Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended June 30, 2013

OR

 

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

For the transition period from                                 to                                .

Commission file number 001-33099

 

LOGO

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

    

32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

         (I.R.S. Employer Identification No.)

55 East 52nd Street, New York, NY 10055

(Address of Principal Executive Offices)

(Zip Code)

(212) 810-5300

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

             X               No                                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes

             X               No                                

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

 

Large accelerated filer          X      

   Accelerated filer                           Non-accelerated filer                

Smaller reporting company                  

       

 

(Do not check if a 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, 2013, there were 167,923,814 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      2   
        Condensed Consolidated Statements of Comprehensive Income      3   
        Condensed Consolidated Statements of Changes in Equity      4   
        Condensed Consolidated Statements of Cash Flows      6   
        Notes to Condensed Consolidated Financial Statements      7   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      44   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      82   
Item 4.    Controls and Procedures      85   

PART II

OTHER INFORMATION

 

Item 1.    Legal Proceedings      86   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      86   
Item 6.    Exhibits      87   

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(in millions, except share data)

(unaudited)

 

         June 30,    
2013
    December 31,
2012
 

Assets

    

Cash and cash equivalents

     $    3,668        $    4,606   

Accounts receivable

     2,249        2,250   

Investments

     1,773        1,750   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     125        297   

Bank loans, other investments and other assets

     2,160        2,264   

Separate account assets

     132,846        134,768   

Separate account collateral held under securities lending agreements

     19,426        23,021   

Property and equipment (net of accumulated depreciation of $614 and $572 at June 30, 2013 and December 31, 2012, respectively)

     524        557   

Intangible assets (net of accumulated amortization of $979 and $899 at June 30, 2013 and December 31, 2012, respectively)

     17,322        17,402   

Goodwill

     12,899        12,910   

Other assets

     753        626   
  

 

 

   

 

 

 

Total assets

                     $193,745                        $200,451   
  

 

 

   

 

 

 

Liabilities

    

Accrued compensation and benefits

     $    948        $    1,547   

Accounts payable and accrued liabilities

     1,271        1,055   

Short-term borrowings

     -        100   

Liabilities of consolidated variable interest entities:

    

Borrowings

     2,145        2,402   

Other liabilities

     93        103   

Long-term borrowings

     4,938        5,687   

Separate account liabilities

     132,846        134,768   

Separate account collateral liabilities under securities lending agreements

     19,426        23,021   

Deferred income tax liabilities

     5,318        5,293   

Other liabilities

     935        858   
  

 

 

   

 

 

 

Total liabilities

     167,920        174,834   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Temporary equity

    

Redeemable noncontrolling interests

     70        32   

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     2        2   

Shares authorized: 500,000,000 at June 30, 2013 and December 31, 2012;

    

Shares issued: 171,252,185 at June 30, 2013 and December 31, 2012;

    

Shares outstanding: 168,150,018 and 168,875,304 at June 30, 2013 and December 31, 2012, respectively

    

Preferred stock (Note 16)

     -        -   

Additional paid-in capital

     19,302        19,419   

Retained earnings

     7,210        6,444   

Appropriated retained earnings

     23        29   

Accumulated other comprehensive loss

     (198     (59

Treasury stock, common, at cost (3,102,167 and 2,376,881 shares held at June 30, 2013 and December 31, 2012, respectively)

     (750     (432
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     25,589        25,403   

Nonredeemable noncontrolling interests

     142        155   

Nonredeemable noncontrolling interests of consolidated variable interest entities

     24        27   
  

 

 

   

 

 

 

Total permanent equity

     25,755        25,585   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

     $193,745        $200,451   
  

 

 

   

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Income

(in millions, except per share data)

(unaudited)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2013     2012     2013     2012  

Revenue

       

Investment advisory, administration fees and securities lending revenue

       

Related parties

    $1,470        $1,272        $2,925        $2,586   

Other third parties

    707        718        1,381        1,381   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment advisory, administration fees and securities lending revenue

    2,177        1,990        4,306        3,967   

Investment advisory performance fees

    89        41        197        121   

BlackRock Solutions and advisory

    138        131        264        254   

Distribution fees

    18        20        35        39   

Other revenue

    60        47        129        97   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,482        2,229        4,931        4,478   

Expenses

       

Employee compensation and benefits

    864        786        1,769        1,611   

Distribution and servicing costs

    90        93        181        188   

Amortization of deferred sales commissions

    12        14        24        30   

Direct fund expenses

    162        144        323        296   

General and administration

    465        324        796        631   

Amortization of intangible assets

    40        39        80        78   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,633        1,400        3,173        2,834   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    849        829        1,758        1,644   

Non-operating income (expense)

       

Net gain (loss) on investments

    141        (7)        203        68   

Net gain (loss) on consolidated variable interest entities

    (23)        11        4        (1)   

Interest and dividend income

    4        8        10        17   

Interest expense

    (53)        (52)        (107)        (101)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income (expense)

    69        (40)        110        (17)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    918        789        1,868        1,627   

Income tax expense

    212        229        496        492   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    706        560        1,372        1,135   

Less:

       

Net income (loss) attributable to redeemable noncontrolling interests

    (1)        3        (1)        4   

Net income (loss) attributable to nonredeemable noncontrolling interests

    (22)        3        12        5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

    $729        $554        $1,361        $1,126   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Basic

    $4.27        $3.13        $7.96        $6.32   

Diluted

    $4.19        $3.08        $7.81        $6.22   

Cash dividends declared and paid per share

    $1.68        $1.50        $3.36        $3.00   

Weighted-average common shares outstanding:

       

Basic

    170,648,731        177,010,239        170,973,462        178,016,539   

Diluted

    173,873,583        179,590,702        174,268,870        180,753,515   

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in millions)

(unaudited)

 

         Three Months Ended    
June 30,
         Six Months Ended    
June 30,
 
     2013      2012      2013      2012  

Net income

     $706         $560         $1,372         $1,135   

Other comprehensive income (loss):

           

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

           

Unrealized holding gains (losses), net of tax(1)

     (21)         (4)         (17)         2   

Less: reclassification adjustment included in net income(2)

     (12)         (2)         (9)         (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     (9)         (2)         (8)         3   

Benefit plans, net of tax(3)

     -         -         -         (1)   

Foreign currency translation adjustments

     (23)         (34)         (131)         (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     (32)         (36)         (139)         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     674         524         1,233         1,136   

Less: Comprehensive income (loss) attributable to noncontrolling interests

     (23)         6         11         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to BlackRock, Inc.

     $697         $518         $1,222         $1,127   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

  (1) 

The tax benefit (expense) was $8 million and $2 million for the three months ended June 30, 2013 and 2012, respectively, and $7 million and ($1) million for the six months ended June 30, 2013 and 2012, respectively.

  (2) 

The tax benefit (expense) was ($6) million and ($4) million for the three and six months ended June 30, 2013, respectively. The tax benefit (expense) was not material for the three and six months ended June 30, 2012.

  (3) 

The tax benefit (expense) for the six months ended June 30, 2012 was not material.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(in millions)

(unaudited)

 

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

December 31, 2012

    $19,421         $6,444         $29         ($59)         ($432)         $25,403         $155         $27         $25,585         $32    

Net income

    -         1,361         -         -         -         1,361         8         4         1,373         (1)    

Allocation of gains (losses) of consolidated collateralized loan obligations

    -         -         3         -         -         3         -         (3)         -         -    

Dividends paid

    -         (595)         -         -         -         (595)         -         -         (595)         -    

Stock-based compensation

    231         -         -         -         -         231         -         -         231         -    

Issuance of common shares related to employee stock transactions

    (379)         -         -         -         397         18         -         -         18         -    

Employee tax benefit withholdings related to employee stock transactions

    -         -         -         -         (215)         (215)         -         -         (215)         -    

Shares repurchased

    -         -         -         -         (500)         (500)         -         -         (500)         -    

Net tax benefit (shortfall) from stock-based compensation

    31         -         -         -         -         31         -         -         31         -    

Subscriptions (redemptions/distributions)-noncontrolling interest holders

    -         -         (9)         -         -         (9)         (21)         130         100         75    

Net consolidations (deconsolidations) of sponsored investment funds

    -         -         -         -         -         -         -         (134)         (134)         (36)    

Other comprehensive income (loss)

    -         -         -         (139)         -         (139)         -         -         (139)         -    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2013

      $19,304           $7,210             $23             ($198)             ($750)             $25,589             $142             $24             $25,755               $70    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) 

Amounts include $2 million of common stock at both June 30, 2013 and December 31, 2012.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(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
Noncontrolling
Interests
    Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-
controlling
Interests /
Temporary
Equity
 

December 31, 2011

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

Net income

    -         1,126         -         -         -         -         1,126         6         (1)         1,131         4    

Allocation of losses of consolidated collateralized loan obligations

    -         -         (2)         -         -         -         (2)         -         2         -         -    

Dividends paid

    -         (545)         -         -         -         -         (545)         -         -         (545)         -    

Stock-based compensation

    235         -         -         -         -         -         235         -         -         235         -    

Merrill Lynch cash capital contribution

    7         -         -         -         -         -         7         -         -         7         -    

Issuance of common shares related to employee stock transactions

    (351)         -         -         -         -         400         49         -         -         49         -    

Employee tax benefit withholdings related to employee stock transactions

    -         -         -         -         -         (139)         (139)         -         -         (139)         -    

Shares repurchased

    (1,000)         -         -         -         -         (167)         (1,167)         -         -         (1,167)         -    

Net tax benefit (shortfall) from stock-based compensation

    59         -         -         -         -         -         59         -         -         59         -    

Subscriptions(redemptions/distributions)-noncontrolling interest holders

    -         -         -         -         -         -         -         (12)         (5)         (17)         188    

Net consolidations (deconsolidations) of sponsored investment funds

    -         -         -         -         -         -         -         -         -         -         (246)    

Other comprehensive income (loss)

    -         -         -         1         -         -         1         -         -         1         -    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)

 

         Six Months Ended    
June 30,
 
         2013              2012      

Cash flows from operating activities

     

Net income

     $1,372         $1,135   

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

     

Depreciation and amortization

     144         145   

Amortization of deferred sales commissions

     24         30   

Stock-based compensation

     231         235   

Deferred income tax expense (benefit)

     37         33   

Gain related to PennyMac initial public offering

     (39)         -   

Gain related to the charitable contribution

     (80)         -   

Charitable contribution

     124         -   

Net (gains) losses on non-trading investments

     (27)         (18)   

Purchases of investments within consolidated sponsored investment funds

     (47)         (70)   

Proceeds from sales and maturities of investments within consolidated sponsored investment funds

     77         41   

Assets and liabilities of consolidated VIEs:

     

Change in cash and cash equivalents

     172         10   

Net (gains) losses within consolidated VIEs

     (4)         1   

Net (purchases) proceeds within consolidated VIEs

     (32)         169   

(Earnings) losses from equity method investees

     (85)         (59)   

Distributions of earnings from equity method investees

     32         18   

Changes in operating assets and liabilities:

     

Accounts receivable

     (15)         (122)   

Deferred sales commissions

     (28)         (23)   

Investments, trading

     (70)         (188)   

Other assets

     (94)         (136)   

Accrued compensation and benefits

     (601)         (557)   

Accounts payable and accrued liabilities

     207         90   

Other liabilities

     32         131   
  

 

 

    

 

 

 

Cash flows from operating activities

     1,330         865   
  

 

 

    

 

 

 

Cash flows from investing activities

     

Purchases of investments

     (182)         (274)   

Proceeds from sales and maturities of investments

     203         209   

Distributions of capital from equity method investees

     38         32   

Net consolidations (deconsolidations) of sponsored investment funds

     (3)         (204)   

Acquisitions, net of cash acquired

     -         (212)   

Purchases of property and equipment

     (46)         (98)   
  

 

 

    

 

 

 

Cash flows from investing activities

     10         (547)   
  

 

 

    

 

 

 

Cash flows from financing activities

     

Repayments of short-term borrowings

     (100)         -   

Repayments of long-term borrowings

     (750)         -   

Proceeds from long-term borrowings

     -         1,495   

Cash dividends paid

     (595)         (545)   

Proceeds from stock options exercised

     15         44   

Proceeds from issuance of common stock

     3         4   

Repurchases of common stock

     (715)         (1,305)   

Merrill Lynch cash capital contribution

     -         7   

Net proceeds from (repayments of) borrowings by consolidated VIEs

     (261)         (174)   

Net (redemptions/distributions paid) subscriptions received from noncontrolling interests holders

     175         171   

Excess tax benefit from stock-based compensation

     35         68   
  

 

 

    

 

 

 

Cash flows from financing activities

     (2,193)         (235)   
  

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (85)         6   
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     (938)         89   

Cash and cash equivalents, beginning of period

     4,606         3,506   
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $3,668         $3,595   
  

 

 

    

 

 

 

Supplemental disclosure of cash flow information:

     

Cash paid for:

     

Interest

     $102         $92   

Interest on borrowings of consolidated VIEs

     $59         $35   

Income taxes

     $492         $556   

Supplemental schedule of non-cash investing and financing transactions:

     

Issuance of common stock

     $378         $352   

Increase (decrease) in noncontrolling interests due to net consolidation (deconsolidation) of sponsored investment funds

     ($170)         ($246)   

See accompanying notes to condensed consolidated financial statements.

 

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BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.  Business Overview

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

On June 30, 2013, The PNC Financial Services Group, Inc. (“PNC”) held 20.8% of the Company’s voting common stock and 21.8% of the Company’s capital stock, which includes outstanding common and non-voting preferred stock.

2.  Significant Accounting Policies

Basis of Presentation.    These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Noncontrolling 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 condensed consolidated 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, 2012, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013 (“2012 Form 10-K”).

The interim financial information at June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

 

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2.  Significant Accounting Policies (continued)

 

Fair Value Measurements.

Hierarchy of Fair Value Inputs.    The provisions of Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

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

Level 1 Inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.

 

   

Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”), which in accordance with GAAP, are calculated under fair value measures and the changes are equal to the earnings of such funds), ETFs, listed equities and certain exchange-traded derivatives.

Level 2 Inputs:

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

 

   

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

Level 3 Inputs:

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

 

   

Level 3 assets may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds and funds of hedge funds, direct private equity investments held within consolidated funds, bank loans and bonds.

 

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2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

   

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

 

   

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.

Significance of Inputs.    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.

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

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

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

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

Fair Value Option.    ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies an irrevocable election to use fair value as the initial and

 

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2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument-by-instrument basis, which must be applied to an entire instrument, and not only specified risks, specific cash flows, or portions of that instrument, and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method.

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

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

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

Separate Account Assets and Liabilities. Separate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. The life insurance company does not underwrite any insurance contracts that involve any insurance risk transfer from the insured to the life insurance company. The separate accounts assets primarily include equity, debt securities, money market funds and derivatives. The separate account assets are not subject to general claims of the creditors of BlackRock. These separate account assets and the related equal and offsetting liabilities are recorded as separate account assets and separate account liabilities on the condensed consolidated statements of financial condition in accordance with the ASC 944-80, Financial Services – Separate Accounts.

The net investment income attributable to separate account assets supporting individual and group pension contracts accrues directly to the contract owner and is not reported on the condensed consolidated statements of income. While BlackRock has no economic interest in these separate account assets and liabilities, BlackRock earns policy administration and management fees associated with these products, which are included in investment advisory, administration fees and securities lending revenue on the condensed consolidated statements of income.

 

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Table of Contents

2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

Separate Account Collateral Assets Held and Liabilities Under Securities Lending Agreements.    The Company facilitates securities lending arrangements whereby securities held by separate account assets maintained by BlackRock Life Limited are lent to third parties under global master securities lending agreements. In exchange, the Company receives collateral with minimum values generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. The required collateral value is calculated on a daily basis. The global master securities lending agreements provide the Company, in the event of customer default, the right to liquidate collateral or to request additional collateral. Under the Company’s securities lending arrangements, the Company can resell or re-pledge the collateral and the borrower can resell or re-pledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore, these transactions are not reported as sales under ASC 860, Transfers and Servicing.

As a result of the Company’s ability to resell or re-pledge the collateral, the Company records on the condensed consolidated statements of financial condition the cash and non-cash collateral received under these arrangements as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. During the six months ended June 30, 2013 and 2012, the Company had not re-sold or re-pledged any of the collateral received under these arrangements. At June 30, 2013 and December 31, 2012, the fair value of loaned securities held by separate account assets was approximately $17.7 billion and $21.0 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $19.4 billion and $23.0 billion, respectively.

Appropriated Retained Earnings.    Upon the initial consolidation of CLOs, BlackRock records a cumulative effect adjustment to appropriated retained earnings on the condensed consolidated statements 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. The net change in the fair value of the CLOs’ assets and liabilities is recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as an adjustment to appropriated retained earnings.

Accounting Pronouncements Adopted in the Six Months Ended June 30, 2013

Amendments to Accumulated Other Comprehensive Income Disclosures.    On February 5, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), which added new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). See Note 15, Accumulated Other Comprehensive Income (Loss).

Disclosures About Offsetting Assets and Liabilities.    On December 16, 2011, the FASB issued ASU 2011-11, Disclosures About Offsetting Assets and Liabilities (“ASU 2011-11”), which creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. On January 31, 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), that provides clarification about which instruments and transactions are subject to ASU 2011-11. The adoption of ASU 2011-11 and ASU 2013-01 on January 1, 2013 was not material to the condensed consolidated financial statements.

 

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2.  Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements Not Yet Adopted

Cumulative Translation Adjustment.    In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 is effective for the Company on January 1, 2014. The Company does not believe the adoption of ASU 2013-05 will have a material impact on the condensed consolidated financial statements.

Investment Company Guidance.    In June 2013, the FASB issued ASU 2013-08, Financial Services — Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). ASU 2013-08 amends the current criteria for an entity to qualify as an investment company, creates new disclosure requirements and amends the measurement criteria for certain interests in other investment companies. The Company is currently evaluating the impact of adopting ASU 2013-08, which is effective for the Company on January 1, 2014.

Benchmark Interest Rate for Hedge Accounting.    In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2013-10”). ASU 2013-10 provides for the inclusion of certain interest rate benchmarks for hedge accounting purposes. ASU 2013-10 is effective for the Company for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not believe the adoption of ASU 2013-10 will have a material impact on the condensed consolidated financial statements.

Presentation of an Unrecognized Tax Benefit.    In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for the Company on January 1, 2014. The Company does not believe the adoption of ASU 2013-11 will have a material impact on the condensed consolidated financial statements.

 

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3.  Investments

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

 

(in millions)   June 30,
2013
   December 31,
2012

Available-for-sale investments

    $150           $158     

Held-to-maturity investments

    53           112     

Trading investments:

        

Consolidated sponsored investment funds

    289           123     

Other equity and debt securities

    79           94     

Deferred compensation plan mutual funds

    57           53     
 

 

 

  

 

 

Total trading investments

    425           270     

Other investments:

        

Consolidated sponsored investment funds

    338           401     

Equity method investments

    545           595     

Deferred compensation plan hedge fund equity method investments

    10           9     

Cost method investments(1)

    122           120     

Carried interest

    130           85     
 

 

 

  

 

 

Total other investments

    1,145           1,210     
 

 

 

  

 

 

Total investments

                $1,773                       $1,750     
 

 

 

  

 

 

 

  (1) 

Amounts primarily include Federal Reserve Bank Stock.

At June 30, 2013, the Company consolidated $627 million of investments held by consolidated sponsored investment funds (non-variable interest entities (“VIEs”)) of which $289 million and $338 million were classified as trading investments and other investments, respectively. At December 31, 2012, the Company consolidated $524 million of investments held by consolidated sponsored investment funds (non-VIEs) of which $123 million and $401 million were classified as trading investments and other investments, respectively.

Available-for-Sale Investments

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

 

(in millions)                                    
        Gross Unrealized   Carrying
Value
 
June 30, 2013   Cost   Gains   Losses  

Equity securities of sponsored investment funds

    $148          $3          ($4)          $147   

Other securities

    2          1          -          3   
 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

    $150          $4          ($4)          $150   
 

 

 

 

 

 

 

 

 

 

 

 

 
              Gross Unrealized   Carrying
Value
 
December 31, 2012   Cost   Gains   Losses  

Equity securities of sponsored investment funds

    $142          $14          ($1)          $155   

Other securities

    2          1          -          3   
 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

            $144                  $15                  ($1)                  $158   
 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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3.  Investments (continued)

 

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $53 million and $112 million at June 30, 2013 and December 31, 2012, respectively. Held-to-maturity investments included foreign government debt held for regulatory purposes and the amortized cost (carrying value) of these investments approximated fair value. At June 30, 2013, $40 million of these investments mature in one year or less and $13 million mature after 10 years.

Trading Investments

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

 

(in millions)        June 30, 2013              December 31, 2012      
     Cost     

Carrying

Value

     Cost     

Carrying

Value

 
  

 

 

    

 

 

 

Trading investments:

           

Deferred compensation plan mutual funds

     $  51         $  57         $  46         $  53   

Equity/Multi-asset mutual funds

     93         100         154         162   

Debt securities/fixed income mutual funds:

           

Corporate debt

     159         156         44         44   

Government debt

     119         112         11         11   
  

 

 

    

 

 

 

Total trading investments

             $422                 $425                 $255                 $270   
  

 

 

    

 

 

 

At June 30, 2013, trading investments included $80 million of equity securities and $209 million of debt securities held by consolidated sponsored investment funds, $57 million of certain deferred compensation plan mutual fund investments and $79 million of other equity and debt securities.

Other Investments

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

 

(in millions)        June 30, 2013              December 31, 2012      
     Cost     

Carrying

Value

     Cost     

Carrying

Value

 
  

 

 

    

 

 

 

Other investments:

           

Consolidated sponsored investment funds

     $325         $338         $378         $401   

Equity method

     467         545         541         595   

Deferred compensation plan hedge fund

equity method investments

     9         10         15         9   

Cost method investments:

           

Federal Reserve Bank stock

     92         92         89         89   

Other

     19         30         31         31   
  

 

 

    

 

 

 

Total cost method investments

     111         122         120         120   

Carried interest

     -         130         -         85   
  

 

 

    

 

 

 

Total other investments

             $912                 $1,145                 $1,054                 $1,210   
  

 

 

    

 

 

 

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

 

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Table of Contents

3.  Investments (continued)

 

Other Investments (continued)

 

Equity method investments primarily include BlackRock’s direct investment in certain BlackRock sponsored investment funds. See Note 10, Other Assets, for information on the Company’s investment in PennyMac Financial Services, Inc. (“PennyMac”), which is included in other assets on the condensed consolidated statements of financial condition.

Cost method investments include non-marketable securities, including Federal Reserve Bank stock, which is held for regulatory purposes and is restricted from sale. At June 30, 2013 and December 31, 2012, there were no indicators of impairment on these investments.

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

4.  Consolidated Sponsored Investment Funds

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

 

(in millions)    June 30,
2013
     December 31,
2012
 

Cash and cash equivalents

     $185         $133   

Investments:

     

Trading investments

     289         123   

Other investments

     338         401   

Other assets

     16         25   

Other liabilities

     (41)         (65)   

Noncontrolling interests

     (212)         (187)   
  

 

 

    

 

 

 

BlackRock’s net interests in consolidated sponsored investment funds

                       $575                           $430   
  

 

 

    

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds of $575 million and $430 million at June 30, 2013 and December 31, 2012, respectively, represents the value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income (expense) and partially offset in net income (loss) attributable to noncontrolling interests for the portion not attributable to BlackRock.

In addition, at June 30, 2013 and December 31, 2012, several consolidated CLOs and one investment fund, which were deemed to be VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion of these consolidated investment products.

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

 

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5.  Fair Value Disclosures

Fair Value Hierarchy

June 30, 2013

Assets measured at fair value on a recurring basis and other assets not held at fair value were as follows:

 

    Assets measured at fair value on a
recurring basis
             
(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,

2013

 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities (funds and CDOs)

    $147        $-        $1        $-        $148   

Debt securities

    -        2        -        -        2   
 

 

 

 

Total available-for-sale

    147        2        1        -        150   

Held-to-maturity:

         

Debt securities

    -        -        -        53        53   

Trading:

         

Deferred compensation plan mutual funds

    57        -        -        -        57   

Equity/Multi-asset mutual funds

    97        3        -        -        100   

Debt securities / fixed income mutual funds

    58        210        -        -        268   
 

 

 

 

Total trading

    212        213        -        -        425   

Other investments:

         

Consolidated sponsored investment funds:

         

Hedge funds / Funds of funds

    3        24        47        -        74   

Private / public equity(2)

    2        13        249        -        264   
 

 

 

 

Total consolidated sponsored investment funds

    5        37        296        -        338   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        68        157        52        277   

Private equity investments

    -        -        105        -        105   

Real estate funds

    -        19        97        7        123   

Fixed income mutual funds

    34        -        -        -        34   

Equity/Multi-asset, alternative mutual funds

    6        -        -        -        6   
 

 

 

 

Total equity method

    40        87        359        59        545   

Deferred compensation plan hedge fund equity method investments

    -        10        -        -        10   

Cost method investments

    -        -        -        122        122   

Carried interest

    -        -        -        130        130   
 

 

 

 

Total investments

    404        349        656        364        1,773   
 

 

 

 

Separate account assets

    95,377        36,635        -        834        132,846   

Separate account collateral held under securities lending agreements:

         

Equity securities

    17,880        -        -        -        17,880   

Debt securities

    -        1,546        -        -        1,546   
 

 

 

 

Total separate account collateral held under securities lending agreements

    17,880        1,546        -        -        19,426   

Other assets(3)

    -        12        -        -        12   

Assets of consolidated VIEs:

         

Bank loans

    -        1,910        93        -        2,003   

Bonds

    -        60        35        -        95   

Private / public equity(4)

    -        7        19        -        26   
 

 

 

 

Total assets of consolidated VIEs

    -        1,977        147        -        2,124   
 

 

 

 

Total

            $113,661                $40,519                $803                $1,198                $156,181   
 

 

 

 

 

  (1) 

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

  (2) 

Level 3 amounts included $209 million and $40 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

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

  (4) 

Level 3 amounts included $17 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by a private equity fund.

 

16


Table of Contents

5.  Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Liabilities measured at fair value on a recurring basis at June 30, 2013 were as follows:

 

(in millions)    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
    

June 30,

2013

 

Liabilities:

           

Borrowings of consolidated VIEs

     $           -         $         -         $2,145         $  2,145   

Separate account collateral liabilities under securities lending agreements

     17,880         1,546         -         19,426   

Other liabilities(1)

     16         5         -         21   
  

 

 

 

Total liabilities measured at fair value

             $17,896                 $1,551                 $2,145                 $21,592   
  

 

 

 

 

  (1) 

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

 

17


Table of Contents

5.  Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

December 31, 2012

Assets measured at fair value on a recurring basis and other assets not held at fair value were as follows:

 

    Assets measured at fair value on a
recurring basis
             
(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,
2012
 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities (funds and CDOs)

  $ 155      $ -      $ 1      $ -      $ 156   

Debt securities

    -        2        -        -        2   
 

 

 

 

Total available-for-sale

    155        2        1        -        158   

Held-to-maturity:

         

Debt securities

    -        -        -        112        112   

Trading:

         

Deferred compensation plan mutual funds

    53        -        -        -        53   

Equity/Multi-asset mutual funds

    159        3        -        -        162   

Debt securities / fixed income mutual funds

    5        50        -        -        55   
 

 

 

 

Total trading

    217        53        -        -        270   

Other investments:

         

Consolidated sponsored investment funds:

         

Hedge funds / Funds of funds

    3        39        73        -        115   

Private / public equity(2)

    10        10        266        -        286   
 

 

 

 

Total consolidated sponsored investment funds

    13        49        339        -        401   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        61        161        39        261   

Private equity investments

    -        -        90        -        90   

Real estate funds

    -        19        88        15        122   

Fixed income mutual funds

    46        -        -        -        46   

Equity/Multi-asset, alternative mutual funds

    76        -        -        -        76   
 

 

 

 

Total equity method

    122        80        339        54        595   

Deferred compensation plan hedge fund equity method investments

    -        9        -        -        9   

Cost method investments

    -        -        -        120        120   

Carried interest

    -        -        -        85        85   
 

 

 

 

Total investments

    507        193        679        371        1,750   
 

 

 

 

Separate account assets

    95,514        38,392        2        860        134,768   

Separate account collateral held under securities lending agreements:

         

Equity securities

    21,273        -        -        -        21,273   

Debt securities

    -        1,748        -        -        1,748   
 

 

 

 

Total separate account collateral held under securities lending agreements

    21,273        1,748        -        -        23,021   

Other assets(3)

    -        12        -        -        12   

Assets of consolidated VIEs:

         

Bank loans

    -        2,004        106        -        2,110   

Bonds

    -        78        46        -        124   

Private / public equity(4)

    2        6        22        -        30   
 

 

 

 

Total assets of consolidated VIEs

    2        2,088        174        -        2,264   
 

 

 

 

Total

  $ 117,296      $ 42,433      $ 855      $ 1,231      $ 161,815   
 

 

 

 

 

  (1) 

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

  (2) 

Level 3 amounts included $212 million and $54 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

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

  (4) 

Level 3 amounts included $20 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by a private equity fund.

 

18


Table of Contents

5.  Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Liabilities measured at fair value on a recurring basis at December 31, 2012 were as follows:

 

(in millions)   

Quoted

Prices in
Active
Markets for
Identical
Assets

(Level 1)

     Significant
Other
Observable
Inputs
(Level 2)
    

Significant
Unobservable
Inputs

(Level 3)

     December 31,
2012
 

Liabilities:

           

Borrowings of consolidated VIEs

   $ -       $ -       $ 2,402       $ 2,402   

Separate account collateral liabilities under securities lending agreements

     21,273         1,748         -         23,021   

Other liabilities(1)

     15         5         -         20   
  

 

 

 

Total liabilities measured at fair value

           $ 21,288           $ 1,753           $ 2,402           $ 25,443   
  

 

 

 

 

 

  (1) 

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

Level 3 Assets.  Level 3 investments of $656 million and $679 million at June 30, 2013 and December 31, 2012, respectively, primarily related to equity method investments and consolidated sponsored investment funds. Level 3 assets within investments, except for direct investments in private equity companies held by private equity funds described below, were primarily valued based upon NAVs received from internal as well as third-party fund managers.

Direct investments in private equity companies held by private equity funds totaled $42 million and $56 million at June 30, 2013 and December 31, 2012, respectively. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used is evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the expected cash flows to a single present value amount using current expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

 

19


Table of Contents

5.  Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

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

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

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

 

20


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2013

 

(in millions)    March 31,
2013
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    June 30,
2013
     Total net 
gains (losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-        $-         $-        $1         $-   

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of funds

     84         2        -         (9     (28     -         (2     47         2   

Private equity

     264         (7     5         (10     -        -         (3     249         (6

Equity method:

                      

Hedge funds / Funds of hedge funds

     136         5        -         -        16        -         -        157         5   

Private equity investments

     99         4        4         -        (2     -         -        105         4   

Real estate funds

     91         7        1         -        (2     -         -        97         6   
  

 

 

 

Total Level 3 investments

     675         11        10         (19     (16     -         (5     656         11   
  

 

 

 

Assets of consolidated VIEs:

                      

Bank loans

     97         (1     48         (29     -        17         (39     93      

Bonds

     49         -        -         (14     -        -         -        35      

Private equity

     20         -        -         (1     -        -         -        19      

Fund of hedge funds

     116         -        18         -        (134     -         -        -      
  

 

 

    

Total Level 3 assets of consolidated VIEs

     282         (1     66         (44     (134     17         (39     147         n/a (3) 
  

 

 

    

Total Level 3 assets

     $957         $10        $76         ($63     ($150     $17         ($44     $803      
  

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

             $2,332         $6        $-         $-        ($181     $-         $-        $2,145         n/a (3) 

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, elimination of investment related to a deconsolidation of a consolidated VIE and a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage.

  (2) 

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

  (3) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

21


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2013

 

(in millions)    December 31,
2012
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    June 30,
2013
     Total net
gains
(losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-        $-         $-        $1         $-   

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of hedge funds

     73         6        12         (9     (28     -         (7     47         6   

Private equity

     266         16        12         (39     -        -         (6     249         14   

Equity method:

                      

Hedge funds / Funds of hedge funds

     161         9        1         -        (14     -         -        157         9   

Private equity investments

     90         10        9         -        (4     -         -        105         10   

Real estate funds

     88         8        3         -        (2     -         -        97         8   
  

 

 

 

Total Level 3 investments

     679         49        37         (48     (48     -         (13     656         47   
  

 

 

    

Separate account assets

     2         -        -         (2     -        -         -        -         n/a (3) 

Assets of consolidated VIEs:

                      

Bank loans

     106         (1     72         (40     -        32         (76     93      

Bonds

     46         (1     4         (14     -        -         -        35      

Private equity

     22         1        -         (4     -        -         -        19      

Fund of hedge funds

     -         -        134         -        (134     -         -        -         -   
  

 

 

    

Total Level 3 assets of consolidated VIEs

     174         (1     210         (58     (134     32         (76     147         n/a (4) 
  

 

 

    

Total Level 3 assets

     $855         $48        $247         ($108     ($182     $32         ($89     $803      
  

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

             $2,402         ($4     $-         $-        ($261     $-         $-        $2,145         n/a (4) 

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, elimination of investment related to a deconsolidation of a consolidated VIE and a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage.

  (2) 

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

  (3) 

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

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

22


Table of Contents

5.  Fair Value Disclosures (continued)

 

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

 

(in millions)    March 31,
2012
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    June 30,
2012
     Total net 
gains (losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-        $-         $-        $1         $-   

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of funds

     53         (5     -         -        (2     -         -        46         (5

Private equity

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

Equity method:

                      

Hedge funds / Funds of hedge funds

     197         3        -         -        (13     -         -        187         3   

Private equity investments

     89         2        1         -        (4     -         -        88         2   

Real estate funds

     95         2        6         -        (2     -         -        101         2   
  

 

 

 

Total Level 3 investments

     764         (6     11         (21     (21     -         (6     721         (7
  

 

 

 

Separate account assets

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

Assets of consolidated VIEs:

                      

Bank loans

     47         1        10         (1     -        47         (19     85      

Bonds

     44         -        -         -        -        -         -        44      

Private equity

     28         (1     -         (2     -        -         -        25      
  

 

 

    

Total Level 3 assets of consolidated VIEs

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

 

 

    

Total Level 3 assets

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

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

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

 

  n/a – not applicable
  (1) 

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

  (2) 

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

  (3) 

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

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

23


Table of Contents

5.  Fair Value Disclosures (continued)

 

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

 

(in millions)    December 31,
2011
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    June 30,
2012
     Total net
gains (losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-        $-         $-        $1         $-   

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of funds

     22         (4     27         -        (2     3         -        46         (4

Private equity

     313         21        9         (39     -        -         (6     298         18   

Equity method:

                      

Hedge funds / Funds of hedge funds

     193         19        -         -        (25     -         -        187         19   

Private equity investments

     85         6        3         -        (6     -         -        88         6   

Real estate funds

     88         2        13         -        (2     -         -        101         2   
  

 

 

 

Total Level 3 investments

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

 

 

 

Separate account assets

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

Assets of consolidated VIEs:

                      

Bank loans

     83         1        17         (7     -        52         (61     85      

Bonds

     40         2        2         -        -        -         -        44      

Private equity

     27         2        -         (4     -        -         -        25      
  

 

 

    

Total Level 3 assets of consolidated VIEs

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

 

 

    

Total Level 3 assets

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

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

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

 

  n/a – not applicable
  (1) 

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

  (2) 

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

  (3) 

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

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

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5.  Fair Value Disclosures (continued)

 

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

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

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

During the three and six months ended June 30, 2012, there were $8 million of transfers out of Level 3 into Level 1 related to equity securities held within separate accounts. These transfers out of Level 3 were due to availability of observable market inputs.

Assets of Consolidated VIEs.    During the three and six months ended June 30, 2013, there were $39 million and $76 million, respectively, of transfers out of Level 3 to Level 2 related to bank loans. In addition, during the three and six months ended June 30, 2013, there were $17 million and $32 million, respectively, of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of Levels 2 and 3 were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.

During the three and six months ended June 30, 2012, there were $19 million and $61 million, respectively, of transfers out of Level 3 into Level 2 related to bank loans. In addition, during the three and six months ended June 30, 2012, there were $47 million and $52 million, respectively, of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of Levels 2 and 3 primarily were due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.

Consolidated Sponsored Investment Funds.    During the six months ended June 30, 2013, there were $12 million of transfers out of Level 1 to Level 2 related to consolidated private equity funds. This transfer was due to a direct investment in a public company held by a consolidated private equity fund valued at a discount due to restrictions on sale.

Other Significant Settlements.    During the three and six months ended June 30, 2013, there were $16 million and $48 million, respectively, of distributions from equity method investees categorized in Level 3.

During the three and six months ended June 30, 2012, there were $19 million and $33 million, respectively, of distributions from equity method investees categorized in Level 3.

During the three and six months ended June 30, 2013, other settlements included $134 million related to a deconsolidation of a consolidated fund of hedge funds, which was previously classified as a VIE. This fund was deconsolidated during the second quarter 2013 due to the granting of additional substantive rights to unaffiliated investors of the fund.

 

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5.  Fair Value Disclosures (continued)

 

In addition, during the three and six months ended June 30, 2013, there was a $28 million reclassification of a Level 3 investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage.

Disclosures of Fair Value for Financial Instruments Not Held at Fair Value. At June 30, 2013 and December 31, 2012, the fair value of the Company’s financial instruments not held at fair value are categorized in the table below:

 

    June 30, 2013     December 31, 2012        
(in millions)      Carrying   
Amount
       Estimated   
Fair Value
       Carrying   
Amount
       Estimated   
Fair Value
       Fair Value   
Hierarchy
 

Financial Assets:

         

Cash and cash equivalents

  $ 3,668      $ 3,668      $ 4,606      $ 4,606        Level 1 (1) 

Accounts receivable

    2,249        2,249        2,250        2,250        Level 1 (2) 

Cash and cash equivalents of consolidated VIEs

    125        125        297        297        Level 1 (1) 

Financial Liabilities:

         

Accounts payable and accrued liabilities

    1,271        1,271        1,055        1,055        Level 1 (2) 

Short-term borrowings

    -        -        100        100        Level 1 (2) 

Long-term borrowings

    4,938        5,308        5,687        6,275        Level 2 (3) 

 

  (1) 

Cash and cash equivalents are carried at either cost or amortized cost that approximates fair value due to their short-term maturities. At June 30, 2013 and December 31, 2012, approximately $185 million and $133 million, respectively, related to cash and cash equivalents held by consolidated sponsored investment funds. Money market funds are valued based on quoted market prices, or $1.00, which generally is the NAV of the fund. At June 30, 2013 and December 31, 2012, approximately $124 million and $98 million, respectively, of money market funds were recorded within cash and cash equivalents on the condensed consolidated statements of financial condition.

 

  (2) 

The carrying amounts of accounts receivable, accounts payable and accrued liabilities and short-term borrowings approximate fair value due to their short-term nature.

 

  (3) 

Long-term borrowings are recorded at amortized cost. The fair value of the long-term borrowings, including the current portion of long-term borrowings, is estimated using market prices at the end of June 2013 and December 2012, respectively. See Note 11, Borrowings, for further information on the June 30, 2013 fair value of the Company’s long-term borrowings.

 

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5.  Fair Value Disclosures (continued)

 

Investments in Certain Entities that Calculate Net Asset Value Per Share

As a practical expedient to value certain investments that do not have a readily determinable fair value and have attributes of an investment company, the Company relies on NAV as the fair value for certain investments. The following tables list 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 NAV per share (or its equivalent).

June 30, 2013

 

(in millions)   Ref     Fair Value     Total Unfunded
Commitments
   

Redemption
Frequency

  Redemption
Notice Period

Trading:

         

Equity

    (a     $3        $-      Daily (100%)   None

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (b     209        26      n/r   n/r

Other funds of hedge funds

    (c     58        -     

Monthly (29%),

Quarterly (3%), n/r (68%)

  2 – 90 days

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (d     224        73     

Monthly (2%), Quarterly (30%)

n/r (68%)

  15 – 90 days

Private equity funds

    (e     105        86      n/r   n/r

Real estate funds

    (f     116        13     

Quarterly (16%)

n/r (84%)

  60 days

Deferred compensation plan hedge fund investments

    (g     10        -      Monthly (30%), Quarterly (70%)   60 – 90 days

Consolidated VIEs:

         

Private equity fund

    (h     17        1      n/r   n/r
   

 

 

   

 

 

     

Total

      $742        $199       
   

 

 

   

 

 

     

 

  n/r – not redeemable

 

  (1) 

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

 

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5.  Fair Value Disclosures (continued)

 

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

 

December 31, 2012

 

(in millions)   Ref     Fair Value     Total
Unfunded
Commitments
   

Redemption
Frequency

  Redemption
Notice Period

Trading:

         

Equity

    (a     $3        $-      Daily (100%)   None

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (b     212        32      n/r   n/r

Other funds of hedge funds

    (c     98        -     

Monthly (22%)

Quarterly (11%)

n/r (67%)

  1 – 90 days

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (d     222        42     

Monthly (2%)

Quarterly (28%)

n/r (70%)

  15 – 90 days

Private equity funds

    (e     90        135      n/r   n/r

Real estate funds

    (f     107        15     

Quarterly (18%)

n/r (82%)

  60 days

Deferred compensation plan hedge fund investments

    (g     9        -     

Monthly (33%)

Quarterly (67%)

  60 – 90 days

Consolidated VIE:

         

Private equity funds

    (h     20        1      n/r   n/r
   

 

 

   

 

 

     

Total

      $          761        $                225       
   

 

 

   

 

 

     

 

  n/r – not redeemable

 

  (1) 

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

 

  (a) This category includes 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 NAV of master offshore funds held by the feeder funds. Investments in this category generally can be redeemed at any time, as long as there are no restrictions in place by the underlying master funds.

 

  (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 capital accounts representing the Company’s ownership interest 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 seven years at both June 30, 2013 and December 31, 2012. The total remaining unfunded commitments to other third-party funds were $26 million and $32 million at June 30, 2013 and December 31, 2012, respectively. The Company was contractually obligated to fund $30 million at both June 30, 2013 and December 31, 2012 to the consolidated funds.

 

  (c) This category includes consolidated funds of hedge funds that invest in multiple strategies to diversify risks. The fair values of the investments have been estimated using the NAV of the fund’s ownership interest in partners’ capital of each fund in the portfolio. Certain of the underlying funds can be redeemed as long as there are no restrictions in place. At June 30, 2013 and December 31, 2012, the underlying funds that are currently restricted from redemptions within one year will be redeemable in approximately 12 to 24 months. This category also includes a consolidated offshore feeder fund that invests in a master fund with multiple alternative investment strategies. The fair value of this investment has been estimated using the NAV of the master offshore fund held by the feeder fund. The investment is currently subject to restrictions in place by the underlying master fund.

 

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5.  Fair Value Disclosures (continued)

 

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

 

  (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 have been estimated using the NAV of the Company’s ownership interest in partners’ capital. It was estimated that the investments in the funds that are not subject to redemption will be liquidated over a weighted-average period of approximately four and five years at June 30, 2013 and December 31, 2012, respectively.

 

  (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 capital accounts representing the Company’s ownership interest in the funds 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 was estimated that the investments in these funds will be liquidated over a weighted-average period of approximately five years at both June 30, 2013 and December 31, 2012.

 

  (f) This category includes several real estate funds that invest directly in real estate and real estate related assets. The fair values of the investments have been estimated using capital accounts representing the Company’s ownership interest in the funds. A majority of the Company’s investments are not subject to redemption or are not currently redeemable 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 not subject to redemptions will be liquidated over a weighted-average period of approximately seven years at June 30, 2013 and eight years at December 31, 2012.

 

  (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 capital accounts representing the Company’s ownership interest in partners’ capital as well as performance inputs. The investments in these funds will be liquidated upon settlement of certain deferred compensation liabilities.

 

  (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 capital accounts representing the Company’s ownership interest 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 third-party 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 two years at June 30, 2013 and three years at December 31, 2012. Total remaining unfunded commitments to other third-party funds were $1 million at both June 30, 2013 and December 31, 2012, which commitments are required to be funded by capital contributions from noncontrolling interest holders.

Fair Value Option.    Upon the initial consolidation of certain CLOs, the Company elected to adopt the fair value option provisions for eligible assets and liabilities, including bank loans and borrowings of the CLOs to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplification. 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 noncontrolling 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.

 

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5.  Fair Value Disclosures (continued)

 

The following table summarizes information related to those assets and liabilities selected for fair value accounting as of June 30, 2013 and December 31, 2012:

 

(in millions)        June 30,    
2013
         December 31,    
2012
 

CLO Bank Loans:

     

Aggregate principal amounts outstanding

     $2,019         $2,124   

Fair value

     2,003         2,110   
  

 

 

    

 

 

 

Aggregate unpaid principal balance in excess of/(less than) fair value

     $16         $14   
  

 

 

    

 

 

 

Unpaid principal balance of loans more than 90 days past due

     $4         $4   

Aggregate fair value of loans more than 90 days past due

     -         -   
  

 

 

    

 

 

 

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

     $4         $4   
  

 

 

    

 

 

 

CLO Borrowings:

     

Aggregate principal amounts outstanding

     $2,274         $2,535   

Fair value

     $2,145         $2,402   

At June 30, 2013, the principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2025.

During the three months ended June 30, 2013 and 2012, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $7 million gain and a $22 million gain, respectively, which were offset by a $23 million loss and a $7 million loss, respectively, from the change in fair value of the CLO borrowings.

During the six months ended June 30, 2013 and 2012, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $79 million gain and a $78 million gain, respectively, which were offset by a $64 million loss and a $74 million loss, respectively, from the change in fair value of the CLO borrowings.

The net gains (losses) were recorded in net gain (loss) on consolidated VIEs on the condensed consolidated statements of income.

The change in fair value of the assets and liabilities included interest income and expense, respectively.

6.  Variable Interest Entities

In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debt obligations (“CDOs”)/CLOs 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 generally limited to its equity interests.

 

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6.  Variable Interest Entities (continued)

 

The primary beneficiary (“PB”) of a VIE that is an investment fund that meets the conditions of ASU 2010-10, Amendments to Statement 167 for Certain Investment Funds (“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. In order to determine whether the Company is the PB 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.

The PB of a CDO/CLO or other entity 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 that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the entity.

Consolidated VIEs. Consolidated VIEs included CLOs in which BlackRock 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 CLOs. In addition, BlackRock was the PB of one investment fund because it 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, 2013 and December 31, 2012, the following balances related to VIEs were consolidated on the condensed consolidated statements of financial condition:

 

(in millions)        June 30, 2013              December 31, 2012      

Assets of consolidated VIEs:

     

Cash and cash equivalents

                 $125                     $297   

Bank loans

     2,003         2,110   

Bonds

     95         124   

Other investments and other assets

     62         30   
  

 

 

    

 

 

 

Total bank loans, bonds, other investments and other assets

     2,160         2,264   

Liabilities of consolidated VIEs:

     

Borrowings

     (2,145)         (2,402)   

Other liabilities

     (93)         (103)   

Appropriated retained earnings

     (23)         (29)   

Noncontrolling interests of consolidated VIEs

     (24)         (27)   
  

 

 

    

 

 

 

Total BlackRock net interests in consolidated VIEs

     $—         $—   
  

 

 

    

 

 

 

For the three months ended June 30, 2013 and 2012, the Company recorded a non-operating loss of $23 million and non-operating income of $11 million, respectively, offset by a $23 million net loss attributable to nonredeemable noncontrolling interests and $11 million net income attributable to nonredeemable noncontrolling interests, respectively, on the condensed consolidated statements of income.

 

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6.  Variable Interest Entities (continued)

 

For the six months ended June 30, 2013 and 2012, the Company recorded non-operating income of $4 million and a non-operating loss of $1 million, respectively, offset by $4 million net income attributable to nonredeemable noncontrolling interests and a $1 million net loss attributable to nonredeemable noncontrolling interests, respectively, on the condensed consolidated statements of income.

At June 30, 2013 and December 31, 2012, the weighted-average maturities of the bank loans and bonds attributable to consolidated VIEs were approximately 4.8 and 4.5 years, respectively.

Non-Consolidated VIEs.    At June 30, 2013 and December 31, 2012, the Company’s carrying value of assets and liabilities and its maximum risk of loss related to VIEs for which it was the sponsor or in which it held a variable interest, but for which it was not the PB, were as follows:

 

(in millions)   Variable Interests on the Condensed
Consolidated
Statement of Financial Condition
       
At June 30, 2013   Investments     Advisory
Fee
Receivables
    Other Net
Assets
(Liabilities)
    Maximum
Risk of Loss (1)
 

CDOs/CLOs

  $                 1      $                 1        ($5   $                 19   

Other sponsored investment funds:

       

Collective trusts

    —         169        —         169   

Other

    18        98        (6 )     116   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 19      $ 268        ($11   $ 304   
 

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2012

 

CDOs/CLOs

  $ 1      $ 1        ($5   $ 19   

Other sponsored investment funds:

       

Collective trusts

    —         248        —         248   

Other

    17        61        (3     77   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 18      $ 310        ($8   $ 344   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

At both June 30, 2013 and December 31, 2012, BlackRock’s maximum risk of loss associated with these VIEs primarily related to: (i) advisory fee receivables; (ii) BlackRock’s investments; and (iii) $17 million of credit protection sold by BlackRock to a third party in a synthetic CDO transaction.

The net assets related to the above CDOs/CLOs and other sponsored investment funds, including collective trusts, that the Company does not consolidate were as follows:

CDOs/CLOs

 

(in billions)        June 30, 2013              December 31, 2012      

Assets at fair value

     $3         $4   

Liabilities(1)

     4         5   
  

 

 

    

 

 

 

Net assets

     ($1)         ($1)   
  

 

 

    

 

 

 

 

(1) 

Amounts primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders.

Other sponsored investments funds. Net assets of other sponsored investment funds that are non-consolidated VIEs approximated $1.5 trillion to $1.6 trillion at both June 30, 2013 and December 31, 2012. Net assets included $1.3 trillion of collective trusts at June 30, 2013 and

 

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6.  Variable Interest Entities (continued)

 

December 31, 2012. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts. The net assets of these VIEs primarily are comprised of cash and cash equivalents and investments offset by liabilities primarily comprised of various accruals for the sponsored investment vehicles.

7. Derivatives and Hedging

In May 2011, the Company entered into a designated cash flow hedge consisting of a $750 million interest rate swap maturing in 2013 to hedge future cash flows on the Company’s floating rate notes due in 2013. Interest on this swap was at a fixed rate of 1.03%, payable semi-annually on May 24 and November 24 of each year. During the second quarter 2013, the interest rate swap matured and the floating rate notes were fully repaid.

The Company maintains a program to enter into swaps to hedge against market price and interest rate exposures with respect to certain seed investments in sponsored investment products. At June 30, 2013, the Company had 12 outstanding total return swaps and four outstanding interest rate swaps with an aggregate notional value of approximately $80 million and $68 million, respectively. At December 31, 2012, the Company had 21 outstanding total return swaps with an aggregate notional value of approximately $206 million. The fair value of the outstanding swaps at June 30, 2013 and December 31, 2012 was not material.

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 certain 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, 2013 and December 31, 2012, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $105 million and $79 million, respectively. The fair value of the forward foreign currency exchange contracts at June 30, 2013 and December 31, 2012 was not material to the condensed consolidated statements of financial condition.

The Company entered into a credit default swap, providing credit protection to a counterparty of approximately $17 million, representing the Company’s maximum risk of loss with respect to the provision of credit protection. The Company carries the credit default swap at fair value based on the expected future cash flows under the arrangement. The fair value of the credit default swap was $5 million at both June 30, 2013 and December 31, 2012 and was included in other liabilities on the condensed consolidated statements of financial condition.

Gains (losses) on total return swaps are recorded in non-operating income (expense) on the condensed consolidated statements of income and were $2 million and ($5) million for the three and six months ended June 30, 2013, respectively, and were $9 million and ($3) million for the three and six months ended June 30, 2012, respectively.

Gains (losses) on the interest rate swap, forward foreign currency exchange contracts and credit default swap were not material to the condensed consolidated statements of income for the three and six months ended June 30, 2013 and 2012.

The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the funds’ investment strategies. The fair value of such derivatives at June 30, 2013 and December 31, 2012 was not material. The change in fair value of such derivatives, which is recorded in non-operating income (expense), was not material for the three and six months ended June 30, 2013 and 2012.

 

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8.  Goodwill

Goodwill activity during the six months ended June 30, 2013 was as follows:

 

(in millions)       

December 31, 2012

                 $12,910   

Goodwill adjustment related to Quellos and other (1)

     (11)   
  

 

 

 

June 30, 2013

     $12,899   
  

 

 

 

 

 

(1) 

The decrease in goodwill during the six months ended June 30, 2013 primarily resulted from a decline related to tax benefits realized from tax-deductible goodwill in excess of book goodwill from the acquisition of the fund-of-funds business of Quellos Group, LLC in October 2007 (the “Quellos Transaction”). 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 from the Quellos Transaction. The balance of the Quellos tax-deductible goodwill in excess of book goodwill was approximately $308 million and $324 million at June 30, 2013 and December 31, 2012, respectively.

9. Intangible Assets

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

 

(in millions)    Indefinite-lived
 intangible assets 
     Finite-lived
 intangible assets 
     Total
 intangible assets 
 

December 31, 2012

                 $16,760                     $642                     $17,402   

Amortization expense

             (80)         (80)   
  

 

 

    

 

 

    

 

 

 

June 30, 2013

     $16,760         $562         $17,322   
  

 

 

    

 

 

    

 

 

 

10. Other Assets

At March 31, 2013, BlackRock held an approximately one-third economic equity interest in Private National Mortgage Acceptance Company, LLC (“PNMAC”), which is accounted for as an equity method investment and is included in other assets on the condensed consolidated statements of financial condition. On May 8, 2013, PennyMac became the sole managing member of PNMAC in connection with an initial public offering of PennyMac (the “PennyMac IPO”). As a result of the PennyMac IPO, BlackRock recorded a non-cash, non-operating pre-tax gain of $39 million related to the carrying value of its equity method investment.

Subsequent to the PennyMac IPO, the Company contributed 6.1 million units of its PennyMac investment to a new donor advised fund (the “Charitable Contribution”). The fair value of the Charitable Contribution was $124 million and is included in general and administration expenses on the condensed consolidated statements of income. In connection with the Charitable Contribution, the Company also recorded a non-cash, non-operating pre-tax gain of $80 million related to the contributed investment and a tax benefit of approximately $57 million.

The carrying value and fair value of the Company’s remaining interest (approximately 20% or 16 million units) in PennyMac was approximately $111 million and $331 million, respectively, at June 30, 2013.

11.  Borrowings

Short-Term Borrowings

2013 Revolving Credit Facility.    In March 2013, the Company’s credit facility was amended to extend the maturity date by one year to March 2018 and the amount of the aggregate commitment

 

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11.  Borrowings (continued)

 

Short-Term Borrowings (continued)

 

was increased to $3.990 billion (the “2013 credit facility”). The 2013 credit facility permits the Company to request up to an additional $1.0 billion of borrowing capacity, subject to lender credit approval, increasing the overall size of the 2013 credit facility to an aggregate principal amount not to exceed $4.990 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 2013 credit 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 unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at June 30, 2013. At June 30, 2013, the Company had no amount outstanding under the 2013 credit facility.

Commercial Paper Program.    In April 2013, BlackRock increased the maximum aggregate amount for which the Company could issue unsecured commercial paper notes (the “CP Notes”) on a private-placement basis up to a maximum aggregate amount outstanding at any time of $3.990 billion. The commercial paper program is currently supported by the 2013 credit facility.

At June 30, 2013, BlackRock had no CP Notes outstanding.

Long-Term Borrowings

The carrying value and fair value of long-term borrowings determined using market prices at the end of June 2013 included the following:

 

(in millions)     Maturity Amount      

 Unamortized 

Discount

     Carrying Value       Fair Value   
 

 

 

 

3.50% Notes due 2014

    $1,000        $ —        $1,000        $1,037   

1.375% Notes due 2015

    750               750        760   

6.25% Notes due 2017

    700        (2)        698        824   

5.00% Notes due 2019

    1,000        (2)        998        1,139   

4.25% Notes due 2021

    750        (4)        746        797   

3.375% Notes due 2022