Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended September 30, 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 October 31, 2013, there were 167,090,120 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      43   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      80   
Item 4.    Controls and Procedures      83   

PART II

OTHER INFORMATION

 

Item 1.    Legal Proceedings      84   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      84   
Item 6.    Exhibits      85   

 

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)

 

         September 30,    
2013
    December 31,
2012
 

Assets

    

Cash and cash equivalents

     $    3,987        $    4,606   

Accounts receivable

     4,311        2,250   

Investments

     1,878        1,750   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     93        297   

Bank loans, other investments and other assets

     2,107        2,264   

Separate account assets

     146,646        134,768   

Separate account collateral held under securities lending agreements

     21,962        23,021   

Property and equipment (net of accumulated depreciation of $649 and $572 at September 30, 2013 and December 31, 2012, respectively)

     523        557   

Intangible assets (net of accumulated amortization of $1,019 and $899 at September 30, 2013 and December 31, 2012, respectively)

     17,513        17,402   

Goodwill

     12,938        12,910   

Other assets

     759        626   
  

 

 

   

 

 

 

Total assets

                     $212,717                        $200,451   
  

 

 

   

 

 

 

Liabilities

    

Accrued compensation and benefits

     $    1,322        $    1,547   

Accounts payable and accrued liabilities

     3,322        1,055   

Short-term borrowings

     -        100   

Liabilities of consolidated variable interest entities:

    

Borrowings

     2,068        2,402   

Other liabilities

     88        103   

Long-term borrowings

     4,938        5,687   

Separate account liabilities

     146,646        134,768   

Separate account collateral liabilities under securities lending agreements

     21,962        23,021   

Deferred income tax liabilities

     5,237        5,293   

Other liabilities

     948        858   
  

 

 

   

 

 

 

Total liabilities

     186,531        174,834   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Temporary equity

    

Redeemable noncontrolling interests

     41        32   

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     2        2   

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

    

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

    

Shares outstanding: 167,277,854 and 168,875,304 at September 30, 2013 and December 31, 2012, respectively

    

Preferred stock (Note 16)

     -        -   

Additional paid-in capital

     19,391        19,419   

Retained earnings

     7,653        6,444   

Appropriated retained earnings

     25        29   

Accumulated other comprehensive loss

     (79     (59

Treasury stock, common, at cost (3,974,331 and 2,376,881 shares held at September 30, 2013 and December 31, 2012, respectively)

     (993     (432
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     25,999        25,403   

Nonredeemable noncontrolling interests

     127        155   

Nonredeemable noncontrolling interests of consolidated variable interest entities

     19        27   
  

 

 

   

 

 

 

Total permanent equity

     26,145        25,585   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

     $212,717        $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 share data)

(unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2013     2012     2013     2012  

Revenue

       

Investment advisory, administration fees and securities lending revenue

       

Related parties

    $1,478        $1,319        $4,403        $3,900   

Other third parties

    675        705        2,056        2,091   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment advisory, administration fees and securities lending revenue

    2,153        2,024        6,459        5,991   

Investment advisory performance fees

    96        103        293        224   

BlackRock Solutions and advisory

    156        128        420        382   

Distribution fees

    19        19        54        58   

Other revenue

    48        46        177        143   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,472        2,320        7,403        6,798   

Expenses

       

Employee compensation and benefits

    866        828        2,635        2,439   

Distribution and servicing costs

    85        94        266        282   

Amortization of deferred sales commissions

    14        13        38        43   

Direct fund expenses

    167        144        490        440   

General and administration

    334        327        1,130        958   

Amortization of intangible assets

    40        39        120        117   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,506        1,445        4,679        4,279   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    966        875        2,724        2,519   

Nonoperating income (expense)

       

Net gain (loss) on investments

    32        75        235        143   

Net gain (loss) on consolidated variable interest entities

    (6     2        (2     1   

Interest and dividend income

    8        10        18        27   

Interest expense

    (52     (57     (159     (158
 

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense)

    (18     30        92        13   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    948        905        2,816        2,532   

Income tax expense

    219        250        715        742   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    729        655        2,101        1,790   

Less:

       

Net income (loss) attributable to redeemable noncontrolling interests

    -        3        (1     7   

Net income (loss) attributable to nonredeemable noncontrolling interests

    (1     10        11        15   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

    $730        $642        $2,091        $1,768   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Basic

    $4.30        $3.72        $12.26        $10.02   

Diluted

    $4.21        $3.65        $12.02        $9.87   

Cash dividends declared and paid per share

    $1.68        $1.50        $5.04        $4.50   

Weighted-average common shares outstanding:

       

Basic

    169,811,633        172,359,141        170,581,930        176,116,975   

Diluted

    173,371,508        175,450,532        174,012,876        178,956,699   

 

 

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    
September 30,
        Nine Months Ended    
September 30,
 
     2013     2012     2013     2012  

Net income

     $729        $655        $2,101        $1,790   

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)

     2        10        3        12   

Less: reclassification adjustment included in net income(2)

     1        (4     10        (5
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     1        14        (7     17   

Benefit plans, net of tax(3)

     -        -        -        (1

Foreign currency translation adjustments

     118        54        (13     53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     119        68        (20     69   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     848        723        2,081        1,859   

Less: Comprehensive income (loss) attributable to noncontrolling interests

     (1     13        10        22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to BlackRock, Inc.

     $849        $710        $2,071        $1,837   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1) 

The tax benefit (expense) was not material for the three and nine months ended September 30, 2013. The tax benefit (expense) was ($7) million for the three months ended September 30, 2012 and ($8) million for the nine months ended September 30, 2012.

(2) 

The tax benefit (expense) was not material for the three and nine months ended September 30, 2013 and 2012.

(3) 

The tax benefit (expense) for the nine months ended September 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
Noncontrolling
Interests /
Temporary
Equity
 

December 31, 2012

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

Net income

    -          2,091       -          -          -          2,091         13          (2)         2,102         (1)    

Allocation of gains (losses) of consolidated collateralized loan obligations

    -          -          (4)         -          -          (4)         -          4         -          -     

Dividends paid

    -          (882)       -          -          -          (882)         -          -          (882)         -     

Stock-based compensation

    339         -          -          -          1         340         -          -          340         -     

Issuance of common shares related to employee stock transactions

    (402)         -          -          -          422         20         -          -          20         -     

Employee tax benefit withholdings related to employee stock transactions

    -          -          -          -          (234)         (234)         -          -          (234)         -     

Shares repurchased

    -          -          -          -          (750)         (750)         -          -          (750)         -     

Net tax benefit (shortfall) from stock-based compensation

    35         -          -          -          -          35         -          -          35         -     

Subscriptions (redemptions/distributions)-noncontrolling interest holders

    -          -          -          -          -          -          (41)         124         83         104    

Net consolidations (deconsolidations) of sponsored investment funds

    -          -          -          -          -          -          -          (134)         (134)         (94)    

Other comprehensive income (loss)

    -          -          -          (20)         -          (20)         -          -          (20)         -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

      $19,393           $7,653             $25             ($79)             ($993)             $25,999             $127             $19             $26,145             $41    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include $2 million of common stock at both September 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
BlackRock
Stockholders’
Equity
    Nonredeemable
Noncontrolling
Interests
    Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-
controlling
Interests /
Temporary
Equity (2)
 

December 31, 2011

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

Net income

    -          1,768          -          -          -          -          1,768          14          1          1,783          7     

Consolidation of a collateralized loan obligation (3)

    -          -          (13)          -          -          -          (13)          -          -          (13)          -     

Allocation of losses of consolidated collateralized loan obligations

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

Dividends paid

    -          (804)          -          -          -          -          (804)          -          -          (804)          -     

Stock-based compensation

    344          -          -          -          -          -          344          -          -          344          -     

Merrill Lynch cash capital contribution

    7          -          -          -          -          -          7          -          -          7          -     

Issuance of common shares related to employee stock transactions

    (366)          -          -          -          -          419          53          -          -          53          -     

Employee tax benefit withholdings related to employee stock transactions

    -          -          -          -          -          (141)          (141)          -          -          (141)          -     

Shares repurchased

    (1,000)          -          -          -          -          (334)          (1,334)          -          -          (1,334)          -     

Net tax benefit (shortfall) from stock-based compensation

    63          -          -          -          -          -          63          -          -          63          -     

Subscriptions (redemptions/distributions)-noncontrolling interest holders

    -          -          -          -          -          -          -          (20)          (8)          (28)          221     

Net consolidations (deconsolidations) of sponsored investment funds

    -          -          -          -          -          -          -          (8)          -          (8)          (272)     

Other comprehensive income (loss)

    -          -          -          69          -          -          69          -          -          69          -     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

(2)

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

(3)

Consolidated during the three months ended September 30, 2012.

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)

 

         Nine Months Ended    
    September 30,    
 
     2013     2012  

Cash flows from operating activities

    

Net income

     $2,101        $1,790   

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

    

Depreciation and amortization

     215        219   

Amortization of deferred sales commissions

     38        43   

Stock-based compensation

     340        344   

Deferred income tax expense (benefit)

     (44     (42

Gain related to PennyMac initial public offering

     (39     -   

Gain related to the charitable contribution

     (80     -   

Charitable contribution

     124        -   

Net (gains) losses on nontrading investments

     (46     (32

Purchases of investments within consolidated sponsored investment funds

     (45     (83

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

     112        48   

Assets and liabilities of consolidated VIEs:

    

Change in cash and cash equivalents

     204        (32

Net (gains) losses within consolidated VIEs

     2        (1

Net (purchases) proceeds within consolidated VIEs

     15        233   

(Earnings) losses from equity method investees

     (110     (124

Distributions of earnings from equity method investees

     39        29   

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,061     (493

Deferred sales commissions

     (42     (31

Investments, trading

     (205     (197

Other assets

     (97     (173

Accrued compensation and benefits

     (225     (199

Accounts payable and accrued liabilities

     2,264        489   

Other liabilities

     16        98   
  

 

 

   

 

 

 

Cash flows from operating activities

     2,476        1,886   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (188     (397

Proceeds from sales and maturities of investments

     225        391   

Distributions of capital from equity method investees

     51        51   

Net consolidations (deconsolidations) of sponsored investment funds

     (63     (208

Acquisitions, net of cash acquired

     (240     (267

Purchases of property and equipment

     (60     (121
  

 

 

   

 

 

 

Cash flows from investing activities

     (275     (551
  

 

 

   

 

 

 

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

     (882     (804

Proceeds from stock options exercised

     15        47   

Proceeds from issuance of common stock

     5        6   

Repurchases of common stock

     (984     (1,475

Merrill Lynch cash capital contribution

     -        7   

Net proceeds from (repayments of) borrowings by consolidated VIEs

     (343     (203

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

     187        193   

Excess tax benefit from stock-based compensation

     40        73   
  

 

 

   

 

 

 

Cash flows from financing activities

     (2,812     (661
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (8     43   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (619     717   

Cash and cash equivalents, beginning of period

     4,606        3,506   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     $3,987        $4,223   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest

     $125        $116   

Interest on borrowings of consolidated VIEs

     $82        $52   

Income taxes

     $746        $837   

Supplemental schedule of noncash investing and financing transactions:

    

Issuance of common stock

     $402        $366   

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

     ($228     ($280

Increase (decrease) in borrowings due to consolidation of VIEs

     $-        $406   

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.

At September 30, 2013, The PNC Financial Services Group, Inc. (“PNC”) held 20.9% of the Company’s voting common stock and 21.9% of the Company’s capital stock, which includes outstanding common and nonvoting 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 September 30, 2013 and for the three and nine months ended September 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 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 in fair values 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 nonbinding 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 nonbinding 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 nonbinding 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.

 

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2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

Fair Value Option.    ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies an irrevocable election to use fair value as the initial and subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument-by-instrument basis, 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 account 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)

 

Separate Account Collateral Assets Held and Liabilities Under Securities Lending Agreements.    The Company facilitates securities lending arrangements whereby securities held by separate accounts 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 noncash 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 nine months ended September 30, 2013 and 2012, the Company had not re-sold or re-pledged any of the collateral received under these arrangements. At September 30, 2013 and December 31, 2012, the fair value of loaned securities held by separate account assets was approximately $20.2 billion and $21.0 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $22.0 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 Nine Months Ended September 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 created 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)

 

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. The adoption of ASU 2013-10 in the third quarter 2013 did not have a material impact on the condensed consolidated financial statements.

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. ASU 2013-08 is effective for the Company on January 1, 2014. The Company does not believe the adoption of ASU 2013-08 will have a material impact on the condensed consolidated financial statements.

Presentation of an Unrecognized Tax Benefit.    In July 2013, the FASB issued ASU 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)   September 30,
2013
   December 31,
2012

Available-for-sale investments

    $168           $158     

Held-to-maturity investments

    57           112     

Trading investments:

        

Consolidated sponsored investment funds

    381           123     

Other equity and debt securities

    67           94     

Deferred compensation plan mutual funds

    57           53     
 

 

 

  

 

 

Total trading investments

    505           270     

Other investments:

        

Consolidated sponsored investment funds

    314           401     

Equity method investments

    564           595     

Deferred compensation plan hedge fund equity method investments

    11           9     

Cost method investments(1)

    122           120     

Carried interest

    137           85     
 

 

 

  

 

 

Total other investments

    1,148           1,210     
 

 

 

  

 

 

Total investments

                $1,878                       $1,750     
 

 

 

  

 

 

 

  (1) 

Amounts primarily include Federal Reserve Bank Stock.

At September 30, 2013, the Company consolidated $695 million of investments held by consolidated sponsored investment funds (excluding variable interest entities (“VIEs”)) of which $381 million and $314 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 (excluding 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
 
At September 30, 2013   Cost   Gains   Losses  

Equity securities of sponsored investment funds

    $163          $6          ($4)          $165   

Other securities

    1          2          -          3   
 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

    $164          $8          ($4)          $168   
 

 

 

 

 

 

 

 

 

 

 

 

 
At December 31, 2012                                    

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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Table of Contents

3.  Investments (continued)

 

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $57 million and $112 million at September 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 September 30, 2013, $43 million of these investments would mature in one year or less and $14 million would mature after 10 years.

Trading Investments

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

 

(in millions)        September 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

     190         194         154         162   

Debt securities/fixed income mutual funds:

           

Corporate debt

     126         126         44         44   

Government debt

     132         128         11         11   
  

 

 

    

 

 

 

Total trading investments

             $499                 $505                 $255                 $270   
  

 

 

    

 

 

 

At September 30, 2013, trading investments included $187 million of equity securities and $194 million of debt securities held by consolidated sponsored investment funds, $57 million of deferred compensation plan mutual fund investments and $67 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)        September 30, 2013              December 31, 2012      
     Cost     

Carrying

Value

     Cost     

Carrying

Value

 
  

 

 

    

 

 

 

Other investments:

           

Consolidated sponsored investment funds

     $303         $314         $378         $401   

Equity method

     480         564         541         595   

Deferred compensation plan hedge fund

equity method investments

     9         11         15         9   

Cost method investments:

           

Federal Reserve Bank stock

     93         93         89         89   

Other

     17         29         31         31   
  

 

 

    

 

 

 

Total cost method investments

     110         122         120         120   

Carried interest

     -         137         -         85   
  

 

 

    

 

 

 

Total other investments

             $902                 $1,148                 $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 nonmarketable securities, including Federal Reserve Bank stock, which is held for regulatory purposes and is restricted from sale. At September 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)    September 30,
2013
     December 31,
2012
 

Cash and cash equivalents

     $105         $133   

Investments:

     

Trading investments

     381         123   

Other investments

     314         401   

Other assets

     13         25   

Other liabilities

     (33)         (65)   

Noncontrolling interests

     (168)         (187)   
  

 

 

    

 

 

 

BlackRock’s net interests in consolidated sponsored investment funds

                       $612                           $430   
  

 

 

    

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds of $612 million and $430 million at September 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 nonoperating income (expense) and partially offset in net income (loss) attributable to noncontrolling interests for the portion not attributable to BlackRock.

In addition, at September 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 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 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

Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value

 

September 30, 2013

(in millions)

 

Quoted

Prices in

Active

Markets for
Identical
Assets

(Level 1)

    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Other Assets
Not Held at Fair
Value(1)
   

September 30,

2013

 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities (funds and CDOs)

  $ 165      $ -      $ 1      $ -      $ 166   

Debt securities

    -        2        -        -        2   
 

 

 

 

Total available-for-sale

    165        2        1        -        168   

Held-to-maturity debt securities

    -        -        -        57        57   

Trading:

         

Deferred compensation plan mutual funds

    57        -        -        -        57   

Equity/Multi-asset mutual funds

    194        -        -        -        194   

Debt securities / fixed income mutual funds

    61        193        -        -        254   
 

 

 

 

Total trading

    312        193        -        -        505   

Other investments:

         

Consolidated sponsored investment funds:

         

Hedge funds / Funds of funds

    1        21        45        -        67   

Private / public equity(2)

    5        8        234        -        247   
 

 

 

 

Total consolidated sponsored investment funds

    6        29        279        -        314   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        67        145        55        267   

Private equity investments

    -        -        98        -        98   

Real estate funds

    -        20        103        7        130   

Fixed income mutual funds

    63        -        -        -        63   

Equity/Multi-asset, alternative mutual funds

    6        -        -        -        6   
 

 

 

 

Total equity method

    69        87        346        62        564   

Deferred compensation plan hedge fund equity method investments

    -        11        -        -        11   

Cost method investments

    -        -        -        122        122   

Carried interest

    -        -        -        137        137   
 

 

 

 

Total investments

    552        322        626        378        1,878   
 

 

 

 

Separate account assets

    106,085        39,675        -        886        146,646   

Separate account collateral held under securities lending agreements:

         

Equity securities

    19,851        -        -        -        19,851   

Debt securities

    -        2,111        -        -        2,111   
 

 

 

 

Total separate account collateral held under securities lending agreements

    19,851        2,111        -        -        21,962   

Other assets(3)

    -        12        -        -        12   

Assets of consolidated VIEs:

         

Bank loans and other assets

    -        1,867        97        20        1,984   

Bonds

    -        64        35        -        99   

Private / public equity(4)

    -        7        17        -        24   
 

 

 

 

Total assets of consolidated VIEs

    -        1,938        149        20        2,107   
 

 

 

 

Total

  $ 126,488      $ 44,058      $ 775      $ 1,284      $ 172,605   
 

 

 

 

Liabilities:

         

Borrowings of consolidated VIEs

  $ -      $ -      $ 2,068      $ -      $ 2,068   

Separate account collateral liabilities under securities lending agreements

    19,851        2,111        -        -        21,962   

Other liabilities(5)

    19        4        33        -        56   
 

 

 

 

Total

  $ 19,870      $ 2,115      $ 2,101      $ -      $ 24,086   
 

 

 

 

 

  (1) 

Amounts are 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 include $202 million and $32 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

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

  (4) 

Level 3 amounts include $15 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by a private equity fund.

  (5) 

Amounts include a credit default swap (see Note 7, Derivatives and Hedging, for more information), securities sold short within consolidated sponsored investment funds and a contingent liability related to the acquisition of Credit Suisse’s ETF franchise.

 

16


Table of Contents

5.  Fair Value Disclosures (continued)

 

Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value

 

                               

December 31, 2012

(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   
 

 

 

 

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(5)

    15        5        -        -        20   
 

 

 

 

Total

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

 

 

 

 

  (1) 

Amounts are 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 include $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 includes company-owned and split-dollar life insurance policies.

  (4) 

Level 3 amounts include $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.

  (5) 

Amounts include a credit default swap (see Note 7, Derivatives and Hedging, for more information) and securities sold short within consolidated sponsored investment funds.

 

17


Table of Contents

5.  Fair Value Disclosures (continued)

 

Level 3 Assets.  Level 3 investments of $626 million and $679 million at September 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 and third-party fund managers.

Direct investments in private equity companies held by private equity funds totaled $34 million and $56 million at September 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.

Level 3 assets recorded within separate account assets include single-broker nonbinding 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.

 

18


Table of Contents

5.  Fair Value Disclosures (continued)

 

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

 

(in millions)   June 30,
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
    September 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

    47        2        -        (2     (2     -        -        45        -   

Private equity

    249        10        -        (23     -        -        (2     234        7   

Equity method:

                 

Hedge funds / Funds of hedge funds

    157        1        1        (1     (13     -        -        145        1   

Private equity investments

    105        4        1        (10     (2     -        -        98        4   

Real estate funds

    97        6        2        -        (2     -        -        103        6   
 

 

 

   

 

 

 

Total Level 3 investments

    656        23        4        (36     (19     -        (2     626        18   
 

 

 

   

 

 

 

Assets of consolidated VIEs:

                 

Bank loans

    93        -        18        (8     -        40        (46     97     

Bonds

    35        1        -        (1     -        -        -        35     

Private equity

    19        -        -        (2     -        -        -        17     
 

 

 

   

Total Level 3 assets of consolidated VIEs

    147        1        18        (11     -        40        (46     149        n/a (3) 
 

 

 

   

Total Level 3 assets

    $803        $24        $22        ($47     ($19     $40        ($48     $775     
 

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

            $2,145        ($5     $-        $-        ($82     $-        $-        $2,068        n/a (3) 

Other liabilities

    -        -        -        -        33        -        -        33     
 

 

 

   

Total Level 3 liabilities

    $2,145        ($5     $-        $-        ($49     $-        $-        $2,101     
 

 

 

   

 

  n/a – not applicable
  (1) 

Amounts primarily include distributions from equity method investees, repayments of borrowings of consolidated VIEs and a contingent liability related to the acquisition of Credit Suisse’s ETF franchise.

  (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.

 

19


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 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
    September 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         8        12         (11     (30     -         (7     45         6   

Private equity

     266         26        12         (62     -        -         (8     234         21   

Equity method:

                      

Hedge funds / Funds of hedge funds

     161         10        2         (1     (27     -         -        145         10   

Private equity investments

     90         14        10         (10     (6     -         -        98         14   

Real estate funds

     88         14        5         -        (4     -         -        103         14   
  

 

 

    

 

 

 

Total Level 3 investments

     679         72        41         (84     (67     -         (15     626         65   
  

 

 

    

 

 

 

Separate account assets

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

Assets of consolidated VIEs:

                      

Bank loans

     106         (1     91         (48     -        71         (122     97      

Bonds

     46         -        4         (15     -        -         -        35      

Private equity

     22         1        -         (6     -        -         -        17      

Fund of hedge funds

     -         -        134         -        (134     -         -        -      
  

 

 

    

Total Level 3 assets of consolidated VIEs

     174         -        229         (69     (134     71         (122     149         n/a (4) 
  

 

 

    

Total Level 3 assets

     $855         $72        $270         ($155     ($201     $71         ($137     $775      
  

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

             $2,402         ($9     $-         $-        ($343     $-         $-        $2,068         n/a (4) 

Other liabilities

     -         -        -         -        33        -         -        33      
  

 

 

    

Total Level 3 liabilities

     $2,402         ($9     $-         $-        ($310     $-         $-        $2,101      
  

 

 

    

 

  n/a – not applicable
  (1) 

Amounts primarily include distributions from equity method investees, repayments of borrowings of consolidated VIEs, elimination of investment related to a deconsolidation of a consolidated VIE, a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage and a contingent liability related to the acquisition of Credit Suisse’s ETF franchise.

  (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.

 

20


Table of Contents

5.  Fair Value Disclosures (continued)

 

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

 

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

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (CDOs)

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

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    46        8        3        (2     -        -        -        55        8   

Private equity

    298        22        -        (14     (8     -        -        298        20   

Equity method:

                 

Hedge funds / Funds of hedge funds

    187        14        -        -        (21     -        -        180        14   

Private equity investments

    88        1        1        -        -        -        -        90        2   

Real estate funds

    101        6        6        (7     (3     -        -        103        4   
 

 

 

   

 

 

 

Total Level 3 investments

    721        51        10        (23     (32     -        -        727        48   
 

 

 

   

 

 

 

Separate account assets

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

Assets of consolidated VIEs:

                 

Bank loans

    85        2        7        (24     7        36        (24     89     

Bonds

    44        1        -        -        -        -        -        45     

Private equity

    25        2        2        (3     -        -        -        26     
 

 

 

   

Total Level 3 assets of consolidated VIEs

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

 

 

   

Total Level 3 assets

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

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

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

 

  n/a – not applicable
  (1) 

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

  (2) 

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

  (3) 

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

 

21


Table of Contents

5.  Fair Value Disclosures (continued)

 

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

 

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

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (CDOs)

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

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    22        4        30        (2     (2     3        -        55        4   

Private equity

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

Equity method:

                 

Hedge funds / Funds of hedge funds

    193        33        -        -        (46     -        -        180        33   

Private equity investments

    85        7        4        -        (6     -        -        90        8   

Real estate funds

    88        8        19        (7     (5     -        -        103        6   
 

 

 

   

 

 

 

Total Level 3 investments

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

 

 

   

 

 

 

Separate account assets

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

Assets of consolidated VIEs:

                 

Bank loans

    83        2        25        (31     7        89        (86     89     

Bonds

    40        3        2        -        -        -        -        45     

Private equity

    27        4        2        (7     -        -        -        26     
 

 

 

   

Total Level 3 assets of consolidated VIEs

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

 

 

   

Total Level 3 assets

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

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

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

 

  n/a – not applicable
  (1) 

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

  (2) 

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

  (3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the 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 nonoperating 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 three and nine months ended September 30, 2012, there were $34 million and $48 million, respectively, of transfers of equity securities into Level 3 from Level 1, primarily due to market inputs no longer being considered observable.

Assets of Consolidated VIEs.    During the three and nine months ended September 30, 2013, there were $46 million and $122 million, respectively, of transfers out of Level 3 to Level 2 related to bank loans. In addition, during the three and nine months ended September 30, 2013, there were $40 million and $71 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 nine months ended September 30, 2012, there were $24 million and $86 million, respectively, of transfers out of Level 3 into Level 2 related to bank loans. In addition, during the three and nine months ended September 30, 2012, there were $36 million and $89 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.

Consolidated Sponsored Investment Funds.    During the nine months ended September 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 valued at a discount due to restrictions on sale.

Other Significant Settlements.    During the three and nine months ended September 30, 2013, there were $17 million and $37 million, respectively, of distributions from equity method investees categorized in Level 3.

During the nine months ended September 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.

In addition, during the nine months ended September 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 BlackRock’s ownership percentage.

During the three and nine months ended September 30, 2012, there were $24 million and $57 million, respectively, of distributions from equity method investees categorized in Level 3.

 

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5.  Fair Value Disclosures (continued)

 

In addition, during the three and nine months ended September 30, 2012, other settlements included $406 million of borrowings related to the consolidation of one additional CLO.

Disclosures of Fair Value for Financial Instruments Not Held at Fair Value. At September 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:

 

    September 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

  $ 3,987      $ 3,987      $ 4,606      $ 4,606        Level 1 (1) 

Accounts receivable

    4,311        4,311        2,250        2,250        Level 1 (2) 

Cash and cash equivalents of consolidated VIEs

    93        93        297        297        Level 1 (1) 

Financial Liabilities:

         

Accounts payable and accrued liabilities

    3,322        3,322        1,055        1,055        Level 1 (2) 

Short-term borrowings

    -        -        100        100        Level 1 (2) 

Long-term borrowings

    4,938        5,310        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 September 30, 2013 and December 31, 2012, approximately $76 million and $98 million, respectively, of money market funds were recorded within cash and cash equivalents on the condensed consolidated statements of financial condition. Money market funds are valued based on quoted market prices, or $1.00 per share, which generally is the NAV of the fund. At September 30, 2013 and December 31, 2012, approximately $105 million and $133 million, respectively, related to cash and cash equivalents held by consolidated sponsored investment funds.

 

  (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 September 2013 and December 2012, respectively. See Note 11, Borrowings, for further information on the September 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. 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 equivalent).

September 30, 2013

 

(in millions)   Ref     Fair Value     Total Unfunded
Commitments
   

Redemption
Frequency

  Redemption
Notice Period

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (a     $202        $25      n/r   n/r

Other funds of hedge funds

    (b     57        -     

Monthly (26%),

Quarterly (2%),

n/r (72%)

  2 – 90 days

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (c     212        92     

Monthly (2%), Quarterly (32%)

n/r (66%)

  15 – 90 days

Private equity funds

    (d     98        57      n/r   n/r

Real estate funds

    (e     123        11     

Quarterly (16%)

n/r (84%)

  60 days

Deferred compensation plan hedge fund investments

    (f     11        -      Monthly (27%), Quarterly (73%)   60 – 90 days

Consolidated VIEs:

         

Private equity fund

    (g     15        1      n/r   n/r
   

 

 

   

 

 

     

Total

      $718        $186       
   

 

 

   

 

 

     

 

  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

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (a     $212        $32      n/r   n/r

Other funds of hedge funds

    (b     98        -     

Monthly (22%)

Quarterly (11%)

n/r (67%)

  1 – 90 days

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (c     222        42     

Monthly (2%)

Quarterly (28%)

n/r (70%)

  15 – 90 days

Private equity funds

    (d     90        135      n/r   n/r

Real estate funds

    (e     107        15     

Quarterly (18%)

n/r (82%)

  60 days

Deferred compensation plan hedge fund investments

    (f     9        -     

Monthly (33%)

Quarterly (67%)

  60 – 90 days

Consolidated VIE:

         

Private equity funds

    (g     20        1      n/r   n/r

Trading:

         

Equity

    (h     3        -      Daily (100%)   None
   

 

 

   

 

 

     

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 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 September 30, 2013 and December 31, 2012. The total remaining unfunded commitments to other third-party funds were $25 million and $32 million at September 30, 2013 and December 31, 2012, respectively. The Company was contractually obligated to fund $30 million at both September 30, 2013 and December 31, 2012 to the consolidated funds.

 

  (b) 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 September 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)

 

  (c) 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 September 30, 2013 and December 31, 2012, respectively.

 

  (d) This category includes several private equity funds that initially invest in nonmarketable 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 September 30, 2013 and December 31, 2012.

 

  (e) 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 September 30, 2013 and eight years at December 31, 2012.

 

  (f) 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 redeemed upon settlement of certain deferred compensation liabilities.

 

  (g) 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 September 30, 2013 and three years at December 31, 2012. Total remaining unfunded commitments to other third-party funds were $1 million at both September 30, 2013 and December 31, 2012, which commitments are required to be funded by capital contributions from noncontrolling interest holders.

 

  (h) 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.

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 at September 30, 2013 and December 31, 2012:

 

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

CLO Bank Loans:

     

Aggregate principal amounts outstanding

     $1,976         $2,124   

Fair value

     1,964         2,110   
  

 

 

    

 

 

 

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

     $12         $14   
  

 

 

    

 

 

 

Unpaid principal balance of loans more than 90 days past due

     $12         $4   

Aggregate fair value of loans more than 90 days past due

     7         -   
  

 

 

    

 

 

 

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

     $5         $4   
  

 

 

    

 

 

 

CLO Borrowings:

     

Aggregate principal amounts outstanding

     $2,201         $2,535   

Fair value

     $2,068         $2,402   

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

During the three months ended September 30, 2013 and 2012, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $25 million and a $45 million gain, respectively, which were offset by a $28 million and a $44 million loss, respectively, from the change in fair value of the CLO borrowings.

During the nine months ended September 30, 2013 and 2012, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $104 million and a $123 million gain, respectively, which were offset by a $92 million and a $118 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 September 30, 2013 and December 31, 2012, the following balances related to VIEs were consolidated on the condensed consolidated statements of financial condition:

 

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

Assets of consolidated VIEs:

     

Cash and cash equivalents

                 $93                     $297   

Bank loans

     1,964         2,110   

Bonds

     99         124   

Other investments and other assets

     44         30   
  

 

 

    

 

 

 

Total bank loans, bonds, other investments and other assets

     2,107         2,264   

Liabilities of consolidated VIEs:

     

Borrowings

     (2,068)         (2,402)   

Other liabilities

     (88)         (103)   

Appropriated retained earnings

     (25)         (29)   

Noncontrolling interests of consolidated VIEs

     (19)         (27)   
  

 

 

    

 

 

 

Total BlackRock net interests in consolidated VIEs

     $-         $-   
  

 

 

    

 

 

 

For the three months ended September 30, 2013 and 2012, the Company recorded a nonoperating loss of $6 million and a nonoperating gain of $2 million, respectively, offset by a $6 million net loss attributable to nonredeemable noncontrolling interests and a $2 million net gain attributable to nonredeemable noncontrolling interests, respectively, on the condensed consolidated statements of income.

 

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6.  Variable Interest Entities (continued)

 

For the nine months ended September 30, 2013 and 2012, the Company recorded a nonoperating loss of $2 million and a nonoperating gain of $1 million, respectively, offset by a $2 million net loss attributable to nonredeemable noncontrolling interests and a $1 million net gain attributable to nonredeemable noncontrolling interests, respectively, on the condensed consolidated statements of income.

At September 30, 2013 and December 31, 2012, the weighted-average maturities of the bank loans and bonds attributable to consolidated VIEs were approximately 4.7 and 4.5 years, respectively.

Non-Consolidated VIEs.    At September 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, was as follows:

 

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

CDOs/CLOs

    $1        $1        ($4)        $19   

Other sponsored investment funds:

       

Collective trusts

    -       166        -       166   

Other

    18        130        (5)        148   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $19        $297        ($9)        $333   
 

 

 

   

 

 

   

 

 

   

 

 

 

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 September 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)        September 30, 2013              December 31, 2012      

Assets at fair value

     $3         $4   

Liabilities(1)

     5         5   
  

 

 

    

 

 

 

Net assets

     ($2)         ($1)   
  

 

 

    

 

 

 

 

(1) 

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

 

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6.  Variable Interest Entities (continued)

 

Other sponsored investments funds. Net assets of other sponsored investment funds that are nonconsolidated VIEs approximated $1.6 trillion to $1.7 trillion at September 30, 2013 and $1.5 trillion to $1.6 trillion at December 31, 2012. Net assets included $1.4 trillion of collective trusts at September 30, 2013 and $1.3 trillion of collective trusts at 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

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 September 30, 2013, the Company had outstanding total return swaps and outstanding interest rate swaps with an aggregate notional value of approximately $113 million and $68 million, respectively. At December 31, 2012, the Company had outstanding total return swaps with an aggregate notional value of approximately $206 million.

The Company executes forward foreign currency exchange contracts to mitigate the risk of foreign exchange risk movements. At September 30, 2013 and December 31, 2012, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $680 million and $79 million, respectively.

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 values of the outstanding total return swaps, interest rate swaps, forward foreign currency exchange contracts and the credit default swap were not material to the condensed consolidated statements of financial condition at September 30, 2013 and December 31, 2012.

Gains (losses) on the total return swaps, interest rate swaps, forward foreign currency exchange contracts and the credit default swap were not material to the condensed consolidated statements of income for the three and nine months ended September 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 September 30, 2013 and December 31, 2012 was not material. The change in fair value of such derivatives, which is recorded in nonoperating income (expense), was not material for the three and nine months ended September 30, 2013 and 2012.

In May 2011, the Company entered into a designated cash flow hedge consisting of a $750 million interest rate swap to hedge future cash flows on the Company’s floating rate notes due in 2013.

 

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7.  Derivatives and Hedging (continued)

 

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. Gains (losses) on the interest rate swap were not material to the condensed consolidated statements of income for the nine months ended September 30, 2013 and the three and nine months ended September 30, 2012.

8.  Goodwill

Goodwill activity during the nine months ended September 30, 2013 was as follows:

 

(in millions)       

December 31, 2012

                 $12,910   

Acquisition (1)

     44   

Goodwill adjustment related to Quellos and other (2)

     (16
  

 

 

 

September 30, 2013

     $12,938   
  

 

 

 

 

 

(1)

Amount represents goodwill from the Company’s acquisition of Credit Suisse’s ETF franchise on July 1, 2013 for approximately $273 million (the “Credit Suisse ETF Transaction”).

 

(2) 

The decrease in goodwill during the nine months ended September 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 $301 million and $324 million at September 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   

Acquisition(1)

     231         -        231   

Amortization expense

     -         (120     (120
  

 

 

    

 

 

   

 

 

 

September 30, 2013

     $16,991         $522        $17,513   
  

 

 

    

 

 

   

 

 

 

 

(1)

Amount represents indefinite-lived management contracts acquired in the Credit Suisse ETF Transaction.

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 noncash, nonoperating pre-tax gain of $39 million related to the carrying value of its equity method investment.

 

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10.   Other Assets (continued)

 

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 noncash, nonoperating 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 $120 million and $292 million, respectively, at September 30, 2013. The fair value of the Company’s interest in PennyMac reflected the PennyMac stock price at September 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 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 September 30, 2013. At September 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 September 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 September 2013 included the following:

 

(in millions)     Maturity Amount      

 Unamortized 

  Discount  

     Carrying Value       Fair Value   
 

 

 

 

3.50% Notes due 2014

    $1,000        $-        $1,000        $1,036   

1.375% Notes due 2015

    750        -        750        762   

6.25% Notes due 2017

    700        (2)        698        818   

5.00% Notes due 2019

    1,000        (2)        998        1,147   

4.25% Notes due 2021

    750        (4)        746        798   

3.375% Notes due 2022

    750        (4)        746        749   
 

 

 

 

Total Long-term Borrowings

    $4,950        ($12)        $4,938        $5,310   
 

 

 

 

In May 2013, the Company repaid $750 million of two-year floating rate notes at maturity.

Long-term borrowings at December 31, 2012 had a carrying value of $5.687 billion and a fair value of $6.275 billion determined using market prices at the end of December 2012.

See Note 11, Borrowings, in the 2012 Form 10-K for more information.

 

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12.  Commitments and Contingencies

Investment Commitments.    At September 30, 2013, the Company had $216 million of various capital commitments to fund sponsored investment funds, including funds of private equity funds, real estate funds, infrastructure funds, opportunistic funds and distressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third-party funds as third-party noncontrolling interest holders have the legal obligation to fund the respective commitments of such funds of funds. Generally, the timing of the funding of these commitments is unknown and the commitments are callable on demand at any time prior to the expiration of the commitment. These unfunded commitments are not recorded on the condensed consolidated statements of financial condition. These commitments do not include potential future commitments approved by the Company, but which are not yet legally binding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.

Contingencies

Contingent Payments.    The Company acts as the portfolio manager in a series of credit default swap transactions and has a maximum potential exposure of $17 million under a credit default swap between the Company and the counterparty. See Note 7, Derivatives and Hedging, for further discussion.

Contingent Payment related to Credit Suisse ETF Transaction.    In connection with the Credit Suisse ETF Transaction, BlackRock is required to make contingent payments annually to Credit Suisse, subject to achieving specified thresholds during a seven year period, subsequent to the acquisition date. The fair value of the contingent payments at September 30, 2013 is not significant to the condensed consolidated statement of financial condition and is included in other liabilities.

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

Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits will have a material effect on BlackRock’s results of operations, financial position, or cash flows. However, there is no assurance as to whether any such pending or threatened matters will have a material effect on BlackRock’s results of operations, financial position or cash flows in any future reporting period. Due to uncertainties surrounding the outcome of these matters, management cannot reasonably estimate the possible loss or range of loss that may arise from these matters.

Indemnifications.    In the ordinary course of business or in connection with certain acquisition agreements, BlackRock enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract

and the amount of indemnification liability, if any, cannot be determined or is considered remote. Consequently, no liability has been recorded on the condensed consolidated statements of financial condition.

 

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12.  Commitments and Contingencies (continued)

 

Contingencies (continued)

 

In connection with securities lending transactions, BlackRock has issued certain indemnifications to certain securities lending clients against potential loss resulting from a borrower’s failure to fulfill its obligations under the securities lending agreement should the value of the collateral pledged by the borrower at the time of default be insufficient to cover the borrower’s obligation under the securities lending agreement. At September 30, 2013, the Company indemnified certain of its clients for their securities lending loan balances of approximately $115 billion. The Company held as agent, cash and securities totaling $121 billion as collateral for indemnified securities on loan at September 30, 2013. The fair value of these indemnifications was not material at September 30, 2013.

13.  Stock-Based Compensation

Restricted stock and restricted stock units (“RSUs”) activity for the nine months ended September 30, 2013 is summarized below:

 

        Outstanding at        

   Restricted
Stock and
RSUs
     Weighted-
Average
Grant Date
Fair Value
 

December 31, 2012

                     5,620,835                 $197.90   

Granted    

     1,645,277         $234.69   

Converted

     (2,502,869)         $204.46   

Forfeited  

     (70,491)         $204.41   
  

 

 

    

September 30, 2013(1)

     4,692,752         $207.20   
  

 

 

    

 

(1) 

At September 30, 2013, approximately 4.4 million awards are expected to vest and 0.3 million awards have vested but have not been converted.

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

In January 2013, the Company granted 1,172,381 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant and 370,812 RSUs to employees that cliff vest 100% on January 31, 2016.

The intrinsic value of outstanding RSUs was $1.3 billion reflecting a closing stock price of $270.62 at September 30, 2013.

At September 30, 2013, total unrecognized stock-based compensation expense related to unvested RSUs was $348 million. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 0.9 years.

 

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13.    Stock-Based Compensation (continued)

 

Market Performance-based RSUs.

Market performance-based RSU activity for the nine months ended September 30, 2013 is summarized below:

 

Outstanding at

   Market
Performance-
Based RSUs
     Weighted-
Average
Grant Date
Fair Value
 

December 31, 2012

                 575,532       $ 115.03   

Granted

     556,581       $ 126.76   
  

 

 

    

September 30, 2013 (1)

     1,132,113       $ 120.80   
  

 

 

    

 

 

(1) 

At September 30, 2013, approximately 1.1 million awards are expected to vest and no awards have vested and have been converted.

The 556,581 market performance-based RSUs that the Company granted in January 2013 will be funded primarily by shares currently held by PNC (see Long-Term Incentive Plans Funded by PNC below).

At September 30, 2013, total unrecognized stock-based compensation expense related to unvested market performance-based awards was $96 million. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 2.8 years.

Long-Term Incentive Plans Funded by PNC.    Under a share surrender agreement, PNC committed to provide up to 4 million shares of BlackRock stock held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”). The current share surrender agreement commits PNC to provide BlackRock series C nonvoting participating preferred stock to fund the remaining committed shares. As of December 31, 2012, 2.5 million shares had been surrendered by PNC. In January 2013, 0.2 million additional shares were surrendered.

At September 30, 2013, the remaining shares committed by PNC of 1.3 million were available to fund future long-term incentive awards.

Stock Options.    Stock option activity for the nine months ended September 30, 2013 is summarized below:

 

Outstanding at

   Shares Under
Option
    Weighted-
Average
Exercise
Price
 

December 31, 2012

           1,099,909      $ 167.76   

Exercised

     (85,090   $ 167.76   
  

 

 

   

September 30, 2013

                 1,014,819      $ 167.76   
  

 

 

   

All options were vested at both September 30, 2013 and December 31, 2012. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2013 was $8.3 million.

 

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14.  Net Capital Requirements

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

Capital Requirements.    At September 30, 2013, the Company was required to maintain approximately $1.1 billion in net capital in certain regulated subsidiaries, including BlackRock Institutional Trust Company, N.A. (a chartered national bank whose powers are limited to trust activities and which is subject to regulatory capital requirements administered by the Office of the Comptroller of the Currency), entities regulated by the Financial Conduct Authority and Prudential Regulation Authority in the United Kingdom and the Company’s broker-dealers. The Company was in compliance with all applicable regulatory net capital requirements.

 

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15.  Accumulated Other Comprehensive Income (Loss)

The following table presents changes in AOCI by component for the three and nine months ended September 30, 2013:

 

(in millions)   Unrealized gains
(losses) on
available-for-sale
investments
         Benefit plans          Foreign
currency
translation
adjustments
         Total  (1)  

June 30, 2013

    $8           ($4        ($202        ($198

Other comprehensive income (loss) before reclassifications(2)

    2           -           118           120   

Amount reclassified from AOCI(3)

    (1        -           -           (1
 

 

 

      

 

 

      

 

 

      

 

 

 

Net other comprehensive income (loss) for the three months ended September 30, 2013

    1           -           118           119   
 

 

 

      

 

 

      

 

 

      

 

 

 

September 30, 2013

    $9           ($4        ($84        ($79
 

 

 

      

 

 

      

 

 

      

 

 

 
(in millions)   Unrealized gains
(losses) on
available-for-sale
investments
         Benefit plans          Foreign
currency
translation
adjustments
         Total  (1)  

December 31, 2012

    $16           ($4        ($71        ($59

Other comprehensive income (loss) before reclassifications(2)

    3           -           (13        (10

Amount reclassified from AOCI(3)

    (10        -           -           (10
 

 

 

      

 

 

      

 

 

      

 

 

 

Net other comprehensive income (loss) for the nine months ended September 30, 2013

    (7        -           (13        (20
 

 

 

      

 

 

      

 

 

      

 

 

 

September 30, 2013

    $9           ($4        ($84        ($79
 

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) 

All amounts are net of tax.

(2) 

The tax benefit (expense) was not material for the three and nine months ended September 30, 2013.

(3) 

The tax benefit (expense) was not material for the three and nine months ended September 30, 2013. The pre-tax amount reclassified from AOCI was included in net gain (loss) on investments on the condensed consolidated statements of income.

 

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16.  Capital Stock

Nonvoting Participating Preferred Stock.    The Company’s preferred shares authorized, issued and outstanding consisted of the following:

 

     September 30,
2013
     December 31,
2012
 

Series A

     

Shares authorized, $0.01 par value

     20,000,000         20,000,000   

Shares issued and outstanding

     -         -   

Series B

     

Shares authorized, $0.01 par value

     150,000,000         150,000,000   

Shares issued and outstanding

     823,188         823,188   

Series C

     

Shares authorized, $0.01 par value

     6,000,000         6,000,000   

Shares issued and outstanding

     1,311,887         1,517,237   

Series D

     

Shares authorized, $0.01 par value

     20,000,000         20,000,000   

Shares issued and outstanding

     -         -   

Share Repurchase Approval.    In January 2013, the Board of Directors approved an increase in the availability under the Company’s existing share repurchase program to allow for the repurchase of up to 10.2 million shares of BlackRock common stock. The Company repurchased 2.9 million common shares in open market-transactions under the share repurchase program for approximately $750 million during the nine months ended September 30, 2013. At September 30, 2013, there were 7.3 million shares still authorized to be repurchased.

17.  Earnings Per Share

Prior to the quarter ended March 31, 2013, the Company calculated earnings per share (“EPS”) pursuant to the two-class method as defined in ASC 260-10, Earnings per Share (“ASC 260-10”), which specifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents are considered participating securities and should be included in the computation of EPS pursuant to the two-class method. The majority of the Company’s participating securities vested in January 2013 and, therefore, beginning in the quarter ended March 31, 2013, the Company calculates EPS under the treasury stock method.

Due to the similarities in terms between BlackRock nonvoting participating preferred stock and the Company’s common stock, the Company considers its participating preferred stock to be a common stock equivalent for purposes of EPS calculations. As such, the Company has included the outstanding nonvoting participating preferred stock in the calculation of average basic and diluted shares outstanding.

 

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17.  Earnings Per Share (continued)

 

The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2013 under the treasury stock method:

 

( in millions, except share data)   Three Months
Ended
September 30,
2013
         Nine Months
Ended
September 30,
2013
 

Net income attributable to BlackRock

    $730           $2,091   

Basic weighted-average shares outstanding

    169,811,633           170,581,930   

Dilutive effect of nonparticipating RSUs and stock options

    3,559,875           3,430,946   
 

 

 

      

 

 

 

Total diluted weighted-average shares outstanding

    173,371,508           174,012,876   
 

 

 

      

 

 

 

Basic earnings per share

    $4.30           $12.26   

Diluted earnings per share

    $4.21           $12.02   

The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2012 under the two-class method:

 

(in millions, except share data)   Three Months
Ended
September 30,
2012
         Nine Months
Ended
September 30,
2012
 

Net income attributable to BlackRock

    $642           $1,768   

Less:

      

Dividends distributed to common shares

    259           803   

Dividends distributed to participating RSUs

    -           1   
 

 

 

      

 

 

 

Undistributed net income attributable to BlackRock

    383           964   

Percentage of undistributed net income allocated to common shares(1)

    99.9%           99.9%   

Undistributed net income allocated to common shares

    382           963   

Plus:

      

Common share dividends

    259           803   
 

 

 

      

 

 

 

Net income attributable to common shares

    $641           $1,766   
 

 

 

      

 

 

 

Basic weighted-average shares outstanding

    172,359,141           176,116,975   

Dilutive effect of nonparticipating RSUs and stock options

    3,091,391           2,839,724   
 

 

 

      

 

 

 

Total diluted weighted-average shares outstanding

    175,450,532           178,956,699   
 

 

 

      

 

 

 

Basic earnings per share

    $3.72           $10.02   

Diluted earnings per share

    $3.65           $9.87   

 

  (1) 

Allocation to common stockholders was based on the total of common shares and participating securities (which represent unvested RSUs that contain nonforfeitable rights to dividends). For the three months and nine months ended September 30, 2012, average outstanding participating securities were 0.2 million.

 

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18.  Income Taxes

The three and nine months ended September 30, 2013 included a $64 million net noncash benefit primarily related to the revaluation of certain deferred income tax liabilities, including legislation enacted in the United Kingdom and domestic state and local income tax changes. In addition, the nine months ended September 30, 2013 included the approximately $57 million tax benefit recognized in connection with the Charitable Contribution and a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards. See Note 10, Other Assets, for more information on the $57 million tax benefit.

The three and nine months ended September 30, 2012 included a $30 million net noncash benefit related to the revaluation of certain deferred income tax liabilities, including legislation enacted in the United Kingdom, domestic state and local income tax changes, and the tax effect resulting from changes in the Company’s organizational structure.

19.  Segment Information

The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company operates in one business segment in accordance with ASC 280-10, Segment Reporting.

The following table illustrates investment advisory, administration fees, securities lending revenue and performance fees, BlackRock Solutions® and advisory revenue, distribution fees and other revenue for the three and nine months ended September 30, 2013 and 2012, respectively.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in millions)      2013          2012          2013          2012    

Equity

   $ 1,170       $ 1,073       $ 3,525       $ 3,196   

Fixed income

     490         491         1,488         1,386   

Multi-asset

     266         241         777         724   

Alternatives

     248         232         718         642   

Cash management

     75         90         244         267   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment advisory, administration fees, securities lending revenue and performance fees

     2,249         2,127         6,752         6,215   

BlackRock Solutions and advisory

     156         128         420         382   

Distribution fees

     19         19         54         58   

Other revenue

     48         46         177         143   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 2,472       $ 2,320       $ 7,403       $ 6,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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19.  Segment Information (continued)

 

The following table illustrates total revenue for the three and nine months ended September 30, 2013 and 2012, respectively, by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the customer resides.

 

(in millions)    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Revenue                                             

     2013          2012          2013          2012    

Americas

   $ 1,632       $ 1,578       $ 4,967       $ 4,676   

Europe

     726         629         2,060         1,795   

Asia-Pacific

     114         113         376         327   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 2,472       $ 2,320       $ 7,403       $ 6,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table illustrates long-lived assets that consist of goodwill and property and equipment at September 30, 2013 and December 31, 2012 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.

 

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

Long-lived Assets

           

Americas

      $ 13,197                $ 13,238   

Europe

        207            166   

Asia-Pacific

        57            63   
     

 

 

       

 

 

 

Total long-lived assets

      $ 13,461                $ 13,467   
     

 

 

       

 

 

 

Americas primarily is comprised of the United States, Canada, Brazil and Mexico, while Europe is primarily comprised of the United Kingdom. Asia-Pacific is comprised of Japan, Australia, Singapore, Hong Kong, Taiwan, Korea, India, Malaysia and China.

20.  Subsequent Events

Acquisitions

MGPA. In October 2013, the Company completed the acquisition of MGPA, an independently managed private equity real estate investment advisory company primarily in Asia and Europe.

Other

The Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or disclosure.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This report, and other statements that BlackRock may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to BlackRock’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” and similar expressions.

BlackRock cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to risk factors previously disclosed in BlackRock’s Securities and Exchange Commission (“SEC”) reports and those identified elsewhere, in this report, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes and volatility in political, economic or industry conditions, the interest rate environment, foreign exchange rates or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock’s investment products; (4) the impact of increased competition; (5) the impact of future acquisitions or divestitures; (6) the unfavorable resolution of legal proceedings; (7) the extent and timing of any share repurchases; (8) the impact, extent and timing of technological changes and the adequacy of intellectual property, information and cyber security protection; (9) the impact of legislative and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock or The PNC Financial Services Group, Inc. (“PNC”); (10) terrorist activities, international hostilities and natural disasters, which may adversely affect the general economy, domestic and local financial and capital markets, specific industries or BlackRock; (11) the ability to attract and retain highly talented professionals; (12) fluctuations in the carrying value of BlackRock’s economic investments; (13) the impact of changes to tax legislation, including income, payroll and transaction taxes, and taxation on products or transactions, which could affect the value proposition to clients and, generally, the tax position of the Company; (14) BlackRock’s success in maintaining the distribution of its products; (15) the impact of BlackRock electing to provide support to its products from time to time and any potential liabilities related to securities lending or other indemnification obligations; and (16) the impact of problems at other financial institutions or the failure or negative performance of products at other financial institutions.

 

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Overview

BlackRock, Inc. (“BlackRock” or the “Company”) is the world’s largest publicly traded investment management firm. BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, the Netherlands, Japan, Hong Kong, Singapore, Australia and Germany. At September 30, 2013, the Company managed $4.096 trillion of assets under management (“AUM”) on behalf of institutional and individual investors worldwide. The Company provides a wide array of products, including passively and actively managed products in various equity, fixed income, multi-asset, alternative investment and cash management products. BlackRock offers clients diversified access to global markets through separate accounts, collective investment trusts, open-end and closed-end mutual funds, exchange-traded products, hedge funds and funds of funds. BlackRock also provides global advisory services for private investment funds and retail products. The Company’s non-U.S. investment funds are based in a number of domiciles and cover a range of asset classes, including equities, fixed income, cash management and alternatives. In addition, BlackRock Solutions® 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.

In the United States, retail offerings include various open-end and closed-end funds, including iShares®, the global product leader in exchange-traded products for institutional, retail and high net worth (“HNW”) investors. iShares AUM totaled $856.9 billion at September 30, 2013. The BlackRock Global Funds, the Company’s primary retail fund group offered outside the United States, are authorized for distribution in 35 jurisdictions worldwide. Additional fund offerings include structured products, real estate funds, hedge funds, hedge funds of funds, private equity funds and funds of funds, and managed futures funds. These products are sold to both U.S. and non-U.S. HNW, retail and institutional investors in a wide variety of active and passive strategies covering equity, fixed income and alternative assets.

BlackRock’s client base consists of financial institutions and other corporate clients, pension plans, charities, official institutions, such as central banks, sovereign wealth funds, supranational authorities and other government entities, HNW individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presence both inside and outside the United States that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships, including the distribution of BlackRock products and services through Merrill Lynch under a global distribution agreement in effect until January 2014. After such term, the agreement will renew for one automatic three-year extension if certain conditions are met.

At September 30, 2013, PNC held 20.9% of the Company’s voting common stock and 21.9% of the Company’s capital stock, which includes outstanding common and nonvoting preferred stock.

 

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Executive Summary

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in millions, except per share data)   2013     2012     2013     2012  

GAAP basis:

       

Total revenue

  $ 2,472         $ 2,320         $ 7,403         $ 6,798      

Total expenses

    1,506           1,445           4,679           4,279      
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 966         $ 875         $ 2,724         $ 2,519      

Operating margin

    39.1%        37.7%        36.8%        37.1%   

Nonoperating income (expense), less net income (loss) attributable to noncontrolling interests(1)

    (17)          17           82           (9)     

Income tax expense

    (219)          (250)          (715)          (742)     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock

  $ 730         $ 642         $ 2,091         $ 1,768      
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $ 4.21         $ 3.65         $ 12.02         $ 9.87      

Effective tax rate

    23.1%        28.1%        25.5%        29.6%   

As adjusted(2):

       

Total revenue

  $ 2,472         $ 2,320         $ 7,403         $ 6,798      

Total expenses

    1,494           1,444           4,522           4,265      
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 978         $ 876         $ 2,881         $ 2,533      

Operating margin

    41.2%        40.7%        40.8%        39.5%   

Nonoperating income (expense), less net income (loss) attributable to noncontrolling interests(1)

    (21)          13           (6)          (15)     

Income tax expense

    (285)          (279)          (844)          (775)     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock

  $ 672         $ 610         $ 2,031         $ 1,743      
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $ 3.88         $ 3.47         $ 11.67         $ 9.73      

Effective tax rate

    29.9%        31.4%        29.4%        30.8%   

Other:

       

Assets under management (end of period)

  $ 4,096,356         $ 3,673,274         $ 4,096,356         $ 3,673,274      

Diluted weighted-average common shares outstanding(3)

    173.4           175.5           174.0           179.0      

Shares outstanding (end of period)

    169.4           172.0           169.4           172.0      

Book value per share(4)

  $ 153.32         $ 145.32         $ 153.32         $ 145.32      

Cash dividends declared and paid per share

  $ 1.68         $ 1.50         $ 5.04         $ 4.50      

 

(1) 

Net of net income (loss) attributable to noncontrolling interests (“NCI”) (redeemable and nonredeemable).

(2) 

As adjusted items are described in more detail in Non-GAAP Financial Measures.

(3) 

Nonvoting participating preferred stock is considered to be a common stock equivalent for purposes of determining basic and diluted earnings per share calculations.

(4) 

Total BlackRock stockholders’ equity, excluding appropriated retained earnings, divided by total common and preferred stock outstanding at September 30, 2013 and 2012, respectively.

 

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Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012

GAAP. Operating income of $966 million increased $91 million from the three months ended September 30, 2012 driven by higher base fees, and higher BlackRock Solutions and advisory revenue. The third quarter 2012 included closed-end fund launch costs of $25 million. Nonoperating income (expense), less net income (loss) attributable to NCI decreased $34 million primarily due to lower net positive marks on investments during the current quarter compared with the prior year quarter. Income tax expense included a $64 million net noncash benefit for the third quarter 2013 and a $30 million net noncash benefit for the third quarter 2012. The net noncash benefits for both periods primarily related to the revaluation of certain deferred income tax liabilities, including legislation enacted in the United Kingdom and domestic state and local income tax changes. Earnings per diluted common share rose $0.56, or 15%, compared with the quarter ended September 30, 2012 due to higher net income and the benefit of share repurchases.

As Adjusted. Operating income of $978 million and operating margin of 41.2% increased $102 million and 50 bps, respectively, from the third quarter 2012. Nonoperating income (expense) decreased $34 million primarily due to the items explained above. Income tax expense on an as adjusted basis for the current quarter and prior year quarter excluded the $64 million and $30 million noncash benefits, respectively. Earnings per diluted common share rose $0.41, or 12%, from the prior year quarter.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

GAAP. Operating income of $2,724 million increased $205 million from the nine months ended September 30, 2012. In the second quarter 2013, as a result of an initial public offering of PennyMac Financial Services, Inc. (the “PennyMac IPO”), the Company recorded a noncash, nonoperating pre-tax gain of $39 million related to the carrying value of its equity method investment. Subsequent to the PennyMac IPO, the Company made a charitable contribution of 6.1 million units of its equity method investment with a fair value of $124 million to a new donor advised fund (the “Charitable Contribution”). In connection with the Charitable Contribution, the Company also recorded a noncash, nonoperating pre-tax gain of $80 million related to the contributed investment. For further information, see Note 10, Other Assets, to the condensed consolidated financial statements.

Operating income reflects growth in base fees and strong performance fees, partially offset by higher expenses, primarily due to the $124 million expense related to the Charitable Contribution and higher revenue-related expenses. The results for the nine months ended September 30, 2013 also included $43 million of organizational alignment costs. Nonoperating income (expense), less net income (loss) attributable to NCI increased $91 million due to the $39 million pre-tax gain related to the PennyMac IPO and the $80 million gain related to the Charitable Contribution, partially offset by lower net positive marks on investments during the nine months ended September 30, 2013 compared with the prior year period. Income tax expense included the $64 million net noncash benefit for the nine months ended September 30, 2013 and the $30 million net noncash benefit for the nine months ended September 30, 2012 described above. In addition, the nine months ended September 30, 2013 included an approximately $57 million tax benefit recognized in connection with the Charitable Contribution and a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards. Earnings per diluted common share rose $2.15, or 22%, compared with the prior year period due to higher net income and the benefit of share repurchases.

 

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As Adjusted. Operating income of $2,881 million and operating margin of 40.8% increased $348 million and 130 bps, respectively, from the nine months ended September 30, 2012. The current period results included the previously mentioned organizational alignment costs of $43 million and the $39 million pre-tax gain related to the PennyMac IPO. Income tax expense on an as adjusted basis excluded the $64 million net noncash benefit for the nine months ended September 30, 2013 and the $30 million net noncash benefit for the nine months ended September 30, 2012 described above. Earnings per diluted common share rose $1.94, or 20%, from the nine months ended September 30, 2012. The financial impact related to the Charitable Contribution has been excluded from as adjusted results for the nine months ended September 30, 2013.

See Non-GAAP Financial Measures for further information on as adjusted items.

For further discussion of BlackRock’s revenue, expenses, nonoperating results and income tax expense, see Discussion of Financial Results herein.

Non-GAAP Financial Measures

BlackRock reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”); however, management believes evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Computations for all periods are derived from the condensed consolidated statements of income as follows:

(a) Operating income, as adjusted, and operating margin, as adjusted:

Operating income, as adjusted, equals operating income, GAAP basis, excluding certain items management deems nonrecurring or transactions that ultimately will not impact BlackRock’s book value, as indicated in the table below. Management believes operating income, as adjusted, and operating margin, as adjusted, are effective indicators of BlackRock’s financial performance over time and, therefore, provide useful disclosure to investors.

 

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(a) (continued)

 

Operating income, as adjusted, and operating margin, as adjusted

 

 
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Amounts in millions)      2013          2012          2013          2012    

Operating income, GAAP basis

     $966          $875          $2,724          $2,519    

Non-GAAP expense adjustments:

           

PNC LTIP funding obligation

     8          5          25          16    

Charitable Contribution

     -           -           124          -     

U.K. lease exit costs

     -           (8)          -           (8)    

Compensation expense related to appreciation (depreciation) on deferred compensation plans

     4          4          8          6    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income, as adjusted

     978           876          2,881           2,533    

Closed-end fund launch costs

     -           22          16           22    

Closed-end fund launch commissions

     -           3          2           3    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income used for operating margin measurement

     $978          $901          $2,899          $2,558    
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue, GAAP basis

           $2,472                $2,320                $7,403                $6,798    

Non-GAAP adjustments:

           

Distribution and servicing costs

     (85)          (94)          (266)          (282)    

Amortization of deferred sales commissions

     (14)          (13)          (38)          (43)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue used for operating margin measurement

     $2,373          $2,213          $7,099          $6,473    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating margin, GAAP basis

     39.1%          37.7%          36.8%          37.1%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating margin, as adjusted

     41.2%          40.7%          40.8%          39.5%    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

   

Operating income, as adjusted, includes non-GAAP expense adjustments. In the third quarter 2012, non-GAAP adjustments included U.K. lease exit costs incurred in the third quarter 2012 that represent an adjustment related to the costs initially recorded in the third quarter 2011 related to costs to exit two locations in London. During the nine months ended September 30, 2013, the $124 million expense related to the Charitable Contribution has been excluded from operating income, as adjusted, due to its nonrecurring nature and because the noncash, nonoperating pre-tax gain of $80 million related to the contributed PennyMac investment is reported in nonoperating income (expense). The portion of compensation expense associated with certain long-term incentive plans (“LTIP”) funded, or to be funded, through share distributions to participants of BlackRock stock held by PNC has been excluded because it ultimately does not impact BlackRock’s book value. Compensation expense associated with appreciation (depreciation) on investments related to certain BlackRock deferred compensation plans has been excluded as returns on investments set aside for these plans, which substantially offset this expense, are reported in nonoperating income (expense).

Management believes operating income exclusive of these items is a useful measure in evaluating BlackRock’s operating performance and helps enhance the comparability of this information for the reporting periods presented.

 

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(a) (continued)

 

   

Operating margin, as adjusted allows the Company to compare performance from period to period by adjusting for items that may not recur, recur infrequently or may have an economic offset in nonoperating income (expense). The Company also uses operating margin, as adjusted, to monitor corporate performance and efficiency and as a benchmark to compare its performance with other companies. Management uses both GAAP and non-GAAP financial measures in evaluating BlackRock’s financial performance. The non-GAAP measure by itself may pose limitations because it does not include all of the Company’s revenues and expenses.

Operating income used for measuring operating margin, as adjusted, is equal to operating income, as adjusted, excluding the impact of closed-end fund launch costs and related commissions. Management believes the exclusion of such costs and related commissions is useful because these costs can fluctuate considerably and revenues associated with the expenditure of these costs will not fully impact the Company’s results until future periods.

Revenue used for operating margin, as adjusted, excludes distribution and servicing costs paid to related parties and other third parties. Management believes the exclusion of such costs is useful because it creates consistency in the treatment for certain contracts for similar services, which due to the terms of the contracts, are accounted for under GAAP on a net basis within investment advisory, administration fees and securities lending revenue. Amortization of deferred sales commissions is excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, substantially offset distribution fee revenue the Company earns. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such offsetting revenues.

(b) Nonoperating income (expense), less net income (loss) attributable to noncontrolling interests, as adjusted, is presented below. The compensation expense offset is recorded in operating income. This compensation expense has been included in nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, to offset returns on investments set aside for these plans, which are reported in nonoperating income (expense), GAAP basis.

Management believes nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, provides comparability of information among reporting periods and is an effective measure for reviewing BlackRock’s nonoperating contribution to results. As compensation expense associated with (appreciation) depreciation on investments related to certain deferred compensation plans, which is included in operating income, substantially offsets the gain (loss) on the investments set aside for these plans, management believes nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, provides a useful measure, for both management and investors, of BlackRock’s nonoperating results that impact book value. During the nine months ended September 30, 2013, the noncash, nonoperating pre-tax gain of $80 million related to the contributed PennyMac investment has been excluded from nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted due to its nonrecurring nature and because the more than offsetting associated Charitable Contribution expense of $124 million is reported in operating income.

 

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(b) (continued)

 

Nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Amounts in millions)        2013             2012             2013             2012      

Nonoperating income (expense), GAAP basis

   ($ 18 )   $ 30     $ 92     $ 13  

Less: Net income (loss) attributable to NCI

     (1 )     13       10       22  
  

 

 

   

 

 

   

 

 

   

 

 

 

Nonoperating income (expense), net of NCI

     (17 )     17       82       (9 )

Gain related to the Charitable Contribution

     -          -          (80 )     -     

Compensation expense related to (appreciation) depreciation on deferred compensation plans

     (4 )     (4 )     (8 )     (6 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted

   ($ 21 )   $ 13     ($ 6 )   ($ 15 )
  

 

 

   

 

 

   

 

 

   

 

 

 

(c) Net income attributable to BlackRock, as adjusted:

Management believes net income attributable to BlackRock, as adjusted, and diluted earnings per common share, as adjusted, are useful measures of BlackRock’s profitability and financial performance. Net income attributable to BlackRock, as adjusted, equals net income attributable to BlackRock, GAAP basis, adjusted for significant nonrecurring items, charges that ultimately will not impact BlackRock’s book value or certain tax items that do not impact cash flow.

See note (a) Operating income, as adjusted, and operating margin, as adjusted, for information on the PNC LTIP funding obligation, Charitable Contribution and the U.K. lease exit costs.

The nine months ended September 30, 2013 included a tax benefit of approximately $57 million recognized in connection with the Charitable Contribution. The tax benefit has been excluded from net income attributable to BlackRock, as adjusted, due to the nonrecurring nature of the Charitable Contribution. The three and nine months ended September 30, 2013 and 2012 reflected adjustments related to the revaluation of certain deferred income tax liabilities, including legislation enacted in the United Kingdom and domestic state and local income tax changes. The resulting decrease in income taxes has been excluded from net income attributable to BlackRock, as adjusted, as these items will not have a cash flow impact and to ensure comparability among periods presented.

 

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(c) (continued)

 

Net income attributable to BlackRock, Inc., as adjusted

 

     Three Months Ended
September  30,
     Nine Months Ended
September  30,
 
(Amounts in millions, except per
share data)
   2013        2012      2013      2012  

Net income attributable to BlackRock, Inc., GAAP basis

     $730            $642          $2,091          $1,768    

Non-GAAP adjustments, net of tax:(d)

             

PNC LTIP funding obligation

     6            3          17          10    

Amount related to the Charitable Contribution

     -            -          (13)          -    

U.K. lease exit costs

     -            (5)          -          (5)    

Income tax changes

     (64)          (30)          (64)          (30)    
  

 

 

      

 

 

    

 

 

    

 

 

 

Net income attributable to BlackRock, Inc., as adjusted

     $672            $610          $2,031          $1,743    
  

 

 

      

 

 

    

 

 

    

 

 

 

Allocation of net income, as adjusted, to common shares(e)

     $672            $609          $2,031          $1,741    

Diluted weighted-average common shares outstanding(f)

     173.4             175.5          174.0          179.0    

Diluted earnings per common share, GAAP basis(f)

     $4.21            $3.65          $12.02          $9.87    

Diluted earnings per common share, as adjusted(f)

     $3.88            $3.47          $11.67          $9.73    

(d) For each period presented, the non-GAAP adjustments, including the PNC LTIP funding obligation and U.K. lease exit costs, were tax effected at the respective blended rates applicable to the adjustments. The nine months ended September 30, 2013 also included a tax benefit of approximately $57 million related to the Charitable Contribution.

(e) For the three and nine months ended September 30, 2012, amounts exclude net income attributable to participating securities.

(f) Nonvoting participating preferred stock is considered to be a common stock equivalent for purposes of determining basic and diluted earnings per share calculations.

 

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Assets Under Management

AUM for reporting purposes generally is based upon how investment advisory and administration fees are calculated for each portfolio. Net asset values, total assets, committed assets or other measures may be used to determine portfolio AUM.

AUM and Net Subscriptions (Redemptions) by Client Type

 

    AUM     Net Subscriptions (Redemptions)(1)  
(in millions)   September 30,
2013
    June 30,
2013
    September 30,
2012
    Three Months
Ended
September 30,
2013
    Nine Months
Ended
September 30,
2013
    Twelve Months
Ended
September 30,
2013
 

Retail

  $ 438,449      $ 414,379      $ 397,954      $ 8,344      $ 22,213      $ 26,322   

iShares

    856,909        774,397        705,765        20,249        44,882        80,596   

Institutional:

           

Active

    890,070        861,231        880,726        53        (8,929     (16,984

Index

    1,612,337        1,514,448        1,393,928        (3,361     18,472        33,687   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total institutional

    2,502,407        2,375,679        2,274,654        (3,308     9,543        16,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term

    3,797,765        3,564,455        3,378,373        25,285        76,638        123,621   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash management

    260,077        252,562        248,331        4,469        (4,195     10,221   

Advisory(2)

    38,514        39,990        46,570        (2,033     (6,036     (6,681
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,096,356      $ 3,857,007      $ 3,673,274        $27,721      $ 66,407      $ 127,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AUM and Net Subscriptions (Redemptions) by Product Type

 

    AUM     Net Subscriptions  (Redemptions)(1)  
(in millions)   September 30,
2013
    June 30,
2013
    September 30,
2012
    Three Months
Ended
September 30,
2013
    Nine Months
Ended
September 30,
2013
    Twelve Months
Ended
September 30,
2013
 

Equity

  $ 2,148,712      $ 1,973,115      $ 1,773,530      $ 11,256      $ 44,581      $ 75,773   

Fixed income

    1,237,559        1,205,359        1,233,811        7,491        10,011        22,411   

Multi-asset

    308,117        289,305        257,607        4,863        24,943        29,029   

Alternatives

           

Core

    72,758        70,227        68,931        1,388        3,305        2,335   

Currency and commodities(3)

    30,619        26,449        44,494        287        (6,202     (5,927
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    103,377        96,676        113,425        1,675        (2,897     (3,592
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term

    3,797,765        3,564,455        3,378,373        25,285        76,638        123,621   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash management

    260,077        252,562        248,331        4,469        (4,195     10,221   

Advisory(2)

    38,514        39,990        46,570        (2,033     (6,036     (6,681
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,096,356      $ 3,857,007      $ 3,673,274      $ 27,721      $ 66,407      $ 127,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amounts include distributions representing return of capital and return on investment to investors.

(2)

Advisory AUM represents long-term portfolio liquidation assignments.

(3)

Amounts include commodity iShares.

 

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Component Changes in AUM for the Third Quarter 2013

The following table presents component changes in AUM by client type and product for the quarter ended September 30, 2013.

 

(in millions)   June 30,
2013
    Net
subscriptions
(redemptions)(1)
    Acquisition(2)     Market
appreciation
(depreciation)
    Foreign
exchange(3)
    September 30,
2013
 

Retail:

           

Equity

  $ 161,441      $ 1,166      $ -      $ 10,261      $ 1,864      $ 174,732   

Fixed income

    141,541        2,256        -        (970     359        143,186   

Multi-asset

    99,105        2,899        -        3,742        271        106,017   

Alternatives

    12,292        2,023        -        (2     201        14,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retail subtotal

    414,379        8,344        -        13,031        2,695        438,449   

iShares:

           

Equity

    577,268        21,069        13,021        38,444        3,726        653,528   

Fixed income

    180,943        (1,452     1,294        222        1,834        182,841   

Multi-asset

    1,107        33        -        35        4        1,179   

Alternatives

    15,079        599        1,645        1,975        63        19,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

iShares subtotal

    774,397        20,249        15,960        40,676        5,627        856,909   

Institutional:

           

Active:

           

Equity

    126,425        (6,098     -        7,585        2,952        130,864   

Fixed income

    490,490        4,922        -        2,393        5,438        503,243   

Multi-asset

    180,310        2,232        -        5,012        4,435        191,989   

Alternatives

    64,006        (1,003     -        347        624        63,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Active subtotal

    861,231        53        -        15,337        13,449        890,070   

Index:

           

Equity

    1,107,981        (4,881     -        71,638        14,850        1,189,588   

Fixed income

    392,385        1,765        -        913        13,226        408,289   

Multi-asset

    8,783        (301     -        175        275        8,932   

Alternatives

    5,299        56        -        (4     177        5,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Index subtotal

    1,514,448        (3,361     -        72,722        28,528        1,612,337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Institutional subtotal

    2,375,679        (3,308     -        88,059        41,977        2,502,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    3,564,455        25,285        15,960        141,766        50,299        3,797,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash management

    252,562        4,469        -        104        2,942        260,077   

Advisory(4)

    39,990        (2,033     -        (195     752        38,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,857,007      $ 27,721      $ 15,960      $ 141,675      $ 53,993      $ 4,096,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include distributions representing return of capital and return on investment to investors.

(2) 

Amounts represent AUM acquired from the Company’s acquisition of Credit Suisse’s ETF franchise on July 1, 2013 (the “Credit Suisse ETF Transaction”).

(3) 

Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

(4) 

Advisory AUM represents long-term portfolio liquidation assignments.

 

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Table of Contents

The following table presents component changes in AUM by product for the quarter ended September 30, 2013.

 

(in millions)   June 30,
2013
    Net
subscriptions
(redemptions)(1)
    Acquisition(2)     Market
appreciation
(depreciation)
    Foreign
exchange(3)
    September 30,
2013
 

Equity:

           

Active

  $ 280,332      $ (5,062   $ —        $ 17,409      $ 4,805      $ 297,484   

iShares

    577,268        21,069        13,021        38,444        3,726        653,528   

Fixed income:

           

Active

    631,808        7,167        —          1,423        5,795        646,193   

iShares

    180,943        (1,452     1,294        222        1,834        182,841   

Multi-asset

    289,305        4,863        —          8,964        4,985        308,117   

Alternatives:

           

Core

    70,227        1,388        —          390        753        72,758   

Currency and commodities(4)

    26,449        287        1,645        1,926        312        30,619   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    2,056,332        28,260        15,960        68,778        22,210        2,191,540   

Non-ETF Index:

           

Equity

    1,115,515        (4,751     —          72,075        14,861        1,197,700   

Fixed income

    392,608        1,776        —          913        13,228        408,525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Non-ETF Index

    1,508,123        (2,975     —          72,988        28,089        1,606,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    3,564,455        25,285        15,960        141,766        50,299        3,797,765   

Cash management

    252,562        4,469        —          104        2,942        260,077   

Advisory(5)

    39,990        (2,033     —          (195     752        38,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,857,007      $ 27,721      $ 15,960      $ 141,675      $ 53,993      $ 4,096,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include distributions representing return of capital and return on investment to investors.

(2) 

Amounts represent AUM acquired in the Credit Suisse ETF Transaction.

(3) 

Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

(4) 

Amounts include commodity iShares.

(5) 

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased $239.3 billion to $4.096 trillion at September 30, 2013 from $3.857 trillion at June 30, 2013, largely driven by market appreciation of $141.7 billion, foreign exchange gains, long-term net inflows and acquired AUM related to the Credit Suisse ETF Transaction.

Net market appreciation of $141.7 billion primarily included appreciation of $127.9 billion from equity products due to improved global equity markets.

AUM increased $54.0 billion from foreign exchange movements resulting from the weakening of the U.S. dollar, largely against the pound sterling and the euro.

Net Subscriptions (Redemptions).    Net subscriptions of $27.7 billion reflected $25.3 billion of long-term net inflows driven by iShares net inflows of $20.2 billion and retail net inflows of $8.3 billion. Net subscriptions in long-term products of $25.3 billion reflected the following:

Net Subscriptions

 

  ·   

iShares net inflows of $20.2 billion, including $16.4 billion of U.S. and $5.0 billion of European iShares net inflows. Strong demand for emerging markets and broad market European equity exposure in the latter part of the quarter drove equity net inflows of $21.1 billion;

  ·   

Active fixed income net inflows of $7.2 billion, reflecting inflows to U.S. core and local currency strategies, partially offset by outflows from U.S. municipal and targeted-duration products; and

 

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Table of Contents
  ·   

Multi-asset net inflows of $4.9 billion, reflecting strong flows into institutional active multi-asset products driven by continued demand for the LifePath® target-date suite, which had net inflows of $3.0 billion, and retail inflows of $2.9 billion with particular demand for the flagship Multi-asset Income and Global Allocation funds.

Net Redemptions

 

  ·   

Active equity net outflows of $5.1 billion, concentrated in U.S. equity and regional and country specific strategies; and

  ·   

Non-ETF index equity net outflows of $4.8 billion, primarily in U.S equities, partially offset by inflows into regional and country specific and global strategies.

Cash Management Net Subscriptions.    Cash management net inflows of $4.5 billion primarily were comprised of net inflows from Americas and EMEA institutional clients in government strategies and offshore funds, respectively.

Advisory Net Redemptions. Planned portfolio liquidations drove advisory net outflows of $2.0 billion.

 

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Table of Contents

Component Changes in AUM for the Nine Months Ended September 30, 2013

The following table presents the component changes in AUM by client type and product for the nine months ended September 30, 2013.

 

(in millions)   December 31,
2012
    Net
subscriptions
(redemptions)(1)
    Acquisition(2)     Market
appreciation
(depreciation)
    Foreign
exchange(3)
    September 30,
2013
 

Retail:

           

Equity

  $ 164,748      $ (1,198   $ -      $ 11,221      $ (39   $ 174,732   

Fixed income

    138,425        10,327        -        (5,640     74        143,186   

Multi-asset

    90,626        8,278        -        7,253        (140     106,017   

Alternatives

    9,685        4,806        -        (18     41        14,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retail subtotal

    403,484        22,213        -        12,816        (64     438,449   

iShares:

           

Equity

    534,648        50,004        13,021        55,395        460        653,528   

Fixed income

    192,852        (3,917     1,294        (7,661     273        182,841   

Multi-asset

    869        261        -        53        (4     1,179   

Alternatives

    24,337        (1,466     1,645        (5,174     19        19,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

iShares subtotal

    752,706        44,882        15,960        42,613        748        856,909   

Institutional:

           

Active:

           

Equity

    129,024        (14,680     -        18,255        (1,735     130,864   

Fixed income

    518,102        (4,121     -        (7,915     (2,823     503,243   

Multi-asset

    166,708        16,840        -        7,575        866        191,989   

Alternatives

    70,861        (6,968     -        1,014        (933     63,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Active subtotal

    884,695        (8,929     -        18,929        (4,625     890,070   

Index:

           

Equity

    1,017,081        10,455        -        170,209        (8,157     1,189,588   

Fixed income

    409,943        7,722        -        (5,126     (4,250     408,289   

Multi-asset

    9,545        (436     -        283        (460     8,932   

Alternatives

    4,912        731        -        (132     17        5,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Index subtotal

    1,441,481        18,472        -        165,234        (12,850     1,612,337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Institutional subtotal

    2,326,176        9,543        -        184,163        (17,475     2,502,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    3,482,366        76,638        15,960        239,592        (16,791     3,797,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash management

    263,743        (4,195     -        236        293        260,077   

Advisory(4)

    45,479        (6,036     -        (370     (559     38,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,791,588      $ 66,407      $ 15,960      $ 239,458      $ (17,057   $ 4,096,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include distributions representing return of capital and return on investment to investors.

(2) 

Amounts represent AUM acquired in the Credit Suisse ETF Transaction.

(3) 

Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

(4) 

Advisory AUM represents long-term portfolio liquidation assignments.

 

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Table of Contents

The following table presents component changes in AUM by product for the nine months ended September 30, 2013.

 

(in millions)   December 31,
2012
    Net
subscriptions
(redemptions)(1)
    Acquisition(2)     Market
appreciation
(depreciation)
    Foreign
exchange(3)
    September 30,
2013
 

Equity:

           

Active

  $ 287,215      $ (16,269   $ -      $ 28,279      $ (1,741   $ 297,484   

iShares

    534,648        50,004        13,021        55,395        460        653,528   

Fixed income:

           

Active

    656,331        6,154        -        (13,549     (2,743     646,193   

iShares

    192,852        (3,917     1,294        (7,661     273        182,841   

Multi-asset

    267,748        24,943        -        15,164        262        308,117   

Alternatives:

           

Core

    68,367        3,305        -        1,243        (157     72,758   

Currency and

    commodities(4)

    41,428        (6,202     1,645        (5,553     (699     30,619   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    2,048,589        58,018        15,960        73,318        (4,345     2,191,540   

Non-ETF Index:

           

Equity

    1,023,638        10,846        -        171,406        (8,190     1,197,700   

Fixed income

    410,139        7,774        -        (5,132     (4,256     408,525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Non-ETF Index

    1,433,777        18,620        -        166,274        (12,446     1,606,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    3,482,366        76,638        15,960        239,592        (16,791     3,797,765   

Cash management

    263,743        (4,195     -        236        293        260,077   

Advisory(5)

    45,479        (6,036     -        (370     (559     38,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,791,588      $ 66,407      $ 15,960      $ 239,458      $ (17,057   $ 4,096,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include distributions representing return of capital and return on investment to investors.

(2) 

Amounts represent AUM acquired in the Credit Suisse ETF Transaction.

(3) 

Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

(4) 

Amounts include commodity iShares.

(5) 

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased approximately $304.8 billion to $4.096 trillion at September 30, 2013 from $3.792 trillion at December 31, 2012, largely driven by market appreciation of $239.5 billion, net inflows and acquired AUM related to the Credit Suisse ETF Transaction. The increase in AUM was partially offset by foreign exchange losses.

Net market appreciation of $239.5 billion included $255.1 billion from equity products, primarily due to improved U.S. and global equity markets and $15.2 billion from multi-asset products, concentrated in global strategies, partially offset by depreciation of $26.3 billion from fixed income products across all fixed income strategies.

The $17.1 billion decrease in AUM from foreign exchange movements was due to the strengthening of the U.S. dollar, primarily against the Japanese yen.

Net Subscriptions (Redemptions).    Net subscriptions reflected positive long-term net inflows of $76.6 billion, partially offset by outflows from cash management and advisory clients. Net long-term subscriptions reflected net subscriptions of $44.9 billion from iShares, $22.2 billion from

 

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retail clients and $9.5 billion from institutional clients. Net subscriptions in long-term products totaling $76.6 billion, reflected the following:

Net Subscriptions

 

  ·   

Equity iShares net inflows of $50.0 billion, across diverse strategies;

  ·   

Multi-asset net inflows of $24.9 billion, reflecting strong flows of $16.8 billion into institutional active multi-asset products, driven by continued demand for the LifePath target date suite and $8.3 billion from retail clients with a particular demand for the flagship Multi-asset Income and Global Allocation funds;

  ·   

Fixed income active net inflows of $6.2 billion, reflecting inflows into local currency, U.S. core and sector specific strategies, partially offset by outflows from U.S. targeted duration strategies;

  ·   

Non-ETF index equity net inflows of $10.8 billion, primarily in global strategies, partially offset by outflows from regional, country specific, and U.S. equity strategies;

  ·   

Non-ETF index fixed income net inflows of $7.8 billion, concentrated in local currency and U.S. targeted duration strategies; and

  ·   

Alternative core net inflows of $3.3 billion, concentrated in retail mutual funds.

Net Redemptions

 

  ·   

Active equity net outflows of $16.3 billion, concentrated in U.S. and global equity and sector specific strategies; and

  ·   

Alternatives currency and commodities net outflows of $6.2 billion, primarily related to active currency redemptions.

Cash Management Net Redemptions.     Cash management net outflows of $4.2 billion were driven by net outflows from Americas institutional clients primarily in prime strategies, partially offset by inflows from Americas institutional clients into government funds.

Advisory Net Redemptions. Planned portfolio liquidation disbursements drove advisory net outflows of $6.0 billion.

 

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Table of Contents

Component Changes in AUM for the Twelve Months Ended September 30, 2013

The following table presents component changes in AUM by client type and product for the twelve months ended September 30, 2013.

 

(in millions)   September 30,
2012
    Net
subscriptions
(redemptions)(1)
    Acquisition(2)     Market
appreciation
(depreciation)
    Foreign
exchange(3)
    September 30,
2013
 

Retail:

           

Equity

  $ 164,759      $ (1,565   $ -      $ 11,291      $ 247      $ 174,732   

Fixed income

    133,737        14,629        -        (5,318     138        143,186   

Multi-asset

    90,034        8,177        -        7,936        (130     106,017   

Alternatives

    9,424        5,081        -        (55     64        14,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retail subtotal

    397,954        26,322        -        13,854        319        438,449   

iShares:

           

Equity

    491,534        80,079        13,021        67,727        1,167        653,528   

Fixed income

    187,771        544        1,294        (7,510     742        182,841   

Multi-asset

    817        310        -        58        (6     1,179   

Alternatives

    25,643        (337     1,645        (7,618     28        19,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

iShares subtotal

    705,765        80,596        15,960        52,657        1,931        856,909   

Institutional:

           

Active:

           

Equity

    130,013        (19,133     -        22,403        (2,419     130,864   

Fixed income

    519,260        (8,815     -        (2,643     (4,559     503,243   

Multi-asset

    158,190        20,055        -        11,754        1,990        191,989   

Alternatives

    73,263        (9,091     -        1,458        (1,656     63,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Active subtotal

    880,726        (16,984     -        32,972        (6,644     890,070   

Index:

           

Equity

    987,224        16,392        -        198,328        (12,356     1,189,588   

Fixed income

    393,043        16,053        -        3,702        (4,509     408,289   

Multi-asset

    8,566        487        -        706        (827     8,932   

Alternatives

    5,095        755        -        (351     29        5,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Index subtotal

    1,393,928        33,687        -        202,385        (17,663     1,612,337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Institutional subtotal

    2,274,654        16,703        -        235,357        (24,307     2,502,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    3,378,373        123,621        15,960        301,868        (22,057     3,797,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash management

    248,331        10,221        -        519        1,006        260,077   

Advisory(4)

    46,570        (6,681     -        (618     (757     38,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,673,274      $ 127,161      $ 15,960      $ 301,769      $ (21,808   $ 4,096,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include distributions representing return of capital and return on investment to investors.

(2) 

Amounts represent AUM acquired in the Credit Suisse ETF Transaction.

(3) 

Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

(4) 

Advisory AUM represents long-term portfolio liquidation assignments.

 

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The following table presents the component changes in AUM by product for the twelve months ended September 30, 2013.

 

(in millions)   September 30,
2012
    Net
subscriptions
(redemptions)(1)
    Acquisition(2)     Market
appreciation
(depreciation)
    Foreign
exchange(3)
    September 30,
2013
 

Equity:

           

Active

  $ 288,799      $ (21,712   $ -      $ 32,533      $ (2,136   $ 297,484   

iShares

    491,534        80,079        13,021        67,727        1,167        653,528   

Fixed income:

           

Active

    652,780        5,780        -        (7,952     (4,415     646,193   

iShares

    187,771        544        1,294        (7,510     742        182,841   

Multi-asset

    257,607        29,029        -        20,454        1,027        308,117   

Alternatives:

           

Core

    68,931        2,335        -        1,714        (222     72,758   

Currency and

    commodities(4)

    44,494        (5,927     1,645        (8,280     (1,313     30,619   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    1,991,916        90,128        15,960        98,686        (5,150     2,191,540   

Non-ETF Index:

           

Equity

    993,197        17,406        -        199,489        (12,392     1,197,700   

Fixed income

    393,260        16,087        -        3,693        (4,515     408,525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Non-ETF Index

    1,386,457        33,493        -        203,182        (16,907     1,606,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    3,378,373        123,621        15,960        301,868        (22,057     3,797,765   

Cash management

    248,331        10,221        -        519        1,006        260,077   

Advisory(5)

    46,570        (6,681     -        (618     (757     38,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,673,274      $ 127,161      $ 15,960      $ 301,769      $ (21,808   $ 4,096,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include distributions representing return of capital and return on investment to investors.

(2) 

Amounts represent AUM acquired in the Credit Suisse ETF Transaction.

(3) 

Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

(4) 

Amounts include commodity iShares.

(5) 

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased approximately $423.1 billion to $4.096 trillion at September 30, 2013 from $3.673 trillion at September 30, 2012, largely driven by market appreciation of $301.8 billion, net inflows of $127.2 billion and acquired AUM related to the Credit Suisse ETF Transaction. The increase in AUM was partially offset by foreign exchange losses.

Net market appreciation of $301.8 billion was driven by $299.7 billion from equity products, primarily due to improved U.S. and global equity markets.

The $21.8 billion decrease in AUM from foreign exchange movements was due to the strengthening of the U.S. dollar, primarily against the Japanese yen, partially offset by the weakening of the U.S. dollar against the euro.

Net Subscriptions (Redemptions). Net subscriptions were driven by long-term net inflows of $123.6 billion reflecting net inflows of $80.6 billion from iShares, $26.3 billion from retail clients and $16.7 billion from institutional clients. Net subscriptions in long-term products totaling $123.6 billion, reflected the following:

Net Subscriptions

 

  ·   

Equity iShares net inflows of $80.1 billion across diverse strategies, including regional, country specific, and U.S. equity strategies;

 

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  ·   

Non-ETF index equity net inflows of $17.4 billion primarily in global strategies, partially offset by outflows from U.S. equity products, and regional and country specific strategies;

  ·   

Multi-asset net inflows of $29.0 billion, reflecting strong flows of $20.1 billion into institutional active multi-asset products driven by continued demand for the LifePath target date suite; and

  ·   

Non-ETF index fixed income net inflows of $16.1 billion concentrated in local currency and global strategies.

Net Redemptions

 

  ·   

Active equity net outflows of $21.7 billion, concentrated in U.S., global and sector strategies.

Cash Management Net Subscriptions. Cash management net inflows of $10.2 billion were comprised of net inflows from Americas institutional clients primarily into government strategies, partially offset by net outflows from international institutional clients from offshore funds.

Advisory Net Redemptions. Planned portfolio liquidation disbursements drove advisory net outflows of $6.7 billion.

 

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Discussion of Financial Results

The Company’s results of operations for the three and nine months ended September 30, 2013 and 2012 are discussed below. For a further description of the Company’s revenues and expenses, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”).

Revenue

Revenues increased $152 million, or 7%, from the prior year quarter and $605 million, or 9%, from the nine months ended September 30, 2012, reflecting base fee growth. The nine months ended September 30, 2013 also reflected strong performance fees.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in millions)    2013      2012      2013      2012  

Investment advisory, administration fees and securities lending revenue:

           

Equity:

           

Active

   $ 425       $ 431       $ 1,290       $ 1,313   

iShares

     589         486         1,744         1,426   

Fixed income:

           

Active

     314         301         948         865   

iShares

     113         116         349         321   

Multi-asset

     262         239         763         718   

Alternatives:

           

Core

     142         130         414         395   

Currency and commodities

     27         31         82         97   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     1,872         1,734         5,590         5,135   

Non-ETF Index(1):

           

Equity

     145         139         446         418   

Fixed income

     61         61         179         171   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal Non-ETF Index

     206         200         625         589   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term

     2,078         1,934         6,215         5,724   

Cash management

     75         90         244         267   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total base fees

     2,153         2,024         6,459         5,991   

Investment advisory performance fees:

           

Equity

     11         17         45         39   

Fixed income

     2         13         12         29   

Multi-asset

     4         2         14         6   

Alternatives

     79         71         222         150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     96         103         293         224   

BlackRock Solutions and advisory

     156         128         420         382   

Distribution fees

     19         19         54         58   

Other revenue

     48         46         177         143   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

       $ 2,472           $ 2,320           $ 7,403           $ 6,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Certain prior period information has been reclassified to conform to the current period presentation.

 

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The table below lists the asset type mix of investment advisory, administration fees and securities lending revenue (collectively, “base fees”) and mix of average AUM by asset class:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    Mix of Base
Fees
    Mix of Average
AUM by
Asset Class(1)
    Mix of Base Fees     Mix of Average
AUM by
Asset Class(1)
 
      2013         2012         2013         2012         2013         2012         2013         2012    

Equity:

                 

Active

    20%        21%        7%        8%        20%        22%        7%        8%   

iShares

    27%        24%        16%        13%        27%        24%        15%        13%   

Fixed income:

                 

Active

    15%        15%        15%        18%        15%        14%        17%        18%   

iShares

    5%        6%        5%        5%        5%        5%        5%        5%   

Multi-asset

    12%        12%        8%        7%        12%        12%        7%        7%   

Alternatives:

                 

Core

    7%        6%        2%        2%        6%        7%        2%        2%   

Currency and commodities

    1%        2%        1%        1%        1%        2%        1%        1%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    87%        86%        54%        54%        86%        86%        54%        54%   

Non-ETF Index:

                 

Equity

    7%        7%        29%        27%        7%        7%        29%        26%   

Fixed income

    3%        3%        10%        12%        3%        3%        10%        13%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Non-ETF Index

    10%        10%        39%        39%        10%        10%        39%        39%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    97%        96%        93%        93%        96%        96%        93%        93%   

Cash management

    3%        4%        7%        7%        4%        4%        7%        7%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total excluding Advisory AUM

    100%        100%        100%        100%        100%        100%        100%        100%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Average AUM for the three and nine months ended September 30, 2013 is calculated as the average of the month-end spot AUM amounts for the trailing four months and ten months, respectively.

For the quarter and nine months ended September 30, 2013, non-ETF index equity and non-ETF index fixed income were only 10%, respectively, of total base fees; however, AUM associated with these base fees represented 39% of total average AUM.

Three Months Ended September 30, 2013 Compared with Three Months ended September 30, 2012

Investment advisory, administration fees and securities lending revenue of $2,153 million in the third quarter 2013 increased $129 million, or 6%, from $2,024 million in the third quarter 2012 due to growth in long-term average AUM. Securities lending fees decreased $30 million from the prior year quarter to $99 million driven by lower spreads consistent with industry trends.

BlackRock Solutions and advisory revenue in the third quarter 2013 totaled $156 million compared with $128 million in the prior year quarter. The current quarter reflected an $18 million increase in Aladdin® business revenues to $112 million and higher advisory assignments revenue.

Nine Months Ended September 30, 2013 Compared with Nine Months ended September 30, 2012

Investment advisory, administration fees and securities lending revenue of $6,459 million for the nine months ended September 30, 2013 increased $468 million from $5,991 million in the prior year period due to growth in long-term average AUM. Securities lending fees decreased $50 million from the prior year period to $347 million in the nine months ended September 30, 2013 driven by lower spreads consistent with industry trends.

Investment advisory performance fees were $293 million in the nine months ended September 30, 2013 compared with $224 million in the prior year period, primarily reflecting higher fees from alternative products.

 

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BlackRock Solutions and advisory revenue in the nine months ended September 30, 2013 totaled $420 million compared with $382 million in the prior year period. The current period reflected a $32 million increase in Aladdin business revenues to $309 million and higher advisory assignments revenue.

Other revenue increased $34 million, largely reflecting higher earnings from certain advisory company equity method investments and higher transition management service fees.

Expenses

Expenses increased $61 million, or 4%, from the prior year quarter and $400 million, or 9%, from the nine months ended September 30, 2012, primarily reflecting higher revenue-related expenses and the $124 million expense related to the Charitable Contribution.

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in millions)   2013     2012     2013     2012  

Expenses, GAAP:

       

Employee compensation and benefits

        $ 866            $ 828            $ 2,635            $ 2,439   

Distribution and servicing costs

    85        94        266        282   

Amortization of deferred sales commissions

    14        13        38        43   

Direct fund expenses

    167        144        490        440   

General and administration:

       

Marketing and promotional

    96        74        291        265   

Occupancy and office related

    67        58        194        180   

Portfolio services

    51        52        148        148   

Technology

    39        38        117        115   

Professional services

    30        24        89        76   

Communications

    9        10        27        30   

Closed-end fund launch costs

    -        22        16        22   

Charitable Contribution

    -        -        124        -   

Other general and administration

    42        49        124        122   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administration expenses

    334        327        1,130        958   

Amortization of intangible assets

    40        39        120        117   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, GAAP

        $   1,506            $   1,445            $   4,679            $   4,279   
 

 

 

   

 

 

   

 

 

   

 

 

 

Less non-GAAP expense adjustments(1):

       

Employee compensation and benefits:

       

PNC LTIP funding obligation

    8        5        25        16   

Compensation expense related to appreciation (depreciation) on deferred compensation plans

    4        4        8        6   

General and administration:

       

U.K. lease exit costs

    -        (8     -        (8

Charitable Contribution

    -        -        124        -   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-GAAP expense adjustments

    12        1        157        14   

Expenses, as adjusted:

       

Employee compensation and benefits

    854        819        2,602        2,417   

Distribution and servicing costs

    85        94        266        282   

Amortization of deferred sales commissions

    14        13        38        43   

Direct fund expenses

    167        144        490        440   

General and administration

    334        335        1,006        966   

Amortization of intangible assets

    40        39        120        117   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, as adjusted

  $ 1,494      $ 1,444      $ 4,522      $ 4,265   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

See Non-GAAP Financial Measures for further information on as adjusted items.

 

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Table of Contents

Three Months Ended September 30, 2013 Compared with Three Months ended September 30, 2012

Employee compensation and benefits expense increased $38 million, or 5%, to $866 million in the current quarter from $828 million in the prior year quarter, reflecting higher headcount and higher incentive compensation driven by higher operating income. Employees at September 30, 2013 totaled approximately 11,200 compared with approximately 10,400 at September 30, 2012.

Distribution and servicing costs totaled $85 million in the current quarter compared with $94 million in the prior year quarter. These costs included payments to Bank of America/Merrill Lynch under a global distribution agreement and PNC, as well as other third parties, primarily associated with the distribution and servicing of client investments in certain BlackRock products. The three months ended September 30, 2013 and 2012 included $45 million and $51 million, respectively, of costs attributable to Bank of America and affiliates.

Direct fund expenses increased $23 million, reflecting higher average AUM where BlackRock pays certain nonadvisory expenses of the funds primarily linked to the use of certain index trademarks, reference data for certain indices, custodial services, fund administration and fund accounting.

General and administration expenses increased $7 million, reflecting higher marketing and promotional costs than the prior year quarter, largely offset by closed-end fund launch costs of $22 million (excluding $3 million included in employee compensation and benefits expense) recorded in the prior year quarter.

Nine Months Ended September 30, 2013 Compared with Nine Months ended September 30, 2012

Employee compensation and benefits expense increased $196 million, or 8%, to $2,635 million in the nine months ended September 30, 2013 from $2,439 million in the prior year period, reflecting increased headcount and higher incentive compensation driven by higher operating income, including higher performance fees.

Distribution and servicing costs totaled $266 million in the nine months ended September 30, 2013 compared with $282 million in the nine months ended September 30, 2012. The nine months ended September 30, 2013 and 2012 included $139 million and $148 million, respectively, of costs attributable to Bank of America and affiliates.

Direct fund expenses increased $50 million, reflecting higher average AUM where BlackRock pays certain nonadvisory expenses of the funds primarily linked to the use of certain index trademarks, reference data for certain indices, custodial services, fund administration and fund accounting.

General and administration expenses increased $172 million, largely driven by the $124 million expense related to the Charitable Contribution and higher marketing and promotional costs.

 

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Nonoperating Results

Nonoperating income (expense), less net income (loss) attributable to NCI for the three and nine months ended September 30, 2013 and 2012 was as follows:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in millions)       2013             2012             2013             2012      

Nonoperating income (expense), GAAP basis

    ($18)        $30          $92         $13     

Less: Net income (loss) attributable to NCI(1)

    (1)        13         10                 22    
 

 

 

   

 

 

   

 

 

   

 

 

 

Nonoperating income (expense)(2)

    (17)                17                 82         (9)   

Gain related to the Charitable Contribution

    -          -          (80)        -     

Compensation expense related to (appreciation) depreciation on deferred compensation plans

    (4)         (4)        (8)         (6)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Nonoperating income (expense), as adjusted(2)

    ($21)        $13         ($6)        ($15)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts included losses of $6 million and a gain of $2 million attributable to consolidated variable interest entities (“VIEs”) for the three months ended September 30, 2013 and 2012, respectively. Amounts included losses of $2 million and a gain of $1 million attributable to consolidated VIEs for the nine months ended September 30, 2013 and 2012, respectively.

(2) 

Net of net income (loss) attributable to NCI.

 

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The components of nonoperating income (expense), less net income (loss) attributable to NCI, for the three and nine months ended September 30, 2013 and 2012 were as follows:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(in millions)       2013             2012             2013             2012      

Net gain (loss) on investments(1)

       

Private equity

    $12        $20        $35        $37   

Real estate

    7        5        17        9   

Distressed credit/mortgage funds

    5        26        28        54   

Hedge funds/funds of hedge funds

    (3     7        5        17   

Other investments(2)

    2        2        11        (1
 

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

            23                60                96                116   

Gain related to PennyMac IPO

    -        -        39        -   

Gain related to the Charitable Contribution

    -        -        80        -   

Investments related to deferred compensation plans

    4        4        8        6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net gain (loss) on investments

    27        64        223        122   

Interest and dividend income

    8        10        18        27   

Interest expense

    (52     (57     (159     (158
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest expense

    (44     (47     (141     (131
 

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating income (expense)(1)

    (17     17        82        (9

Gain related to the Charitable Contribution

    -        -        (80     -   

Compensation expense related to (appreciation) depreciation on deferred compensation plans

    (4     (4     (8     (6
 

 

 

   

 

 

   

 

 

   

 

 

 

Nonoperating income (expense), as adjusted(1)

    ($21     $13        ($6     ($15
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Net of net income (loss) attributable to NCI.

(2)

Amounts included net gains (losses) related to equity and fixed income investments, and BlackRock’s seed capital hedging program.

Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012.

Net gains on investments of $27 million in the three months ended September 30, 2013 decreased $37 million from the prior year quarter due to lower net positive marks, primarily on distressed credit/mortgage funds.

Net interest expense decreased $3 million from the three months ended September 30, 2012. For further information on the Company’s long-term debt, see Liquidity and Capital Resources herein.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012.

Net gains on investments of $223 million in the nine months ended September 30, 2013 increased $101 million from the prior year period due to the $39 million gain related to the PennyMac IPO and the $80 million gain related to the Charitable Contribution, partially offset by lower net positive marks.

 

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Net interest expense increased $10 million from the nine months ended September 30, 2012 primarily due to lower dividend income.

Income Tax Expense

Income tax expense for the three and nine months ended September 30, 2013 and 2012 was as follows:

 

     GAAP      As Adjusted  
(in millions)    Three Months Ended
September 30,
     Nine Months Ended
September 30,
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012      2013      2012      2013      2012  

Income before income taxes(1)

     $949         $892         $2,806         $2,510         $957         $889         $2,875         $2,518   

Income tax expense

     $219         $250         $715         $742         $285         $279         $844         $775   

Effective tax rate

     23.1%         28.1%         25.5%         29.6%         29.9%         31.4%         29.4%         30.8%   

 

(1) 

Net of net income (loss) attributable to NCI.

The three and nine months ended September 30, 2013 included a $64 million net noncash benefit primarily related to the revaluation of certain deferred income tax liabilities, including legislation enacted in the United Kingdom and domestic state and local income tax changes. In addition, the nine months ended September 30, 2013 included the approximately $57 million tax benefit recognized in connection with the Charitable Contribution and a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards. The $64 million net noncash benefit and the $57 million tax benefit related to the Charitable Contribution were excluded from as adjusted results.

The three and nine months ended September 30, 2012 included a $30 million net noncash benefit, which was excluded from as adjusted results, related to the revaluation of certain deferred income tax liabilities, including legislation enacted in the United Kingdom, domestic state and local income tax changes, and the tax effect resulting from changes in the Company’s organizational structure.

Balance Sheet Overview

As Adjusted Balance Sheet

The following table presents a reconciliation of the condensed consolidated statement of financial condition presented on a GAAP basis to the condensed consolidated statement of financial condition, excluding the impact of separate account assets and separate account collateral held under securities lending agreements (directly related to lending separate account securities) and separate account liabilities and separate account collateral liabilities under securities lending agreements, consolidated VIEs and consolidated sponsored investment funds.

The Company presents the as adjusted balance sheet as additional information to enable investors to exclude certain assets that have equal and offsetting liabilities or noncontrolling interests that ultimately do not have an impact on stockholders’ equity (excluding appropriated retained earnings related to consolidated collateralized loan obligations (“CLOs”)) or cash flows. Management views the as adjusted balance sheet, a non-GAAP financial measure, as an economic presentation of its total assets and liabilities; however, it does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

 

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Separate Account Assets and Liabilities and Separate Account Collateral Held under Securities Lending Agreements

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 Company records equal and offsetting separate account liabilities. The separate account assets are not available to creditors of the Company and the holders of the pension contracts have no recourse to the Company’s assets. The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the condensed consolidated statements of income. While BlackRock has no economic interest in these assets or liabilities, BlackRock earns an investment advisory fee for the service of managing these assets on behalf of the clients.

In addition, the Company records on its condensed consolidated statements of financial condition the separate account collateral received under securities lending arrangements as its own asset in addition to an equal and offsetting separate account collateral liability for the obligation to return the collateral.

Consolidated VIEs

At September 30, 2013, BlackRock’s consolidated VIEs included CLOs and one investment fund. The assets of these VIEs are not available to creditors of the Company and the Company has no obligation to settle the liabilities of the VIEs. While BlackRock has no material economic interest in these assets or liabilities, BlackRock earns an investment advisory fee, as well as a potential performance fee, for the service of managing these assets on behalf of clients.

Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds. The Company is not 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 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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    September 30, 2013  
          Segregated client assets
generating advisory fees in
which BlackRock has no
economic interest or
liability
       
(in millions)   GAAP
Basis
    Separate
Account
Assets/
Collateral
    Consolidated
VIEs
    Consolidated
Sponsored
Investment
Funds
    As
Adjusted
 

Assets

         

Cash and cash equivalents

  $ 3,987      $ —       $ —       $ 105      $ 3,882   

Accounts receivable

    4,311        —         —         —         4,311   

Investments

    1,878        —         —         83        1,795   

Assets of consolidated VIEs

    2,200        —         2,200        —         —    

Separate account assets and separate account collateral held under securities lending agreements

    168,608        168,608        —         —         —    

Other assets(1)

    1,282        —         —         13        1,269   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    182,266          168,608            2,200               201        11,257   

Goodwill and intangible assets, net

    30,451        —         —         —           30,451   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 212,717      $ 168,608      $ 2,200      $ 201      $ 41,708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Accrued compensation and benefits

  $ 1,322      $ —       $ —       $ —       $ 1,322   

Accounts payable and accrued liabilities

    3,322        —         —         —         3,322   

Liabilities of consolidated VIEs

    2,156        —         2,156        —         —    

Long-term borrowings

    4,938        —         —         —         4,938   

Separate account liabilities and separate account collateral liabilities under securities lending agreements

    168,608        168,608        —         —         —    

Deferred income tax liabilities

    5,237        —         —         —         5,237   

Other liabilities

    948        —         —         33        915   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    186,531        168,608        2,156        33        15,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

         

Total stockholders’ equity(2)

    25,999        —         25        —         25,974   

Noncontrolling interests

    187        —         19        168        —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    26,186        —         44        168        25,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 212,717      $ 168,608      $ 2,200      $ 201      $ 41,708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include property and equipment and other assets.

(2) 

GAAP amount includes $25 million of appropriated retained earnings related solely to consolidated CLOs in which the Company has no equity exposure.

The following discussion summarizes the significant changes in assets and liabilities on a GAAP basis. The discussion does not include changes related to assets and liabilities that are equal and offsetting and have no impact on BlackRock’s stockholders’ equity.

 

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Assets. Cash and cash equivalents at September 30, 2013 and December 31, 2012 included $105 million and $133 million, respectively, of cash held by consolidated sponsored investment funds (see Liquidity and Capital Resources for details on the change in cash and cash equivalents during the nine months ended September 30, 2013).

Accounts receivable at September 30, 2013 increased $2,061 million from December 31, 2012, primarily reflecting an increase in unit trust receivables (substantially offset by an increase in unit trust payables recorded within accounts payable and accrued liabilities), partially offset by lower performance fee receivables. Investments increased $128 million from December 31, 2012 (for more information see Investments herein). Goodwill and intangible assets increased $139 million from December 31, 2012, primarily due to the Credit Suisse ETF Transaction, partially offset by $120 million of intangible assets amortization expense. Other assets (including property plant and equipment) increased $99 million from December 31, 2012, primarily related to an increase in current taxes receivable, higher earnings from certain advisory company equity method investments and an increase in other receivables, partially offset by a decrease in property and equipment.

Liabilities. Accrued compensation and benefits at September 30, 2013 decreased $225 million from December 31, 2012, primarily due to 2012 incentive compensation cash payments in the first quarter 2013, partially offset by the effect of 2013 incentive compensation accruals. Accounts payable and accrued liabilities increased $2,267 million from December 31, 2012 due to higher unit trust payables (substantially offset by an increase in unit trust receivables recorded within accounts receivable) and increased accruals, including direct fund and marketing expenses. Borrowings decreased $849 million from December 31, 2012 resulting from the repayments of $750 million and $100 million of long-term and short-term borrowings, respectively.

Net deferred income tax liabilities at September 30, 2013 decreased $56 million, primarily due to the effects of temporary differences associated with stock compensation and investment income. The change also reflects the revaluation of certain deferred income tax liabilities due to legislation enacted in the United Kingdom, domestic state and local income tax changes, and realization of tax loss carryforwards. Other liabilities at September 30, 2013 increased $90 million from December 31, 2012, primarily resulting from an increase in deferred carried interest, a contingent liability related to the Credit Suisse ETF Transaction and other operating liabilities.

Investments

Investments totaled $1,878 million at September 30, 2013 and $1,750 million at December 31, 2012. Investments include investments held by sponsored investment funds deemed to be controlled by BlackRock. Management reviews BlackRock’s investments on an “economic” basis, which eliminates the portion of investments that does not impact BlackRock’s book value. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

The Company presents total investments, as adjusted, to enable investors to understand the portion of its investments that is owned by the Company, net of NCI, as a gauge to measure the impact of changes in net nonoperating gain (loss) on investments to net income (loss) attributable to BlackRock.

 

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The Company further presents net “economic” investment exposure, net of deferred compensation investments and hedged investments, to reflect another gauge for investors as the economic impact of investments held pursuant to deferred compensation arrangements is substantially offset by a change in compensation expense and the impact of hedged investments is substantially mitigated by swap hedges. Carried interest capital allocations are excluded as there is no impact to BlackRock’s stockholders’ equity until such amounts are realized as performance fees. Finally, the Company’s regulatory investment in Federal Reserve Bank stock, which is not subject to market or interest rate risk, is excluded from the Company’s net economic investment exposure.

 

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

Total investments, GAAP

           $ 1,878              $ 1,750   

Investments held by consolidated sponsored investment funds(1)

     (695     (524

Net exposure to consolidated investment funds

     612        430   
  

 

 

   

 

 

 

Total investments, as adjusted

     1,795        1,656   

Federal Reserve Bank stock

     (93     (89

Carried interest

     (137     (85

Deferred compensation investments

     (68     (62

Hedged investments

     (181     (209
  

 

 

   

 

 

 

Net “economic” investment exposure

           $         1,316              $         1,211   
  

 

 

   

 

 

 

 

(1) 

At September 30, 2013 and December 31, 2012, approximately $695 million and $524 million, respectively, of BlackRock’s total GAAP investments were held in sponsored investment funds that were deemed to be controlled by BlackRock in accordance with GAAP, and, therefore, are consolidated even though BlackRock may not economically own a majority of such funds.

The following table represents the carrying value of the Company’s economic investment exposure, by asset type, at September 30, 2013 and December 31, 2012:

 

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

Private equity

   $         279          $         298      

Real estate

     130            122      

Distressed credit/mortgage funds

     186            214      

Hedge funds/funds of hedge funds

     157            159      

Other investments(1)

     564            418      
  

 

 

    

 

 

 

Net “economic” investment exposure

   $ 1,316          $ 1,211      
  

 

 

    

 

 

 

 

(1)

Other investments primarily include seed investments in fixed income and equity funds/strategies as well as U.K. government securities held for regulatory purposes.

 

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As adjusted investment activity for the nine months ended September 30, 2013 was as follows:

 

(in millions)       

Investments, as adjusted, December 31, 2012

     $1,656      

Purchases/capital contributions

     503      

Sales/maturities

     (379)      

Distributions(1)

     (129)      

Market valuations/earnings from equity method investments

     92      

Carried interest capital allocations

     52      
  

 

 

 

Investments, as adjusted, September 30, 2013

     $1,795      
  

 

 

 

 

(1) 

Amount represents return of capital and return of investments.

The following table presents investments, as adjusted at September 30, 2013:

 

(in millions)   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Other
Investments Not
Held at Fair
Value(1)
    Investments at
September 30,
2013
 

Total investments, as adjusted(2)

  $           588      $           300      $               529      $               378      $                   1,795   

 

(1) 

Amount includes investments held at cost or amortized cost, carried interest and equity method investments, which include investment companies, which are not accounted for under a fair value measure. Certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures, therefore, the Company’s investment in such equity method investees may not represent fair value.

(2)

Amounts include cash and cash equivalents, other assets and liabilities that are consolidated from non-VIE sponsored investment funds. See Note 5, Fair Value Disclosures, to the condensed consolidated financial statements contained in Part I, Item 1 of this filing, for total GAAP investments.

Liquidity and Capital Resources

BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds and VIEs

BlackRock consolidates certain of its sponsored investment funds and CLOs, notwithstanding the fact BlackRock may only have a minority interest, if any, in these funds or CLOs. As a result, the condensed consolidated statements of cash flows include the cash flows of consolidated sponsored investment funds and CLOs. The Company uses an adjusted cash flow statement, which excludes the impact of consolidated sponsored investment funds and CLOs, as a supplemental non-GAAP measure to assess liquidity and capital requirements. The Company believes that its cash flows, excluding the impact of the consolidated sponsored investment funds and CLOs, provide investors with useful information on the cash flows of BlackRock relating to its ability to fund additional operating, investing and financing activities. BlackRock’s management does not advocate that investors consider such non-GAAP measures in isolation from, or as a substitute for, its cash flows presented in accordance with GAAP.

 

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The following table presents a reconciliation of the condensed consolidated statements of cash flows presented on a GAAP basis to the consolidated statements of cash flows, excluding the impact of the cash flows of consolidated sponsored investment funds and consolidated VIEs:

 

(in millions)    GAAP
Basis
     Impact on
Cash Flows
of Consolidated
Sponsored
Investment
Funds
     Impact on
Cash Flows
of
Consolidated
VIEs
     Cash Flows
Excluding
Impact of
Consolidated
Sponsored
Investment
Funds  and
VIEs
 

Cash and cash equivalents, December 31, 2012

   $ 4,606        $ 133          $ -          $ 4,473      

Cash flows from operating activities

     2,476                      17            219            2,240      

Cash flows from investing activities

     (275)         (108)           -            (167)     

Cash flows from financing activities

     (2,812)         63            (219)           (2,656)     

Effect of exchange rate changes on cash and cash equivalents

     (8)         -            -            (8)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net change in cash and cash equivalents

     (619)         (28)                       -            (591)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, September 30, 2013

   $ 3,987        $ 105          $ -          $ 3,882      
  

 

 

    

 

 

    

 

 

    

 

 

 

Sources of BlackRock’s operating cash primarily include investment advisory, administration fees and securities lending revenue, performance fees, revenue from BlackRock Solutions and advisory products and services, other revenue and distribution fees.

BlackRock uses its cash to pay all operating expenses, interest and principal on the Company’s borrowings, income taxes, dividends on BlackRock’s capital stock, repurchases of the Company’s stock, capital expenditures and purchases of co-investments and seed investments.

Cash flows from operating activities, excluding the impact of consolidated sponsored investment funds and VIEs, primarily include the receipt of investment advisory and administration fees, securities lending revenue and other revenue offset by the payment of operating expenses incurred in the normal course of business, including the effect of first quarter cash payments related to year-end incentive compensation.

Cash outflows from investing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the nine months ended September 30, 2013 were $167 million and primarily reflected $240 million related to the Credit Suisse ETF Transaction, $190 million of investment purchases, partially offset by $272 million of net proceeds from sales and maturities of investments.

Cash outflows from financing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the nine months ended September 30, 2013 were $2.7 billion, primarily resulting from $984 million of share repurchases, including $750 million in open market transactions and $234 million of employee tax withholdings related to employee stock transactions, a $750 million long-term debt repayment, $882 million of cash dividend payments and a $100 million short-term debt repayment. Cash outflows from financing activities were partially offset by cash inflows related to $40 million of excess tax benefits from stock-based compensation.

 

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The Company manages its financial condition and funding to maintain appropriate liquidity for the business. Liquidity resources at September 30, 2013 and December 31, 2012 were as follows:

 

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

Cash and cash equivalents

   $ 3,987       $ 4,606   

Cash and cash equivalents held by consolidated sponsored investment funds(1)

     (105)         (133)   
  

 

 

    

 

 

 

Sub-total

     3,882         4,473   

Credit facility – undrawn

     3,990          3,685   
  

 

 

    

 

 

 

Total liquidity

   $         7,872        $         8,158   
  

 

 

    

 

 

 

 

(1) 

The Company is not able to access such cash to use in its operating activities.

Total liquidity decreased $286 million during the nine months ended September 30, 2013, primarily reflecting the $750 million repayment of long-term borrowings, cash payments of 2012 year-end incentive awards, share repurchases, including $750 million in open market transactions, and cash dividend payments, partially offset by positive operating cash flow and the increased aggregate commitment of the 2013 credit facility to $3.990 billion.

A significant portion of the Company’s $1,795 million of total investments, as adjusted, is illiquid in nature and, as such, may not be readily convertible to cash.

Share Repurchase Approval. In January 2013, the Board of Directors approved an increase in the availability under the Company’s existing share repurchase program to allow for the repurchase of up to 10.2 million shares of BlackRock common stock. The Company repurchased 2.9 million common shares in open market-transactions under the share repurchase program for approximately $750 million during the nine months ended September 30, 2013. At September 30, 2013, there were 7.3 million shares still authorized to be repurchased.

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

BlackRock Institutional Trust Company, N.A. (“BTC”) is chartered as a national bank that does not accept client deposits and whose powers are limited to trust activities. BTC provides investment management services, including investment advisory and securities lending agency services, to institutional investors and other clients. BTC is subject to regulatory capital and liquid asset requirements administered by the Office of the Comptroller of the Currency.

At September 30, 2013, the Company was required to maintain approximately $1.1 billion compared with $1.2 billion at December 31, 2012 in net capital in certain regulated subsidiaries, including BTC, entities regulated by the Financial Conduct Authority and Prudential Regulation Authority in the United Kingdom and the Company’s broker-dealers. The Company was in compliance with all applicable regulatory net capital requirements. The decrease in net capital is primarily due to a reduction in the BTC minimum Tier 1 capital requirement from $500 million to $385 million in August 2013.

 

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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 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 September 30, 2013.

The 2013 credit facility provides back-up liquidity, funds ongoing working capital for general corporate purposes and funds various investment opportunities. At September 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 September 30, 2013, BlackRock had no CP Notes outstanding.

Long-Term Borrowings

At September 30, 2013, the principal amount of long-term borrowings was $4.950 billion. See Note 11, Borrowings, in the 2012 Form 10-K for more information on borrowings outstanding at December 31, 2012. During the nine months ended September 30, 2013, the Company paid approximately $124 million of interest on long-term borrowings. Future principal repayments and interest requirements at September 30, 2013 were as follows:

 

(in millions)                     

Year

       Principal              Interest          Total
    Payments    
 

October-December 2013(1)

     $        -          $     76         $     76   

2014

            1,000         196                   1,196   

2015

     750         156         906   

2016

            151         151   

2017

     700         151         851   

2018

            107         107   

Thereafter

     2,500                       235         2,735   
  

 

 

    

 

 

    

 

 

 

Total

     $4,950         $1,072         $6,022   
  

 

 

    

 

 

    

 

 

 

 

  (1)

In May 2013, the Company repaid $750 million of two-year floating rate notes at maturity.

Investment Commitments. At September 30, 2013, the Company had $216 million of various capital commitments to fund sponsored investment funds, including funds of private equity funds, real estate funds, infrastructure funds, opportunistic funds and distressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third-party funds as third-party noncontrolling interest holders have the legal obligation to fund the respective commitments of such funds of funds. Generally, the timing of the funding of these commitments is unknown and the commitments are callable on demand at any time prior to the

 

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expiration of the commitment. These unfunded commitments are not recorded on the condensed consolidated statements of financial condition. These commitments do not include potential future commitments approved by the Company, but which are not yet legally binding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.

Carried Interest Claw-back. As a general partner in certain investment funds, including private equity partnerships and certain hedge funds, the Company may receive carried interest cash distributions from the partnerships in accordance with distribution provisions of the partnership agreements. The Company may, from time to time, be required to return all or a portion of such distributions to the limited partners in the event the limited partners do not achieve a return as specified in the various partnership agreements. Therefore, BlackRock records carried interest subject to such claw-back provisions in investments, or cash to the extent that it is distributed, and as a deferred carried interest liability on its condensed consolidated statements of financial condition. Carried interest is realized and recorded as performance fees on its condensed consolidated statements of income upon the earlier of the termination of the investment fund or when the likelihood of claw-back is mathematically improbable.

Contingent Payment related to Credit Suisse ETF Transaction. In connection with the Credit Suisse ETF Transaction, BlackRock is required to make contingent payments annually to Credit Suisse, subject to achieving specified thresholds during a seven year period, subsequent to the acquisition date. The fair value of the contingent payments at September 30, 2013 is not significant to the condensed consolidated statement of financial condition and is included in other liabilities.

Indemnifications. On behalf of certain clients, the Company lends securities to highly rated banks and broker-dealers. In these securities lending transactions, the borrower is required to provide and maintain collateral at or above regulatory minimums. Securities on loan are marked to market daily to determine if the borrower is required to pledge additional collateral. BlackRock has issued certain indemnifications to certain securities lending clients against potential losses resulting from a borrower’s failure to fulfill its obligations should the value of the collateral pledged by the borrower at the time of default be insufficient to cover the borrower’s obligations under the securities lending agreement. At September 30, 2013, the Company indemnified certain of its clients for their securities lending loan balances of approximately $115 billion. The Company held as agent, cash and securities totaling $121 billion as collateral for indemnified securities on loan at September 30, 2013. The fair value of these indemnifications was not material at September 30, 2013. The Company currently expects indemnified balances to increase over time.

While the collateral pledged by a borrower is intended to be sufficient to offset the borrower’s obligations to return securities borrowed and any other amounts owing to the lender under the relevant securities lending agreement, in the event of a borrower default, the Company can give no assurance that the collateral pledged by the borrower will be sufficient to fulfill such obligations. If the amount of such pledged collateral is not sufficient to fulfill such obligations to a client for whom the Company has provided indemnification, BlackRock would be responsible for the amount of the shortfall. These indemnifications cover only the collateral shortfall described above, and do not in any way guarantee, assume or otherwise insure the investment performance or return of any cash collateral vehicle into which securities lending cash collateral is invested.

 

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Critical Accounting Policies

The preparation of the condensed consolidated 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. In addition to Consolidation of VIEs, Fair Value Measurements, Goodwill and Intangible Assets and Performance Fees/Carried Interest discussed below, see Note 2, Significant Accounting Policies, in the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filing and the Company’s Critical Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in BlackRock’s 2012 Form 10-K and Note 2, Significant Accounting Policies, in the 2012 Form 10-K for further information.

Consolidation of 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”) or CLOs and sponsored investment funds, which may be considered VIEs in accordance with GAAP. At September 30, 2013, the Company’s VIEs primarily consisted of the following:

CLOs. At September 30, 2013, BlackRock was the manager of over 20 CLOs/CDOs and other securitization entities. BlackRock was determined to be the primary beneficiary (“PB”) for certain of these CLOs, which required BlackRock to consolidate these VIEs. BlackRock was deemed to be the PB because it has the power to direct the activities of the CLOs that most significantly impact the entities’ economic performance and has the right to receive benefits that potentially could be significant to the VIE. At September 30, 2013, the Company had $2,181 million and $2,156 million in assets and liabilities, respectively, on its condensed consolidated statements of financial condition related to these consolidated CLOs. In addition, the Company recorded appropriated retained earnings for the difference between the assets and liabilities, as the CLO noteholders, not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. Changes in the fair value of the assets and liabilities of these CLOs have no impact on net income attributable to BlackRock or its cash flows. Excluding outstanding management receivables, the Company has no risk of loss with its involvement with these VIEs.

Sponsored Private Equity Fund of Funds. At September 30, 2013, BlackRock was determined to be the PB of one investment fund of funds and was deemed to absorb the majority of the variability due to its de-facto third-party relationships with other partners in the fund, which limited the ability of the partners to transfer or sell their interests without BlackRock’s consent as the general partner of the fund. At September 30, 2013, the Company had recorded $2 million, $17 million and $19 million in cash and cash equivalents, investments and nonredeemable noncontrolling interests of the consolidated VIE, respectively, on its condensed consolidated statements of financial condition related to this VIE. Changes in the fair value of the assets and liabilities of this VIE have no impact on net income attributable to BlackRock. Excluding outstanding management fee receivables, the Company has no risk of loss related to its involvement with this VIE.

Fair Value Measurements. The provisions of 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.

Level 3 inputs include the most currently available information, including capital account balances for partnership interests in various alternative investments, which may be adjusted by using the returns of certain market indices. Certain investments that are valued using net asset values and

 

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are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3. BlackRock’s $626 million of Level 3 investments, or 33% of total GAAP investments at September 30, 2013, primarily included co-investments in private equity fund of funds and private equity funds, funds of hedge funds as well as alternative hedge funds that invest in distressed credit and mortgage securities and real estate equity products. Many of these investees are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund, which could include BlackRock employees. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information including independent appraisals from third-party sources. However, in some instances current valuation information, for illiquid securities or securities in markets that are not active, may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used to value these investments.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. See Note 2, Significant Accounting Policies, in the condensed consolidated financial statements contained in Part I, Item 1 of this filing for further information regarding fair value measurements.

Goodwill and Intangible Assets. The value of advisory contracts acquired in business acquisitions to manage AUM in proprietary open-end investment funds as well as collective trust funds without a specified termination date are classified as indefinite-lived intangible assets. The assignment of indefinite lives to such investment fund contracts is based upon the assumption there is no foreseeable limit on the contract period to manage these funds due to the likelihood of continued renewal at little or no cost. In addition, trade names/trademarks are considered indefinite-lived intangibles as they are expected to generate cash flows indefinitely. Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. In accordance with the applicable provisions of ASC 350, Intangibles – Goodwill and Other (“ASC 350”), indefinite-lived intangible assets and goodwill are not amortized. The Company performed its annual impairment assessment review for goodwill and indefinite and finite-lived intangible assets on BlackRock’s annual impairment test date of July 31st.

Goodwill. BlackRock assessed its goodwill for impairment on July 31st and considered such factors as the book value and the market capitalization of the Company. At July 31, 2013, the impairment assessment indicated no impairment charge was required. The Company continues to monitor its book value per share compared with closing prices of its common stock for potential indicators of impairment. At September 30, 2013, the Company’s common stock closed at $270.62, which exceeded its book value, after excluding appropriated retained earnings, of approximately $153.32 per share.

Indefinite-lived and finite-lived intangibles. BlackRock assessed its indefinite-lived management contracts and trade names for impairment on July 31st. In evaluating whether it is more likely than not that the fair value of indefinite-lived intangibles is less than its carrying value, BlackRock performed certain quantitative assessments and assessed various significant qualitative factors including AUM, revenue basis points, projected AUM growth rates, operating margins, tax rates and discount rates. In addition, the Company considered other factors including: (i) macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; (ii) industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics, a change in the market for an entity’s services, or regulatory, legal or political developments; and (iii) entity-specific events, such as a change in management or key personnel, overall financial performance and litigation that could affect significant inputs.

 

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As of July 31, 2013, the Company determined that the impairment assessment performed indicated no impairment charges were required and the classification was still appropriate.

In addition, for finite-lived intangibles, management determined that no indicators existed which would result in an impairment charge or a change in the remaining useful life of its finite-lived intangible assets.

Performance Fees / Carried Interest. The Company receives investment advisory performance fees or incentive allocations, including carried interest allocations, from certain actively managed investment funds and certain separately managed accounts. These performance fees are earned upon exceeding specified relative and/or absolute investment return thresholds. Such fees are recorded upon completion of the measurement period, which varies by product or account, and could be monthly, quarterly, annually or longer. For the nine months ended September 30, 2013 and 2012, performance fee revenue totaled $293 million and $224 million, respectively.

The Company receives carried interest from certain alternative investments upon exceeding performance thresholds. BlackRock may be required to return all, or part, of such carried interest depending upon future performance of these funds. The Company records a deferred carried interest liability to the extent it receives cash or capital allocations related to carried interest prior to meeting the revenue recognition criteria. BlackRock records carried interest subject to such claw-back provisions in investments or cash to the extent that it is distributed, on its condensed consolidated statements of financial condition. Carried interest is realized and recorded as performance fee revenue upon the earlier of the termination of the investment fund or when the likelihood of claw-back is mathematically improbable. The Company records realized carried interest as performance fees on its condensed consolidated statements of income.

At September 30, 2013 and December 31, 2012, the Company had $144 million and $97 million, respectively, of deferred carried interest recorded in other liabilities on the condensed consolidated statements of financial condition. The ultimate amount of performance fee revenue that will be recognized, if any, for these products is unknown.

Recent Developments

Acquisitions

MGPA. In October 2013, the Company completed the acquisition of MGPA, an independently managed private equity real estate investment advisory company primarily in Asia and Europe.

Accounting Developments

For accounting pronouncements that the Company adopted during the nine months ended September 30, 2013 and for recent accounting pronouncements not yet adopted, see Note 2, Significant Accounting Policies, in the condensed consolidated financial statements contained in Part I, Item 1 of this filing.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

AUM Market Price Risk.    BlackRock’s investment advisory and administration fees are primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns realized on AUM. At September 30, 2013, the majority of the Company’s investment advisory and administration fees were based on average or period end AUM of the applicable investment funds or separate accounts. Movements in equity market prices, interest rates/credit spreads, foreign exchange rates or all three could cause the value of AUM to decline, which would result in lower investment advisory and administration fees.

 

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Corporate Investments Portfolio Risks.    As a leading investment management firm, BlackRock devotes significant resources across all of its operations to identifying, measuring, monitoring, managing and analyzing market and operating risks, including the management and oversight of its own investment portfolio. The Board of Directors of the Company has adopted guidelines for the review of investments to be made by the Company, requiring, among other things, that investments be reviewed by certain senior officers of the Company, and that certain investments may be referred to the Audit Committee or the Board of Directors, depending on the circumstances, for approval.

In the normal course of its business, BlackRock is exposed to equity market price risk, interest rate/credit spread risk and foreign exchange rate risk associated with its corporate investments.

BlackRock has investments primarily in sponsored investment products that invest in a variety of asset classes, including real estate, private equity and hedge funds. Investments generally are made for co-investment purposes, to establish a performance track record, to hedge exposure to certain deferred compensation plans or for regulatory purposes. Currently, the Company has a seed capital hedging program in which it enters into swaps to hedge market and interest rate exposure to certain investments. At September 30, 2013, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional value of approximately $113 million and $68 million, respectively.

At September 30, 2013, approximately $695 million of BlackRock’s total investments were maintained in sponsored investment funds deemed to be controlled by BlackRock in accordance with GAAP and, therefore, are consolidated even though BlackRock may not own a majority of such funds. Excluding the impact of the Federal Reserve Bank stock, carried interest, investments made to hedge exposure to certain deferred compensation plans and certain investments that are hedged via the seed capital hedging program, the Company’s economic exposure to its investment portfolio is $1,316 million. See Management’s Discussion and Analysis-Balance Sheet Overview-Investments for further information on the Company’s investments.

The “economic” investment exposure of the portfolio is presented below:

Equity Market Price Risk. At September 30, 2013, the Company’s net exposure to equity market price risk in its investment portfolio was approximately $766 million of the Company’s total economic investment exposure. Investments subject to market price risk include private equity and real estate investments, hedge funds and funds of funds as well as mutual funds. The Company estimates that a hypothetical 10% adverse change in market prices would result in a decrease of approximately $76.6 million in the carrying value of such investments.

Interest Rate/Credit Spread Risk. At September 30, 2013, the Company was exposed to interest-rate risk and credit spread risk as a result of approximately $550 million of investments in debt securities and sponsored investment products that invest primarily in debt securities. Management considered a hypothetical 100 basis point fluctuation in interest rates or credit spreads and estimates that the impact of such a fluctuation on these investments, in the aggregate, would result in a decrease, or increase, of approximately $15.2 million in the carrying value of such investments.

Foreign Exchange Rate Risk. As discussed above, the Company invests in sponsored investment products that invest in a variety of asset classes. The carrying value of the total economic investment exposure denominated in foreign currencies, primarily the pound sterling and euro, was $187 million at September 30, 2013. A 10% adverse change in the applicable foreign exchange rates would result in approximately a $18.7 million decline in the carrying value of such investments.

 

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Other Market Risks. The Company executes forward foreign currency exchange contracts to mitigate the risk of foreign exchange risk movements. At September 30, 2013, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $680 million.

 

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Item 4. Controls and Procedures

Disclosure Controls and Procedures.    Under the direction of BlackRock’s Chief Executive Officer and Chief Financial Officer, BlackRock evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at September 30, 2013. Based on this evaluation, BlackRock’s Chief Executive Officer and Chief Financial Officer have concluded that BlackRock’s disclosure controls and procedures were effective.

Internal Control over Financial Reporting.    There have been no changes in internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected or are reasonably likely to materially affect such internal control over financial reporting.

 

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PART II — OTHER INFORMATION

Item 1.      Legal Proceedings

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

Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits will have a material effect on BlackRock’s results of operations, financial position or cash flows. However, there is no assurance as to whether any such pending or threatened matters will have a material effect on BlackRock’s results of operations, financial position or cash flows in any future reporting period. Due to uncertainties surrounding the outcome of these matters, management cannot reasonably estimate the possible loss or range of loss that may arise from these matters.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2013, the Company made the following purchases of its common stock, which is registered pursuant to Section 12(b) of the Exchange Act.

 

 

      Total Number 
   of Shares
Purchased
    Average Price
  Paid per Share  
    Total Number of
Shares
Purchased as
Part of Publicly
  Announced Plans  
or Programs
    Maximum
Number of
  Shares that May  
Yet Be
Purchased
Under the Plans
or Programs(1)
 
July 1, 2013 through July 31, 2013     302,546     (2)      $279.66          255,000                 8,013,755    
August 1, 2013 through August 31, 2013     636,243     (2)      $272.75         620,000         7,393,755    
September 1, 2013 through September 30, 2013     38,495     (2)      $263.26         33,400         7,360,355    
 

 

 

     

 

 

   

Total

            977,284                $274.52                 908,400      
 

 

 

     

 

 

   

 

(1) 

In January 2013, the Board of Directors approved an increase in the availability under the Company’s existing share repurchase program to allow for the repurchase of up to 10.2 million shares of BlackRock common stock with no stated expiration date.

(2) 

Includes purchases made by the Company primarily to satisfy income tax withholding obligations of employees and members of the Company’s Board of Directors related to the vesting of certain restricted stock or restricted stock unit awards and purchases made by the Company as part of the publicly announced share repurchase program.

 

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Item 6.      Exhibits

 

 Exhibit No.  

  

Description

12.1    Computation of Ratio of Earnings to Fixed Charges
31.1    Section 302 Certification of Chief Executive Officer
31.2    Section 302 Certification of Chief Financial Officer
32.1    Section 906 Certification of Chief Executive Officer and Chief Financial Officer
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  BLACKROCK, INC.   
  (Registrant)   
  By:       /s/ Gary Shedlin   

Date: November 8, 2013

     Gary S. Shedlin   
     Senior Managing Director &  Chief Financial Officer   

 

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EXHIBIT INDEX

 

Exhibit No.    

  

Description

12.1    Computation of Ratio of Earnings to Fixed Charges
31.1    Section 302 Certification of Chief Executive Officer
31.2    Section 302 Certification of Chief Financial Officer
32.1    Section 906 Certification of Chief Executive Officer and Chief Financial Officer
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE            XBRL Taxonomy Extension Presentation Linkbase Document