Fair Value Hierarchy

Total assets measured at fair value on a recurring basis of $152.6 billion at September 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)
     September 30,
2012
 

Assets:

              

Investments

              

Available-for-sale:

              

Equity securities (funds and CDOs)

   $ 189       $ —         $ 1       $ —         $ 190   

Debt securities

     —           2         —           —           2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     189         2         1         —           192   

Held-to-maturity:

              

Debt securities

     —           —           —           103         103   

Trading:

              

Deferred compensation plan mutual funds

     53         —           —           —           53   

Equity/Multi-asset class mutual funds

     62         3         —           —           65   

Debt securities

     —           6         —           —           6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading

     115         9         —           —           124   

Other investments:

              

Consolidated sponsored investment funds:

              

Real estate

     5         —           —           —           5   

Hedge funds / Funds of funds

     10         48         55         —           113   

Private / public equity(2)

     13         7         298         —           318   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated sponsored investment funds

     28         55         353         —           436   

Equity method:

              

Hedge funds / Funds of hedge funds

     —           60         180         30         270   

Private equity investments

     —           —           90         —           90   

Real estate funds

     —           —           103         15         118   

Equity/Multi-asset class, alternative mutual funds

     31         —           —           —           31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity method

     31         60         373         45         509   

Deferred compensation plan hedge fund equity method investments

     —           10         —           —           10   

Cost method investments

     —           —           —           365         365   

Carried interest

     —           —           —           125         125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     363         136         727         638         1,864   

Separate account assets:

              

Equity securities

     89,217         —           33         —           89,250   

Debt securities

     —           34,463         3         —           34,466   

Derivatives

     —           29         —           —           29   

Money market funds

     2,223         —           —           —           2,223   

Other

     —           1,102         —           943         2,045   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total separate account assets

     91,440         35,594         36         943         128,013   

Collateral held under securities lending agreements:

              

Equity securities

     18,367         —           —           —           18,367   

Debt securities

     —           4,195         —           —           4,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateral held under securities lending agreements

     18,367         4,195         —           —           22,562   

Other assets(3)

     —           11         —           —           11   

Assets of consolidated VIEs:

              

Bank loans

     —           1,406         89         —           1,495   

Bonds

     —           80         45         —           125   

Debt securities

     —           30         —           —           30   

Private / public equity(4)

     2         5         26         —           33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets of consolidated VIE

     2         1,521         160         —           1,683   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 110,172       $ 41,457       $ 923       $ 1,581       $ 154,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts comprised of investments held at cost, amortized cost, carried interest and certain 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 $24 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 September 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)
     September 30,
2012
 

Liabilities:

           

Borrowings of consolidated VIEs

   $ —         $ —         $ 1,843       $ 1,843   

Collateral liabilities under securities lending agreements

     18,367         4,195         —           22,562   

Other liabilities(1)

     13         4         —           17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ 18,380       $ 4,199       $ 1,843       $ 24,422   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts include 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 certain 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 include 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.

Level 3 Assets. Level 3 assets recorded within investments of $727 million at September 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 September 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.

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.

 

20


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 September 30, 2012

 

(Dollar amounts in millions)   June 30,
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
    September 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

    46        8        3        (2     —          —          —          55        8   

Private equity

    298        22        —          (14     (8     —          —          298        20   

Equity method:

                 

Hedge funds / Funds of hedge funds

    187        14        —          —          (21     —          —          180        14   

Private equity investments

    88        1        1        —          —          —          —          90        2   

Real estate funds

    101        6        6        (7     (3     —          —          103        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 investments

    721        51        10        (23     (32     —          —          727        48   

Separate account assets:

                 

Equity securities

    7        (4     3        (7     —          34        —          33     

Debt securities

    —          —          3        —          —          —          —          3     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 separate account assets

    7        (4     6        (7     —          34        —          36        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    85        2        7        (24     7        36        (24     89     

Bonds

    44        1        —          —          —          —          —          45     

Private equity

    25        2        2        (3     —          —          —          26     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

    154        5        9        (27     7        36        (24     160        n/a (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets

  $ 882      $ 52      $ 25      ($ 57   ($ 25   $ 70      ($ 24   $ 923     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

  $ 1,439      ($ 27   $ —        $ —        $ 377      $ —        $ —        $ 1,843        n/a (4) 

 

n/a – not applicable

(1) 

Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO.

(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.

 

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 Nine Months Ended September 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
    September 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        30        (2     (2     3        —          55        4   

Private equity

    313        43        2        (46     (8     —          (6     298        38   

Equity method:

                 

Hedge funds / Funds of hedge funds

    193        33        —          —          (46     —          —          180        33   

Private equity investments

    85        7        4        —          (6     —          —          90        8   

Real estate funds

    88        8        19        (7     (5     —          —          103        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 investments

    702        95        55        (55     (67     3        (6     727        89   

Separate account assets:

                 

Equity securities

    3        (5     7        (12     —          48        (8     33     

Debt securities

    7        —          3        (6     —          —          (1     3     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 separate account assets

    10        (5     10        (18     —          48        (9     36        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    83        2        25        (31     7        89        (86     89     

Bonds

    40        3        2        —          —          —          —          45     

Private equity

    27        4        2        (7     —          —          —          26     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

    150        9        29        (38     7        89        (86     160        n/a (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets

  $ 862      $ 99      $ 94      ($ 111   ($ 60   $ 140      ($ 101   $ 923     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

  $ 1,574      ($ 66   $ —        $ —        $ 203      $ —        $ —        $ 1,843        n/a (4) 

 

n/a – not applicable

(1) 

Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO.

 

(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 Three Months Ended September 30, 2011

 

(Dollar amounts in millions)   June 30,
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
    September 30,
2011
    Total net gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments:

                 

Available-for-sale:

                 

Equity securities (CDOs)

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

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    17        (2     —          —          (1     —          —          14        (1

Private equity

    312        (7     —          (10     (1     —          —          294        (10

Equity method:

                 

Hedge funds / Funds of hedge funds

    211        (19     —          —          —          —          —          192        (20

Private equity investments

    77        3        1        —          —          —          —          81        2   

Real estate funds

    48        3        5        —          (1     —          —          55        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 investments

    667        (23     6        (10     (3     —          —          637        (27

Separate account assets:

                 

Equity securities

    4        (1     1        (3     —          —          —          1     

Debt securities

    10        (1     —          (1     —          —          —          8     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 separate account assets

    14        (2     1        (4     —          —          —          9        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    41        (2     5        —          16        23        (11     72     

Private equity

    29        —          —          —          —          —          —          29     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

    70        (2     5        —          16        23        (11     101        n/a (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets

  $ 751      ($ 27   $ 12      ($ 14   $ 13      $ 23      ($ 11   $ 747     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

  $ 1,292      $ 38      $ —        $ —        $ 332      $ —        $ —        $ 1,586        n/a (4) 

 

n/a – not applicable

(1) 

Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO.

(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 Nine Months Ended September 30, 2011

 

(Dollar amounts in millions)    December 31,
2010
     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
    September 30,
2011
     Total net gains
(losses)
included in
earnings(2)
 

Assets:

                      

Investments:

                      

Available-for-sale:

                      

Equity securities (CDOs)

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

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of funds

     19         (1     —           (2     (1     —           (1     14         —     

Private equity

     299         23        8         (38     —          2         —          294         20   

Equity method:

                      

Hedge funds / Funds of hedge funds

     226         (7     5         (1     (31     —           —          192         (7

Private equity investments

     68         10        4         —          (1     —           —          81         10   

Real estate funds

     36         5        17         —          (3     —           —          55         5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Level 3 investments

     650         30        34         (41     (37     2         (1     637         28   

Separate account assets:

                      

Equity securities

     4         1        8         (41     —          38         (9     1      

Debt securities

     170         (3     96         (168     —          —           (87     8      
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

Total Level 3 separate account assets

     174         (2     104         (209     —          38         (96     9         n/a (3) 

Assets of consolidated VIEs:

                      

Bank loans

     32         (4     25         (16     16        46         (27     72      

Private equity

     30         3        —           (4     —          —           —          29