Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2010

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

 

 

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.

 

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, 2010, there were 64,026,785 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

   52
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   112
Item 4.  

Controls and Procedures

   114

PART II

 

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

   115
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   115
Item 4.  

Reserved

   116
Item 6.  

Exhibits

   116

 

i


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(Dollar amounts in millions, except per share data)

(unaudited)

 

     June 30,
2010
   December 31,
2009

Assets

     

Cash and cash equivalents

   $ 2,183    $ 4,708

Accounts receivable

     1,989      1,718

Due from related parties

     158      189

Investments

     1,463      1,049

Separate account assets

     105,476      119,629

Assets of consolidated variable interest entities

     

Cash and cash equivalents

     61      —  

Bank loans and other investments

     1,290      —  

Collateral held under securities lending agreements

     18,304      19,335

Deferred sales commissions, net

     91      103

Property and equipment (net of accumulated depreciation of $372 and $303 at June 30, 2010 and December 31, 2009, respectively)

     433      443

Intangible assets (net of accumulated amortization of $535 and $466 at June 30, 2010 and December 31, 2009, respectively)

     17,586      17,666

Goodwill

     12,640      12,638

Other assets

     592      588
             

Total assets

   $ 162,266    $ 178,066
             

Liabilities

     

Accrued compensation and benefits

   $ 798    $ 1,482

Accounts payable and accrued liabilities

     1,099      850

Due to related parties

     178      490

Short-term borrowings

     444      2,234

Liabilities of consolidated variable interest entities

     

Borrowings

     1,215      —  

Other liabilities

     6      —  

Convertible debentures

     71      243

Long-term borrowings

     3,191      3,191

Separate account liabilities

     105,476      119,629

Collateral liability under securities lending agreements

     18,304      19,335

Deferred tax liabilities

     5,601      5,518

Other liabilities

     635      492
             

Total liabilities

     137,018      153,464
             

Commitments and contingencies (Note 12)

     

Temporary equity

     

Redeemable non-controlling interests

     94      49

 

1


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition (continued)

(Dollar amounts in millions, except per share data)

(unaudited)

 

     June 30,
2010
    December 31,
2009
 

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     1        1   

Shares authorized: 500,000,000 at June 30, 2010 and December 31, 2009;

    

Shares issued: 64,395,617 and 62,776,777 at June 30, 2010 and December 31, 2009, respectively;

    

Shares outstanding: 63,525,823 and 61,896,236 at June 30, 2010 and December 31, 2009, respectively

    

Preferred stock (Note 16)

     1        1   

Additional paid-in capital

     22,284        22,127   

Retained earnings

     2,902        2,436   

Appropriated retained earnings

     89        —     

Accumulated other comprehensive loss

     (186     (96

Escrow shares, common, at cost (868,940 shares held at June 30, 2010 and December 31, 2009)

     (137     (137

Treasury stock, common, at cost (854 and 11,601 shares held at June 30, 2010 and December 31, 2009, respectively)

     —          (3
                

Total BlackRock, Inc. stockholders’ equity

     24,954        24,329   

Nonredeemable non-controlling interests

     159        224   

Nonredeemable non-controlling interests of consolidated variable interest entities

     41        —     
                

Total permanent equity

     25,154        24,553   
                

Total liabilities, temporary equity and permanent equity

   $ 162,266      $ 178,066   
                

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Income

(Dollar amounts in millions, except per share data)

(unaudited)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2010     2009     2010     2009  

Revenue

        

Investment advisory, administration fees and securities lending revenue

        

Related parties

   $ 1,162      $ 589      $ 2,311      $ 1,139   

Other third parties

     630        268        1,234        518   
                                

Investment advisory, administration fees and securities lending revenue

     1,792        857        3,545        1,657   

Investment advisory performance fees

     50        17        100        28   

BlackRock Solutions and advisory

     114        112        227        247   

Distribution fees

     32        23        60        48   

Other revenue

     44        20        95        36   
                                

Total revenue

     2,032        1,029        4,027        2,016   
                                

Expenses

        

Employee compensation and benefits

     709        390        1,482        741   

Distribution and servicing costs

        

Related parties

     64        96        128        199   

Other third parties

     33        29        69        53   

Amortization of deferred sales commissions

     27        26        53        53   

Direct fund expenses

     122        15        235        28   

General and administration

     340        176        629        316   

Restructuring charges

     —          —          —          22   

Amortization of intangible assets

     40        36        80        72   
                                

Total expenses

     1,335        768        2,676        1,484   
                                

Operating income

     697        261        1,351        532   

Non-operating income (expense)

        

Net gain (loss) on investments

     (13     88        24        (84

Net gain (loss) on consolidated variable interest entities

     (29     —          (28     —     

Interest and dividend income

     5        4        9        12   

Interest expense

     (38     (15     (78     (30
                                

Total non-operating income (expense)

     (75     77        (73     (102
                                

Income before income taxes

     622        338        1,278        430   

Income tax expense

     233        94        461        124   
                                

Net income

     389        244        817        306   

Less:

        

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

     2        1        2        1   

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

     (45     25        (40     3   
                                

Net income attributable to BlackRock, Inc.

   $ 432      $ 218      $ 855      $ 302   
                                

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

        

Basic

   $ 2.23      $ 1.62      $ 4.43      $ 2.25   

Diluted

   $ 2.21      $ 1.59      $ 4.38      $ 2.22   

Cash dividends declared and paid per share

   $ 1.00      $ 0.78      $ 2.00      $ 1.56   

Weighted-average common shares outstanding:

        

Basic

     190,975,161        130,928,926        190,329,206        130,574,535   

Diluted

     192,569,539        133,364,611        192,213,593        132,668,695   

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Dollar amounts in millions)

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Net income

   $ 389      $ 244      $ 817      $ 306   

Other comprehensive income:

        

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

        

Unrealized holding gains (losses), net of tax

     —          2        3        1   

Less: reclassification adjustment included in net income

     1        (6     2        (14
                                

Net change from available-for-sale investments, net of tax(1)

     (1     8        1        15   

Minimum pension liability adjustment

     —          —          (1     1   

Foreign currency translation adjustments

     (20     103        (90     89   
                                

Comprehensive income attributable to BlackRock, Inc.

   $ 368      $ 355      $ 727      $ 411   
                                

 

(1)

The tax benefit (expense) on unrealized holding gains (losses) was less than $1 million and ($2) million during the three months ended June 30, 2010 and 2009, respectively, and ($1) million and ($5) million during the six months ended June 30, 2010 and 2009, respectively.

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

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, 2009

  $ 22,129      $ 2,436      $ —          ($96     ($137     ($3   $ 24,329      $ 224      $ —        $ 24,553      $ 49   

January 1, 2010 initial recognition of ASU 2009-17

    —          —          114        —          —          —          114        (49     49        114        —     

Net income

    —          855        (25     —          —          —          830        (12     (3     815        2   

Dividends paid, net of dividend expense for unvested RSUs

    —          (389     —          —          —          —          (389     —          —          (389     —     

Stock-based compensation

    220        —          —          —          —          1        221        —          —          221        —     

PNC LTIP capital contribution

    5        —          —          —          —          —          5        —          —          5        —     

Exchange of common stock for preferred shares series B

    128        —          —          —          —          (128     —          —          —          —          —     

Net issuance of common shares related to employee stock transactions

    (175     —          —          —          —          66        (109     —          —          (109     —     

Convertible debt conversions

    (64     —          —          —          —          64        —          —          —          —          —     

Net tax benefit (shortfall) from stock-based compensation

    43        —          —          —          —          —          43        —          —          43        —     

Minimum pension liability adjustment

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

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

    —          —          —          —          —          —          —          (5     (5     (10     55   

Net consolidations (deconsolidations) of sponsored investment funds

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

Other change in non-controlling interests

    —          —          —          —          —          —          —          1        —          1        —     

Foreign currency translation adjustments

    —          —          —          (90     —          —          (90     —          —          (90     —     

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

    —          —          —          1        —          —          1        —          —          1        —     
                                                                                       

June 30, 2010

  $ 22,286      $ 2,902      $ 89      ($ 186   ($ 137   $ —        $ 24,954      $ 159      $ 41      $ 25,154      $ 94   
                                                                                       

See accompanying notes to condensed consolidated financial statements.

 

( 1 )

Includes $1 million of common stock and $1 million of preferred stock at June 30, 2010 and December 31, 2009, respectively.

 

5


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(Dollar amounts in millions)

(unaudited)

 

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

December 31, 2008

  $ 10,474      $ 1,982      ($186   ($143     ($58   $ 12,069      $ 225      $ 12,294      $ 266   

Reclass to temporary equity - convertible debt

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

Net income

    —          302      —        —          —          302        3        305        1   

Dividends paid, net of dividend expense for unvested RSUs

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

Stock-based compensation

    159        —        —        —          —          159        —          159        —     

Issuance of shares to institutional investor

    300        —        —        —          —          300        —          300        —     

Issuance of common shares for contingent consideration

    43        —        —        —          —          43        —          43        —     

PNC LTIP capital contribution

    6        —        —        —          —          6        —          6        —     

Net issuance of common shares related to employee stock transactions

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

Net tax benefit (shortfall) from stock-based compensation

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

Minimum pension liability adjustment

    —          —        1      —          —          1        —          1        —     

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

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

Net consolidations (deconsolidations) of sponsored investment funds

    —          —        —        —          —          —          (9     (9     —     

Other change in non-controlling interests

    —          —        —        —          —          —          (2     (2     —     

Foreign currency translation adjustments

    —          —        89      —          —          89        —          89        —     

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

    —          —        15      —          —          15        —          15        —     
                                                                   

June 30, 2009

  $ 10,893      $ 2,076      ($81   ($143   $ —        $ 12,745      $ 213      $ 12,958      $ 15   
                                                                   

See accompanying notes to condensed consolidated financial statements.

 

( 1 )

Includes $1 million of preferred stock at June 30, 2009 and $1 million of common stock at June 30, 2009 and December 31, 2008, respectively.

 

6


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollar amounts in millions)

(unaudited)

 

     Six Months Ended
June 30,
 
     2010     2009  

Cash flows from operating activities

    

Net income

   $ 817      $ 306   

Adjustments to reconcile net income to cash from operating activities:

    

Depreciation and amortization

     157        115   

Amortization of deferred sales commissions

     53        53   

Stock-based compensation

     221        159   

Deferred income tax expense (benefit)

     89        (59

Net (gains) losses on non-trading investments

     10        9   

Purchases of investments within consolidated funds

     (6     (17

Proceeds from sales and maturities of investments within consolidated funds

     10        245   

Assets and liabilities of consolidated VIEs:

    

Change in cash and cash equivalents

     (13     —     

Net (gains) losses and net (purchases)/proceeds within consolidated VIEs

     37        —     

(Earnings) losses from equity method investees

     (48     74   

Distributions of earnings from equity method investees

     9        6   

Other adjustments

     (1     2   

Changes in operating assets and liabilities:

    

Accounts receivable

     (286     (164

Due from related parties

     23        170   

Deferred sales commissions

     (41     (29

Investments, trading

     (109     (97

Other assets

     (20     (137

Accrued compensation and benefits

     (682     (434

Accounts payable and accrued liabilities

     243        69   

Due to related parties

     (312     16   

Other liabilities

     159        (13
                

Cash flows from operating activities

     310        274   
                

Cash flows from investing activities

    

Purchases of investments

     (408     (14

Proceeds from sales and maturities of investments

     57        198   

(Purchases)/proceeds of assets held for sale

     1        (1

Distributions of capital from equity method investees

     22        20   

Net consolidations (deconsolidations) of sponsored investment funds

     —          6   

Contingent/other acquisition payments

     (8     (158

Purchases of property and equipment

     (66     (33
                

Cash flows from investing activities

     (402     18   
                

 

7


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Dollar amounts in millions)

(unaudited)

 

     Six Months Ended
June 30,
 
     2010     2009  

Cash flows from financing activities

    

Repayments of long-term borrowings

     —          (1

Repayments of short-term borrowings

     (1,790     —     

Repayments of convertible debt

     (172     —     

Cash dividends paid

     (389     (208

Proceeds from stock options exercised

     6        11   

Proceeds from issuance of common stock

     2        304   

Repurchases of common stock

     (117     (40

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

     45        (257

Excess tax benefit from stock-based compensation

     43        16   

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

     —          70   
                

Cash flows from financing activities

     (2,372     (105
                

Effect of exchange rate changes on cash and cash equivalents

     (61     86   
                

Net (decrease) increase in cash and cash equivalents

     (2,525     273   
                

Cash and cash equivalents, beginning of period

     4,708        2,032   
                

Cash and cash equivalents, end of period

   $ 2,183      $ 2,305   
                

Supplemental disclosure of cash flow information is as follows:

    

Cash paid for:

    

Interest

   $ 74      $ 26   

Interest on borrowings of consolidated variable interest entities

   $ 25      $ —     

Income taxes

   $ 282      $ 340   

Supplemental schedule of non-cash investing and financing transactions is as follows:

    

Issuance of common stock

   $ 235      $ 77   

Contingent common stock payment related to Quellos transaction

   $ —        $ 43   

Increase in borrowings due to consolidation of VIEs

   $ 1,157      $ —     

See accompanying notes to condensed consolidated financial statements.

 

8


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

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

On December 1, 2009, BlackRock completed its acquisition of Barclays Global Investors (“BGI”) from Barclays Bank PLC (“Barclays”) (the “BGI Transaction”). In exchange for BGI, BlackRock paid approximately $6.65 billion in cash and issued capital stock valued at $8.53 billion comprised of 3,031,516 shares of BlackRock common stock and 34,535,255 shares of BlackRock Series B and D participating preferred stock. See Note 3, Mergers and Acquisitions, for more details on this transaction.

On June 30, 2010, equity ownership of BlackRock was as follows:

 

     Voting
Common Stock
    Capital
Stock(1)
 

Bank of America/Merrill Lynch & Co., Inc.

   3.6   33.8

The PNC Financial Services Group, Inc. (“PNC”)

   34.3   24.2

Barclays

   4.7   19.6

Other

   57.4   22.4
            
   100.0   100.0
            

 

(1)

Includes outstanding common and preferred stock only.

 

9


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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 revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission (“SEC”) on March 10, 2010.

The interim financial information at June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 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.

Business Combinations

In accordance with the requirements of Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), certain line items on the condensed consolidated statement of financial condition, including goodwill, intangible assets, and deferred tax liabilities, have been retrospectively adjusted as of December 31, 2009 to reflect new information obtained about facts that existed as of December 1, 2009, the BGI acquisition date. See Note 3, Mergers and Acquisitions, for the changes in the BGI purchase price allocation.

Fair Value Measurements

ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), requires among other things, disclosures about assets and liabilities that are measured and reported at fair value. The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., 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. Additionally, companies are required to provide enhanced disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.

 

10


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

2. Significant Accounting Policies (continued)

Basis of Presentation (continued)

Fair Value Measurements (continued)

 

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

Level 1 Inputs - Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date. Level 1 assets include listed mutual funds, equities and certain 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; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. Assets that generally are included in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, securities held within consolidated hedge funds, certain limited partnership interests in hedge funds in which the valuations for substantially all of the investments within the fund are based upon Level 1 or Level 2 inputs, restricted public securities valued at a discount, as well as over the counter derivatives, including interest and inflation rate swaps and foreign exchange currency contracts that have inputs to the valuations that can be generally 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. Assets included in this category generally include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds and certain held for sale real estate disposal assets. Liabilities included in this category include borrowings of consolidated collateralized loan obligations.

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, 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 to value these investments.

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

Fair Value Option

ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent 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.

 

11


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

2. Significant Accounting Policies (continued)

Basis of Presentation (continued)

 

Acquired Management Contracts with Indefinite Useful Lives

The value of contracts to manage assets in proprietary open-end funds, closed-end funds and collective trusts without a specified termination date are classified as indefinite-lived intangible assets. The assignment of indefinite lives to such contracts is primarily based upon the following: a) the assumption that there is no foreseeable limit on the contract period to manage these funds; b) the Company expects to, and has the ability to continue to operate these products indefinitely; c) the products have multiple investors and are not reliant on a single investor or small group of investors for their continued operation; d) current competitive factors and economic conditions do not indicate a finite life; and e) there is a high likelihood of continued renewal based on historical experience.

Collateral Assets Held and Liabilities Under Securities Lending Agreements

The Company facilitates securities lending arrangements whereby securities held by separate account assets are lent to third parties. In exchange, the Company receives collateral, principally cash and securities, ranging from 102% to 108% of the value of the securities lent in order to reduce credit risk. Under the Company’s securities lending arrangements, the Company can resell 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 and obligates the Company to repurchase or redeem the transferred securities before their maturity. These transactions are not reported as sales under ASC 860, Transfers and Servicing, because of the obligation of the Company to repurchase the securities.

As a result, the Company records the collateral received under these arrangements (both cash and non-cash), as its own asset in addition to a corresponding liability for the obligation to return the collateral. As with the securities lending collateral discussed above, the fair value of the asset received and related obligation to return the collateral are recorded by the Company. At June 30, 2010, the fair value of loaned securities held by separate account assets was approximately $17 billion and the collateral held under these securities lending agreements was approximately $18.3 billion. At June 30, 2010 and December 31, 2009, the Company had not sold or repledged any of the collateral received under these arrangements. The fair value of the collateral liability approximates the fair value of the collateral assets and is recorded in collateral liability under securities lending agreements on the Company’s condensed consolidated statements of financial condition.

Classification and Measurement of Redeemable Securities

The provisions of ASC 480-10, Distinguishing Liabilities from Equity, require temporary equity classification for instruments that are currently redeemable or convertible for cash or other assets at the option of the holder. At June 30, 2010 and December 31, 2009, the Company determined that $94 million and $49 million, respectively, of non-controlling interests related to certain consolidated sponsored investment funds were redeemable for cash or other assets at the option of the holder, resulting in temporary equity classification on the Company’s condensed consolidated statements of financial condition.

 

12


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

2. Significant Accounting Policies (continued)

Basis of Presentation (continued)

 

Assets and Liabilities to be Disposed of by Sale

In the course of the business of establishing real estate and other alternative investment funds, the Company may purchase land, properties and other assets while incurring liabilities directly associated with the assets, together a disposal group, with the intention to sell the disposal group to sponsored investment funds upon their launch. In accordance with the provisions of ASC 360-10, Property, Plant, and Equipment, the Company treats these assets and liabilities as a “disposal group”, measured at the lower of the carrying amount or fair value. Losses are recognized for any initial or subsequent write-down to fair value and gains are recognized for any subsequent increase in fair value, but not in excess of the cumulative loss previously recognized.

At June 30, 2010, the Company held disposal group assets of $24 million and related liabilities of $24 million in other assets and other liabilities, respectively, on its condensed consolidated statement of financial condition. Disposal group liabilities include approximately $22 million of borrowings directly associated with the disposal group assets. During the six months ended June 30, 2009, the Company recorded a net loss of $1 million within non-operating income (expense) on its condensed consolidated statement of income related to the disposal group and did not record any adjustments in 2010.

Convertible Debt Instruments

In accordance with the provisions within ASC 470-20, Debt (“ASC 470-20”), issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in the statement of financial condition. The excess of the initial proceeds of the convertible debt instrument over the amount allocated to the liability component creates a debt discount, which should be amortized as interest expense over the expected life of the liability. At June 30, 2010, the Company had $71 million of principal convertible debentures outstanding, which were issued in February 2005, bear interest at a rate of 2.625%, and are due in 2035. The Company retrospectively adopted the requirements of ASC 470-20 on January 1, 2009 resulting in a total cumulative impact of a $9 million reduction to retained earnings at December 31, 2008. The effective borrowing rate for nonconvertible debt at the time of issuance of the 2.625% convertible debentures was estimated to be 4.3%, which resulted in $18 million of the $250 million initial aggregate principal amount of the debentures issued, or $12 million after tax, being attributable to equity. As of March 31, 2010, the initial $18 million debt discount was fully amortized.

 

13


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

2. Significant Accounting Policies (continued)

 

Accounting Policies Adopted in the Six Months Ended June 30, 2010

New Consolidation Guidance for Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), which amended the consolidation guidance for variable interest entities. The amendments include: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the primary beneficiary of a variable interest entity (“VIE”), which requires that the primary beneficiary have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, and (3) the requirement to continually reassess the primary beneficiary of a VIE.

In February 2010, the FASB issued ASU 2010-10, Amendments to Statement 167 for Certain Investment Funds (“ASU 2010-10”). This ASU defers the application of Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R), for a reporting enterprise’s interest in an entity if all of the following conditions are met:

(1) the entity either has all of the attributes of an investment company, as specified in ASC 946-10, Financial Services-Investment Companies (“ASC 946-10”) or it is industry practice to apply measurement principles for financial reporting that are consistent with those in ASC 946-10; (2) the entity is not a securitization entity, an asset-backed financing entity, or an entity formerly considered a qualifying special-purpose entity, and (3) the reporting enterprise does not have an explicit or implicit obligation to fund losses of the entity that could potentially be significant to the entity.

In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with the requirement of Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.

The amendments in ASU 2010-10 clarify that for entities that do not qualify for the deferral, related parties should be considered when evaluating each of the criteria for determining whether a decision maker or service provider fee represents a variable interest.

An entity that qualifies for the deferral will continue to be assessed for consolidation under the overall guidance on variable interest entities in ASC 810, Consolidation (“ASC 810”) (before its amendment by SFAS No. 167) or other applicable consolidation guidance, including guidance for the consolidation of partnerships in ASC 810. The amendment does not defer the disclosure requirements of ASU 2009-17.

On January 1, 2010, upon adoption of ASU 2009-17, the Company determined it was the primary beneficiary of three collateralized loan obligations (“CLOs”), which resulted in consolidation of these CLOs on the Company’s consolidated financial statements. Upon consolidation, the Company elected the fair value option for eligible financial assets and liabilities, to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplifications. Upon adoption of the provisions of ASU 2009-17, the Company recorded a cumulative effect adjustment to appropriated retained earnings of $114 million.

 

14


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

2. Significant Accounting Policies (continued)

Accounting Policies Adopted in the Six Months Ended June 30, 2010 (continued)

 

Appropriated Retained Earnings

Upon adoption of 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 adoption of ASU 2009-17, the net change in the fair value of the CLOs’ assets and liabilities will be recorded as net income (loss) attributable to non-controlling interests and as an adjustment to appropriated retained earnings.

Improving Disclosures about Fair Value Measurements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”). ASU 2010-06 amends ASC 820-10 to require new disclosures with regards to significant transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and other settlements within the Level 3 fair value rollforward. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption on January 1, 2010 of the additional disclosure requirements of ASU 2010-06 did not materially impact BlackRock’s condensed consolidated financial statements. The adoption of the additional Level 3 rollforward disclosure requirements, which will be effective in 2011, are not expected to materially impact BlackRock’s financial statement disclosures.

 

15


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

3. Mergers and Acquisitions

Barclays Global Investors

On December 1, 2009, BlackRock acquired from Barclays all of the outstanding equity interests of subsidiaries of Barclays conducting the investment management business of BGI in exchange for an aggregate of 37,566,771 shares of BlackRock common stock and participating preferred stock and $6.65 billion in cash. The fair value of the 37,566,771 shares at closing, on December 1, 2009, was $8.53 billion, at a price of $227.08 per share, the closing price of BlackRock’s common stock on November 30, 2009.

A summary of the initial and revised fair values of the assets acquired and liabilities and non-controlling interests assumed on December 1, 2009 in this acquisition is as follows:

 

(Dollar amounts in millions)    Initial
Estimate of

Fair Value
    Purchase
Price
Adjustments
    Revised
Estimate of

Fair Value
 

Accounts receivable

   $ 593        ($12   $ 581   

Investments

     125        —          125   

Separate account assets

     116,301        —          116,301   

Collateral held under securities lending agreements

     23,498        —          23,498   

Property and equipment

     205        (2     203   

Finite-lived intangible management contracts (intangible assets)

     163        (7     156   

Indefinite-lived intangible management contracts (intangible assets)

     9,785        25        9,810   

Trade names / trademarks (indefinite-lived intangible assets)

     1,403        —          1,403   

Goodwill

     6,842        68        6,910   

Other assets

     366        —          366   

Separate account liabilities

     (116,301     —          (116,301

Collateral liability under securities lending agreements

     (23,498     —          (23,498

Deferred tax liabilities

     (3,799     8        (3,791

Accrued compensation and benefits

     (885     —          (885

Other liabilities assumed

     (660     (80     (740

Non-controlling interests assumed

     (12     —          (12
                        

Total consideration, net of cash acquired

   $ 14,126      $ —        $ 14,126   
                        

Summary of consideration, net of cash acquired:

      

Cash paid

   $ 6,650      $ —        $ 6,650   

Cash acquired

     (1,055     —          (1,055

Capital stock at fair value

     8,531        —          8,531   
                        

Total cash and stock consideration

   $ 14,126      $ —        $ 14,126   
                        

At this time, except for the items noted below, the Company does not expect additional material changes to the value of the assets acquired or liabilities assumed in conjunction with the transaction.

 

   

As management receives additional tax related information the following items are subject to change: deferred income tax assets and liabilities, goodwill, other assets, due from and to related parties and other liabilities.

Helix Financial Group LLC

In January 2010, the Company completed the acquisition of substantially all of the net assets of Helix Financial Group LLC, which provides advisory, valuation and analytics solutions to commercial real estate lenders and investors (the “Helix Transaction”). The assets acquired and liabilities assumed, as well as the total consideration paid for the acquisition, were not material to the Company’s condensed consolidated financial statements.

 

16


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

4. Investments

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

 

     Carrying Value
(Dollar amounts in millions)    June 30,
2010
   December 31,
2009

Available-for-sale investments

   $ 59    $ 73

Held-to-maturity investments

     46      29

Trading investments

     268      167

Other investments:

     

Consolidated sponsored investment funds

     301      360

Equity method investments

     432      376

Deferred compensation plan hedge fund equity method investments

     28      29

Cost method investments

     329      15
             

Total other investments

     1,090      780
             

Total investments

   $ 1,463    $ 1,049
             

At June 30, 2010, the Company had $512 million of total investments held by consolidated sponsored investment funds (non-VIEs) of which $211 million and $301 million were classified as trading investments and other investments, respectively.

At December 31, 2009, the Company had $463 million of total investments held by consolidated sponsored investment funds of which $103 million and $360 million were classified as trading investments and other investments, respectively. Other investments at December 31, 2009 included $40 million related to a consolidated VIE, which has been reclassified as of January 1, 2010 to bank loans and other investments of consolidated VIEs on the condensed consolidated statement of financial condition.

 

17


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

4. Investments (continued)

 

Available-for-Sale Investments

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

 

(Dollar amounts in millions)                     

June 30, 2010

   Cost    Gross Unrealized     Carrying
Value
      Gains    Losses    

Available-for-sale investments:

          

Equity securities:

          

Sponsored investment funds

   $ 39    $ 2    ($2   $ 39

Collateralized debt obligations

     2      1    —          3

Debt securities:

          

Mortgage debt

     5      1    —          6

Asset-backed debt

     10      1    —          11
                          

Total available-for-sale investments

   $ 56    $ 5    ($2   $ 59
                          

December 31, 2009

   Cost    Gross Unrealized     Carrying
Value
      Gains    Losses    

Available-for-sale investments:

          

Equity securities:

          

Sponsored investment funds

   $ 53    $ 2    ($1   $ 54

Collateralized debt obligations

     2      —      —          2

Debt securities:

          

Mortgage debt

     6      1    —          7

Asset-backed debt

     10      —      —          10
                          

Total available-for-sale investments

   $ 71    $ 3    ($1   $ 73
                          

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

During the six months ended June 30, 2010 and 2009, the Company recorded other-than-temporary impairments of less than $1 million and $4 million, respectively, which were recorded in non-operating (expense) on the condensed consolidated statements of income. The $4 million of impairments during the six months ended June 30, 2009 included $2 million of credit loss impairments on debt securities, which was determined by comparing the estimated discounted cash flows versus the amortized cost for each individual security.

The Company reviewed the gross unrealized losses of $2 million as of June 30, 2010 related to available-for-sale equity securities, of which approximately $1 million had been in a loss position for greater than twelve months, and determined that these unrealized losses were not other-than-temporary primarily because the Company has the ability and intent to hold the securities for a period of time sufficient to allow for recovery of such unrealized losses. As a result, the Company did not record additional impairments on such equity securities.

 

18


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

4. Investments (continued)

 

Held-to-Maturity Investments

A summary of the carrying value of held-to-maturity investments is as follows:

 

     Carrying Value
(Dollar amounts in millions)    June 30,
2010
   December 31,
2009

Held-to-maturity investments:

     

Foreign government debt

   $ 45    $ 28

U.S. government debt

     1      1
             

Total held-to-maturity investments:

   $ 46    $ 29
             

Held-to-maturity investments include debt instruments held for regulatory purposes and the carrying value of these investments approximates fair value.

Trading and Other Investments

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

 

     June 30, 2010    December 31, 2009
(Dollar amounts in millions)    Cost    Carrying
Value
   Cost    Carrying
Value

Trading investments:

           

Deferred compensation plan mutual fund investments

   $ 42    $ 40    $ 49    $ 42

Equity securities

     89      88      112      97

Debt securities:

           

Municipal debt

     12      13      10      11

Mortgage debt

     9      9      —        —  

Foreign government debt

     1      1      15      15

Corporate debt

     43      42      1      1

U.S. government/government agency debt

     66      68      1      1

Asset-backed debt

     7      7      —        —  
                           

Total trading investments

   $ 269    $ 268    $ 188    $ 167
                           

Other investments:

           

Consolidated sponsored investment funds

   $ 334    $ 301    $ 380    $ 360

Equity method investments

     524      432      499      376

Deferred compensation plan hedge fund equity method investments

     25      28      28      29

Cost method investments:

           

Federal Reserve Bank stock

     324      324      10      10

Other

     5      5      5      5
                           

Total cost method investments

     329      329      15      15
                           

Total other investments

   $ 1,212    $ 1,090    $ 922    $ 780
                           

Trading Investments

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

 

19


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

4. Investments (continued)

 

Cost Method Investments

Cost method investments include non-marketable securities, including $324 million of restricted Federal Reserve Bank stock at June 30, 2010, which is held for regulatory purposes.

As of June 30, 2010, there were no indicators of impairments on these investments.

Contractual Maturity of Debt Securities

The cost or amortized cost and fair value of debt securities classified as available-for-sale and held-to-maturity by maturity at June 30, 2010 is 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

Available-for-sale investments:

              

Mortgage debt

   $ —      $ —      $ 1    $ 4    $ 5

Asset-backed debt

     —        —        —        10      10
                                  

Cost

   $ —      $ —      $ 1    $ 14    $ 15
                                  

Fair value

   $ —      $ —      $ 1    $ 16    $ 17
                                  

Held-to-maturity investments:

              

Foreign government debt

   $ 18    $ 22    $ —      $ 5    $ 45

U.S. government debt

     1      —        —        —        1
                                  

Amortized cost

   $ 19    $ 22    $ —      $ 5    $ 46
                                  

Fair value

   $ 19    $ 22    $ —      $ 5    $ 46
                                  

 

20


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

5. 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 that are owned by these consolidated sponsored investment funds are classified as other or trading investments. At June 30, 2010 and December 31, 2009, the following balances related to these funds were consolidated on the condensed consolidated statements of financial condition:

 

(Dollar amounts in millions)    June 30,
2010
    December 31,
2009
 

Cash and cash equivalents

   $ 108      $ 75   

Investments

     512        463   

Other net assets (liabilities)

     (67     (7

Non-controlling interests

     (253     (273
                

Total net interests in consolidated investment funds

   $ 300      $ 258   
                

At December 31, 2009, the above balances included a consolidated sponsored investment fund that was also deemed a VIE. This VIE, as well as three consolidated CLOs, which are also VIEs, were excluded from the June 30, 2010 balances above. See Note 7, Variable Interest Entities, for further discussion.

BlackRock’s total exposure to consolidated sponsored investment funds of $300 million and $258 million at June 30, 2010 and December 31, 2009, 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 net income (loss) attributable to non-controlling interests.

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

 

21


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

6. Fair Value Disclosures

Fair Value Hierarchy

Assets and liabilities measured at fair value on a recurring basis at June 30, 2010 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)
   Other Assets
Not Held at Fair
Value(1)
   June 30, 2010

Assets:

             

Investments

             

Available-for-sale:

             

Equity

   $ 39      $ 3    $ —      $ —      $ 42

Fixed income

     —          17      —        —        17
                                   

Total available-for-sale

     39        20      —        —        59

Held-to-maturity:

             

Fixed income

     —          —        —        46      46
                                   

Total held-to-maturity

     —          —        —        46      46

Trading;

             

Equity / Multi-asset class

     76        12      —        —        88

Fixed income

     1        139      —        —        140

Deferred compensation plan mutual fund investments

     40        —        —        —        40
                                   

Total trading

     117        151      —        —        268

Other investments:

             

Consolidated sponsored investment funds:

             

Hedge funds / Funds of funds

     —          —        28      —        28

Private equity

     14        —        259      —        273
                                   

Total Consolidated sponsored investment funds

     14        —        287      —        301

Equity method

             

Hedge funds / Funds of funds

     —          —        261      26      287

Private equity investments

     —          —        60      19      79

Real estate funds

     —          —        48      8      56

Fixed income mutual fund

     —          10      —        —        10
                                   

Total equity method

     —          10      369      53      432

Deferred compensation plan hedge fund equity method investments

     —          10      18      —        28

Cost method investments

     —          —        —        329      329
                                   

Total investments

     170        191      674      428      1,463

Separate account assets

             

Equity

     63,746        666      7      —        64,419

Fixed income

     —          35,066      1,448      —        36,514

Derivatives

     (39     1,734      —        —        1,695

Money market funds

     2,018        —        —        —        2,018

Other

     —          —        —        830      830
                                   

Total separate account assets

     65,725        37,466      1,455      830      105,476

Collateral held under securities lending agreements

             

Equity

     13,748        —        —        —        13,748

Fixed income

     —          4,556      —        —        4,556
                                   

Total collateral held under securities lending agreements

     13,748        4,556      —        —        18,304
                                   

Other assets(2)

     —          11      24      —        35

Assets of consolidated VIEs

             

Bank loans

     —          1,162      —        —        1,162

Bonds

     —          91      —        —        91

Private equity

     3        —        30      —        33

Other

     —          4      —        —        4
                                   

Total investments of consolidated VIEs

     3        1,257      30      —        1,290
                                   

Total assets measured at fair value

   $ 79,646      $ 43,481    $ 2,183    $ 1,258    $ 126,568
                                   

Liabilities:

             

Borrowings of consolidated VIEs

   $ —        $ —      $ 1,215    $ —      $ 1,215

Collateral liability under securities lending agreements

     13,748        4,556      —        —        18,304

Other liabilities(3)

     10        3      —        —        13
                                   

Total liabilities measured at fair value

   $ 13,758      $ 4,559    $ 1,215    $ —      $ 19,532
                                   

 

(1)

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

(2)

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

(3)

Includes credit default swap (Pillars) and short sales of equity securities within consolidated sponsored investment funds.

 

22


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

6. Fair Value Disclosures (continued)

Fair Value Hierarchy (continued)

 

Assets and liabilities measured at fair value on a recurring basis at December 31, 2009 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)
   Other Assets
Not Held at
Fair Value(1)
   December 31,
2009

Assets:

              

Investments:

              

Available-for-sale

   $ 53    $ 20    $ —      $ —      $ 73

Held-to-maturity

     —        —        —        29      29

Trading

     118      49      —        —        167

Other investments:

              

Consolidated sponsored investment funds

     22      —        338      —        360

Equity method

     —        1      334      41      376

Deferred compensation plan hedge fund equity method investments

     —        14      15      —        29

Cost method investments

     —        —        —        15      15
                                  

Total investments

     193      84      687      85      1,049

Separate account assets

     99,983      17,599      1,292      755      119,629

Collateral held under securities lending agreements

     11,580      7,755      —        —        19,335

Other assets(2)

     —        11      46      —        57
                                  

Total assets measured at fair value

   $ 111,756    $ 25,449    $ 2,025    $ 840    $ 140,070
                                  

Liabilities:

              

Collateral liability under securities lending agreements

   $ 11,580    $ 7,755    $ —      $ —      $ 19,335
                                  

 

(1)

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

(2)

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

 

23


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

6. Fair Value Disclosures (continued)

 

Separate Account Assets

BlackRock Pensions Limited and BlackRock Asset Management Pensions Limited, both wholly-owned subsidiaries of the Company, are registered life insurance companies that maintain separate account assets, representing segregated funds held for purposes of funding individual and group pension contracts, and equal and offsetting separate account non-financial liabilities. The changes in Level 3 assets in the three and six months ended June 30, 2009, primarily related to purchases, sales and gains/(losses). The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owner and are not reported on the condensed consolidated statements of income.

Money Market Funds within Cash and Cash Equivalents

At June 30, 2010 and December 31, 2009, approximately $142 million and $1.4 billion, respectively, of money market funds were recorded within cash and cash equivalents on the Company’s condensed consolidated statements of financial condition. Money market funds are valued through the use of quoted market prices (a Level 1 input), or $1.00, which is generally the net asset value of the fund.

Level 3 Assets

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

Level 3 assets recorded within separate account assets may include single broker non-binding quotes for fixed income securities.

Level 3 investments of consolidated VIEs include direct private equity investments and private equity funds valued based upon valuations received from internal as well as third party fund managers.

Level 3 Liabilities

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

 

24


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

6. 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, 2010

 

(Dollar amounts in millions)    March 31,
2010
   Realized
and
unrealized
gains /
(losses), net
    Purchases,
sales, other
settlements
and
issuances,
net
    Net
transfers in
and/or out
of Level 3
    June 30,
2010
   Total net
gains
(losses)
included in
earnings(1)
 

Assets:

              

Investments:

              

Consolidated sponsored investment funds:

              

Hedge funds / Funds of funds

   $ 25    ($1   $ 4      $ —        $ 28    $ —     

Private equity

     280    (22     2        (1     259      (22

Equity method:

              

Hedge funds / Funds of funds

     237    1        23        —          261      (1

Private equity investments

     58    2        —          —          60      1   

Real estate funds

     39    3        6        —          48      3   

Deferred compensation plan hedge funds

     17    1        —          —          18      —     
                                            

Total investments

     656    (16     35        (1     674      (19

Separate account assets:

              

Equity

     63    (5     (51     —          7   

Fixed income

     1,090    6        160        192        1,448   
                                      

Total separate account assets

     1,153    1        109        192        1,455      n/a (2) 

Other assets

     24    2        (2     —          24      2   

Private equity investments of consolidated VIEs

     35    (6     1        —          30      n/a (3) 
                                      

Total assets measured at fair value

   $ 1,868    ($19   $ 143      $ 191      $ 2,183   
                                      

Liabilities:

              

Borrowings of consolidated VIEs

   $ 1,214    ($1   $ —        $ —        $ 1,215      n/a (3) 

 

n/a – not applicable

( 1 )

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

( 2)

The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owner and are not reported on the Company’s condensed consolidated statements of income.

( 3)

The net investment income (expense) attributable to assets and borrowings of consolidated VIEs are allocated to non-controlling interests on the Company’s condensed consolidated statements of income.

 

25


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

6. 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, 2010

 

(Dollar amounts in millions)    December 31,
2009
   Realized
and
unrealized
gains /
(losses), net
    Purchases,
sales, other
settlements
and
issuances,
net
    Net
transfers in
and/or out
of Level 3
    June 30,
2010
   Total net
gains
(losses)
included in
earnings(1)
 

Assets:

              

Investments:

              

Consolidated sponsored investment funds:

              

Hedge funds / Funds of funds

   $ 26      ($1   $ 3      $ —        $ 28    ($1

Private equity

     312      (18     (34     (1     259    (17

Equity method:

              

Hedge funds / Funds of funds

     247      14        —          —          261    13   

Private equity investments

     51      2        7        —          60    2   

Real estate funds

     36      2        10        —          48    2   

Deferred compensation plan hedge funds

     15      3        —          —          18    2   
                                            

Total investments

     687      2        (14     (1     674    1   

Separate account assets:

              

Equity

     5      (5     (54     61        7   

Fixed income

     1,287      40        345        (224     1,448   
                                        

Total separate account assets

     1,292      35        291        (163     1,455    n/a (2) 

Other assets

     46      (10     (12     —          24    (10

Private equity investments of consolidated VIEs

     —        (4     34        —          30    n/a (3) 
                                        

Total assets measured at fair value

   $ 2,025    $ 23      $ 299        ($164   $ 2,183   
                                        

Liabilities:

              

Borrowings of consolidated VIEs

   $ —        ($58   $ 1,157      $ —        $ 1,215    n/a (3) 

 

n/a – not applicable

( 1 )

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

( 2)

The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owner and are not reported on the Company’s condensed consolidated statements of income.

( 3)

The net investment income (expense) attributable to assets and borrowings of consolidated VIEs are allocated to non-controlling interests on the Company’s condensed consolidated statements of income.

 

26


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

6. 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, 2009

 

(Dollar amounts in millions)

   March 31,
2009
   Realized
and
unrealized
gains /
(losses),
net
    Purchases,
sales, other
settlements and
issuances, net
    Net
transfers
in and/
or out of
Level 3
   June 30,
2009
   Total net
gains
(losses)
included in
earnings(1)
 

Investments

   $ 666    $ 78      ($48   $ —      $ 696    $ 76   

Other assets

     51      (1   —          —        50      (1
                                           

Total investments and other assets measured at fair value

   $ 717    $ 77      ($48   $ —      $ 746    $ 75   
                                           

Other liabilities

   $ 76    $ —        ($76   $ —      $ —      $ —     

 

(1 )

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

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

 

(Dollar amounts in millions)

   December 31,
2008
   Realized
and
unrealized
gains /
(losses),
net
    Purchases,
sales, other
settlements and
issuances, net
    Net
transfers
in and/or
out of
Level 3
    June 30,
2009
   Total net
gains
(losses)
included  in
earnings(1)
 

Investments

   $ 813    ($40   ($58   ($19   $ 696    ($40

Other assets

     64    (15   1      —          50    (15
                                      

Total investments and other assets measured at fair value

   $ 877    ($55   ($57   ($19   $ 746    ($55
                                      

 

(1 )

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

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 is allocated to non-controlling interests to reflect net income (loss) not attributable to the Company.

Significant Transfers in and/or out of Levels

Transfers in and/or out of Levels are reflected as of the beginning of the period when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable or when the book value of certain equity method investments no longer represents fair value as determined under fair value methodologies.

As a result of changes in valuation sources, due to availability of observable market inputs, for the assets held within separate account assets there were transfers into Level 3 from Level 1 and Level 2 and transfers out of Level 3 to Level 2.

Significant Other Settlements in 2010

As of January 1, 2010, upon the adoption of ASU 2009-17 there was a $35 million reclassification of assets from Level 3 private equity investments to Level 3 private equity assets of consolidated VIEs.

 

27


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

6. Fair Value Disclosures (continued)

 

Investments in Certain Entities that Calculate Net Asset Value Per Share

As a practical expedient to value certain investments, the Company relies on net asset values as the fair value for certain investments. The following table lists information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a net asset value per share (or its equivalent) at June 30, 2010:

 

(Dollars amounts in millions)    Fair
Value
   Total
Unfunded
Commitment
  

Redemption
Frequency

   Redemption
Notice Period

Trading:

           

Equity (a)

   $ 12    $ —      Daily (100%)    n/a

Consolidated sponsored investment funds:

           

Private equity fund of funds (b)

     215      72    n/a    n/a

Other fund of funds (c)

     8      —     

Monthly (39%),

Quarterly (51%)

Semi-annually and

Annually (10%)

   30 –120 days

Equity method (1):

           

Hedge funds/funds of hedge funds (d)

     261      93   

Monthly (7%),

Quarterly (18%),

n/a (75%)

   15 – 90 days

Private equity funds (e)

     60      64    n/a    n/a

Real estate funds (f)

     48      68    n/a    n/a

Deferred compensation plan hedge fund investments (g)

     28      —     

Monthly (11%),

Quarterly (89%)

   30 – 60 days

Private equity investments of consolidated VIEs (h)

     29      2    n/a    n/a
                   

Total

   $ 661    $ 299      
                   

 

n/a – not applicable

(1) Comprised of equity method investments, which include investment companies, which in accordance with GAAP account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees approximates fair value.

 

(a) This category includes several consolidated offshore feeder funds that invest in master funds with multiple equity strategies to diversify risks. The fair values of the investments in this category have been estimated using the net asset value of master offshore funds held by the feeder funds. Investments in this category can generally be redeemed at any time, as long as there are no restrictions in place by the underlying master funds.

 

28


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

6. Fair Value Disclosures (continued)

Investments in Certain Entities that Calculate Net Asset Value Per Share (continued)

 

(b) This category includes the underlying third party private equity funds within consolidated BlackRock sponsored private equity funds of funds. The fair values of the investments in the third party funds have been estimated using the net asset value of the Company’s ownership interest in partners’ capital in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption, however, for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately 9 years.
  Total remaining unfunded commitments to other third party funds is $72 million. The Company is contractually obligated to fund only $50 million to the consolidated funds, while the remaining unfunded balance in the table above would be funded by capital contributions from non-controlling interest holders.
(c) This category includes several consolidated funds of funds that invest in multiple strategies to diversify risks. The fair values of the investments in this category have been estimated using the net asset value of the fund’s ownership interest in partners’ capital of each fund in the portfolio. Investments in this category can generally be redeemed, as long as there are no restrictions in place by the underlying funds.
(d) This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit and mortgage instruments and other third party hedge funds. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital. It is estimated that the investments in the funds that are not subject to redemptions will be liquidated over a weighted-average period of less than 7 years.
(e) This category includes several private equity funds that initially invest in non-marketable securities of private companies, which ultimately may become public in the future. The fair values of these investments have been estimated using the net asset value of the Company’s ownership interest in partners’ capital as well as other performance inputs. The Company’s investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the private equity funds. It is estimated that the investment in these funds will be liquidated over a weighted-average period of approximately 7 years.
(f) This category includes several real estate funds that invest primarily to acquire, expand, renovate, finance, hold for investment, and ultimately sell income-producing apartment properties or to capitalize on the distress in the residential real estate market. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital. The Company’s investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the real estate funds. It is estimated that the investments in these funds will be liquidated over a weighted-average period of approximately 13 years.
(g) This category includes investments in certain hedge funds that invest in energy and health science related equity securities. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital as well as performance inputs.
(h) This category includes the underlying third party private equity funds within one consolidated BlackRock sponsored private equity fund of funds. The fair values of the investments in the third party funds have been estimated using the net asset value of the Company’s ownership interest in partners’ capital in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption, however for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately 5 years. Total remaining unfunded commitments to other third party funds is $2 million, which will be funded by capital contributions from non-controlling interest holders.

 

29


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

6. Fair Value Disclosures (continued)

 

Fair Value Option

Upon consolidation of three CLOs on January 1, 2010, the Company elected to adopt the fair value accounting provisions for eligible assets, including bank loans and borrowings of the CLOs. To the extent there is a difference between the change in fair value of the assets and liabilities, the difference will be reflected as net income (loss) attributable to nonredeemable non-controlling interests on the condensed consolidated statements of income and offset by a change in appropriated retained earnings on the condensed consolidated statements of financial condition.

The following table presents, as of June 30, 2010, the fair value of those assets and liabilities selected for fair value accounting:

 

(Dollars amounts in millions)    June 30, 2010

CLO Bank Loans:

  

Aggregate principal amounts outstanding

   $ 1,282

Fair value

   $ 1,162

Aggregate unpaid principal balance in excess of fair value

   $ 120

Unpaid principal balance of loans more than 90 days past due

   $ 7

Aggregate fair value of loans more than 90 days past due

   $ 1

Aggregate unpaid principal balance in excess of fair value for loans more than 90 days past due

   $ 6

CLO Borrowings:

  

Aggregate principal amounts outstanding

   $ 1,434

Fair value

   $ 1,215

The principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2019.

During the six months ended June 30, 2010, the change in fair value of the bank loans, along with the bonds held at fair value, resulted in a $65 million gain, which was offset by an $83 million loss in the fair value of the CLO borrowings. The net gain (loss) was recorded in non-operating income (expense) on the condensed consolidated statement of income. The change in fair value of the assets and liabilities includes interest income and expense, respectively.

 

30


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

7. Variable Interest Entities

In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debt/loan obligations (“CDO” or “CLO”) and sponsored investment funds, which may be considered VIEs. The Company receives advisory fees and/or other incentive related fees for its services and may from time to time own equity or debt securities or enter into derivatives with the vehicles, each of which are considered variable interests. The Company enters into these variable interests principally to address client needs through the launch of such investment vehicles. The VIEs are primarily financed via capital contributed by equity and debt holders. The Company’s involvement in financing the operations of the VIEs is limited to its equity interests.

The primary beneficiary of a VIE that is an investment fund that meets the conditions of ASU 2010-10 is the enterprise that has a variable interest (or combination of variable interests, including those of related parties) that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns or both. The primary beneficiary of a CDO/CLO that is a VIE that does not meet the conditions of ASU 2010-10 is the enterprise that has the power to direct activities of the entity and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the CDO/CLO.

In order to determine whether the Company is the primary beneficiary of a VIE, management must make significant estimates and assumptions of probable future cash flows of the VIEs. Assumptions made in such analyses may include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, pre-payments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.

VIEs in which BlackRock is the Primary Beneficiary

As of June 30, 2010

As of June 30, 2010, BlackRock was the primary beneficiary of four VIEs, which included three CLOs in which it did not have an investment, however, BlackRock, as the collateral manager, was deemed to have both the power to control the activities of the CLOs and the right to receive benefits that could potentially be significant to the VIE. In addition, BlackRock was the primary beneficiary of one sponsored private equity investment fund, in which it had a non-substantive investment, which absorbed the majority of the variability due to its de-facto third party relationships with other partners in the fund. The assets of these VIEs are not available to creditors of the Company. In addition, the investors in these VIEs have no recourse to the credit of the Company. At June 30, 2010, the following balances related to these four VIEs, which were consolidated on the Company’s condensed consolidated statements of financial condition:

 

(Dollar amounts in millions)    June 30, 2010  

Assets of consolidated VIEs

  

Cash and cash equivalents

   $ 61   

Bank loans, bonds and other investments

     1,290   

Liabilities of consolidated VIEs

  

Borrowings

     (1,215

Other liabilities

     (6

Appropriated retained earnings

     (89

Non-controlling interests of consolidated VIEs

     (41
        

Total net interests in consolidated VIEs

   $ —     
        

For the six months ended June 30, 2010, the Company recorded non-operating expense of $28 million offset by a $28 million net loss attributable to nonredeemable non-controlling interests on the Company’s condensed consolidated statements of income. For the six months ended June 30, 2009, the Company recorded a non-operating expense of $6 million offset by a $6 million net loss attributable to non-controlling interests on its condensed consolidated statements of income.

At June 30, 2010, bank loans, bonds and other investments of consolidated VIEs were $1,162 million, $91 million, and $37 million, respectively. The weighted-average maturity of the bank loans and bonds was approximately 4.1 years.

 

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Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

7. Variable Interest Entities (continued)

VIEs in which BlackRock is the Primary Beneficiary (continued)

 

As of December 31, 2009

As of December 31, 2009, BlackRock was the primary beneficiary of one VIE, a sponsored private equity investment fund in which it did not have a substantive investment, due to its de-facto third party relationships with other partners in the fund. Due to the consolidation of this VIE, at December 31, 2009, the Company recorded $54 million of net assets, primarily comprised of investments and cash and cash equivalents. These net assets were offset by $54 million of nonredeemable non-controlling interests, which reflect the equity ownership of third parties, on the Company’s condensed consolidated statements of financial condition.

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

At June 30, 2010 and December 31, 2009, the Company’s carrying value of assets and liabilities and its maximum risk of loss related to VIEs in which it holds a significant variable interest or is the sponsor that holds a variable interest, but for which it was not the primary beneficiary, were as follows:

As of June 30, 2010

 

     (Dollar amounts in millions)
     Variable Interests on the Condensed
Consolidated Statement of Financial
Condition
     
     Investments    Advisory
Fee
Receivables
   Other Net
Assets
(Liabilities)
    Maximum
Risk of
Loss

CDOs/CLOs

   $ 2    $ 2    ($3   $ 21

Other sponsored investment funds

     20      210    (6     229
                          

Total

   $ 22    $ 212    ($9   $ 250
                          

The size of the net assets of the VIEs that the Company does not consolidate related to CDOs/CLOs, collective trust funds and other sponsored investment funds were as follows:

 

   

CDOs/CLOs - approximately ($4) billion, comprised of approximately $9 billion of assets at fair value and $13 billion of liabilities, primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders.

 

   

Other sponsored investments funds – approximately $1.4 trillion to $1.5 trillion

 

   

This amount includes approximately $1 trillion of collective trusts. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts.

 

   

The net assets of the VIEs are primarily comprised of cash and cash equivalents and investments offset by liabilities primarily comprised of various accruals for the sponsored investment vehicles.

At June 30, 2010, BlackRock’s maximum risk of loss associated with these VIEs primarily relates to: (i) BlackRock’s investments, (ii) advisory fee receivables and (iii) credit protection sold by BlackRock to a third party in a synthetic CDO transaction.

 

32


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

7. Variable Interest Entities (continued)

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

 

As of December 31, 2009

 

     (Dollar amounts in millions)
     Variable Interests on the Condensed
Consolidated Statement of Financial
Condition
     
     Investments    Advisory
Fee
Receivables
   Other Net
Assets
(Liabilities)
    Maximum
Risk of Loss

CDOs/CLOs

   $ 2    $ 2    ($3   $ 21

Other sponsored investment funds

     14      254    (7     268
                          

Total

   $ 16    $ 256    ($10   $ 289
                          

The size of the net assets of the VIEs that the Company does not consolidate related to CDOs/CLOs, collective trust funds and other sponsored investment funds were as follows:

 

   

CDOs/CLOs - approximately ($8) billion, comprised of approximately $10 billion of assets at fair value and $18 billion of liabilities, primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders.

 

   

Other sponsored investments funds – approximately $1.5 trillion to $1.6 trillion

 

   

This amount includes approximately $1.1 trillion of collective trusts. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts.

 

   

The net assets of the VIEs are primarily comprised of cash and cash equivalents and investments offset by liabilities primarily comprised of various accruals for the sponsored investment vehicles.

At December 31, 2009, BlackRock’s maximum risk of loss associated with these VIEs primarily relates to: (i) BlackRock’s investments, (ii) advisory fee receivables and (iii) credit protection sold by BlackRock to a third party in a synthetic CDO transaction.

 

33


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

8. Derivatives and Hedging

For the six months ended June 30, 2010 and the year ended December 31, 2009, the Company did not hold any derivatives designated in a formal hedge relationship under ASC 815-10, Derivatives and Hedging (“ASC 815-10”).

By using derivative financial instruments, the Company exposes itself to market and counterparty risk. Market risk from forward foreign currency exchange contracts is the effect on the value of a financial instrument that results from a change in currency exchange rates. The Company manages exposure to market risk associated with foreign currency exchange contracts by establishing and monitoring parameters that limit the types and degrees of market risk that may be undertaken. At June 30, 2010, the Company had two outstanding forward foreign exchange contracts with two counterparties with an aggregate notional value of $100 million.

During 2007, the Company commenced a program to enter into a series of total return swaps to economically hedge against market price exposures with respect to certain seed investments in sponsored investment products. At June 30, 2010, the Company had seven outstanding total return swaps with two counterparties with an aggregate notional value of approximately $21 million.

The Company acts as the portfolio manager for a synthetic CDO transaction, referred to as Pillars. In connection with the transaction, the Company entered into a credit default swap with Citibank, N.A. (“Citibank”), providing Citibank credit protection of approximately $17 million, representing the Company’s maximum risk of loss with respect to the provision of credit protection. Pursuant to ASC 815-10, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement.

On behalf of clients that maintain separate accounts representing segregated funds held for the purpose of funding individual and group pension contracts, the Company invests in various derivative instruments, which may include futures and forward foreign currency contracts and interest rate and inflation rate swaps.

The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the fund’s investment strategy. The change in fair value of such derivatives, which is recorded in non-operating income (expense), was not material to the Company’s condensed consolidated financial statements.

 

34


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

8. Derivatives and Hedging (continued)

 

The following table presents the fair value as of June 30, 2010 of derivative instruments not designated as hedging instruments:

 

     Assets    Liabilities
(Dollar amounts in millions)    Balance Sheet
Location
   Fair Value    Balance Sheet
Location
   Fair Value

Foreign exchange contracts

   Other assets    $ 1    Other liabilities    $ —  

Total return swaps

   Other assets      1    Other liabilities      —  

Credit default swap (Pillars)

   Other assets      —      Other liabilities      3

Separate account derivatives

   Separate account
assets
     1,695    Separate account
liabilities
     1,695
                   

Total

      $ 1,697       $ 1,698
                   

The following table presents the fair value as of December 31, 2009 of derivative instruments not designated as hedging instruments:

 

     Assets    Liabilities
(Dollar amounts in millions)    Balance Sheet
Location
   Fair Value    Balance Sheet
Location
   Fair Value

Foreign exchange contracts

   Other assets    $ —      Other liabilities    $ —  

Total return swaps

   Other assets      —      Other liabilities      —  

Credit default swap (Pillars)

   Other assets      —      Other liabilities      3

Separate account derivatives

   Separate account
assets
     1,501    Separate account
liabilities
     1,501
                   

Total

      $ 1,501       $ 1,504
                   

 

35


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

8. Derivatives and Hedging (continued)

 

The following table presents gains (losses) recognized in income on derivative instruments for the three and six months ended June 30, 2010:

 

(Dollar amounts in millions)

  

Income Statement Location

   Three
Months
Ended
June 30,
2010
   Six
Months
Ended
June 30,
2010

Foreign exchange contracts

   General and administration expenses    $ 4    $ 1

Total return swaps

   Non-operating income (expense)      3      2

Credit default swap (Pillars)

   Non-operating income (expense)      —        —  
                

Total

      $ 7    $ 3
                

Net realized and unrealized gains and losses attributable to derivatives held by separate account assets and liabilities accrue directly to the contract owner and are not reported in the Company’s condensed consolidated statements of income.

9. Goodwill

Goodwill at June 30, 2010 and changes during the six months ended June 30, 2010 were as follows:

 

(Dollar amounts in millions)

      

December 31, 2009, as reported

   $ 12,570   

BGI purchase price allocation adjustment

     68   
        

December 31, 2009, as adjusted

     12,638   

Impact of excess tax basis amortization

     (10

Other net additions

     12   
        

June 30, 2010

   $ 12,640   
        

In accordance with ASC 805, goodwill has been retrospectively adjusted to reflect new information obtained about facts that existed as of December 1, 2009, the BGI acquisition date. During the six months ended June 30, 2010, goodwill increased by $70 million. The increase related to purchase price allocation adjustments related to the BGI Transaction, the purchase of substantially all of the net assets of Helix Financial Group LLC and other net additions, offset by a decline related to tax benefits realized from tax-deductible goodwill in excess of book goodwill.

At June 30, 2010, the balance of the Quellos tax-deductible goodwill in excess of book goodwill was approximately $356 million. Goodwill related to the Quellos Transaction will continue to be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill.

 

36


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

10. Intangible Assets

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

 

(Dollar amounts in millions)

   Indefinite-lived
intangible assets
   Finite-lived
intangible assets
    Total  

December 31, 2009, as reported

   $ 16,566    $ 1,082      $ 17,648   

BGI purchase price allocation adjustments

     25      (7     18   
                       

December 31, 2009, as adjusted

     16,591      1,075        17,666   

Amortization expense

     —        (80     (80
                       

June 30, 2010

   $ 16,591    $ 995      $ 17,586   
                       

In accordance with ASC 805, intangible assets have been retrospectively adjusted to reflect new information obtained about facts that existed as of December 1, 2009, the BGI acquisition date. During the six months ended June 30, 2010, intangible assets decreased $62 million related to amortization, partially offset by BGI purchase price allocation adjustments.

11. Borrowings

Short-Term Borrowings

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

 

(Dollar amounts in millions)

   June 30,
2010
   December 31,
2009

Commercial paper program

   $ 344    $ 2,034

2007 Revolving credit facility

     100      200
             

Total short-term borrowings

   $ 444    $ 2,234
             

Commercial Paper Program

On October 14, 2009, BlackRock established a commercial paper program (the “CP Program”) under which the Company may issue unsecured commercial paper notes (the “CP Notes”) on a private placement basis up to a maximum aggregate amount outstanding at any time of $3 billion. The proceeds of the commercial paper issuances were used for the financing of a portion of the BGI Transaction. Subsidiaries of Bank of America and Barclays, as well as other third parties, act as dealers under the CP Program. The CP Program is supported by the 2007 revolving credit facility.

The Company began issuance of CP Notes under the CP Program on November 4, 2009. As of June 30, 2010, BlackRock had $344 million of outstanding CP Notes with a weighted-average interest rate of 0.31% and a weighted-average maturity of 12 days. As of August 4, 2010, BlackRock had $30 million of outstanding CP Notes with a weighted-average interest rate of 0.43% and a weighted-average maturity of 19 days.

 

37


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

11. Borrowings (continued)

Short-Term Borrowings (continued)

 

2007 Revolving Credit Facility

In August 2007, the Company entered into a five-year $2.5 billion unsecured revolving credit facility (the “2007 facility”), which permits the Company to request an additional $500 million of borrowing capacity, subject to lender credit approval, up to a maximum of $3.0 billion. The 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at June 30, 2010.

The 2007 facility provides back-up liquidity, funds ongoing working capital for general corporate purposes and funds various investment opportunities. At June 30, 2010, the Company had $100 million outstanding under the 2007 facility with an interest rate of 0.53% and a maturity date during July 2010. During July 2010, the Company rolled over the $100 million in borrowings with an interest rate of 0.51% and a maturity date during August 2010.

Lehman Commercial Paper Inc. has a $140 million participation under the 2007 Facility; however BlackRock does not expect that Lehman Commercial Paper Inc. will honor its commitment to fund additional amounts. Bank of America, a related party, has a $140 million participation under the 2007 facility.

Japan Commitment-line

In June 2010, BlackRock Japan Co., Ltd., a wholly-owned subsidiary of the Company, renewed a five billion Japanese yen commitment-line agreement with a banking institution (the “Japan Commitment-line”). The term of the renewed Japan Commitment-line is three months and will accrue interest on outstanding borrowings at the applicable Japanese short-term prime rate. The Japan Commitment-line is intended to provide liquidity and flexibility for operating requirements in Japan. At June 30, 2010, the Company had no borrowings outstanding under the Japan Commitment-line.

Convertible Debentures

The carrying value of the 2.625% convertible debentures due in 2035 included the following:

 

(Dollar amounts in millions)

   June 30,
2010
   December 31,
2009

Maturity amount

   $ 71    $ 243

Unamortized discount

     —        —  
             

Carrying value

   $ 71    $ 243
             

The Company recognized $2 million and $6 million for the six months ended June 30, 2010 and 2009, respectively of interest expense, comprised of $2 million and $4 million related to the coupon and less than $1 million and $2 million related to amortization of the discount for the six months ended June 30, 2010 and 2009, respectively. At June 30, 2010, the estimated fair value of the convertible debentures was $105 million, which was estimated using a market price at the end of June 2010.

On February 15, 2009, the convertible debentures became convertible at the option of the holder into cash and shares of the Company’s common stock at any time prior to maturity. During the six months ended June 30, 2010, holders of $172 million of debentures converted their holdings into cash and shares.

 

38


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

11. Borrowings (continued)

 

Long-Term Borrowings

The carrying value and fair value of long-term borrowings estimated using an applicable bond index at June 30, 2010 included the following:

 

(Dollar amounts in millions)

   2.25%
Notes
due 2012
    3.50%
Notes
due 2014
    6.25%
Notes
due 2017
    5.00%
Notes
due 2019
    Total
Long-term
Borrowings
 

Maturity amount

   $ 500      $ 1,000      $ 700      $ 1,000      $ 3,200   

Unamortized discount

     (1     (1     (4     (3     (9
                                        

Carrying value

   $ 499      $ 999      $ 696      $ 997      $ 3,191   
                                        

Fair value

   $ 509      $ 1,046      $ 805      $ 1,062      $ 3,422   

2017 Notes

In September 2007, the Company issued $700 million in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “2017 Notes”). Interest is payable semi-annually on March 15 and September 15 of each year, or approximately $44 million per year. The 2017 Notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a “make-whole” redemption price. The 2017 Notes were issued at a discount of $6 million, which is being amortized over their ten-year term. The Company incurred approximately $4 million of debt issuance costs, which are being amortized over ten years. As of June 30, 2010, $3 million of unamortized debt issuance costs were included in other assets on the condensed consolidated statement of financial condition.

2012, 2014 and 2019 Notes

In December 2009, the Company issued $2.5 billion in aggregate principal amount of unsecured and unsubordinated obligations. These notes were issued as three separate series of senior debt securities including $0.5 billion of 2.25% notes, $1.0 billion of 3.50% notes and $1.0 billion of 5.0% notes maturing in December 2012, 2014 and 2019, respectively. Net proceeds of this offering were used to repay borrowings under the CP Program and for general corporate purposes. Interest on these notes is payable semi-annually on June 10 and December 10 of each year beginning June 10, 2010, or approximately $96 million per year. These notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a “make-whole” redemption price. These notes were issued collectively at a discount of $5 million that is being amortized over the terms of the notes. The Company incurred approximately $13 million of debt issuance costs, which are being amortized over the respective terms of these notes. As of June 30, 2010, $12 million of unamortized debt issuance costs were included in other assets on the condensed consolidated statement of financial condition.

 

39


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

11. Borrowings (continued)

Carrying Value and Fair Value of Long-Term Borrowings (continued)

 

The carrying value and fair value of long-term borrowings estimated using an applicable bond index at December 31, 2009 included the following:

 

(Dollar amounts in millions)

   2.25%
Notes
due 2012
    3.50%
Notes
due 2014
    6.25%
Notes
due 2017
    5.00%
Notes
due 2019
    Total
Long-term
Borrowings
 

Maturity amount

   $ 500      $ 1,000      $ 700      $ 1,000      $ 3,200   

Unamortized discount

     (1     (1     (4     (3     (9
                                        

Carrying value

   $ 499      $ 999      $ 696      $ 997      $ 3,191   
                                        

Fair value

   $ 497      $ 987      $ 751      $ 987      $ 3,222   

12. Commitments and Contingencies

Investment Commitments

At June 30, 2010, the Company had approximately $297 million of investment commitments relating primarily to funds of private equity funds, real estate funds and hedge funds. Amounts to be funded generally are callable at any time prior to the expiration of the commitment. This amount excludes additional commitments made by consolidated sponsored funds of funds to underlying third party funds as third party non-controlling interest holders have the legal obligation to fund the respective commitments of such funds of funds.

Legal Proceedings

From time to time, BlackRock receives subpoenas or other requests for information from various U.S. federal, state governmental and regulatory authorities in connection with certain industry-wide or other investigations or proceedings. It is BlackRock’s policy to cooperate fully with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations and other litigation arising in connection with BlackRock’s activities. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which potentially could harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.

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

 

40


Table of Contents

PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

12. Commitments and Contingencies (continued)

 

Indemnifications

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

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

Under the transaction agreement in the BGI Transaction, the Company has agreed to indemnify Barclays for losses it may incur arising from (1) breach by the Company of certain representations, (2) breach by the Company of any covenant in the agreement, (3) liabilities of the entities acquired in the transaction other than liabilities assumed by Barclays or for which it is providing indemnification, and (4) certain taxes.

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

Contingent Payments Related to Business Acquisitions

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

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

In connection with the SSR Transaction, which closed in January 2005, the Company will make a final contingent payment in 2010 of approximately $9 million.

Drapers Gardens

In January 2010, the Company entered into an agreement with Mourant & Co Trustees Limited and Mourant Property Trustees Limited as Trustees of the Drapers Gardens Unit Trust, for the lease of approximately 292,418 square feet of office and ancillary (including retail) space located at Drapers Gardens, 12 Throgmorton Avenue, London, EC2, United Kingdom.

The term of the lease began on February 17, 2010 (the “Effective Date”) and will continue for twenty-five years, with the option to renew for an additional five year term. The lease provides for total annual base rental payments of approximately £13 million (exclusive of value added tax and other lease charges, or approximately $21.7 million based on an exchange rate of $1.60 per £1), payable quarterly in advance. The annual rent is subject to increase on each fifth anniversary of the Effective Date to the then open market rent. The lease includes an initial rent free period for thirty-six (36) months and twenty-two (22) days following the Effective Date.

In addition, the Company entered into a purchase obligation for construction services of approximately $50 million.

 

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PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

13. Stock-Based Compensation

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

 

(Dollar amounts in millions)

   Three Months Ended
June 30,
   Six Months Ended
June 30,
   2010    2009    2010    2009

Stock-based compensation:

           

Restricted stock and restricted stock units (“RSUs”)

   $ 96    $ 59    $ 186    $ 123

Long-term incentive plans funded by PNC

     14      15      29      30

Stock options

     3      3      6      6
                           

Total stock-based compensation

   $ 113    $ 77    $ 221    $ 159
                           

Restricted Stock and RSUs

Restricted stock and RSU activity at June 30, 2010 and changes during the six months ended June 30, 2010 were as follows:

 

Outstanding at

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

December 31, 2009

   5,360,463      $ 154.75

Granted

   3,096,714      $ 232.48

Converted

   (1,325,601   $ 154.77

Forfeited

   (235,365   $ 180.47
        

June 30, 2010 (1)

   6,896,211      $ 188.77
        

 

(1)

At June 30, 2010, 46,712 awards have vested but have not been converted.

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

In January 2010, the Company granted the following awards under the BlackRock, Inc. 1999 Stock Award and Incentive Plan:

 

   

846,884 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant.

 

   

256,311 RSUs to employees that cliff vest on January 31, 2012. Awards to certain individuals require that BlackRock has actual GAAP earnings per share of at least $6.13 in 2010 or $6.50 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards. The RSUs may not be sold before the one-year anniversary of the vesting date.

 

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PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

13. Stock-Based Compensation (continued)

Restricted Stock and RSUs (continued)

 

   

1,497,222 RSUs to employees that vest 50% on both January 31, 2013 and 2014. Awards to certain individuals require that BlackRock has actual GAAP earnings per share of at least $6.13 in 2010 or $6.50 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards.

 

   

124,575 shares of restricted common stock to employees that vest in tranches on January 31, 2010, 2011 and 2012. The restricted common stock may not be sold before the one-year anniversary of each vesting date.

In May 2010, the Company granted 198,977 RSUs to employees that cliff vest on January 31, 2012. Awards to certain individuals require that BlackRock has actual GAAP earnings per share of at least $6.13 in 2010 or $6.50 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards. The RSUs may not be sold before the one-year anniversary of the vesting date.

At June 30, 2010, there was $751 million in total unrecognized stock-based compensation expense related to unvested restricted stock and RSUs. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 1.8 years.

Long-Term Incentive Plans Funded by PNC

Under a share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”). In February 2009, the share surrender agreement was amended for PNC to provide BlackRock series C non-voting participating preferred stock to fund the remaining committed shares.

The BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan (the “2002 LTIP Awards”) permitted the grant of up to $240 million in deferred compensation awards, of which the Company previously granted approximately $233 million. Approximately $208 million of the 2002 LTIP Awards were paid in January 2007. The 2002 LTIP Awards were settled for approximately 16.7% in cash and the remainder in BlackRock stock contributed by PNC and distributed to plan participants. During the six months ended June 30, 2010, approximately $6 million of previously issued 2002 LTIP Awards were settled in cash and BlackRock shares held by PNC at a conversion price approximating the market price on the settlement date. On the payment date, the Company recorded a capital contribution from PNC for the amount of shares funded by PNC.

 

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PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

13. Stock-Based Compensation (continued)

 

Stock Options

Options outstanding at June 30, 2010 and changes during the six months ended June 30, 2010 were as follows:

 

Outstanding at

   Shares
Under
Option
    Weighted-
Average
Exercise
Price

December 31, 2009

   2,641,836      $ 98.59

Exercised

   (210,150   $ 38.63

Forfeited

   (9,002   $ 167.76
        

June 30, 2010

   2,422,684      $ 103.53
        

The aggregate intrinsic value of options exercised during the six months ended June 30, 2010 was $36 million.

At June 30, 2010, the Company had $15 million in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 1.3 years.

 

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PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

14. Related Party Transactions

Loan Commitments with Anthracite

Prior to March 31, 2010, the Company was committed to provide financing of up to $60 million to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that was managed by a subsidiary of BlackRock. The financing is collateralized by a pledge by Anthracite of its ownership interest in a real estate debt investment fund, which is also managed by a subsidiary of BlackRock. At June 30, 2010, $33.5 million of financing was outstanding and remains outstanding as of August 2010, which is past its final maturity date of March 5, 2010. At June 30, 2010, the carrying value of the collateral was estimated to be $9 million, which resulted in an additional $3.5 million reduction in due from related parties on the Company’s condensed consolidated statement of financial condition and an equal amount recorded in general and administrative expenses on the Company’s condensed consolidated statement of income in the six months ended June 30, 2010. The Company has no obligation to loan additional amounts to Anthracite under this facility. Anthracite filed a voluntary petition for relief under chapter 7 of title 11 of the U.S. Code in the U.S. Bankruptcy Court for the Southern District of New York on March 15, 2010. The management agreement between the Company and Anthracite has expired. Recovery of any amount of the financing provided by the Company in excess of the value of the collateral is not anticipated. The Company continues to evaluate the collectability of the outstanding borrowings by reviewing the carrying value of the net assets of the collateral, which fluctuates each period.

15. Net Capital Requirements

The Company is required to maintain net capital in certain regulated subsidiaries within a number of jurisdictions, which is partially maintained by retaining cash and cash equivalent investments in those jurisdictions. As a result, such subsidiaries of the Company may be restricted in their ability to transfer cash between different jurisdictions and to their parents. Additionally, transfers of cash between international jurisdictions, including repatriation to the United States, may have adverse tax consequences that could discourage such transfers.

Banking Regulatory Requirements

BlackRock Institutional Trust Company, N.A. (“BTC”), a wholly-owned subsidiary of the Company, is chartered as a national bank whose powers are limited to trust activities. BTC is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s condensed consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that invoke quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under the regulatory accounting practices. BTC’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Broker-dealers

BlackRock Investments, LLC, BlackRock Capital Markets, LLC, BlackRock Execution Services and BlackRock Fund Distribution Company are registered broker-dealers and wholly-owned subsidiaries of BlackRock that are subject to the Uniform Net Capital requirements under the Securities Exchange Act of 1934, which requires maintenance of certain minimum net capital levels.

Capital Requirements as of June 30, 2010

At June 30, 2010, the Company was required to maintain approximately $865 million in net capital in certain regulated subsidiaries, including BTC, and is in compliance with all applicable regulatory minimum net capital requirements.

 

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PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

16. Capital Stock

Non-voting Participating Preferred Stock

The Company’s preferred shares authorized, issued and outstanding consisted of the following:

 

     June 30,
2010
   December 31,
2009

Series A

     

Shares authorized, $0.01 par value

   20,000,000    20,000,000

Shares issued

   —      —  

Shares outstanding

   —      —  

Series B

     

Shares authorized, $0.01 par value

   150,000,000    150,000,000

Shares issued

   124,620,593    112,817,151

Shares outstanding

   124,620,593    112,817,151

Series C

     

Shares authorized, $0.01 par value

   6,000,000    6,000,000

Shares issued

   2,866,439    2,889,467

Shares outstanding

   2,866,439    2,889,467

Series D

     

Shares authorized, $0.01 par value

   20,000,000    20,000,000

Shares issued

   —      11,203,442

Shares outstanding

   —      11,203,442

Capital Exchanges

In January 2010, 600,000 common shares were exchanged for Series B preferred stock and all 11,203,442 Series D preferred stock outstanding at December 31, 2009 were exchanged for Series B preferred stock.

PNC Contribution

During the six months ended June 30, 2010, PNC contributed 23,028 of Series C preferred stock in connection with its share surrender agreement to fund certain LTIP awards.

 

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PART I – FINANCIAL INFORMATION (continued)

 

Item 1. Financial Statements (continued)

 

17. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the three months ended June 30, 2010 and 2009:

 

(Dollar amounts in millions, except per share data)

   Three Months Ended June 30,  
   2010     2009  
   Basic     Diluted     Basic     Diluted  

Net income attributable to BlackRock, Inc.

   $ 432      $ 432      $ 218      $ 218   

Less:

        

Dividends distributed to common shares

     195        195        103        103   

Dividends distributed to participating RSUs

     3        3        3        3   
                                

Undistributed net income attributable to BlackRock, Inc.

     234        234        112        112   

Percentage of undistributed net income allocated to common shares (a)

     98.6     98.6     97.3     97.3
                                

Undistributed net income allocated to common shares

     231        231        109        109   

Plus:

        

Common dividends

     195        195        103        103   
                                

Net income attributable to common shares

   $ 426      $ 426      $ 212      $ 212   
                                

Weighted-average common shares outstanding

     190,975,161</