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 March 31, 2015

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 April 30, 2015, there were 164,616,254 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      34   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      59   
Item 4.    Controls and Procedures      61   

PART II

OTHER INFORMATION

 

Item 1.    Legal Proceedings      62   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      63   
Item 6.    Exhibits      64   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(unaudited)

 

(in millions, except shares and per share data)    March 31,
2015
    December 31,
2014
 

Assets

    

Cash and cash equivalents

     $    4,293        $    5,723   

Accounts receivable

     2,836        2,120   

Investments

     2,204        1,921   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     279        278   

Bank loans, other investments and other assets

     3,895        3,352   

Separate account assets

     162,046        161,287   

Separate account collateral held under securities lending agreements

     35,367        33,654   

Property and equipment (net of accumulated depreciation of $605 and $587 at March 31, 2015 and December 31, 2014, respectively)

     537        467   

Intangible assets (net of accumulated amortization of $1,075 and $1,040 at March 31, 2015 and December 31, 2014, respectively)

     17,429        17,344   

Goodwill

     12,975        12,961   

Other assets

     853        701   
  

 

 

   

 

 

 

Total assets

                     $242,714                        $239,808   
  

 

 

   

 

 

 

Liabilities

    

Accrued compensation and benefits

     $       684        $    1,865   

Accounts payable and accrued liabilities

     1,714        1,035   

Liabilities of consolidated variable interest entities:

    

Borrowings

     3,964        3,389   

Other liabilities

     182        245   

Borrowings

     4,938        4,938   

Separate account liabilities

     162,046        161,287   

Separate account collateral liabilities under securities lending agreements

     35,367        33,654   

Deferred income tax liabilities

     5,077        4,989   

Other liabilities

     1,086        886   
  

 

 

   

 

 

 

Total liabilities

     215,058        212,288   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Temporary equity

    

Redeemable noncontrolling interests

     180        35   

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     2        2   

Shares authorized: 500,000,000 at March 31, 2015 and December 31, 2014;

    

Shares issued: 171,252,185 at March 31, 2015 and December 31, 2014;

    

Shares outstanding: 164,949,507 and 164,786,788 at March 31, 2015 and December 31, 2014, respectively

    

Preferred stock (Note 15)

     -        -   

Additional paid-in capital

     19,126        19,386   

Retained earnings

     10,597        10,164   

Appropriated retained earnings

     16        (19

Accumulated other comprehensive loss

     (439     (273

Treasury stock, common, at cost (6,302,678 and 6,465,397 shares held at March 31, 2015 and December 31, 2014, respectively)

     (1,927     (1,894
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     27,375        27,366   

Nonredeemable noncontrolling interests

     89        104   

Nonredeemable noncontrolling interests of consolidated variable interest entities

     12        15   
  

 

 

   

 

 

 

Total permanent equity

     27,476        27,485   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

     $242,714        $239,808   
  

 

 

   

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Income

(unaudited)

 

(in millions, except shares and per share data)   Three Months Ended
March 31,
 
    2015     2014  

Revenue

   

Investment advisory, administration fees and securities lending revenue

   

Related parties

    $1,681        $1,611   

Other third parties

    709        680   
 

 

 

   

 

 

 

Total investment advisory, administration fees and securities lending revenue

    2,390        2,291   

Investment advisory performance fees

    108        158   

BlackRock Solutions and advisory

    147        154   

Distribution fees

    17        19   

Other revenue

    61        48   
 

 

 

   

 

 

 

Total revenue

    2,723        2,670   

Expense

   

Employee compensation and benefits

    981        982   

Distribution and servicing costs

    99        89   

Amortization of deferred sales commissions

    13        15   

Direct fund expense

    189        179   

General and administration

    339        313   

Amortization of intangible assets

    35        41   
 

 

 

   

 

 

 

Total expense

    1,656        1,619   
 

 

 

   

 

 

 

Operating income

    1,067        1,051   

Nonoperating income (expense)

   

Net gain (loss) on investments

    63        76   

Net gain (loss) on consolidated variable interest entities

    35        (16

Interest and dividend income

    4        10   

Interest expense

    (51     (53
 

 

 

   

 

 

 

Total nonoperating income (expense)

    51        17   
 

 

 

   

 

 

 

Income before income taxes

    1,118        1,068   

Income tax expense

    258        324   
 

 

 

   

 

 

 

Net income

    860        744   

Less:

   

Net income (loss) attributable to redeemable noncontrolling interests

    4        1   

Net income (loss) attributable to nonredeemable noncontrolling interests

    34        (13
 

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

    $822        $756   
 

 

 

   

 

 

 

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

   

Basic

    $4.92        $4.47   

Diluted

    $4.84        $4.40   

Cash dividends declared and paid per share

    $2.18        $1.93   

Weighted-average common shares outstanding:

   

Basic

    167,089,037        169,081,421   

Diluted

    169,723,167        171,933,803   

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

(in millions)        Three Months Ended    
March 31,
 
       2015         2014    

Net income

   $ 860      $ 744   

Other comprehensive income:

    

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

    

Unrealized holding gains (losses), net of tax

     -        -   

Less: reclassification adjustment included in net income(1)

     -        8   
  

 

 

   

 

 

 

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

     -        (8

Benefit plans, net

     (1     -   

Foreign currency translation adjustments

     (165     8   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (166     -   
  

 

 

   

 

 

 

Comprehensive income

     694        744   

Less: Comprehensive income (loss) attributable to noncontrolling interests

     38        (12
  

 

 

   

 

 

 

Comprehensive income attributable to BlackRock, Inc.

   $ 656      $ 756   
  

 

 

   

 

 

 

 

 

(1) 

The tax benefit (expense) was not material for the three months ended March 31, 2014.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

(in millions)   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, 2014

    $19,388           $10,164           $(19)          $(273)          $(1,894)          $27,366           $104           $15           $27,485           $35     

Net income

    -          822          -          -          -          822          (1)         35          856          4    

Allocation of gains (losses) of consolidated collateralized loan obligations

    -          -          35          -          -          35          -          (35)         -          -    

Dividends paid

    -          (389)         -          -          -          (389)         -          -          (389)         -    

Stock-based compensation

    143          -          -          -          -          143          -          -          143          -    

Issuance of common shares related to employee stock transactions

    (458)         -          -          -          465          7          -          -          7           -    

Employee tax withholdings related to employee stock transactions

    -          -          -          -          (223)         (223)         -          -          (223)         -    

Shares repurchased

    -          -          -          -          (275)         (275)         -          -          (275)         -    

Net tax benefit (shortfall) from stock-based compensation

    55          -          -          -          -          55          -          -          55          -    

Subscriptions (redemptions/ distributions) — noncontrolling interest holders

    -          -          -          -          -          -          (14)         (3)         (17)         123    

Net consolidations (deconsolidations) of sponsored investment funds

    -          -          -          -          -          -          -          -          -          18     

Other comprehensive income (loss)

    -          -          -          (166)         -          (166)         -          -          (166)         -    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2015

      $19,128            $10,597            $16              ($439)             ($1,927)             $27,375              $89              $12              $27,476              $180    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) 

Amounts include $2 million of common stock at both March 31, 2015 and December 31, 2014.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

(in millions)   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, 2013

    $19,475          $8,208          $22          ($35)         ($1,210)         $26,460          $135          $21          $26,616          $54     

Net income

    -          756          -          -          -          756          3          (16)         743          1     

Allocation of gains (losses) of consolidated collateralized loan obligations

    -          -          (16)         -          -          (16)         -          16          -          -     

Dividends paid

    -          (366)         -          -          -          (366)         -          -          (366)         -     

Stock-based compensation

    126          -          -          -          1          127          -          -          127          -     

Issuance of common shares related to employee stock transactions

    (603)         -          -          -          604          1          -          -          1          -     

Employee tax withholdings related to employee stock transactions

    -          -          -          -          (325)         (325)         -          -          (325)         -     

Shares repurchased

    -          -          -          -          (250)         (250)         -          -          (250)         -     

Net tax benefit (shortfall) from stock-based compensation

    91          -          -          -          -          91          -          -          91          -     

Subscriptions (redemptions/distributions)-noncontrolling interest holders

    -          -          -          -          -          -          (21)         (3)         (24)         49     

Net consolidations (deconsolidations) of sponsored investment funds

    -          -          -          -          -          -          -          -          -          (16)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2014

      $19,089            $8,598              $6              ($35)            ($1,180)              $26,478              $117              $18              $26,613              $88     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) 

Amounts include $2 million of common stock at both March 31, 2014 and December 31, 2013.

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

(in millions)        Three Months Ended     
March 31,
 
     2015     2014  

Cash flows from operating activities

    

Net income

     $860        $744   

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

    

Depreciation and amortization

     63        73   

Amortization of deferred sales commissions

     13        15   

Stock-based compensation

     143        127   

Deferred income tax expense (benefit)

     87        165   

Other gains

     (40     -   

Net (gains) losses on nontrading investments

     19        (47

Purchases of investments within consolidated sponsored investment funds

     (5     (7

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

     18        69   

Assets and liabilities of consolidated VIEs:

    

Change in cash and cash equivalents

     209        (46

Net (gains) losses within consolidated VIEs

     (35     16   

Net (purchases) proceeds within consolidated VIEs

     (177     169   

(Earnings) losses from equity method investees

     (33     (39

Distributions of earnings from equity method investees

     9        7   

Changes in operating assets and liabilities:

    

Accounts receivable

     (750     (624

Investments, trading

     (336     (95

Other assets

     (91     (82

Accrued compensation and benefits

     (1,188     (1,079

Accounts payable and accrued liabilities

     654        521   

Other liabilities

     90        (93
  

 

 

   

 

 

 

Cash flows from operating activities

     (490     (206
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (101     (123

Proceeds from sales and maturities of investments

     152        266   

Distributions of capital from equity method investees

     9        8   

Net consolidations (deconsolidations) of sponsored investment funds

     27        (3

Acquisition

     (88     -   

Purchases of property and equipment

     (98     (15
  

 

 

   

 

 

 

Cash flows from investing activities

     (99     133   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from long-term borrowings

     -        997   

Cash dividends paid

     (389     (366

Repurchases of common stock

     (498     (575

Net proceeds from (repayments of) borrowings by consolidated VIEs

     (29     (120

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

     106        25   

Excess tax benefit from stock-based compensation

     55        102   

Other financing activities

     7        1   
  

 

 

   

 

 

 

Cash flows from financing activities

     (748     64   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (93     13   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,430     4   

Cash and cash equivalents, beginning of period

     5,723        4,390   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     $4,293        $4,394   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest

     $40        $23   

Interest on borrowings of consolidated VIEs

     $30        $27   

Income taxes (net of refunds)

     $133        $178   

Supplemental schedule of noncash investing and financing transactions:

    

Issuance of common stock

     $458        $603   

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

     $18        ($16

Increase (decrease) in borrowings due to consolidation of VIEs

     $603        -   

 

 

See accompanying notes to condensed consolidated financial statements.

 

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BlackRock, Inc.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1.  Business Overview

BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) is a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients worldwide.

BlackRock’s diverse platform of active (alpha) and index (beta) investment strategies across asset classes enables the Company to tailor investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. Products are offered directly and through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds, iShares® exchange-traded funds (“ETFs”), separate accounts, collective investment funds and other pooled investment vehicles. BlackRock also offers the BlackRock Solutions® investment and risk management technology platform, Aladdin®, risk analytics and advisory services and solutions to a broad base of institutional investors.

At March 31, 2015, The PNC Financial Services Group, Inc. (“PNC”) held 20.9% of the Company’s voting common stock and 22.0% 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 represents the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Accounts and transactions between consolidated entities have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense 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, 2014, which was filed with the Securities and Exchange Commission (“SEC”) on February 27, 2015 (“2014 Form 10-K”).

The interim financial information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Fair Value Measurements.

Hierarchy of Fair Value Inputs.    The Company uses a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices

 

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(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 uses 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, 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, funds of hedge funds, direct private equity investments held within consolidated funds, bank loans and bonds.

 

   

Level 3 liabilities include borrowings of consolidated collateralized loan obligations (“CLOs”) valued based upon nonbinding single-broker quotes and contingent liabilities related to acquisitions valued based upon discounted cash flow analysis using unobservable market data.

 

   

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic 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.

 

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As a practical expedient, the Company uses 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, opportunistic funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships generally 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 number of inputs used to value equity, debt securities and bank loans is sourced from 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. On a quarterly basis, meetings are held with key 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.

Fair Value Option.    The Company applies the fair value option provisions for eligible assets and liabilities, including bank loans and borrowings, held by consolidated 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 is 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.

Derivative Instruments and Hedging Activities.    The Company does not use derivative financial instruments for trading or speculative purposes. The Company may use derivative financial instruments primarily for purposes of hedging exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities, and market exposures for certain seed investments. 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 securities, 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.

 

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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.

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 legal title to the 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 the right to request additional collateral or, in the event of borrower default, the right to liquidate collateral. 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.

The Company records on the condensed consolidated statements of financial condition the cash and noncash collateral received under these BlackRock Life Limited securities lending arrangements as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. During the three months ended March 31, 2015 and 2014, the Company had not resold or repledged any of the collateral received under these arrangements. At March 31, 2015 and December 31, 2014, the fair value of loaned securities held by separate accounts was approximately $32.5 billion and $30.6 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $35.4 billion and $33.7 billion, respectively.

Appropriated Retained Earnings.    Upon the consolidation of CLOs, BlackRock records an 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 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 a change to appropriated retained earnings.

Recent Accounting Pronouncements Not Yet Adopted

Revenue from Contracts with Customers.    In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The Company is currently evaluating the impact of adopting ASU 2014-09, which is effective for the Company on January 1, 2017.

Amendments to the Consolidation Analysis, and Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.    In August 2014, the FASB issued ASU 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”). ASU 2014-13 provides an entity that consolidates a collateralized financing entity (“CFE”) that had elected the fair value option for the financial assets and financial liabilities of such CFE an alternative to current fair value measurement guidance. If elected, the Company could measure both the financial assets and the financial liabilities of the CFE by using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The election would effectively eliminate any measurement difference previously recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as an adjustment to appropriated retained earnings.

 

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In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which significantly amends the consolidation analysis required under current consolidation guidance. The amendments include changes to: (i) the VIE analysis for limited partnerships; (ii) the criteria for evaluating whether fees paid to a decision maker or a service provider are a variable interest; (iii) the effect of fee arrangements on the primary beneficiary (“PB”) determination; (iv) the effect of related parties on the PB determination; and (v) the consolidation evaluation for certain investment funds. This includes a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.

ASU 2014-13 and ASU 2015-02 are effective for the Company on January 1, 2016, with retrospective or modified retrospective approach required. ASU 2014-13 and ASU 2015-02 permit early adoption in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently expecting to deconsolidate CLOs and consolidate certain other investment products.

Debt Issuance Costs.    In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU 2015-03 is effective for the Company on January 1, 2016, with early adoption permitted for financial statements that have not been previously issued. The guidance also requires retrospective application to all prior periods presented. The Company does not expect the adoption of ASU 2015-03 to be material to the condensed consolidated financial statements.

Disclosures for Investments in Certain Entities that Calculate NAV Per Share.    In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. ASU 2015-07 is effective for the Company on January 1, 2016, with early adoption permitted. The guidance also requires retrospective application to all prior periods presented. The Company does not expect the adoption of ASU 2015-07 to be material to the condensed consolidated financial statements.

3.  Investments

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

 

(in millions)   March 31,
2015
   December 31,
2014

Available-for-sale investments

    $203           $201     

Held-to-maturity investments

    13           79     

Trading investments:

        

Consolidated sponsored investment funds

    787           443     

Other equity and debt securities

    16           29     

Deferred compensation plan mutual funds

    66           64     
 

 

 

  

 

 

Total trading investments

    869           536     

Other investments:

        

Consolidated sponsored investment funds

    255           270     

Equity method investments

    656           633     

Deferred compensation plan equity method investments

    21           21     

Cost method investments(1)

    96           96     

Carried interest

    91           85     
 

 

 

  

 

 

Total other investments

    1,119           1,105     
 

 

 

  

 

 

Total investments

                $2,204                       $1,921     
 

 

 

  

 

 

 

(1) 

Amounts primarily include Federal Reserve Bank (“FRB”) Stock.

 

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At March 31, 2015, the Company consolidated $1,042 million of investments held by consolidated sponsored investment funds (excluding variable interest entities (“VIEs”)) of which $787 million and $255 million were classified as trading investments and other investments, respectively. At December 31, 2014, the Company consolidated $713 million of investments held by consolidated sponsored investment funds (excluding VIEs) of which $443 million and $270 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
 
March 31, 2015   Cost   Gains   Losses  

Equity securities of sponsored investment funds

    $200          $7          ($4)          $203   
December 31, 2014                  

Equity securities of sponsored investment funds

            $205                  $5                  ($9)                  $201   

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

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $13 million and $79 million at March 31, 2015 and December 31, 2014, 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 March 31, 2015, these investments mature after five years through ten years.

Trading Investments

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

 

(in millions)        March 31, 2015              December 31, 2014      
     Cost      Carrying
Value
     Cost      Carrying
Value
 
  

 

 

    

 

 

 

Trading investments:

     

Deferred compensation plan mutual funds

     $48         $66         $48         $64   

Equity securities/multi-asset mutual funds

     202         230         210         239   

Debt securities/fixed income mutual funds:

           

Corporate debt

     250         252         109         110   

Government debt

     257         264         100         103   

Asset/mortgage backed debt

     57         57         20         20   
  

 

 

    

 

 

 

Total trading investments

         $814                 $869             $487                 $536   
  

 

 

    

 

 

 

At March 31, 2015, trading investments included $572 million of debt securities and $215 million of equity securities held by consolidated sponsored investment funds, $66 million of certain deferred compensation plan mutual fund investments and $16 million of other equity and debt securities.

At December 31, 2014, trading investments included $223 million of debt securities and $220 million of equity securities held by consolidated sponsored investment funds, $64 million of certain deferred compensation plan mutual fund investments and $29 million of other equity and debt securities.

 

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Other Investments

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

 

(in millions)    March 31, 2015      December 31, 2014  
     Cost      Carrying
Value
     Cost      Carrying
Value
 
  

 

 

    

 

 

 

Other investments:

           

Consolidated sponsored investment funds

     $268         $255         $268         $270   

Equity method

     519         656         518         633   

Deferred compensation plan equity method investments

     20         21         21         21   

Cost method investments:

           

Federal Reserve Bank stock

     92         92         92         92   

Other

     4         4         4         4   
  

 

 

    

 

 

 

Total cost method investments

     96         96         96         96   

Carried interest

     -         91         -         85   
  

 

 

    

 

 

 

Total other investments

             $903                 $1,119                 $903                 $1,105   
  

 

 

    

 

 

 

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

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

In addition, the Company accounts for its interest in PennyMac Financial Services, Inc. (“PennyMac”) as an equity method investment. At March 31, 2015 and December 31, 2014 the Company’s investment in PennyMac was excluded from the balances in the table above and included in other assets on the condensed consolidated statements of financial condition. The carrying value and fair value of the Company’s interest (approximately 20% or 16 million shares and units) was approximately $179 million and $264 million, respectively, at March 31, 2015 and approximately $167 million and $269 million, respectively, at December 31, 2014. The fair value of the Company’s interest reflected the PennyMac stock price at March 31, 2015 and December 31, 2014, respectively (a Level 1 input).

Cost method investments include nonmarketable securities, including FRB stock, which is held for regulatory purposes and is restricted from sale. At March 31, 2015 and December 31, 2014, 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.

 

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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)    March 31,
2015
    December 31,
2014
 

Cash and cash equivalents

     $  180        $120   

Investments:

    

Trading investments

     787        443   

Other investments

     255        270   

Other assets

     46        20   

Other liabilities

     (122     (18

Noncontrolling interests

     (269     (139
  

 

 

   

 

 

 

BlackRock’s net interests in consolidated sponsored investment funds

                   $877                      $696   
  

 

 

   

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds represents the value of its economic ownership interest in these sponsored investment funds. Valuation changes associated with investments held at fair value by 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 March 31, 2015 and December 31, 2014, several consolidated CLOs and one sponsored investment fund, which were deemed to be VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion on these consolidated investment products. See Note 2, Significant Accounting Policies-Recent Accounting Pronouncements Not Yet Adopted, for further information on ASU 2015-02.

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

 

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5.  Fair Value Disclosures

Fair Value Hierarchy

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

 

March 31, 2015

(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)
   

March 31,

2015

 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities of sponsored investment funds

  $ 200      $ 3      $ -      $ -      $ 203       

Held-to-maturity debt securities

    -        -        -        13        13       

Trading:

         

Deferred compensation plan mutual funds

    66        -        -        -        66       

Equity/Multi-asset mutual funds

    230        -        -        -        230       

Debt securities / fixed income mutual funds

    1        572        -        -        573       
 

 

 

 

Total trading

    297        572        -        -        869       

Other investments:

         

Consolidated sponsored investment funds private / public equity(2)

    12        7        236        -        255       

Equity method:

         

Hedge funds / Funds of hedge funds

    -        164        73        1        238       

Private equity investments

    -        -        168        -        168       

Real estate funds

    -        21        90        7        118       

Fixed income mutual funds

    10        -        -        -        10       

Other

    122        -        -        -        122       
 

 

 

 

Total equity method

    132        185        331        8        656       

Deferred compensation plan equity method investments

    -        -        21        -        21       

Cost method investments

    -        -        -        96        96       

Carried interest

    -        -        -        91        91       
 

 

 

 

Total investments

    641        767        588        208        2,204       
 

 

 

 

Separate account assets

    115,164        45,628        -        1,254        162,046       

Separate account collateral held under securities lending agreements:

         

Equity securities

    32,523        -        -        -        32,523       

Debt securities

    -        2,844        -        -        2,844       
 

 

 

 

Total separate account collateral held under securities lending agreements

    32,523        2,844        -        -        35,367       

Assets of consolidated VIEs:

         

Bank loans and other assets

    -        3,622        171        41        3,834       

Bonds

    -        29        18        -        47       

Private / public equity(3)

    -        4        10        -        14       
 

 

 

 

Total assets of consolidated VIEs

    -        3,655        199        41        3,895       
 

 

 

 

Total

  $ 148,328      $ 52,894      $ 787      $ 1,503      $ 203,512       
 

 

 

 

Liabilities:

         

Borrowings of consolidated VIEs

  $ -      $ -      $ 3,964      $ -      $ 3,964       

Separate account collateral liabilities under securities lending agreements

    32,523        2,844        -        -        35,367       

Other liabilities(4)

    -        6        51        -        57       
 

 

 

 

Total

  $ 32,523      $ 2,850      $ 4,015      $ -      $ 39,388       
 

 

 

 

 

  (1) 

Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which 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 $157 million and $79 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

Level 3 amounts include $10 million of underlying third-party private equity funds held by a consolidated private equity fund of funds.

  (4) 

Amounts include a derivative (see Note 7, Derivatives and Hedging, for more information) and contingent liabilities related to certain acquisitions (see Note 11, Commitments and Contingencies, for more information).

 

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

 

December 31, 2014

(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,

2014

 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities of sponsored investment funds

  $ 198      $ 3      $ -      $ -      $ 201   

Held-to-maturity debt securities

    -        -        -        79        79   

Trading:

         

Deferred compensation plan mutual funds

    64        -        -        -        64   

Equity/Multi-asset mutual funds

    239        -        -        -        239   

Debt securities / fixed income mutual funds

    11        222        -        -        233   
 

 

 

 

Total trading

    314        222        -        -        536   

Other investments:

         

Consolidated sponsored investment funds private / public equity(2)

    11        11        248        -        270   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        213        64        5        282   

Private equity investments

    -        -        107        -        107   

Real estate funds

    -        21        88        8        117   

Fixed income mutual funds

    29        -        -        -        29   

Other

    98        -        -        -        98   
 

 

 

 

Total equity method

    127        234        259        13        633   

Deferred compensation plan equity method investments

    -        -        21        -        21   

Cost method investments

    -        -        -        96        96   

Carried interest

    -        -        -        85        85   
 

 

 

 

Total investments

    650        470        528        273        1,921   
 

 

 

 

Separate account assets

    113,566        46,866        -        855        161,287   

Separate account collateral held under securities lending agreements:

         

Equity securities

    30,387        -        -        -        30,387   

Debt securities

    -        3,267        -        -        3,267   
 

 

 

 

Total separate account collateral held under securities lending agreements

    30,387        3,267        -        -        33,654   

Assets of consolidated VIEs:

         

Bank loans and other assets

    -        2,958        302        32        3,292   

Bonds

    -        29        18        -        47   

Private / public equity(3)

    -        3        10        -        13   
 

 

 

 

Total assets of consolidated VIEs

    -        2,990        330        32        3,352   
 

 

 

 

Total

  $ 144,603      $ 53,593      $ 858      $ 1,160      $ 200,214   
 

 

 

 

Liabilities:

         

Borrowings of consolidated VIEs

  $ -      $ -      $ 3,389      $ -      $ 3,389   

Separate account collateral liabilities under securities lending agreements

    30,387        3,267        -        -        33,654   

Other liabilities(4)

    -        5        39        -        44   
 

 

 

 

Total

  $ 30,387      $ 3,272      $ 3,428      $ -      $ 37,087   
 

 

 

 

 

  (1) 

Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which 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 $168 million and $80 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

Level 3 amounts include $10 million of underlying third-party private equity funds held by a consolidated private equity fund of funds.

  (4) 

Amounts include a derivative (see Note 7, Derivatives and Hedging, for more information) and contingent liabilities related to certain acquisitions (see Note 11, Commitments and Contingencies, for more information).

Level 3 Assets.    Level 3 investments of $588 million and $528 million at March 31, 2015 and December 31, 2014, respectively, primarily related to equity method investments and private equity funds held by 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 $79 million and $80 million at March 31, 2015 and December 31, 2014, 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,

 

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

Level 3 Liabilities.    Level 3 borrowings of consolidated VIEs include CLO borrowings valued based upon single-broker nonbinding quotes.

Level 3 other liabilities include contingent liabilities related to certain acquisitions, which were valued based upon discounted cash flow analyses using unobservable market data inputs.

 

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Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2015

 

(in millions)   December 31,
2014
    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
    March 31,
2015
    Total net
unrealized
gains (losses)
included in
earnings(2)
 

Assets:

                 

Investments:

                 

Consolidated sponsored investment funds:

                 

Private equity

    $248        ($12     $5        ($5     $-        $-        $-        $236      ($ 11

Equity method:

                 

Hedge funds / Funds of hedge funds

    64        7        8        (4     (2     -        -        73        9   

Private equity investments

    107        (5     73        -        (7     -        -        168        (7

Real estate funds

    88        1        1        -        -        -        -        90        2   

Deferred compensation plan equity method investments

    21        1        -        -        (1     -        -        21        1   
 

 

 

   

 

 

 

Total Level 3 investments

    528        (8     87        (9     (10     -        -        588        (6
 

 

 

   

 

 

 

Assets of consolidated VIEs:

                 

Bank loans

    302        1        17        (12     26        72        (235     171     

Bonds

    18        -        -        -        -        -        -        18     

Private equity

    10        -        -        -        -        -        -        10     
 

 

 

   

Total Level 3 assets of consolidated VIEs

    330        1        17        (12     26        72        (235     199        N/A (3) 
 

 

 

   

Total Level 3 assets

    $858        ($7     $104        ($21     $16        $72        ($235     $787     
 

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

            $3,389        ($1     $-        $-        $574        $-        $-        $3,964        N/A (3) 

Other liabilities

    39        2        -        -        14        -        -        51        -   
 

 

 

   

Total Level 3 liabilities

    $3,428        $1        $-        $-        $588        $-        $-        $4,015     
 

 

 

   

 

  N/A – not applicable
  (1) 

Amount primarily includes distributions from equity method investees and loans and net proceeds from borrowings of consolidated VIEs. Amounts also include a contingent liability related to an acquisition.

  (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.

 

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Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2014

 

(in millions)   December 31,
2013
    Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases     Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3(2)
    Transfers
out of
Level 3
    March 31,
2014
    Total net
unrealized
gains (losses)
included in
earnings(3)
 

Assets:

                 

Investments

                 

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    $24        $1        $-        ($12     ($1     $-        $-        $12        $-   

Private equity

    223        1        5        (14     -        41        -        256        1   

Equity method:

                 

Hedge funds / Funds of hedge funds

    99        2        4        (11     (3     -        -        91        2   

Private equity investments

    101        3        3        -        (6     -        -        101        4   

Real estate funds

    98        2        2        -        (2     -        -        100        1   

Deferred compensation plan equity method investments

    29        2        -        -        -        -        -        31        2   
 

 

 

   

 

 

 

Total Level 3 investments

    574        11        14        (37     (12     41        -        591        10   
 

 

 

   

 

 

 

Assets of consolidated VIEs:

                 

Bank loans

    129        -        16        (13     -        73        (58     147     

Bonds

    35        -        -        (7     -        -        -        28     

Private equity

    14        -        -        (1     -        -        -        13     
 

 

 

   

Total Level 3 assets of consolidated VIEs

    178        -        16        (21     -        73        (58     188        N/A (4) 
 

 

 

   

Total Level 3 assets

            $752        $11        $30        ($58     ($12     $114        ($58     $779     
 

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

    $2,369        $5        $-        $-        ($120     $-        $-        $2,244        N/A (4) 

Other liabilities

    42        -        -        -        -        -        -        42        -   
 

 

 

   

Total Level 3 liabilities

    $2,411        $5        $-        $-        ($120     $-        $-        $2,286     
 

 

 

   

 

  N/A – not applicable
  (1) 

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

  (2) 

Includes investments previously held at cost.

  (3) 

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

  (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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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 sponsored 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 carrying value of certain equity method investments no longer represents fair value as determined under valuation methodologies.

Assets of Consolidated VIEs.    During the three months ended March 31, 2015 and 2014, there were $235 million and $58 million, respectively, of transfers out of Level 3 to Level 2 related to bank loans. In addition, during the three months ended March 31, 2015 and 2014, there were $72 million and $73 million, respectively, of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of levels were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.

Significant Issuances and Other Settlements.    During the three months ended March 31, 2015, other settlements included $603 million of borrowings due to the consolidation of one additional CLO and $29 million of repayments of borrowings of consolidated CLOs. During the three months ended March 31, 2014, other settlements included $120 million of repayments of borrowings of consolidated CLOs.

Disclosures of Fair Value for Financial Instruments Not Held at Fair Value.    At March 31, 2015 and December 31, 2014, the fair value of the Company’s financial instruments not held at fair value are categorized in the table below:

 

     March 31, 2015      December 31, 2014         
(in millions)    Carrying 
Amount
     Estimated 
Fair Value
     Carrying 
Amount
     Estimated 
Fair Value
     Fair Value 
Hierarchy
 

Financial Assets:

              

Cash and cash equivalents

   $ 4,293       $ 4,293       $ 5,723       $ 5,723         Level 1 (1)/ (2) 

Accounts receivable

     2,836         2,836         2,120         2,120         Level 1 (3) 

Cash and cash equivalents of consolidated VIEs

     279         279         278         278         Level 1 (1) 

Financial Liabilities:

              

Accounts payable and accrued liabilities

     1,714         1,714         1,035         1,035         Level 1 (3) 

Long-term borrowings

     4,938         5,365         4,938         5,309         Level 2 (4) 

 

  (1) 

Cash and cash equivalents are carried at either cost or amortized cost, which approximates fair value due to their short-term maturities.

 

  (2) 

At March 31, 2015 and December 31, 2014, approximately $184 million and $100 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.

 

  (3) 

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

 

  (4) 

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 March 2015 and December 2014, respectively. See Note 10, Borrowings, for the fair value of each of the Company’s long-term borrowings.

 

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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 uses 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).

March 31, 2015

 

(in millions)   Ref     Fair Value     Total
Unfunded
Commitments
   

Redemption
Frequency

  Redemption
Notice Period

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (a     $157      $   21      N/R   N/R

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (b     237        39     

Daily/Monthly (37%)

 

Quarterly (32%)

 

N/R (31%)

  1 – 90 days

Private equity funds

    (c     168        68     

N/R

  N/R

Real estate funds

    (d     111        -     

Quarterly (19%)

 

N/R (81%)

  60 days

Deferred compensation plan investments

    (e     21        5      N/R   N/R

Consolidated VIEs:

         

Private equity fund

    (f     10        1      N/R   N/R
   

 

 

   

 

 

     

Total

      $704      $ 134       
   

 

 

   

 

 

     

December 31, 2014

         
(in millions)   Ref     Fair Value     Total
Unfunded
Commitments
   

Redemption
Frequency

  Redemption
Notice Period

Consolidated sponsored investment funds:

         

Private equity funds of funds

    (a     $168        $22      N/R   N/R

Equity method:(1)

         

Hedge funds/funds of hedge funds

    (b     277        39     

Daily/Monthly (29%)

 

Quarterly (48%)

 

N/R (23%)

  1 –90 days

Private equity funds

    (c     107        61      N/R   N/R

Real estate funds

    (d     109        1     

Quarterly (19%)

 

N/R (81%)

  60 days

Deferred compensation plan investments

    (e     21        5      N/R   N/R

Consolidated VIEs:

         

Private equity fund

    (f     10        1      N/R   N/R
   

 

 

   

 

 

     

Total

      $692      $ 129       
   

 

 

   

 

 

     

 

  N/R– not redeemable

 

  (1) 

Comprised of equity method investments, which include investment companies, which 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

 

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  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 six years and seven years at March 31, 2015 and December 31, 2014, respectively. The total remaining unfunded commitments to other third-party funds were $21 million at March 31, 2015 and $22 million at December 31, 2014. The Company had contractual obligations to the consolidated funds of $31 million at both March 31, 2015 and December 31, 2014.
  (b) 

This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit, opportunistic 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 two years at both March 31, 2015 and December 31, 2014.

  (c) 

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 four years at both March 31, 2015 and December 31, 2014.

  (d) 

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 are 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 both March 31, 2015 and December 31, 2014.

  (e) 

This category includes investments in several real estate funds . 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 are not subject to redemption; however, distributions as a result of the liquidation of the underlying assets will be used to settle certain deferred compensation liabilities over time.

  (f) 

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 one year at both March 31, 2015 and December 31, 2014. Total remaining unfunded commitments to other third-party funds were not material at both March 31, 2015 and December 31, 2014, which commitments are required to be funded by capital contributions from noncontrolling interest holders.

Fair Value Option.

The following table summarizes information at March 31, 2015 and December 31, 2014 related to those assets and liabilities for which the fair value option was elected:

 

(in millions)    March 31,
2015
         December 31,    
2014
 

CLO Bank Loans:

     

Aggregate principal amounts outstanding

     $3,827         $3,338   

Fair value

     3,793         3,260   
  

 

 

    

 

 

 

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

     $34         $78   

Unpaid principal balance of loans more than 90 days past due

     $4         $6   

Aggregate fair value of loans more than 90 days past due

     -         2   
  

 

 

    

 

 

 

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

     $4         $4   
  

 

 

    

 

 

 

CLO Borrowings:

     

Aggregate principal amounts outstanding

     $4,088         $3,508   

Fair value

     $3,964         $3,389   

At March 31, 2015, the principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2027.

During the three months ended March 31, 2015 and 2014, the change in fair value of the bank loans and bonds held by the CLOs resulted in an $84 million and a $27 million gain, respectively, which were partially offset by a $39 million and a $22 million loss, respectively, from the change in fair value of the CLO borrowings.

 

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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.

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, prepayments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes. See Note 2, Significant Accounting Policies in the 2014 Form 10-K, for more information.

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 related-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 March 31, 2015 and December 31, 2014, the following balances related to VIEs were recorded on the condensed consolidated statements of financial condition:

 

(in millions)      March 31, 2015         December 31, 2014    

Assets of consolidated VIEs:

    

Cash and cash equivalents

     $279        $278   

Bank loans

     3,793        3,260   

Bonds

     47        47   

Other investments and other assets

     55        45   
  

 

 

   

 

 

 

Total bank loans, bonds, other investments and other assets

     3,895        3,352   

Liabilities of consolidated VIEs:

    

Borrowings

     (3,964     (3,389

Other liabilities

     (182     (245

Appropriated retained earnings

     (16     19   

Noncontrolling interests of consolidated VIEs

     (12     (15
  

 

 

   

 

 

 

Total BlackRock net interests in consolidated VIEs

     $-        $-   
  

 

 

   

 

 

 

The Company recorded $35 million of nonoperating income and $16 million of nonoperating expense and an equal and offsetting income/loss attributable to nonredeemable noncontrolling interests related to consolidated VIEs during the three months ended March 31, 2015 and 2014, respectively.

At both March 31, 2015 and December 31, 2014, the weighted-average maturity of the bank loans and bonds was approximately 4.9 years.

 

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See Note 2, Significant Accounting Policies-Recent Accounting Pronouncements Not Yet Adopted, for further information on ASU 2015-02.

Non-Consolidated VIEs.    At March 31, 2015 and December 31, 2014, the Company’s carrying value of assets and liabilities pertaining to its variable interests in VIEs 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 March 31, 2015    Investments      Advisory
Fee
Receivables
     Other Net
Assets
(Liabilities)
     Maximum
Risk of Loss(1)
 

CDOs/CLOs

     $-         $1         ($6)         $18   

Other sponsored investment funds:

           

Collective trusts

     -         212         -            212   

Other

     52         163         (3)         215   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $52         $376         ($9)         $445   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014

  

CDOs/CLOs

     $-         $2         ($5)         $19   

Other sponsored investment funds:

           

Collective trusts

     -         191         -         191   

Other

     57         177         (3)         234   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $57         $370         ($8)         $444   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) At both March 31, 2015 and December 31, 2014, BlackRock’s maximum risk of loss associated with these VIEs primarily related to  collecting advisory fee receivables and BlackRock’s investments.

The net assets of the above CDOs/CLOs that the Company does not consolidate were as follows:

CDOs/CLOs

 

(in billions)        March 31, 2015              December 31, 2014      

Assets at fair value

     $1         $1   

Liabilities(1)

     2         2   
  

 

 

    

 

 

 

Net assets

     ($1      ($1
  

 

 

    

 

 

 

 

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

The net assets of other sponsored investment funds that are nonconsolidated VIEs approximated $1.7 trillion to $1.8 trillion at both March 31, 2015 and December 31, 2014. Net assets included approximately $1.5 trillion of collective trusts at March 31, 2015 and approximately $1.4 trillion of collective trusts at December 31, 2014. 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, partially 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 March 31, 2015, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional value of approximately $260 million and $99 million, respectively. At December 31, 2014, the Company had outstanding total return swaps and interest rate swaps with aggregate notional values of approximately $238 million and $84 million, respectively.

 

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The Company has entered into a derivative 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 derivative at fair value based on the expected discounted future cash flows under the arrangement.

The Company executes forward foreign currency exchange contracts to mitigate the risk of certain foreign exchange movements. At March 31, 2015 and December 31, 2014, the Company had outstanding forward foreign currency exchange contracts with aggregate notional values of approximately $215 million and $201 million, respectively.

Gains (losses) on total return swaps and interest rate swaps are recorded in nonoperating income (expense) and were not material to the condensed consolidated statements of income for the three months ended March 31, 2015 and 2014.

Gains (losses) on forward foreign currency exchange contracts are recorded in other general and administration expense and were not material to the condensed consolidated statements of income for the three months ended March 31, 2015 and 2014.

The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the funds’ investment strategies. Gains (losses) on such derivatives are recorded in nonoperating income (expense) and were not material for the three months ended March 31, 2015 and 2014.

The fair values of the outstanding derivatives were not material to the condensed consolidated statements of financial condition at both March 31, 2015 and December 31, 2014.

8.  Goodwill

Goodwill activity during the three months ended March 31, 2015 was as follows:

 

(in millions)       

December 31, 2014

                 $12,961   

BKCA acquisition

     19   

Goodwill adjustment related to Quellos(1)

     (5
  

 

 

 

March 31, 2015

     $12,975   
  

 

 

 

 

(1) 

The decrease in goodwill during the three months ended March 31, 2015 resulted from 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 $255 million and $263 million at March 31, 2015 and December 31, 2014, respectively.

The $19 million increase represents goodwill from the Company’s acquisition in March 2015 of certain assets related to BlackRock Kelso Capital Advisors LLC (“BKCA”) that constituted a business under current accounting guidance for approximately $100 million, including contingent consideration.

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, 2014

                 $16,988                     $356                    $17,344   

Amortization expense

     -         (35     (35

BKCA acquisition

     120         -        120   
  

 

 

    

 

 

   

 

 

 

March 31, 2015

     $17,108         $321        $17,429   
  

 

 

    

 

 

   

 

 

 

 

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Indefinite-lived Acquired Management Contracts

Indefinite-lived intangible assets increased by $120 million in the three months ended March 31, 2015, as a result of the BKCA acquisition.

10.   Borrowings

Short-Term Borrowings

2015 Revolving Credit Facility.    In April 2015, the Company’s credit facility was amended to extend the maturity date to March 2020 and to increase the amount of the aggregate commitment to $4.0 billion (the “2015 credit facility”). The 2015 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 2015 credit facility to an aggregate principal amount not to exceed $5.0 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 2015 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 March 31, 2015. The 2015 credit facility provides back-up liquidity to fund ongoing working capital for general corporate purposes and various investment opportunities. At March 31, 2015, the Company had no amount outstanding under the 2015 credit facility.

Commercial Paper Program.    The maximum aggregate amount for which the Company can issue unsecured commercial paper notes (the “CP Notes”) on a private-placement basis up to a maximum aggregate amount outstanding at any time is $3.990 billion. The commercial paper program is currently supported by the 2015 credit facility. At March 31, 2015, BlackRock had no CP Notes outstanding.

Long-Term Borrowings

The carrying value and fair value of long-term borrowings estimated using market prices at March 31, 2015 included the following:

 

(in millions)     Maturity Amount        Unamortized 
  Discount  
      Carrying Value         Fair Value    
 

 

 

 

1.375% Notes due 2015

    $750        $ -        $750        $751   

6.25% Notes due 2017

    700        (1)        699        785   

5.00% Notes due 2019

    1,000        (2)        998        1,136   

4.25% Notes due 2021

    750        (3)        747        840   

3.375% Notes due 2022

    750        (3)        747        793   

3.50% Notes due 2024

    1,000        (3)        997        1,060   
 

 

 

 

Total Long-term Borrowings

    $4,950        ($12)        $4,938        $5,365   
 

 

 

 

Long-term borrowings at December 31, 2014 had a carrying value of $4.938 billion and a fair value of $5.309 billion determined using market prices at the end of December 2014.

See Note 19, Subsequent Events, for information on the May 2015 debt offering and Note 12, Borrowings, in the 2014 Form 10-K for more information regarding the Company’s borrowings.

11.  Commitments and Contingencies

Investment Commitments.    At March 31, 2015, the Company had $353 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. In addition to the capital

 

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commitments of $353 million, the Company had approximately $30 million of contingent commitments for certain funds which have investment periods that have expired. 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 that 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 derivative transactions and has a maximum potential exposure of $17 million under a derivative between the Company and counterparty. See Note 7, Derivatives and Hedging, for further discussion.

Contingent Payments Related to Business Acquisitions.    In connection with the acquisition of Credit Suisse’s ETF franchise, BlackRock is required to make contingent payments annually to Credit Suisse, subject to achieving specified thresholds during a seven-year period, subsequent to the 2013 acquisition date. BlackRock is required to make contingent payments related to the acquisition of MGPA during a five-year period, subject to achieving specified thresholds, subsequent to the 2013 acquisition date. In addition, BlackRock is required to make contingent payments in connection with the BKCA acquisition over a three-year period, subject to the acquired business achieving specified performance targets. The fair value of the remaining aggregate contingent payments at March 31, 2015 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 BlackRock-sponsored 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 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 the likelihood of any liability is considered remote. Consequently, no liability has been recorded on the condensed consolidated statements of financial condition.

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 March 31, 2015, the Company indemnified certain of its clients for their securities lending loan balances of approximately $153.9 billion. The Company held as agent, cash and securities totaling $164.4 billion as collateral for indemnified securities on loan at March 31, 2015. The fair value of these indemnifications was not material at March 31, 2015.

 

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12.  Stock-Based Compensation

Restricted stock and restricted stock units (“RSUs”) activity for the three months ended March 31, 2015 is summarized below:

 

Outstanding at        

   Restricted
Stock and
RSUs
    Weighted-
Average
Grant Date
Fair Value
 

December 31, 2014

                     3,401,909                $257.01   

Granted    

     1,260,795        $343.91   

Converted

     (1,531,673     $228.31   

Forfeited  

     (4,768     $304.46   
  

 

 

   

March 31, 2015(1)

     3,126,263        $306.04   
  

 

 

   

 

(1) 

At March 31, 2015, approximately 2.9 million awards are expected to vest and 0.1 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 2015, the Company granted 952,329 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant and 303,999 RSUs to employees that cliff vest 100% on January 31, 2018.

At March 31, 2015, the intrinsic value of outstanding RSUs was $1.1 billion reflecting a closing stock price of $365.84.

At March 31, 2015, total unrecognized stock-based compensation expense related to unvested RSUs was $601 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 1.6 years.

Market Performance-based RSUs.

Market performance-based RSUs outstanding at both March 31, 2015 and December 31, 2014 were 1,425,319 with a weighted average exercise price of $137.31. At March 31, 2015, approximately 1.4 million awards are expected to vest and an immaterial amount of awards have vested but have not been converted. No market performance based RSUs were granted during the three months ended March 31, 2015.

At March 31, 2015, the intrinsic value of outstanding market performance-based RSUs was $521 million reflecting a closing stock price of $365.84.

See Note 14, Stock-Based Compensation, in the 2014 Form 10-K for more information on market performance-based RSUs.

At March 31, 2015, total unrecognized stock-based compensation expense related to unvested market performance-based awards was $87 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 1.7 years.

Performance-Based RSUs.

Pursuant to the BlackRock, Inc. Amended and Restated 1999 Stock Award and Incentive Plan, performance-based RSUs may be granted to certain employees. Each performance-based award consists of a “base” number of restricted stock units granted to the employee. The number of shares that an employee ultimately receives at vesting will be equal to the base number of performance-based RSUs granted, multiplied by a predetermined percentage determined in accordance with the level of attainment of Company performance measures during the performance period and could be higher or lower than the original RSU grant. The awards are generally forfeited

 

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if the employee leaves the Company before the vesting date. Performance-based RSUs are not considered participating securities as the dividend equivalents are subject to forfeiture prior to vesting of the award.

In January 2015, the Company granted 262,847 performance-based RSUs to certain employees that cliff vest 100% on January 31, 2018. These awards are amortized over a service period of three years.

Performance-based RSU activity for the three months ended March 31, 2015 is summarized below:

 

Outstanding at

   Performance-
Based RSUs
     Weighted-
Average
Grant Date
Fair Value
 

December 31, 2014

     -         $-   

Granted

                 262,847         $343.86   
  

 

 

    

March 31, 2015(1)

     262,847       $ 343.86   
  

 

 

    

 

(1) 

At March 31, 2015, approximately 0.3 million awards are expected to vest and no awards have vested and have not been converted.

At March 31, 2015, total unrecognized stock-based compensation expense related to unvested performance-based awards was $84 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 2.8 years.

The Company values performance-based RSUs at their grant-date fair value as measured by BlackRock’s common stock price. The total grant-date fair market value of performance-based RSUs expected to vest was $90 million.

At March 31, 2015, the intrinsic value of outstanding performance-based RSUs was $96.2 million reflecting a closing stock price of $365.84.

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 March 31, 2015, 2.7 million shares had been surrendered by PNC.

At March 31, 2015, the remaining shares committed by PNC of 1.3 million were available to fund certain future long-term incentive awards.

Stock Options.    Stock option activity for the three months ended March 31, 2015 is summarized below:

 

Outstanding at

   Shares
under
option
     Weighted
average
exercise
price
 

December 31, 2014(1)

     906,719       $ 167.76   

Exercised(1)

     (32,116    $ 167.76   
  

 

 

    

March 31, 2015(1)

     874,603       $ 167.76   
  

 

 

    

 

(1) 

The aggregate intrinsic value of options exercised during the three months ended March 31, 2015 was $6.2 million. At March 31, 2015, all  options were vested.

The remaining average life of stock options outstanding at March 31, 2015 is approximately two years.

 

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13.  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 March 31, 2015, 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.

14.  Accumulated Other Comprehensive Income (Loss)

The following table presents changes in AOCI by component for the three months ended March 31, 2015 and 2014:

 

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

December 31, 2014

  $ 2        $ 4        ($ 279     ($ 273

Other comprehensive income (loss) before reclassifications

    -          (1       (165       (166

Amount reclassified from AOCI

    -          -          -          -   
 

 

 

     

 

 

     

 

 

     

 

 

 

Net other comprehensive income (loss) for the three months ended March 31, 2015

    -          (1       (165       (166
 

 

 

     

 

 

     

 

 

     

 

 

 

March 31, 2015

  $ 2        $ 3        ($ 444     ($ 439
 

 

 

     

 

 

     

 

 

     

 

 

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

December 31, 2013

  $ 7        $ 6        ($ 48     ($ 35

Other comprehensive income (loss) before reclassifications

    -          -          8          8   

Amount reclassified from AOCI(2),(3)

    (8       -          -          (8
 

 

 

     

 

 

     

 

 

     

 

 

 

Net other comprehensive income (loss) for the three months ended March 31, 2014

    (8       -          8          -   
 

 

 

     

 

 

     

 

 

     

 

 

 

March 31, 2014

  ($ 1     $ 6        ($ 40     ($ 35
 

 

 

     

 

 

     

 

 

     

 

 

 

 

(1) 

All amounts are net of tax.

(2) 

The tax benefit (expense) was not material for the three months ended March 31, 2014.

(3) 

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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15.  Capital Stock

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

 

     March 31,
2015
     December 31,
2014
 

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(1)

     823,188         823,188   

Series C

     

Shares authorized, $0.01 par value

     6,000,000         6,000,000   

Shares issued and outstanding(1)

     1,311,887         1,311,887   

Series D

     

Shares authorized, $0.01 par value

     20,000,000         20,000,000   

Shares issued and outstanding

     -         -   

 

(1) 

Shares held by PNC.

Share Repurchases.    The Company repurchased 0.8 million common shares in open market-transactions under the share repurchase program for approximately $275 million during the three months ended March 31, 2015.

In January 2015, the Board of Directors approved an increase in the availability of shares that may be repurchased under the Company’s existing share repurchase program to allow for the repurchase of up to a total of 9.4 million additional shares of BlackRock common stock. At March 31, 2015, there were 8.6 million shares still authorized to be repurchased.

16.  Income Taxes

The first quarter of 2015 included nonrecurring tax benefits of $69 million, primarily due to the realization of losses from changes in the Company’s organizational tax structure and the resolution of certain outstanding tax matters.

17.  Earnings Per Share

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 earnings per share (“EPS”) calculations. As such, the Company has included the outstanding nonvoting participating preferred stock in the calculation of average basic and diluted shares outstanding.

The following table sets forth the computation of basic and diluted EPS for the three months ended March 31, 2015 and 2014 under the treasury stock method:

 

     Three Months Ended
March 31,
 
(in millions, except per share data)    2015      2014  

Net income attributable to BlackRock

     $822         $756   

Basic weighted-average shares outstanding

     167,089,037         169,081,421   

Dilutive effect of nonparticipating RSUs and stock options

     2,634,130         2,852,382   
  

 

 

    

 

 

 

Total diluted weighted-average shares outstanding

     169,723,167         171,933,803   
  

 

 

    

 

 

 

Basic earnings per share

     $4.92         $4.47   

Diluted earnings per share

     $4.84         $4.40   

 

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18.  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.

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 months ended March 31, 2015 and 2014.

 

     Three Months Ended
March 31,
 
(in millions)    2015        2014  

Equity

   $ 1,306         $ 1,277   

Fixed income

     575           503   

Multi-asset

     312           289   

Alternatives

     232           306   

Cash management

     73           74   
  

 

 

      

 

 

 

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

     2,498           2,449   

BlackRock Solutions and advisory

     147           154   

Distribution fees

     17           19   

Other revenue

     61           48   
  

 

 

      

 

 

 

Total revenue

       $ 2,723             $ 2,670   
  

 

 

      

 

 

 

The following table illustrates total revenue for the three months ended March 31, 2015 and 2014 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
March 31,
 

Revenue

     2015            2014    

Americas

   $ 1,851         $ 1,782   

Europe

             743                   757   

Asia-Pacific

     129           131   
  

 

 

      

 

 

 

Total revenue

   $ 2,723         $ 2,670   
  

 

 

      

 

 

 

The following table illustrates long-lived assets that consist of goodwill and property and equipment at March 31, 2015 and December 31, 2014 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)    March 31,
2015
     December 31,
2014
 

Long-lived Assets

     

Americas

   $ 13,238       $ 13,151   

Europe

     187         194   

Asia-Pacific

     87         83   
  

 

 

    

 

 

 

Total long-lived assets

   $ 13,512       $ 13,428   
  

 

 

    

 

 

 

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

 

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19.  Subsequent Events

Debt Offering.    In May 2015, the Company issued 700 million (or approximately $760 million based on an exchange rate of $1.09 per 1) of 1.25% senior unsecured notes maturing on May 6, 2025 (the “2025 Notes”). The notes are expected to be listed on the New York Stock Exchange. The net proceeds of the 2025 Notes will be used for general corporate purposes, including refinancing of outstanding indebtedness. Interest of approximately $10 million per year based on current exchange rates is payable annually on May 6 of each year. The 2025 Notes may be redeemed in whole or in part prior to maturity at any time at the option of the Company at a “make-whole” redemption price. The 2025 Notes were issued at a discount of approximately $3 million that will be amortized over the term of the 2025 Notes.

Other.    The Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional 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 (“AUM”); (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. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) is a leading publicly traded investment management firm with $4.774 trillion of AUM at March 31, 2015. With approximately 12,300 employees in more than 30 countries, BlackRock provides a broad range of investment and risk management services to institutional and retail clients worldwide.

BlackRock’s diverse platform of active (alpha) and index (beta) investment strategies across asset classes enables the Company to tailor investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. Products are offered directly and through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds, iShares® exchange-traded funds (“ETFs”), separate accounts, collective investment funds and other pooled investment vehicles. BlackRock also offers the BlackRock Solutions® investment and risk management technology platform, Aladdin®, risk analytics and advisory services and solutions to a broad base of institutional investors.

BlackRock serves a diverse mix of institutional and retail clients across the globe. Clients include tax-exempt institutions, such as defined benefit and defined contribution pension plans, charities, foundations and endowments; official institutions, such as central banks, sovereign wealth funds, supranationals and other government entities; taxable institutions, including insurance companies, financial institutions, corporations and third-party fund sponsors, and retail investors.

BlackRock maintains a significant global sales and marketing presence that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to investors directly and through financial professionals and pension consultants, and establishing third-party distribution relationships.

At March 31, 2015, PNC held 20.9% of the Company’s voting common stock and 22.0% of the Company’s capital stock, which includes outstanding common and nonvoting preferred stock.

Certain items previously reported have been reclassified to conform to current year presentation.

 

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EXECUTIVE SUMMARY

 

     Three Months Ended
March 31,
 
(in millions, except shares and per share data)    2015      2014  

GAAP basis:

     

Total revenue

   $ 2,723          $ 2,670      

Total expense

     1,656            1,619      
  

 

 

    

 

 

 

Operating income

   $ 1,067          $ 1,051      

Operating margin

     39.2%         39.4%   

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

     13            29      

Income tax expense

     (258)           (324)     
  

 

 

    

 

 

 

Net income attributable to BlackRock

   $ 822          $ 756      
  

 

 

    

 

 

 

Diluted earnings per common share

   $ 4.84          $ 4.40      

Effective tax rate

     23.9%         30.0%   

As adjusted(2):

     

Total revenue

   $ 2,723          $ 2,670      

Total expense

     1,646            1,608      
  

 

 

    

 

 

 

Operating income

   $ 1,077          $ 1,062      

Operating margin

     41.2%         41.4%   

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

     11            26      

Income tax expense

     (258)           (326)     
  

 

 

    

 

 

 

Net income attributable to BlackRock

   $ 830          $ 762      
  

 

 

    

 

 

 

Diluted earnings per common share

   $ 4.89          $ 4.43      

Effective tax rate

     23.7%         30.0%   

Other:

     

Assets under management (end of period)

   $ 4,774,192          $ 4,400,925      

Diluted weighted-average common shares outstanding(3)

     169,723,167            171,933,803      

Common and preferred shares outstanding (end of period)

     167,084,582            169,138,109      

Book value per share(4)

   $ 163.74          $ 156.51      

Cash dividends declared and paid per share

   $ 2.18          $ 1.93      

 

(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 shares are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations.

(4) 

Total BlackRock stockholders’ equity, excluding appropriated retained earnings of $16 million and $6 million for the three months ended March 31, 2015 and 2014, respectively, divided by total common and preferred shares outstanding at March 31 of the respective period-end.

 

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THREE MONTHS ENDED MARCH 31, 2015 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2014

GAAP.    Operating income of $1,067 million increased $16 million and operating margin of 39.2% declined 20 bps from the first quarter of 2014. Operating income reflected the impact of $252 billion of net new inflows over the last twelve months and continued strong growth in Aladdin fees, partially offset by a higher level of transaction-related revenue in last year’s first quarter and significant negative foreign exchange movements. Nonoperating income (expense), less net income (loss) attributable to NCI, decreased $16 million due to lower positive marks in the first quarter of 2015. Earnings per diluted common share rose $0.44, or 10%, compared with the first quarter of 2014 due to higher net income and the benefit of share repurchases.

As Adjusted.    Operating income of $1,077 million increased $15 million and operating margin of 41.2% declined 20 bps from the first quarter of 2014. Earnings per diluted common share rose $0.46, or 10%, from the first quarter of 2014.

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

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

 

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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 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. Management also uses non-GAAP financial measures as a benchmark to compare its performance with other companies and to enhance the comparability of this information for the reporting periods presented. Non-GAAP measures may pose limitations because they do not include all of BlackRock’s revenue and expense. 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.

Management uses both GAAP and non-GAAP financial measures in evaluating BlackRock’s financial performance. Adjustments to GAAP financial measures (“non-GAAP adjustments”) include certain items management deems nonrecurring or occur infrequently, transactions that ultimately will not impact BlackRock’s book value or certain tax items that do not impact cash flow.

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

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

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.

 

     Three Months Ended
March 31,
 
(in millions)      2015          2014    

Operating income, GAAP basis

     $1,067           $1,051    

Non-GAAP expense adjustments:

     

PNC LTIP funding obligation

     8          8    

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

     2          3    
  

 

 

    

 

 

 

Operating income, as adjusted

     1,077          1,062    

Closed-end fund launch costs / commissions

     -          -    
  

 

 

    

 

 

 

Operating income used for operating margin measurement

             $1,077                  $1,062    
  

 

 

    

 

 

 

Revenue, GAAP basis

     $2,723          $2,670    

Non-GAAP adjustments:

     

Distribution and servicing costs

     (99)          (89)    

Amortization of deferred sales commissions

     (13)          (15)    
  

 

 

    

 

 

 

Revenue used for operating margin measurement

     $2,611          $2,566    
  

 

 

    

 

 

 

Operating margin, GAAP basis

     39.2%          39.4%    
  

 

 

    

 

 

 

Operating margin, as adjusted

     41.2%          41.4%    
  

 

 

    

 

 

 

 

   

Operating income, as adjusted, includes non-GAAP expense adjustments. 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).

 

   

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

 

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believes the exclusion of such costs and related commissions is useful because these costs can fluctuate considerably and revenue 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 revenue.

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

Nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, equals nonoperating income (expense), GAAP basis, less net income (loss) attributable to NCI, adjusted for compensation expense associated with (appreciation) depreciation on investments related to certain BlackRock deferred compensation plans. 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.

 

     Three Months Ended
March 31,
 
(in millions)        2015             2014      

Nonoperating income (expense), GAAP basis

   $ 51      $ 17   

Less: Net income (loss) attributable to NCI

     38        (12
  

 

 

   

 

 

 

Nonoperating income (expense), net of NCI

     13        29   

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

     (2     (3
  

 

 

   

 

 

 

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

   $ 11      $ 26   
  

 

 

   

 

 

 

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

 

     Three Months Ended
March 31,
 
(in millions, except per share data)        2015              2014      

Net income attributable to BlackRock, GAAP basis

   $ 822         $ 756    

Non-GAAP adjustments, net of tax:

     

PNC LTIP funding obligation

     5          6    

Income tax matters

     3          -    
  

 

 

    

 

 

 

Net income attributable to BlackRock, as adjusted

   $ 830        $ 762    
  

 

 

    

 

 

 

Diluted weighted-average common shares outstanding(4)

     169.7          171.9    

Diluted earnings per common share, GAAP basis(4)

   $ 4.84        $ 4.40    

Diluted earnings per common share, as adjusted(4)

   $ 4.89        $ 4.43    

See aforementioned discussion regarding operating income, as adjusted, and operating margin, as adjusted, for information on the PNC LTIP funding obligation.

For each period presented, the non-GAAP adjustment related to the PNC LTIP funding obligation was tax effected at the respective blended rates applicable to the adjustments.

(4) 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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Table of Contents

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 Inflows (Outflows) by Client Type

 

     AUM      Net Inflows (Outflows)  
(in millions)    March 31,
2015
     December 31,
2014
     March 31,
2014
     Three
Months
Ended
March 31,
2015
    Twelve
Months
Ended
March 31,
2015
 

Retail

   $ 550,980       $ 534,329       $ 508,717       $ 14,172      $ 55,114   

iShares

     1,074,130         1,024,228         930,380         35,478        128,321   

Institutional:

             

Active

     984,282         959,160         939,654         17,984        20,174   

Index

     1,854,205         1,816,124         1,726,855         2,806        21,358   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total institutional

     2,838,487         2,775,284         2,666,509         20,790        41,532   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term

     4,463,597         4,333,841         4,105,606         70,440        224,967   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cash management

     292,495         296,353         263,533         561        38,690   

Advisory(1)

     18,100         21,701         31,786         (2,297     (11,697
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 4,774,192       $ 4,651,895       $ 4,400,925       $ 68,704      $ 251,960   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

AUM and Net Inflows (Outflows) by Product Type

 

     AUM      Net Inflows (Outflows)  
(in millions)    March 31,
2015
     December 31,
2014
     March 31,
2014
     Three
Months
Ended
March 31,
2015
    Twelve
Months
Ended
March 31,
2015
 

Equity

   $ 2,527,130       $ 2,451,111       $ 2,347,934       $ 20,941      $ 69,520   

Fixed income

     1,428,480         1,393,653         1,289,014         36,289        117,072   

Multi-asset

     395,312         377,837         353,231         12,792        36,706   

Alternatives

             

Core

     89,086         88,006         87,865         (201     926   

Currency and commodities(2)

     23,589         23,234         27,562         619        743   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

     112,675         111,240         115,427         418        1,669   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term

     4,463,597         4,333,841         4,105,606         70,440        224,967   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cash management

     292,495         296,353         263,533         561        38,690   

Advisory(1)

     18,100         21,701         31,786         (2,297     (11,697
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 4,774,192       $ 4,651,895       $ 4,400,925       $ 68,704      $ 251,960   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

AUM and Net Inflows (Outflows) by Investment Style

 

     AUM      Net Inflows (Outflows)  
(in millions)    March 31,
2015
     December 31,
2014
     March 31,
2014
     Three
Months
Ended
March 31,
2015
    Twelve
Months
Ended
March 31,
2015
 

Active

   $ 1,496,210       $ 1,453,613       $ 1,417,546       $ 31,547      $ 66,131   

Index and iShares

     2,967,387         2,880,228         2,688,060         38,893        158,836   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term

     4,463,597         4,333,841         4,105,606         70,440        224,967   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cash management

     292,495         296,353         263,533         561        38,690   

Advisory(1)

     18,100         21,701         31,786         (2,297     (11,697
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 4,774,192       $ 4,651,895       $ 4,400,925       $ 68,704      $ 251,960   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

Advisory AUM represents long-term portfolio liquidation assignments.

(2) 

Amounts include commodity iShares.

 

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Table of Contents

Component Changes in AUM for the Three Months Ended March 31, 2015

The following table presents the component changes in AUM by client type and product for the quarter ended March 31, 2015.

 

(in millions)    December 31,
2014
     Net
inflows
(outflows)
    Acquisition(1)      Market
change
    FX impact(2)     March 31,
2015
     Average
AUM(3)
 

Retail:

                 

Equity

   $ 200,445       $ 332      $ -       $ 5,102      ($ 4,173   $ 201,706       $ 201,052   

Fixed income

     189,820         12,787        -         962        (2,164     201,405         195,821   

Multi-asset

     125,341         1,402        -         2,426        (767     128,402         127,031   

Alternatives

     18,723         (349     1,293         296        (496     19,467         18,671   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Retail subtotal

     534,329         14,172        1,293         8,786        (7,600     550,980         542,575   

iShares:

                 

Equity

     790,067         16,725        -         28,200        (10,656     824,336         804,294   

Fixed income

     217,671         18,595        -         2,591        (5,674     233,183         228,005   

Multi-asset

     1,773         (18     -         30        (13     1,772         1,827   

Alternatives

     14,717         176        -         49        (103     14,839         14,954   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

iShares subtotal

     1,024,228         35,478        -         30,870        (16,446     1,074,130         1,049,080   

Institutional:

                 

Active:

                 

Equity

     125,143         168        -         6,206        (3,481     128,036         126,662   

Fixed income

     518,590         5,723        -         9,546        (7,742     526,117         525,711   

Multi-asset

     242,913         11,717        -         12,549        (10,095     257,084         250,197   

Alternatives

     72,514         376        -         1,094        (939     73,045         72,734   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Active subtotal

     959,160         17,984        -         29,395        (22,257     984,282         975,304   

Index:

                 

Equity

     1,335,456         3,716        -         53,361        (19,481     1,373,052         1,354,904   

Fixed income

     467,572         (816     -         16,183        (15,164     467,775         469,931   

Multi-asset

     7,810         (309     -         818        (265     8,054         7,928   

Alternatives

     5,286         215        -         (27     (150     5,324         5,359   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Index subtotal

     1,816,124         2,806        -         70,335        (35,060     1,854,205         1,838,122   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Institutional subtotal

     2,775,284         20,790        -         99,730        (57,317     2,838,487         2,813,426   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Long-term

     4,333,841         70,440        1,293         139,386        (81,363     4,463,597       $ 4,405,081   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash management

     296,353         561        -         (42     (4,377     292,495      

Advisory(4)

     21,701         (2,297     -         526        (1,830     18,100      
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

Total

   $ 4,651,895       $ 68,704      $ 1,293       $ 139,870      ($ 87,570   $ 4,774,192      
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

(1) 

Amount represents $1.3 billion of AUM acquired in the acquisition of certain assets of BlackRock Kelso Capital Advisors LLC in March 2015.

(2) 

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

(3) 

Average AUM is calculated as the average of the month-end spot AUM amounts for the trailing four months.

(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 three months ended March 31, 2015.

 

(in millions)   December 31,
2014
    Net
inflows
(outflows)
    Acquisition(1)     Market
change
    FX
impact(2)
    March 31,
2015
   
Average
AUM(3)
 

Equity:

             

Active

  $ 292,802      $ 546      $ -      $ 11,445        ($6,675   $ 298,118      $ 295,297   

iShares

    790,067        16,725        -        28,200        (10,656     824,336        804,294   

Non-ETF index

    1,368,242        3,670        -        53,224        (20,460     1,404,676        1,387,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity subtotal

    2,451,111        20,941        -        92,869        (37,791     2,527,130        2,486,912   

Fixed income:

             

Active

    701,324        17,855        -        10,447        (9,532     720,094        714,317   

iShares

    217,671        18,595        -        2,591        (5,674     233,183        228,005   

Non-ETF index

    474,658        (161     -        16,244        (15,538     475,203        477,146   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed income subtotal

    1,393,653        36,289        -        29,282        (30,744     1,428,480        1,419,468   

Multi-asset

    377,837        12,792        -        15,823        (11,140     395,312        386,983   

Alternatives:

             

Core

    88,006        (201     1,293        1,425        (1,437     89,086        88,062   

Currency and commodities(4)

    23,234        619        -        (13     (251     23,589        23,656   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Alternatives subtotal

    111,240        418        1,293        1,412        (1,688     112,675        111,718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    4,333,841        70,440        1,293        139,386        (81,363     4,463,597      $ 4,405,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash management

    296,353        561        -        (42     (4,377     292,495     

Advisory(5)

    21,701        (2,297     -        526        (1,830     18,100     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ 4,651,895      $ 68,704      $ 1,293      $ 139,870        ($87,570   $ 4,774,192     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) 

Amount represents $1.3 billion of AUM acquired in the acquisition of certain assets of BlackRock Kelso Capital Advisors LLC in March 2015.

(2) 

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

(3) 

Average AUM is calculated as the average of the month-end spot AUM amounts for the trailing four months.

(4) 

Amounts include commodity iShares.

(5) 

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased $122.3 billion, or 3%, to $4.774 trillion at March 31, 2015 from $4.652 trillion at December 31, 2014, driven largely by net market appreciation and positive net inflows, partially offset by negative foreign exchange movements.

Net market appreciation of $139.9 billion included $92.9 billion from equity products due to higher U.S. and global equity markets and $29.3 billion from fixed income products.

AUM decreased $87.6 billion from foreign exchange movements, primarily resulting from the strengthening of the U.S. dollar, largely against the euro and pound sterling.

Net Inflows (Outflows).    Net inflows of $68.7 billion reflected $70.4 billion of long-term net inflows across all client types, including $35.5 billion, $20.8 billion and $14.2 billion from iShares, institutional and retail clients, respectively. Net inflows in long-term products of $70.4 billion reflected the following:

 

  ·   

iShares net inflows of $35.5 billion, which were led by fixed income net inflows of $18.6 billion, diversified across exposures and geographies. Equity net inflows of $16.7 billion were driven by the Core Series as well as demand for European equities;

  ·   

Active fixed income net inflows of $17.9 billion, which were led by retail active fixed income net inflows of $12.1 billion. Active fixed income net inflows were diversified across exposures, and included strong flows into the unconstrained Strategic Income Opportunities fund, high yield and the Total Return fund. Institutional active fixed income net inflows of $5.7 billion were driven by unconstrained and total return mandates; and

 

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Table of Contents
  ·   

Multi-asset net inflows of $12.8 billion were driven by $11.7 billion of institutional active net inflows, reflecting strong solutions-based insurance wins and ongoing demand for the LifePath® target-date product suite.

Cash Management Net Inflows.    Cash management net inflows of $0.6 billion were primarily comprised of net inflows from EMEA institutional clients concentrated in offshore funds, partially offset by net outflows from Americas institutional clients from prime and government strategies.

Advisory Net Outflows.    Advisory net outflows of $2.3 billion were driven by portfolio liquidations.

Component Changes in AUM for the Twelve Months Ended March 31, 2015

The following table presents the component changes in AUM by client type and product for the twelve months ended March 31, 2015.

 

(in millions)    March 31,
2014
     Net
inflows
(outflows)
    Acquisition(1)      Market
change
    FX
impact(2)
    March 31,
2015
    
Average
AUM(3)
 

Retail:

                 

Equity

   $ 208,238       ($ 269   $ -       $ 4,219        ($10,482   $ 201,706       $ 206,939   

Fixed income

     160,448         43,724        -         1,806        (4,573     201,405         180,458   

Multi-asset

     121,548         11,131        -         (2,418     (1,859     128,402         125,831   

Alternatives

     18,483         528        1,293         316        (1,153     19,467         18,897   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Retail subtotal

     508,717         55,114        1,293         3,923        (18,067     550,980         532,125   

iShares:

                 

Equity

     723,973         75,417        -         48,942        (23,996     824,336         775,337   

Fixed income

     188,022         51,979        -         4,635        (11,453     233,183         210,296   

Multi-asset

     1,437         311        -         45        (21     1,772         1,649   

Alternatives

     16,948         614        -         (2,450     (273     14,839         16,090   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

iShares subtotal

     930,380         128,321        -         51,172        (35,743     1,074,130         1,003,372   

Institutional:

                 

Active:

                 

Equity

     132,374         (10,447     -         14,632        (8,523     128,036         129,656   

Fixed income

     509,692         5,802        -         32,841        (22,218     526,117         520,137   

Multi-asset

     223,865         24,701        -         30,326        (21,808     257,084         241,399   

Alternatives

     73,723         118        -         1,911        (2,707     73,045         72,917   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Active subtotal

     939,654         20,174        -         79,710        (55,256     984,282         964,109   

Index:

                 

Equity

     1,283,349         4,819        -         141,113        (56,229     1,373,052         1,331,971   

Fixed income

     430,852         15,567        -         59,601        (38,245     467,775         453,205   

Multi-asset

     6,381         563        -         2,124        (1,014     8,054         7,284   

Alternatives

     6,273         409        -         (997     (361     5,324         5,948   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Index subtotal

     1,726,855         21,358        -         201,841        (95,849     1,854,205         1,798,408   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Institutional subtotal

     2,666,509         41,532        -         281,551        (151,105     2,838,487         2,762,517   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Long-term

     4,105,606         224,967        1,293         336,646        (204,915     4,463,597       $ 4,298,014   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash management

     263,533         38,690        -         546        (10,274     292,495      

Advisory(4)

     31,786         (11,697     -         1,400        (3,389     18,100      
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

Total

   $ 4,400,925       $ 251,960      $ 1,293       $ 338,592        ($218,578   $ 4,774,192      
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

(1) 

Amount represents $1.3 billion of AUM acquired in the acquisition of certain assets of BlackRock Kelso Capital Advisors LLC in March 2015.

(2) 

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

(3) 

Average AUM is calculated as the average of the month-end spot AUM amounts for the trailing thirteen months.

(4) 

Advisory AUM represents long-term portfolio liquidation assignments.

 

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The following table presents component changes in AUM by product for the twelve months ended March 31, 2015.

 

(in millions)   March 31,
2014
    Net
inflows
(outflows)
    Acquisition(1)     Market
change
    FX
impact(2)
    March 31,
2015
   
Average
AUM(3)
 

Equity:

             

Active

  $ 314,850      ($ 17,420   $ -      $ 17,196        ($  16,508   $ 298,118      $ 306,332   

iShares

    723,973        75,417        -        48,942        (23,996     824,336        775,337   

Non-ETF index

    1,309,111        11,523        -        142,768        (58,726     1,404,676        1,362,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity subtotal

    2,347,934        69,520        -        208,906        (99,230     2,527,130        2,443,903   

Fixed income:

             

Active

    665,151        47,006        -        33,861        (25,924     720,094        694,165   

iShares

    188,022        51,979        -        4,635        (11,453     233,183        210,296   

Non-ETF index

    435,841        18,087        -        60,387        (39,112     475,203        459,635   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed income subtotal

    1,289,014        117,072        -        98,883        (76,489     1,428,480        1,364,096   

Multi-asset

    353,231        36,706        -        30,077        (24,702     395,312        376,163   

Alternatives:

             

Core

    87,865        926        1,293        2,426        (3,424     89,086        88,189   

Currency and commodities(4)

    27,562        743        -        (3,646     (1,070     23,589        25,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Alternatives subtotal

    115,427        1,669        1,293        (1,220     (4,494     112,675        113,852   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term

    4,105,606        224,967        1,293        336,646        (204,915     4,463,597      $ 4,298,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash management

    263,533        38,690        -        546        (10,274     292,495     

Advisory(5)

    31,786        (11,697     -        1,400        (3,389     18,100     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ 4,400,925      $ 251,960      $ 1,293      $ 338,592        ($218,578   $ 4,774,192     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) 

Amount represents $1.3 billion of AUM acquired in the acquisition of certain assets of BlackRock Kelso Capital Advisors LLC in March 2015.

(2) 

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

(3) 

Average AUM is calculated as the average of the month-end spot AUM amounts for the trailing thirteen months.

(4) 

Amounts include commodity iShares.

(5) 

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased $373.3 billion, or 8%, to $4.774 trillion at March 31, 2015 from $4.401 trillion at March 31, 2014, driven largely by net market appreciation and positive net inflows, partially offset by negative foreign exchange movements.

Net market appreciation of $338.6 billion reflected $208.9 billion of growth from equity products, primarily due to higher U.S. and global equity markets, and net appreciation in fixed income and multi-asset products of $98.9 billion and $30.1 billion, respectively, across the majority of strategies.

AUM decreased $218.6 billion from foreign exchange movements primarily resulting from the strengthening of the U.S. dollar, largely against the euro, pound sterling and Japanese yen.

Net Inflows (Outflows).    Net inflows of $252.0 billion reflected $225.0 billion of long-term net inflows across all client types, including $128.3 billion, $55.1 billion and $41.5 billion from iShares, retail and institutional clients, respectively. Net inflows in long-term products of $225.0 billion reflected the following:

Net Inflows

 

  ·   

iShares net inflows of $128.3 billion, including equity iShares and fixed income iShares net inflows of $75.4 billion and $52.0 billion, respectively. Equity iShares net inflows were led by the Core Series and developed-markets equity offerings. Strong demand for local currency and U.S. Sector-specific mandates drove fixed income iShares net inflows;

  ·   

Active fixed income net inflows of $47.0 billion, led by retail active fixed income net inflows of $41.2 billion, which reflected strong interest in unconstrained fixed income, high yield and core bond offerings;

 

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Table of Contents
  ·   

Multi-asset net inflows of $36.7 billion, led by $24.7 billion of institutional active net inflows, which reflected strong demand for the LifePath target-date series, the dynamic diversified growth strategy and solutions-based insurance mandates. Retail net inflows of $11.1 billion were concentrated in Multi-Asset Income funds;

  ·   

Non-ETF index fixed income net inflows of $18.1 billion, driven by strong demand for local currency and U.S. core strategies; and

  ·   

Non-ETF index equity net inflows of $11.5 billion, driven by net inflows into global mandates, partially offset by outflows from U.S. equity strategies.

Net Outflows

 

  ·   

Active equity net outflows of $17.4 billion, driven by fundamental equity outflows of $16.4 billion.

Cash Management Net Inflows.    Cash management net inflows of $38.7 billion were primarily comprised of net inflows from Americas institutional clients into government strategies and net inflows from EMEA institutional clients in offshore funds.

Advisory Net Outflows.    Advisory net outflows of $11.7 billion were driven by portfolio liquidations.

 

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Table of Contents

DISCUSSION OF FINANCIAL RESULTS

The Company’s results of operations for the three months ended March 31, 2015 and 2014 are discussed below. For a further description of the Company’s revenue and expense, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”).

Revenue

 

     Three Months Ended
March 31,
 
(in millions)         2015                2014       

Investment advisory, administration fees and securities lending revenue:

     

Equity:

     

Active

   $ 422       $ 463   

iShares

     684         634   

Non-ETF index

     163         158   
  

 

 

    

 

 

 

Equity subtotal

     1,269         1,255   

Fixed income:

     

Active

     373         324   

iShares

     130         113   

Non-ETF index

     68         58   
  

 

 

    

 

 

 

Fixed income subtotal

     571         495   

Multi-asset

     304         286   

Alternatives:

     

Core

     154         159   

Currency and commodities

     19         22   
  

 

 

    

 

 

 

Alternatives subtotal

     173         181   
  

 

 

    

 

 

 

Long-term

     2,317         2,217   

Cash management

     73         74   
  

 

 

    

 

 

 

Total base fees

     2,390         2,291   

Investment advisory performance fees:

     

Equity

     37         22   

Fixed income

     4         8   

Multi-asset

     8         3   

Alternatives

     59         125   
  

 

 

    

 

 

 

Total

     108         158   

BlackRock Solutions and advisory

     147         154   

Distribution fees

     17         19   

Other revenue

     61         48   
  

 

 

    

 

 

 

Total revenue

   $ 2,723       $ 2,670   
  

 

 

    

 

 

 

 

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Table of Contents

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 product type:

 

     Mix of Base Fees          Mix of Average AUM
by Asset Class(1)
 
     Three months ended March 31,          Three months
ended March 31,
 
     2015     2014          2015     2014  

Equity:

            

Active

     17     20         7     7

iShares

     29     28         17     17

Non-ETF index

     7     7         29     30
  

 

 

   

 

 

       

 

 

   

 

 

 

Equity subtotal

     53     55         53     54

Fixed income:

            

Active

     16     14         15     15

iShares

     5     5         5     4

Non-ETF index

     3     3         10     10
  

 

 

   

 

 

       

 

 

   

 

 

 

Fixed income subtotal

     24     22         30     29

Multi-asset

     13     12         8     8

Alternatives:

            

Core

     6     7         2     2

Currency and commodities

     1     1         1     1
  

 

 

   

 

 

       

 

 

   

 

 

 

Alternatives subtotal

     7     8         3     3
  

 

 

   

 

 

       

 

 

   

 

 

 

Long-term

     97     97         94     94
  

 

 

   

 

 

       

 

 

   

 

 

 

Cash management

     3     3         6     6
  

 

 

   

 

 

       

 

 

   

 

 

 

Total excluding Advisory AUM

     100     100         100     100
  

 

 

   

 

 

       

 

 

   

 

 

 

 

(1) 

Average AUM is calculated as the average of the month-end spot AUM amounts for the trailing four months.

Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014

Revenue increased $53 million, or 2%, from the first quarter of 2014, reflecting strong organic growth and market appreciation, which outpaced the impact of divergent beta and foreign exchange movements, partially offset by a decline in performance fees.

Investment advisory, administration fees and securities lending revenue of $2,390 million for the current quarter increased $99 million from $2,291 million in the first quarter of 2014 driven by strong organic growth and market appreciation, which outpaced the impact of divergent beta and foreign exchange movements. Securities lending fees of $114 million in the current quarter increased $9 million from the first quarter of 2014, primarily reflecting an increase in average balances of securities on loan.

Investment advisory performance fees of $108 million in the current quarter decreased $50 million from the first quarter of 2014, primarily due to the impact of a large fee associated with the liquidation of a closed-end mortgage fund in last year’s first quarter.

BlackRock Solutions and advisory revenue of $147 million in the current quarter decreased $7 million from $154 million in the first quarter of 2014 due to reduced Financial Markets Advisory Services (“FMA”) revenue from disposition-related advisory assignments, partially offset by higher revenue from the Aladdin platform. BlackRock Solutions and advisory revenue included $126 million in Aladdin revenue in the current quarter compared with $112 million in the first quarter of 2014.

 

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Table of Contents

Expense

 

     Three Months Ended
March 31,
 
(in millions)    2015      2014  

Expense, GAAP:

     

Employee compensation and benefits

   $ 981       $ 982   

Distribution and servicing costs

     99         89   

Amortization of deferred sales commissions

     13         15   

Direct fund expense

     189         179   

General and administration:

     

Marketing and promotional

     95         89   

Occupancy and office related

     67         62   

Portfolio services

     54         50   

Technology

     41         41   

Professional services

     29         25   

Communications

     9         10   

Other general and administration

     44         36   
  

 

 

    

 

 

 

Total general and administration expense

     339         313   

Amortization of intangible assets

     35         41   
  

 

 

    

 

 

 

Total expense, GAAP

   $ 1,656       $ 1,619   
  

 

 

    

 

 

 

Less non-GAAP expense adjustments:

     

Employee compensation and benefits:

     

PNC LTIP funding obligation

     8         8   

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

     2         3   
  

 

 

    

 

 

 

Total non-GAAP expense adjustments

     10         11   

Expense, as adjusted:

     

Employee compensation and benefits

     971         971   

Distribution and servicing costs

     99         89   

Amortization of deferred sales commissions

     13         15   

Direct fund expense

     189         179   

General and administration

     339         313   

Amortization of intangible assets

     35         41   
  

 

 

    

 

 

 

Total expense, as adjusted

   $ 1,646       $ 1,608   
  

 

 

    

 

 

 

Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014

GAAP.    Expense increased $37 million, or 2%, from the first quarter of 2014, primarily reflecting higher general and administration expense.

Employee compensation and benefits expense decreased $1 million from the first quarter of 2014, reflecting the impact of foreign exchange movements, partially offset by higher headcount. Employees at March 31, 2015 totaled approximately 12,300 compared with approximately 11,500 at March 31, 2014.

Distribution and servicing costs totaled $99 million in the current quarter compared with $89 million in the first quarter of 2014. These costs included payments to Bank of America/Merrill Lynch under a global distribution agreement and payments to PNC, as well as other third parties, primarily associated with the distribution and servicing of client investments in certain BlackRock products. Distribution and servicing costs for the first quarter of 2015 and 2014 included $47 million and $46 million, respectively, attributable to Bank of America/Merrill Lynch.

 

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General and administration expense increased $26 million from the first quarter of 2014, primarily reflecting higher marketing and promotional expense, higher portfolio and professional services expense, and the impact of a benefit from the reversal of a real estate-related retirement obligation which was no longer required to be funded in last year’s first quarter.

As Adjusted.    Expense, as adjusted, increased $38 million, or 2%, to $1,646 million in the current quarter from $1,608 million in the first quarter of 2014. The increase in total expense, as adjusted, is primarily attributable to higher general and administration expense.

NONOPERATING RESULTS

Nonoperating income (expense), less net income (loss) attributable to NCI for the quarters ended March 31, 2015 and 2014 was as follows:

 

     Three Month Ended
March 31,
 
(in millions)      2015         2014    

Nonoperating income (expense), GAAP basis(1)

     $51        $17   

Less: Net income (loss) attributable to NCI

     38        (12
  

 

 

   

 

 

 

Nonoperating income (expense)(2)

     13        29   

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

     (2     (3
  

 

 

   

 

 

 

Nonoperating income (expense), as adjusted(2)

           $11              $26   
  

 

 

   

 

 

 

 

(1) 

Amounts included gains of $35 million and losses of $16 million attributable to consolidated variable interest entities (“VIEs”) for the three months ended March 31, 2015 and 2014, respectively.

(2) 

Net of net income (loss) attributable to NCI.

The components of nonoperating income (expense), less net income (loss) attributable to NCI, for the quarters ended March 31, 2015 and 2014 were as follows:

 

     Three Months Ended
March 31,
 
(in millions)        2015             2014      

Net gain (loss) on investments(1)

    

Private equity

     $1        $44   

Real estate

     2        2   

Other alternatives(2)

     4        21   

Other investments(3)

     6        2   
  

 

 

   

 

 

 

Subtotal

             13                69   

Other gains(4)

     45        -   

Investments related to deferred compensation plans

     2        3   
  

 

 

   

 

 

 

Total net gain (loss) on investments(1)

     60        72   

Interest and dividend income

     4        10   

Interest expense

     (51     (53
  

 

 

   

 

 

 

Net interest expense

     (47     (43
  

 

 

   

 

 

 

Total nonoperating income (expense)(1)

     13        29   

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

     (2     (3
  

 

 

   

 

 

 

Nonoperating income (expense), as adjusted(1)

     $11        $26   
  

 

 

   

 

 

 

 

(1) 

Net of net income (loss) attributable to NCI.

(2) 

Amounts primarily include net gains (losses) related to direct hedge fund strategies and hedge fund solutions. The prior year quarter also included net gains related to opportunistic credit strategies.

(3) 

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

(4) 

Amount primarily includes a gain related to the acquisition of certain assets of BlackRock Kelso Capital Advisors LLC.

 

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Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014

BlackRock Kelso Capital Advisors LLC.    On March 6, 2015, BlackRock acquired certain assets related to managing BlackRock Capital Investment Corporation (formerly known as BlackRock Kelso Capital Corporation) from BlackRock Kelso Capital Advisors LLC (“BKCA”). In connection with the acquisition, BlackRock recorded a noncash, nonoperating, pre-tax gain of $40 million related to the fair value of its pre-existing interest in BKCA. See Note 8, Goodwill, and Note 9, Intangible Assets, for further discussion on the BKCA acquisition.

Net gains on investments of $60 million in the current quarter decreased $12 million from the first quarter of 2014 due to lower positive marks in the first quarter of 2015.

Income Tax Expense

 

(in millions)    GAAP
Three Months Ended
March 31,
    As adjusted
Three Months Ended
March 31,
 
         2015             2014             2015             2014      

Income before income taxes(1)

   $ 1,080      $ 1,080      $ 1,088      $ 1,088   

Income tax expense

   $ 258      $ 324      $ 258      $ 326   

Effective tax rate

     23.9     30.0     23.7     30.0

 

(1) 

Net of net income (loss) attributable to NCI.

Income tax expense in the first quarter of 2015 benefited from $69 million of nonrecurring items.

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 the Company’s 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.

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 Company’s condensed consolidated statements of income. While BlackRock has no economic interest in these assets or liabilities, BlackRock earns an investment advisory fee for the service of managing these assets on behalf of the clients.

In addition, the Company records on its condensed consolidated statements of financial condition the separate account collateral received under BlackRock Life Limited securities lending arrangements as its own asset in

 

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addition to an equal and offsetting separate account collateral liability for the obligation to return the collateral. The collateral is not available to creditors of the Company, and the borrowers under the securities lending arrangements have no recourse to the Company’s assets.

Consolidated VIEs

At March 31, 2015, BlackRock’s consolidated VIEs included multiple CLOs and one private 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. See Note 2, Significant Accounting Policies- Recent Accounting Pronouncements Not Yet Adopted, for further information on ASU 2015-02.

Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds. The Company can not readily access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company can not readily sell investments held by consolidated sponsored investment funds in order to obtain cash for use in the Company’s operations.

 

    March 31, 2015  
          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

  $ 4,293      $ -      $ -      $ 180      $ 4,113   

Accounts receivable

    2,836        -        -        -        2,836   

Investments

    2,204        -        -        165        2,039   

Assets of consolidated VIEs

    4,174        -        4,174        -        -   

Separate account assets and collateral held under securities lending agreements

    197,413        197,413        -        -        -   

Other assets(1)

    1,390        -        -        46        1,344   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    212,310          197,413            4,174               391          10,332   

Goodwill and intangible assets, net

    30,404        -        -        -        30,404   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 242,714      $ 197,413      $ 4,174      $ 391      $ 40,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Accrued compensation and benefits

  $ 684      $ -      $ -      $ -      $ 684   

Accounts payable and accrued liabilities

    1,714        -        -        -        1,714   

Liabilities of consolidated VIEs

    4,146        -        4,146        -        -   

Borrowings

    4,938        -        -        -        4,938   

Separate account liabilities and collateral liabilities under securities lending agreements

    197,413        197,413        -        -        -   

Deferred income tax liabilities

    5,077        -        -        -        5,077   

Other liabilities

    1,086        -        -        122        964   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    215,058        197,413        4,146        122        13,377   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

         

Total stockholders’ equity(2)

    27,375        -        16        -        27,359   

Noncontrolling interests

    281        -        12        269        -   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    27,656        -        28        269        27,359   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 242,714      $ 197,413      $ 4,174      $ 391      $ 40,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include property and equipment and other assets.

(2) 

GAAP amount includes $16 million of appropriated retained earnings related solely to consolidated CLOs in which the Company has no equity exposure.

 

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The following discussion summarizes the significant changes in assets and liabilities on a GAAP basis. Please see the condensed consolidated statements of financial condition as of March 31, 2015 and December 31, 2014 contained in Part I, Item 1 of this filing. 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.

Assets.    Cash and cash equivalents at March 31, 2015 and December 31, 2014 included $180 million and $120 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 three months ended March 31, 2015).

Accounts receivable at March 31, 2015 increased $716 million from December 31, 2014 due to an increase in unit trust receivables (substantially offset by an increase in unit trust payables recorded within accounts payable and accrued liabilities). Investments increased $283 million from December 31, 2014 (for more information see Investments herein). Goodwill and intangible assets increased $99 million from December 31, 2014, primarily due to the BKCA acquisition, partially offset by $35 million of amortization of intangible assets. Other assets (including property, plant and equipment) increased $222 million from December 31, 2014, primarily related to an increase in property and equipment, and an increase in current taxes receivable and other assets.

Liabilities.    Accrued compensation and benefits at March 31, 2015 decreased $1,181 million from December 31, 2014, primarily due to 2014 incentive compensation cash payments in the first quarter of 2015, partially offset by the effect of 2015 incentive compensation accruals. Accounts payable and accrued liabilities at March 31, 2015 increased $679 million from December 31, 2014 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 expense.

Net deferred income tax liabilities at March 31, 2015 increased $88 million, primarily due to the effects of temporary differences associated with stock compensation and the BKCA acquisition. Other liabilities increased $200 million from December 31, 2014, primarily resulting from an increase in consolidated funds and other operating liabilities.

Investments

Investments totaled $2,204 million at March 31, 2015 and $1,921 million at December 31, 2014. Investments include consolidated 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 or net income attributable to BlackRock. 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)    March 31,
2015
     December 31,
2014
 

Total investments, GAAP

           $ 2,204               $ 1,921   

Investments held by consolidated sponsored investment funds(1)

     (1,042      (713

Net exposure to consolidated investment funds

     877         696   
  

 

 

    

 

 

 

Total investments, as adjusted

     2,039         1,904   

Federal Reserve Bank stock

     (92      (92

Carried interest

     (91      (85

Deferred compensation investments

     (87      (85

Hedged investments

     (358      (323
  

 

 

    

 

 

 

Total “economic” investment exposure

           $         1,411               $         1,319   
  

 

 

    

 

 

 

 

(1) 

At March 31, 2015 and December 31, 2014, approximately $1,042 million and $713 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 March 31, 2015 and December 31, 2014:

 

(in millions)    March 31,
2015
     December 31,
2014
 

Private equity

           $ 358              $ 314   

Real estate

     118        117   

Other alternatives(1)

     247        289   

Other investments(2)

     688        599   
  

 

 

    

 

 

 

Total “economic” investment exposure

           $         1,411              $         1,319  
  

 

 

    

 

 

 

 

(1) 

Other alternatives include distressed credit/mortgage funds/opportunistic funds and hedge funds/funds of hedge funds.

(2) 

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

As adjusted investment activity for the three months ended March 31, 2015 was as follows:

 

(in millions)       

Investments, as adjusted, December 31, 2014

   $ 1,904  

Purchases/capital contributions

     330  

Sales/maturities

     (181 )

Distributions(1)

     (32 )

Market valuations/earnings from equity method investments

     12  

Carried interest capital allocations

     6  
  

 

 

 

Investments, as adjusted, March 31, 2015

   $ 2,039  
  

 

 

 

 

(1) 

Amounts include distributions representing return of capital and return on investments

 

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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.

The following table presents a reconciliation of the condensed consolidated statements of cash flows presented on a GAAP basis to the condensed 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, 2014

   $ 5,723           $ 120           $ -           $ 5,603       

Cash flows from operating activities

     (490)           (61)           32            (461)     

Cash flows from investing activities

     (99)           12                    -             (111)     

Cash flows from financing activities

     (748)           109            (32)           (825)     

Effect of exchange rate changes on cash and cash equivalents

     (93)           -             -             (93)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net change in cash and cash equivalents

     (1,430)           60            -             (1,490)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, March 31, 2015

   $ 4,293          $ 180          $ -           $ 4,113      
  

 

 

    

 

 

    

 

 

    

 

 

 

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 expense, interest and principal on 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 year-end incentive compensation accrued for in the prior year.

Cash outflows from investing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the three months ended March 31, 2015 were $111 million and primarily reflected $103 million of investment purchases, $98 million of purchases of property and equipment and $88 million related to the BKCA acquisition, partially offset by $169 million of net proceeds from sales and maturities of certain investments.

Cash outflows from financing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the three months ended March 31, 2015 were $825 million, primarily resulting from $498 million of share repurchases, including $275 million in open market transactions and $223 million of employee tax withholdings related to employee stock transactions and $389 million of cash dividend payments, partially offset by $55 million of excess tax benefits from vested stock-based compensation awards.

 

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The Company manages its financial condition and funding to maintain appropriate liquidity for the business. Liquidity resources at March 31, 2015 and December 31, 2014 were as follows:

 

(in millions)    March 31,
2015
     December 31,
2014
 

Cash and cash equivalents

   $ 4,293       $ 5,723    

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

     (180)         (120)   
  

 

 

    

 

 

 

Subtotal

     4,113         5,603    

Credit facility – undrawn

     4,000         3,990    
  

 

 

    

 

 

 

Total liquidity

   $       8,113       $       9,593    
  

 

 

    

 

 

 

 

(1) 

The Company can not readily access such cash to use in its operating activities.

Total liquidity decreased $1,480 million during the three months ended March 31, 2015, primarily reflecting cash payments of 2014 year-end incentive awards, share repurchases of $498 million and cash dividend payments.

A significant portion of the Company’s $2,039 million of total investments, as adjusted, is illiquid in nature and, as such, can not be readily convertible to cash.

Share Repurchases.    The Company repurchased 0.8 million common shares in open market-transactions under the share repurchase program for approximately $275 million during the three months ended March 31, 2015.

In January 2015, the Board of Directors approved an increase in the availability of shares that may be repurchased under the Company’s existing share repurchase program to allow for the repurchase of up to a total of 9.4 million additional shares of BlackRock common stock. At March 31, 2015, there were 8.6 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.

The Company was required to maintain approximately $1.1 billion at both March 31, 2015 and December 31, 2014 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. At such date, the Company was in compliance with all applicable regulatory net capital requirements.

Short-Term Borrowings

2015 Revolving Credit Facility.    In April 2015, the Company’s credit facility was amended to extend the maturity date to March 2020 and to increase the amount of the aggregate commitment to $4.0 billion (the “2015 credit facility”). The 2015 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 2015 credit facility to an aggregate principal amount not to exceed $5.0 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 2015 credit facility requires the Company not to

 

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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 March 31, 2015. The 2015 credit facility provides back-up liquidity to fund ongoing working capital for general corporate purposes and various investment opportunities. At March 31, 2015, the Company had no amount outstanding under the 2015 credit facility.

Commercial Paper Program.    The maximum aggregate amount for which the Company can issue unsecured commercial paper notes (the “CP Notes”) on a private-placement basis up to a maximum aggregate amount outstanding at any time is $3.990 billion. The commercial paper program is currently supported by the 2015 credit facility. At March 31, 2015 and December 31, 2014, BlackRock had no CP Notes outstanding.

Long-Term Borrowings

At March 31, 2015, the principal amount of long-term borrowings outstanding was $4.950 billion. See Note 12, Borrowings, in the 2014 Form 10-K for more information on borrowings outstanding as of December 31, 2014. During the quarter ended March 31, 2015, the Company paid approximately $39 million of interest on long-term borrowings. Future principal repayments and interest requirements at March 31, 2015 were as follows:

 

(in millions)                     

Year

       Principal              Interest          Total
    Payments    
 

Remainder of 2015

     $750         $     152         $902   

2016

            186         186   

2017

     700         186         886   

2018

            142         142   

2019

     1,000         142         1,142   

2020

            92         92   

Thereafter

            2,500                       177         2,677   
  

 

 

    

 

 

    

 

 

 

Total

     $4,950         $1,077                 $6,027   
  

 

 

    

 

 

    

 

 

 

In May 2015, the Company issued 700 million (or approximately $760 million based on an exchange rate of $1.09 per 1) of 1.25% senior unsecured notes maturing on May 6, 2025 (the “2025 Notes”). The notes are expected to be listed on the New York Stock Exchange. The net proceeds of the 2025 Notes will be used for general corporate purposes, including refinancing of outstanding indebtedness. Interest of approximately $10 million per year based on current exchange rates is payable annually on May 6 of each year. The 2025 Notes may be redeemed in whole or in part prior to maturity at any time at the option of the Company at a “make-whole” redemption price. The 2025 Notes were issued at a discount of approximately $3 million.

Investment Commitments.    At March 31, 2015, the Company had $353 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. In addition to the capital commitments of $353 million, the Company had approximately $30 million of contingent commitments for certain funds which have investment periods that have expired. 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 that 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.

Contingent Payments Related to Business Acquisitions.    In connection with the acquisition of Credit Suisse’s ETF franchise, BlackRock is required to make contingent payments annually to Credit Suisse, subject to achieving specified thresholds during a seven-year period, subsequent to the 2013 acquisition date. BlackRock is required

 

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to make contingent payments related to the acquisition of MGPA during a five-year period, subject to achieving specified thresholds, subsequent to the 2013 acquisition date. In addition, BlackRock is required to make contingent payments in connection with the BKCA acquisition over a three-year period, subject to the acquired business achieving specified performance targets. The fair value of the remaining aggregate contingent payments at March 31, 2015 is not significant to the condensed consolidated statement of financial condition and is included in other liabilities.

Carried Interest Clawback.    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 clawback 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 BlackRock’s condensed consolidated statements of income upon the earlier of the termination of the investment fund or when the likelihood of clawback is considered mathematically improbable.

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 March 31, 2015, the Company indemnified certain of its clients for their securities lending loan balances of approximately $153.9 billion. The Company held, as agent, cash and securities totaling $164.4 billion as collateral for indemnified securities on loan at March 31, 2015. The fair value of these indemnified securities was not material at March 31, 2015.

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.

Critical Accounting Policies

The preparation of 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 revenue and expense during the reporting periods. Actual results could differ significantly from those estimates. Management considers the following critical accounting policies important to understanding the condensed consolidated financial statements. For a summary of these and additional accounting policies see Note 2, Significant Accounting Policies, in the condensed consolidated financial statements contained in Part I, Item 1 of this filing and Critical Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2014 Form 10-K and Note 2, Significant Accounting Policies, in the 2014 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. At March 31, 2015, the Company’s consolidated VIEs consisted primarily of CLOs.

 

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CLOs.    At March 31, 2015, 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 that were determined to be VIEs, which required BlackRock to consolidate them. 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 March 31, 2015, the Company had $4,162 million and $4,146 million in assets and liabilities, respectively, on its condensed consolidated statement of financial condition related to these consolidated CLOs. The Company recorded appropriated retained earnings for the difference between the assets and liabilities of the CLOs recorded on the condensed consolidated statement of financial condition as the CLO noteholders 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 fee receivables, the Company has no risk of loss related to its involvement with these VIEs. See Note 2, Significant Accounting Policies-Recent Accounting Pronouncements Not Yet Adopted, for further information on ASU 2015-02.

Fair Value Measurements.    The Company’s assessment of the significance of a particular input to the fair value measurement according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined) in its entirety requires judgment and considers factors specific to the financial instrument. See Note 2, Significant Accounting Policies, in the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filing for more information on fair value measurements.

Level 3 inputs include the most currently available information, including capital account balances for its 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 are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3. BlackRock’s $588 million of Level 3 investments, or 27% of total GAAP investments at March 31, 2015, primarily included co-investments in private equity funds of funds and private equity funds, funds of hedge funds as well as alternative hedge funds that invest in distressed credit, opportunistic funds 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 to value these investments.

Investment Advisory Performance Fees / Carried Interest.    The Company receives investment advisory performance fees or incentive allocations from certain actively managed investment funds and certain separately managed accounts (“SMAs”). These performance fees are dependent upon exceeding specified relative 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.

In addition, the Company receives carried interest from certain alternative investment products upon exceeding performance thresholds. BlackRock may be required to return all, or part, of such carried interest depending upon future performance of these funds. Therefore, BlackRock records carried interest subject to such clawback provisions in investments or cash to the extent that it is distributed, on its condensed consolidated statements of financial condition. Carried interest is recorded as performance fee revenue upon the earlier of the termination of the investment fund or when the likelihood of clawback is considered mathematically improbable.

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. At March 31, 2015 and December 31, 2014, the Company had $115 million and $105 million, respectively, of deferred carried interest recorded in other liabilities on the condensed consolidated statements of financial condition. The ultimate timing of the recognition of performance fee revenue, if any, for these products is unknown.

 

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The following table presents changes in the deferred carried interest liability for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 
(in millions)    2015      2014  

Beginning balance

   $ 105       $ 108   

Net additional allocations

     12         18   

Performance fee revenue recognized

     (2      (54
  

 

 

    

 

 

 

Ending balance

   $ 115       $ 72   
  

 

 

    

 

 

 

Accounting Developments

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 March 31, 2015, 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.

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 March 31, 2015, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional value of approximately $260 million and $99 million, respectively.

At March 31, 2015, approximately $1,042 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 $1,411 million. See Balance Sheet Overview-Investments in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information on the Company’s investments.

 

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Equity Market Price Risk.    At March 31, 2015, the Company’s net exposure to equity market price risk in its investment portfolio was approximately $707 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 $70.7 million in the carrying value of such investments.

Interest Rate/Credit Spread Risk.    At March 31, 2015, the Company was exposed to interest-rate risk and credit spread risk as a result of approximately $704 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 $13.7 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 $179 million at March 31, 2015. A 10% adverse change in the applicable foreign exchange rates would result in approximately a $17.9 million decline in the carrying value of such investments.

Other Market Risks.    The Company executes forward foreign currency exchange contracts to mitigate the risk of certain foreign exchange risk movements. At March 31, 2015, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $215 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) as of the end of the period covered by this quarterly report on Form 10-Q. 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 were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected or are reasonably likely to materially affect our 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 BlackRock-sponsored 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.

The Italian securities regulator, Commissione Nazionale per le Societa e la Borsa (“Consob”), initiated a civil proceeding on January 3, 2014 against Nigel Bolton, a portfolio manager and head of BlackRock Investment Management (UK) Limited’s European Equity Team (“EET”), in connection with the sale of shares in the Italian oil and gas services company Saipem, SpA in January 2013.

Consob alleges that Mr. Bolton, on behalf of certain BlackRock clients, sold, or influenced the sale of, approximately 10.7 million shares of Saipem using material, non-public information thereby avoiding client losses of over 114.5 million. The EET’s sale of Saipem shares occurred between January 25 and January 29, 2013, and Saipem announced negative news following the market close on January 29, 2013. While BlackRock is not charged in the proceeding, it may be liable for the actions of its employee.

BlackRock conducted a thorough investigation and found no evidence to support the allegations. As a result of the investigation, BlackRock believes that the sale of Saipem shares was made as a fiduciary based on publicly available information that was widely disseminated in the marketplace, including negative publicity and a third-party analyst research report reducing earnings estimates, which was issued to the market before trading on January 25, 2013.

While under Italian law the potential penalty could be greater than the loss actually avoided, BlackRock believes that Mr. Bolton ultimately will not be found liable and, as a result, neither Mr. Bolton nor BlackRock will incur any penalty.

On April 20, 2015, the Securities and Exchange Commission (“SEC”) announced an agreement with BlackRock Advisors, LLC (“BlackRock Advisors”), a subsidiary of BlackRock, Inc. (“BlackRock”), to settle charges relating to BlackRock Advisors’ handling and disclosure of a former portfolio manager’s personal investments and involvement in a family business. On June 27, 2014, BlackRock announced that it had received a written “Wells Notice” from the SEC staff indicating the staff’s preliminary determination to recommend that the SEC file an action against BlackRock Advisors. As part of the settlement with the SEC, BlackRock Advisors agreed to pay a $12 million penalty and consent to the entry of an Administrative Order containing findings that BlackRock Advisors violated Sections 206(2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, as well as causing a violation of Rule 38a-1 of the Investment Company Act of 1940 and ordering BlackRock Advisors to cease and desist from committing or causing any violations and any future violations of those provisions. BlackRock neither admitted nor denied the SEC’s findings. As part of the settlement, BlackRock will be required to retain an independent compliance consultant to review its outside activity policy and any related conflicts. BlackRock does not expect this matter to have a material adverse effect on its results of operations, financial position or cash flows.

On May 27, 2014, certain purported investors in the BlackRock Global Allocation Fund, Inc. and the BlackRock Equity Dividend Fund (collectively, the “Funds”) filed a consolidated complaint (the “Consolidated Complaint”) in the U.S. District Court for the District of New Jersey against BlackRock Advisors, LLC, BlackRock Investment Management, LLC and BlackRock International Limited (collectively, the “Defendants”) under the caption In re BlackRock Mutual Funds Advisory Fee Litigation. The Consolidated Complaint, which purports to be brought derivatively on behalf of the Funds, alleges that the Defendants violated Section 36(b) of the Investment Company Act by receiving allegedly excessive investment advisory fees from the Funds. On February 24, 2015,

 

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the same plaintiffs filed another complaint in the same court against BlackRock Investment Management, LLC and BlackRock Advisors, LLC. The allegations and legal claims in both complaints are substantially similar, with the new complaint purporting to challenge fees received by Defendants after the plaintiffs filed their prior complaint. Both complaints seek, among other things, to recover on behalf of the Funds all allegedly excessive advisory fees received by Defendants in the twelve month period preceding the start of each lawsuit, along with purported lost investment returns on those amounts, plus interest. On March 25, 2015, Defendants’ motion to dismiss the Consolidated Complaint was denied. The Defendants believe the claims in both lawsuits are without merit and intend to vigorously defend the actions.

Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability arising out of these and other 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 March 31, 2015, 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)
 
January 1, 2015 through January 31, 2015     887,906 (2)      $343.44         253,142                 9,107,325    
February 1, 2015 through February 28, 2015     459,309 (2)      $368.68         457,003         8,650,322    
March 1, 2015 through March 31, 2015     63,064 (2)      $373.08         47,597         8,602,725     
 

 

 

     

 

 

   

Total

        1,410,279                $352.99                 757,742      
 

 

 

     

 

 

   

 

(1) 

In January 2015, 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 9.4 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

  4.1(1)   

Officers’ Certificate, dated May 6, 2015, for the 1.250% Notes due 2025 issued pursuant to the

Indenture, dated as of September 17, 2007, between BlackRock, as issuer, and The Bank of New

York, as trustee, relating to senior debt securities.

10.1(2)    Amendment No. 4, dated as of April 2, 2015, to BlackRock, Inc.’s Five-Year Revolving Credit Agreement, dated as of March 10, 2011, as amended by Amendment No. 1 thereto, dated as of March 30, 2012, Amendment No. 2 thereto, dated as of March 28, 2013, and Amendment No. 3 thereto, dated as of March 28, 2014, by and among BlackRock, Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, L/C agent and a lender, and the banks and other financial institutions referred to therein.
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

 

(1) 

Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on May 6, 2015

(2) 

Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on April 3, 2015

 

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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: May 8, 2015

     Gary S. Shedlin   
   

 Senior Managing Director &

 Chief Financial Officer

  

 

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EXHIBIT INDEX

 

Exhibit No.    

  

Description

  4.1(1)   

Officers’ Certificate, dated May 6, 2015, for the 1.250% Notes due 2025 issued pursuant to the

Indenture, dated as of September 17, 2007, between BlackRock, as issuer, and The Bank of New

York, as trustee, relating to senior debt securities.

10.1(2)    Amendment No. 4, dated as of April 2, 2015, to BlackRock, Inc.’s Five-Year Revolving Credit Agreement, dated as of March 10, 2011, as amended by Amendment No. 1 thereto, dated as of March 30, 2012, Amendment No. 2 thereto, dated as of March 28, 2013, and Amendment No. 3 thereto, dated as of March 28, 2014, by and among BlackRock, Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, L/C agent and a lender, and the banks and other financial institutions referred to therein.
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

 

(1) 

Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on May 6, 2015

(2) 

Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on April 3, 2015

 

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