UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DCWashington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20082010
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 No. 001-33099
BlackRock, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 32-0174431 | |
(State or
| (I.R.S. Employer Identification No.) |
4055 East 52nd Street, New York, NY 1002210055
(Address of principal executive offices)Principal Executive Offices)
(212) 810-5300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
| Common Stock, $.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer | x | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ Nox
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 20082010 was approximately $2.9$5.6 billion. There isThe registrant has no non-voting common stock of the registrant outstanding.stock.
As of January 31, 2009,2011, there were 118,171,765131,795,285 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference herein:
Portions of the definitive Proxy Statement of BlackRock, Inc. to be filed pursuant to Regulation 14A of the general rules and regulations under the Securities Exchange Act of 1934, as amended, for the 20092011 annual meeting of stockholders to be held on May 21, 200925, 2011 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.
Index to Form 10-K
TABLE OF CONTENTS
| Item 1. | BUSINESS |
Overview
BlackRock, Inc. (“BlackRock” or the “Company”) is one of the largest publicly tradedan independent investment management firms in the United Statesfirm with $1.307$3.561 trillion of assets under management (“AUM”) at December 31, 2008.2010. The Company is highly regulated, serves its clients as a fiduciary, and derives all of its revenues from client business. We focus exclusively on investment management and risk management; we do not engage in proprietary trading or other activities that could conflict with the interests of our clients. Our business is global: we invest in capital markets throughout the world, we have employees in 25 countries and we serve investors in more than 100 countries. Our clients include taxable, tax-exempt and official institutions, retail investors and high net worth individuals.
The 2009 combination of BlackRock manages assets on behalfand Barclays Global Investors (“BGI”) created a firm with unsurpassed breadth of institutionalinvestment expertise and individual investors worldwiderisk management capabilities across the global capital markets. Our unique platform enables us to bring together active (alpha) investments with index (beta) products and risk management to develop tailored solutions for clients. Our product range includes single- and multi-asset class portfolios investing in equities, fixed income and/or money market instruments. We offer our products directly and through intermediaries in a variety of fixed income, cash management, equityvehicles, including open-end and balancedclosed-end mutual funds,iShares® exchange-traded funds (“ETFs”) and alternativeother exchange traded products (together with ETFs, “ETPs”), collective investment funds and separate accounts and funds. In addition, throughaccounts. We also offer ourBlackRock Solutions®, the Company offers (“BRS”) investment systems, risk management and advisory services that combine capital markets expertise with proprietarily-developed systems and technology.BlackRock Solutions provides risk management and enterprise investment services for $7 trillion in assets, liabilities and derivatives.to institutional investors.
BlackRockBlackRock’s common stock is publicly traded on the New York Stock Exchange under the symbol, “BLK”. A majority of our Board of Directors is independent, in ownership and governance, withwe have no single majority stockholder andshareholder. On November 15, 2010, certain of BlackRock’s stockholders completed a majority$9.6 billion secondary offering through the sale of independent directors. At December 31, 2008,58.7 million shares held by Bank of America Corporation (“Bank of America”) through its wholly-owned subsidiary, Merrill Lynch & Co., Inc. (“Merrill Lynch”) owned approximately 44.2%, and The PNC Financial Services Group Inc. (“PNC”) at a price of $163.00. None of the proceeds of the offering went to the Company. At December 31, 2010, Bank of America did not hold any of BlackRock’s voting common stock outstanding and held approximately 48.2%7.1% of the Company’sBlackRock’s capital stock on a fully diluted basis. Thestock. PNC Financial Services Group, Inc. (“PNC”) ownedheld approximately 36.5%25.3% of BlackRock’s voting common stock outstanding and held approximately 32.1%20.3% of the Company’s capital stock on a fully diluted basis.
On January 1, 2009,stock. Barclays Bank of America CorporationPLC (“Bank of America”Barclays”) acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and PNC pursuant to which each agreed to exchange a portion of the BlackRock voting common stock they held for non-voting preferred stock. Following the closing of these exchanges on February 27, 2009, Bank of America/Merrill Lynch and PNC owned approximately 4.9% and 46.5%2.3% of BlackRock’s voting common stock respectively. The capital stockoutstanding and held by Bank of America/Merrill Lynch and PNC in BlackRock remained largely unchanged at approximately 47.4% and 31.5% on a fully diluted basis, respectively.
BlackRock closed 2008 with AUM of $1.307 trillion, a decrease of 4% over year-end 2007 levels. Over the past five years, BlackRock’s AUM has had a compound annual growth rate of 33%.
Assets Under Management
By Product Type
| Year ended December 31, | |||||||||||||||||||||
| (Dollars in millions) | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 5 Year CAGR | ||||||||||||||
Fixed income | $ | 483,173 | $ | 513,020 | $ | 448,012 | $ | 303,928 | $ | 240,709 | $ | 214,356 | 18 | % | |||||||
Equity and balanced | 280,821 | 459,182 | 392,708 | 37,303 | 14,792 | 13,721 | 83 | % | |||||||||||||
Cash management | 338,439 | 313,338 | 235,768 | 86,128 | 78,057 | 74,345 | 35 | % | |||||||||||||
Alternative investment products | 59,723 | 71,104 | 48,139 | 25,323 | 8,202 | 6,934 | 54 | % | |||||||||||||
Sub Total | 1,162,156 | 1,356,644 | 1,124,627 | 452,682 | 341,760 | 309,356 | 30 | % | |||||||||||||
Advisory1 | 144,995 | — | — | — | — | — | NM | ||||||||||||||
Total | $ | 1,307,151 | $ | 1,356,644 | $ | 1,124,627 | $ | 452,682 | $ | 341,760 | $ | 309,356 | 33 | % | |||||||
NM – Not Meaningful
CAGR = Compound Annual Growth Rate
|
|
1
Overview (continued)
Growth in AUM over the past five years includes acquired AUM of $660.8 billion. On September 29, 2006, Merrill Lynch contributed the entities and assets that constituted its investment management business (the “MLIM Business,” formerly named Merrill Lynch Investment Managers or “MLIM”) to the Company (the “MLIM Transaction”), adding $589.2 billion in AUM. Acquired AUM also includes approximately $21.9 billion in AUM acquired as a result of BlackRock’s acquisition of the fund of funds business of Quellos Group, LLC (the “Quellos Business” or “Quellos”), which closed on October 1, 2007 (the “Quellos Transaction”) and approximately $49.7 billion in AUM acquired in BlackRock’s acquisition of SSRM Holdings, Inc. from MetLife, Inc. in January 2005 (the “SSR Transaction”).
Assets Under Management
By Product Mix
| Year ended December 31, | |||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||
Fixed income | 37 | % | 38 | % | 40 | % | 67 | % | 71 | % | |||||
Equity and balanced | 21 | % | 34 | % | 35 | % | 8 | % | 4 | % | |||||
Cash management | 26 | % | 23 | % | 21 | % | 19 | % | 23 | % | |||||
Alternative investments products | 5 | % | 5 | % | 4 | % | 6 | % | 2 | % | |||||
Sub Total | 89 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
Advisory1 | 11 | % | — | — | — | — | |||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
| |||||||||||||||
|
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BlackRock offers a broad range of investment and risk management services to institutional and retail investors worldwide. These diverse capabilities span the global capital markets and permit the Company to serve a wide variety of investor interests. As of year-end 2008, more than 25%19.6% of the Company’s separate account clients had awarded BlackRock mandates in more than one asset class. The Company’s $1.307 trillion of AUM at year-end 2008 consisted of approximately 21% equity and balanced, 37% fixed income, 26% cash management, 5% alternative investments and 11% advisory portfolios.
The Company manages assets on behalf of investors in more than 60 countries. Approximately 41% of long-dated AUM, 12% of cash management AUM and 5% of advisory AUM were managed on behalf of international clients, with the balance managed for U.S. investors. In all regions, clients include both institutional and retail investors. At year-end 2008, approximately 76% of long-dated AUM, 91% of cash management AUM and 100% of advisory AUM were managed for institutional clients, with the remainder managed for retail and high net worth investors.
BlackRock has developed and maintains an extensive operating platform, Aladdin®, to support its global investment and risk management operations. The Company offers Aladdin and a variety of related services to institutional investors under theBlackRock Solutions brand name. At year-end 2008, over $7 trillion of assets, liabilities and derivatives were processed on the Aladdin platform in connection with outsourcing, risk management and advisory services provided to 135 clients.
2
Overview (continued)
capital stock.
BlackRock operates in a global marketplace characterized by a high degree of market volatility and economic uncertainty, factors that can significantly affect earnings and stockholder returns in any given period. Management seeks to achieve attractive returns for stockholders over time by, among other things, capitalizing on the following factors:
Thethe Company’s diversified product offerings, which enhance its ability to offer a variety of traditional and alternative investment products across the risk spectrum and to tailor single- and multi- asset class investment solutions to address specific client needs;
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the Company’s longstanding commitment to risk management and the continued development of, and increased interest in, BRS products and services;
Thethe Company’s global presence, with nearly one-thirdapproximately 41% of employees outside the U.S. supporting local investment capabilities and serving clients throughoutof which approximately 44% of total AUM was managed for clients domiciled outside the world;U.S.; and
Thethe growing recognition of the BlackRock brand globally, the strength of the Company’s culture and the depth and breadth of its intellectual capital.
The Company’s ability to increase revenue, earnings and stockholder value over time is predicated on its ability to generate new business in investment management andBlackRock Solutions products and services. New business efforts are dependent on BlackRock’s ability to achieve clients’ investment objectives in a manner consistent with their risk preferences and to deliver excellent client service. All of these efforts require the commitment and contributions of BlackRock employees. Accordingly, the ability to retainattract and attractretain talented professionals is critical to the Company’s long-term success.
3
| Item 1. | BUSINESS (continued) |
Overview (continued)
Selected financial results for the last six years are shown below:
Selected GAAP Financial Results
| (Dollars in millions, except per share amounts) | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 5 Year CAGR | ||||||||||||||||||||
Revenue | $ | 5,064 | $ | 4,845 | $ | 2,098 | $ | 1,191 | $ | 725 | $ | 598 | 53 | % | |||||||||||||
Operating income | $ | 1,593 | $ | 1,294 | $ | 472 | $ | 341 | $ | 165 | $ | 228 | 48 | % | |||||||||||||
Operating margin | 31.4 | % | 26.7 | % | 22.5 | % | 28.6 | % | 22.9 | % | 38.2 | % | (4 | )% | |||||||||||||
Non-operating income (expense), net of non-controlling interests | $ | (419 | ) | $ | 165 | $ | 40 | $ | 32 | $ | 30 | $ | 22 | (280 | )% | ||||||||||||
Net income | $ | 786 | $ | 995 | $ | 323 | $ | 234 | $ | 143 | $ | 155 | 38 | % | |||||||||||||
Diluted earnings per share | $ | 5.91 | $ | 7.53 | $ | 3.87 | $ | 3.50 | $ | 2.17 | $ | 2.36 | 20 | % | |||||||||||||
Selected Non-GAAP Financial Results1
| (Dollars in millions, except per share amounts) | 20082 | 20072 | 20062 | 2005 | 2004 | 2003 | 5 Year CAGR | ||||||||||||||||||||
As adjusted: | |||||||||||||||||||||||||||
Operating income | $ | 1,662 | $ | 1,518 | $ | 674 | $ | 408 | $ | 263 | $ | 231 | 48 | % | |||||||||||||
Operating margin | 38.7 | % | 37.5 | % | 36.7 | % | 38.9 | % | 40.1 | % | 42.2 | % | (2 | )% | |||||||||||||
Non-operating income (expense), net of non-controlling interests | $ | (381 | ) | $ | 153 | $ | 32 | $ | 21 | $ | 25 | $ | 19 | (282 | )% | ||||||||||||
Net income | $ | 858 | $ | 1,079 | $ | 445 | $ | 269 | $ | 178 | $ | 155 | 41 | % | |||||||||||||
Diluted earnings per share | $ | 6.45 | $ | 8.17 | $ | 5.33 | $ | 4.03 | $ | 2.69 | $ | 2.36 | 22 | % | |||||||||||||
| Selected GAAP Financial Results | ||||||||||||||||||||||||||||
| (Dollar amounts in millions, except per share amounts) | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 5 Year CAGR | |||||||||||||||||||||
Total revenue | $ | 8,612 | $ | 4,700 | $ | 5,064 | $ | 4,845 | $ | 2,098 | $ | 1,191 | 49 | % | ||||||||||||||
Operating income | $ | 2,998 | $ | 1,278 | $ | 1,593 | $ | 1,294 | $ | 472 | $ | 341 | 54 | % | ||||||||||||||
Operating margin | 34.8 | % | 27.2 | % | 31.5 | % | 26.7 | % | 22.5 | % | 28.6 | % | 4 | % | ||||||||||||||
Non-operating income (expense)(1) | $ | 36 | $ | (28 | ) | $ | (422 | ) | $ | 162 | $ | 37 | $ | 28 | 5 | % | ||||||||||||
Net income attributable to BlackRock, Inc. | $ | 2,063 | $ | 875 | $ | 784 | $ | 993 | $ | 321 | $ | 231 | 55 | % | ||||||||||||||
Diluted earnings per common share | $ | 10.55 | $ | 6.11 | $ | 5.78 | $ | 7.37 | $ | 3.83 | $ | 3.45 | 25 | % | ||||||||||||||
| Selected Non-GAAP Financial Results | ||||||||||||||||||||||||||||
| (Dollar amounts in millions, except per share amounts) | 2010(2) | 2009(2) | 2008(2) | 2007 | 2006 | 2005 | 5 Year CAGR | |||||||||||||||||||||
As adjusted: | ||||||||||||||||||||||||||||
Operating income | $ | 3,167 | $ | 1,570 | $ | 1,662 | $ | 1,518 | $ | 674 | $ | 408 | 51 | % | ||||||||||||||
Operating margin | 39.3 | % | 38.2 | % | 38.7 | % | 37.4 | % | 36.7 | % | 38.9 | % | — | % | ||||||||||||||
Non-operating income (expense)(1) | $ | 25 | $ | (46 | ) | $ | (384 | ) | $ | 150 | $ | 29 | $ | 18 | 7 | % | ||||||||||||
Net income attributable to BlackRock, Inc. | $ | 2,139 | $ | 1,021 | $ | 856 | $ | 1,077 | $ | 443 | $ | 266 | 52 | % | ||||||||||||||
Diluted earnings per common share | $ | 10.94 | $ | 7.13 | $ | 6.30 | $ | 7.99 | $ | 5.29 | $ | 3.99 | 22 | % | ||||||||||||||
| (1) | Net of net income (loss) attributable to non-controlling interests. |
|
| See reconciliation to GAAP measures in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations |
See additional information in Item 6, Selected Financial Data.
BlackRock reports its financial results using accounting principles generally accepted in the United States of America (“GAAP”); however, management believes that evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Certain prior year non-GAAP financial measures havedata has been restatedreclassified to conform to current year presentation.
4
| Item 1. | BUSINESS (continued) |
Overview (continued)
Operating Income, as Adjusted:
GAAP reported operating income includes all compensation relatedcertain significant items, the after-tax impact of which management considers non-recurring or transactions that ultimately will not impact BlackRock’s book value and, therefore, are excluded in calculating operating income, as adjusted.
Operating income, as adjusted (a non-GAAP measure), excludes certain expenses associated with certain of BlackRock’s long-term incentive plans (“LTIP”), which are partially funded by BlackRock stock currently held by PNC and by anticipated capital contributions from Merrill Lynch, certain costsincurred related to the integration of the MLIMacquisitions of SSRM Holdings, Inc. (“SSR”), Merrill Lynch Investment Managers (“MLIM”), the fund of funds business of Quellos Group, LLC (“Quellos”) and Quellos Transactions in 2006BGI, as well as advisory fees, legal fees and 2007, certain costs associated withconsulting transaction expenses related to the SSRBGI Transaction, in 2005, a 2007 termination fee for closed-end fund administration and servicing arrangements with Merrill Lynch, a 2008 and 2009 restructuring chargecharges and compensation expense associated with appreciation / appreciation/(depreciation) on assets related to BlackRock’scertain BlackRock deferred compensation plans.
Operating income, as adjusted (a non-GAAP measure), excludes the expense related to the 2008 restructuring charges, the 2007 termination of the closed-end fund administration and servicing arrangements with Merrill Lynch, and MLIM and Quellos integration costs consisting principally of certain professional fees, rebranding costs and compensation costs incurred in conjunction with the integration. These expenses have been excluded from operating income, as adjusted, because they have been deemed non-recurring by management and to help ensureenhance the comparability of this information to prior periods.
The portion of compensation expense associated with LTIPcertain of BlackRock’s long-term incentive plan (“LTIP”) awards that has or will be funded through distributions to participants of shares of BlackRock common stock held by PNC and the anticipateda Merrill Lynch cash compensation contribution, havea portion of which has been received, has been excluded because, exclusive of the impact related to the exercise of LTIP participants’ put options, primarily in the three months ended March 31, 2007, these charges do not impact BlackRock’s book value. A detailed discussion of the LTIP funded by PNC is included in Note 1315, Stock-Based Compensation, to the consolidated financial statements beginning on page F-1 of this Form 10-K.
Compensation expense associated with appreciation appreciation/(depreciation) on assets related to certain BlackRock deferred compensation plans has been excluded as returns on investments directedset aside for these plans, which substantially offset this expense, are reported in non-operating income (expense).
Management believes that operating income exclusive of these costs areis more representative of the operating performance for the respective periods.
Operating Margin, as Adjusted:
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 commissions. Management believes that excluding such costs and commissions is useful because these costs can fluctuate considerably and revenues associated with the expenditure of these costs will not fully impact the Company’s results until future periods.
Operating margin, as adjusted, allows the Company to compare performance from period-to-period by adjusting for items that may not recur, recur infrequently or may fluctuate based on market movements, such as restructuring charges, transaction/integration costs, closed-end fund launch costs and fluctuations in deferred compensation expense based on mark-to-market movements in investments held to fund certain compensation plans. The Company also uses operating margin, as adjusted, to monitor corporate performance and efficiency and as a benchmark to compare its performance to other companies. Management reviews both the GAAP and non-GAAP financial measures.
| Item 1. | BUSINESS (continued) |
Overview (continued)
Operating Margin, as Adjusted (continued):
Revenue used for operating margin, as adjusted, excludes portfolio administrationdistribution and servicing costs paid to related parties and to other third parties. Management believes that excluding such costs is useful to BlackRock because it creates consistency in the Company receives offsetting revenuetreatment for these services.certain contracts for similar services, which due to the terms of the contracts, are accounted under GAAP on a net basis within investment advisory, administration fees and securities lending revenue. Amortization of deferred mutual fund sales commissions areis excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, offset distribution fee revenue earned by the Company. Reimbursable property management compensation was excluded from operating margin, as adjusted, as it representsrepresented compensation and benefits paid to personnel of Metric Property Management, Inc. (“Metric”), a subsidiary of BlackRock Realty Advisors, Inc. (“Realty”), which is. Prior to the transfer in 2008 to a third party, these employees were retained on Metric’s payroll when certain properties were acquired by Realty’s clients. The related compensation and benefits were fully reimbursed by Realty’s clients resulting in noand have been excluded from revenue used for operating margin, as adjusted, because they did not bear an economic cost to BlackRock. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such offsetting revenues.
Non-Operating Income (Expense), Less Net ofIncome (Loss) Attributable to Non-controlling Interests, as Adjusted:
Non-operating income (expense), less net ofincome (loss) attributable to non-controlling interests, as adjusted, equals non-operating income (expense), GAAP basis, less net ofincome (loss) attributable to non-controlling interests, GAAP basis, adjusted for compensation expense associated with depreciation (appreciation)or appreciation on assets related to certain BlackRock deferred compensation plans, whichplans. The compensation expense offset is recorded in operating income. This compensation expense has been included in non-operating income (expense), less net ofincome (loss) attributable to non-controlling interests, as adjusted, to offset returns on investments set aside for these plans, which are reported in non-operating income (expense), GAAP basis.
5
Overview (continued)
Non-Operating Income (Expense), Net of Non-controlling Interests, as Adjusted (continued):
Management believes that non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted, provides for comparability of this information to prior periods and is an effective measure for reviewing BlackRock’s non-operating contribution to its consolidated results. As compensation expense associated with depreciation or appreciation on theassets related to certain BlackRock deferred compensation plans, which is included in operating income, offsets the gain/(loss) on the investments set aside for these plans, management believes that non-operating income (expense), less net ofincome (loss) attributable to non-controlling interests, as adjusted, provides a useful measures tomeasure, for both management and investors, of BlackRock’s non-operating results.results that impact book value.
Net Income Attributable to BlackRock, Inc., as Adjusted:
GAAP reported net income attributable to BlackRock, Inc. and GAAP diluted earnings per common share include certain significant items, the after-tax impact of which management considers non-recurring or transactions that ultimately will not impact BlackRock’s book value or do not have a cash flow impact and, therefore, are excluded in calculating net income attributable to BlackRock, Inc., as adjusted.
Net income attributable to BlackRock, Inc., as adjusted, and diluted earnings per common share, as adjusted (a non-GAAP measure)(non-GAAP measures), exclude the after-tax impact of the 2008 and 2009 restructuring charges, the 2007 termination of closed-end fund administration and servicing arrangements with Merrill Lynch, LTIP expense to be funded by PNC and by an expecteda Merrill Lynch cash compensation contribution, a portion of which has been received, the SSR, MLIM, Quellos and SSRBGI integration costs, BGI transaction costs and the effect on deferred income tax expense attributable to changes in corporate income tax rate reductions.rates as a result of enacted legislation.
| Item 1. | BUSINESS (continued) |
Overview (continued)
See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a detailed reconciliation of GAAP reported operating income, non-operating income (expense), less net ofincome (loss) attributable to non-controlling interests, net income attributable to BlackRock, Inc. and diluted earnings per common share to adjusted non-GAAP operating income, non-operating income (expense), net income attributable to BlackRock, Inc. and diluted earnings per common share.
ProductsReported AUM by Asset Class
*December 31,
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Equity | $ | 36,774 | $ | 316,961 | $ | 362,705 | $ | 203,292 | $ | 1,536,055 | $ | 1,694,467 | ||||||||||||
Fixed income | 301,032 | 445,320 | 510,207 | 481,365 | 1,055,627 | 1,141,324 | ||||||||||||||||||
Multi-asset class | 3,425 | 78,601 | 98,623 | 77,516 | 142,029 | 185,587 | ||||||||||||||||||
Alternatives | 25,323 | 48,292 | 71,771 | 61,544 | 102,101 | 109,738 | ||||||||||||||||||
Long-term | 366,554 | 889,174 | 1,043,306 | 823,717 | 2,835,812 | 3,131,116 | ||||||||||||||||||
Cash management | 86,128 | 235,453 | 313,338 | 338,439 | 349,277 | 279,175 | ||||||||||||||||||
Advisory | — | — | — | 144,995 | 161,167 | 150,677 | ||||||||||||||||||
Total | $ | 452,682 | $ | 1,124,627 | $ | 1,356,644 | $ | 1,307,151 | $ | 3,346,256 | $ | 3,560,968 | ||||||||||||
Component Changes in AUM by Asset Class
Five Years Ended December 31, 2010
| 12/31/2005 | Net New Business | Acquired AUM, net(1) | Market / FX App (Dep) | 12/31/2010 | 5-Year CAGR(2) | |||||||||||||||||||
Equity | $ | 36,774 | $ | 127,913 | $ | 1,322,892 | $ | 206,888 | $ | 1,694,467 | 115 | % | ||||||||||||
Fixed income | 301,032 | 106,203 | 625,841 | 108,248 | 1,141,324 | 31 | % | |||||||||||||||||
Multi-asset class | 3,425 | 53,442 | 111,089 | 17,631 | 185,587 | 122 | % | |||||||||||||||||
Alternatives | 25,323 | 5,325 | 85,093 | (6,003 | ) | 109,738 | 34 | % | ||||||||||||||||
Long-term | 366,554 | 292,883 | 2,144,915 | 326,764 | 3,131,116 | 54 | % | |||||||||||||||||
Cash management | 86,128 | 2,619 | 189,245 | 1,183 | 279,175 | 27 | % | |||||||||||||||||
Advisory | — | 144,378 | (10 | ) | 6,309 | 150,677 | N/A | |||||||||||||||||
Total | $ | 452,682 | $ | 439,880 | $ | 2,334,150 | $ | 334,256 | $ | 3,560,968 | 51 | % | ||||||||||||
| (1) | Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009, other reclassifications to conform to current period combined AUM policy and presentation and BGI merger-related outflows due to manager concentration considerations and scientific active equity performance. |
| (2) | Compounded Annual Growth Rate |
AUM
AUM represents assets that we manage on a discretionary basis pursuant to investment management agreements that are expected to continue for at least 12 months. In general, reported AUM corresponds to the basis used for billing (for example, net asset value). Reported AUM does not include assets for which we provide risk management or other forms of non-discretionary advice, or assets that we are retained to manage on a short-term, temporary basis (for example, in a transition management mandate, as described below).
| Item 1. | BUSINESS (continued) |
Overview (continued)
BlackRock offers a variety of investment management and risk management products and services. Investment management offerings include single- and multi- asset class portfolios, which may be structured to focus on a particular investment style, capitalization range, region or market sector, credit or maturity profile, or liability structure. Revenue from these products primarily consists of advisory fees are typically structured as a percentage of AUM and, in some instances, performance fees expressed as a percentage of returns in excess ofnet asset value. On some products, we earn securities lending fees. We also earn performance fees on certain portfolios relative to an agreed-upon targets. Riskbenchmark or return hurdle. In addition, BlackRock offers itsAladdin® investment system, as well as risk management, products, including BlackRock’s Aladdin platform, outsourcing and advisory and transition management services, are offered to institutional investors under theBlackRock Solutions BRS name. Revenue on these services may be based on several criteria including asset volume, number of users, accomplishment of specific deliverables or other performance objectives.
At December 31, 2010, AUM was $3.561 trillion, representing a compound annual growth rate of 51% over the last five years. AUM growth during the period was achieved through net new business and mergers, including the acquisitions of MLIM in 2006, the fund of funds business of Quellos in 2007 and BGI in 2009. These acquisitions significantly changed our AUM mix, from predominantly fixed income in 2005 to a broadly diversified product range spanning asset classes and investment styles, as described below.
Products *
Asset Classes
Component Changes in AUM by Asset Class
| 12/31/2009 | Net New Business | Acquired AUM, net(1) | Market / FX App (Dep) | 12/31/10 Sub-Total | BGI merger- related outflows(2) | 12/31/2010 | ||||||||||||||||||||||
Equity | $ | 1,536,055 | $ | 69,067 | $ | (8,310 | ) | $ | 197,052 | $ | 1,793,864 | $ | (99,397 | ) | $ | 1,694,467 | ||||||||||||
Fixed income | 1,055,627 | 36,013 | 3,452 | 66,114 | 1,161,206 | (19,882 | ) | 1,141,324 | ||||||||||||||||||||
Multi-asset class | 142,029 | 26,262 | 3,550 | 13,873 | 185,714 | (127 | ) | 185,587 | ||||||||||||||||||||
Alternatives | 102,101 | (136 | ) | — | 8,263 | 110,228 | (490 | ) | 109,738 | |||||||||||||||||||
Long-term | 2,835,812 | 131,206 | (1,308 | ) | 285,302 | 3,251,012 | (119,896 | ) | 3,131,116 | |||||||||||||||||||
Cash management | 349,277 | (61,424 | ) | (4,852 | ) | (2,763 | ) | 280,238 | (1,063 | ) | 279,175 | |||||||||||||||||
Advisory | 161,167 | (12,021 | ) | — | 1,541 | 150,687 | (10 | ) | 150,677 | |||||||||||||||||||
Total | $ | 3,346,256 | $ | 57,761 | $ | (6,160 | ) | $ | 284,080 | $ | 3,681,937 | $ | (120,969 | ) | $ | 3,560,968 | ||||||||||||
Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation. |
| (2) | Includes outflows due to manager concentration considerations and scientific active equity performance. |
At year-end 2010, products invested primarily in long-term assets represented 88% of total AUM or $3.131 trillion, of which 54% were equity mandates, 36% fixed income accounts, 6% multi-asset class portfolios and 4% alternative investments. The remaining AUM was in cash management products and advisory mandates, which are long-term portfolio liquidation assignments. Net new business in long-term products totaled $131.2 billion, before giving effect to merger-related outflows (see below). Net inflows in long-term products were offset by net outflows in cash management products, as money market fund yields remained near zero and net distributions from advisory portfolios.
Unless stated otherwise, net new business figures are before giving effect to merger-related outflows of $121.0 billion, or less than 7% of the $1.8 trillion of AUM acquired in the BGI Transaction. The annualized investment advisory base fee loss associated with merger-related outflows is less than approximately $175 million.
| * | See Product Performance Notes below. |
6
| Item 1. | BUSINESS (continued) |
Products (continued)
BlackRock, Inc.Products (continued)
Assets Under ManagementEquity and Fixed Income
(Dollar amountsEquity and fixed income AUM include a wide range of active and passive strategies. In total, equity AUM increased $158.4 billion or 10% to $1.694 trillion at year-end 2010. Growth was driven by $69.1 billion of net new business and $197.1 billion of investment performance and market appreciation. Fixed income AUM ended 2010 at $1.141 trillion, up $85.7 billion or 8% relative to December 31, 2009. Net new business contributed $36.0 billion of the growth, while markets and investment performance contributed $66.1 billion. Merger-related outflows totaled $99.4 billion and $19.9 billion in millions)equities and fixed income, respectively, primarily due to manager concentration and underperformance in scientific active equities. (See additional discussion under “AUM by Style,” below.)
(unaudited)Multi-Asset Class
BlackRock’s multi-asset class AUM ended 2010 at $185.6 billion, an increase of 31% or $43.6 billion. During the year, we were awarded $26.3 billion of net new business and portfolio values rose $13.9 billion. BlackRock’s multi-asset class team manages a variety of bespoke mandates that leverage our broad investment expertise in global equities, currencies, bonds and commodities and our extensive risk management capabilities. Investment solutions might include a combination of long-only portfolios and alternative investments, as well as tactical asset allocation overlays. The products are described briefly below.
BlackRock’s multi-asset class products were managed on behalf of a well-balanced client base. At December 31, 2010, institutional investors represented 56% of multi-asset class AUM, while retail and high net worth investors accounted for 44%. Flows were almost evenly split as well, with $15.3 billion or 59% and $10.7 billion or 41% coming from institutional and retail and high net worth investors, respectively. The geographic mix was similarly diversified, with 59% of multi-asset class AUM managed for clients based in the Americas, 32% in Europe, the Middle East and Africa (“EMEA”) and 9% in Asia-Pacific. During the year, clients in the Americas and EMEA awarded BlackRock net new business of $26.6 billion, which offset net outflows of $0.5 billion from clients in Asia-Pacific.
| December 31, 2007 | Net subscriptions (redemptions) | Foreign exchange 1 | Market appreciation (depreciation) | December 31, 2008 | ||||||||||||||
By Product | ||||||||||||||||||
Fixed income | $ | 513,020 | $ | (6,594 | ) | $ | (6,222 | ) | $ | (17,030 | ) | $ | 483,173 | |||||
Cash management | 313,338 | 25,670 | (1,908 | ) | 1,339 | 338,439 | ||||||||||||
Equity and balanced | 459,182 | 869 | (18,782 | ) | (160,448 | ) | 280,821 | |||||||||||
Alternative investment products | 71,104 | 2,903 | (1,235 | ) | (13,049 | ) | 59,723 | |||||||||||
Sub Total | 1,356,644 | 22,848 | (28,147 | ) | (189,189 | ) | 1,162,156 | |||||||||||
Advisory AUM2 | — | 144,756 | — | 239 | 144,995 | |||||||||||||
Total AUM | $ | 1,356,644 | $ | 167,604 | $ | (28,147 | ) | $ | (188,950 | ) | $ | 1,307,151 | ||||||
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| • | Fiduciary management services accounted for 15% or $28.6 billion of multi-asset class AUM at December 31, 2010. AUM increased $4.1 billion during the year. These are complex mandates in which pension plan sponsors retain BlackRock to assume responsibility for some or all aspects of plan management. Customized services include tailoring investment strategy to client-specific risk budgets and return objectives, working closely with the client’s investment staff and trustees. |
Volatile investor sentiment presented challenges for asset allocation strategies in 2010. While 35% of multi-asset class AUM achieved returns above their benchmarks or peer medians for the one year, longer-term results remained strong, with 81% of multi-asset class AUM outperforming for the three years and 87% for the five years ended December 31, 2010.
| Item 1. | BUSINESS (continued) |
Products (continued)
Alternative Investments
BlackRock ended 2010 with $109.7 billion of AUM in its alternative investment products, an increase of $7.6 billion. Net outflows totaled $0.1 billion, as withdrawals and disbursements in real estate, currency and opportunistic funds were offset by inflows in single- and multi-strategy hedge funds, global macro funds, funds of hedge funds and commodity products. We believe that as investors adapt their asset allocation strategies to best meet their investment objectives in the current environment, they will continue to increase their use of alternative investments to complement their core holdings.
The alternative investment client base was predominantly institutional, representing 75% or $81.8 billion of alternatives AUM with retail and high net worth investors comprising 8% or $9.3 billion of AUM at December 31, 2010.iShares comprised $18.6 billion or 17% of ending AUM. The geographic mix was well diversified, with 55% of AUM managed for clients in the Americas, 24% for clients in EMEA and 21% for clients in Asia-Pacific.
During 2010, we launched BlackRock Alternative Investors (“BAI”) to coordinate our alternative investment efforts, including product management, business development and client service. The products offered under the BAI umbrella are described below.
| • | Real estate debt and equity products managed by BlackRock totaled $12.9 billion at year-end. Offerings include high yield debt and core, value-added and opportunistic equity portfolios. Real estate AUM decreased $5.5 billion during the year, driven by $3.3 billion in net outflows and $2.2 billion in market declines. Market performance rebounded for U.S. funds in 2010 and showed continued strength in the U.K. and within separate accounts. |
| • | Funds of funds AUM increased $1.8 billion or 8% to $23.9 billion at December 31, 2010, including $18.5 billion in funds of hedge funds and hybrid vehicles and $5.4 billion in private equity fund of funds. During the year, growth was driven by net inflows of $0.5 billion and $1.3 billion of investment and market performance. Performance was strong and a growing number of institutional clients worldwide sought our expertise in customized accounts and commingled vehicles. |
| • | Hedge funds ended the year with $25.9 billion of AUM in a variety of single-strategy, multi-strategy and global macro hedge funds, as well as portable alpha, distressed and opportunistic offerings. Products include both open-end hedge funds and similar products and closed-end funds that have been created to take advantage of specific opportunities over a defined, often longer-term investment horizon. Growth of $1.1 billion primarily came from $0.6 billion of net inflows into |
| • | Currency and commodity mandates totaled $45.6 billion at year-end 2010. These products include a range of active and passive products primarily managed through institutional separate accounts. AUM increased $10.0 billion during the year, driven by $2.8 billion of net inflows, primarily in commodities and currency overlays and $7.1 billion of market appreciation. OuriShares commodities products represented $18.6 billion of AUM, which are not eligible to pay performance fees. |
Cash Management and Securities Lending
AUM in cash management products totaled $279.2 billion at December 31, 2010, a decrease of $70.1 billion, or 20%, from AUM reported at year-end 2009. Investors continued to look for higher returns by reallocating balances to deposits and operations and to a lesser extent, longer-term investment products. Cash management products include taxable and tax-exempt money market funds and customized separate accounts. Portfolios may be denominated in U.S. dollar, euro or pound sterling.
| Item 1. | BUSINESS (continued) |
Products (continued)
Our cash management clientele is largely institutional, with 85% of cash AUM managed for institutions and 15% for retail and high net worth investors at year-end 2010. The investor base was also predominantly domestic, with 75% managed for investors in the Americas and 25% for clients in other regions, almost all EMEA-based. We suffered net outflows during the year, as investors sought higher yields in bank deposits, direct money market investments and as they became more confident of the market recovery, in longer-term assets. Clients also used their cash for operating purposes, as business investment increased and merger and acquisition activity increased. We expect these trends to continue, which will continue to put pressure on cash management flows.
The cash management team also invests the cash we receive as collateral for securities on loan in other portfolios. Securities lending, which is offered as a potential source of incremental returns on long-term portfolios, is managed by a dedicated team, supported by quantitative analysis, proprietary technology and disciplined risk management. Fees for securities lending can be structured as a share of earnings and/or a percentage of the value of the cash collateral. The value of the securities on loan and the revenue earned is captured in the corresponding asset class in AUM. The value of the cash or securities collateral is not included in cash management AUM.
The combination of the legacy businesses, along with the addition of new lending mandates, has increased lendable inventory and solidified BlackRock as a top tier provider of lendable assets. Outstanding loan balances ended the year at approximately $104 billion, down slightly from $111 billion at year-end 2009. Balance volatility throughout 2010 was lower than in recent years. Demand remained weak, as relatively few securities command premium lending fees. This trend is expected to continue through 2011, with a turnaround occurring when the end-borrowers of securities begin re-risking and putting their capital to work with more conviction.
BlackRock employs a conservative investment style that emphasizes quality, liquidity and superior client service throughout all market cycles. Disciplined risk management, including a rigorous credit surveillance process, is an integral part of the investment process. BlackRock’s Cash Management Risk Committee has established risk limits, such as aggregate issuer exposure limits and maturity limits, across many of the products BlackRock manages, including over all of its cash management products. In the ordinary course of our business, there may be instances when a portfolio may exceed an internal risk limit or when an internal risk limit may be changed and no such instances, individually or in the aggregate, have been material to the Company. To the extent that daily evaluation/reporting of the profile of the portfolios identifies that a limit has been exceeded, the relevant portfolio will be adjusted. To the extent a portfolio manager would like to obtain a temporary waiver of a risk limit, the portfolio manager must obtain approval from the credit research team, which is independent from the cash management portfolio managers. While a risk limit may be waived, such temporary waivers are infrequent.
| Item 1. | BUSINESS (continued) |
Products (continued)
Investment Styles
Reported Long-term AUM by Asset Class & Style
December 31, 2010
| Active | Institutional Index | iShares/ ETPs | Total | |||||||||||||
Equity | $ | 334,532 | $ | 911,775 | $ | 448,160 | $ | 1,694,467 | ||||||||
Fixed income | 592,303 | 425,930 | 123,091 | 1,141,324 | ||||||||||||
Multi-asset class | 181,101 | 4,116 | 370 | 185,587 | ||||||||||||
Alternatives | 82,544 | 8,603 | 18,591 | 109,738 | ||||||||||||
Long-term | $ | 1,190,480 | $ | 1,350,424 | $ | 590,212 | $ | 3,131,116 | ||||||||
Component Changes in Long-term AUM by Style
| 12/31/2009 | Net New Business | Acquired AUM, net(1) | Market / FX App (Dep) | 12/31/10 Sub-Total | BGI merger- related outflows(2) | 12/31/2010 | ||||||||||||||||||||||
Active | $ | 1,172,503 | $ | (2,016 | ) | $ | (4,820 | ) | $ | 89,395 | $ | 1,255,062 | $ | (64,582 | ) | $ | 1,190,480 | |||||||||||
Institutional index | 1,169,094 | 89,186 | 3,512 | 143,947 | 1,405,739 | (55,315 | ) | 1,350,424 | ||||||||||||||||||||
iShares / ETPs | 494,215 | 44,037 | — | 51,960 | 590,212 | — | 590,212 | |||||||||||||||||||||
Long-term | $ | 2,835,812 | $ | 131,207 | $ | (1,308 | ) | $ | 285,302 | $ | 3,251,013 | $ | (119,897 | ) | $ | 3,131,116 | ||||||||||||
| (1) | Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation. |
| (2) |
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EquityLong-term1 product offerings include active and Balancedpassive (index) strategies. The investment objective for active portfolios is to earn attractive returns in excess of a market benchmark or performance hurdle (alpha). In contrast, passive strategies seek to closely track the returns of the corresponding index (beta), generally by investing in the securities that comprise the index or in a subset of those securities selected to approximate the risk and return profile of the index.
The BGI Transaction included an at-scale index business that materially changed BlackRock’s AUM mix. Index AUM, including institutional andiShares products, increased from 4% of AUM at year-end 2008 (prior to the BGI Transaction) to 54% of AUM at December 31, 2010.
Although many clients use both active and passive strategies, the profile of these assets differs greatly. For example, clients often use index products to gain exposure to a market or asset class pending reallocation to an active manager. This has the effect of increasing turnover on index AUM. In addition, institutional index assignments tend to be very large (multi-billion dollars) and priced at low fee rates. This has the effect of exaggerating the significance of net flows in institutional index on BlackRock’s earnings.
| 1 | See discussions of Cash Management and Advisory (BRS) offerings. |
| Item 1. | BUSINESS (continued) |
Products (continued)
Active Strategies
BlackRock managesComponent Changes in AUM - Active
| 12/31/2009 | Net New Business | Acquired AUM, net(1) | Market / FX App (Dep) | 12/31/10 Sub-Total | BGI merger- related outflows(2) | 12/31/2010 | ||||||||||||||||||||||
Equity | $ | 348,573 | $ | 2,632 | $ | (3,920 | ) | $ | 41,737 | $ | 389,022 | $ | (54,490 | ) | $ | 334,532 | ||||||||||||
Fixed income | 595,580 | (22,142 | ) | (3,923 | ) | 32,262 | 601,777 | (9,474 | ) | 592,303 | ||||||||||||||||||
Multi-asset class | 141,473 | 23,402 | 3,023 | 13,331 | 181,229 | (128 | ) | 181,101 | ||||||||||||||||||||
Alternatives | 86,877 | (5,908 | ) | — | 2,065 | 83,034 | (490 | ) | 82,544 | |||||||||||||||||||
Long-term | $ | 1,172,503 | $ | (2,016 | ) | $ | (4,820 | ) | $ | 89,395 | $ | 1,255,062 | $ | (64,582 | ) | $ | 1,190,480 | |||||||||||
| (1) | Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation. |
| (2) | Includes outflows due to manager concentration considerations and scientific active equity performance. |
We offer two types of active strategies: those that rely primarily on fundamental research and those that utilize primarily quantitative models to drive security selection and portfolio construction. At year-end 2010, active long-term AUM increased $18.0 billion to $1.190 trillion at year-end, of which 28% was in equities, 50% in fixed income, 15% in multi-asset and 7% in alternatives. Favorable markets contributed $89.4 billion of growth, which was slightly offset by $2.0 billion of net outflows. AUM growth was significantly hampered by merger-related outflows of $64.6 billion, primarily in scientific active equities (“SAE”).
Active Equity
BlackRock’s active equity AUM closed the year at $334.5 billion, a rangedecline of equity strategies across the risk/return spectrum,4%, or $14.0 billion relative to year-end 2009. Net new business contributed $2.6 billion of growth, while investment and market performance added $41.7 billion. A wide variety of products are offered, including global and regional portfolios; value, growth and core mandates;products; large, mid and small cap strategies; and selected sector funds. Amidst particularly volatile conditionsWe believe an improving U.S. economy, strong corporate balance sheets, and challengingsustained strong growth in the emerging markets bodes well for equity managers, BlackRock’s applicationmarkets in 2011, although geopolitical risk remains a potential drag on investor sentiment.
BlackRock manages active equity portfolios for a diverse base of risk analytics to equity portfolio construction helped managers reposition their portfolios effectively for the new environment.
BlackRock’s equityinstitutional and balanced AUM closed the year at $280.8 billion. The sharp fall in global equity markets caused AUM to decline $160.4 billion or 35% sinceretail and high net worth investors globally. At December 31, 2007. Foreign exchange translation accounted for an additional $18.8 billion or 4% decay in reported AUM. Despite the challenging market environment, the Company attracted $0.9 billion2010, approximately half of net new business during the year, with inflows in asset allocation and index products partially offset by outflows in sector funds, U.S.active equity and emerging market portfolios. BlackRock’s equity investment teams achieved strong relative performance, with 70%, 85%, and 91% of equity fund assets ranked in the top two peer group quartiles for the one-, three- and five-year periods ended December 31, 2008.
At year-end 2008, 49% of the Company’s equity and balanced AUM or $136.4 billion, were managed for U.S. investors and 51%, or $144.4 billion, were managed for international investors in over 35 countries. In addition, BlackRock’s channel mix($165.8 billion) was well balanced with 53% of assets managed on behalf of institutional clientsinvestors in separate accounts, collective investment trusts and 47% managed on behalf ofmutual funds and half ($168.7 billion) for retail and high net worth investors. During 2008, we were awarded $10.9 billioninvestors, largely through open-end mutual funds and $3.0 billion of net new business from U.S. retail and institutional investors, respectively. These inflows were offset by net outflows of $7.0 billion from international retail investors and $5.9 billion from U.S. high net worth investors, principally in broker-sold separately managed accounts. Approximately 46% of our active equity AUM was managed for investors based in the Americas, 39% in EMEA and 15% in Asia-Pacific.
| • | Fundamental active equity ended 2010 with $239.1 billion in AUM. Net inflows of $3.9 billion in equity dividend, global, European and other regional strategies were offset by outflows of $0.2 billion in U.S. equity funds. Market appreciation of $30.4 billion bolstered AUM as equity markets rebounded late in the year. BlackRock’s fundamental active equity investors seek to add value relative to a specified index or on an absolute basis primarily through security selection based on proprietary research and portfolio manager judgment. Performance was strong in European and emerging market products, as well as selected sector funds including: energy, natural resources and health sciences. In total, 62%, 65% and 77% of fundamental active equity AUM beat their benchmarks or peer medians for the one-, three- and five-year periods ended December 31, 2010, respectively. During the year, we drew on existing talent to fill out the leadership team and attracted an experienced CIO for our U.S. fundamental active equity strategies. |
7
| Item 1. | BUSINESS (continued) |
Products (continued)
Products (continued)
| • | Scientific active equity AUM declined 32% to $95.4 billion. Portfolio appreciation of $11.4 billion was insufficient to overcome BGI merger-related outflows of $52.6 billion, much of which was anticipated due to underperformance dating back to 2007 in key developed market products. SAE strategies seek superior investment outcomes through a stock selection process that aims to systematically find and exploit pricing opportunities, while rigorously managing risk and cost. During the year, we appointed a new head of the SAE business, who reorganized the team and instilled a strong performance culture that has begun to stabilize the asset base. Though still nascent, there are early signs of improvement, as 55%, 45% and 36% of SAE AUM outperformed their benchmarks or peer medians for the one-, three- and five-year periods ended December 31, 2010, respectively. |
Active Fixed Income
BlackRock offers an array ofBlackRock’s active fixed income products across currencies, sectorsAUM ended 2010 at $592.3 billion, a slight decrease of 1% or $3.3 billion, from the previous year’s results. During the year, we had $22.1 billion of net outflows, partially offset by $32.3 billion of investment and maturities. Portfolios can bemarket performance. Fixed income mandates are often tailored relative to clients’client-specified liabilities, accounting, regulatory or rating agency requirements, or other investment policies. In 2008, investors worldwide soughtU.S. bonds enjoyed good absolute returns in 2010. Despite a slight pullback during the safetyfourth quarter, the Barclays Capital U.S. Aggregate Index returned 6.5% for the year. While sovereign credit risk remains a concern, particularly in parts of government-guaranteed debt, particularly lateEurope, inflation is not expected to have a material impact on Federal Reserve policy in the year in the face of extreme market disruption and deteriorating economic conditions. Clients continued to migrate from broad bond market portfolios and structured products to long duration and other liability driven strategies. Widespread de-leveraging of balance sheets caused significant devaluation of assets, which in turn led to demand for advisory services and investor interest in a variety of distressed and opportunistic products.2011.
Of BlackRock’s total active fixed income AUM, ended the year at $483.2 billion, a decrease of $29.8 billion or 6% year-over-year. A substantial majority of this decline (78% or $23.2 billion) resulted from adverse market movements, primarily in the form of dramatic widening of credit spreads as liquidity dried up. Net outflows accounted for the remaining $6.6 billion or 1% fall-off in AUM, driven by investors’ cash needs, structured product liquidations, a shift toward liability driven investing and insourcing following a single client’s merger activity. The year82% was exceptionally challenging for bond managers, and BlackRock was not immune. Although we remained competitive within our institutional peer group, investment performance fell short of our expectations, particularly in multi-sector portfolios. For the one-, three- and five-year periods ended December 31, 2008, 37%, 36% and 45% of bond fund assets ranked in the top two peer group quartiles.
BlackRock’s fixed income client base remains largely institutional, with 86% of AUM, or $415.8 billion, managed on behalf of institutional clientsinvestors and 14%, or $67.4 billion, managed18% for retail and high net worth investors. The client base reflects our historical roots, with 69% of active fixed income AUM managed for investors in the Americas, 23% for EMEA domiciled clients, and 8% for investors in the Asia-Pacific region. Net inflows of $11.4$1.3 billion from internationalAsia-Pacific clients were overwhelmedmore than offset by net outflows of $18.0$23.4 billion from U.S. investors resulting in a slight shift in the client mix from 35% international at year-end 2007 to 36% at year-end 2008.Americas and EMEA.
| • | Fundamental fixed income AUM totaled $553.5 billion, or 93% of active fixed income AUM, at year-end 2010. These products emphasize risk-controlled sector rotation and security selection driven by sector experts and direct interaction with issuers and market makers. Fundamental strategies experienced net outflows of $10.2 billion largely driven by client changes in overall asset allocation and long-term performance concerns. In addition, $8.8 billion of fixed income assets, on which we have been waiving fees for more than a year, transferred to cash management. Market appreciation contributed $30.5 billion to ending AUM. Positive flows in U.S. municipal bonds of $2.0 billion were buoyed by the successful launch of the $1.2 billion Build America Bond Trust in the third quarter of the year. Fundamental taxable fixed income strategies achieved strong performance in 2010, with 72%, 49% and 49% of AUM above their benchmarks or peer medians for the one-, three-, and five-year periods ended December 31, 2010, respectively. |
| • | Model-driven fixed income AUM declined $3.9 billion or 9%, ending the year at $38.8 billion. Investment and market performance of $1.7 billion was insufficient to overcome $3.2 billion of outflows. These strategies employ models to identify relative return opportunities and to apply those results, subject to a pragmatic review of model risk, on a systematic basis across portfolios. Performance in our model-driven fixed income strategies was mixed, with 66%, 81% and 92% of AUM above their benchmarks or peer medians for the one-, three- and five-year periods ended December 31, 2010, respectively. |
Cash ManagementMulti-Asset and Alternatives
The cash management industry was particularly challenged byVirtually all (98%) of AUM in multi-asset class mandates, and the credit and liquidity crisis that persisted throughout 2008. Difficulties intensifiedmajority (75%) of AUM in alternative investments are managed in active strategies. These products are discussed earlier. (See the third quarter when the bankruptcy of Lehman Brothers caused the Reserve Primary Fund’s net asset value to drop below $1, thereby becoming the second fund ever to “break the buck” in the nearly 40-year history of money market mutual funds. This landmark event triggered large redemptions in prime money market funds as investors sought safety in Treasuries and government money market funds. This massive “flight to safety” necessitated substantial selling by prime funds, which in turn froze short-term funding markets until government intervention encouraged investors to reallocate back into prime money market funds.corresponding sections under “Products — Asset Classes.”)
Throughout the year, BlackRock navigated these extraordinary market conditions to ensure safety and liquidity for our cash management clients. Flows were volatile, particularly in the third and fourth quarters, when the Company’s liquidity products had net outflows of $53.5 billion and net inflows of $48.6 billion, respectively. Cash management AUM closed the year at $338.4 billion, an increase of 8% or $25.1 billion since year-end 2007. For the year-ended December 31, 2008, average assets were approximately 26% higher than for calendar year 2007.
BlackRock’s cash management activities are primarily conducted on behalf of U.S. investors, with increasing demand from international clients, especially in the United Kingdom and Middle East. At December 31, 2008, cash management AUM for U.S. investors reached $297.7 billion, up 4% from 2007, and $40.7 billion for international clients, up 52% from a year ago. For the first time, net inflows from international clients surpassed net subscriptions from U.S. investors, $15.1 billion and $10.6 billion respectively. BlackRock’s cash management clientele remains largely institutional, with $309.2 billion or 91% managed on behalf of institutions and $29.2 billion or 9% managed on behalf of retail and high net worth investors.
8
| Item 1. | BUSINESS (continued) |
Products (continued)
Cash ManagementProducts (continued)
Institutional Index
Management expects continued volatilityComponent Changes in cash management flows given ongoing dislocationsAUM - Institutional Index
| 12/31/2009 | Net New Business | Acquired AUM, net(1) | Market / FX App (Dep) | 12/31/10 Sub-Total | BGI merger- related outflows(2) | 12/31/2010 | ||||||||||||||||||||||
Equity | $ | 806,083 | $ | 44,569 | $ | (4,390 | ) | $ | 110,420 | $ | 956,682 | $ | (44,907 | ) | $ | 911,775 | ||||||||||||
Fixed income | 357,557 | 39,148 | 7,374 | 32,259 | 436,338 | (10,408 | ) | 425,930 | ||||||||||||||||||||
Multi-asset class | 354 | 2,721 | 528 | 513 | 4,116 | — | 4,116 | |||||||||||||||||||||
Alternatives | 5,100 | 2,748 | — | 755 | 8,603 | — | 8,603 | |||||||||||||||||||||
Long-term | $ | 1,169,094 | $ | 89,186 | $ | 3,512 | $ | 143,947 | $ | 1,405,739 | $ | (55,315 | ) | $ | 1,350,424 | |||||||||||||
| (1) | Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation. |
| (2) | Includes outflows due to manager concentration considerations and scientific active equity performance. |
Institutional index AUM, generally managed in the market and the extremely low levelcommon trust funds or separate accounts, comprised 38% of rates on Treasury bills and other money market instruments.
Alternatives
BlackRock’s alternative investment capabilities include real estate equity and debt; hedge fund, private equity and real asset funds of funds; single-strategy hedge funds, and distressed, opportunistic and other absolute return strategies. BlackRock invests alongside clients in many of these products as a way of evidencing our long-term commitment to these strategies and alignment of interest with our clients. These coinvestments are held on balance sheet and marked to market. While alternative investment strategies generally are designed to provide returns with low correlations to the broad equity and bond markets, market turmoil affected all strategies in 2008 and return correlations increased dramatically.
In many ways, 2008 was a “perfect storm” for alternative investments – frozen capital markets, lack of financing, forced deleveraging, poor absolute returns, imposition of redemption constraints and revelation of a massive alleged hedgefund fraud (in which none of BlackRock’s fund of funds were invested). Industry-wide, investors sought to redeem hedge fund and fund of fund holdings in record numbers, and were often forced to liquidate better performing products that could provide liquidity. BlackRock was able to meet all redemption requests in these products in 2008. Despite these headwinds, BlackRock raised $2.9 billion of net new business across a range of alternative products during the year, which helped to offset market and foreign exchange declines of $14.3 billion. At year-end, alternative investmenttotal AUM totaled $59.7 billion.
BlackRock’s real estate offerings span a wide range of strategies, including core, value-added and opportunistic equity and high yield debt for institutional and private investors. Assets on the real estate platform as ofat December 31, 2008 were $25.8 billion, down $3.6 billion from 2007 year-end, largely as a result of declining market values worldwide. Net new business in real estate equity and debt products totaled $1.4 billion in 2008.
The Company’s fund of funds platform which operates under the name, BlackRock Alternative Advisors (“BAA”), manages a variety of multi-manager strategies investing in hedge funds, private equity funds and real asset funds.2010. AUM in these products closed the year at $22.7 billion, a decrease of $6.7 billion,growth was driven largely by negative market returns and, to a lesser extent, redemptions in funds of hedge funds. These declines were partially offset by net new business of $0.9$89.2 billion and market appreciation of $143.9 billion. Merger-related outflows of $55.3 billion were concentrated among a relatively small number of clients. Where possible, we worked with these investors to address manager concentration issues by reallocating commoditized, low fee AUM, while retaining significant relationships and opportunities.
Equity products comprised 68% of institutional index AUM, ending the year at $911.8 billion, driven by net inflows of $44.6 billion and $110.4 billion of market appreciation. Net inflows in global, U.S. equity and other regional strategies were partially offset by outflows of $2.7 billion in BAA’s privateother low fee currency overlays for equity fundstrategies. Toward the end of funds business. Allthe year, investors began to reallocate to higher return asset classes, helping to fuel a recovery in the global equity markets. Institutional index equity portfolios closely tracked their respective benchmarks, with 97%, 96% and 98% of these assets are managed on behalfAUM at or above tracking error tolerance for one-, three-, and five-year periods.
Fixed income products represented 32% or $425.9 billion of institutional index AUM, an increase of 19% or $68.4 billion. Net new business totaled $39.1 billion fueled by $12.8 billion of net inflows primarily in liability hedging strategies. Investors remained risk averse largely due to the European sovereign debt crisis in the first half of the year, favoring low risk fixed income exposures. As global markets stabilized and high net worth clients, split almost evenly betweena recovery in the U.S. looked increasingly likely, equity markets recovered and international investors.investor confidence returned. Institutional index fixed income portfolios closely tracked their respective benchmarks, with 92%, 94% and 98% of AUM at or above tracking error tolerance for one-, three-, and five-year periods.
Less than 1% of institutional index AUM is in alternatives or multi-asset class products. (See discussions under “Products — Asset Classes,” above.)
| Item 1. | BUSINESS (continued) |
BlackRock ended 2008
Products (continued)
iShares / ETPs
Component Changes in AUM - iShares / ETPs
| 12/31/2009 | Net New Business | Acquired AUM, net(1) | Market / FX App (Dep) | 12/31/10 Sub-Total | BGI merger- related outflows(2) | 12/31/2010 | ||||||||||||||||||||||
Equity | $ | 381,398 | $ | 21,865 | $ | — | $ | 44,897 | $ | 448,160 | $ | — | $ | 448,160 | ||||||||||||||
Fixed income | 102,490 | 19,008 | — | 1,593 | 123,091 | — | 123,091 | |||||||||||||||||||||
Multi-asset class | 203 | 140 | — | 27 | 370 | — | 370 | |||||||||||||||||||||
Alternatives | 10,124 | 3,024 | — | 5,443 | 18,591 | — | 18,591 | |||||||||||||||||||||
Long-term | $ | 494,215 | $ | 44,037 | $ | — | $ | 51,960 | $ | 590,212 | $ | — | $ | 590,212 | ||||||||||||||
| (1) | Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy and presentation. |
| (2) | Includes outflows due to manager concentration considerations and scientific active equity performance. |
iShares is the leading ETF provider in the world, with $11.2$590.2 billion of AUM at December 31, 2010, an increase of $96.0 billion or 19% since year-end 2009. We were the top asset gatherer globally in equity and fixed income hedge funds, portable alpha, distressed, opportunistic and other absolute return strategies. Net20102, with $44.0 billion of net inflows complemented by $52.0 billion of market appreciation. We also introduced 78 new businessETPs during the year, included $3.6 billion of inflows into distressed creditmaintaining our dual commitment to innovation and mortgage vehicles, as clients turnedresponsible product structuring. Our broad product range offers investors the building blocks required to BlackRockassemble diversified portfolios and implement tactical asset allocation strategies and the liquidity required to make adjustments to their exposures quickly and cost-efficiently.
The market for innovativeETPs continues to grow globally, with investor preference driven to varying degrees by performance (as measured by tracking error, which is the difference between net returns on the ETP and opportunistic investment solutions. These flows were offset by $2.2 billion of net outflows inthe corresponding index), liquidity (bid-ask spread), tax-efficiency, transparency and client service. Flows also reflect investor risk appetite, which shifted toward fixed income and, within equities, to broad and single country emerging market funds in 2010. In early 2011, investors have begun to shift equity hedge fundsallocations back to developed markets.
At year-end, ouriShares product mix included $448.2 billion, or 76%, in equity offerings, and $2.9$123.1 billion, or 21%, in bond ETPs. The remaining $19.0 billion or 3% ofiShares AUM was in multi-asset and alternative investments.iShares equity AUM increased $66.8 billion or 18% versus 2009, with $21.9 billion in net inflows and $44.9 billion of market and foreign exchange declines.appreciation.iShares fixed income AUM rose $20.6 billion or 20% over the previous year, with 92% of the increase being driven by $19.0 billion of net inflows.iShares multi-asset and alternatives AUM grew by $8.6 billion or 84%, with $3.2 billion of net inflows, predominately in commodity products such as gold and silver, and $5.5 billion of market and foreign exchange appreciation.
In total, we had net inflows in 315 different ETPs during 2010. As of year-end, we managed three of the top five, six of the top ten, and twelve of the 20 largest ETFs in the U.S.2 OuriShares offerings were traded on 19 exchanges throughout the world. These included 276 funds2 in the Americas with $480.3 billion, or 81%, ofiShares AUM. Assets in these funds increased $77.6 billion, or 19%, during the year, including $27.8 billion of net inflows.
| 2 | Year-end 2010 ETF Landscape Industry Review; BlackRock Global ETF Research and Implementation Strategy Team, Bloomberg, National Stock Exchange (NSX) |
| Item 1. | BUSINESS (continued) |
Products (continued)
Notwithstanding a substantial increase in the number of ETP sponsors and products,iShares has maintained market share of more than 48% in the U.S. and 36% in EMEA3. In addition, we are the largest ETF manager in Mexico, have pioneered the product in Chile and Peru, and have introduced products in Brazil, Australia, Hong Kong and Japan. Importantly, our share of revenues is significantly higher due to our product mix. In general, we expect to maintain our pricing, so long as it is supported by performance and theiShares value proposition, although we continually seek to achieve efficiencies and pass them through to our clients.
BlackRock Solutions and Advisory
BlackRock offers investment systems, risk management, outsourcing and advisory services under theBlackRock Solutions brand name. TheOver $10.0 trillion of positions are processed on ourBlackRock SolutionsAladdin operating platform, Aladdin,which serves as the investment system for BlackRock and a growing number of sophisticated institutional investors.BlackRock Solutionsinvestors around the world. BRS also uses Aladdin to support ongoingoffers comprehensive risk reporting via theGreen Package® and risk management advisory services, interactive fixed income analytics through our web-based calculator,AnSer®, middle and back office outsourcing services and investment accounting outsourcing, financial markets advisory and transition management services.accounting. Clients have also retained BRSBRS’ Financial Markets Advisory (“FMA”) group for shorter-term advisorya variety of engagements, such as valuation and risk assessment of illiquid assets, portfolio restructuring, workouts and dispositions.dispositions of distressed assets and financial and balance sheet strategies.
Demand forBlackRock Solutions services increased sharply in 2008 in the face of extreme market dislocations. RevenueAs global capital markets have recovered, clients have focused more than doubled to $406 million, up from $198 million in 2007. A substantial portion of the growth resulted from increased demand for advisory services that bring together the Company’s analytical,on risk management, and capital markets capabilities. demand for BRS services continues to be robust. During the year, BRS added 62 net new assignments. While revenue declined modestly by 4% to $460 million, demand was strong forAladdin and risk management services, with year-over-year revenue growing 14%, particularly in EMEA where we signed a record number of new BRS clients onto the platform.Aladdinassignments are long-term contracts providing significant recurring revenue.
During the year we added 7249 new FMA assignments and completed 33 engagements. The nature of FMA assignments shifted from urgent, short-term risk analyses to longer term advisory and risk monitoring engagements, with year-over-year revenue declining 23%, as the crisis subsided and fewer clients required emergency valuation and liquidation services. Advisory AUM decreased 7% to $150.7 billion, with $1.5 billion of market appreciation insufficient to offset $12.0 billion of client distributions in these long-term liquidation portfolios.
At year-end, BRS served 149 clients, including 46 short-term engagements. Clients include financial institutions,banks, insurance companies, official institutions, pension funds, asset managers and other institutional investors based in the U.S.,across North America, Europe, Asia and Australia. During the year, BlackRock acquired and integrated Helix Financial Group LLC to enhance BRS’commercial real estate capabilities, which proved to be critical to BRS’ success in winning several high profile assignments. We will continue to consider acquisition opportunities that can expandAladdinfunctionality and our risk management expertise.
The BRS and Aladdin teams are also supporting key aspects of the BGI integration. These efforts are vital to establishing a unified operating platform and consistent operating processes. We expect functionality added in connection with the integration to enhance theAladdinplatform over time. Additionally, we will seek to leverage our scale for the benefit of our clients through the creation of a robust global trading platform and other initiatives.
Transition Management Services
BlackRock also offers transition management services, involving the temporary oversight of a client’s assets as they transition from one manager to another or from one strategy to another. We provide a comprehensive service that includes project management and implementation based on achieving best execution consistent with the client’s risk management tolerances. We use state-of-the-art tools and work closely with BlackRock’s trading cost research team to manage four dimensions of risk throughout the transition: exposure, execution, process and operational risk. The average transition assignment is executed within two weeks, although the duration can be longer or shorter depending on the size, complexity and liquidity of the related assets. These portfolios are not included in AUM unless BlackRock has been retained to manage the assets after the transition phase.
9
| 3 | Year-end 2010 ETF Landscape Industry Review; BlackRock Global ETF Research and Implementation Strategy Team, Bloomberg, National Stock Exchange (NSX). |
| Item 1. | BUSINESS (continued) |
BlackRock Solutions and Advisory (continued)
BlackRock Solutions’Products (continued) core product is
Risk & Quantitative Analysis
Across all asset classes, in addition to the Aladdin investment platform and associated risk analytics and advisory services that leverage Aladdin. In July 2008, BlackRock acquired Impact Investing, a providerefforts of equitythe portfolio management visualizationteams, the Risk & Quantitative Analysis (“RQA”) group at BlackRock provides risk management advice and independent risk oversight of the investment management processes, identifies and helps manage counterparty and operational risks, coordinates standards for firmwide investment performance measurement and determines risk management-related analytical software. These capabilities are currently being integrated intoand information requirements. Where appropriate, RQA will work with portfolio managers and developers to facilitate the Aladdin platform with the ultimate goaldevelopment or improvement of extending Aladdin’s multi-asset class capabilities. Over time, these efforts are expected to enable us to expand ourBlackRock Solutions activities by serving a broader array of client needs. At December 31, 2008, 36 institutions on four continents had selected Aladdin as their investment operating platform, including 8 implementations completed in 2008.
During this recent period of market distress, our Financial Markets Advisory practice provided the holders of distressed assets with guidance on valuing, restructuringrisk models and managing their portfolios. Clients have included major public and private institutions around the world, including the Federal Reserve Bank of New York, which engaged BlackRock as manager and adviser for several special purpose facilities. With support from experts throughout the firm, the advisory team completed 43 short-term assignments in 2008, up from 18 such assignments in 2007. At year-end, BlackRock managed $145.0 billion in advisory assets under management.analytics.
Product Performance Notes
Past performance is not indicative of future results. Investments inThe performance information for actively managed accounts reflects U.S. open-end and closed-end mutual funds and similar EMEA-based products with respect to peer median comparisons, and actively managed institutional separate accounts and funds located globally with respect to benchmark comparisons, as determined using objectively based internal parameters, using the most current information available as of December 31, 2010. The performance information does not include funds or accounts that are neither insured nor guaranteednot measured against a benchmark, private equity products, CDOs, or accounts managed by the U.S. government. Relative peer groupBlackRock’s Financial Markets Advisory Group. Comparisons are based on gross-of-fee performance for U.S.-based products and institutional separate accounts, and net-of-fee performance for EMEA-based products. The performance tracking information for institutional index accounts is based on quartilesgross-of-fee performance as of December 31, 2010, and includes all institutional accounts globally using an index strategy. AUM information is based on AUM for each account or fund in the asset class shown without adjustment for overlapping management of the same account or fund, as of December 31, 2010. Source of performance information and peer medians is BlackRock, Inc. and is based in part on data from Lipper Inc. for U.S. funds and Morningstar,©, Inc. for non-U.S. funds. Rankings are based on total returns withFund performance reflects the reinvestment of dividends and distributions, reinvested and dobut does not reflect sales charges. BlackRock waives certain fees, without which performance would be lower. Funds with returns among the top 50% of a peer group of funds with comparable objectives are in the top two quartiles. Some funds have less than three years of performance.
Clients
ClientsReported AUM by Client Region & Client Type
December 31, 2010
| Institutional | Retail / HNW | iShares/ ETPs(1) | Total | |||||||||||||
Americas | $ | 1,401,566 | $ | 295,036 | $ | 480,345 | $ | 2,176,947 | ||||||||
EMEA | 828,587 | 87,544 | 100,684 | 1,016,815 | ||||||||||||
Asia-Pacific | 325,907 | 32,116 | 9,183 | 367,206 | ||||||||||||
Total | $ | 2,556,060 | $ | 414,696 | $ | 590,212 | $ | 3,560,968 | ||||||||
| (1) | Based on jurisdiction of fund, not underlying client. |
BlackRock serves a diverse universe of institutional and retail investors globally. Products are offered both directly and through financial intermediaries. BlackRock seeks to leverage its broad capabilities and global perspective to help clients address investment and risk management challenges and access attractive investment opportunities. BlackRock’s funds are registered in 40 jurisdictions around the globe, and the Company serves clientshigh net worth investors in more than 60100 countries through the efforts of professionals located in 25 countries. BlackRock’sWe strive to leverage our global expertise and scale, together with our understanding of local requirements and business customs, to most effectively serve our clients. Portfolios may be invested in local, regional or global capital markets. Products may be structured to address location-specific issues, such as regulations, taxation, operational infrastructure, market liquidity, and client-specific issues, such as investment policy, liability structure and ratings.
In order to enhance our ability to best serve our clients and develop our talent, we modified our matrix organizational structure in 2010 to reinforce the teamwork required among global functions and regions. The global functions — Portfolio Management, BRS, Global Clients, and Corporate & Business Operations — are key to driving coordination and consistency, and to achieving the benefits of our scale. The regions — Americas, EMEA, and Asia-Pacific — support local clients, employees, regulators and business strategy. At December 31, 2010, 44% of our AUM at year-end totaled $1.307 trillion, including $1.162 trillion of investment assets and $145.0 billion of advisory assets. Investment assets are managed on behalf of a geographically diverse clientele, with $780.7 billion or 67%was managed for clients outside the U.S., and 41% of employees were based outside the U.S. investors and $381.5 billion or 33% managed for international investors. The advisory asset base is significantly more concentrated among a small number of institutions, 95% or $137.3 billion of which is managed for U.S. clients and 5% or $7.7 billion for international investors.We expect these figures to approach 50% over the coming years.
10
| Item 1. | BUSINESS (continued) |
Clients (continued)
BlackRock, Inc.Clients (continued)
Assets Under ManagementGlobal Clientele
(Dollar amounts in millions)Reported AUM by Asset Class & Client Region
(unaudited)December 31, 2010
| December 31, 2007 | Net subscriptions | Foreign exchange 1 | Market appreciation | December 31, 2008 | |||||||||||||
By Client Region | |||||||||||||||||
United States | $ | 873,330 | $ | 135,038 | $ | (136 | ) | $ | (90,257 | ) | $ | 917,975 | |||||
International | 483,314 | 32,566 | (28,011 | ) | (98,693 | ) | 389,176 | ||||||||||
Total AUM2 | $ | 1,356,644 | $ | 167,604 | $ | (28,147 | ) | $ | (188,950 | ) | $ | 1,307,151 | |||||
|
|
|
|
| Americas | EMEA | | Asia- Pacific | | Total | |||||||||||
Equity | $ | 1,045,713 | $ | 483,129 | $ | 165,625 | $ | 1,694,467 | ||||||||
Fixed income | 609,412 | 374,410 | 157,502 | 1,141,324 | ||||||||||||
Multi-asset class | 109,306 | 59,773 | 16,508 | 185,587 | ||||||||||||
Alternatives | 60,120 | 26,469 | 23,149 | 109,738 | ||||||||||||
Long-term | 1,824,551 | 943,781 | 362,784 | 3,131,116 | ||||||||||||
Cash management | 209,595 | 68,370 | 1,210 | 279,175 | ||||||||||||
Advisory | 142,801 | 4,664 | 3,212 | 150,677 | ||||||||||||
Total | $ | 2,176,947 | $ | 1,016,815 | $ | 367,206 | $ | 3,560,968 | ||||||||
Reported AUM by Style & Client Region
December 31, 2010
| Americas | EMEA | Asia- Pacific | Total | |||||||||||||
Active | $ | 711,179 | $ | 345,593 | $ | 133,708 | $ | 1,190,480 | ||||||||
Institutional index | 633,027 | 497,504 | 219,893 | 1,350,424 | ||||||||||||
iShares/ETPs | 480,345 | 100,684 | 9,183 | 590,212 | ||||||||||||
Long-term | 1,824,551 | 943,781 | 362,784 | 3,131,116 | ||||||||||||
Cash management | 209,595 | 68,370 | 1,210 | 279,175 | ||||||||||||
Advisory | 142,801 | 4,664 | 3,212 | 150,677 | ||||||||||||
Total | $ | 2,176,947 | $ | 1,016,815 | $ | 367,206 | $ | 3,560,968 | ||||||||
InstitutionalAmericas
BlackRock’s institutional clients span Europe, the Middle East, Africa (“EMEA”), Asia-Pacific and the Americas. The types of investors served include pension plans, charities and other tax-exempt institutions; insurance companies, corporations, banks and other taxable institutions; and central banks, government agencies, sovereign wealth funds and other official institutions. At December 31, 2008, BlackRockyear-end 2010, assets managed $1.079 trillion of assets on behalf of institutional investors globally, including $934.1 billionclients domiciled in the Americas (defined as the U.S., Caribbean, Canada, Latin America and Iberia), totaled $2.177 trillion or 61% of investment assets and $145.0 billiontotal AUM, an increase of advisory assets. Investment AUM included $613.9$118.8 billion or 66% managed for U.S. clients and $320.26% in 2010. Growth was driven by $78.4 billion or 34% managed for international institutions.
Assets managed for tax-exempt institutions, including defined benefit and defined contribution pension plans, foundations, endowments and other non-profit organizations, decreased 11% to $271.2 billion at December 31, 2008 due to adverse markets and foreign exchange translation. In 2008, BlackRock was awardedin net new business in long-term products and $177.3 billion in investment performance and market appreciation. Clients are served through offices in Brazil, Canada, Chile, Mexico, Spain and throughout the U.S.
Offerings include closed-end funds andiShares traded on domestic stock exchanges, a full range of $19.6 billion from tax-exemptopen-end mutual funds, collective investment funds, common trusts, private funds and separate accounts. The long-term product mix is well diversified and proportional to the firm’s mix: 57% in equities, 34% in fixed income, 6% in multi-asset class and 3% in alternatives. By comparison, cash management offerings predominantly serve clients including $3.3 billionin the Americas. We also have a wide variety of advisory assets, driven by significant inflows from U.S.BRS assignments for institutional investors and international pension funds. During the year, BlackRock continued to gain traction with defined contribution pension plans, particularlygovernmental entities in the U.S. and the U.K., in recognition of the Company’s strong equity offerings and newer target date and target risk products. In addition, clients increasingly sought strategic relationships and customized investment solutions, and our work throughout the year with tax-exempt institutions ranged from tailoring portfolios and benchmarks to designing liability-driven investments and multi-asset class solutions to comprehensive fiduciary outsourcing assignments.Canada.
AUM for taxable institutions decreased $12.4 billion or 7% to $165.3 billion at year-end 2008. Approximately 44% of the decline was due to adverse market and foreign exchange movements. The remainder reflected outflows in investment assets of $12.8 billion, 72% of which resulted from the merger of a single large insurance client, partially offset by $5.8 billion of inflows in advisory assets. BlackRock is one of the largest managers of insurance assets worldwide, and continues to benefit from increasing momentum toward investment outsourcing. This business is, however, subject to event risk arising from insurance company mergers, as we experienced during the year.
11
| Item 1. | BUSINESS (continued) |
Clients (continued)
The mix by investment style is also balanced, with 39% of long-term AUM managed in active products, 35% in institutional index accounts and 26% iniShares and other ETPs at year-end. Note that theiShares figures are based on the jurisdiction of the fund, rather than the underlying investor. Non-U.S. investors often prefer U.S.iShares, primarily due to the depth of the markets and liquidity of the products.
Institutional (continued)EMEA
In 2008, BlackRock greatly expanded its work with central banks, government agencies and sovereign wealth funds, especiallyAUM for clients based in the United States and the Middle East. Assets managed on behalf of official institutionsEMEA ended the year at $168.9$1.017 trillion or 29% of total AUM, an increase of $79.7 billion including $135.9 billion of advisory assets under management. Advisory assets represented almost all (98%) offrom 2009. During the $138.1 billion ofyear, clients awarded us net new business of $28.0 billion, including inflows from investors in 24 countries across the region. Our offerings include fund families in the U.K., Luxembourg and Dublin, andiShares listed on stock exchanges throughout Europe, as well as separate accounts and pooled investment products.
Clients invested across the entire product spectrum with official institutions during51% of long-term AUM in equities, 40% in fixed income, 6% in multi-asset class and 3% in alternatives. EMEA clients constitute the year, as clients sought BlackRock’s independent valuationremaining 25% of our cash management AUM, and risk managementrepresent just 3% of our advisory services to help navigate the deteriorating balance sheets of regulated institutions and manage the orderly liquidation of troubled portfolios.
In addition to the foregoing, BlackRock serves as a subadvisor to third party fund sponsors and directly advisesAUM. BRS has steadily built its presence in EMEA, includingAladdinrelationships with a variety of fundsinstitutional investors and commingled vehicles offeredFMA engagements for financial services companies and official institutions, including the valuation assignment announced in January 2011 for the Central Bank of Ireland.
The mix by investment style is slightly more concentrated than in the Americas, with 36% invested in active products, 53% in institutional index accounts and 11% iniShares and other ETPs. The relatively higher percentage in institutional index is driven by low fee institutional liability hedging portfolios which account for approximately 25% of total institutional index assets. The relatively lower percentage iniShares primarily reflects the fact that the European ETP market is at an earlier stage of development.
Asia-Pacific
Clients in the Asia-Pacific region are served through offices in Japan, Australia, Hong Kong, Singapore, Taiwan and Korea, and joint ventures in China and India. At December 31, 2010, we managed $367.2 billion of AUM for clients in the region, an increase of 5% or $16.2 billion from 2009. Net new business contributed $15.4 billion, and the remainder of the increase was attributable to institutional investors. AUMinvestment performance and favorable market movements. We also acquired the Taiwan-based asset manager Primasia Investment Trust Co. Ltd, strengthening our onshore investment capabilities by offering locally managed investment solutions.
At year-end, the mix of long-term products managed for these clients totaled $174.8 billion at December 31, 2008, including $118.7consisted of 46% equities, 43% fixed income, 5% multi-asset class and 6% alternative investments. Asia-Pacific clients represented 2% of our advisory AUM and less than 1% of our cash management AUM. BRS served a select number of the largest and most sophisticated investors in the region.
The mix among investment styles was more tilted toward institutional index accounts than in the other regions, with $219.9 billion or 68% 61% of long-term AUM in these products. This bias can be traced to the presence of very large governmental institutions and pensions that are heavy users of index products. Asia-Pacific institutional investors also useiSharesfor clients or funds basedtactical allocation, but often favor the liquidity of the U.S. products (which are counted in AmericasiShares). Active mandates represented 36% of AUM managed for investors in the U.S. and $56.0 billion or 32% based internationally. Products focus primarily on BlackRock’s fixed income, equity and alternative investment capabilities, which represented 36%, 30% and 29% of subadvised and institutional fund AUMregion at year-end. Equity and alternative markets took a heavy toll on these assets during 2008, contributing to a 23% decline due to adverse markets and a 2% decline from net outflows.
The remaining $298.9 billion of institutional assets are managed in the Company’s cash management products, which are discussed in the Product section above.
BlackRock, Inc.
Assets Under Management
(Dollar amounts in millions)
(unaudited)
| December 31, 2007 | Net subscriptions (redemptions) | FX1 | Market (depreciation) | December 31, 2008 | ||||||||||||||
By Client Type | ||||||||||||||||||
Institutional | $ | 1,023,640 | $ | 168,663 | $ | (22,910 | ) | $ | (90,350 | ) | $ | 1,079,043 | ||||||
Retail/HNW | 333,004 | (1,059 | ) | (5,237 | ) | (98,600 | ) | 228,108 | ||||||||||
Total AUM2 | $ | 1,356,644 | $ | 167,604 | $ | (28,147 | ) | $ | (188,950 | ) | $ | 1,307,151 | ||||||
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12
| Item 1. | BUSINESS (continued) |
Clients (continued)
Clients Served
Reported AUM by Asset Class & Client Type
December 31, 2010
| Institutional | Retail / HNW | iShares / ETPs(1) | Total | |||||||||||||
Equity | $ | 1,070,622 | $ | 175,685 | $ | 448,160 | $ | 1,694,467 | ||||||||
Fixed income | 910,422 | 107,811 | 123,091 | 1,141,324 | ||||||||||||
Multi-asset class | 104,076 | 81,141 | 370 | 185,587 | ||||||||||||
Alternatives | 81,803 | 9,344 | 18,591 | 109,738 | ||||||||||||
Long-term | 2,166,923 | 373,981 | 590,212 | 3,131,116 | ||||||||||||
Cash management | 238,478 | 40,697 | — | 279,175 | ||||||||||||
Advisory | 150,659 | 18 | — | 150,677 | ||||||||||||
Total | $ | 2,556,060 | $ | 414,696 | $ | 590,212 | $ | 3,560,968 | ||||||||
Reported AUM by Style & Client Type
December 31, 2010
| Institutional | Retail / HNW | iShares / ETPs(1) | Total | |||||||||||||
Active | $ | 824,447 | $ | 366,033 | $ | — | $ | 1,190,480 | ||||||||
Institutional Index | 1,342,476 | 7,948 | — | 1,350,424 | ||||||||||||
iShares/ETPs | — | — | 590,212 | 590,212 | ||||||||||||
Long-term | 2,166,923 | 373,981 | 590,212 | 3,131,116 | ||||||||||||
Cash management | 238,478 | 40,697 | — | 279,175 | ||||||||||||
Advisory | 150,659 | 18 | — | 150,677 | ||||||||||||
Total | $ | 2,556,060 | $ | 414,696 | $ | 590,212 | $ | 3,560,968 | ||||||||
| (1) | Based on jurisdiction of fund, not underlying client. |
We serve a diverse mix of institutional and retail investors worldwide. 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 and high net worth investors. We also serve both institutional and retail and high net worth investors who acquireiShares on exchanges worldwide (iShares is discussed under “Products,” above).
Institutional Investors
Assets managed for institutional investors totaled $2.556 trillion or 72% of total AUM at year-end 2010. During the year, net new business, excluding merger-related outflows, in long-term products totaled $60.3 billion, which was partially offset by $38.4 billion of net outflows in cash management and $12.0 billion of net distributions in advisory assignments. Investment performance and market appreciation contributed $201.2 billion of additional AUM growth.
| Item 1. | BUSINESS (continued) |
Clients (continued)
BlackRock’s institutional AUM is well diversified by both product and region. Long-term AUM was $2.167 trillion at year-end, 49% of which was in equities, 42% fixed income, 5% multi-asset class and 4% alternatives. The mix by investment style was 38% active and 62% passive (excluding institutional investors iniShares). As noted earlier, institutional index accounts tend to be very large mandates managed for relatively low fee rates and subject to higher turnover.
We serve institutional investors on six continents, with 55% of AUM managed on behalf of investors in the Americas, 32% in EMEA and 13% in Asia-Pacific. Institutional clients are further diversified by sub-segments: tax-exempt, official institutions, taxable and cash investors, as described below.
BlackRock is among the largest managers of pension plan assets in the world, with $1.487 trillion, or 58%, of institutional AUM managed for defined benefit, defined contribution and other pension plans for corporations, governments and unions at December 31, 2010. An additional $57.0 billion was managed for other tax-exempt investors, including charities, foundations and endowments. Assets managed for these clients grew $90.4 billion during 2010, including $18.4 billion of net inflows from defined contribution plans, which represent an important and growing component of the retirement market.
| • | We also managed $245.4 billion or 10% of institutional AUM for official institutions, including central banks, sovereign wealth funds, supranationals, multilateral entities and government ministries and agencies. These clients often require specialized investment policy advice, the use of customized benchmarks and training support. In addition, BRS has been selected by a number of official institutions to provide a range of services, includingAladdin, risk management and financial markets advisory assignments. |
BlackRock is the top independent manager of assets for insurance companies, which accounted for $218.6 billion or 9% of institutional AUM at year-end. These clients awarded us $4.6 billion of net new business, driven by a trend toward outsourcing, particularly in Europe last year. Assets managed for other taxable institutions, including corporations, banks and third party fund sponsors for which we provide sub-advisory services, totaled $326.6 billion or 13% of institutional AUM at year-end.
The remaining $221.7 billion or 9% of institutional AUM was managed on behalf of taxable and tax-exempt institutions invested in our cash management products at December 31, 2010. See the Product section above for additional information on our cash management AUM.
Retail and High Net Worth Investors
BlackRock’s investment management expertise is available toBlackRock serves retail and high net worth investors globally through separate accounts, open-end and closed-end funds, unit trusts and other collectiveprivate investment vehicles. Asfunds. At December 31, 2010, assets managed for retail and high net worth investors totaled $414.7 billion, up 8%, or $31.3 billion, versus year-end 2009 AUM. During the year, net inflows of year-end 2008, BlackRock managed $228.1$26.9 billion on behalfin long-term products were partially offset by $21.9 billion of net outflows in money market funds. Investment performance and market appreciation contributed $31.1 billion of additional AUM growth.
Retail and high net worth investors are served principally through intermediaries, including broker-dealers, banks, trust companies, insurance companies and independent financial advisors. Clients invest primarily in mutual funds, which totaled $318.2 billion or 77% of retail and high net worth investors worldwide,AUM at year-end, with 57%the remainder invested in equityprivate investment funds and alternative investment products, 30%separately managed accounts. The product mix is well diversified, with 47% of long-term AUM in equities, 29% in fixed income, 22% in multi-asset class and 13%2% in money market funds.alternatives. The product mix differed considerablyvast majority (98%) of long-term AUM is invested in active products, although this is partially inflated by region,the fact thatiShares is shown independently, since we cannot identify all of the underlying investors.
The client base is also diversified geographically, with international investors holding a much greater proportion68% of assets in equity funds (90% vs. 50% going into 2008). Adverse markets and sharply higher investor redemption rates caused international retail AUM to fall much more significantly during the year, resulting in a meaningful shift in the client mix. Specifically, the Company started 2008 with a 62%/38% mix oflong-term AUM managed for U.S.investors based in the Americas, 23% in EMEA, and international investors, respectively, and ended the year with a 73%/27% mix.
As9% in Asia-Pacific. The remaining $40.7 billion, or 10%, of December 31, 2008, BlackRock managed $166.8 billion of assets for U.S. retail and high net worth investors. NotwithstandingAUM is invested in cash management products, principally money market funds offered in the significant challenges faced byU.S. Our success in each of these regions reflects strong relationships with intermediaries and an established ability to deliver our global investment expertise in funds and other products tailored to local regulations and requirements.
| Item 1. | BUSINESS (continued) |
Clients (continued)
Our retail distributors and investors, BlackRock was able to enhance its positioning and market share during the year. Net new business in retail totaled $11.3 billion, a 7% organic growth rate, which was partially offset by net outflows of $4.2 billion in U.S. high net worth offerings include theBlackRock Funds in the U.S., our Luxembourg cross-border fund families,BlackRock Global Funds(“BGF”),BlackRock Strategic Funds and a range of retail funds in the U.K. BGF is comprised of 61 funds and is registered in 35 countries. Over 60% of the funds are rated by S&P. In 2010, we were ranked as the second largest cross border fund provider4. In the U.K., we ranked among the six largest fund managers4, and are known for our innovative product offerings, including the absolute alpha products principally broker-sold separately managed accounts. Importantly, BlackRock securedwe introduced in 2005. In the U.S., we had over 65 new50 product placements on broker-dealer platforms and had 70 open-end and closed-end mutual funds with 4- or 5-star Morningstar ratings as of year-end 2008.
BlackRock has an extensive international retail platform, anchored by our flagship Luxembourg-based fund family, BlackRock Global Funds. BlackRock Global Funds are registered for sale in 37 countries and in 16 languages. As of December 31, 2008, BlackRock managed $61.3 billion on behalf of international retail investors. As referenced above, AUM were down significantly due to adverse equity markets and accelerating redemption rates. Year-over-year, international retail AUM dropped 45% or $55.6 billion due to market declines and foreign exchange translation alone.
Net inflows from international retail clients of $0.8 billion in the first half ofduring the year were offset by $8.9 billion of outflowsand have grown our market position from tenth to fourth largest fund manager since we acquired MLIM in late-20065. In 2010, BlackRock won the second half ofDalbar award for customer service in financial services, the year. Outflows were particularly concentratedeleventh occasion on which we have been recognized for outstanding achievement in Korea, where a change in taxation caused a large scale reallocation away from offshore products, and in Taiwan, where many retail investors redeemed products that included capital guarantees or other structuring elements, because of concern about the future of investment banks. The mass migration of retail investors away from mutual funds in Spain and Italy was another detrimental factor.
Despite 2008’s hostile markets, the robustness of the BlackRock brand and international retail platform ensured that the Company remained the second largest cross-border mutual fund provider internationally and one of the top net sellers in that market. In the UK, BlackRock was the top net seller in 2008. The Company benefitted from retail investor demand for balanced, absolute return and cash products during the period, with its flagship Global Allocation product dominating industry sales for most of the year.this area.
Competition
BlackRock competes with investment management firms, mutual fund complexes, insurance companies, banks, brokerage firms and other financial institutions that offer products that are similar to, or alternatives to, those offered by BlackRock. In order to grow its business, BlackRock must be able to compete effectively for AUM. Key competitive factors include investment performance track records, the efficient delivery of beta for passively managed products, investment style and discipline, client service and brand name recognition. Historically, the Company has competed principally on the basis of its long-term investment performance track record, its investment process, its risk management and analytic capabilities and the quality of its client service. BlackRock has historically grown aggregate AUM and management believes that the Company will continue to do so by focusing on strong investment performance and client service and by developing new products and new distribution capabilities. Certain of the Company’s competitors, however, have greater marketing resources than BlackRock, particularly in retail channels and outside the United States.channels. These factors may place BlackRock at a competitive disadvantage and there can be no assurance that the Company’s strategies and efforts to maintain its existing AUM and to attract new business will be successful.
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| 4 | Lipper Feri |
| 5 | Simfund |
| Item 1. | BUSINESS (continued) |
Geographic Information
BlackRock has clients in over 60100 countries across the globe, including the United States, the United Kingdom, and Japan.
The following table illustrates the Company’s revenues and long-lived assets, including goodwill and property and equipmenttotal revenue for the years ended December 2010, 2009 and 2008 2007 and 2006.by geographic region. These amounts are aggregated on a legal entity jurisdiction basis and do not necessarily reflect where the customer is sourced.resides.
Revenues (in millions) | 2008 | % of total | 2007 | % of total | 2006 | % of total | ||||||||||||
North America | $ | 3,438 | 68 | % | $ | 3,070 | 63 | % | $ | 1,715 | 82 | % | ||||||
Europe | 1,360 | 27 | % | 1,490 | 31 | % | 321 | 15 | % | |||||||||
Asia-Pacific | 266 | 5 | % | 285 | 6 | % | 62 | 3 | % | |||||||||
Total revenues | $ | 5,064 | 100 | % | $ | 4,845 | 100 | % | $ | 2,098 | 100 | % | ||||||
Long-lived Assets (in millions) | ||||||||||||||||||
North America | $ | 5,714 | 99 | % | $ | 5,695 | 98 | % | $ | 5,408 | 99 | % | ||||||
Europe | 27 | 0 | % | 35 | 1 | % | 30 | 0 | % | |||||||||
Asia-Pacific | 52 | 1 | % | 56 | 1 | % | 34 | 1 | % | |||||||||
Total long-lived assets | $ | 5,793 | 100 | % | $ | 5,786 | 100 | % | $ | 5,472 | 100 | % | ||||||
| (Dollar amounts in millions) | % of | % of | % of | |||||||||||||||||||||
Revenue | 2010 | Total | 2009 | Total | 2008 | Total | ||||||||||||||||||
Americas | $ | 5,824 | 67 | % | $ | 3,309 | 70 | % | $ | 3,438 | 68 | % | ||||||||||||
Europe | 2,300 | 27 | % | 1,179 | 25 | % | 1,360 | 27 | % | |||||||||||||||
Asia-Pacific | 488 | 6 | % | 212 | 5 | % | 266 | 5 | % | |||||||||||||||
Total revenue | $ | 8,612 | 100 | % | $ | 4,700 | 100 | % | $ | 5,064 | 100 | % | ||||||||||||
North AmericaThe following table illustrates the Company’s long-lived assets, including goodwill and property and equipment at December 31, 2010, 2009 and 2008 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.
| (Dollar amounts in millions) | % of | % of | % of | |||||||||||||||||||||
Long-lived Assets | 2010 | Total | 2009 | Total | 2008 | Total | ||||||||||||||||||
Americas | $ | 13,092 | 99 | % | $ | 12,983 | 99 | % | $ | 5,714 | 99 | % | ||||||||||||
Europe | 42 | — | % | 46 | — | % | 27 | — | % | |||||||||||||||
Asia-Pacific | 99 | 1 | % | 94 | 1 | % | 52 | 1 | % | |||||||||||||||
Total long-lived assets | $ | 13,233 | 100 | % | $ | 13,123 | 100 | % | $ | 5,793 | 100 | % | ||||||||||||
Americas primarily is comprised of the United States, Canada, Brazil and Mexico, while Europe primarily is comprised of the United Kingdom and Asia-Pacific primarily is comprised of Japan, Australia and Hong Kong.
Employees
At December 31, 2008,2010, BlackRock had a total of 5,341 full-time9,127 employees, and no employees of Metric. Of all full-time employees, 1,836 areincluding 3,797 located in offices outside the United States. At December 31, 2009, BlackRock had a total of 8,629 employees.
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| Item 1. | BUSINESS (continued) |
Regulation
Virtually all aspects of BlackRock’s business are subject to various laws and regulations both in and outside the United States, some of which are summarized below. These laws and regulations are primarily intended to protect investment advisory clients, stockholders ofinvestors in registered and unregistered investment companies, trust customers of BlackRock Institutional Trust Company, N.A. (“BTC”) and the bank subsidiaries of Bank of America and PNC and their customers. Under these laws and regulations, agencies that regulate investment advisers, investment funds and financial and bank holding companies and their subsidiaries, such as BlackRock and its subsidiaries, have broad administrative powers, including the power to limit, restrict or prohibit the regulated entity from carrying on business if it fails to comply with such laws and regulations. Possible sanctions for significant compliance failures include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations, censures and fines. The rules governing the regulation of financial institutions and their holding companies and subsidiaries are very detailed and technical. Accordingly, the discussion below is general in nature and does not purport to be complete.
Recent market disruptionsRegulatory Reform
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”) was signed into law in the United States. The DFA is expansive in scope and requires the adoption of extensive regulations and numerous regulatory decisions in order to be implemented. The adoption of these regulations and decisions will in large measure determine the impact of the DFA on BlackRock. The DFA may significantly change BlackRock’s operating environment in unpredictable ways. It is not possible to predict the ultimate effects that the DFA, or subsequent implementing regulations and decisions, will have ledupon BlackRock’s business and results of operations. Among the potential impacts of the DFA, provisions of the DFA referred to numerous proposals bothas the Volcker Rule could affect the method by which BlackRock invests in and operates its private equity funds, hedge funds and fund of funds platforms. In addition, BlackRock could become designated as a systemically important financial institution (“SIFI”) and become subject to direct supervision by the Federal Reserve System (the “Federal Reserve”). If BlackRock were designated as a SIFI, it could be subject to enhanced prudential, supervisory and other requirements, such as risk-based capital requirements; leverage limits; liquidity requirements; resolution plan and credit exposure report requirements; concentration limits; a contingent capital requirement; enhanced public disclosures; short-term debt limits; and overall risk management requirements. Further, proposed regulations under the DFA, relating to regulation of swaps and derivatives, could impact the manner by which BlackRock and BlackRock advised funds use and trade swaps and other derivatives, and could expose BlackRock to increased costs as the derivatives market moves toward central clearing and increased position reporting. Other jurisdictions outside the United States for changesin which BlackRock operates are also in the process of devising or considering more pervasive regulation of many elements of the financial services industry. Newindustry, which could have a similar impact on BlackRock.
The DFA and its regulations, and other new laws or regulations, or changes in enforcement of existing laws or regulations, could materially and adversely impact the scope or profitability of BlackRock’s business activities, couldactivities; require BlackRock to change certain business practicespractices; and could expose BlackRock to additional costs (including compliance and tax costs) and liabilities, as well as reputational harm. For example, in addition to regulatory changes mandated by the DFA, the Securities and Exchange Commission (the “SEC”) has adopted new regulations related to, and continues to review the role and risks related to, money market funds and have indicated that it may adopt additional regulations. Some of the proposed changes, if adopted, could significantly alter money market fund products and the entire money market fund industry. Similarly, the SEC continues to review the distribution fees paid to mutual fund distributors in accordance with Rule 12b-1 under the Investment Company Act of 1940, which are important to a number of the mutual funds we manage. Any changes to 12b-1 fees would alter the way our distribution partners distribute our products. Regulatory changes could also lead to business disruptions, could materially and adversely impact the value of assets in which BlackRock has invested directly and/or on behalf of clients, and, to the extent the regulations strictly control the activities of financial services firms, could make it more difficult for BlackRock to conduct certain businesses or distinguish itself from competitors.
Additional legislation, changes in rules promulgated by regulators and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and regulations may directly affect the method of operation and profitability of BlackRock. BlackRock’s profitability also could be materially and adversely affected by modification of the rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce.
| Item 1. | BUSINESS (continued) |
Regulation (continued)
U.S. Regulation
CertainBlackRock and certain of BlackRock’sits U.S. subsidiaries are subject to regulation, primarily at the federal level, by the Securities and Exchange Commission (the “SEC”),SEC, the Department of Labor (the “DOL”), the Board of Governors of the Federal Reserve, Bankthe Office of the Comptroller of the Currency of the United States (the “FRB”“OCC”), the Financial Industry Regulatory Authority (“FINRA”), the National Futures Association (the “NFA”), the Commodity Futures Trading Commission (the “CFTC”) and other government agencies and regulatory bodies. Certain BlackRockof BlackRock’s U.S. subsidiaries are also subject to various anti-terrorist financing, privacy, anti-money laundering regulations including the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”), the Bank Secrecy Acteconomic sanctions, laws and regulations promulgatedestablished by the Office of Foreign Assets Control of the U.S. Treasury Department.various agencies.
The Investment Advisers Act of 1940, as amended (the “Advisers Act”), imposes numerous obligations on registered investment advisers such as BlackRock, including record-keeping, operational and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act of 1940, as amended (the “Investment Company Act”), imposes stringent governance, compliance, operational, disclosure and related obligations on registered investment companies and ontheir investment advisers to those companies and distributors, such as BlackRock. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and the Investment Company Act, ranging from fines and censure to termination of an investment adviser’s registration. Investment advisers also are subject to certain state securities laws and regulations. Non-compliance with certain provisions of the Advisers Act, the Investment Company Act or other federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines and reputational damage.
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Regulation (continued)
U.S. Regulation (continued)
BlackRock’s trading and investment activities for client accounts are regulated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as the rules of various U.S. and non-U.S. securities exchanges and self-regulatory organizations, including laws governing trading on inside information, market manipulation and a broad number of technical trading requirements (e.g., volume limitations, reporting obligations) and market regulation policies in the United States and globally. Depending on the scope of the rules to be adopted by the SEC, provisions of the DFA added to the Exchange Act may require certain BlackRock subsidiaries to register as municipal advisers in relation to their services for state and local governments, pension plans and other investment programs, such as college savings plans. In addition, BlackRock manages a variety of investment funds listed on U.S. and non-U.S. exchanges, which are subject to the rules of such exchanges. Violation of these laws and regulations could result in restrictions on the Company’s activities and in damage to its reputation. BlackRock manages a variety of private pools of capital, including hedge funds, funds of hedge funds, private equity funds, real estate funds, collective investment trusts, managed futures funds and hybrid funds. Congress, regulators, tax authorities and others continue to explore, on their own and in response to demands from the investment community and the public, increased regulation related to private pools of capital, including changes with respect to investor eligibility, certain limitations on trading activities, record-keeping and reporting, the scope of anti-fraud protections, safekeeping of client assets and a variety of other matters. BlackRock may be materially and adversely affected by new legislation, or rule-making or changes in the interpretation or enforcement of existing rules and regulations imposed by various regulators.
Certain BlackRock subsidiaries are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to regulations promulgated thereunder by the DOL, insofar as they act as a “fiduciary” under ERISA with respect to benefit plan clients. ERISA and applicable provisions of the Internal Revenue Code impose certain duties on persons who are fiduciaries under ERISA, prohibit certain transactions involving ERISA plan clients and impose excise taxes for violations of these prohibitions, mandate certain required periodic reporting and disclosures and require BlackRock to carry bonds ensuring against losses caused by fraud or dishonesty. ERISA also imposes additional compliance, reporting and operational requirements on BlackRock that otherwise are not applicable to non-benefit plan clients.
| Item 1. | BUSINESS (continued) |
Regulation (continued)
BlackRock has two subsidiaries that are registered as commodity pool operators and commodity trading advisers, and one additional subsidiarytwo other subsidiaries that are registered as commodity trading advisers and three additional subsidiaries only aregistered as commodity pool operator,operators with the CFTC. All threeseven of these subsidiaries are members of the NFA. The CFTC and NFA each administer a comparable regulatory system covering futures contracts and various other financial instruments, including swaps as a result of the DFA, in which certain BlackRock clients may invest. TwoFour of BlackRock’s other subsidiaries, BlackRock Investments, Inc.LLC (“BII”BRIL”) and, BlackRock Capital Markets, LLC, BlackRock Execution Services, and BlackRock Fund Distribution Company (“BRCM”BFDC”), are registered with the SEC as broker-dealers and are member-firms of FINRA. BII’s FINRAEach broker-dealer has a membership agreement with FINRA that limits itsthe scope of such broker-dealer’s permitted activities to the sale of investment company securities, certain private placements of securities, and certain investment banking and financial consulting activities. BRCM’s FINRA membership agreement limits its permitted activities to retailing corporate debt and government securities, arranging for transactions in listed securities by exchange members and commission sharing arrangements with third party brokers. Although BII and BRCM have limited business activities, they are subject to the customer dealing, reporting and other requirements of FINRA, as well as the net capital and other requirements of the SEC. BIIBRIL is also an approved person with the New York Stock Exchange (“NYSE”), which subjects its operations. BRIL and BFDC are members of the Municipal Securities Rulemaking Board (“MSRB”) and are subject to NYSE regulation.
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Regulation (continued)
MSRB rules.
U.S. Banking Regulation
Each of Bank of America and PNC is a bank holding company and a “financial holding company” regulated by the FRBFederal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Because theBased on Bank of America’s and PNC’s current and/or prior ownership interests of each of Bank of America and PNC in BlackRock, exceeds 25%, BlackRock is deemed to be a non-bank subsidiary of Bank of America and PNC and is therefore subject to the supervision and regulation of the FRBFederal Reserve and to most banking laws, regulations and orders that apply to Bank of America and PNC. The supervision and regulation of Bank of America, PNC and their respective subsidiaries under applicable banking laws is intended primarily for the protection of their respective banking subsidiaries, their depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation, and the banking system as a whole, rather than for the protection of stockholders, creditors or clients of Bank of America, PNC or BlackRock. Bank of America’s and PNC’s relationships and good standing with their regulators are important to the conduct of BlackRock’s business. BlackRock may also be subject to foreign banking laws and supervision that could affect its business.
BTC is a national trust company that does not accept deposits and is a member of the Federal Reserve System. Accordingly, BTC is examined and supervised by the OCC and is subject to various banking laws and regulations enforced by the OCC, such as capital adequacy, regulations governing fiduciaries, conflicts of interest, self-dealing, and anti-money laundering laws and regulations. BTC is also subject to various Federal Reserve regulations applicable to member institutions, such as regulations restricting transactions with affiliates. Many of these laws and regulations are meant for the protection of BTC’s customers, and not BTC, BlackRock and its affiliates or BlackRock’s shareholders.
BlackRock generally may conduct only activities that are authorized for a "financial“financial holding company"company” under the BHC Act. Investment management is an authorized activity, but must be conducted within applicable regulatory requirements, which in some cases are more restrictive than those BlackRock faces under applicable securities laws. BlackRock may also invest in investment companies and private investment funds to which it provides advisory, administrative or other services, to the extent consistent with applicable law and regulatory interpretations. The FRBFederal Reserve has broad powers to approve, deny or refuse to act upon applications or notices for BlackRock to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations. There are limits on the ability of bank subsidiaries of Bank of America and PNC to extend credit to or conduct other transactions with BlackRock. Bank of America, PNC and their subsidiaries are also subject to examination by various banking regulators, which results in examination reports and ratings that may adversely impact the conduct and growth of BlackRock’s businesses.
The FRBFederal Reserve has broad enforcement authority over BlackRock, including the power to prohibit BlackRock from conducting any activity that, in the FRB’sFederal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound practice in conducting BlackRock’s business. The FRBFederal Reserve may also impose substantial fines and other penalties for violations of applicable banking laws, regulations and orders. The DFA strengthened the Federal Reserve’s supervisory and enforcement authority over a bank holding company’s non-bank affiliates, such as BlackRock.
| Item 1. | BUSINESS (continued) |
Regulation (continued)
Any failure of either Bank of America or PNC to maintain its status as a financial holding company could result in substantial limitations on certain BlackRock activities and its growth. Such a change of status could be caused by any failure of one of Bank of America’s or PNC'sPNC’s bank subsidiaries to remain "well“well capitalized,"” by any examination downgrade of one of Bank of America’s or PNC’s bank subsidiaries, or by any failure of one of Bank of America’s or PNC'sPNC’s bank subsidiaries to maintain a satisfactory rating under the Community Reinvestment Act. In addition, the DFA broadened the requirements for maintaining financial holding company status by now also requiring the holding company to remain “well capitalized” and “well managed.”
Non-U.S. Regulation
BlackRock’s international operations are subject to the laws and regulations of non-U.S. jurisdictions and non-U.S. regulatory agencies and bodies. As BlackRock continues to expand its international business,presence, a number of its subsidiaries and international operations have become subject to regulatory systems comparable to those affecting its operations in the United States.
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Regulation (continued)
Non-U.S. Regulation (continued)
The Financial Services Authority (the “FSA”) currently regulates BlackRock’scertain BlackRock subsidiaries in the United Kingdom. Authorization by the FSA is required to conduct any financial services related business in the United Kingdom pursuant to the Financial Services and Markets Act 2000. The FSA’s rules govern a firm’s capital resources requirements, senior management arrangements, conduct of business, interaction with clients and systems and controls. Breaches of these rules may result in a wide range of disciplinary actions against the Company’s U.K.-regulated subsidiaries. The U.K. government has announced that it intends to abolish the FSA and to establish three new regulatory bodies, the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority in its place. More detailed proposals, including draft legislation, are expected early in 2011 with the aim being for the new regulatory structure to be in place by the end of 2012.
In addition theseto the above, the Company’s U.K.-regulated subsidiaries and other European subsidiaries and branches, must comply with the pan-European regime established by the Markets in Financial Instruments Directive (“MiFID”), which came into effect on November 1, 2007 and regulates the provision of investment services throughout the European Economic Area, as well as the Capital Requirements Directive, which delineates regulatory capital requirements. MiFID replaced and expanded upon the Investment Services Directive (the “ISD”), which had been in place since 1995. MiFID sets out more detailed requirements governing the organization and conduct of business of investment firms and regulated markets. It also includes new pre- and post-trade transparency requirements for equity markets and more extensive transaction reporting requirements.
MiFID seeks to further harmonize the provision of financial services across Europe by implementing requirements for key areas such as senior management systems and controls. MiFID also attempts to clarify jurisdictional uncertainties that arose under the ISD to facilitate cross border services. The United Kingdom has adopted the MiFID rules into national legislation. However,legislation, as have those other European jurisdictions (excluding Switzerland which is not part of the introductionEU) in which BlackRock has a presence. A review of MiFID by the European Commission is in process and is likely to result in further regulation including changes to pre- and post-trade reporting obligations and an expansion of the types of instruments subject to these requirements. It may also result in changes to other areas, such as firms’ conduct of business requirements. In addition, the new EU Alternative Investment Fund Managers Directive has been approved by the European Parliament in final form and is likely to be implemented by the summer of 2013. This directive will regulate managers of, and service providers to, alternative investment funds domiciled within Europe and the marketing of all alternative investment funds into Europe. There are also ongoing plans to reform the framework to which regulated firms are subject, including in relation to regulatory capital and the protection of client assets.
| Item 1. | BUSINESS (continued) |
Regulation (continued)
In the aftermath of the financial crisis, the European Commission set out a detailed plan for EU financial reform, outlining a number of initiatives to be reflected in new or updated directives, regulations and recommendations. UCITS IV, the next iteration of the Undertakings for Collective Investment in Transferable Securities (“UCITS”) directive, is required to be adopted in the national law of each EU member state by July 1, 2011. This directive will introduce a requirement for UCITS funds to provide a key investor information document. There are also European Commission consultations in process that are intended to improve retail investor protection and create a consistent framework and approach for certain insurance wrap products (referred to in the United Kingdom as packaged retail investment products), and regarding UCITS V, which is addressing, among other items, custodial liability. In the United Kingdom, the Bribery Act 2010, which is not yet in effect, will applyimpose additional burdens on the Company’s U.K.-regulated subsidiaries. In addition, a retail distribution review has been initiated by the FSA, and is expected to BlackRock’s European activities remains possible.change how investment advice is paid for in the United Kingdom for all investment products. Final retail distribution rules are expected in early 2011, with implementation to occur by the end of 2012.
In addition to the FSA, the activities of certain BlackRock subsidiaries, branches, and investment fundsrepresentative offices are regulatedoverseen by among othercomparable regulators the Irish Financial Regulator, the Cayman Islands Monetary Authority, the Commission de Surveillance du Secteur Financier in Germany, The Netherlands, Ireland, Luxembourg, Switzerland, Isle of Man, Jersey, Guernsey, France, Belgium, Italy, Poland, Spain and the Financial Services Commission in Jersey.Sweden. Regulators in these jurisdictions have authority with respect to financial services including, among other things, the authority to grant or cancel required licenses or registrations. In addition, these regulators may also subject certain BlackRock subsidiaries to net capital requirements. Other BlackRock subsidiaries, branches, and representative offices are regulated in China, Hong Kong, Singapore, Taiwan, South Korea, India, Dubai, Brazil, Chile, Mexico and Canada.
In Japan, certain BlackRock subsidiaries are subject to the Financial Instruments and Exchange Law (the “FIEL”) and the Law Concerning Investment Trusts and Investment Corporations. These laws are administered and enforced by the Japanese Financial Services Agency (the “JFSA”), which establishes standards for compliance, including capital adequacy and financial soundness requirements, customer protection requirements and conduct of business rules. The JFSA is empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease and desist orders or the suspension or revocation of registrations and licenses granted under the FIEL.
In Australia, BlackRock’s Australian-based subsidiary issubsidiaries are subject to various Australian federal and state laws and iscertain subsidiaries are regulated primarily by the Australian Securities and Investments Commission (the “ASIC”) and the Australian Prudential Regulatory Authority (the “APRA”). The ASIC regulates companies and financial services in Australia and is responsible for promoting investor, creditor and consumer protection. The APRA is the prudential regulator of the Australian financial services industry and oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies and most members of the superannuation (pension) industry. Failure to comply with applicable law and regulations could result in the cancellation, suspension or variation of this subsidiary’s licensethe regulated subsidiaries licenses in Australia.
The activities of certain BlackRock subsidiaries in Hong Kong are subject to the Securities and Futures Ordinance (the “SFO”) which governs the securities and futures markets and the non-bank retail leveraged foreign exchange market in Hong Kong. The SFO is administered by the Securities and Futures Commission (the “SFC”), an independent non-governmental body. The relevant subsidiaries, and certain individuals representing them, which conduct business in any of the regulated activities specified in the SFO are generally required to be registered or licensed with the SFC, and are subject to the rules, codes and guidelines issued by the SFC from time to time.
There are parallel legal and regulatory arrangements in force in many other non-U.S. jurisdictions where BlackRock’s subsidiaries are authorized to conduct business, including Hong Kong, India, South Korea, Singapore, Taiwan and The Netherlands.business.
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| Item 1. | BUSINESS (continued) |
Regulation (continued)
Changes in RegulationAvailable Information
Additional legislation, changes in rules promulgated by our regulators and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of BlackRock. The profitability of BlackRock also could be affected by rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce.
The rules governing the regulation of financial institutions and their holding companies and subsidiaries are very detailed and technical. Accordingly, the above discussion is general in nature and does not purport to be complete.
Available Information
BlackRock files annual, quarterly and current reports, proxy statements and all amendments to these reports and other information with the SEC. BlackRock makes available free-of–charge, on or through its website athttp://www.blackrock.com,, the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The Company also makes available on its website the charters for the Audit Committee, Management Development and Compensation Committee and Nominating and Governance Committee of the Board of Directors, its Code of Business Conduct and Ethics, its Code of Ethics for Chief Executive and Senior Financial Officers and its Corporate Governance Guidelines. Further, BlackRock will provide, without charge, upon written request, a copy of the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings as well as the committee charters, its Code of Business Conduct and Ethics, its Code of Ethics for Chief Executive and Senior Financial Officers and its Corporate Governance Guidelines. Requests for copies should be addressed to Investor Relations, BlackRock, Inc., 55 East 52nd Street, New York, New York 10055. Investors may read and copy any document BlackRock files at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Reports, proxy statements and other information regarding issuers that file electronically with the SEC, including BlackRock’s filings, are also available to the public from the SEC’s website athttp://www.sec.gov.www.sec.gov.
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| Item 1A. | RISK FACTORS |
As a leading investment management firm, risk is an inherent part of BlackRock’s business. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. While BlackRock devotes significant resources across all of its operations to identify, measure, monitor, manage and analyze market and operating risks, BlackRock’s business, financial condition, operating results or non-operating results could be materially adversely affected, however,or our stock price could decline by any of the following risks.
Risks Related to BlackRock’s Business and Competition
Changes in the value levels of the capital, commodities or currency markets or other asset classes could lead to a decline in revenues and earnings.
BlackRock’s investment management revenues 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 earned on AUM. Movements in equity, debt or commodity market prices, interest rates or foreign exchange rates or all three could cause the following, which would result in lower investment advisory and administration fees or earnings:cause:
the value of AUM to decrease;
the returns realized on AUM to decrease;
clients to withdraw funds in favor of products in markets that they perceive offer greater opportunity and that BlackRock doesmay not serve;
clients to rebalance assets away from products that BlackRock manages into products that it doesmay not manage;
clients to rebalance assets away from products that earn higher fees into products with lower fees; and;and
an impairment to the value of intangible assets and goodwill.
The occurrence of any of these events could result in lower investment advisory, administration and performance fees or earnings and cause our stock price to decline.
| Item 1A. | RISK FACTORS (continued) |
Poor investment performance could lead to the loss of clients and a decline in revenues and earnings.
The Company’s management believes that investment performance, including the efficient delivery of beta for passively managed products, is one of the most important factors for the growth and retention of AUM. Poor investment performance relative to applicable portfolio benchmarks or to competitors could reduce revenues and cause earnings to decline as a result of:
existing clients withdrawing funds in favor of better performing products, which could result in lower investment advisory and administration fees;
the diminishing ability to attract funds from existing and new clients might diminish;clients;
the Company earning minimal or no performance fees; and
an impairment to the value of intangible assets and goodwill.
BlackRock may electThe determination to invest in or provide other support to itsparticular products from time to time.time may reduce earnings or other investments in the business.
BlackRock may, at its option, from time to time support investment products through seed investments, co-investments or follow-on investments, warehouse lending facilities or other forms of capital or credit support. See, for example, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Such investments or support utilizeutilizes capital that would otherwise be available for other corporate purposes. Losses on such investments or support, or failure to have or devote sufficient capital to support products, could have an adverse impact on revenues and earnings.
Changes in the value levels of the capital markets or other asset classes could lead to a decline in the value of investments that BlackRock owns.
At December 31, 2008, BlackRock held2010, BlackRock’s net economic investment exposure of approximately $1.4$1.0 billion of investments that are reflected on its statement of financial condition. Approximately $0.7 billion of this amount is the result of consolidation of certain sponsored investment funds. BlackRock’s economic interest in these investments (see Item 7A, Quantitative and Qualitative Disclosures About Market Risk) is primarily the result of co-investments and seed and co-investmentsinvestments in its sponsored investment funds. A decline in the prices of stocks or bonds, or the value of real estate or other alternative investments within or outside the United States could lower the value of these investments and result in a decline of non-operating income and increasedan increase in the volatility toof our earnings.
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Continued capital losses on investments could have adverse income tax consequences.
The Company may generate realized and unrealized capital losses on seed investments and co-investments. Realized capital losses may be carried back three years and carried forward five years and offset against realized capital gains for federal income tax purposes. The Company has unrealized capital losses for which a deferred tax asset has been established. In the event such unrealized losses are realized, the Company may not be able to offset such losses within the carryback or carryforward period or from future realized capital gains, in which case the deferred tax asset will not be utilized.realized. The failure to utilize the deferred tax asset could materially increase BlackRock’s income tax expense.
The soundness of other financial institutions could adversely affect BlackRock.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. BlackRock, and the products and accounts that it manages, have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose BlackRock or the funds and accounts that it manages to credit risk in the event of default of its counterparty or client. There is no assurance that any such losses would not materially and adversely impact BlackRock’s revenues and earnings.
| Item 1A. | RISK FACTORS (continued) |
The failure or negative performance of products of other financial institutions could lead to reduced AUM in similar products of BlackRock without regard to the performance of BlackRock’s products.
The failure or negative performance of products of other financial institutions could lead to a loss of confidence in similar products of BlackRock without regard to the performance of BlackRock’s products. Such a negative contagion could lead to withdrawals, redemptions and liquidity issues in such products and have a material adverse impact on our AUM, revenues and earnings.
Loss of key employees could lead to the loss of clients and a decline in revenues.
The ability to attract and retain quality personnel has contributed significantly to BlackRock’s growth and success and is important to attracting and retaining clients. The market for qualified fund managers, investment analysts, financial advisers and other professionals is competitive. There can be no assurance that the Company will be successful in its efforts to recruit and retain required personnel. Loss of key personnel could have ana material adverse effect on the Company.
BlackRock’s investment advisory contracts may be terminated or may not be renewed by clients and the liquidation of certain funds may be accelerated at the option of investors.
Separate account and commingled trust clients may terminate their investment management contracts with BlackRock or withdraw funds on short notice. The Company has, from time to time, lost separate accounts and could, in the future, lose accounts or significant AUM under various circumstances such as adverse market conditions or poor performance.
Additionally, BlackRock manages its U.S. mutual funds, pursuant toclosed-end funds and exchanged-traded funds under management contracts with the funds that must be renewed and approved by the funds’ boards of directors annually. A majority of the directors of each mutualsuch fund are independent from BlackRock. Consequently, there can be no assurance that the board of directors of each fund managed by the Company will approve the fund’s management contract each year, or will not condition its approval on the terms of the management contract being revised in a way that is adverse to the Company.Company.
Further, the governing agreements of many of the Company’s private investment funds generally provide that, subject to certain conditions, investors in those funds, and in some cases independent directors of those funds, may remove the investment adviser, general partner or the equivalent of the fund or liquidate the fund without cause by a simple majority vote, resulting in a reduction in the management or performance fees as well as the total carried interest BlackRock could earn.
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Failure to comply with client contractual requirements and/or guidelines could result in damage awards against BlackRock and loss of revenues due to client terminations.
When clients retain BlackRock to manage assets or provide products or services on their behalf, they specify guidelines or contractual requirements that the Company is required to observe in the provision of its services. A failure to comply with these guidelines or contractual requirements could result in damage to BlackRock’s reputation or in its clients seeking to recover losses, withdrawing their AUM or terminating their contracts, any of which could cause the Company’s revenues and earnings to decline.
Competitive fee pressures could reduce revenues and profit margins.
The investment management businessindustry, including the offering of exchange-traded funds, is highly competitive and has relatively low barriers to entry. To the extent that the Company is forced to compete on the basis of price, it may not be able to maintain its current fee structure. Fee reductions on existing or future new business could cause revenues and profit margins to decline.
| Item 1A. | RISK FACTORS (continued) |
Performance fees may increase revenue and earnings volatility, which could decrease BlackRock’s stock price.volatility.
A portion of the Company’s revenues is derived from performance fees on investment and risk management advisory assignments. Performance fees represented $540 million, or 6%, of total revenue for the year ended December 31, 2010. In most cases, performance fees are based on relative or absolute investment returns, although in some cases they are based on achieving specific service standards. Generally, the Company is entitled to performance fees only if the returns on the related portfolios exceed agreed-upon periodic or cumulative return targets. If these targets are not exceeded, performance fees for that period will not be earned and, if targets are based on cumulative returns, the Company may not earn performance fees in future periods. Performance fees will vary from period to period in relation to volatility in investment returns and the timing of revenue recognition, causing earnings to be more volatile. The volatility in earnings may decrease BlackRock’s stock price. Performance fees represented $177 million, or 3%, of total revenue for the year ended December 31, 2008.
Additional acquisitions may decrease earnings and harm the Company’s competitive position.
BlackRock employs a variety of strategies intended to enhance earnings and expand product offerings in order to improve profit margins. These strategies have included smaller-sized lift-outs of investment teams and acquisitions of investment management businesses, such as the MLIM, Quellos and QuellosBGI Transactions. In general, theseThese strategies may not be effective, and failure to successfully develop and implement these strategies may decrease earnings and harm the Company’s competitive position in the investment management industry. In the event BlackRock pursues additional sizeable acquisitions, it may not be able to find suitable businesses to acquire at acceptable prices, and it may not be able to successfully integrate or realize the intended benefits from thesesuch acquisitions.
Risks Related to BlackRock’s Operations
Failure to maintain adequate infrastructure could impede BlackRock’s productivity and growth.
The Company’s infrastructure, including its technological capacity, data centers, backup facilities and office space, is vital to the competitiveness of its business. The failure to maintain an adequate infrastructure commensurate with the size and scope of its business, including any expansion, could impede the Company’s productivity and growth, which could cause the Company’s earnings or stock price to decline.
Failure to maintain adequate business continuity plans could have a material adverse impact on BlackRock and its products.
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A significant portion of BlackRock’s critical business operations are concentrated in a few geographic areas, including San Francisco, California, New York, New York and London, England. A major earthquake, fire, terrorist or other catastrophic event could result in disruption to the business. The failure of the Company to maintain updated adequate business continuity plans, including backup facilities, could impede the Company’s ability to operate upon a disruption, which could cause the Company’s earnings or stock price to decline.
Operating in international markets increases BlackRock’s operational, regulatory and other risks.
As a result of BlackRock’s extensive international business activities, the Company faces increased operational, regulatory, reputational and foreign exchange rate risks. The failure of the Company’s systems of internal control to properly mitigate such additional risks, or of its operating infrastructure to support such international activities, could result in operational failures and regulatory fines or sanctions, which could cause the Company’s earnings or stock price to decline.
| Item 1A. | RISK FACTORS (continued) |
Failure to maintain a technological advantage could lead to a loss of clients and a decline in revenues.
A key element to BlackRock’s continued success is the ability to maintain a technological advantage both in terms of operational efficiency and in providing the sophisticated risk analytics incorporated into BlackRock’s operating systemsAladdin technology platform that support investment advisory andBlackRock Solutions clients. Moreover, the Company’s technological and software advantage is dependent on a number of third parties who provide various types of data. The failure of these third parties to provide such data or software could result in operational difficulties and adversely impact BlackRock’s ability to provide services to its investment advisory andBlackRock Solutions clients. There can be no assurance that the Company will be able to maintain this technological advantage or be able to effectively protect and enforce its intellectual property rights in these systems and processes.
Failure to implement effective information security policies, procedures and capabilities could disrupt operations and cause financial losses that could result in a decrease in BlackRock’s earnings or stock price.
BlackRock is dependent on the effectiveness of its information security policies, procedures and capabilities to protect its computer and telecommunications systems and the data that reside on or are transmitted through them. An externally caused information security incident, such as a hacker attack, or a virus or worm, or an internally caused issue, such as failure to control access to sensitive systems, could materially interrupt business operations or cause disclosure or modification of sensitive or confidential information and could result in material financial loss, regulatory actions, breach of client contracts, reputational harm or legal liability, which, in turn, could cause a decline in the Company’s earnings or stock price.
The continuingfailure of a key vendor to BlackRock to fulfill its obligations could have a material adverse effect on BlackRock and its products.
BlackRock depends on a number of key vendors for various fund administration, custody and transfer agent roles and other operational needs. The failure or inability of BlackRock to diversify its sources for key services or the failure of any key vendors to fulfill their obligations could lead to operational issues for the company and in certain products, which could result in financial losses for the Company and its clients.
The remaining integration of the QuellosBGI business creates numerous risks and uncertainties that could adversely affect profitability.
The QuellosA portion of the BGI business and personnel areremain in the process of being integrated with BlackRock’s previously existing business and personnel. These transition activities are complex and the Company may encounter unexpected difficulties or incur unexpected costs including:
the diversion of management’s attention to integration matters;
difficulties in achieving expected synergies associated with the transaction;
difficulties in the integration of operations and systems;
difficulties in the assimilation of employees; and
challenges in keeping existing clients and obtaining new clients, including potential conflicts of interest;interest and
challenges in attracting client imposed concentration limits on the use of an investment manager; and retaining key personnel.
As a result, the Company may not be able to realize all of the expected revenue growth and other benefits that it hopeshoped to achieve from the transaction. In addition, BlackRock may be required to spend additional time or money on integration that would otherwise be spent on the development and expansion of its business and services.
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| Item 1A. | RISK FACTORS (continued) |
Failure to manage risks in operating BlackRock’s securities lending program for clients could lead to a loss of clients and a decline in revenues and liquidity.
The size of BlackRock’s securities lending programs increased significantly with the completion of the BGI Transaction. As part of these programs, BlackRock must manage risks associated with (i) ensuring that the value of the collateral held against the securities on loan does not decline in value or become illiquid and that its nature and value complies with regulatory requirements and investment requirements, (ii) the potential that a borrower defaults or does not return a loaned security on a timely basis, (iii) the potential that the collateral held may not be sufficient to repurchase the loaned security, and (iv) errors in the settlement of securities, daily mark-to-market valuations and collateral collection. The failure of the Company’s controls to mitigate these risks could result in financial losses for our clients that participate in our securities lending programs as well as for the Company.
Risks Related to Relationships with Bank of America, America/Merrill Lynch, PNC, Barclays and PNCOther Institutional Investors
Merrill Lynch is an important distributor of BlackRock’s products, and the Company is therefore subject to risks associated with the business of Merrill Lynch.
Under a global distribution agreement entered into with Merrill Lynch, Merrill Lynch provides distribution, portfolio administration and servicing for certain BlackRock assetinvestment management products and services through its various distribution channels. The Company may not be successful in distributing products through Merrill Lynch or in distributing its products and services through other third party distributors. If BlackRock is unable to distribute its products and services successfully or if it experiences an increase in distribution-related costs, BlackRock’s business, results of operations or financial condition may be materially and adversely affected.
Loss of market share withwithin Merrill Lynch’s Global Private Client GroupWealth & Investment Management business could harm operating results.
A significant portion of BlackRock’s revenue has historically come from AUM generated by Merrill Lynch’s Global Private Client GroupWealth & Investment Management (“GPC”GWIM”). business. BlackRock’s ability to maintain a strong relationship with GPC, or any successor group at Bank of America,within GWIM is material to the Company’s future performance. If one of the Company’s competitors gains significant additional market share within the GPCGWIM retail channel at the expense of BlackRock, then BlackRock’s business, results of operations or financial condition may be negatively impacted.
The failure of Barclays to fulfill its commitments, or the inadequacy of the support provided, under certain capital support agreements in favor of a number of cash management funds acquired in the BGI Transaction, could negatively impact such funds and BlackRock.
Barclays has provided capital support agreements through December 2013, or until certain criteria are met, to support certain cash management products, which were acquired by BlackRock in the BGI Transaction. The failure of Barclays to fulfill its obligations under these agreements, or the inadequacy of the support provided, could cause our clients to suffer losses and BlackRock to suffer reputational and other adverse impacts. For so long as Banka discussion on the capital support agreements see “Management, Discussion and Analysis – Liquidity and Capital Resources – Barclays Support of America/Merrill LynchCertain Cash Funds.”
| Item 1A. | RISK FACTORS (continued) |
PNC and PNC maintain certain levels of stock ownership, Bank of America/Merrill Lynch and PNC willBarclays have each agreed to vote as stockholders in accordance with the recommendation of BlackRock’s Board of Directors, and certain actions will require special board approval or the prior approval of Bank of America/Merrill Lynch, PNC and PNC.Barclays.
As a result of stockholder agreements entered into with PNC and Merrill Lynch, together with the Company’s ownership structure, stockholders may have no effective power to influence corporate actions. At February 27, 2009, Merrill Lynch owned approximately 4.9% of BlackRock’s voting common stock and approximately 47.4% of its total capital stock on a fully-diluted basis, and PNC owned approximately 46.5% of BlackRock’s outstanding voting common stock and approximately 31.5% of its total capital stock on a fully-diluted basis.
Merrill Lynch and PNCBarclays have agreed to vote all of their voting shares in accordance with the recommendation of BlackRock’s Board of Directors to the extent consistentin accordance with the provisions of the Merrill Lynchtheir respective stockholder agreement and the PNC implementation and stockholder agreement.agreements with BlackRock. As a consequence, if the shares held by PNC and Barclays constitute a substantial portion of the outstanding voting shares, matters submitted to a stockholder vote that require a majority or a plurality of votes for approval, including elections of directors, will be approved or disapproved solelyhave a substantial number of shares voted in accordance with the determinations of the BlackRock Board of Directors, so long as the shares held by Merrill Lynch and PNC constitute a majority of the outstanding shares.Directors. This arrangement has the effect of concentrating a significant block of voting control over BlackRock in its Board of Directors, whether or not stockholders agree with any particular determination of the Board.
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At December 31, 2010, PNC and Barclays owned approximately, 25.3% and 2.3%, respectively, of BlackRock’s voting common stock.
A large portion of our capital stock is held by a small group of significant shareholders. Future sales of our common stock in the public market by us or our large stockholders could adversely affect the trading price of our common stock.
As of December 31, 2010, after giving effect to the dispositions referred to in the following sentence, PNC, Barclays and Bank of America/Merrill Lynch owned 20.3%, 19.6% and 7.1% of our capital stock, respectively. We have entered into registration rights agreements with PNC, Barclays and Bank of America/Merrill Lynch, as well as the institutional investors who purchased shares of BlackRock capital stock in connection with the BGI Transaction, and, pursuant to such agreements, on November 15, 2010, Bank of America/Merrill Lynch and PNC sold approximately 58.7 million shares of our capital stock. The registration rights agreements, which include customary “piggyback” registration provisions, may continue to allow the respective stockholders to cause us to file one or more registration statements for the resale of their respective shares of capital stock and cooperate in certain underwritten offerings. Sales by us or our large stockholders of a substantial number of shares of our common stock in the public market pursuant to registration rights or otherwise, or the perception that these sales might occur, could cause the market price of our common stock to decline.
Legal and Regulatory Risks
BlackRock is subject to extensive regulation in the United States and internationally.
BlackRock’s business is subject to extensive regulation in the United States and around the world. See the discussion under the heading “Business – Regulation.” Violation of applicable laws or regulations could result in fines, temporary or permanent prohibition of the engagement in certain activities, reputational harm, suspensions of personnel or revocation of their licenses, suspension or termination of investment adviser or broker-dealer registrations, or other sanctions, which could have a material adverse effect on BlackRock’s reputation, business, results of operations or financial condition and cause the Company’s earnings or stock price to decline.
BlackRock may be adversely impacted by legal and regulatory changes in the United States and internationallyinternationally..
Recent market disruptions have led to numerous proposalsOn July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”) was signed into law in the United StatesStates. The DFA is expansive in scope and internationally for changesrequires the adoption of extensive regulations and numerous regulatory decisions in order to be implemented. The adoption of these regulations and decisions will in large measure determine the regulationimpact of the financial services industry. NewDFA on BlackRock.
The DFA and its regulations, and other new laws or regulations, or changes in enforcement of existing laws or regulations, could adversely impact the scope or profitability of BlackRock’s business activities, could require BlackRock to change certain business practices and could expose BlackRock to additional costs (including compliance and tax costs) and liabilities, as well as reputational harm. Regulatory changes could also lead to business disruptions, could adversely impact the value of assets in which BlackRock has invested directly and on behalf of clients and/or via seed or co-investments, and, to the extent the regulations strictly control the activities of financial services firms, could make it more difficult for BlackRock to conduct certain businessesbusiness activities or to distinguish itself from competitors.
| Item 1A. | RISK FACTORS (continued) |
Failure to comply with the Advisers Act and the Investment Company Act and related regulations could result in substantial harm to BlackRock’s reputation and results of operations.
Certain BlackRock subsidiaries are registered with the SEC under the Advisers Act and BlackRock’s U.S. mutual funds and exchange-traded funds are registered with the SEC under the Investment Company Act. The Advisers Act imposes numerous obligations and fiduciary duties on registered investment advisers, including record-keeping, operating and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act imposes similar obligations, as well as additional detailed operational requirements, on investment advisers to registered investment companies. The failure of any of BlackRock’s subsidiaries to comply with the Advisers Act or the Investment Company Act could cause the SEC to institute proceedings and impose sanctions for violations of either of these acts, including censure, termination of an investment adviser’s registration or prohibition to serve as adviser to SEC-registered funds, and could lead to litigation by investors in those funds or harm to the Company’s reputation, any of which could cause its earnings or stock price to decline.
Failure to comply with ERISA regulations could result in penalties and cause the Company’s earnings or stock price to decline.
Certain BlackRock subsidiaries are subject to ERISA and to regulations promulgated thereunder, insofar as they act as a “fiduciary” under ERISA with respect to benefit plan clients. ERISA and applicable provisions of the Internal Revenue Code impose duties on persons who are fiduciaries under ERISA, prohibit specified transactions involving ERISA plan clients and provide monetary penalties for violations of these prohibitions. The failure of any of BlackRock’sthe relevant subsidiaries to comply with these requirements could result in significant penalties that could reduce the Company’s earnings or cause its stock price to decline.
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BlackRock is subject to banking regulations that may limit its business activities.
Because the total equity ownership interest of each of Bank of America and PNC in BlackRock exceeds 25%,or until recently exceeded certain thresholds, BlackRock is deemed to be a non-bank subsidiary of each of Bank of America and PNC, which are both financial holding companies under the Bank Holding Company Act of 1956, as amended. As a non-bank subsidiary of each of Bank of America and PNC, BlackRock is subject to banking regulation, including the supervision and regulation of the FRB.Federal Reserve. Such banking regulation limits the activities and the types of businesses that BlackRock may conduct. The FRBFederal Reserve has broad enforcement authority over BlackRock, including the power to prohibit BlackRock from conducting any activity that, in the FRB’sFederal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound practice in conducting BlackRock’s business, and to impose substantial fines and other penalties for violations. Any failure of either Bank of America or PNC to maintain its status as a financial holding company could result in substantial limitations on certain BlackRock activities and its growth. In addition, beingBlackRock’s trust bank subsidiary is subject to regulation by the OCC, which is similar in many respects to that imposed under the Advisers Act and the Investment Company Act as described above and to capital requirements established by the OCC. The OCC has broad enforcement authority over BlackRock’s trust bank subsidiary. Being subject to banking regulation may put BlackRock at a competitive disadvantage because most of its competitors are not subject to these limitations.
Failure to comply with laws and regulations in the United Kingdom, other member states of the European Union, Hong Kong, Japan, Australia and other non-U.S. jurisdictions in which BlackRock operates could result in substantial harm to BlackRock’s reputation and results of operations.
The Financial Services Authority (the “FSA”) regulates BlackRock’s subsidiaries in the United Kingdom. Authorization by the FSA is required to conduct any financial services-related business in the United Kingdom under the Financial Services and Markets Act 2000. The FSA’s rules govern a firm’s capital resources requirements, senior management arrangements, conduct of business, interaction with clients and systems and controls. Breaches of these rules may result in a wide range of disciplinary actions against the Company’s U.K.-regulated subsidiaries.
| Item 1A. | RISK FACTORS (continued) |
In addition, these subsidiaries, and other European subsidiaries, branches or branches,representative offices, must comply with the pan-European regime established by the Markets in Financial Instruments Directive, which regulates the provision of investment services throughout the European Economic Area, as well as the Capital Requirements Directive, which delineates regulatory capital requirements. As discussed under “Business-Regulation,” in the aftermath of the financial crisis the European Commission set out a detailed plan to complete the EU’s financial reform, outlining a number of initiatives to be reflected in new or updated directives, regulations and recommendations. There are changes proposed by the Alternative Investment Fund Managers Directive, to be implemented by the summer of 2013, and UCITS IV, which is required to be adopted in the national law of each EU member state by July 1, 2011. There are also European Commission consultations in process regarding certain insurance wrap products (referred to in the United Kingdom as packaged retail investment products), covering pre-contractual information to be provided with respect to such products, and UCITS V, which addresses, among other items, custodial liability. In the United Kingdom, the Bribery Act 2010 was to be implemented in April 2011 but has been put on hold while the U.K. government rewrites guidance for businesses on how to comply with its provisions. When in force it is likely to impose additional procedures on the Company’s U.K.-regulated subsidiaries. In addition, a retail distribution review initiated by the FSA is expected to change how investment advice is paid for in the United Kingdom for all investment products. Final retail distribution rules are expected in early 2011, with implementation to occur by the end of 2012.
In Japan, certain BlackRock subsidiaries are subject to the Financial Instruments and Exchange Law (the “FIEL”) and the Law Concerning Investment Trusts and Investment Corporations. These laws are administered and enforced by the Japanese Financial Services Agency (the “JFSA”), which establishes standards for compliance, including capital adequacy and financial soundness requirements, customer protection requirements and conduct of business rules. The JFSA is empowered to conduct administrative proceedings that can result in censure, fine,fines, the issuance of cease and desist orders or the suspension or revocation of registrations and licenses granted under the FIEL.
In Australia, BlackRock’s Australian-based subsidiary issubsidiaries are subject to various Australian federal and state laws and iscertain subsidiaries are regulated primarily by the Australian Securities and Investments Commission (the “ASIC”) and the Australian Prudential RegulatoryRegulation Authority. The ASIC regulates companies and financial services in Australia and is responsible for promoting investor, creditor and consumer protection. Failure to comply with applicable law and regulations could result in the cancellation, suspension or variation of this subsidiary’s licensethe relevant subsidiaries’ licenses in Australia.
The activities of certain BlackRock subsidiaries in Hong Kong are subject to the Securities and Futures Ordinance (the “SFO”) which governs the securities and futures markets and the non-bank retail leveraged foreign exchange market in Hong Kong. The SFO is administered by the Securities and Futures Commission (the “SFC”), an independent non-governmental body. The relevant subsidiaries, and certain individuals representing them, which conduct business in any of the regulated activities specified in the SFO are generally required to be registered or licensed with the SFC, and are subject to the rules, codes and guidelines issued by the SFC from time to time.
There are parallelsimilar legal and regulatory arrangements in force in many other non-U.S. jurisdictions where BlackRock’s subsidiaries conduct business or where the funds and products it manages are organized, including the Cayman Islands, Hong Kong, India, Ireland, Jersey, Luxembourg, South Korea, Singapore, Taiwan and The Netherlands.organized. Failure to comply with laws and regulations in any of these jurisdictions could result in substantial harm to BlackRock’s reputation and results of operation.
26
Legal proceedings could adversely affect operating results and financial condition for a particular period.
Many aspects of BlackRock’s business involve substantial risks of legal liability. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations, class actions and other litigation arising in connection with BlackRock’s activities. From time to time, BlackRock receives subpoenas or other requests for information from various U.S. federal, stateand non-U.S. governmental and regulatory authorities in connection with certain industry-wide, company-specific or other investigations or proceedings. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
The Company has no unresolved comments from the SEC staff relating to BlackRock’s periodic or current reports filed with the SEC pursuant to the Exchange Act of 1934.
| Item 2. | PROPERTIES |
BlackRock’s principal office, which is leased, is located at 4055 East 52nd Street, New York, New York. BlackRock leases additional office space in New York City at 5540 East 52nd Street and throughout the world, including Boston, Chicago, Edinburgh, Florham Park (New Jersey)Gurgaon (India), Hong Kong, London, Melbourne, Munich, Plainsboro (New Jersey), San Francisco, Seattle, Singapore, Sydney, Taipei and Tokyo. The Company also owns an 84,500 square foot office building in Wilmington (Delaware).
| Item 3. | LEGAL PROCEEDINGS |
From time to time, BlackRock receives subpoenas or other requests for information from various U.S. federal, state governmental and regulatory authorities in connection with certain industry-wide, company-specific or other investigations or proceedings. It is BlackRock’s policy to fully cooperate with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations and other litigation arising in connection with BlackRock’s activities. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.
Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits will have a material adverse effect on BlackRock’s earnings, financial position, or cash flows, although, at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations in any future reporting period.
No matters were submitted to a vote of BlackRock’s security holders during the fourth quarter of the year ended December 31, 2008.
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| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
BlackRock’s common stock is listed on the NYSE and is traded under the symbol “BLK”. At the close of business on January 31, 2009,2011, there were 504400 common stockholders of record. Common stockholders include institutional or omnibus accounts that hold common stock for multiple underlying investors.
The following table sets forth for the periods indicated the high and low reported sale prices, period-end closing prices for the common stock and dividends declared per share for the common stock as reported on the NYSE:
| Common Stock Price Ranges | Common Stock Price Ranges | Closing | Cash Dividend | |||||||||||||||||||||||||
| High | Low | Closing Price | Dividend Declared | High | Low | Price | Declared | |||||||||||||||||||||
2008 | ||||||||||||||||||||||||||||
2010 | ||||||||||||||||||||||||||||
First Quarter | $ | 231.99 | $ | 165.72 | $ | 204.18 | $ | 0.78 | $ | 243.80 | $ | 200.56 | $ | 217.76 | $ | 1.00 | ||||||||||||
Second Quarter | $ | 227.51 | $ | 171.86 | $ | 177.00 | $ | 0.78 | $ | 212.27 | $ | 143.01 | $ | 143.40 | $ | 1.00 | ||||||||||||
Third Quarter | $ | 249.37 | $ | 156.20 | $ | 194.50 | $ | 0.78 | $ | 172.87 | $ | 138.42 | $ | 170.25 | $ | 1.00 | ||||||||||||
Fourth Quarter | $ | 195.00 | $ | 94.78 | $ | 134.15 | $ | 0.78 | $ | 193.74 | $ | 161.53 | $ | 190.58 | $ | 1.00 | ||||||||||||
2007 | ||||||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||||||
First Quarter | $ | 180.30 | $ | 151.32 | $ | 156.31 | $ | 0.67 | $ | 143.32 | $ | 88.91 | $ | 130.04 | $ | 0.78 | ||||||||||||
Second Quarter | $ | 162.83 | $ | 143.69 | $ | 156.59 | $ | 0.67 | $ | 183.80 | $ | 119.12 | $ | 175.42 | $ | 0.78 | ||||||||||||
Third Quarter | $ | 179.97 | $ | 139.20 | $ | 173.41 | $ | 0.67 | $ | 220.17 | $ | 159.45 | $ | 216.82 | $ | 0.78 | ||||||||||||
Fourth Quarter | $ | 224.54 | $ | 172.18 | $ | 216.80 | $ | 0.67 | $ | 241.66 | $ | 206.00 | $ | 232.20 | $ | 0.78 | ||||||||||||
BlackRock’s closing common stock price as of February 27, 200925, 2011 was $96.81.$203.92.
Dividends
On February 26, 2009,24, 2011, the Board of Directors approved BlackRock’s quarterly dividend of $0.78$1.375 to be paid on March 23, 20092011 to stockholders of record on March 9, 2009.7, 2011.
Barclays, Merrill Lynch, and its affiliates and PNC and itstheir respective affiliates receive dividends on thealong with other institutional investors that hold non-voting participating preferred stock that they holdreceive dividends on these shares, which are equivalent to the dividends received by common stockholders.
28
| Item 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued) |
Issuer Purchases of Equity Securities
During the three months ended December 31, 2008,2010, 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 2 | 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 Programs1 | ||||||
October 1, 2008 through October 31, 2008 | 9,467 | $ | 194.60 | — | 751,400 | ||||
November 1, 2008 through November 30, 2008 | 185 | $ | 116.61 | — | 751,400 | ||||
December 1, 2008 through December 31, 2008 | 1,069 | $ | 134.67 | — | 751,400 | ||||
Total | 10,721 | $ | 187.28 | — | |||||
| 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) | |||||||||||||
October 1, 2010 through October 31, 2010 | 3,525 | (2) | $ | 170.30 | — | 4,203,898 | ||||||||||
November 1, 2010 through November 30, 2010 | 399 | (2) | $ | 165.85 | — | 4,203,898 | ||||||||||
December 1, 2010 through December 31, 2010 | 885 | (2) | $ | 180.75 | — | 4,203,898 | ||||||||||
Total | 4,809 | $ | 171.85 | — | 4,203,898 | |||||||||||
|
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|
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| Item 6. | SELECTED FINANCIAL DATA |
The selected financial data presented below has been derived in part from, and should be read in conjunction with, the consolidated financial statements of BlackRock and Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operationsincluded in this Form 10-K. Prior year data reflects certain reclassifications to conform to the current year presentation.
| Year ended December 31, | ||||||||||||||||
| (Dollar amounts in millions, except per share data) | 2008 | 2007 | 20061 | 20052 | 2004 | |||||||||||
Income statement data: | ||||||||||||||||
Revenue | ||||||||||||||||
Investment advisory and administration fees | $ | 4,409 | $ | 4,360 | $ | 1,841 | $ | 1,018 | $ | 634 | ||||||
BlackRock Solutions and advisory | 406 | 198 | 148 | 124 | 90 | |||||||||||
Distribution fees | 139 | 123 | 36 | 11 | — | |||||||||||
Other revenue | 110 | 164 | 73 | 38 | 1 | |||||||||||
Total revenue | 5,064 | 4,845 | 2,098 | 1,191 | 725 | |||||||||||
Expenses | ||||||||||||||||
Employee compensation and benefits | 1,815 | 1,767 | 934 | 588 | 386 | |||||||||||
Portfolio administration and servicing costs | 597 | 548 | 173 | 64 | 50 | |||||||||||
Amortization of deferred mutual fund sales commissions | 130 | 108 | 30 | 9 | — | |||||||||||
General and administration3,4 | 745 | 870 | 451 | 181 | 123 | |||||||||||
Restructuring charges | 38 | — | — | — | — | |||||||||||
Termination of closed-end fund administration and servicing arrangements | — | 128 | — | — | — | |||||||||||
Amortization of intangible assets | 146 | 130 | 38 | 8 | 1 | |||||||||||
Total expenses | 3,471 | 3,551 | 1,626 | 850 | 560 | |||||||||||
Operating income | 1,593 | 1,294 | 472 | 341 | 165 | |||||||||||
Total non-operating income (expense) | (574 | ) | 529 | 56 | 35 | 35 | ||||||||||
Income before income taxes and non-controlling interests | 1,019 | 1,823 | 528 | 376 | 200 | |||||||||||
Income tax expense | 388 | 464 | 189 | 139 | 52 | |||||||||||
Income before non-controlling interests | 631 | 1,359 | 339 | 237 | 148 | |||||||||||
Non-controlling interests | (155 | ) | 364 | 16 | 3 | 5 | ||||||||||
Net income | $ | 786 | $ | 995 | $ | 323 | $ | 234 | $ | 143 | ||||||
Per share data5: | ||||||||||||||||
Basic earnings | $ | 6.07 | $ | 7.75 | $ | 4.00 | $ | 3.64 | $ | 2.25 | ||||||
Diluted earnings | $ | 5.91 | $ | 7.53 | $ | 3.87 | $ | 3.50 | $ | 2.17 | ||||||
Book value 6 | $ | 92.89 | $ | 90.13 | $ | 83.57 | $ | 14.41 | $ | 12.07 | ||||||
Common and preferred cash dividends | $ | 3.12 | $ | 2.68 | $ | 1.68 | $ | 1.20 | $ | 1.00 | ||||||
Income statement data: Total revenue Expenses Restructuring charges Termination of closed-end fund administration and servicing arrangements Fee sharing payment(3) Other operating expenses Total expenses Operating income Total non-operating income (expense) Income before income taxes Income tax expense Net income Less: Net income (loss) attributable to non-controlling interests(4) Net income attributable to BlackRock, Inc. Per share data:(5) Basic earnings Diluted earnings Book value(6) Common and preferred cash dividends Year ended December 31, (Dollar amounts in millions, except per share data) 2010(1) 2009 2008 2007(2) 2006 $ 8,612 $ 4,700 $ 5,064 $ 4,845 $ 2,098 — 22 38 — — — — — 128 — — — — — 34 5,614 3,400 3,433 3,423 1,592 5,614 3,422 3,471 3,551 1,626 2,998 1,278 1,593 1,294 472 23 (6 ) (577 ) 526 53 3,021 1,272 1,016 1,820 525 971 375 387 463 188 2,050 897 629 1,357 337 (13 ) 22 (155 ) 364 16 $ 2,063 $ 875 $ 784 $ 993 $ 321 $ 10.67 $ 6.24 $ 5.86 $ 7.53 $ 3.95 $ 10.55 $ 6.11 $ 5.78 $ 7.37 $ 3.83 $ 136.09 $ 128.86 $ 92.91 $ 90.16 $ 83.63 $ 4.00 $ 3.12 $ 3.12 $ 2.68 $ 1.68
30
| Item 6. | SELECTED FINANCIAL DATA (continued) |
| December 31, | |||||||||||||||
| (Dollar amounts in millions) | 2008 | 2007 | 20061 | 20052 | 2004 | ||||||||||
Balance sheet data: | |||||||||||||||
Cash and cash equivalents | $ | 2,032 | $ | 1,656 | $ | 1,160 | $ | 484 | $ | 458 | |||||
Investments | $ | 1,429 | $ | 2,000 | $ | 2,098 | $ | 299 | $ | 228 | |||||
Goodwill and intangible assets, net | $ | 11,974 | $ | 12,073 | $ | 11,139 | $ | 484 | $ | 184 | |||||
Total assets | $ | 19,924 | $ | 22,561 | $ | 20,470 | $ | 1,848 | $ | 1,145 | |||||
Short-term borrowings | $ | 200 | $ | 300 | $ | — | $ | — | $ | — | |||||
Long-term borrowings | $ | 946 | $ | 947 | $ | 253 | $ | 254 | $ | 5 | |||||
Total liabilities | $ | 7,367 | $ | 10,387 | $ | 8,579 | $ | 916 | $ | 360 | |||||
Non-controlling interests | $ | 491 | $ | 578 | $ | 1,109 | $ | 10 | $ | 17 | |||||
Stockholders’ equity | $ | 12,066 | $ | 11,596 | $ | 10,782 | $ | 922 | $ | 768 | |||||
| December 31, | |||||||||||||||
| (Dollar amounts in millions) | 2008 | 2007 | 20061 | 20052 | 2004 | ||||||||||
Assets under management: | |||||||||||||||
Fixed income | $ | 483,173 | $ | 513,020 | $ | 448,012 | $ | 303,928 | $ | 240,709 | |||||
Equity and balanced | 280,821 | 459,182 | 392,708 | 37,303 | 14,792 | ||||||||||
Cash management | 338,439 | 313,338 | 235,768 | 86,128 | 78,057 | ||||||||||
Alternative investment products | 59,723 | 71,104 | 48,139 | 25,323 | 8,202 | ||||||||||
Sub Total | 1,162,156 | 1,356,644 | 1,124,627 | 452,682 | 341,760 | ||||||||||
Advisory7 | 144,995 | — | — | — | — | ||||||||||
Total assets under management | $ | 1,307,151 | $ | 1,356,644 | $ | 1,124,627 | $ | 452,682 | $ | 341,760 | |||||
| December 31, | ||||||||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009(1) | 2008 | 2007 | 2006 | |||||||||||||||
Balance sheet data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 3,367 | $ | 4,708 | $ | 2,032 | $ | 1,656 | $ | 1,160 | ||||||||||
Goodwill and intangible assets, net | 30,317 | 30,346 | 11,974 | 12,073 | 11,139 | |||||||||||||||
Total assets(7) | 178,459 | 178,124 | 19,924 | 22,561 | 20,470 | |||||||||||||||
Less: | ||||||||||||||||||||
Separate account assets(8) | 121,137 | 119,629 | 2,623 | 4,670 | 4,300 | |||||||||||||||
Collateral held under securities lending agreements(8) | 17,638 | 19,335 | — | — | — | |||||||||||||||
Consolidated investment vehicles(9) | 1,610 | 282 | 502 | 805 | 1,236 | |||||||||||||||
Adjusted total assets | 38,074 | 38,878 | 16,799 | 17,086 | 14,934 | |||||||||||||||
Short-term borrowings | $ | 100 | $ | 2,234 | $ | 200 | $ | 300 | $ | — | ||||||||||
Convertible debentures | 67 | 243 | 245 | 242 | 238 | |||||||||||||||
Long-term borrowings | 3,192 | 3,191 | 697 | 697 | 3 | |||||||||||||||
Total borrowings | $ | 3,359 | $ | 5,668 | $ | 1,142 | $ | 1,239 | $ | 241 | ||||||||||
Total stockholders’ equity | $ | 26,094 | $ | 24,329 | $ | 12,069 | $ | 11,601 | $ | 10,789 | ||||||||||
| December 31, | ||||||||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009(1) | 2008 | 2007 | 2006 | |||||||||||||||
Assets under management:(10) | ||||||||||||||||||||
Equity: | ||||||||||||||||||||
Active | $ | 334,532 | $ | 348,574 | $ | 152,216 | $ | 291,324 | $ | 255,330 | ||||||||||
Institutional index | 911,775 | 806,082 | 51,076 | 71,381 | 61,631 | |||||||||||||||
iShares / Exchange-traded products | 448,160 | 381,399 | — | — | — | |||||||||||||||
Fixed income: | ||||||||||||||||||||
Active | 592,303 | 595,580 | 477,492 | 506,265 | 441,046 | |||||||||||||||
Institutional index | 425,930 | 357,557 | 3,873 | 3,942 | 4,274 | |||||||||||||||
iShares / Exchange-traded products | 123,091 | 102,490 | — | — | — | |||||||||||||||
Multi-asset class | 185,587 | 142,029 | 77,516 | 98,623 | 78,601 | |||||||||||||||
Alternatives | 109,738 | 102,101 | 61,544 | 71,771 | 48,292 | |||||||||||||||
Long-term | 3,131,116 | 2,835,812 | 823,717 | 1,043,306 | 889,174 | |||||||||||||||
Cash management | 279,175 | 349,277 | 338,439 | 313,338 | 235,453 | |||||||||||||||
Sub-total | 3,410,291 | 3,185,089 | 1,162,156 | 1,356,644 | 1,124,627 | |||||||||||||||
Advisory(11) | 150,677 | 161,167 | 144,995 | — | — | |||||||||||||||
Total | $ | 3,560,968 | $ | 3,346,256 | $ | 1,307,151 | $ | 1,356,644 | $ | 1,124,627 | ||||||||||
| Significant increases in 2009 (for balance sheet data and AUM) and 2010 (for income statement data) were primarily the result of the BGI Transaction which closed on December 1, 2009. |
| (2) | Significant increases in |
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| Includes |
| Series A, B, C and D non-voting participating preferred stock is considered to be a common stock equivalent for purposes of earnings per share calculations. |
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| (7) |
|
| (8) | Equal and offsetting amounts, related to separate account assets and collateral held under securities lending agreements, are recorded in liabilities. |
| (9) | Includes assets held by consolidated variable interest entities and consolidated sponsored investments funds. |
| (10) | Data reflects the reclassification of AUM into the current period presentation. |
| (11) | Advisory AUM represents long-term portfolio liquidation assignments. |
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| Item 7. | 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” or 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 SECSecurities and Exchange Commission (“SEC”) reports and those identified elsewhere in this report the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes and volatility in political, economic or industry conditions, the interest rate environment, foreign exchange rates or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock’s investment products; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions or divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) 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, Barclays Bank PLC, Bank of America Corporation, Merrill Lynch & Co., Inc. or PNC;The PNC Financial Services Group, Inc.; (11) terrorist activities, and international hostilities and natural disasters, which may adversely affect the general economy, domestic and local financial and capital markets, specific industries or BlackRock; (12) the ability to attract and retain highly talented professionals; (13) fluctuations in the carrying value of BlackRock’s economic investments; (14) fluctuations in foreign currency exchange rates, which may adversely affect the value of investment advisory and administration fees earned by BlackRock or the carrying value of certain assets and liabilities denominated in foreign currencies; (15) the impact of changes to tax legislation and, generally, the tax position of the Company; (16) the ability of BlackRock to effectively manage the former Quellos business along with its historical operations; (17)(15) BlackRock’s success in maintaining the distribution of its products; (18)(16) the impact of BlackRock electing to provide support to its products from time to time; and (19)(17) the impact of problems at other financial institutions or the failure or negative performance of products at other financial institutions.institutions; and (18) the ability of BlackRock to complete the integration of the operations of Barclays Global Investors.
32
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview
BlackRock, Inc. (“BlackRock” or the “Company”) is one of the largest publicly traded investment management firms infirm. As of December 31, 2010, the United States with $1.307Company managed $3.561 trillion of assets under management (“AUM”) at December 31, 2008. BlackRock manages assets on behalf of institutional and individual investors worldwide throughworldwide. The Company provides a varietywide array of products including passively and actively managed products including equities, fixed income, multi-asset class, alternative investment and cash management equityproducts, and balanced and alternative investmentoffer clients diversified access to global markets through separate accounts, collective investment trusts, open-end and closed-end mutual funds, exchange-traded funds, hedge funds and funds of funds. In addition,BlackRock Solutions® provides market risk management, financial strategicmarkets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation of illiquid securities, dispositions and workouts,workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.
Severe market dislocations continued in 2008, with a broad range of markets delivering sharply negative returns. Such conditions continue to challenge investors worldwide, many of which have withdrawn from long-dated markets in favor of safe havens, such as money markets, deposits and U.S. Treasuries. The deterioration in net asset values adversely affected investors and investment managers. AUM ended the year at $1.307 trillion, down 4% since December 31, 2007. For the year, net new business totaled $167.6 billion, representing a 12% organic growth rate, which was overwhelmed by a $217.1 billion decline in asset values due to the severe fall in markets and U.S. dollar strengthening. During the last twelve months, we were awarded net inflows of $135.0 billion from U.S. investors and $32.6 billion from international investors.BlackRock Solutionshad exceptionally robust results, adding 72 assignments during the year and completing 46 short-term mandates. For the year,BlackRock Solutions and advisory revenue exceeded $400 million, more than doubling the amount earned in 2007.
On September 29, 2006, Merrill Lynch & Co., Inc. (“Merrill Lynch”) contributed the entities and assets that constituted its investment management business, Merrill Lynch Investment Managers (“MLIM”), to BlackRock in exchange for common and non-voting preferred stock such that immediately after such closing Merrill Lynch held approximately 45% of BlackRock’s common stock outstanding and approximately 49.3% of the Company’s capital stock on a fully diluted basis (the “MLIM Transaction”). On October 1, 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”) for up to $1.719 billion in a combination of cash and common stock (the “Quellos Transaction”).
At December 31, 2008, Merrill Lynch owned approximately 44.2% of BlackRock’s voting common stock outstanding and approximately 48.2% of the Company’s capital stock on a fully diluted basis. The PNC Financial Services Group, Inc. (“PNC”) owned approximately 36.5% of BlackRock’s voting common stock outstanding and approximately 32.1% of the Company’s capital stock on a fully diluted basis.
On January 1, 2009, Bank of America Corporation (“Bank of America”) acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and The PNC Financial Services Group, Inc. (“PNC”) pursuant to which each agreed to exchange a portion of the BlackRock voting common stock they holdheld for non-voting preferred stock. Following
On December 1, 2009, BlackRock acquired from Barclays Bank PLC (“Barclays”) all of the outstanding equity interests of subsidiaries of Barclays conducting the business of Barclays Global Investors (“BGI”) (the “BGI Transaction”) in exchange for 37.6 million capital shares valued at $8.53 billion, or $227.08 per share, the closing price of these exchangesBlackRock’s common stock on February 27,November 30, 2009 and $6.65 billion in cash, for a total of $15.2 billion. The fair value of the BGI Transaction on June 5, 2009, several days prior to the announcement of the transaction, included the capital shares valued at $6.16 billion, or $163.74 per share, and $6.65 billion in cash, for a total of $12.8 billion. The increase in the fair value of BlackRock’s common stock resulted in $2.4 billion, or 19%, of additional purchase price consideration for accounting purposes as compared to a 16% increase in the S&P 500.
On November 15, 2010, Bank of America/Merrill LynchAmerica and PNC owned approximately 4.9% and 46.5%sold 58,737,122 shares of BlackRock’s voting common stock, respectively. The capitalwhich included 56,407,040 shares of common stock that converted from non-voting preferred stock. In connection with this transaction, BlackRock entered into an exchange agreement with PNC pursuant to which PNC agreed to exchange 11,105,000 shares of BlackRock non-voting preferred stock they held by Bankfor common stock.
As of America/Merrill Lynch and PNC inDecember 31, 2010, equity ownership of BlackRock remained largely unchanged at approximately 47.4% and 31.5% on a fully diluted basis, respectively.was as follows:
| Voting Common Stock | Capital Stock(1) | |||||||
PNC | 25.3 | % | 20.3 | % | ||||
Barclays | 2.3 | % | 19.6 | % | ||||
Bank of America/Merrill Lynch | 0.0 | % | 7.1 | % | ||||
Other | 72.4 | % | 53.0 | % | ||||
| 100.0 | % | 100.0 | % | |||||
33
| (1) | Includes outstanding common and non-voting preferred stock only. |
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)
The following table summarizes BlackRock’s operating performance for the years ended December 31, 2008, 20072010, 2009 and 2006:
BlackRock, Inc.2008:
Financial Highlights
(Dollar amounts in millions, except per share data)
| Year ended December 31, | Variance | ||||||||||||||||||||||||
| 2008 vs. 2007 | 2007 vs. 2006 | ||||||||||||||||||||||||
| 2008 | 2007 | 2006 | Amount | % | Amount | % | |||||||||||||||||||
GAAP basis: | |||||||||||||||||||||||||
Total revenue | $ | 5,064 | $ | 4,845 | $ | 2,098 | $ | 219 | 5 | % | $ | 2,747 | 131 | % | |||||||||||
Total expenses | $ | 3,471 | $ | 3,551 | $ | 1,626 | $ | (80 | ) | (2 | )% | $ | 1,925 | 118 | % | ||||||||||
Operating income | $ | 1,593 | $ | 1,294 | $ | 472 | $ | 299 | 23 | % | $ | 822 | 174 | % | |||||||||||
Operating margin | 31.4 | % | 26.7 | % | 22.5 | % | |||||||||||||||||||
Non-operating income (expense), net of non-controlling interests | $ | (419 | ) | $ | 165 | $ | 40 | $ | (584 | ) | (354 | )% | $ | 125 | 313 | % | |||||||||
Net income | $ | 786 | $ | 995 | $ | 323 | $ | (209 | ) | (21 | )% | $ | 672 | 208 | % | ||||||||||
Diluted earnings per share(e) | $ | 5.91 | $ | 7.53 | $ | 3.87 | $ | (1.62 | ) | (22 | )% | $ | 3.66 | 95 | % | ||||||||||
As adjusted: | |||||||||||||||||||||||||
Operating income(a) | $ | 1,662 | $ | 1,518 | $ | 674 | $ | 144 | 9 | % | $ | 844 | 125 | % | |||||||||||
Operating margin(a) | 38.7 | % | 37.5 | % | 36.7 | % | |||||||||||||||||||
Non-operating income (expense), net of non-controlling interests (b) | $ | (381 | ) | $ | 153 | $ | 32 | $ | (534 | ) | (349 | )% | $ | 121 | 378 | % | |||||||||
Net income(c), (d) | $ | 858 | $ | 1,079 | $ | 445 | $ | (221 | ) | (20 | )% | $ | 634 | 142 | % | ||||||||||
Diluted earnings per share(c), (d), (e) | $ | 6.45 | $ | 8.17 | $ | 5.33 | $ | (1.72 | ) | (21 | )% | $ | 2.84 | 53 | % | ||||||||||
Other: | |||||||||||||||||||||||||
Weighted average diluted shares outstanding(e) | 132,996,426 | 132,088,810 | 83,358,394 | 907,616 | 1 | % | 48,730,416 | 58 | % | ||||||||||||||||
Assets under management | $ | 1,307,151 | $ | 1,356,644 | $ | 1,124,627 | $ | (49,493 | ) | (4 | )% | $ | 232,017 | 21 | % | ||||||||||
| Variance | ||||||||||||||||||||||||||||
| Year ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | Amount | % | Amount | % | ||||||||||||||||||||||
GAAP basis: | ||||||||||||||||||||||||||||
Total revenue | $ | 8,612 | $ | 4,700 | $ | 5,064 | $ | 3,912 | 83 | % | $ | (364 | ) | (7 | %) | |||||||||||||
Total expenses | $ | 5,614 | $ | 3,422 | $ | 3,471 | $ | 2,192 | 64 | % | $ | (49 | ) | (1 | %) | |||||||||||||
Operating income | $ | 2,998 | $ | 1,278 | $ | 1,593 | $ | 1,720 | 135 | % | $ | (315 | ) | (20 | %) | |||||||||||||
Operating margin | 34.8 | % | 27.2 | % | 31.5 | % | 7.6 | % | 28 | % | (4.3 | %) | (14 | %) | ||||||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests | $ | 36 | $ | (28 | ) | $ | (422 | ) | $ | 64 | * | $ | 394 | 93 | % | |||||||||||||
Net income attributable to BlackRock, Inc. | $ | 2,063 | $ | 875 | $ | 784 | $ | 1,188 | 136 | % | $ | 91 | 12 | % | ||||||||||||||
Diluted earnings per common share (e) | $ | 10.55 | $ | 6.11 | $ | 5.78 | $ | 4.44 | 73 | % | $ | 0.33 | 6 | % | ||||||||||||||
Effective tax rate | 32.0 | % | 30.0 | % | 33.0 | % | 2.0 | % | 7 | % | (3.0 | %) | (9 | %) | ||||||||||||||
As adjusted: | ||||||||||||||||||||||||||||
Operating income (a) | $ | 3,167 | $ | 1,570 | $ | 1,662 | $ | 1,597 | 102 | % | $ | (92 | ) | 6 | % | |||||||||||||
Operating margin (a) | 39.3 | % | 38.2 | % | 38.7 | % | 1.1 | % | 3 | % | (0.5 | %) | (1 | %) | ||||||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests (b) | $ | 25 | $ | (46 | ) | $ | (384 | ) | $ | 71 | * | $ | 338 | 88 | % | |||||||||||||
Net income attributable to BlackRock, Inc.(c), (d) | $ | 2,139 | $ | 1,021 | $ | 856 | $ | 1,118 | 110 | % | $ | 165 | 19 | % | ||||||||||||||
Diluted earnings per common share (c), (d), (e) | $ | 10.94 | $ | 7.13 | $ | 6.30 | $ | 3.81 | 53 | % | $ | 0.83 | 13 | % | ||||||||||||||
Effective tax rate | 33.0 | % | 33.0 | % | 33.0 | % | — | % | — | % | — | % | — | % | ||||||||||||||
Other: | ||||||||||||||||||||||||||||
Assets under management (end of period) | $ | 3,560,968 | $ | 3,346,256 | $ | 1,307,151 | $ | 214,712 | 6 | % | $ | 2,039,105 | 156 | % | ||||||||||||||
Diluted weighted-average common shares outstanding (e) | 192,692,047 | 139,481,449 | 131,376,517 | 53,210,598 | 38 | % | 8,104,932 | 6 | % | |||||||||||||||||||
Shares outstanding (end of period) | 191,191,553 | 188,806,296 | 129,896,028 | 2,385,257 | 1 | % | 58,910,268 | 45 | % | |||||||||||||||||||
Book value per share ** | $ | 136.09 | $ | 128.86 | $ | 92.91 | $ | 7.23 | 6 | % | $ | 35.95 | 39 | % | ||||||||||||||
Cash dividends declared and paid per share | $ | 4.00 | $ | 3.12 | $ | 3.12 | $ | 0.88 | 28 | % | $ | — | — | % | ||||||||||||||
34
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)
Financial Highlights
(continued)
BlackRock reports its financial results on a GAAP basis;in accordance with accounting principles generally accepted in the United States (“GAAP”); however, management believes that evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
Certain prior period non-GAAP data has been reclassified to conform to the current presentation. Computations for all periods are derived from the Company’s consolidated statements of income as follows:
(a) Operating income, as adjusted and operating margin, as adjusted:
| (a) | Operating income, as adjusted, and operating margin, as adjusted: |
Operating income, as adjusted, equals operating income, GAAP basis, excluding certain items deemed non-recurring by management or transactions that ultimately will not impact BlackRock’s book value, as indicated in the table below. Operating income used for operating margin measurement equals operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Operating margin, as adjusted, equals operating income used for operating margin measurement, divided by revenue used for operating margin measurement, as indicated in the table below.
| Year ended | Year ended December 31, | |||||||||||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | 2008 | |||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
Operating income, GAAP basis | $ | 1,593 | $ | 1,294 | $ | 472 | $ | 2,998 | $ | 1,278 | $ | 1,593 | ||||||||||||
Non-GAAP adjustments: | ||||||||||||||||||||||||
Restructuring charges | 38 | — | — | |||||||||||||||||||||
Non-GAAP expense adjustments: | ||||||||||||||||||||||||
BGI transaction/integration costs | ||||||||||||||||||||||||
Employee compensation and benefits | 25 | 60 | — | |||||||||||||||||||||
General and administration | 65 | 123 | — | |||||||||||||||||||||
Total BGI transaction/integration costs | 90 | 183 | — | |||||||||||||||||||||
PNC LTIP funding obligation | 59 | 54 | 50 | 58 | 59 | 59 | ||||||||||||||||||
Merrill Lynch compensation contribution | 10 | 10 | 2 | 10 | 10 | 10 | ||||||||||||||||||
MLIM/Quellos integration costs | — | 20 | 142 | |||||||||||||||||||||
Termination of closed-end fund administration and servicing arrangements | — | 128 | — | |||||||||||||||||||||
Compensation expense related to (depreciation) appreciation on deferred compensation plans | (38 | ) | 12 | 8 | ||||||||||||||||||||
Restructuring charges | — | 22 | 38 | |||||||||||||||||||||
Compensation expense related to appreciation/(depreciation) on deferred compensation plans | 11 | 18 | (38 | ) | ||||||||||||||||||||
Operating income, as adjusted | 1,662 | 1,518 | 674 | 3,167 | 1,570 | 1,662 | ||||||||||||||||||
Closed-end fund launch costs | 9 | 36 | 11 | 15 | 2 | 9 | ||||||||||||||||||
Closed-end fund launch commissions | — | 6 | 3 | 2 | 1 | — | ||||||||||||||||||
Operating income used for operating margin measurement | $ | 1,671 | $ | 1,560 | $ | 688 | $ | 3,184 | $ | 1,573 | $ | 1,671 | ||||||||||||
Revenue, GAAP basis | $ | 5,064 | $ | 4,845 | $ | 2,098 | $ | 8,612 | $ | 4,700 | $ | 5,064 | ||||||||||||
Non-GAAP adjustments: | ||||||||||||||||||||||||
Portfolio administration and servicing costs | (598 | ) | (548 | ) | (173 | ) | ||||||||||||||||||
Amortization of deferred mutual fund sales commissions | (130 | ) | (108 | ) | (30 | ) | ||||||||||||||||||
Distribution and servicing costs | (408 | ) | (477 | ) | (591 | ) | ||||||||||||||||||
Amortization of deferred sales commissions | (102 | ) | (100 | ) | (130 | ) | ||||||||||||||||||
Reimbursable property management compensation | (21 | ) | (27 | ) | (22 | ) | — | — | (21 | ) | ||||||||||||||
Revenue used for operating margin, as adjusted, measurement | $ | 4,315 | $ | 4,162 | $ | 1,873 | ||||||||||||||||||
Revenue used for operating margin measurement | $ | 8,102 | $ | 4,123 | $ | 4,322 | ||||||||||||||||||
Operating margin, GAAP basis | 31.4 | % | 26.7 | % | 22.5 | % | 34.8 | % | 27.2 | % | 31.5 | % | ||||||||||||
Operating margin, as adjusted | 38.7 | % | 37.5 | % | 36.7 | % | 39.3 | % | 38.2 | % | 38.7 | % | ||||||||||||
35
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)
BlackRock, Inc.Overview (continued)
Financial Highlights
(continued)
(a)
| (a) | (continued) |
Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of BlackRock’s financial performance over time. As such, management believes that operating income, as adjusted, and operating margin, as adjusted, provide useful disclosure to investors.
Operating income, as adjusted:
BGI transaction and integration costs recorded in 2010 and 2009 consist principally of certain advisory payments, compensation expense, legal fees, marketing and promotional, occupancy and consulting expenses incurred in conjunction with the BGI Transaction. Restructuring charges recorded in 2009 and 2008 consist of compensation costs, occupancy costs and professional fees. MLIM and Quellos integration costs recorded in 2007 consist principally of certain professional fees, rebranding costs and compensation costs incurred in conjunction with these integrations. The expenses associated with: (i) the 2008with restructuring (ii) MLIM and QuellosBGI transaction and integration costs and (iii) the 2007 termination of the closed-end fund administration and servicing arrangements with Merrill Lynch have been deemed non-recurring by management and have been excluded from operating income, as adjusted, to help ensureenhance the comparability of this information to priorthe current reporting periods. As such, management believes that operating margins exclusive of these costs are useful measures in evaluating BlackRock’s operating performance for the respective periods.
The portion of compensation expense associated with certain long-term incentive plans (“LTIP”) that will be funded through the distribution to participants of shares of BlackRock stock held by PNC and the anticipateda Merrill Lynch cash compensation contribution, a portion of which has been received, have been excluded because exclusive of the impact related to the exercise of LTIP participants’ put options, primarily in the three months ended March 31, 2007, these charges ultimately do not impact BlackRock’s book value.
Compensation expense associated with appreciation appreciation/(depreciation) on assetsinvestments 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 non-operating income.income (expense).
Operating margin, as adjusted:
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 commissions. Management believes that excluding such costs and commissions is useful because these costs can fluctuate considerably and revenues associated with the expenditure of these costs will not fully impact the Company’s results until future periods.
Operating margin, as adjusted, allows the Company to compare performance from period-to-period by adjusting for items that may not recur, recur infrequently or may fluctuate based on market movements, such as restructuring charges, transaction and integration costs, closed-end fund launch costs, commissions paid to certain employees as compensation and fluctuations in compensation expense based on mark-to-market movements in investments held to fund certain compensation plans. The Company also uses operating margin, as adjusted, to monitor corporate performance and efficiency and as a benchmark to compare its performance to other companies. Management uses both the GAAP and non-GAAP financial measures in evaluating the financial performance of BlackRock. The non-GAAP measure by itself may pose limitations because it does not include all of the Company’s revenues and expenses.
Revenue used for operating margin, as adjusted, excludes portfolio administrationdistribution and servicing costs paid to related parties and to other third parties. Management believes that excluding such costs is useful to BlackRock because it creates consistency in the Company receives offsetting revenuetreatment for these services.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 mutual fund sales commissions is excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, offset distribution fee revenue earned by the Company. Reimbursable property management compensation representsrepresented compensation and benefits paid to personnel of Metric Property Management, Inc. (“Metric”), a subsidiary of BlackRock Realty Advisors, Inc. (“Realty”). ThesePrior to the transfer in 2008, these employees were retained on Metric’s payroll when certain properties were acquired by Realty’s clients. The related compensation and benefits were fully reimbursed by Realty’s clients and have been excluded from revenue used for operating margin, as adjusted, because they did not bear noan economic cost to BlackRock. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such offsetting revenues.
36
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)
BlackRock, Inc.Overview (continued)
Financial Highlights
(continued)
(b) Non-operating income (expense), net of non-controlling interests, as adjusted:
| (b) | Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted: |
Non-operating income (expense), less net ofincome (loss) attributable to non-controlling interests (“NCI”), as adjusted, equals non-operating income (expense), GAAP basis, less net of non-controlling interests,income (loss) attributable to NCI, GAAP basis, adjusted for compensation expense associated with depreciation depreciation/(appreciation) on assetsinvestments related to certain BlackRock deferred compensation plans, whichplans. The compensation expense offset is recorded in operating income. This compensation expense has been included in non-operating income (expense), less net of non-controlling interests,income (loss) attributable to NCI, as adjusted, to offset returns on investments set aside for these plans, which are reported in non-operating income (expense), GAAP basis.
| Year ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Non-operating income (expense), GAAP basis | $ | (574 | ) | $ | 529 | $ | 56 | |||||
Non-controlling interests, GAAP basis | (155 | ) | 364 | 16 | ||||||||
Non-operating income (expense), net of non-controlling interests | (419 | ) | 165 | 40 | ||||||||
Compensation expense related to depreciation (appreciation) on deferred compensation plans | 38 | (12 | ) | (8 | ) | |||||||
Non-operating income (expense), net of non-controlling interests, as adjusted | $ | (381 | ) | $ | 153 | $ | 32 | |||||
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | 2008 | |||||||||
Non-operating income (expense), GAAP basis | $ | 23 | $ | (6 | ) | $ | (577 | ) | ||||
Less: Net income (loss) attributable to NCI | (13 | ) | 22 | (155 | ) | |||||||
Non-operating income (expense) (1) | 36 | (28 | ) | (422 | ) | |||||||
Compensation expense related to (appreciation)/depreciation on deferred compensation plans | (11 | ) | (18 | ) | 38 | |||||||
Non-operating income (expense), less net income (loss) attributable to NCI, as adjusted | $ | 25 | $ | (46 | ) | $ | (384 | ) | ||||
| (1) | Net of net income (loss) attributable to non-controlling interests. |
Management believes that non-operating income (expense), less net income (loss) attributable to NCI, as adjusted, provides for comparability of this information to prior periods and is an effective measure for reviewing BlackRock’s non-operating contribution to its results. As compensation expense associated with (appreciation)/depreciation on theinvestments related to certain deferred compensation plans, which is included in operating income, offsets the gain/(loss) on the investments set aside for these plans, management believes that non-operating income (expense), less net of non-controlling interests,income (loss) attributable to NCI, as adjusted, provides a useful measures tomeasure, for both management and investors, of BlackRock’s non-operating results.results that impact book value.
37
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)
BlackRock, Inc.Overview (continued)
Financial Highlights
(continued)
(c) Net income, as adjusted:
| (c) | Net income attributable to BlackRock, Inc., as adjusted: |
Management believes that net income attributable to BlackRock, Inc., as adjusted, and diluted earnings per common share, as adjusted, are useful measures of BlackRock’s profitability and financial performance. Net income attributable to BlackRock, Inc., as adjusted, equals net income attributable to BlackRock, Inc., GAAP basis, adjusted for significant non-recurring items as well as charges that ultimately will not impact BlackRock’s book value.value or benefits that do not impact cash flow.
| Year ended December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||
Net income, GAAP basis | $ | 786 | $ | 995 | $ | 323 | ||||
Non-GAAP adjustments, net of tax:(d) | ||||||||||
Restructuring charges | 26 | — | — | |||||||
PNC’s LTIP funding obligation | 39 | 34 | 32 | |||||||
Merrill Lynch compensation contribution | 7 | 6 | 1 | |||||||
MLIM/Quellos integration costs | — | 13 | 89 | |||||||
Termination of closed-end fund administration and servicing arrangements | — | 82 | — | |||||||
Corporate deferred income tax rate changes | — | (51 | ) | — | ||||||
Net income, as adjusted | $ | 858 | $ | 1,079 | $ | 445 | ||||
Diluted weighted average shares outstanding(e) | 132,996,426 | 132,088,810 | 83,358,394 | |||||||
Diluted earnings per share, GAAP basis (e) | $ | 5.91 | $ | 7.53 | $ | 3.87 | ||||
Diluted earnings per share, as adjusted(e) | $ | 6.45 | $ | 8.17 | $ | 5.33 | ||||
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions, except per share data) | 2010 | 2009 | 2008 | |||||||||
Net income attributable to BlackRock, Inc., GAAP basis | $ | 2,063 | $ | 875 | $ | 784 | ||||||
Non-GAAP adjustments, net of tax: (d) | ||||||||||||
BGI transaction/integration costs | 59 | 129 | — | |||||||||
PNC LTIP funding obligation | 40 | 41 | 39 | |||||||||
Merrill Lynch compensation contribution | 7 | 7 | 7 | |||||||||
Restructuring charges | — | 14 | 26 | |||||||||
Income tax law changes | (30 | ) | (45 | ) | — | |||||||
Net income attributable to BlackRock, Inc., as adjusted | $ | 2,139 | $ | 1,021 | $ | 856 | ||||||
Allocation of net income attributable to BlackRock, Inc., as adjusted: (f) | ||||||||||||
Common shares (e) | $ | 2,109 | $ | 995 | $ | 828 | ||||||
Participating restricted stock units | 30 | 26 | 28 | |||||||||
Net income attributable to BlackRock, Inc., as adjusted | $ | 2,139 | $ | 1,021 | $ | 856 | ||||||
Diluted weighted-average common shares outstanding (e) | 192,692,047 | 139,481,449 | 131,376,517 | |||||||||
Diluted earnings per common share, GAAP basis (e) | $ | 10.55 | $ | 6.11 | $ | 5.78 | ||||||
Diluted earnings per common share, as adjusted (e) | $ | 10.94 | $ | 7.13 | $ | 6.30 | ||||||
The restructuring charges and the MLIMBGI transaction and Quellos integration costs reflected in GAAP net income attributable to BlackRock, Inc. have been deemed non-recurring by management and have been excluded from net income attributable to BlackRock, Inc., as adjusted, to help ensureenhance the comparability of this information to priorthe reporting periods.
The portion of the compensation expense associated with certain LTIP awards that will be funded through the distribution to participants of shares of BlackRock stock held by PNC and the anticipated Merrill Lynch cash compensation contribution, havea portion of which has been excluded from net income, as adjusted, because, exclusive of the impact related to the exercise of LTIP participants’ put options, primarily in the three months ended March 31, 2007, these charges do not impact BlackRock’s book value. The termination of the closed-end fund administration and servicing arrangements with Merrill Lynchreceived, has been excluded from net income attributable to BlackRock, Inc., as adjusted, as the termination of the arrangements is deemed non-recurring by management.because these charges ultimately do not impact BlackRock’s book value.
During third quarter 2007,2010 and third quarter 2009, the United Kingdom and GermanyNew York City, respectively, enacted legislation reducing corporate income taxes, effective in April and January of 2008, respectively,tax rates, which resulted in a revaluation of certain net deferred tax liabilities.liabilities primarily related to acquired intangible assets. The resulting decrease in income taxes has been excluded from net income attributable to BlackRock, Inc., as adjusted, as it isthese were non-recurring enacted tax legislation changes that do not have a cash flow impact and to ensure comparability of this information to currentthe reporting periods.
(d) For the year ended December 31, 2008, non-GAAP adjustments were tax effected at 33%, BlackRock’s 2008 effective tax rate. Non-GAAP adjustments, for the year ended December 31, 2007, were tax effected at 36%, which approximated BlackRock’s 2007 effective tax rate after adjusting primarily for the impact of the United Kingdom and Germany corporate income tax rate reductions.
(e) Series A non-voting participating preferred stock is considered to be a common stock equivalent for purposes of earnings per share calculations.
38
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)
Financial Highlights
(continued)
| (d) | For the years ended December 31, 2010, 2009 and 2008 non-GAAP adjustments were tax effected at 33%, 30% and 33%, respectively, which reflects the blended rate applicable to the adjustments. |
| (e) | Series A, B, C and D non-voting participating preferred stock are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations. Certain unvested restricted stock units (“RSUs”) are not included in this number as they are deemed participating securities in accordance with required provisions of Accounting Standards Codification (“ASC”) 260-10,Earnings per Share(“ASC 260-10”). |
| (f) | Allocation of net income attributable to BlackRock, Inc., as adjusted, to common shares and participating RSUs is calculated pursuant to the two-class method as defined in ASC 260-10. |
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)
BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, Thethe Netherlands, Japan, Hong Kong, Australia and Australia.Germany. The Company managesprovides a wide array of taxableproducts including passively and tax-exemptactively managed equities, fixed income, equitymulti-asset class, cash management and balancedalternatives and offers clients diversified access to global markets through separate accounts, collective trusts, open-end and closed-end mutual funds, exchange-traded funds, hedge funds, and separate accounts, as well as a wide assortmentfunds of index-based equity and alternative investment products for afunds to its diverse global clientele. BlackRock provides global advisory services for mutualinvestment funds and other non-U.S. equivalent retail products. The Company’s non-U.S. mutualinvestment funds are based in a number of domiciles and cover a range of asset classes, including cash management, fixed income, equities and equities. The Merrill Lynch International Investment Funds, the primary retail fund group offered outside the United States, were rebranded in April 2008 as the BlackRock Global Funds. The BlackRock Global Funds are authorized for distribution in more than 37 jurisdictions worldwide. alternatives.
In the United States, the primary retail offerings include various open-end and closed-end funds.funds, includingiShares®, the global product leader in exchange-traded funds for institutional, retail and high net worth investors. There are over 475iShares globally across equities, fixed income and commodities, which trade like common stocks on 19 exchanges worldwide. The BlackRock Global Funds, the Company’s primary retail fund group offered outside the United States, are authorized for distribution in more than 35 jurisdictions worldwide. Additional fund offerings include structured products, real estate funds, hedge funds, hedge funds of funds, private equity funds and funds of funds, managed futures funds and exchange funds. These products are sold to both U.S. and non-U.S. high net worth, retail and institutional investors in a wide variety of active and passive strategies covering both equity and fixed income assets.
BlackRock’s client base consists of financial institutions and other corporate clients, pension plans, charities, official institutions, such as central banks, sovereign wealth funds, supranational authorities and other government entities, high net worth individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presence both inside and outside the United States that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to retail and institutional investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships. BlackRock also distributes its products and services through Merrill Lynch under a global distribution agreement, which following Bank of America’s acquisition of Merrill Lynch, runs throughuntil January 2014. After such term, the agreement will renew for one automatic three-year extension if certain conditions are met. See Note 15, Related Party Transactions, to the consolidated financial statements beginning on page F-1 of this Form 10-K.
BlackRock derives a substantial portion of its revenue from investment advisory and administration base fees, which are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of AUM, percentages of committed capital during investment periods of certain alternative products, or, in the case of certain real estate equity separate accounts,clients, net operating income generated by the underlying properties, and are affected by changes in AUM, including market appreciation or depreciation, foreign exchange gains or lossestranslation and net subscriptions or redemptions. Net subscriptions or redemptions represent the sum of new client assets, additional fundings from existing clients (including dividend reinvestment), withdrawals of assets from, and termination of, client accounts, and purchases and redemptions of mutualinvestment fund shares.shares and distributions to investors representing return of capital and return on investments to investors. Market appreciation or depreciation includes current income earned on, and changes in the fair value of, securities held in client accounts. Foreign exchange translation reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
BlackRock also earns revenue by lending securities on behalf of clients, primarily to brokerage institutions. The securities loaned are secured by collateral in the form of cash or securities, with minimums generally ranging from approximately 102% to 112% of the value of the loaned securities. The revenue earned is shared between BlackRock and the funds or other third-party accounts managed by the Company from which the securities are borrowed.
Investment advisory agreements for certain separate accounts and BlackRock’s alternative investment products provide for performance fees, based upon relative and/or absolute investment performance, in addition to base fees based on AUM. Investment advisory performance fees generally are earned after a given period of time orand when investment performance exceeds certaina contractual thresholds.threshold. As such, the timing of the recognition of performance fees may increase the volatility of BlackRock’s revenue and earnings. Historically, the magnitude of performance fees in the fourth quarter generally exceeds the first three calendar quarters in a year due to the higher number of products with performance measurement periods that end on December 31.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)
BlackRock provides a variety of risk management, investment analytic and investment system and advisory services to financial institutions, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts and government agencies. These services are provided under the brand nameBlackRock Solutionsand include a wide array of risk management services, valuation services relatingrelated to illiquid securities, disposition and workout assignments (including long-term portfolio liquidation assignments), strategic planning and execution, and enterprise investment system outsourcing to clients. Over $10 trillion of positions are processed on ourAladdin® operating platform, which serves as the investment system for clients.BlackRock and other institutional investors. Fees earned forBlackRock Solutionsand advisory services are determined using some, or all, of the following methods: (i) fixed fees, (ii) percentages of various attributes of advisory assets under management and (iii) performance fees if contractual thresholds are met.
BlackRock also builds upon its leadership position to meet the growing need for investment and risk management solutions. Through its scale and diversity of products, it is able to provide its clients with customized solutions including fiduciary outsourcing for liability-driven investments and overlay strategies for pension plan sponsors, balance sheet management and related services for insurance companies and target date and target return funds, as well as asset allocation portfolios, for retail investors. BlackRock is also able to service these clients via itsAladdin platform to provide risk management and other outsourcing services for institutional investors and custom and tailored solutions to address complex risk exposures.
39
Employee compensation and benefits expense includes salaries, commissions, temporary help, severance, deferred and incentive compensation, employer payroll taxes and related benefit costs.
Distribution and servicing costs include payments made to Merrill Lynch-affiliated entities under a global distribution agreement, to PNC-affiliated entities and Barclays, as well as other third parties, primarily associated with obtaining and retaining client investments in certain BlackRock products.
Direct fund expenses primarily consist of third party non-advisory expenses incurred by BlackRock related to certain funds for the use of index trademarks, reference data for indices, custodial services, fund administration, fund accounting, transfer agent services, shareholder reporting services, legal expenses, audit and tax services as well as other fund related expenses directly attributable to the non-advisory operations of the fund. These expenses may vary over time with fluctuations in AUM, number of shareholder accounts, or other attributes directly related to volume of business.
General and administration expenses includes marketing and promotional, occupancy and office related costs, portfolio services (including clearing expenses related to transition management services), technology, professional services, communications, closed-end fund launch costs and other general and administration expenses.
Non-operating income (expense) includes the effect of changes in the valuations on investments (excluding available-for-sale investments) and earnings on equity method investments, as well as interest and dividend income and interest expense. Other comprehensive income includes changes in valuations related to available-for-sale investments. BlackRock primarily holds investments in sponsored investment products that invest in a variety of asset classes, including private equity, distressed credit/mortgage debt securities, hedge funds and real estate. 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, including Federal Reserve Bank stock. BlackRock does not engage in proprietary trading or other investment activities that could conflict with the interests of its clients.
In addition, non-operating income (expense) includes the impact of changes in the valuations of consolidated sponsored investment funds and consolidated collateralized loan obligations. The portion of non-operating income (expense) not attributable to BlackRock is allocated to non-controlling interests on the consolidated statements of income.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Overview (continued)Assets Under Management
Operating expenses reflect employee compensation and benefits, portfolio administration and servicing costs, amortization of deferred mutual fund sales commissions, generalAUM for reporting purposes is generally based upon how investment advisory and administration expense and amortization of intangible assets. Employee compensation and benefits expense reflects salaries, deferred and incentive compensation, stock-based compensation and related benefit costs. Portfolio administration and servicing costs include payments madefees are calculated for each portfolio. Net asset values, total assets, committed assets or other measures may be used to Merrill Lynch-affiliated entities under the global distribution agreement and to PNC-affiliated entities, as well as to third parties, primarily associated with the administration and servicing of client investments in certain BlackRock products.determine portfolio AUM.
BlackRock holds 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 to establish a performance track record, for co-investment purposes or to hedge exposure to certain deferred compensation plans. Non-operating income (expense) includes the impact of the change in the valuations of these investments.
Assets Under Management
AUM for reporting purposes is generally 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 decreased approximately $49 billion, or 4%, to $1.307 trillion at December 31, 2008, compared with $1.357 trillion at December 31, 2007. The decline in AUM was attributable to $189 billion in net market depreciation and $28 billion in net foreign exchange losses, partially offset by $168 billion in net subscriptions.
Asset ClassBlackRock, Inc.
Assets Under Management(1)
| Year ended December 31, | Variance | ||||||||||||||
| (Dollar amounts in millions) | 2008 | 2007 | 2006 | 2008 vs. 2007 | 2007 vs. 2006 | ||||||||||
Fixed income | $ | 483,173 | $ | 513,020 | $ | 448,012 | (6 | )% | 15 | % | |||||
Equity and balanced | 280,821 | 459,182 | 392,708 | (39 | )% | 17 | % | ||||||||
Cash management | 338,439 | 313,338 | 235,768 | 8 | % | 33 | % | ||||||||
Alternative investment products | 59,723 | 71,104 | 48,139 | (16 | )% | 48 | % | ||||||||
Sub Total | 1,162,156 | 1,356,644 | 1,124,627 | (14 | )% | 21 | % | ||||||||
Advisory1 | 144,995 | — | — | NM | NM | ||||||||||
Total | $ | 1,307,151 | $ | 1,356,644 | $ | 1,124,627 | (4 | )% | 21 | % | |||||
| December 31, | Variance | |||||||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
Equity: | ||||||||||||||||||||
Active | $ | 334,532 | $ | 348,574 | $ | 152,216 | (4 | %) | 129 | % | ||||||||||
Institutional index | 911,775 | 806,082 | 51,076 | 13 | % | * | ||||||||||||||
iShares / Exchange-traded products | 448,160 | 381,399 | — | 18 | % | * | ||||||||||||||
Fixed income: | ||||||||||||||||||||
Active | 592,303 | 595,580 | 477,492 | (1 | %) | 25 | % | |||||||||||||
Institutional index | 425,930 | 357,557 | 3,873 | 19 | % | * | ||||||||||||||
iShares / Exchange-traded products | 123,091 | 102,490 | — | 20 | % | * | ||||||||||||||
Multi-asset class | 185,587 | 142,029 | 77,516 | 31 | % | 83 | % | |||||||||||||
Alternatives | 109,738 | 102,101 | 61,544 | 7 | % | 66 | % | |||||||||||||
Long-term | 3,131,116 | 2,835,812 | 823,717 | 10 | % | 244 | % | |||||||||||||
Cash management | 279,175 | 349,277 | 338,439 | (20 | %) | 3 | % | |||||||||||||
Sub-total | 3,410,291 | 3,185,089 | 1,162,156 | 7 | % | 174 | % | |||||||||||||
Advisory (2) | 150,677 | 161,167 | 144,995 | (7 | %) | 11 | % | |||||||||||||
Total | $ | 3,560,968 | $ | 3,346,256 | $ | 1,307,151 | 6 | % | 156 | % | ||||||||||
NM* –Not Meaningfulapplicable or the percentage is in excess of +/- 1,000%.
| (1) | Data reflects the reclassification of AUM into the current period presentation. |
Advisory AUM represents long-term portfolio liquidation assignments. |
40
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Assets Under Management (continued)
Mix of Assets Under Management
by Asset Class(1)
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Equity: | ||||||||||||
Active | 9 | % | 10 | % | 12 | % | ||||||
Institutional index | 26 | % | 25 | % | 4 | % | ||||||
iShares / Exchange-traded products | 13 | % | 11 | % | — | % | ||||||
Fixed income: | ||||||||||||
Active | 17 | % | 18 | % | 36 | % | ||||||
Institutional index | 12 | % | 11 | % | — | % | ||||||
iShares / Exchange-traded products | 3 | % | 3 | % | — | % | ||||||
Multi-asset class | 5 | % | 4 | % | 6 | % | ||||||
Alternatives | 3 | % | 3 | % | 5 | % | ||||||
Long-term | 88 | % | 85 | % | 63 | % | ||||||
Cash management | 8 | % | 10 | % | 26 | % | ||||||
Sub-total | 96 | % | 95 | % | 89 | % | ||||||
Advisory(2) | 4 | % | 5 | % | 11 | % | ||||||
Total | 100 | % | 100 | % | 100 | % | ||||||
| (1) | Data reflects the reclassification of AUM into the current period presentation. |
| (2) | Advisory AUM represents long-term portfolio liquidation assignments. |
AUM increased approximately $215 billion, or 6%, to $3.561 trillion at December 31, 2010, compared to $3.346 trillion at December 31, 2009. The growth in AUM was primarily attributable to $267 billion in net market appreciation, $131 billion of net subscriptions in long-term mandates and $17 billion increase due to foreign exchange movements, partially offset by $127 billion of BGI merger-related outflows (due to manager concentration considerations and active equity quantitative performance) and acquisition adjustments, $61 billion of net outflows in cash management products and $12 billion of net client distributions in advisory assignments.
Net market appreciation of $267 billion included $191 billion of net appreciation in equity products due to an increase in global equity markets, $55 billion in fixed income products due to current income and changes in interest rate spreads, $14 billion in multi-asset class products, and $7 billion in alternatives, primarily due to appreciation in precious metals, including silver and gold.
The $17 billion net increase in AUM from converting non-U.S. dollar denominated AUM into U.S. dollars was primarily due to the weakening of the U.S. dollar against the Japanese yen, Canadian dollar and Australian dollar, partially offset by the strengthening of the U.S. dollar against the euro and pound sterling.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Assets Under Management (continued)
The following table presents the component changes in BlackRock’s AUM for the years ended December 31, 2010, 2009 and 2008.
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | 2008 | |||||||||
Beginning assets under management | $ | 3,346,256 | $ | 1,307,151 | $ | 1,356,644 | ||||||
Net subscriptions/(redemptions) (1) | ||||||||||||
Long-term | 131,206 | 84,436 | (2,822 | ) | ||||||||
Cash management | (61,424 | ) | (49,122 | ) | 25,670 | |||||||
Advisory (2) | (12,021 | ) | 11,642 | 144,756 | ||||||||
Total net subscriptions/(redemptions) | 57,761 | 46,956 | 167,604 | |||||||||
BGI merger-related outflows (3) | (120,969 | ) | (2,894 | ) | — | |||||||
Acquisitions/reclassifications (4) | (6,160 | ) | 1,850,252 | — | ||||||||
Market appreciation/(depreciation) | 266,981 | 143,706 | (188,950 | ) | ||||||||
Foreign exchange (5) | 17,099 | 1,085 | (28,147 | ) | ||||||||
Total change | 214,712 | 2,039,105 | (49,493 | ) | ||||||||
Ending assets under management | $ | 3,560,968 | $ | 3,346,256 | $ | 1,307,151 | ||||||
| (1) | Includes distributions representing return of capital and return on investment to investors. |
| (2) | Advisory AUM represents long-term portfolio liquidation assignments. |
| (3) | Includes outflows due to manager concentration considerations and active equity quantitative performance. |
| (4) | Includes AUM acquired from Barclays in December 2009 and R3 Capital Management, LLC in April 2009 and Barclays acquisition adjustments and reclassifications to conform to current period combined AUM policy. |
| (5) | Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. |
BlackRock has historically grown aggregate AUM through organic growth and acquisitions. Management believes that the Company will be able to continue to grow AUM by focusing on strong investment performance, the efficient delivery of beta for index products, client service and by developing new products and new distribution capabilities.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Assets Under Management (continued)
The following table presents the component changes in BlackRock’s AUM(1) for the year ended December 31, 2010.
| (Dollar amounts in millions) | December 31, 2009 | Net subscriptions (redemptions)(2) | BGI merger- related outflows(3) | Acquisition/ reclassifications(4) | Market appreciation/ (depreciation) | Foreign exchange(5) | December 31, 2010 | |||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||
Active | $ | 348,574 | $ | 2,632 | $ | (54,490 | ) | $ | (3,920 | ) | $ | 40,670 | $ | 1,066 | $ | 334,532 | ||||||||||||
Institutional index | 806,082 | 44,570 | (44,907 | ) | (4,390 | ) | 104,152 | 6,268 | 911,775 | |||||||||||||||||||
iShares/ETPs(6) | 381,399 | 21,865 | — | — | 45,830 | (934 | ) | 448,160 | ||||||||||||||||||||
Fixed income: | ||||||||||||||||||||||||||||
Active | 595,580 | (22,143 | ) | (9,474 | ) | (3,922 | ) | 31,945 | 317 | 592,303 | ||||||||||||||||||
Institutional index | 357,557 | 39,148 | (10,408 | ) | 7,374 | 21,220 | 11,039 | 425,930 | ||||||||||||||||||||
iShares/ETPs | 102,490 | 19,008 | — | — | 2,195 | (602 | ) | 123,091 | ||||||||||||||||||||
Multi-asset class | 142,029 | 26,262 | (127 | ) | 3,550 | 13,917 | (44 | ) | 185,587 | |||||||||||||||||||
Alternatives | 102,101 | (136 | ) | (490 | ) | — | 7,170 | 1,093 | 109,738 | |||||||||||||||||||
Long-term | 2,835,812 | 131,206 | (119,896 | ) | (1,308 | ) | 267,099 | 18,203 | 3,131,116 | |||||||||||||||||||
Cash management | 349,277 | (61,424 | ) | (1,063 | ) | (4,852 | ) | (38 | ) | (2,725 | ) | 279,175 | ||||||||||||||||
Sub-total | 3,185,089 | 69,782 | (120,959 | ) | (6,160 | ) | 267,061 | 15,478 | 3,410,291 | |||||||||||||||||||
Advisory(7) | 161,167 | (12,021 | ) | (10 | ) | — | (80 | ) | 1,621 | 150,677 | ||||||||||||||||||
Total | $ | 3,346,256 | $ | 57,761 | $ | (120,969 | ) | $ | (6,160 | ) | $ | 266,981 | $ | 17,099 | $ | 3,560,968 | ||||||||||||
| (1) | Data reflects the reclassification of prior period AUM into the current period presentation. |
| (2) | Includes distributions representing return of capital and return on investment to investors. |
| (3) | Includes outflows due to manager concentration considerations and active equity quantitative performance. |
| (4) | Includes acquisition adjustments and reclasses of AUM acquired from Barclays in December 2009 and other reclassifications to conform to current period combined AUM policy. |
| (5) | Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. |
| (6) | Exchange-traded products (“ETPs”) |
| (7) | Advisory AUM represents long-term portfolio liquidation assignments. |
Business Outlook
The Company began 2011 with a substantially increased AUM base as compared with 2010 average AUM as a result of strong markets in second half of 2010 and 2010 organic growth in long-term products. BlackRock believes we are in an environment of economic growth and believes that equities in the United States could post double digit returns in 2011 for the third straight year. BlackRock will continue to actively monitor global corporate earnings growth, bank lending policies, changes in the labor markets, inflation expectations, and monetary policies.
The Company offers a broad range of equity, fixed income and alternative products which are designed to track various indices and products that target returns in excess of specified benchmarks or absolute returns. BlackRock’s broad set of product offerings and risk skills and tools allow us to work with clients to meet their investment objectives. While investing in fixed income and cash continue to be core to many clients portfolios, we are also seeing trends of re-risking into equities, implementation of barbell strategies comprised of beta, alpha and alternatives, and clients seeking investment solutions which we can help to meet by combining multi-asset class solutions with risk management.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Business Outlook (continued)
The following items could impact the Company’s results in 2011 and beyond:
AUM and Flows
As investors shift their preferences between asset classes and between active and passive investment styles, the Company’s broad product profile should enable it to retain and capture revenue as it has a wide array of offerings in multiple asset types and product styles. As equity markets continue to improve and as clients re-risk into beta and alpha equity products, which have higher yielding fee structures, BlackRock’s revenue and margin could benefit.
| • | BlackRock’s unique combination of index and active capabilities positions it well to assist companies in narrowing the gap on underfunded pension plans by implementing barbell strategies using a combination of index, alpha and alternative products. In addition, as retirement money moves away from defined benefit plans into defined contributions plans and ultimately to individuals, BlackRock is well positioned to offer individual investment options with itsLifePath® target date portfolios and wide array of ETFs and other mutual fund products. |
| • | Exchange-traded funds are playing an increasingly important role in asset allocation and advisory portfolios for institutional and retail investors. The overall size of the global exchange-traded funds market is expected to continue to grow at a significant rate for several years. BlackRock has a leading market share due to its large array of products and assets under management in this market. As additional asset managers enter the marketplace to offer exchange traded funds they may offer similar products at a lower fee structures. We believe that many factors beyond pricing influence investor preferences. As a first mover in several products, manyiSharesproducts have achieved a critical mass, providing both liquidity to investors and minimizing additional costs to investors in the form of bid-ask spreads and lower discounts/premiums on the ETFs traded market prices as compared with the underlying unit net asset values. Investors also value an ETF’s ability to closely track its benchmark and the information, tools and education provided byiShares. |
The levels of cash management assets may continue to decline from year-end levels as we expect rates to remain low and if clients continue to re-risk their portfolios. The Company’s diversified global product offerings, client service and independent advice may enable it to retain a portion of these assets.
Outflows related to manager concentration considerations as a result of the BGI Transaction, many of which were low basis point assignments, are expected to be largely behind us by the end of first quarter 2011. Outflows as a result of the historical performance of the legacy BGI active quantitative equity strategies are expected to abate as performance improves under the new leadership of the strategy.
Regulatory Reform
The regulatory environment is continuing to evolve for financial institutions as well as money market funds with the intent of the reform supported by BlackRock, to protect the industry and our clients. The specific details of regulatory reform may effect the competitive environment and may provide BlackRock with risks as well as opportunities. For example, BlackRock is continuing to explore the creation of an internal trading platform on its enterprise systems to cross trades within its AUM and potentially among other client transactions, which would result in a reduction of transaction costs and ultimately increased performance returns for our clients.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Business Outlook (continued)
Performance fees and BRS/advisory fees
A continued return to higher market levels may enable the Company’s alternative investment products with absolute return objectives to contribute additional performance fee revenue. While most of the absolute return AUM eligible for performance fees is above “high water marks”, certain products are still dependent upon achieving high water marks to be performance fee eligible.
| • | The on-going aftermath of the global liquidity crunch and the associated market disruption gave rise to greater demand for our risk tools and advisory services, combining our extensive capital markets and structuring expertise with rigorous modeling and analytical capabilities. In 2011, we expect to continue to see strong demand for ourAladdin operating platform and our comprehensive risk reporting from sophisticated institutional investors and governmental agencies investing in longer term risk management solutions as well as strong demand for financial market advisory services. |
Future opportunities
The Company plans to continue to focus on increasing the recognition of its global brand to position itself for globalization while reinvesting in the business for future growth opportunities where the cost in the current period will precede the expected future revenue.
As BlackRock seeks to grow its alternative product offerings, BlackRock may choose to seed or co-invest in additional products to establish track records and to align with clients’ interests. BlackRock acts as an independent asset manager and does not engage in proprietary trading or deposit taking activities.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009
Operating Income and Operating Margin Overview
GAAP
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Revenue | $ | 8,612 | $ | 4,700 | $ | 3,912 | 83 | % | ||||||||
Expenses | 5,614 | 3,422 | 2,192 | 64 | % | |||||||||||
Operating income | $ | 2,998 | $ | 1,278 | $ | 1,720 | 135 | % | ||||||||
Operating margin | 34.8 | % | 27.2 | % | 7.6 | % | 28 | % | ||||||||
Operating income
Operating income totaled $3.0 billion for the year ended December 31, 2010, an increase of $1.7 billion compared with operating income for the year ended December 31, 2009. Operating income for the year ended December 31, 2010 included the full year effect of revenue and expenses related to the December 1, 2009 acquisition of BGI and $90 million of BGI integration costs as compared to $183 million of BGI transaction/integration costs for the year ended December 31, 2009. The transaction/integration expenses are not part of BlackRock’s on-going business and are principally comprised of compensation expense, legal fees, advisory payments, occupancy costs, marketing and promotional and consulting expenses.
The increase in operating income for the year ended December 31, 2010 is attributable to the $3.9 billion increase in revenue primarily related to an increase in base and performance fees associated with the AUM acquired in the BGI Transaction and growth in long-term AUM, which included market appreciation and net new business, partially offset by a $2.2 billion net increase in operating expenses related to increases in employee compensation and benefits, general and administration expenses and direct fund expenses due to the BGI Transaction.
Operating margin
The Company’s operating margin was 34.8% for the year ended December 31, 2010, compared with 27.2% for the year ended December 31, 2009.
The increase in operating margin for year ended December 31, 2010 included the positive effects of synergies related to the BGI Transaction, growth in long-term AUM driven by market appreciation, a $93 million decrease in BGI transaction/integration costs, a decline of $22 million in restructuring charges and a $17 million change in foreign currency remeasurement costs/benefits, which more than offset decreases to margin related to a $131 million increase in stock-based compensation expense related to additional grants to a larger number of employees at the end of January 2010, $20 million in costs for a U.K. regulatory assessment, a $20 million expense related to a contribution to a donor-advised charitable fund, a $16 million increase in occupancy costs due to the commencement of rent for Drapers Gardens, a $14 million increase of closed-end fund launch costs/commissions and a $13 million increase in amortization of intangible assets related to the finite-lived management contracts acquired in the BGI Transaction, as well as increased investments to grow the business.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Operating Income and Operating Margin Overview (continued)
As Adjusted
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Revenue | $ | 8,612 | $ | 4,700 | $ | 3,912 | 83 | % | ||||||||
Expenses | 5,445 | 3,130 | 2,315 | 74 | % | |||||||||||
Operating income (1) | $ | 3,167 | $ | 1,570 | $ | 1,597 | 102 | % | ||||||||
Operating margin (1) | 39.3 | % | 38.2 | % | 1.1 | % | 3 | % | ||||||||
| (1) | Operating income, as adjusted, and operating margin, as adjusted, are described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Operating income
Operating income, as adjusted, totaled $3.2 billion for the year ended December 31, 2010, which was an increase of $1.6 billion compared to operating income for the year ended December 31, 2009.
The increase in operating income, as adjusted, for the year ended December 31, 2010 is attributable to the $3.9 billion increase in revenue primarily related to an increase in base and performance fees associated with the AUM acquired in the BGI Transaction and growth in long-term AUM, which included market appreciation and net new business, partially offset by a $2.3 billion net increase in operating expenses primarily related to increases in employee compensation and benefits, general and administration expenses and direct fund expenses due to the BGI Transaction.
Operating margin
Operating margin, as adjusted, was 39.3% and 38.2% for the years ended December 31, 2010 and 2009, respectively.
The increase in operating margin, as adjusted, for year ended December 31, 2010 included the positive effects of synergies related to the BGI Transaction, growth in long-term AUM driven by market appreciation, which more than offset decreases to margin related to a $132 million increase in stock-based compensation expense related to additional grants to a larger number of employees at the end of January 2010, $20 million in costs for a U.K. regulatory assessment, a $20 million expense related to a contribution to a donor-advised charitable fund, a $16 million increase in occupancy costs due to the commencement of rent for Drapers Gardens and a $13 million increase in amortization of intangible assets related to the finite-lived management contracts acquired in the BGI Transaction, as well as increased investments to grow the business.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Revenue
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Investment advisory, administration fees and securities lending revenue: | ||||||||||||||||
Equity: | ||||||||||||||||
Active | $ | 1,848 | $ | 1,230 | $ | 618 | 50 | % | ||||||||
Institutional index | 424 | 56 | 368 | 657 | % | |||||||||||
iShares / Exchange-traded products | 1,660 | 136 | 1,524 | * | ||||||||||||
Fixed income: | ||||||||||||||||
Active | 1,047 | 865 | 182 | 21 | % | |||||||||||
Institutional index | 166 | 16 | 150 | 938 | % | |||||||||||
iShares / Exchange-traded products | 263 | 19 | 244 | * | ||||||||||||
Multi-asset class | 740 | 479 | 261 | 54 | % | |||||||||||
Alternatives | 632 | 400 | 232 | 58 | % | |||||||||||
Cash management | 510 | 625 | (115 | ) | (18 | %) | ||||||||||
Total | 7,290 | 3,826 | 3,464 | 91 | % | |||||||||||
Investment advisory performance fees: | ||||||||||||||||
Equity | 123 | 46 | 77 | 167 | % | |||||||||||
Fixed income | 55 | 21 | 34 | 162 | % | |||||||||||
Multi-asset class | 33 | 20 | 13 | 65 | % | |||||||||||
Alternatives | 329 | 115 | 214 | 186 | % | |||||||||||
Total | 540 | 202 | 338 | 167 | % | |||||||||||
BlackRock Solutionsand advisory | 460 | 477 | (17 | ) | (4 | %) | ||||||||||
Distribution fees | 116 | 100 | 16 | 16 | % | |||||||||||
Other revenue | 206 | 95 | 111 | 117 | % | |||||||||||
Total revenue | $ | 8,612 | $ | 4,700 | $ | 3,912 | 83 | % | ||||||||
* – Not applicable or the percentage is in excess of +/- 1,000%.
Total revenue for the year ended December 31, 2010 increased $3,912 million, or 83%, to $8,612 million, compared with $4,700 million for the year ended December 31, 2009. The $3,912 million increase was the result of a $3,464 million increase in total investment advisory, administration fees and securities lending revenue, a $338 million increase in performance fees, a $111 million increase in other revenue and a $16 million increase in distribution fees, partially offset by a $17 million decrease inBlackRock Solutions and advisory revenue.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Revenue (continued)
Investment Advisory, Administration Fees and Securities Lending Revenue
Investment advisory, administration fees and securities lending revenues increased $3,464 million to $7,290 million for the year ended December 31, 2010, compared to $3,826 million for the year ended December 31, 2009 primarily related to fees earned on products acquired in the BGI acquisition as well as organic growth in long-term AUM due to market appreciation and net new business, which included securities lending revenue of $325 million for the year ended December 31, 2010, compared to $36 million for the year ended December 31, 2009.
The $3,464 million net increase in investment advisory, administration fees and securities lending revenues consisted of $1,524 million in equityiShares / Exchange-traded products, $618 million in active equity products and $368 million in institutional index equity products, $244 million in fixed incomeiShares / exchange-traded products, $182 million in active fixed income products and $150 million in institutional index fixed income products, $261 million in multi-asset class products and $232 million in alternatives investment products, partially offset by a $115 million decrease in cash management products, due to lower average AUM.
Performance Fees
Investment advisory performance fees increased $338 million, or 167%, to $540 million for the year ended December 31, 2010, as compared to $202 million for the year ended December 31, 2009, primarily due to an increase in performance fees earned upon exceeding absolute investment or relative investment return thresholds on alternative multi-strategy, fixed income and equity hedge funds and separate accounts across regional/country equity strategies, fixed income and multi-asset class products.
BlackRock Solutions and Advisory
BlackRock Solutions and advisory revenue for the year ended December 31, 2010 decreased $17 million, or 4%, compared with the year ended December 31, 2009. The decrease inBlackRock Solutions and advisory revenue was primarily due to a decline in non-recurring advisory assignments, as well as the effect of a decline in advisory AUM due to distributions in portfolio liquidation assignments, which have AUM based fees, partially offset by additionalAladdin, risk management solutions and investment accounting mandates. Revenue earned on advisory assignments was comprised of advisory and portfolio structuring assignment fees and ongoing fees based on AUM of the respective portfolio assignments.
Distribution Fees
Distribution fees of $116 million for the year ended December 31, 2010 increased $16 million, as compared to $100 million for the year ended December 31, 2009. The increase primarily is the result of higher AUM in certain share classes ofBlackRock Funds.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Revenue (continued)
Other Revenue
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Other revenue: | ||||||||||||||||
Transition management service fees | $ | 74 | $ | 22 | $ | 52 | 236 | % | ||||||||
Commissions revenue | 35 | 28 | 7 | 25 | % | |||||||||||
iPath marketing fees (1) | 27 | 2 | 25 | * | ||||||||||||
Equity method investment earnings (2) | 22 | 15 | 7 | 47 | % | |||||||||||
Custody fees | 13 | 1 | 12 | * | ||||||||||||
Fund accounting | 5 | 9 | (4 | ) | (44 | %) | ||||||||||
Other miscellaneous revenue | 30 | 18 | 12 | 67 | % | |||||||||||
Total other revenue | $ | 206 | $ | 95 | $ | 111 | 117 | % | ||||||||
* –Not applicable or the percentage is in excess of +/- 1,000%.
| (1) | Related to exchange-traded notes issued by Barclays. |
| (2) | Related to operating advisory company investments. |
Other revenue of $206 million for the year ended December 31, 2010 increased $111 million, or 117%, compared with $95 million for the year ended December 31, 2009. The increase in other revenue was primarily the result of a $52 million increase in fees, which excludes related portfolio service costs, earned for transition management services due to an increase in transactions to execute transitions of equity and fixed income mandates, a $25 million increase in marketing fees earned from Barclays for services to distribute Barclays iPath products, $12 million increase for custody fees earned onLifePath products (a portion of which is paid to a third party sub-custodian and reflected within direct fund expenses), a $7 million increase in BlackRock’s share of underlying earnings from certain operating advisory company investments and a $7 million increase in commissions revenue as a result of unit trust and open-end mutual fund class A sales commissions.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Expenses
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Expenses: | ||||||||||||||||
Employee compensation and benefits | $ | 3,097 | $ | 1,802 | $ | 1,295 | 72 | % | ||||||||
Distribution and servicing costs | �� | 408 | 477 | (69 | ) | (14 | %) | |||||||||
Amortization of deferred sales commissions | 102 | 100 | 2 | 2 | % | |||||||||||
Direct fund expenses | 493 | 95 | 398 | 419 | % | |||||||||||
General and administration | 1,354 | 779 | 575 | 74 | % | |||||||||||
Restructuring charges | — | 22 | (22 | ) | (100 | %) | ||||||||||
Amortization of intangible assets | 160 | 147 | 13 | 9 | % | |||||||||||
Total expenses, GAAP | $ | 5,614 | $ | 3,422 | $ | 2,192 | 64 | % | ||||||||
Total expenses, GAAP | $ | 5,614 | $ | 3,422 | $ | 2,192 | 64 | % | ||||||||
Less non-GAAP expense adjustments: | ||||||||||||||||
BGI transaction/integration costs | ||||||||||||||||
Employee compensation and benefits | 25 | 60 | (35 | ) | (58 | %) | ||||||||||
General and administration | 65 | 123 | (58 | ) | (47 | %) | ||||||||||
Total BGI transaction/integration costs | 90 | 183 | (93 | ) | (51 | %) | ||||||||||
PNC LTIP funding obligation | 58 | 59 | (1 | ) | (2 | %) | ||||||||||
Merrill Lynch compensation contribution | 10 | 10 | — | — | % | |||||||||||
Restructuring charges | — | 22 | (22 | ) | (100 | %) | ||||||||||
Compensation expense related to appreciation/(depreciation) on deferred compensation plans | 11 | 18 | (7 | ) | (39 | %) | ||||||||||
Total non-GAAP expense adjustments | 169 | 292 | (123 | ) | (42 | %) | ||||||||||
Total expenses, as adjusted | $ | 5,445 | $ | 3,130 | $ | 2,315 | 74 | % | ||||||||
Total GAAP expenses increased $2,192 million, or 64%, to $5,614 million for the year ended December 31, 2010, compared to $3,422 million for the year ended December 31, 2009. Excluding certain items deemed non-recurring by management or transactions that ultimately will not affect the Company’s book value, total expenses, as adjusted, increased $2,315 million, or 74%. The increase in total expenses, as adjusted, is primarily attributable to the BGI Transaction including increases in employee compensation and benefits, general and administration expenses and direct fund expenses, partially offset by a reduction of distribution and servicing costs.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Expenses (continued)
Employee Compensation and Benefits
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Employee compensation and benefits, GAAP | $ | 3,097 | $ | 1,802 | $ | 1,295 | 72 | % | ||||||||
Less non-GAAP expense adjustments: | ||||||||||||||||
BGI transaction/integration costs | 25 | 60 | (35 | ) | (58 | %) | ||||||||||
PNC LTIP funding obligation | 58 | 59 | (1 | ) | (2 | %) | ||||||||||
Merrill Lynch compensation contribution | 10 | 10 | — | — | % | |||||||||||
Compensation expense related to appreciation/ (depreciation) on deferred compensation plans | 11 | 18 | (7 | ) | (39 | %) | ||||||||||
Total non-GAAP expense adjustments | 104 | 147 | (43 | ) | (29 | %) | ||||||||||
Employee compensation and benefits, as adjusted | $ | 2,993 | $ | 1,655 | $ | 1,338 | 81 | % | ||||||||
Employee compensation and benefits expense increased $1,295 million, or 72%, to $3,097 million, for the year ended December 31, 2010, compared to $1,802 million for the year ended December 31, 2009.
Employee compensation and benefits, as adjusted, increased by $1,338 million after excluding the decrease of $43 million of non-GAAP adjustments primarily related to a decrease in BGI integration costs. The $1,338 million increase in employee compensation and benefits expense for the year ended December 31, 2010 was attributable to a $721 million increase in incentive compensation and a $617 million increase in salaries, benefits, payroll taxes, temporary help and commissions. The increase in incentive compensation is primarily associated with the increase in operating income after excluding the BGI integration costs, a $132 million increase in stock-based compensation expense related to the effect of additional grants to a larger number of employees at the end of January 2010, offset by an $8 million decrease in other deferred compensation. The $617 million increase in salaries, benefits and payroll taxes reflects an increase in the number of employees primarily resulting from the BGI Transaction as well as growth in number of employees subsequent to the BGI Transaction. Employees at December 31, 2010 totaled approximately 9,100 as compared to approximately 8,600 at December 31, 2009.
Distribution and Servicing Costs
Distribution and servicing costs decreased $69 million to $408 million for the year ended December 31, 2010, compared to $477 million for the year ended December 31, 2009. These costs include payments to Bank of America/Merrill Lynch under a global distribution agreement, PNC and Barclays, as well as other third parties, primarily associated with the distribution and servicing of client investments in certain BlackRock products. The $69 million decrease primarily related to lower levels of distribution payments due to lower levels of average cash management AUM and a decrease of costs due to an increase in advisory fee waivers for certain cash management funds serviced by Merrill Lynch.
Distribution and servicing costs for the year ended December 31, 2010 included $246 million of costs attributable to Bank of America/Merrill Lynch and affiliates, and $10 million of costs attributable to PNC and affiliates as compared to $349 million and $19 million, respectively, in the year ended December 31, 2009. Distribution and servicing costs related to other third parties, including Barclays, increased $43 million to $152 million for the year ended December 31, 2010, as compared to $109 million for the year ended December 31, 2009 due to an expansion of distribution platforms and higher long-term AUM.
Amortization of Deferred Sales Commissions
Amortization of deferred sales commissions increased $2 million to $102 million for the year ended December 31, 2010, as compared to $100 million for the year ended December 31, 2009. The increase in amortization of deferred sales commissions was primarily the result of higher sales and redemptions in certain share classes of U.S. open-end mutual funds.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Expenses (continued)
Direct Fund Expenses
Direct fund expenses increased $398 million primarily related to the addition of legacy BGI funds subject to these arrangements under which BlackRock pays certain fund expenses.
General and Administration Expenses
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
General and administration expenses(1), GAAP: | ||||||||||||||||
Marketing and promotional | $ | 328 | $ | 85 | $ | 243 | 286 | % | ||||||||
Occupancy and office related | 317 | 182 | 135 | 74 | % | |||||||||||
Portfolio services | 177 | 100 | 77 | 77 | % | |||||||||||
Technology | 152 | 114 | 38 | 33 | % | |||||||||||
Professional services | 115 | 162 | (47 | ) | (29 | %) | ||||||||||
Communications | 49 | 26 | 23 | 88 | % | |||||||||||
Regulatory, filing and license fees | 34 | 5 | 29 | 580 | % | |||||||||||
Charitable contribution | 20 | — | 20 | * | ||||||||||||
Closed-end fund launch costs | 15 | 2 | 13 | 650 | % | |||||||||||
Other general and administration | 147 | 103 | 44 | 43 | % | |||||||||||
Total general and administration expenses, GAAP | $ | 1,354 | $ | 779 | $ | 575 | 74 | % | ||||||||
Less BGI transaction and integration costs: | ||||||||||||||||
Marketing and promotional | $ | 33 | $ | 11 | $ | 22 | 200 | % | ||||||||
Occupancy and office related | 12 | 1 | 11 | * | ||||||||||||
Technology | 2 | 7 | (5 | ) | (71 | %) | ||||||||||
Professional services | 12 | 91 | (79 | ) | (87 | %) | ||||||||||
Other general and administration | 6 | 13 | (7 | ) | (54 | %) | ||||||||||
Total BGI transaction and integration costs | $ | 65 | $ | 123 | ($ | 58 | ) | (47 | %) | |||||||
General and administration expenses, as adjusted: | ||||||||||||||||
Marketing and promotional | $ | 295 | $ | 74 | $ | 221 | 299 | % | ||||||||
Occupancy and office related | 305 | 181 | 124 | 69 | % | |||||||||||
Portfolio services | 177 | 100 | 77 | 77 | % | |||||||||||
Technology | 150 | 107 | 43 | 40 | % | |||||||||||
Professional services | 103 | 71 | 32 | 45 | % | |||||||||||
Communications | 49 | 26 | 23 | 88 | % | |||||||||||
Regulatory, filing and license fees | 34 | 5 | 29 | 580 | % | |||||||||||
Charitable contribution | 20 | — | 20 | * | ||||||||||||
Closed-end fund launch costs | 15 | 2 | 13 | 650 | % | |||||||||||
Other general and administration | 141 | 90 | 51 | 57 | % | |||||||||||
Total general and administration expenses, as adjusted | $ | 1,289 | $ | 656 | $ | 633 | 96 | % | ||||||||
* – Not applicable or the percentage is in excess of +/- 1,000%.
| (1) | Prior year data reflects certain reclassifications to conform to the current year presentation. |
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Expenses (continued)
General and Administration Expenses (continued)
General and Administration Expenses, GAAP
General and administration expenses increased $575 million, or 74%, to $1,354 million, for the year ended December 31, 2010 compared with $779 million for the year ended December 31, 2009, primarily due to the BGI Transaction.
BGI Transaction and Integration Costs
BGI integration costs of $65 million for the year ended December 31, 2010 decreased $58 million as compared with $123 million for the year ended December 31, 2009 primarily due to advisory and legal costs incurred for the year ended December 31, 2009, partially offset by higher re-branding costs in 2010.
General and Administration Expenses, as Adjusted
Excluding the BGI transaction and integration expenses, general and administration expenses, as adjusted, of $1,289 million, increased $633 million, or 96%, for the year ended December 31, 2010 compared with $656 million for the year ended December 31, 2009.
Marketing and promotional expenses increased $221 million, primarily due to an increase in global and exchange-traded fund marketing expenses, which included travel, promotional and rebranding and advertising expenses.
Occupancy and office related expenses increased $124 million primarily related to the expansion of the Company due to the BGI Transaction, including expenses related to Drapers Gardens and an increase in lease impairments as a result of vacating certain locations in the year ended December 31, 2010.
Portfolio service costs increased $77 million, or 77%, to $177 million, due to an increase in market data and research expenses as well as transition management execution and clearing expenses.
Technology expenses increased $43 million, or 40%, to $150 million, primarily due to an increase in software licensing and maintenance and hardware depreciation expenses.
Professional services increased $32 million, or 45%, to $103 million compared with $71 million for the year ended December 31, 2009 primarily related to consulting, accounting/tax and legal costs.
Communications increased $23 million, primarily related to the expansion of the Company due to the BGI Transaction.
Regulatory, filing and license fees increased $29 million, primarily due to a $20 million U.K. regulatory assessment.
Charitable contribution increased $20 million, which is related to a contribution to a donor advised charitable fund.
Closed-end fund launch costs (excluding compensation costs) increased $13 million as compared to the year ended December 31, 2009 due to the Build America Bond Trust fund, which launched during the year ended December 31, 2010 and generated approximately $1.2 billion in AUM.
Other general and administration expenses increased $51 million, or 57%, to $141 million compared with $90 million for the year ended December 31, 2009, due to an increase of $86 million related to growth of the Company including recruiting, training and insurance costs, as well as costs for potential operating errors/fines, partially offset by a $17 million change in foreign currency remeasurement costs/benefits from $11 million of costs in the year ended December 31, 2009 to a $6 million benefit in the year ended December 31, 2010, a $9 million decline in an expense for a potentially uncollectible receivable recorded in 2009 and $9 million of lower provisions related to an outstanding loan to Anthracite Capital Inc.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Expenses (continued)
Restructuring Charges
For the year ended December 31, 2009, BlackRock recorded pre-tax restructuring charges of $22 million, primarily related to severance, outplacement costs, occupancy costs and accelerated amortization of certain previously granted stock awards associated with a reduction in work force and reengineering efforts.
Amortization of Intangible Assets
Amortization of intangible assets increased $13 million to $160 million for the year ended December 31, 2010, as compared to $147 million for the year ended December 31, 2009. The increase in amortization of intangible assets reflects amortization of finite-lived management contracts acquired in the BGI Transaction.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Assets Under ManagementNon-operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009
Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests
Non-operating income (expense), less net income (loss) attributable to non-controlling interests for the years ended December 31, 2010 and 2009 was as follows:
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Non-operating income (expense), GAAP basis | $ | 23 | ($ | 6 | ) | $ | 29 | * | ||||||||
Less: Net income (loss) attributable to NCI(1) | (13 | ) | 22 | (35 | ) | * | ||||||||||
Non-operating income (expense)(2) | 36 | (28 | ) | 64 | * | |||||||||||
Compensation expense related to (appreciation)/depreciation on deferred compensation plans | (11 | ) | (18 | ) | 7 | 39 | % | |||||||||
Non-operating income (expense), as adjusted(2) | $ | 25 | ($ | 46 | ) | $ | 71 | * | ||||||||
* –Not applicable or the percentage is in excess of +/- 1,000%.
| (1) | Includes a $35 million loss attributable to consolidated variable interest entities for the year ended December 31, 2010. |
| (2) | Net of net income (loss) attributable to non-controlling interests. |
The components of non-operating income (expense), less net income (loss) attributable to non-controlling interests, for the years ended December 31, 2010 and 2009 were as follows:
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Net gain (loss) on investments(1) | ||||||||||||||||
Private equity | $ | 31 | $ | 9 | $ | 22 | 244 | % | ||||||||
Real estate | 17 | (114 | ) | 131 | * | |||||||||||
Distressed credit/mortgage funds | 66 | 100 | (34 | ) | (34 | %) | ||||||||||
Hedge funds/funds of hedge funds | 18 | 18 | — | — | % | |||||||||||
Other investments(2) | 14 | (11 | ) | 25 | * | |||||||||||
Sub-total | 146 | 2 | 144 | * | ||||||||||||
Investments related to deferred compensation plans | 11 | 18 | (7 | ) | (39 | %) | ||||||||||
Total net gain (loss) on investments | 157 | 20 | 137 | 685 | % | |||||||||||
Interest and dividend income | 29 | 20 | 9 | 45 | % | |||||||||||
Interest expense | (150 | ) | (68 | ) | (82 | ) | 121 | % | ||||||||
Net interest expense | (121 | ) | (48 | ) | (73 | ) | 152 | % | ||||||||
Total non-operating income (expense)(1) | 36 | (28 | ) | 64 | * | |||||||||||
Compensation expense related to (appreciation)/depreciation on deferred compensation plans | (11 | ) | (18 | ) | 7 | 39 | % | |||||||||
Non-operating income (expense), as adjusted(1) | $ | 25 | ($ | 46 | ) | $ | 71 | * | ||||||||
* –Not applicable or the percentage is in excess of +/- 1,000%.
| (1) | Net of net income (loss) attributable to non-controlling interests. |
| (2) | Includes net gains / (losses) related to equity and fixed income investments and BlackRock’s seed capital hedging program. |
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Non-operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Market depreciationNon-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests (continued)
Non-operating income, less net income (loss) attributable to non-controlling interests, increased $64 million to $36 million for the year ended December 31, 2010, as compared to $28 million net non-operating expense for the year ended December 31, 2009. The $36 million non-operating income, net of $189 billionnon-controlling interests for the year ended December 31, 2010 was comprised of $146 million of net gains on co-investments and seed investments and $11 million of appreciation related to hedges of deferred compensation, partially offset by $121 million of net interest expense.
The $146 million net gain on investments, less non-controlling interests, related to the Company’s co-investments and seed investments, included net gains in distressed credit/mortgage funds of $66 million, private equity investments of $31 million, real estate equity/debt products of $17 million, hedge funds/funds of hedge funds of $18 million and other investments of $14 million.
Net gain on co-investments and seed investments increased $144 million from the year ended December 31, 2009 primarily due to depreciationan increase in real estate valuations as compared with 2009, which included significant valuation declines in real estate equity and balanced AUMdebt co-investments.
Net interest expense was $121 million, an increase of $160$73 million primarily due to an increase in interest expense related to the December 2009 issuances of $2.5 billion of long-term notes, partially offset by higher dividend income related to an investment required for regulatory purposes.
Income Tax Expense
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
| (Dollar amounts in millions) | GAAP | GAAP | % Change | As adjusted | As adjusted | % Change | ||||||||||||||||||
Income before income taxes(1) | $ | 3,034 | $ | 1,250 | 143 | % | $ | 3,192 | $ | 1,524 | 109 | % | ||||||||||||
Income tax expense | $ | 971 | $ | 375 | 159 | % | $ | 1,053 | $ | 503 | 109 | % | ||||||||||||
Effective tax rate | 32.0 | % | 30.0 | % | 33.0 | % | 33.0 | % | ||||||||||||||||
| (1) | Net of net income (loss) attributable to non-controlling interests. |
Income tax expense increased $596 million in the year ended December 31, 2010 as equity markets declinedcompared to the year ended December 31, 2009. The effective income tax rates for the years ended December 31, 2010 and 2009 were 32.0% and 30.0%, respectively.
The year ended December 31, 2010 included the effect of third quarter 2010 tax legislation enacted in the United Kingdom, which resulted in approximately a $30 million tax benefit revaluation of certain net deferred income tax liabilities primarily related to acquired intangible assets, which has been excluded from net income attributable to BlackRock, Inc., as adjusted, as it was a non-recurring enacted tax legislation change that does not have a cash flow impact and to ensure comparability of this information to prior reporting periods. In addition, the year ended December 31, 2010 included the effect of favorable tax rulings and the resolution of certain outstanding tax positions in third quarter 2010.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Non-operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Income Tax Expense (continued)
The year ended December 31, 2009 included the effect of third quarter 2009 legislation enacted primarily with respect to New York City corporate income taxes, effective January 1, 2009, which resulted in approximately a $45 million tax benefit revaluation of net deferred income tax liabilities primarily related to acquired intangible assets, which has been excluded from net income attributable to BlackRock, Inc., as adjusted, as it was a non-recurring enacted tax legislation change that does not have a cash flow impact and to ensure comparability of this information to prior reporting periods. The year ended December 31, 2009 also included $25 million of tax benefits primarily related to a favorable tax ruling and the final resolution of outstanding tax matters.
The Company succeeded to a $580 million California net operating loss carryforward for fiscal year 2007, 2008 and 2009 in connection with the BGI Transaction, for which it has not recorded a deferred income tax asset because of certain technical matters related to the predecessor’s unitary tax returns. The Company will continue to assess these matters, which may result in future tax benefits which, based on current factors, could approximate $40 million, if they are resolved favorably.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Net Income Attributable to BlackRock, Inc.
The components of net income attributable to BlackRock, Inc. and net income attributable to BlackRock, Inc., as adjusted, for the years ended December 31, 2010 and 2009 are as follows:
| Year ended December 31, | % Change | Year ended December 31, | % Change | |||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
| (Dollar amounts in millions, except per share data) | GAAP | GAAP | As adjusted | As adjusted | ||||||||||||||||||||
Operating income | $ | 2,998 | $ | 1,278 | 135 | % | $ | 3,167 | $ | 1,570 | 102 | % | ||||||||||||
Non-operating income (expense)(1) | 36 | (28 | ) | * | 25 | (46 | ) | * | ||||||||||||||||
Income tax expense | (971 | ) | (375 | ) | 159 | % | (1,053 | ) | (503 | ) | 109 | % | ||||||||||||
Net income attributable to BlackRock, Inc. | $ | 2,063 | $ | 875 | 136 | % | $ | 2,139 | $ | 1,021 | 110 | % | ||||||||||||
% attributable to common shares | 99 | % | 97 | % | 99 | % | 97 | % | ||||||||||||||||
Net income attributable to common shares | $ | 2,033 | $ | 853 | 138 | % | $ | 2,109 | $ | 995 | 112 | % | ||||||||||||
Diluted weighted-average common shares outstanding(2) | 192,692,047 | 139,481,449 | 38 | % | 192,692,047 | 139,481,449 | 38 | % | ||||||||||||||||
| Diluted EPS components: | ||||||||||||||||||||||||
Operating income | $ | 10.28 | $ | 5.75 | 79 | % | $ | 10.85 | $ | 7.17 | 51 | % | ||||||||||||
Non-operating income (expense)(1) | 0.12 | (0.13 | ) | * | 0.09 | (0.21 | ) | * | ||||||||||||||||
Income tax benefit | 0.15 | 0.49 | (69 | %) | — | 0.17 | (100 | %) | ||||||||||||||||
Diluted earnings per common share | $ | 10.55 | $ | 6.11 | 73 | % | $ | 10.94 | $ | 7.13 | 53 | % | ||||||||||||
* –Not applicable or the percentage is in excess of +/- 1,000%.
| (1) | Net of net income (loss) attributable to non-controlling interests (redeemable and nonredeemable). |
| (2) | Unvested RSUs that contain non-forfeitable rights to dividends are not included as they are deemed participating securities in accordance with GAAP. Upon vesting of the participating RSUs the shares are added to the weighted average shares outstanding which results in an increase to the percentage of net income attributable to common shares. In addition, series A, B, C, and D non-voting preferred stock are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations. |
GAAP
Net income attributable to BlackRock, Inc. for the year ended December 31, 2010 includes operating income of $2,998 million, or $10.28 per diluted common share, non-operating income, less net income attributable to non-controlling interests, of $36 million, or $0.12 per diluted common share, and $30 million, or $0.15 per diluted common share, of tax benefits related to a United Kingdom income tax law change. Net income attributable to BlackRock, Inc. totaled $2,063 million, or $10.55 per diluted common share, for the year ended December 31, 2010, which was an increase of $1,188 million, or $4.44 per diluted common share, compared to the year ended December 31, 2009.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2010, as compared with the year ended December 31, 2009 (continued)
Net Income Attributable to BlackRock, Inc. (continued)
Net income attributable to BlackRock, Inc. of $2,063 million for the year ended December 31, 2010 included the after-tax effect of the BGI integration costs of $59 million, the portion of certain LTIP awards, which will be funded through a capital contribution of BlackRock stock held by PNC of $40 million, and certain compensation of former MLIM employees of $7 million to be funded through a cash contribution by Merrill Lynch, a portion of which was received by BlackRock in 2010.
Net income attributable to BlackRock, Inc. of $875 million for the year ended December 31, 2009 included the after-tax effect of the portion of certain LTIP awards, which will be funded through a capital contribution of BlackRock stock held by PNC of $41 million, BGI transaction/integration costs of $129 million, restructuring charges of $14 million and certain compensation of former MLIM employees of $7 million to be funded through a cash contribution by Merrill Lynch, a portion of which was received by BlackRock in 2009.
As Adjusted
Exclusive of the items discussed above, diluted earnings per common share, as adjusted, of $10.94 for the year ended December 31, 2010 increased $3.81, or 53%, compared to the year ended December 31, 2009.
Net income attributable to BlackRock, Inc., as adjusted, for the year ended December 31, 2010 included operating income of $3,167 million, or $10.85 per diluted common share, non-operating income, less net income attributable to non-controlling interests, of $25 million, or $0.09 per diluted common share. Net income of $1,021 million or $7.13 per diluted common share attributable to BlackRock, Inc., as adjusted, for the year ended December 31, 2009 included the effect of $25 million of tax benefits primarily related to a favorable tax ruling and the final resolution of an outstanding tax matter received during the year ended December 31, 2008, depreciation on fixed income products2009. Diluted earnings per common share, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of $17 billionFinancial Condition and alternative investment productsResults of $13 billion. The $28 billion reduction in AUM from foreign exchange was across all asset classes due to the strengthening of the U.S. dollar which resulted in foreign exchange translation loss from converting non-dollar denominated AUM into U.S. dollars. Net subscriptions of $168 billion for the year ended December 31, 2008 were attributable to net new business of $145 billion in long-term advisory liquidation assignments, $26 billion in cash management products and $3 billion in alternative investment products, partially offset by $7 billion of net outflows in fixed income products.Operations.
The following table presents the component changes in BlackRock’s AUM for the years ended December 31, 2008, 2007 and 2006.
BlackRock, Inc.
Component Changes in Assets Under Management
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions) | 2008 | 2007 | 2006 | |||||||||
Beginning assets under management | $ | 1,356,644 | $ | 1,124,627 | $ | 452,682 | ||||||
Net subscriptions | 167,604 | 137,639 | 32,814 | |||||||||
Acquisitions | — | 21,868 | 589,158 | |||||||||
Market appreciation (depreciation) | (188,950 | ) | 60,132 | 42,196 | ||||||||
Foreign exchange1 | (28,147 | ) | 12,378 | 7,777 | ||||||||
Total change | (49,493 | ) | 232,017 | 671,945 | ||||||||
Ending assets under management | $ | 1,307,151 | $ | 1,356,644 | $ | 1,124,627 | ||||||
Percent change in total change in AUM from net subscriptions and acquisitions | NM | 69 | % | 93 | % | |||||||
Percent change in total AUM | (4 | )% | 21 | % | 148 | % | ||||||
Organic growth percentage | 12 | % | 12 | % | 7 | % | ||||||
|
|
41
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Assets Under Management (continued)Operating results for the year ended December 31, 2009, as compared with the year ended December 31, 2008
The following table presents the component changes in BlackRock’s AUM during 2008.(1) for the year ended December 31, 2009.
| (Dollar amounts in millions) | December 31, 2007 | Net subscriptions (redemptions) | Market appreciation (depreciation) | Foreign exchange 1 | December 31, 2008 | |||||||||||||
Fixed income | $ | 513,020 | $ | (6,594 | ) | $ | (17,031 | ) | $ | (6,222 | ) | $ | 483,173 | |||||
Equity and balanced | 459,182 | 869 | (160,448 | ) | (18,782 | ) | 280,821 | |||||||||||
Cash management | 313,338 | 25,670 | 1,339 | (1,908 | ) | 338,439 | ||||||||||||
Alternative investment products | 71,104 | 2,903 | (13,049 | ) | (1,235 | ) | 59,723 | |||||||||||
Sub Total | 1,356,644 | 22,848 | (189,189 | ) | (28,147 | ) | 1,162,156 | |||||||||||
Advisory2 | — | 144,756 | 239 | — | 144,995 | |||||||||||||
Total | $ | 1,356,644 | $ | 167,604 | $ | (188,950 | ) | $ | (28,147 | ) | $ | 1,307,151 | ||||||
| (Dollar amounts in millions) | December 31, 2008 | Net subscriptions (redemptions)(2) | BGI merger- related outflows(3) | Acquisition/ reclassifications(4) | Market appreciation/ (depreciation) | Foreign exchange(5) | December 31, 2009 | |||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||
Active | $ | 152,216 | $ | 10,849 | ($ | 1,549 | ) | $ | 128,063 | $ | 55,147 | $ | 3,848 | $ | 348,574 | |||||||||||||
Institutional index | 51,076 | 24,528 | (492 | ) | 695,658 | 39,365 | (4,053 | ) | 806,082 | |||||||||||||||||||
iShares / ETPs(6) | — | 8,716 | — | 363,940 | 9,715 | (972 | ) | 381,399 | ||||||||||||||||||||
Fixed income: | ||||||||||||||||||||||||||||
Active | 477,492 | 27,835 | (784 | ) | 49,270 | 38,626 | 3,141 | 595,580 | ||||||||||||||||||||
Institutional index | 3,873 | 2,275 | (23 | ) | 366,702 | (9,168 | ) | (6,102 | ) | 357,557 | ||||||||||||||||||
iShares / ETPs | — | 3,669 | — | 101,286 | (1,973 | ) | (492 | ) | 102,490 | |||||||||||||||||||
Multi-asset class | 77,516 | 10,959 | — | 36,408 | 16,703 | 443 | 142,029 | |||||||||||||||||||||
Alternatives | 61,544 | (4,395 | ) | (46 | ) | 49,395 | (4,717 | ) | 320 | 102,101 | ||||||||||||||||||
Long-term | 823,717 | 84,436 | (2,894 | ) | 1,790,722 | 143,698 | (3,867 | ) | 2,835,812 | |||||||||||||||||||
Cash management | 338,439 | (49,122 | ) | — | 59,530 | (161 | ) | 591 | 349,277 | |||||||||||||||||||
Sub-total | 1,162,156 | 35,314 | (2,894 | ) | 1,850,252 | 143,537 | (3,276 | ) | 3,185,089 | |||||||||||||||||||
Advisory(7) | 144,995 | 11,642 | — | — | 169 | 4,361 | 161,167 | |||||||||||||||||||||
Total | $ | 1,307,151 | $ | 46,956 | ($ | 2,894 | ) | $ | 1,850,252 | $ | 143,706 | $ | 1,085 | $ | 3,346,256 | |||||||||||||
| (1) | Data reflects the reclassification of prior period AUM into the current period presentation. |
| (2) | Includes distributions representing return of capital and return on investment to investors. |
| (3) | Includes outflows due to manager concentration considerations and active equity quantitative performance. |
| (4) |
|
| (5) | Foreign exchange reflects the impact of converting |
| (6) | Exchange-traded products (“ETPs”) |
Advisory AUM represents long-term portfolio liquidation assignments. |
Business Outlook
As fiscalAUM increased approximately $2.039 trillion, or 156%, to $3.346 trillion at December 31, 2009, began, domesticcompared to $1.307 trillion at December 31, 2008. The growth in AUM was primarily attributable to $1.849 trillion acquired in the BGI Transaction, $1 billion acquired from R3 Capital Management, LLC, $145 billion in net market appreciation and international markets continued to reflect a difficultforeign exchange movements, $84 billion of net subscriptions in long-term mandates, $12 billion of net new business in advisory assignments offset by $49 billion of outflows in cash management products. Net market environmentappreciation of $144 billion included $104 billion of net appreciation in equity products due to a downturnan increase in the global economy. Illiquid capitalequity markets, lack of financing$27 billion in fixed income products due to current income and forced deleveraging have resultedchanges in extreme price declines across many asset classes. The U.S. housinginterest rate spreads and $17 billion in multi-asset class products, offset by $5 billion market and credit markets continue to be ongoing concerns, and revelations of a massive alleged hedge fund fraud (in which none of BlackRock’s funds of funds were invested) have contributed to investors, industry-wide, seeking to redeem hedge fund and fund of funds holdingsdepreciation in record numbers.
The timing and direction of volatile markets, investment performance and new client asset flows will continue to impact the revenue the Company recognizes. The direction of markets, particularlyalternative products, primarily in real estate and private equity, will also affect the valuation of the assets on the Company’s balance sheet.products.
The Company notes that the global recession, declining asset values, the liquidity crunch and associated market disruption have impacted our business, including the value and mix of AUM and associated base fees. AUM and base fees may be affected by further market changes during the remainder of 2009.
The build-up of institutional liquidity assets experienced since the fourth quarter of 2007 may be temporary, as these assets are expected to be redeployed to longer-dated strategies as market conditions stabilize. The Company’s strategic focus on performance, globalization and product diversification, client service and independent advice may enable it to retain a portion of these assets.
42
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Business OutlookOperating results for the year ended December 31, 2009, as compared with the year ended December 31, 2008 (continued)
Operating Income and Operating Margin Overview GAAP |
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
Revenue | $ | 4,700 | $ | 5,064 | ($ | 364 | ) | (7 | %) | |||||||
Expenses | 3,422 | 3,471 | (49 | ) | (1 | %) | ||||||||||
Operating income | $ | 1,278 | $ | 1,593 | ($ | 315 | ) | (20 | %) | |||||||
Operating margin | 27.2 | % | 31.5 | % | (4.3 | %) | (14 | %) | ||||||||
Alternative investment products with performance fee hurdles based on absolute performance measuresOperating Income
Operating income totaled $1,278 million for the year ended December 31, 2009, which was a decrease of $315 million compared to the year ended December 31, 2008. Operating income for the year ended December 31, 2009 included $141 million resulting from incremental revenue and high water marks mayexpenses related to the operations of BGI and $183 million of BGI transaction and integration costs. The transaction and integration expenses are not contribute performance fee revenue at levels that the Company has earned in prior periods.
The valuepart of the Company’s co-investmentson-going business and are principally comprised of advisory fees, compensation expense, legal fees and consulting expenses.
Operating income for the year ended December 31, 2009 included the effect of a $431 million decrease in alternative products may continue to declineinvestment advisory, administration fees and securities lending revenue, associated with a market driven reduction in average AUM for all asset classes for the year ended December 31, 2009 as the underlying value in certain assets classes, particularly real estate and private equity, continue to decline.
In early 2009, returns on many major equity indices have continued to decline from year-end 2008, which may impact the Company’s revenue in future periods.
The Company will continue to assess the appropriateness of its cost structure relativecompared to the external environment. year ended December 31, 2008, and a $42 million reduction in distribution fees and other revenue, offset by an $84 million increase inBlackRock Solutions and advisory revenue, a $25 million increase in performance fees revenue and a $49 million net decrease in operating expenses primarily due to declines in employee compensation and benefits, distribution and servicing costs, amortization of deferred sales commissions and restructuring expenses, offset by increases in direct fund expenses and general and administration expenses.
Operating Margin
The Company may decideCompany’s operating margin was 27.2% for the year ended December 31, 2009, compared to take additional measures31.5% for the year ended December 31, 2008. The reduction in operating margin in 2009 as compared to reduce costs. While any measure would be expected2008 included the effect of $183 million of BGI transaction and integration costs and a change from $50 million of foreign currency remeasurement benefits in 2008 to lower the cost base over time, certain measures may or may not have upfront implementation costs.$11 million of foreign currency remeasurement costs in 2009.
Given the severity of the market-driven revenue impacts mentioned above, the operating margins of the Company would be expected to decline, even in the face of cost saving measures.
There may be certain circumstances in which the Company may consider temporarily waiving fees on certain products. If these circumstances were to occur and fee waivers were to be granted, the revenues of the Company would be adversely affected.
The effective tax rate of the Company is affected, among other things, by the geographic distribution of earnings and global changes in tax legislation. The effective tax rate may vary from period to period as a result of these factors.
43
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2008,2009, as compared with the year ended December 31, 20072008 (continued)
RevenueOperating Income and Operating Margin Overview (continued)
| Year ended December 31, | Variance | ||||||||||||
| (Dollar amounts in millions) | 2008 | 2007 | Amount | % | |||||||||
Investment advisory and administration fees: | |||||||||||||
Fixed income | $ | 892 | $ | 901 | $ | (9 | ) | (1 | )% | ||||
Equity and balanced | 2,101 | 2,218 | (117 | ) | (5 | )% | |||||||
Cash management | 708 | 520 | 188 | 36 | % | ||||||||
Alternative investment products | 531 | 371 | 160 | 43 | % | ||||||||
Investment advisory and administration base fees | 4,232 | 4,010 | 222 | 6 | % | ||||||||
Fixed income | 4 | 4 | — | 0 | % | ||||||||
Equity and balanced | 95 | 107 | (12 | ) | (11 | )% | |||||||
Alternative investment products | 78 | 239 | (161 | ) | (67 | )% | |||||||
Investment advisory performance fees | 177 | 350 | (173 | ) | (49 | )% | |||||||
Total investment advisory and administration fees | 4,409 | 4,360 | 49 | 1 | % | ||||||||
BlackRock Solutionsand advisory | 406 | 198 | 208 | 105 | % | ||||||||
Distribution fees | 139 | 123 | 16 | 13 | % | ||||||||
Other revenue | 110 | 164 | (54 | ) | (32 | )% | |||||||
Total revenue | $ | 5,064 | $ | 4,845 | $ | 219 | 5 | % | |||||
Total revenue for the year ended December 31, 2008 increased $219 million, or 5%, to $5,064 million, compared with $4,845As Adjusted
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
Revenue | $ | 4,700 | $ | 5,064 | ($ | 364 | ) | (7 | %) | |||||||
Expenses | 3,130 | 3,402 | (272 | ) | (8 | %) | ||||||||||
Operating income(1) | $ | 1,570 | $ | 1,662 | ($ | 92 | ) | (6 | %) | |||||||
Operating margin(1) | 38.2 | % | 38.7 | % | (0.5 | %) | (1 | %) | ||||||||
| (1) | Operating income, as adjusted, and operating margin, as adjusted, are described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Operating income, as adjusted, totaled $1,570 million for the year ended December 31, 2007.2009, which was a decrease of $92 million compared to the year ended December 31, 2008. The $219 million increase was primarily the resultdecline of a $208 million increase inBlackRock Solutionsand advisory revenue and a $49 million increase in total investment advisory and administration fees, partially offset by a $54 million decrease in other revenue.
Investment Advisory and Administration Fees
The increase in investment advisory and administration fees of $49 million, or 1%, was the result of an increase in investment advisory and administration base fees of $222 million, or 6%, to $4,232 millionoperating income, as adjusted, for the year ended December 31, 2008,2009 as compared with $4,010 million for the year ended December 31, 2007, partially offset by a decrease of $173 million in investment advisory performance fees.
The increase in investment advisory and administration base fees of $222 million forto the year ended December 31, 2008 compared withis related to the yeareffect of the $364 million decrease in total revenue offset by a $272 million decrease in operating expenses due to decreases in employee compensation and benefits, distribution and servicing costs and general and administration expenses.
Operating margin, as adjusted, was 38.2% and 38.7% for the years ended December 31, 2007, consisted2009 and 2008, respectively. The reduction in margin includes the effect of increasesthe $61 million increase in base fees of $188 millionexpenses related to the change in cash management products and $160 million in alternative investment products, partiallyforeign currency remeasurement offset by decreasesa reduction of $117 million in equity and balanced products and $9 million in fixed income products. Investment advisory and administration base fees increased for the year ended December 31, 2008 primarilycertain expenses as a result of increased average AUMadditional cost controls in 2008 compared to 2007 for cash management products due to net subscriptions and alternative investment products due to the full year impact of the Quellos Transaction, offset by lower fees in equity and balanced products due to the impact of market depreciation on AUM.2009.
44
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2008,2009, as compared with the year ended December 31, 2007 (continued)
Revenue (continued)2008
Investment Advisory and Administration Fees (continued)Revenue
Investment advisory performance fees
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
Investment advisory, administration fees and securities lending revenue: | ||||||||||||||||
Equity: | ||||||||||||||||
Active | $ | 1,230 | $ | 1,587 | ($ | 357 | ) | (22 | %) | |||||||
Institutional index | 56 | 28 | 28 | 100 | % | |||||||||||
iShares / Exchange-traded products | 136 | — | 136 | * | ||||||||||||
Fixed income: | ||||||||||||||||
Active | 865 | 872 | (7 | ) | (1 | %) | ||||||||||
Institutional index | 16 | 2 | 14 | 700 | % | |||||||||||
iShares / Exchange-traded products | 19 | — | 19 | * | ||||||||||||
Multi-asset class | 479 | 519 | (40 | ) | (8 | %) | ||||||||||
Alternatives | 400 | 541 | (141 | ) | (26 | %) | ||||||||||
Cash management | 625 | 708 | (83 | ) | (12 | %) | ||||||||||
Total | 3,826 | 4,257 | (431 | ) | (10 | %) | ||||||||||
Investment advisory performance fees: | ||||||||||||||||
Equity | 46 | 86 | (40 | ) | (47 | %) | ||||||||||
Fixed income | 21 | 5 | 16 | 320 | % | |||||||||||
Multi-asset class | 20 | 8 | 12 | 150 | % | |||||||||||
Alternatives | 115 | 78 | 37 | 47 | % | |||||||||||
Total | 202 | 177 | 25 | 14 | % | |||||||||||
BlackRock Solutionsand advisory | 477 | 393 | 84 | 21 | % | |||||||||||
Distribution fees | 100 | 139 | (39 | ) | (28 | %) | ||||||||||
Other revenue | 95 | 98 | (3 | ) | (3 | %) | ||||||||||
Total revenue | $ | 4,700 | $ | 5,064 | ($ | 364 | ) | (7 | %) | |||||||
* – Not applicable or the percentage is in excess of +/- 1,000%.
Total revenue for the year ended December 31, 2009 decreased by $173$364 million, or 49%7%, to $177$4,700 million, compared with $5,064 million for the year ended December 31, 2008, as compared to $350 million2008. Total revenue for the year ended December 31, 2007 primarily as a2009 includes $312 million of incremental revenue related to the BGI acquisition. The $364 million decrease was the result of lowera $431 million decrease in total investment advisory, performanceadministration fees earned onand securities lending revenue, a $39 million decrease in distribution fees and a $3 million decrease in other alternative investment products, including real estate funds, fixed income hedge funds and international equity products.
BlackRock Solutions and Advisory
BlackRock Solutionsand advisory revenue, of $406offset by an $84 million for the year ended December 31, 2008 increased $208 million, or 105%, compared with the year ended December 31, 2007. The increase inBlackRock Solutionsand advisory revenue was primarily the result of additional advisory assignments and Aladdin® assignments during the period. A portion of the revenue earned on advisory assignments was comprised of one-time advisory and portfolio structuring fees and ongoing fees based on AUM of the respective portfolio assignments.
Distribution Fees
Distribution fees increased by $16a $25 million to $139 million for the year ended December 31, 2008, as compared to $123 million for the year ended December 31, 2007. The increase in distribution fees is primarily due to the full-year impact of the acquisition of distribution financing arrangements from PNC in second quarter 2007, which resulted in the Company receiving distribution fees from such arrangements, as well as an increase in contingent deferred sales commissions as a result of redemptions in certain share classes of open-ended funds.
Other Revenueperformance fees.
Other revenue of $110 million for the year ended December 31, 2008 decreased $54 million, or 32%, compared with the year ended December 31, 2007. Other revenue represents property management fees of $31 million earned on real estate products (primarily related to reimbursement of salaries and benefits of certain Metric employees from certain real estate products), $25 million of net interest related to securities lending, $23 million of unit trust sales commissions and $31 million of other revenue, including fund accounting services.
The decrease in other revenue of $54 million for the year ended December 31, 2008, as compared to the year ended December 31, 2007, was primarily the result of a decrease in fees earned for fund accounting services of $16 million, a $14 million decline in other advisory service fees earned in 2007, a $12 million decline in unit trust sales commissions and a $7 million decline in property management fees primarily related to the termination in the fourth quarter of 2008 of certain Metric contracts with BlackRock real estate clients. Certain Metric employees have been transferred to a third party, which will provide to real estate clients the property management services formerly provided by Metric. At December 31, 2008, Metric had no remaining employees.
45
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2008,2009, as compared with the year ended December 31, 20072008 (continued)
ExpensesRevenue (continued)
| Year ended December 31, | Variance | ||||||||||||
| (Dollar amounts in millions) | 2008 | 2007 | Amount | % | |||||||||
Expenses: | |||||||||||||
Employee compensation and benefits | $ | 1,815 | $ | 1,767 | $ | 48 | 3 | % | |||||
Portfolio administration and servicing costs | 597 | 548 | 49 | 9 | % | ||||||||
Amortization of deferred mutual fund sales commissions | 130 | 108 | 22 | 20 | % | ||||||||
General and administration | 745 | 870 | (125 | ) | (14 | )% | |||||||
Restructuring charges | 38 | — | 38 | NM | |||||||||
Termination of closed-end fund administration and servicing arrangements | — | 128 | (128 | ) | (100 | )% | |||||||
Amortization of intangible assets | 146 | 130 | 16 | 12 | % | ||||||||
Total expenses | $ | 3,471 | $ | 3,551 | $ | (80 | ) | (2 | )% | ||||
NM – Not MeaningfulInvestment Advisory, Administration Fees and Securities Lending Revenue
Total expenses decreased $80Investment advisory, administration fees and securities lending revenue for the year ended December 31, 2009 included approximately $278 million of fees related to the BGI acquisition. The decrease in investment advisory, administration fees and securities lending revenues of $431 million for the year ended December 31, 2009, compared with the year ended December 31, 2008 consisted of decreases of $357 million in active equity products, $40 million in multi-asset class products, $141 million in alternative investment products, $7 million in active fixed income products and $83 million in cash management products primarily associated with a market driven reduction in average AUM for equity, multi-asset class and alternative products and net redemptions in cash management products. The decrease was offset by a $136 million increase in equityiShares / Exchange-traded products, a $28 million increase in institutional index equity products, a $19 million increase in fixed incomeiShares / Exchange-traded products and a $14 million increase in institutional index fixed income products, primarily related to products acquired in the BGI acquisition.
Performance Fees
Investment advisory performance fees increased $25 million, or 2%14%, to $3,471$202 million for the year ended December 31, 2009, as compared to $177 million for the year ended December 31, 2008, primarily due to an increase in performance fees in alternative equity hedge funds, fixed income and multi-asset class separate accounts, offset by a decrease in international equity separate accounts. The year ended December 31, 2009 included $24 million of performance fees related to products acquired in the BGI acquisition.
BlackRock Solutions and Advisory
BlackRock Solutions and advisory revenue for the year ended December 31, 2009 increased $84 million, or 21%, compared with $3,551the year ended December 31, 2008. The increase inBlackRock Solutions and advisory revenue was primarily the result of additional advisory assignments during the period, as well as additional Aladdin and risk management mandates. Revenue earned on advisory assignments was comprised of advisory and portfolio structuring assignment fees and ongoing fees based on AUM of the respective portfolio assignments.
Distribution Fees
Distribution fees decreased $39 million to $100 million for the year ended December 31, 2007. The decrease was attributable to a one-time expense of $128 million related to the termination of certain closed-end fund administration and servicing arrangements in 2007 and a $125 million decrease in general and administration expenses, partially offset by increases in portfolio administration and servicing costs, employee compensation and benefits, restructuring charges, amortization of deferred mutual fund sales commissions, and amortization of intangible assets. The year ended December 31, 2007, included $20 million of MLIM and Quellos integration costs, which were primarily recorded in general and administration expense.
Employee Compensation and Benefits
Employee compensation and benefits expense increased $48 million, or 3%, to $1,815 million at December 31, 2008,2009, as compared to $1,767$139 million for the year ended December 31, 2007.2008. The increasedecrease in employee compensation and benefits expensedistribution fees was primarily attributable to a $91 million increasethe result of lower sales, redemptions and AUM in salaries and benefits offset by a $38 million decrease in deferred compensation which is primarily linked to depreciation on assets related to certain deferred compensation plans. The increaseshare classes of $91 million in salaries and benefits was primarily due to an increase in headcount throughout the majority of 2007 and 2008 (including the impact associated with the fund of funds acquisition in 2007). Full time employees at December 31, 2008 totaled 5,341 (including the impact of a reduction in force in the fourth quarter) as compared to 5,952 (including Metric) at December 31, 2007. The decline in deferred compensation of $38 million is substantially offset by the change in valuations of investments set aside for these plans, which are included in non-operating income (expense).open-end mutual funds.
46
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2008,2009, as compared with the year ended December 31, 20072008 (continued)
Expenses (continued)
Portfolio Administration and Servicing CostsRevenue (continued)
Portfolio administration and servicing costs increased $49 million,
Other Revenue
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
Other revenue: | ||||||||||||||||
Commissions revenue | $ | 28 | $ | 26 | $ | 2 | 8 | % | ||||||||
Transition management service fees | 22 | 13 | 9 | 69 | % | |||||||||||
Equity method investment earnings(1) | 15 | 1 | 14 | * | ||||||||||||
Fund accounting | 9 | 11 | (2 | ) | (18 | %) | ||||||||||
Property management fees | 1 | 32 | (31 | ) | (97 | %) | ||||||||||
Other miscellaneous revenue | 20 | 15 | 5 | 33 | % | |||||||||||
Total other revenue | $ | 95 | $ | 98 | ($ | 3 | ) | (3 | %) | |||||||
* – Not applicable or 9%, to $597 million during the year ended December 31, 2008, compared to $548percentage is in excess of +/- 1,000%.
| (1) | Related to operating advisory company investments. |
Other revenue of $95 million for the year ended December 31, 2007. These costs include payments to Merrill Lynch under the global distribution agreement, and payments to PNC as well as other third parties, primarily associated2009 decreased $3 million, or 3%, compared with the administration and servicing of client investments in certain BlackRock products. The $49 million increase related primarily to higher levels of average AUM in cash management products.
Portfolio administration and servicing costsyear ended December 31, 2008. Other revenue for the year ended December 31, 20082009 included $464$10 million of costs attributable to Merrill Lynch and affiliates and $30 million of costs attributable to PNC and affiliates as compared to $444 million and $28 million, respectively, in the year ended December 31, 2007. The increased costs attributable to Merrill Lynch is offset by approximately $10 million expense reduction associated with the 2007 termination of closed-end fund administration and servicing arrangements. Portfolio administration and servicing costsincremental revenue related to the operations of BGI.
The decrease in other non-related third parties increased $30 million as a result of an expansion of distribution platforms.
Amortization of Deferred Mutual Fund Sales Commissions
Amortization of deferred mutual fund sales commissions increased by $22 million to $130 million for the year ended December 31, 2008, as compared to $108 million for the year ended December 31, 2007. The increase in amortization of deferred mutual fund sales commissionsrevenue was primarily the result of a $31 million decline in property management fees primarily related to the acquisitionoutsourcing in the fourth quarter of distribution financing arrangements2008 of Metric contracts with BlackRock real estate clients, partially offset by a $14 million increase in BlackRock’s share of underlying earnings from PNCcertain operating advisory company investments and a $9 million increase in second quarter 2007 as well as higher sales and redemptions in certain share classes of open-ended funds.fees earned for transition management services.
General and Administration Expense
| (Dollar amounts in millions) | Year ended December 31, | Variance | |||||||||||
| 2008 | 2007 | Amount | % | ||||||||||
General and administration expense: | |||||||||||||
Portfolio services | $ | 171 | $ | 170 | $ | 1 | 1 | % | |||||
Marketing and promotional | 156 | 169 | (13 | ) | (8 | )% | |||||||
Occupancy | 138 | 130 | 8 | 6 | % | ||||||||
Technology | 116 | 118 | (2 | ) | (1 | )% | |||||||
Professional services | 77 | 94 | (17 | ) | (18 | )% | |||||||
Closed-end fund launch costs | 9 | 36 | (27 | ) | (74 | )% | |||||||
Other general and administration | 78 | 153 | (75 | ) | (50 | )% | |||||||
Total general and administration expense | $ | 745 | $ | 870 | $ | (125 | ) | (14 | )% | ||||
47
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2008,2009, as compared with the year ended December 31, 20072008 (continued)
Expenses (continued)
Expenses
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
Expenses: | ||||||||||||||||
Employee compensation and benefits | $ | 1,802 | $ | 1,815 | ($ | 13 | ) | (1 | %) | |||||||
Distribution and servicing costs | 477 | 591 | (114 | ) | (19 | %) | ||||||||||
Amortization of deferred sales commissions | 100 | 130 | (30 | ) | (23 | %) | ||||||||||
Direct fund expenses | 95 | 86 | 9 | 10 | % | |||||||||||
General and administration | 779 | 665 | 114 | 17 | % | |||||||||||
Restructuring charges | 22 | 38 | (16 | ) | (42 | %) | ||||||||||
Amortization of intangible assets | 147 | 146 | 1 | 1 | % | |||||||||||
Total expenses, GAAP | $ | 3,422 | $ | 3,471 | ($ | 49 | ) | (1 | %) | |||||||
Total expenses, GAAP | $ | 3,422 | $ | 3,471 | ($ | 49 | ) | (1 | %) | |||||||
Less: Non-GAAP adjustments: | ||||||||||||||||
BGI transaction/integration costs | ||||||||||||||||
Employee compensation and benefits | 60 | — | 60 | * | ||||||||||||
General and administration | 123 | — | 123 | * | ||||||||||||
Total BGI transaction/integration costs | 183 | — | 183 | * | ||||||||||||
PNC LTIP funding obligation | 59 | 59 | — | — | % | |||||||||||
Merrill Lynch compensation contribution | 10 | 10 | — | — | % | |||||||||||
Restructuring charges | 22 | 38 | (16 | ) | (42 | %) | ||||||||||
Compensation expense related to appreciation/(depreciation) on deferred compensation plans | 18 | (38 | ) | 56 | * | |||||||||||
Total non-GAAP adjustments | 292 | 69 | 223 | 323 | % | |||||||||||
Total expenses, as adjusted | $ | 3,130 | $ | 3,402 | ($ | 272 | ) | (8 | %) | |||||||
* – Not applicable or the percentage is in excess of +/- 1,000%.
Total GAAP expenses decreased $49 million, or 1%, to $3,422 million for the year ended December 31, 2009, compared to $3,471 million for the year ended December 31, 2008. Excluding certain items deemed non-recurring by management or transactions that ultimately will not affect the Company’s book value, total expenses, as adjusted, decreased $272 million, or 8%. The decrease in total expenses, as adjusted, is primarily attributable to decreases in employee compensation and benefits, distribution and servicing costs and amortization of deferred sales commissions.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2009, as compared with the year ended December 31, 2008 (continued)
Expenses (continued)
Employee Compensation and Benefits
| Year Ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
Employee compensation and benefits, GAAP | $ | 1,802 | $ | 1,815 | ($ | 13 | ) | (1 | %) | |||||||
Less non-GAAP expense adjustments: | ||||||||||||||||
BGI integration costs | 60 | — | 60 | * | ||||||||||||
PNC LTIP funding obligation | 59 | 59 | — | — | % | |||||||||||
Merrill Lynch compensation contribution | 10 | 10 | — | — | % | |||||||||||
Compensation expense related to appreciation/ (depreciation) on deferred compensation plans | 18 | (38 | ) | 56 | * | |||||||||||
Total non-GAAP expense adjustments | 147 | 31 | 116 | 374 | % | |||||||||||
Employee compensation and benefits, as adjusted | $ | 1,655 | $ | 1,784 | ($ | 129 | ) | (7 | %) | |||||||
* –Not applicable or the percentage is in excess of +/- 1,000%.
Employee compensation and benefits expense decreased $13 million, or 1%, to $1,802 million, for the year ended December 31, 2009, compared to $1,815 million for the year ended December 31, 2008. Employee compensation and benefits expense for the year ended December 31, 2009 included $89 million of incremental expense related to an increase in the number of employees related to BGI.
The decrease in employee compensation and benefits expense was attributable to a $118 million decrease in salaries, benefits and commissions, a $12 million decrease in incentive compensation associated with lower operating income, partially offset by a $60 million increase related to the BGI integration costs and a $57 million increase in deferred compensation, which is offset primarily by an increase in non-operating income related to appreciation on assets associated with certain deferred compensation plans. The $118 million decrease in salaries, benefits and commissions is due to lower employment levels as a result of the Company’s cost control efforts and outsourcing of Metric services, partially offset by a one month impact of the increase in employees related to the BGI Transaction. Employees at December 31, 2009 totaled approximately 8,600 as compared to approximately 5,300 at December 31, 2008.
Distribution and Servicing Costs
Distribution and servicing costs decreased $114 million to $477 million for the year ended December 31, 2009, compared to $591 million for the year ended December 31, 2008. These costs include 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. The $114 million decrease primarily related to lower levels of average AUM serviced by related parties across all asset classes and an increase in waivers within certain cash management funds, resulting in lower distribution payments.
Distribution and servicing costs for the year ended December 31, 2009 included $349 million of costs attributable to Bank of America/Merrill Lynch and affiliates and $19 million of costs attributable to PNC and affiliates as compared to $464 million and $30 million, respectively, in the year ended December 31, 2008. Distribution and servicing costs related to other third parties increased $12 million to $109 million for the year ended December 31, 2009, as compared to $97 million for the year ended December 31, 2008 due to an expansion of distribution platforms.
Amortization of Deferred Sales Commissions
Amortization of deferred sales commissions decreased $30 million to $100 million for the year ended December 31, 2009, as compared to $130 million for the year ended December 31, 2008. The decrease in amortization of deferred sales commissions was primarily the result of lower sales and redemptions in certain share classes of U.S. open-end mutual funds.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2009, as compared with the year ended December 31, 2008 (continued)
Expenses (continued)
Direct Fund Expenses
Direct fund expenses incurred by BlackRock related to non-advisory operating expenses of certain funds increased $9 million primarily related to the addition of legacy BGI funds subject to these arrangements under which BlackRock pays certain fund expenses.
General and Administration Expenses
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
General and administration expenses(1), GAAP: | ||||||||||||||||
Occupancy and office related | $ | 182 | $ | 162 | $ | 20 | 12 | % | ||||||||
Professional services | 162 | 76 | 86 | 113 | % | |||||||||||
Technology | 114 | 116 | (2 | ) | (2 | %) | ||||||||||
Portfolio services | 100 | 88 | 12 | 14 | % | |||||||||||
Marketing and promotional | 85 | 154 | (69 | ) | (45 | %) | ||||||||||
Communications | 26 | 27 | (1 | ) | (4 | %) | ||||||||||
Closed-end fund launch costs | 2 | 9 | (7 | ) | (78 | %) | ||||||||||
Other general and administration | 108 | 33 | 75 | 227 | % | |||||||||||
Total general and administration expenses, GAAP | $ | 779 | $ | 665 | $ | 114 | 17 | % | ||||||||
Less BGI transaction and integration costs: | ||||||||||||||||
Occupancy and office related | $ | 1 | $ | — | $ | 1 | * | |||||||||
Professional services | 91 | — | 91 | * | ||||||||||||
Technology | 7 | — | 7 | * | ||||||||||||
Marketing and promotional | 11 | — | 11 | * | ||||||||||||
Other general and administration | 13 | — | 13 | * | ||||||||||||
Total BGI transaction and integration costs | $ | 123 | $ | — | $ | 123 | * | |||||||||
General and administration expenses, as adjusted: | ||||||||||||||||
Occupancy and office related | $ | 181 | $ | 162 | $ | 19 | 12 | % | ||||||||
Professional services | 71 | 76 | (5 | ) | (7 | %) | ||||||||||
Technology | 107 | 116 | (9 | ) | (8 | %) | ||||||||||
Portfolio services | 100 | 88 | 12 | 14 | % | |||||||||||
Marketing and promotional | 74 | 154 | (80 | ) | (52 | %) | ||||||||||
Communications | 26 | 27 | (1 | ) | (4 | %) | ||||||||||
Closed-end fund launch costs | 2 | 9 | (7 | ) | (78 | %) | ||||||||||
Other general and administration | 95 | 33 | 62 | 188 | % | |||||||||||
Total general and administration expenses, as adjusted | $ | 656 | $ | 665 | ($ | 9 | ) | (1 | %) | |||||||
* –Not applicable or the percentage is in excess of +/- 1,000%.
| (1) | Prior year data reflects certain reclassifications to conform to the current year presentation. |
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2009, as compared with the year ended December 31, 2008 (continued)
Expenses (continued)
General and Administration Expenses (continued)
General and Administration Expenses, GAAP
General and administration expenses decreased $125increased $114 million, or 14%17%, for the year ended December 31, 20082009 compared with the year ended December 31, 2007. Other general2008.
BGI Transaction and administrationIntegration Costs
BGI transaction and integration costs decreased $75 million, or 50%, to $78 million from $153 million, primarily related to a $49 million decrease in foreign currency remeasurement costs and $26 million decrease in costs associated with the support of two enhanced cash funds. Closed-end funds launch costs decreased $27 million as compared to the year ended December 31, 2007 due to three closed-end funds launched during the year ended December 31, 2007, which generated approximately $3.0 billion in AUM as compared to two closed-end funds launched in the year ended December 31, 2008, which generated approximately $400 million in AUM. Professional services decreased $17 million, or 18%, to $77 million compared to $94$123 million for the year ended December 31, 20072009 included professional services of $91 million primarily due to decreases in accounting, tax and other consulting costs related to legal, advisory and consulting costs.
General and Administration Expenses, as Adjusted
Excluding the MLIMBGI transaction and integration in 2007. expenses, general and administration expenses, as adjusted, of $656 million, decreased $9 million, or 1%, for the year ended December 31, 2009 compared with $665 million for the year ended December 31, 2008.
Marketing and promotional expenses decreased $13$80 million, or 8%52%, primarily due to a decline in travel and promotional expenses. The decrease was partially offset by
Occupancy and office related expenses increased $19 million, which included an $8$11 million expense related to the write-off of certain leasehold improvements.
Portfolio service costs increased $12 million, or 6%14%, increase in occupancy expenses to $138$100 million, due to fund expense reimbursements.
Professional services decreased $5 million, or 7%, to $71 million compared to $130with $76 million for the year ended December 31, 2007 as2008 primarily due to lower consulting fees.
Other general and administration expenses increased $62 million, or 188%, to $95 million from $33 million, primarily related to a $61 million change in foreign currency remeasurement costs/benefits from a $50 million benefit in the year ended December 31, 2008 to $11 million of costs in the year ended December 31, 2009, a $21 million increase to a provision related to an outstanding loan to Anthracite Capital Inc., and a $10 million expense for potentially uncollectible fee receivables, partially offset by a reduction of various expenses primarily the result of expansion of offices worldwide (including the full-year impact of the Quellos Transaction).cost control efforts.
Restructuring Charges
For the year ended December 31, 2009 BlackRock recorded pre-tax restructuring charges of $22 million, primarily related to severance, outplacement costs, occupancy costs and accelerated amortization of certain previously granted stock awards associated with a reduction in work force and reengineering efforts. For the year ended December 31, 2008, BlackRock recorded pre-tax restructuring charges of $38 million, primarily related to severance, outplacement costs and accelerated amortization of certain previously granted stock awards associated with a 9% reduction in work force. See Restructuringrestructuring charges discussion in Note 1820 to the consolidated financial statements beginning on page F-1 of this Form 10-K.
TerminationAmortization of Closed-end Fund Administration and Servicing ArrangementsIntangible Assets
ForAmortization of intangible assets increased $1 million to $147 million for the year ended December 31, 2007, BlackRock recorded a one-time expense of $128 million related to the termination of administration and servicing arrangements with Merrill Lynch on 40 closed-end funds with original terms of 30-40 years.
Amortization of Intangible Assets
The $16 million increase in the amortization of intangible assets2009, as compared to $146 million for the year ended December 31, 2008, compared to $130 million for the year ended December 31, 2007, primarily2008. The increase in amortization of intangible assets reflects the full-year impact of the amortization of finite-lived intangible assetsmanagement contracts acquired in the QuellosBGI Transaction.
48
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
OperatingNon-operating results for the year ended December 31, 2008,2009, as compared with the year ended December 31, 2007 (continued)2008
Non-Operating Income (Expense), Less Net ofIncome (Loss) Attributable to Non-Controlling Interests
Non-operating income (expense), less net ofincome (loss) attributable to non-controlling interests for the years ended December 31, 20082009 and 20072008 was as follows:
| (Dollar amounts in millions) | Year ended December 31, | Variance | ||||||||||||
| 2008 | 2007 | Amount | % | |||||||||||
Total non-operating income (expense) | $ | (574 | ) | $ | 529 | $ | (1,103 | ) | (208 | )% | ||||
Non-controlling interests | (155 | ) | 364 | (519 | ) | 143 | % | |||||||
Total non-operating income (expense), net of non-controlling interests | $ | (419 | ) | $ | 165 | $ | (584 | ) | (353 | )% | ||||
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
Non-operating income (expense), GAAP basis | ($ | 6 | ) | ($ | 577 | ) | $ | 571 | 99 | % | ||||||
Less: Net income (loss) attributable to NCI | 22 | (155 | ) | 177 | * | |||||||||||
Non-operating income (expense)(1) | (28 | ) | (422 | ) | 394 | 93 | % | |||||||||
Compensation expense related to (appreciation)/depreciation on deferred compensation plans | (18 | ) | 38 | (56 | ) | * | ||||||||||
Non-operating income (expense), as adjusted(2) | ($ | 46 | ) | ($ | 384 | ) | $ | 338 | 88 | % | ||||||
* –Not applicable or the percentage is in excess of +/- 1,000%.
| (1) | Net of net income (loss) attributable to non-controlling interests. |
The components of non-operating income (expense), less net ofincome (loss) attributable to non-controlling interests, for the years ended December 31, 20082009 and 20072008 were as follows:
| (Dollar amounts in millions) | Year ended December 31, | Variance | |||||||||||||
| 2008 | 2007 | Amount | % | ||||||||||||
Non-operating income (expense), net of non-controlling interests: | |||||||||||||||
Net gain (loss) on investments, net of non-controlling interests: | |||||||||||||||
Private equity | $ | (28 | ) | $ | 65 | $ | (93 | ) | (144 | )% | |||||
Real estate | (127 | ) | 34 | (161 | ) | (475 | )% | ||||||||
Hedge funds/funds of hedge funds | (194 | ) | 23 | (217 | ) | NM | |||||||||
Investments related to deferred compensation plans | (38 | ) | 12 | (50 | ) | (419 | )% | ||||||||
Other investments1 | (30 | ) | 8 | (38 | ) | (441 | )% | ||||||||
Total net gain (loss) on investments, net of non-controlling interests | (417 | ) | 142 | (559 | ) | (393 | )% | ||||||||
Interest and dividend income | 65 | 74 | (9 | ) | (13 | )% | |||||||||
Interest expense | (66 | ) | (49 | ) | (17 | ) | 33 | % | |||||||
Other non-controlling interest2 | (1 | ) | (2 | ) | 1 | 67 | % | ||||||||
Total non-operating income (expense), net of non-controlling interests | (419 | ) | 165 | (584 | ) | (353 | )% | ||||||||
Compensation expense related to depreciation (appreciation) on deferred compensation plans | 38 | (12 | ) | 50 | 419 | % | |||||||||
Non-operating income (expense), net of non-controlling interests, as adjusted | $ | (381 | ) | $ | 153 | $ | (534 | ) | (348 | )% | |||||
| Year ended December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | ||||||||||||
Net gain (loss) on investments(1) | ||||||||||||||||
Private equity | $ | 9 | ($ | 28 | ) | $ | 37 | * | ||||||||
Real estate | (114 | ) | (127 | ) | 13 | 10 | % | |||||||||
Distressed credit/mortgage funds | 100 | (141 | ) | 241 | * | |||||||||||
Hedge funds/funds of hedge funds | 18 | (53 | ) | 71 | * | |||||||||||
Other investments(2) | (11 | ) | (30 | ) | 19 | 63 | % | |||||||||
Sub-total | 2 | (379 | ) | 381 | * | |||||||||||
Investments related to deferred compensation plans | 18 | (38 | ) | 56 | * | |||||||||||
Total net gain (loss) on investments | 20 | (417 | ) | 437 | * | |||||||||||
Net income (loss) attributable to other non-controlling interests(3) | — | (1 | ) | 1 | 100 | % | ||||||||||
Interest and dividend income | 20 | 65 | (45 | ) | (69 | %) | ||||||||||
Interest expense | (68 | ) | (69 | ) | 1 | (1 | %) | |||||||||
Net interest expense | (48 | ) | (4 | ) | (44 | ) | * | |||||||||
Total non-operating income (expense)(1) | (28 | ) | (422 | ) | 394 | 93 | % | |||||||||
Compensation expense related to (appreciation)/depreciation on deferred compensation plans | (18 | ) | 38 | (56 | ) | * | ||||||||||
Non-operating income (expense), as adjusted(1) | ($ | 46 | ) | ($ | 384 | ) | $ | 338 | 88 | % | ||||||
NM* –Not Meaningful
applicable or the percentage is in excess of +/- 1,000%.
| Net of net income (loss) attributable to non-controlling interests. |
| (2) | Includes net |
| Includes non-controlling |
49
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
OperatingNon-operating results for the year ended December 31, 2008,2009, as compared with the year ended December 31, 20072008 (continued)
Non-Operating Income (Expense), Less Net ofIncome (Loss) Attributable to Non-Controlling Interests (continued)
Non-operating expense, less net income net of(loss) attributable to non-controlling interests, decreased $584$394 million to $419 million of expense for the year ended December 31, 2008, as compared to non-operating income, net of non-controlling interests of $165$28 million for the year ended December 31, 2007. The decrease in net non-operating income primarily reflects declines in valuations from seed investments and co-investments in real estate funds, private equity and hedge funds/funds of hedge funds (which includes the impact of a $141 million decline in valuations of distressed credit products) and a $50 million decline in valuations of investments associated with certain deferred compensation plans. In addition, net interest expense increased $26 million primarily related to incremental interest expense related to the full year impact of the issuance of long-term debt in September 2007.
Income Taxes
Income tax expense was $388 million and $464 million for the years ended December 31, 2008 and 2007, respectively. The effective income tax rate for the year ended December 31, 2008 was 33.0%,2009, as compared to 31.8% for the year ended December 31, 2007. The increase in the effective income tax rate was primarily the result of a one-time tax benefit of $51 million recognized in 2007 due to tax legislation changes enacted in the third quarter 2007 in the United Kingdom and Germany, which resulted in a revaluation of certain deferred tax liabilities. Accordingly, BlackRock revalued its deferred tax liabilities in these jurisdictions. Excluding this deferred income tax benefit, the 2007 adjusted effective tax rate was 35.3%. The effective income tax rate for the year ended December 31, 2008 declined as compared to the 2007 adjusted effective tax rate, primarily as a result of the impact of foreign taxes.
Operating Income and Operating Margin
GAAP
Operating income totaled $1,593$422 million for the year ended December 31, 2008, which2008.
The $20 million net gain on investments, less non-controlling interests, related to the Company’s co-investment and seed investments, included valuation gains in distressed credit/mortgage funds of $100 million, investments related to deferred compensation plans of $18 million, hedge funds/funds of hedge funds of $18 million and private equity products of $9 million offset by net losses in real estate products of $114 million and other investments of $11 million.
Net interest expense was $48 million, an increase of $299$44 million comparedprimarily due to a decline in interest rates earned on cash equivalents and interest rates paid on its line of credit, offset by an $8 million increase in interest expense related to $2.5 billion in issuances of long-term notes in December 2009.
Income Tax Expense
| Year ended December 31, | % Change | Year ended December 31, | % Change | |||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
| (Dollar amounts in millions) | GAAP | GAAP | As adjusted | As adjusted | ||||||||||||||||||||
Income before income taxes(1) | $ | 1,250 | $ | 1,171 | 7 | % | $ | 1,524 | $ | 1,278 | 19 | % | ||||||||||||
Income tax expense | $ | 375 | $ | 387 | (3 | %) | $ | 503 | $ | 422 | 19 | % | ||||||||||||
Effective tax rate | 30.0 | % | 33.0 | % | 33.0 | % | 33.0 | % | ||||||||||||||||
| (1) | Net of net income (loss) attributable to non-controlling interests. |
Income tax expense decreased $12 million in the year ended December 31, 2007. The Company’s operating margin was 31.4% for the year ended December 31, 2008, compared to 26.7% for the year ended December 31, 2007. Operating income and operating margin for the year ended December 31, 2008 included the impact of a $50 million foreign currency remeasurement benefit and a $38 million deferred compensation benefit due to depreciation on assets related to certain deferred compensation plans, offset by $38 million of restructuring charges. Operating income and operating margin for the year ended December 31, 2007 included the impact related to the termination of certain closed-end fund servicing and administration arrangements of $128 million, $42 million of closed-end fund launch costs and commissions and $20 million of MLIM integration costs.
As Adjusted
Operating income, as adjusted, totaled $1,662 million for the year ended December 31, 2008, which was an increase of $144 million compared to the year ended December 31, 2007. Operating margin, as adjusted, was 38.7% and 37.5% for the years ended December 31, 2008 and 2007, respectively. The growth of operating income, as adjusted, and operating margin, as adjusted, for the year ended December 31, 20082009 as compared to the year ended December 31, 2007 is2008. The effective income tax rates for the years ended December 31, 2009 and 2008 were 30.0% and 33.0%, respectively.
The year ended December 31, 2009 included the effect of third quarter 2009 legislation enacted primarily with respect to New York City corporate income taxes, effective January 1, 2009, which resulted in approximately a $45 million tax benefit revaluation of net deferred income tax liabilities primarily related to theacquired intangible assets, which has been excluded from net income attributable to BlackRock, Inc., as adjusted, as it was a non-recurring enacted tax legislation change that does not have a cash flow impact and to ensure comparability of $219this information to prior reporting periods. The year ended December 31, 2009 also included $25 million of revenue growth (including the full year impact of the Quellos Transaction)tax benefits primarily related to a favorable tax ruling and the impactfinal resolution of a $49 million decline in foreign currency remeasurement costs, offset by a $91 million increase in salaries and benefits and a $16 million increase in amortization of finite-lived intangible assets primarily associated with the Quellos Transaction.outstanding tax matters.
Operating income, as adjusted, and operating margin, as adjusted, are described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
50
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2008,2009, as compared with the year ended December 31, 20072008 (continued)
Net Income Attributable to BlackRock, Inc.
The components of net income attributable to BlackRock, Inc. and net income attributable to BlackRock, Inc., as adjusted, for the years ended December 31, 20082009 and 20072008 are as follows:
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||
| 2008 | 2007 | Variance % | 2008 | 2007 | Variance % | |||||||||||||||||
| GAAP | GAAP | As adjusted | As adjusted | |||||||||||||||||||
Operating income | $ | 1,593 | $ | 1,294 | 23 | % | $ | 1,662 | $ | 1,518 | 9 | % | ||||||||||
Non-operating income (expense), net of non-controlling interests | (419 | ) | 165 | (354 | )% | (381 | ) | 153 | (349 | )% | ||||||||||||
Income tax expense | (388 | ) | (464 | ) | (16 | )% | (423 | ) | (592 | ) | (29 | )% | ||||||||||
Net income | $ | 786 | $ | 995 | (21 | )% | $ | 858 | $ | 1,079 | (20 | )% | ||||||||||
Diluted earnings per share | $ | 5.91 | $ | 7.53 | (22 | )% | $ | 6.45 | $ | 8.17 | (21 | )% | ||||||||||
| Year ended December 31, | % Change | Year ended December 31, | % Change | |||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
| (Dollar amounts in millions, except per share data) | GAAP | GAAP | As adjusted | As adjusted | ||||||||||||||||||||
Operating income | $ | 1,278 | $ | 1,593 | (20 | %) | $ | 1,570 | $ | 1,662 | (6 | %) | ||||||||||||
Non-operating (expense)(1) | (28 | ) | (422 | ) | 93 | % | (46 | ) | (384 | ) | 88 | % | ||||||||||||
Income tax expense | (375 | ) | (387 | ) | (3 | %) | (503 | ) | (422 | ) | 19 | % | ||||||||||||
Net income attributable to BlackRock, Inc. | $ | 875 | $ | 784 | 12 | % | $ | 1,021 | $ | 856 | 19 | % | ||||||||||||
% attributable to common shares | 97 | % | 97 | % | 97 | % | 97 | % | ||||||||||||||||
Net income attributable to common shares | $ | 853 | $ | 759 | 12 | % | $ | 995 | $ | 828 | 20 | % | ||||||||||||
Diluted weighted-average common shares outstanding(2) | 139,481,449 | 131,376,517 | 6 | % | 139,481,449 | 131,376,517 | 6 | % | ||||||||||||||||
Diluted EPS components: | ||||||||||||||||||||||||
Operating income | $ | 5.75 | $ | 7.86 | (27 | %) | $ | 7.17 | $ | 8.20 | (13 | %) | ||||||||||||
Non-operating (expense)(1) | (0.13 | ) | (2.08 | ) | 94 | % | (0.21 | ) | (1.90 | ) | 89 | % | ||||||||||||
Income tax benefit | 0.49 | — | * | 0.17 | — | * | ||||||||||||||||||
Diluted earnings per common share | $ | 6.11 | $ | 5.78 | 6 | % | $ | 7.13 | $ | 6.30 | 13 | % | ||||||||||||
* – Not applicable or the percentage is in excess of +/- 1,000%.
| (1) | Net of net income (loss) attributable to non-controlling interests (redeemable and nonredeemable). |
| (2) | Unvested RSUs that contain non-forfeitable rights to dividends are not included as they are deemed participating securities in accordance with GAAP. Upon vesting of the participating RSUs, the shares are added to the weighted average shares outstanding which results in an increase to the percentage of net income attributable to common shares. In addition, series A, B, C, and D non-voting preferred stock are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations. |
GAAP
Net income attributable to BlackRock, Inc. for the year ended December 31, 20082009 includes operating income of $1,593,$1,278 million, or $8.02$5.75 per diluted common share, and non-operating losses,expenses, less net ofincome attributable to non-controlling interests, of $419$28 million, or $2.11$0.13 per diluted common share versus an $0.80 gainand $70 million, or $0.49 per diluted common share, in 2007.of tax benefits related to local income tax law changes, a favorable tax ruling and the final resolution of outstanding tax matters. Net income attributable to BlackRock, Inc. totaled $786$875 million, or $5.91$6.11 per diluted common share, for the year ended December 31, 2008,2009, which was a decreasean increase of $209$91 million, or $1.62$0.33 per diluted common share, compared to the year ended December 31, 2007.2008.
Net income
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2009, as compared with the year ended December 31, 2008 (continued)
Net Income Attributable to BlackRock, Inc. (continued)
Net income attributable to BlackRock, Inc. for the year ended December 31, 2009 included the after-tax impacteffect of the portion of LTIP awards, which will be funded through a capital contribution of BlackRock stock held by PNC of $41 million, BGI transaction/integration costs of $129 million, restructuring charges of $14 million, and an expected cash contribution, a portion of which has been paid by Merrill Lynch in third quarter 2009 of $7 million to fund certain compensation of former MLIM employeesemployees. In addition, net income for the year ended December 31, 2009 included a $45 million one-time reduction in income tax expense as a result of enacted legislation primarily with respect to New York City corporate income taxes, which resulted in a revaluation of certain deferred income tax assets and restructuring charges of $39 million, $7 million, and $26 million, respectively.liabilities.
Net income attributable to BlackRock, Inc. of $995$784 million for the year ended December 31, 20072008 included the after-tax impact related to the terminationeffect of certain closed-end fund administration and servicing arrangements of $82 million, the portion of certain LTIP awards, which will be funded through a capital contribution of BlackRock stock held by PNC of $34$39 million, MLIM integration costsrestructuring charges of $13$26 million and an expected contribution by Merrill Lynch of $6$7 million to fund certain compensation of former MLIM employees. In addition, the United Kingdom and Germany enacted legislation reducing corporate income tax rates resultingemployees, a portion of which was received by BlackRock in a one-time decrease of $51 million in income tax expense which is included in net income.third quarter 2009.
As Adjusted
Exclusive of thesethe items in both periods,discussed above, diluted earnings per common share, as adjusted, of $7.13 for the year ended December 31, 2009 increased $0.83, or 13%, compared to the year ended December 31, 2008.
Net income attributable to BlackRock, Inc., as adjusted, for the year ended December 31, 2008 decreased $1.72,2009 includes operating income of $1,570 million, or 21%,$7.17 per diluted common share, non-operating expenses, less net income attributable to $6.45 comparednon-controlling interests, of $46 million, or $0.21 per diluted common share and $25 million of income tax benefits, or $0.17 per diluted common share primarily related to a favorable tax ruling and the year ended December 31, 2007. final resolution of an outstanding tax matter received during 2009.
Diluted earnings per common share, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
51
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006Balance Sheet Overview
The following table presents a reconciliation of the component changes in BlackRock’s AUM for 2007.Company’s condensed consolidated statement of financial condition presented on a GAAP basis to the Company’s consolidated statement of financial condition, excluding the impact of consolidated VIEs, consolidated sponsored investment funds, separate account assets and collateral held under securities lending agreements and separate account liabilities and collateral liabilities under securities lending agreements:
| (Dollar amounts in millions) | December 31, 2006 | Net subscriptions | Acquisition/ reclassifications 1 | Market appreciation | Foreign exchange2 | December 31, 2007 | ||||||||||||
Fixed income | $ | 448,012 | $ | 27,196 | $ | 14,037 | $ | 20,091 | $ | 3,684 | $ | 513,020 | ||||||
Equity and balanced | 392,708 | 23,489 | — | 35,016 | 7,969 | 459,182 | ||||||||||||
Cash management | 235,768 | 75,272 | — | 1,933 | 365 | 313,338 | ||||||||||||
Alternative investment products | 48,139 | 11,682 | 7,831 | 3,092 | 360 | 71,104 | ||||||||||||
Total | $ | 1,124,627 | $ | 137,639 | $ | 21,868 | $ | 60,132 | $ | 12,378 | $ | 1,356,644 | ||||||
| December 31, 2010 | ||||||||||||||||||||
| (Dollar amounts in millions) | GAAP Basis | Separate Account Assets/ Collateral | Consolidated VIEs | Consolidated Sponsored Investment Funds | As Adjusted | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 3,367 | $ | — | $ | — | $ | 65 | $ | 3,302 | ||||||||||
Accounts receivable | 2,095 | — | — | — | 2,095 | |||||||||||||||
Investments | 1,540 | — | — | 137 | 1,403 | |||||||||||||||
Assets of consolidated variable interest entities | 1,405 | — | 1,405 | — | — | |||||||||||||||
Separate account assets and collateral held under securities lending agreements | 138,775 | 138,775 | — | — | — | |||||||||||||||
Other assets(1) | 960 | — | — | 3 | 957 | |||||||||||||||
Sub-total | 148,142 | 138,775 | 1,405 | 205 | 7,757 | |||||||||||||||
Goodwill and intangible assets, net | 30,317 | — | — | — | 30,317 | |||||||||||||||
Total assets | $ | 178,459 | $ | 138,775 | $ | 1,405 | $ | 205 | $ | 38,074 | ||||||||||
Liabilities | ||||||||||||||||||||
Accrued compensation and benefits | $ | 1,520 | $ | — | $ | — | $ | — | $ | 1,520 | ||||||||||
Accounts payable and accrued liabilities | 1,068 | — | — | — | 1,068 | |||||||||||||||
Borrowings(2) | 3,359 | — | — | — | 3,359 | |||||||||||||||
Liabilities of consolidated variable interest entities | 1,285 | — | 1,285 | — | — | |||||||||||||||
Separate account liabilities and collateral liability under securities lending agreements | 138,775 | 138,775 | — | — | — | |||||||||||||||
Deferred income tax liabilities | 5,477 | — | — | — | 5,477 | |||||||||||||||
Other liabilities(3) | 641 | — | — | 10 | 631 | |||||||||||||||
Total liabilities | 152,125 | 138,775 | 1,285 | 10 | 12,055 | |||||||||||||||
Equity | ||||||||||||||||||||
Total stockholders’ equity | 26,094 | — | 75 | — | 26,019 | |||||||||||||||
Non-controlling interests | 240 | — | 45 | 195 | — | |||||||||||||||
Total equity | 26,334 | — | 120 | 195 | 26,019 | |||||||||||||||
Total liabilities and equity | $ | 178,459 | $ | 138,775 | $ | 1,405 | $ | 205 | $ | 38,074 | ||||||||||
|
|
|
|
| (3) | Includes due to related parties and other liabilities. |
Operating resultsManagement reviews its as adjusted balance sheet, a non-GAAP financial measure, for the year ended December 31, 2007 reflectreasons described below. BlackRock’s management does not advocate that investors consider such non-GAAP financial measure in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The Company presents the full yearas adjusted balance sheet to enable investors to eliminate gross presentation of certain assets that have equal and offsetting liabilities and ultimately do not have an impact on stockholders’ equity (excluding appropriated retained earnings related to consolidated CLOs) or cash flows. The recognition of the MLIM Transaction, which closed on September 29, 2006. With the exception ofas adjusted assets and liabilities generally result in net income (loss) attributable to BlackRock, Solutionsand advisory, the magnitude of the acquired business is the primary driver of most line item variances in the analysis below comparing the year ended December 31, 2007 to the year ended December 31, 2006. Certain prior year amounts have been reclassified to conform to the current presentation.Inc.
Revenue
| (Dollar amounts in millions) | Year ended December 31, | Variance | |||||||||||
| 2007 | 2006 | Amount | % | ||||||||||
Investment advisory and administration fees: | |||||||||||||
Fixed income | $ | 901 | $ | 590 | $ | 311 | 53 | % | |||||
Equity and balanced | 2,218 | 625 | 1,593 | 255 | % | ||||||||
Cash management | 520 | 203 | 317 | 156 | % | ||||||||
Alternative investment products | 371 | 181 | 190 | 105 | % | ||||||||
Investment advisory and administration base fees | 4,010 | 1,599 | 2,411 | 151 | % | ||||||||
Fixed income | 4 | 6 | (2 | ) | (33 | )% | |||||||
Equity and balanced | 107 | 20 | 87 | 435 | % | ||||||||
Alternative investment products | 239 | 216 | 23 | 11 | % | ||||||||
Investment advisory performance fees | 350 | 242 | 108 | 45 | % | ||||||||
Total investment advisory and administration fees | 4,360 | 1,841 | 2,519 | 137 | % | ||||||||
BlackRock Solutionsand advisory | 198 | 148 | 50 | 34 | % | ||||||||
Distribution fees | 123 | 36 | 87 | 242 | % | ||||||||
Other revenue | 164 | 73 | 91 | 125 | % | ||||||||
Total revenue | $ | 4,845 | $ | 2,098 | $ | 2,747 | 131 | % | |||||
52
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006Balance Sheet Overview (continued)
Revenue (continued)The following table presents selected significant components of BlackRock’s GAAP consolidated statements of financial condition at December 31, 2010 and 2009:
(Dollar amounts in millions) | December 31, 2010 | December 31, 2009 | Variance | |||||||||||||
| Amount | % Change | |||||||||||||||
Cash and cash equivalents | $ | 3,367 | $ | 4,708 | ($ | 1,341 | ) | (28 | %) | |||||||
Accounts receivable | 2,095 | 1,718 | 377 | 22 | % | |||||||||||
Investments | 1,540 | 1,049 | 491 | 47 | % | |||||||||||
Goodwill and Intangible assets, net | 30,317 | 30,346 | (29 | ) | — | % | ||||||||||
Other assets(1) | 960 | 1,339 | (379 | ) | (28 | %) | ||||||||||
Accrued compensation and benefits | 1,520 | 1,482 | 38 | 3 | % | |||||||||||
Accounts payable and accrued liabilities | 1,068 | 840 | 228 | 27 | % | |||||||||||
Borrowings(2) | 3,359 | 5,668 | (2,309 | ) | (41 | %) | ||||||||||
Deferred income tax liabilities | 5,477 | 5,571 | (94 | ) | (2 | %) | ||||||||||
Other liabilities(3) | 641 | 997 | (356 | ) | (36 | %) | ||||||||||
Stockholders’ equity | 26,094 | 24,329 | 1,765 | 7 | % | |||||||||||
Total revenue for
| (1) | Includes due from related parties, deferred sales commissions, property and equipment and other assets. |
| (2) | Includes short-term borrowings, convertible debentures and long-term borrowings. |
| (3) | Includes due to related parties and other liabilities. |
The following discussion summarizes the year ended December 31, 2007 increased $2,747 million, or 131%, to $4,845 million, compared with $2,098 million for the year ended December 31, 2006. The $2,747 million increase was primarily the result of a $2,519 million increasesignificant changes in total investment advisoryassets and administration fees, an $87 million increase in distribution fees, a $50 million increase inBlackRock Solutionsliabilities. These changes do not include assets and advisory,liabilities that are equal and a $91 million increase in other revenue.offsetting and have no impact on BlackRock’s stockholders’ equity.
Investment Advisory and Administration Fees
The increase in investment advisory and administration fees of $2,519 million, or 137%, was the result of an increase in investment advisory and administration base fees of $2,411 million, or 151%, to $4,010 million for the year ended December 31, 2007, compared with $1,599 million for the year ended December 31, 2006, along with an increase of $108 million in investment advisory performance fees. Investment advisory and administration base fees increased for the year ended December 31, 2007 primarily due to the MLIM Transaction, which added $589 billion in AUM on September 29, 2006 and additional increased AUM of $232 billion during 2007.
The increase in investment advisory and administration base fees of $2,411 million for the year ended December 31, 2007, compared with the year ended December 31, 2006 consisted of increases of $1,593 million in equity and balanced products, $317 million in cash management products, $311 million in fixed income products, and $190 million in alternative investment products. The increase in investment advisory and administration base fees for all products was driven by AUM acquired in the MLIM Transaction on September 29, 2006, as well as increases in AUM of $66 billion, $65 billion, $78 billion and $23 billion, respectively, over the past twelve months, which includes the $22 billion of alternative investment AUM acquired in the Quellos Transaction.
Investment advisory performance fees increased by $108 million, or 45%, to $350 million for the year ended December 31, 2007, compared to $242 million for the year ended December 31, 2006 primarily due to higher performance fees on equity and fixed income hedge funds, as well as real estate equity products.
BlackRock Solutions and Advisory
BlackRock Solutionsand advisory revenue of $198 million for the year ended December 31, 2007 increased $50 million, or 34%, compared with the year ended December 31, 2006. The increase inBlackRock Solutionsand advisory revenue was primarily the result of additional advisory and Aladdin assignments during the period.
Distribution Fees
Distribution fees increased by $87 million to $123 million for the year ended December 31, 2007, as compared to $36 million for the year ended December 31, 2006. The increase in distribution fees is primarily due to the acquisition of distribution financing arrangements from the MLIM Transaction in third quarter 2006 and from PNC in second quarter 2007, which resulted in the Company receiving distribution fees from such arrangements.
Other Revenue
Other revenue of $164 million for the year ended December 31, 2007 increased $91 million compared with the year ended December 31, 2006. Other revenue represents property management fees of $38 million earned on real estate products (primarily related to reimbursement of salaries and benefits of certain Metric employees from certain real estate products), fees for fund accounting of $27 million, net interest related to securities lending of $27 million and $14 million for other advisory service fees.
53
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006Balance Sheet Overview (continued)
Revenue (continued)
The increase in other revenue of $91 million, or 125%, for the year ended December 31, 2007 as compared to $73 million for the year ended December 31, 2006 was primarily the result of an increase of $25 million in unit trust sales commissions, an increase of $21 million in fees earned related to securities lending, a $15 million increase in fund accounting services,Cash and a $14 million increase for other advisory service fees.
Expenses
| (Dollar amounts in millions) | Year ended December 31, | Variance | |||||||||||
| 2007 | 2006 | Amount | % | ||||||||||
Expenses: | |||||||||||||
Employee compensation and benefits | $ | 1,767 | $ | 934 | $ | 833 | 89 | % | |||||
Portfolio administration and servicing costs | 548 | 173 | 375 | 217 | % | ||||||||
Amortization of deferred mutual fund sales commissions | 108 | 30 | 78 | 260 | % | ||||||||
General and administration | 870 | 417 | �� | 453 | 109 | % | |||||||
Termination of closed-end fund administration and servicing arrangements | 128 | — | 128 | NM | |||||||||
Fee sharing payment | — | 34 | (34 | ) | (100 | )% | |||||||
Amortization of intangible assets | 130 | 38 | 92 | 242 | % | ||||||||
Total expenses | $ | 3,551 | $ | 1,626 | $ | 1,925 | 118 | % | |||||
NM – Not MeaningfulCash Equivalents
Total expenses, which reflect the full-year impact of the MLIM Transaction on September 29, 2006, increased $1,925 million, or 118%, to $3,551 million for the year ended December 31, 2007, compared with $1,626 million for the year ended December 31, 2006. Total expenses included integration charges related to the MLIM Transaction of $20 millionCash and $142 million in 2007 and 2006, respectively. The year ended December 31, 2007 included $20 million of total MLIM and Quellos integration charges primarily in general and administration, compared to integration charges of $45 million related to employee compensation and benefits and $97 million related to general and administration, respectively, in the year ended December 31, 2006.
Employee Compensation and Benefits
Employee compensation and benefits increased by $833 million, or 89%, to $1,767 million,cash equivalents at December 31, 2007 compared to $934 million for the year ended December 31, 2006. The increase in employee compensation2010 and benefits was primarily attributable to increases in incentive compensation, salaries and benefits and stock-based compensation of $406 million, $3682009 included $65 million and $66$75 million of cash held by consolidated sponsored investment funds, respectively. The $406 million, increase in incentive compensation is primarily attributable to higher operating incomeSee Liquidity and direct incentives associated with higher performance fees earnedCapital Resources for further details on the Company’s alternative investment products. The $368 million increasechange in salariescash and benefits was primarily attributable to higher staffing levels associated with the MLIM and Quellos Transactions and business growth. Employees (including employees of Metric)cash equivalents during 2010.
Accounts Receivable
Accounts receivable at December 31, 2007 totaled 5,952 as compared to 5,113 at2010 increased $377 million from December 31, 2006.2009, resulting from increase in base fees related to AUM growth and higher performance fees.
Investments
The Company presents total net “economic” investments to enable investors to understand the portion of its investments that are owned by the Company, net of non-controlling interests, as a gauge to measure the impact of changes in net non-operating gain (loss) on investments to net income (loss) attributable to BlackRock, Inc.
(Dollar amounts in millions) | December 31, 2010 | December 31, 2009 | Variance | |||||||||||||
| Amount | % Change | |||||||||||||||
Total investments, GAAP | $ | 1,540 | $ | 1,049 | $ | 491 | 47 | % | ||||||||
Investments held by consolidated sponsored investment funds(1) | (397 | ) | (463 | ) | 66 | 14 | % | |||||||||
Net exposure to consolidated investment funds | 260 | 258 | 2 | 1 | % | |||||||||||
Total net “economic” investments | $ | 1,403 | $ | 844 | $ | 559 | 66 | % | ||||||||
54
| (1) | At December 31, 2010 and 2009, approximately $397 million and $463 million, respectively, of BlackRock’s total investments were maintained in sponsored investment funds that are 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. |
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006 (continued)
ExpensesBalance Sheet Overview (continued)
Portfolio Administration and Servicing CostsInvestments (continued)
Portfolio administration
The Company further presents the total net “economic” investment exposure, net of deferred compensation investments and servicing costs increased $375 millionhedged investments, to $548 million duringreflect another gauge for investors as the year endedeconomic 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 total return swap hedges. Carried interest is excluded as generally there is no impact to BlackRock’s stockholders equity as the balance fluctuates. 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.
The following table represents the carrying value of investments, by asset type, at December 31, 2007, compared to $173 million for2010 and 2009:
| Year ended | ||||||||||||||||
| December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Private equity | $ | 277 | $ | 232 | $ | 45 | 19 | % | ||||||||
Real estate | 54 | 44 | 10 | 23 | % | |||||||||||
Distressed credit/mortgage funds | 267 | 197 | 70 | 36 | % | |||||||||||
Hedge funds/funds of hedge funds | 97 | 108 | (11 | ) | (10 | %) | ||||||||||
Other investments(1) | 269 | 142 | 127 | 89 | % | |||||||||||
Total net “economic” investment exposure | 964 | 723 | 241 | 33 | % | |||||||||||
Federal Reserve Bank stock | 325 | 10 | 315 | * | ||||||||||||
Carried interest | 13 | 4 | 9 | 225 | % | |||||||||||
Deferred compensation investments | 76 | 71 | 5 | 7 | % | |||||||||||
Hedged investments | 25 | 36 | (11 | ) | (31 | %) | ||||||||||
Total net “economic” investments | $ | 1,403 | $ | 844 | $ | 559 | 66 | % | ||||||||
* – Not applicable or the year endedpercentage is in excess of +/- 1,000%.
| (1) | Other investments primarily include seed investments in fixed income and equity funds/strategies as well as U.K. government securities held for regulatory purposes. |
Total net “economic” investments at December 31, 2006. These costs include payments2010 increased $559 million from December 31, 2009, resulting from changes in the investment portfolio due to Merrill Lynch under the global distribution agreement,purchases (including $315 million of Federal Reserve Bank stock), sales, maturities and payments to PNCdistributions as well as other third parties, primarily associatedmarket valuations and earnings from equity method investments.
BlackRock reports its investments on a GAAP basis, which includes investments that are owned by sponsored investment funds that are deemed to be controlled by BlackRock in accordance with GAAP and therefore consolidated even though BlackRock may not own the administration and servicingmajority of clientany such funds. As a result, management reviews its investments on an “economic” basis, which eliminates the portion of investments that do not impact BlackRock’s book value. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in certain BlackRock products.
Portfolio administration and servicing costs for the year ended December 31, 2007 included $444 million of costs attributable to Merrill Lynch and affiliates and $28 million of costs attributable to PNC and other affiliates as compared to $96 million and $25 million, respectively, in the year ended December 31, 2006. Portfolio administration and servicing costs related to other non-related parties increased $28 millionisolation from, or as a result of an expansion of distribution platforms.substitute for, financial information prepared in accordance with GAAP.
Amortization of Deferred Mutual Fund Sales Commissions
Amortization of deferred mutual fund sales commissions increased by $78 million to $108 million for the year ended December 31, 2007, as compared to $30 million for the year ended December 31, 2006. The increase in amortization of deferred mutual fund sales commissions was primarily the result of the acquisition of distribution financing arrangements from MLIM at the end of third quarter 2006 and from PNC in second quarter 2007.
General and Administration Expense
| (Dollar amounts in millions) | Year ended December 31, | Variance | ||||||||||
| 2007 | 2006 | Amount | % | |||||||||
General and administration expense: | ||||||||||||
Portfolio services | $ | 170 | $ | 52 | $ | 118 | 228 | % | ||||
Marketing and promotional | 169 | 100 | 69 | 69 | % | |||||||
Occupancy | 130 | 64 | 66 | 103 | % | |||||||
Technology | 118 | 61 | 57 | 93 | % | |||||||
Professional services | 94 | 73 | 21 | 30 | % | |||||||
Closed-end fund launch costs | 36 | 11 | 25 | 207 | % | |||||||
Other general and administration | 153 | 56 | 97 | 177 | % | |||||||
Total general and administration expense | $ | 870 | $ | 417 | $ | 453 | 109 | % | ||||
General and administration expense increased $453 million, or 109%, for the year ended December 31, 2007 to $870 million, compared to $417 million for the year ended December 31, 2006.
55
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006Balance Sheet Overview (continued)
Expenses (continued)The following table represents investments measured at fair value on a recurring basis at December 31, 2010:
| (Dollar amounts in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Investments Not Held at Fair Value(1) | Investments at December 31, 2010 | |||||||||||||||
Total investments, GAAP | $ | 249 | $ | 133 | $ | 650 | $ | 508 | $ | 1,540 | ||||||||||
Net assets for which the Company does not bear “economic” exposure(2) | (8 | ) | (7 | ) | (122 | ) | — | (137 | ) | |||||||||||
Net “economic” investments(3) | $ | 241 | $ | 126 | $ | 528 | $ | 508 | $ | 1,403 | ||||||||||
| (1) | Comprised of investments held at cost, amortized cost, carried interest and equity method investments, which include investment companies, and other assets which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures, therefore, the Company’s investment in such equity method investees may not represent fair value. |
| (2) | Consists of net assets attributable to non-controlling investors of consolidated non-VIE sponsored investment funds. |
| (3) | Includes BlackRock’s portion of cash and cash equivalents, other assets, accounts payable and accrued liabilities, and other liabilities that are consolidated from non-VIE sponsored investment funds. |
GeneralGoodwill and Administration Expense (continued)Intangible Assets
Portfolio services costs increased by $118 million to $170 million, relating to supporting higher AUM levelsGoodwill and increased trading activities. Marketing and promotional expense increased $69 million, or 69%, to $169 million for the year endedintangible assets at December 31, 2007, compared to $1002010 decreased $29 million for the year endedfrom December 31, 2006 primarily due to increased marketing activities, including $852009, resulting from $160 million amortization expense related to domesticfinite-lived intangibles and international marketing efforts,a decline in goodwill related to tax benefits realized from tax-deductible goodwill in excess of book goodwill from the Quellos Transaction, partially offset by a decrease of $16 million related to BlackRock’s advertising and rebranding campaign in 2006. Occupancy costs for the year ended December 31, 2007 totaled $130 million, representing a $66 million, or 103%, increase from $64 million for the year ended December 31, 2006. The increase in occupancy costs primarily reflects costs related to the expansion of corporate facilities as a result of the MLIM and Quellos Transactions and business growth. Technology expenses increased $57 million, or 93%, to $118 million compared to $61 million for the year ended December 31, 2006 primarily due to a $13 million increase in technology consulting expenses, a $19 million increase in hardware depreciation expense and a $15 million increase in software licensing and maintenance costs. Closed-end fund launch costs totaled $36 million for the year ended December 31, 2007 relating to three new closed-end funds launched during the year, generating approximately $3.0 billion in AUM. Closed-end fund launch costs for the year ended December 31, 2006 totaled $11 million relating to three new closed-end funds launched during the period, generating $2.2 billion in AUM. Professional services increased $21 million, or 30%, to $94 million compared to $73 million for the year ended December 31, 2006 primarily due to increased accounting, tax and legal services necessary to support business growth. Other general and administration costs increased by $97 million to $153 million from $56 million, including $24 million of capital contributions to two enhanced cash funds in support of fund net asset values and a $12 million charge reflecting the valuation of capital support agreements covering certain securities remaining in the funds and a $32 million increase in office related expenses.
Termination of Closed-end Fund Administration and Servicing Arrangements
For the year ended December 31, 2007, BlackRock recorded an expense of $128$136 million related to the terminationrelease of administrationcommon shares held in escrow in connection with the Quellos Transaction, and servicing arrangements with Merrill Lynch on 40 closed-end funds with original termsincreases in intangibles and goodwill from the purchases of 30-40 years.Primasia Investment Trust Co., LTD. and Helix Financial Group LLC.
Fee Sharing Payment
For the year ended December 31, 2006, BlackRock recorded a fee sharing payment of $34 million, representing a payment related to a large institutional real estate equity client account acquired in the SSR Transaction in January 2005.
Amortization of IntangibleOther Assets
The $92Other assets at December 31, 2010 decreased $379 million from December 31, 2009, resulting from decreases in current taxes receivable, sales of held for sale assets, deferred sales commissions due to redemptions in certain share classes of U.S. open-end mutual funds and receivables from related parties.
Accrued Compensation and Benefits
Accrued compensation and benefits at December 31, 2010 increased $38 million from December 31, 2009, primarily related to an increase in 2010 incentive compensation offset by the amortizationeffect of intangible assetscash payments related to $130 million for2009 year end incentive compensation and other compensation accruals assumed in the year endedBGI Transaction.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31, 2007, compared to $382010 increased $228 million for the year endedfrom December 31, 2006, primarily reflects amortization2009, resulting from increases in unit trust payable, retrocessions, current taxes payable and other accruals payable to Merrill Lynch.
Borrowings
Borrowings at December 31, 2010 decreased $2,309 million from December 31, 2009, resulting from repayments of finite-lived intangible assets acquired in the MLIMshort-term borrowings and Quellos Transactions.convertible debt of $2,134 million and $176 million, respectively.
56
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006Balance Sheet Overview (continued)
Non-OperatingDeferred Income Net of Non-Controlling InterestsTax Liabilities
Non-operating income, net of non-controlling interests, for the years endedDeferred tax liabilities at December 31, 2007 and 2006 was as follows:
| (Dollar amounts in millions) | Year ended December 31, | Variance | |||||||||||
| 2007 | 2006 | Amount | % | ||||||||||
Total non-operating income | $ | 529 | $ | 56 | $ | 473 | NM | ||||||
Non-controlling interests | 364 | 16 | (348 | ) | NM | ||||||||
Total non-operating income, net of non-controlling interests | $ | 165 | $ | 40 | $ | 125 | 313 | % | |||||
NM – Not Meaningful
The components of non-operating income, net of non-controlling interests, for the year ended2010 decreased $94 million from December 31, 20072009, primarily related to intangible assets. The decrease included revaluation of certain deferred income tax liabilities due to the 2010 tax legislation enacted in the United Kingdom.
Other Liabilities
Other liabilities at December 31, 2010 decreased $356 million from December 31, 2009, primarily resulting from a decrease related to repayments to Barclays of approximately $320 million to settle certain non-interest bearing notes assumed in the BGI Transaction and 2006 weresettlement of liabilities related to the sales of held for sale assets, partially offset by increases in various other liabilities.
Stockholders’ Equity
Total stockholders’ equity at December 31, 2010 increased $1,765 from December 31, 2009, principally resulting from $2,063 million of net income attributable to BlackRock, $445 million of stock-based compensation expense, $136 million related to the release of common shares held in escrow in connection with the Quellos Transaction, $44 million excess tax benefits from vested stock-based compensation and a $10 million Merrill Lynch cash capital contribution in 2010, partially offset by $776 million of payments for cash dividends, $109 million of net issuances of common shares related to employee stock transactions and $140 million of stock repurchases under the repurchase plan approved in July 2010.
Liquidity and Capital Resources
BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds and VIEs
In accordance with GAAP, certain BlackRock sponsored investment funds and collateralized loan obligations (“CLOs”) are consolidated into the financial statements of BlackRock, notwithstanding the fact that BlackRock may only have a minority interest, if any, in these funds or CLOs. As a result, BlackRock’s 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 follows: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 flow presented in accordance with GAAP.
| (Dollar amounts in millions) | Year ended December 31, | Variance | |||||||||||||
| 2007 | 2006 | Amount | % | ||||||||||||
Non-operating income, net of non-controlling interests: | |||||||||||||||
Net gain on investments, net of non-controlling interests: | |||||||||||||||
Private equity | $ | 65 | $ | — | $ | 65 | NM | ||||||||
Real estate | 34 | 1 | 33 | NM | |||||||||||
Hedge funds/funds of hedge funds | 23 | 7 | 16 | 228 | % | ||||||||||
Investments related to deferred compensation plans | 12 | 8 | 4 | 50 | % | ||||||||||
Other investments1 | 8 | 5 | 3 | 60 | % | ||||||||||
Total net gain on investments, net of non-controlling interests | 142 | 21 | 121 | NM | |||||||||||
Other non-controlling interest2 | (2 | ) | — | (2 | ) | NM | |||||||||
Interest and dividend income | 74 | 29 | 45 | 153 | % | ||||||||||
Interest expense | (49 | ) | (10 | ) | (39 | ) | 398 | % | |||||||
Total non-operating income, net of non-controlling interests | 165 | 40 | 125 | 313 | % | ||||||||||
Compensation expense related to (appreciation) on deferred compensation plans | (12 | ) | (8 | ) | (4 | ) | (50 | )% | |||||||
Non-operating income, net of non-controlling interests, as adjusted | $ | 153 | $ | 32 | $ | 121 | 378 | % | |||||||
NM – Not Meaningful
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57
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006 (continued)
Non-Operating Income, Net of Non-Controlling InterestsLiquidity and Capital Resources (continued)
Non-operating income, netBlackRock Cash Flows Excluding the Impact of non-controlling interests, increased $125 million to $165 million for the year ended December 31, 2007, compared to $40 million for the year ended December 31, 2006 as a result of a $121 million increase in net gain on investments, net of non-controlling interests,Consolidated Sponsored Investment Funds and a $45 million increase in interest and dividend income, partially offset by a $39 million increase in interest expense primarily related to borrowings under BlackRock’s revolving credit agreement and the $700 million issuance of long-term debt in September 2007. The increase in net gain on investments, net of non-controlling interests, was primarily due to market appreciation and investment gains from seed investments in private equity products, real estate equity products and other alternative products including hedge funds and funds of funds, partially offset by $14 million of increased impairments related to seed investments in collateralized debt obligations.
Income Taxes
Income tax expense was $464 million and $189 million for the years ended December 31, 2007 and 2006, respectively, representing effective income tax rates of 31.8% and 37.0%, respectively. The reduction in the effective tax rate is primarily the result of a one-time deferred income tax benefit of $51 million, recognized in the third quarter of 2007, due to tax legislation changes enacted in third quarter 2007 in the United Kingdom and Germany that reduced corporate income tax rates in those jurisdictions in 2008. Accordingly, BlackRock revalued its deferred tax liabilities in these jurisdictions. Excluding this deferred income tax benefit, the 2007 adjusted effective tax rate was 35.3%.
Operating Income and Operating margin
GAAPVIEs (continued)
Operating income totaled $1,294 million for
The following table presents a reconciliation of the year ended December 31, 2007 which was an increaseCompany’s consolidated statements of $822 million comparedcash flows presented on a GAAP basis to the year ended December 31, 2006. Operating margin was 26.7% for the year ended December 31, 2007 compared to 22.5% for the year ended December 31, 2006. Operating income and operating margin for the year ended December 31, 2007 reflect the impactCompany’s consolidated statements of $128 million for the termination of closed-end fund administration and servicing arrangements with Merrill Lynch, $42 million of closed-end fund launch costs and commissions, $20 million of integration costs, as well as the full year impact of the MLIM Transaction. Operating income and operating margin for the year ended December 31, 2006 reflect $142 million of integration costs, $14 million of closed-end fund launch costs and commissions,cash flows, excluding the impact of the MLIM Transaction subsequent to closing on September 29, 2006, as well as a $34 million fee sharing payment in conjunction with the SSR Transaction.cash flows of consolidated sponsored investment funds and consolidated VIEs:
| Year ended | Year ended | |||||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||||
| 2010 | 2009 | Variance | ||||||||||||||||||||||||||
| (Dollar amounts 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 Flows Excluding Impact of Consolidated Sponsored Investment Funds and VIEs | Amount | % | |||||||||||||||||||||
Cash flows from: | ||||||||||||||||||||||||||||
Operating | $ | 2,488 | ($ | 76 | ) | ($ | 1 | ) | $ | 2,565 | $ | 1,231 | $ | 1,334 | 108 | % | ||||||||||||
Investing | (627 | ) | (52 | ) | — | (575 | ) | (5,550 | ) | 4,975 | * | |||||||||||||||||
Financing | (3,170 | ) | 118 | (8 | ) | (3,280 | ) | 6,934 | (10,214 | ) | * | |||||||||||||||||
Effect of exchange rate changes | (32 | ) | — | — | (32 | ) | 47 | (79 | ) | * | ||||||||||||||||||
Net change in cash and cash equivalents | (1,341 | ) | (10 | ) | (9 | ) | (1,322 | ) | 2,662 | (3,984 | ) | * | ||||||||||||||||
Cash and cash equivalents, beginning of year | 4,708 | 75 | 9 | 4,624 | 1,971 | 2,653 | 135 | % | ||||||||||||||||||||
Cash and cash equivalents, end of year | $ | 3,367 | $ | 65 | $ | — | $ | 3,302 | $ | 4,633 | ($ | 1,331 | ) | (29 | %) | |||||||||||||
As Adjusted* – Not applicable or the percentage is in excess of +/- 1,000%.
Operating income, as adjusted, totaled $1,518 million for the year endedCash and cash equivalents, excluding cash held by consolidated sponsored investment funds and VIEs at December 31, 2007 which was an increase2010 decreased $1,322 million from December 31, 2009, resulting from $2,565 million of $844cash inflows from operating activities, $3,280 million comparedof cash outflows from financing activities, $575 million of cash outflows from investing activities and a $32 million decrease due to the year ended December 31, 2006. Operating margin, as adjusted, was 37.5%effect of foreign exchange rate changes on cash and 36.7% for the years ended December 31, 2007 and 2006, respectively. Operating income and operating margin, as adjusted, for the year ended December 31, 2007 as compared to the year ended December 31, 2006 include the full year impact of the MLIM Transaction, as well as the impact of the Quellos Transaction which closed on October 1, 2007.cash equivalents.
Operating margin and operating income, as adjusted, are described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006Liquidity and Capital Resources (continued)
Net Income
The componentsBlackRock Cash Flows Excluding the Impact of net incomeConsolidated Sponsored Investment Funds and net income, as adjusted, for the years ended December 31, 2007 and 2006 are as follows:VIEs (continued)
| Year ended December 31, | Variance % | Year ended December 31, | Variance % | |||||||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||||||||
| GAAP | GAAP | As adjusted | As adjusted | |||||||||||||||||||
Operating income | $ | 1,294 | $ | 472 | 174 | % | $ | 1,518 | $ | 674 | 125 | % | ||||||||||
Non-operating income, net of non-controlling interests | 165 | 40 | 313 | % | 153 | 32 | 378 | % | ||||||||||||||
Income tax expense | (464 | ) | (189 | ) | 146 | % | (592 | ) | (261 | ) | 127 | % | ||||||||||
Net income | $ | 995 | $ | 323 | 208 | % | $ | 1,079 | $ | 445 | 142 | % | ||||||||||
Diluted earnings per share | $ | 7.53 | $ | 3.87 | 95 | % | $ | 8.17 | $ | 5.33 | 53 | % | ||||||||||
Net income totaled $995 million, or $7.53 per diluted share, for the year ended December 31, 2007, which was an increase of $672 million, or $3.66 per diluted share, compared to the year ended December 31, 2006.
Net income for the year ended December 31, 2007 includes $82 million related to the after-tax impacts of the termination of closed-end fund administration and servicing arrangements with Merrill Lynch, $34 million related to the portion of certain LTIP awards to be funded through a capital contribution of BlackRock common stock held by PNC, $13 million related to integration costs associated with the MLIM Transactions and $6 million related to an expected contribution by Merrill Lynch to fund certain compensation of former MLIM employees. In addition, the United Kingdom and Germany enacted legislation reducing corporate income tax rates resulting in a one-time decrease of $51 million in income tax expense which is included in net income. MLIM integration costs primarily include compensation costs, professional fees and rebranding costs.
Net income of $323 million during the year ended December 31, 2006 included the after-tax impacts of the portion of certain LTIP awards to be funded through a capital contribution of $32 million of BlackRock common stock held by PNC, MLIM integration costs of $89 million and an expected contribution by Merrill Lynch of $1 million to fund certain compensation of former MLIM employees. Exclusive of these items, fully diluted earnings per share, as adjusted, for the year ended December 31, 2007 increased $2.84, or 53%, to $8.17 compared to $5.33 for the year ended December 31, 2006.
Liquidity and Capital Resources
Operating Activities
Sources of BlackRock’s operating cash primarily include investment advisory, administration fees and administrationsecurities lending revenue, performance fees, revenues fromBlackRock Solutionsand advisory products and services, mutual fundother revenue and distribution fees and realized earnings and distributions on the Company’s investments.fees. BlackRock primarily uses its cash to pay compensation and benefits, portfolio administrationdistribution and servicing costs, direct fund expenses, general and administration expenses, interest and principal on the Company’s borrowings, purchases of co- and seed investments, capital expenditures, income taxes, and dividends on BlackRock’s capital stock.stock, capital expenditures and to purchase co-investments and seed investments.
59
PART I — FINANCIAL INFORMATION (continued)
Liquidity and Capital Resources (continued)
BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds
In accordance with GAAP, certain BlackRock sponsored investment funds are consolidated into the consolidated financial statements of BlackRock, notwithstanding the fact that BlackRock may only have a minority economic interest in these funds. As a result, BlackRock’s consolidated statements ofNet cash flows include the cash flows of consolidated sponsored investment funds. The Company uses an adjusted cash flow, which excludes the impact of consolidated sponsored investment funds, 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, provide investors with useful information on the cash flows of BlackRock relating to our 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 Company’s consolidated statements of cash flows presented on a GAAP basis to the Company’s consolidated statements of cash flows, excluding the impact on cash flows of consolidated sponsored investment funds:
| Year Ended December 31, 2008 | ||||||||||||
| (Dollar amounts in millions) | GAAP Basis | Impact on Cash Flows of Consolidated Sponsored Investment Funds | Cash Flows Excluding Impact of Consolidated Sponsored Investment Funds | |||||||||
Cash flows from operating activities | $ | 1,916 | $ | 413 | $ | 1,503 | ||||||
Cash flows from investing activities | (394 | ) | (9 | ) | (385 | ) | ||||||
Cash flows from financing activities | (887 | ) | (410 | ) | (477 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (259 | ) | — | (259 | ) | |||||||
Net change in cash and cash equivalents | 376 | (6 | ) | 382 | ||||||||
Cash and cash equivalents, beginning of period | 1,656 | 67 | 1,589 | |||||||||
Cash and cash equivalents, end of period | $ | 2,032 | $ | 61 | $ | 1,971 | ||||||
Cash and cash equivalents, excluding cash held by consolidated sponsored investment funds, at December 31, 2008 increased $382 million from December 31, 2007, primarily resulting from $1,503 million of cash inflows from operating activities, offset by $385 million of cash outflows from investing activities, $477 million of cash outflows from financing activities, and a $259 million decrease due to the effect of foreign exchange rates.
60
PART I — FINANCIAL INFORMATION (continued)
Liquidity and Capital Resources (continued)
BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds (continued)
Cash inflows from operating activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the year ended December 31, 2008,2010 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. Cash flows from operating activities, excluding the impact of consolidated sponsored investment funds, inNet cash inflows for the year ended December 31, 20082010 included the effect of cash payments related to year end2009 incentive compensation, that is paidincluding the payments for BGI employee compensation accruals assumed in the first quarter. BGI Transaction and repayments to Barclays of approximately $320 million to settle certain non-interest bearing notes assumed in the BGI Transaction.
Investing Activities
Cash outflows from investing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the year ended December 31, 20082010 were $575 million and primarily include netincluded $656 million of purchases of investments, that are made to establish a performance track record, to co-invest with clients or to hedge exposure to certain deferred compensation plans. including $315 million of Federal Reserve Bank stock, $131 million of purchases of property and equipment, and $23 million of acquisition related payments, partially offset by $181 million of net proceeds from sales and maturities of investments and $53 million of return of capital from equity method investees.
Financing Activities
Cash outflows from financing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the year ended December 31, 20082010 were $3,280 million primarily include $419included repayments of short-term borrowings and convertible debt of $2,134 million and $176 million, respectively, $776 million of payments for cash dividends and $264 million related to repurchases of common stock, including $140 million of stock repurchases under the repurchase plan approved in July 2010 and $124 million to satisfy tax withholding obligations of employees related to vesting of certain restricted stock awards. Cash outflows from financing activities were partially offset by cash inflows related to $44 million of excess tax benefits from vested stock-based compensation and a net $100$10 million repayment of short-term borrowings.Merrill Lynch cash capital contribution.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Capital Resources
The Company manages its consolidated financial condition and funding to maintain appropriate liquidity for the business. Capital resources at December 31, 20082010 and 20072009 were as follows:
| December 31, 2008 | December 31, 2007 | |||||||
Cash and cash equivalents | $ | 2,032 | $ | 1,656 | ||||
Cash and cash equivalents held by consolidated sponsored investment funds1 | (61 | ) | (67 | ) | ||||
Regulatory capital2 | (172 | ) | (217 | ) | ||||
2007 credit facility - undrawn3,4 | 2,171 | 2,100 | ||||||
Committed access | $ | 3,970 | $ | 3,472 | ||||
| ||||||||
| December 31, | Variance | |||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||||||
Cash and cash equivalents | $ | 3,367 | $ | 4,708 | ($ | 1,341 | ) | (28 | %) | |||||||
Cash and cash equivalents held by consolidated sponsored investment funds(1) | (65 | ) | (75 | ) | 10 | 13 | % | |||||||||
Subtotal | 3,302 | 4,633 | (1,331 | ) | (29 | %) | ||||||||||
2007 credit facility – undrawn(2) | 2,266 | 2,171 | 95 | 4 | % | |||||||||||
Commercial paper(3) | — | (2,034 | ) | 2,034 | 100 | % | ||||||||||
Total liquidity | $ | 5,568 | $ | 4,770 | $ | 798 | 17 | % | ||||||||
Required regulatory capital(4) | $ | 897 | $ | 857 | $ | 40 | 5 | % | ||||||||
| (1) |
| The Company may not be able to access such cash to use in its operating activities. |
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| (3) | The outstanding commercial paper notes that are supported by the 2007 credit facility reduce the availability of the facility. |
| (4) | A portion of the required regulatory capital is partially met with cash and cash equivalents. |
In addition, aThe $798 million increase in total liquidity during the year ended December 31, 2010 included the effects on liquidity of the following: positive operating cash flows which were partially offset by (i) cash payments of 2009 year end incentive awards, including the payments for BGI employee compensation accrual assumed in the BGI Transaction, (ii) the purchase of $315 million of Federal Reserve Bank stock, (iii) the settlement of approximately $320 million of certain non-interest bearing notes assumed in the BGI Transaction and (iv) $176 million of repayments related to convertible debt.
A significant portion of the Company’s $1,011$1,403 million of net economic investments are illiquid in nature and, as such, may not be readily convertible to cash.
Short-term BorrowingsBorrowings:
The following describes the Company’s short-term borrowing arrangements, which the Company has access to utilize.
2007 Credit Facility
In August 2007, the Company entered into a five-year, $2.5 billion unsecured revolving credit facility (the “2007 facility”), which permits the Company to request an additional $500 million of borrowing capacity, subjectprovide back-up liquidity, fund ongoing working capital for general corporate purposes and to lender credit approval, up to a maximum of $3 billion.fund investment opportunities. The 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to EBITDA,earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 0.51 to 1 at December 31, 2008.
2010. At December 31, 2008,2010, the Company had $200$100 million outstanding under the 2007 facility with an interest rate of 0.61%0.47% and a maturity date of February 28, 2011. The Company had a daily average of $100 million outstanding during January 2009. During January 2009, the Company rolled over the $200 million in borrowings with an interest rate of 0.56%fourth quarter 2010 and a maturity date during February 2009.
61
Liquidity and Capital Resources (continued)
Short-term Borrowings (continued)
daily average of $115 million outstanding for the full year 2010.
Lehman Commercial Paper, Inc. has a $140 million participation under the 2007 facility; however, BlackRock does not expect that Lehman Commercial Paper, Inc. will honor its commitment to fund additional amounts.
In addition, in December 2007, in order Bank of America, a related party prior to support two enhanced cash funds that BlackRock manages, BlackRock elected to procure two letters of creditNovember 2010, has a $140 million participation under the 2007 facility in an aggregate amount of $100 million. In December 2008, the letters of credit were terminated.facility.
In June 2008, BlackRock Japan Co., Ltd., a wholly owned subsidiary of the Company, entered into a five billion Japanese yen commitment-line agreement with a banking institution (the “Japan Commitment-line”). The term of the Japan Commitment-line is one year and interest will accrue at the applicable Japanese short-term prime rate. The Japan Commitment-line is intended to provide liquidity flexibility for operating requirements in Japan. At December 31, 2008, the Company had no borrowings outstanding under the Japan Commitment-line.
Conversion of Convertible Debentures During 2008
During October 2008, the convertible debentures became convertible at the option of the holders into cash and shares of the Company’s common stock after the trustee determined that the trading price for the convertible debentures on each day of a five consecutive trading day period was less than 103% of the product of the last reported sale price of the Company’s common stock on such date and the conversion rate on such date. During the conversion period holders of $0.5 million of convertible debentures elected to convert their holdings into cash and shares.
Support of Two Enhanced Cash Funds
At December 31, 2008, BlackRock managed approximately $338 billion in cash management assets. Of this amount, approximately $350 million was held by two private placement enhanced cash funds. During 2007 and 2008, market events reduced the liquidity of certain securities, including securities issued by asset-backed structured investment vehicles held by these two funds.
During 2007, BlackRock made investments in the funds to enhance fund liquidity and to facilitate redemptions. At December 31, 2008, BlackRock’s total net investment in these two funds was approximately $82 million. BlackRock also provided capital contributions in 2007 and 2008 totaling $24 million and $3 million, respectively, to help preserve a one dollar net asset value per share for these two funds. These capital contributions resulted in an increase to general and administration expense.
In December 2007, BlackRock entered into capital support agreements with the two funds, backed by letters of credit drawn under BlackRock’s existing credit facility. Pursuant to the capital support agreements, BlackRock agreed to make subsequent capital contributions to the funds to cover realized losses, up to $100 million, related to specified securities held by the funds. In December 2008, BlackRock’s maximum potential obligation under the capital support agreements was reduced to $45 million, and in January 2009, one capital support agreement was terminated, due to the closure of the related fund, leaving only one capital support agreement, with a total $20 million potential obligation outstanding. Subsequent to December 31, 2008, the funds distributed approximately $100 million in aggregate to investors as a result of security sales and maturities.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Support of Two Enhanced Cash FundsShort-term Borrowings (continued)
Commercial Paper Program
On October 14, 2009, BlackRock recorded $12 million and $7 million in general and administration expense in 2007 and 2008, respectively, andestablished a corresponding liabilitycommercial paper program (the “CP Program”) under which the Company may issue unsecured commercial paper notes (the “CP Notes”) on a private placement basis up to a maximum aggregate amount outstanding at December 31, 2008 related to the fair valueany time of $3 billion. The initial proceeds of the capital support agreements with the two funds. The fair value of the potential liability relatedcommercial paper issuances were used to the capital support agreements will fluctuate in subsequent periods based principally on projected cash flows of the specified securities covered by the capital support agreements and market liquidity.
In addition, BlackRock may, at its option, from time to time, purchase securities from the funds at the greater of the funds’ amortized cost or fair value. In the event securities are purchased at amortized cost, a loss would be recorded based on the difference from fair value. During 2008, BlackRock purchased one security resulting in $6 million of non-operating losses.
At December 31, 2008, in applying the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R),Consolidation of Variable Interest Entities(“FIN 46(R)”), BlackRock concluded that it is the primary beneficiary of the two enhanced cash funds which resulted in consolidation of the funds on its consolidated statement of financial condition. At December 31, 2007, BlackRock concluded it was not the primary beneficiary of these funds.
Exposure to Collateralized Debt Obligations
In the normal course of business, BlackRock acts as a collateral manager to various CDOs. A CDO is a managed investment vehicle that purchases a portfolio of assets or enters into swaps. A CDO funds its activities through the issuance of several tranches of debt and equity, the repayment and return of which are linked to the performance of the assets in the CDO. The Company also may invest infinance a portion of the debt or equity issued. These entities meetBGI Transaction. Subsidiaries of Bank of America and Barclays, as well as other third parties, act as dealers under the definition of a variable interest entity under FIN 46(R). BlackRock has concluded that it is not the primary beneficiary of these CDOs, and as a result it does not consolidate these CDOs on its consolidated financial statements.CP Program. At December 31, 2008, BlackRock’s carrying value2010 the CP Program was supported by the 2007 facility.
The Company began to issue CP Notes under the CP Program on November 4, 2009. As of investments in these CDOs onDecember 31, 2010, BlackRock did not have any outstanding CP Notes. The Company did not have any CP Notes outstanding subsequent to September 2010 and had a daily average of $404 million CP Notes outstanding for the statement of financial condition was approximately $4 million.full year 2010.
Japan Commitment-line
In addition,September 2010, BlackRock managesJapan Co., Ltd., a serieswholly-owned subsidiary of credit default swap transactions, referred to collectively as the Pillars synthetic CDO transaction, whichCompany, renewed its five billion Japanese yen commitment-line agreement (the “Japan Commitment-line”) for a term of one year. The Japan Commitment-line is backed by a portfolio of both investment grade corporate and structured finance exposures. In connection with the transaction, BlackRock has entered into a credit default swap with a counterpartyintended to provide credit protection of $17 million, which represents the Company’s maximum risk of loss with respect to the provision of credit protection.liquidity and flexibility for operating requirements in Japan. At December 31, 2008,2010, the fair valueCompany had no borrowings outstanding under the Japan Commitment-line.
Other Significant 2010 Cash Uses
Settlement of Acquisition Related Liabilities with Barclays
In general, as certain acquired BGI receivables are collected, the credit default swapCompany is required to pay Barclays approximately $342 million, which was approximately $0.5 million and was includedrecorded as of December 31, 2009 in due to related parties on the Company’s consolidated statement of financial condition, to settle certain non-interest bearing notes assumed in other liabilities.
Atthe BGI Transaction. As of December 31, 2008, BlackRock’s maximum risk2010, the Company had repaid approximately $320 million.
Federal Reserve Bank stock
BlackRock Institutional Trust Company, N.A. (“BTC”), a wholly-owned subsidiary of the Company, purchased $315 million of additional loss relatedFederal Reserve Bank stock during the year ended December 31, 2010 pursuant to CDOs was approximately $20 million.its regulatory requirements. Additional purchases of Federal Reserve Bank stock, pursuant to BTC’s regulatory requirements, may be required; however, such amounts currently are not expected to be material.
Capital ActivitiesApproval to Repurchase up to 5,100,000 shares
On August 2, 2006,In July 2010, BlackRock announced that its Board of Directors had authorized a shareapproved the repurchase of up to 5,100,000 shares to neutralize the dilutive effects of restricted stock units and options that have been granted to employees and which will become dilutive over the next several years. The shares are to be repurchased with management discretion on the timing of the repurchases. BlackRock’s pre-existing repurchase program to purchase an additional 2.1 millionestablished in 2006 was terminated effective with the new authorization. As of December 31, 2010, the Company had repurchased 896,102 shares of BlackRock common stock. Pursuant to this repurchase program, BlackRock may make repurchases from time to time, as market conditions warrant, in the open market or in privately negotiated transactions at the discretion of management. The Company repurchased 1,348,600 shares under the program in open market transactions for approximately $200.9 million through December 31, 2008. The Company did not repurchase any shares under the program during 2008. As a result, the Company is currently authorized to repurchase an additional 751,400 shares under its share repurchase program.$140 million.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Barclays Support of Certain Cash Funds
Barclays has provided capital support agreements to support certain cash management products acquired by BlackRock in the BGI Transaction. Pursuant to the terms of the capital support agreements, Barclays agreed to cover losses on covered securities within the products in the aggregate of up to $2.2 billion from December 1, 2009 through December 1, 2013 or until certain criteria are met. BlackRock and Barclays have procedures in place to determine loss events on covered securities within the products and to ensure support payments from Barclays. At December 31, 2010, Barclays’ remaining maximum potential obligation in the aggregate under the capital support agreements was $1.7 billion. At December 31, 2010, BlackRock concluded that although these funds were variable interest entities, it was not the primary beneficiary of these funds.
Net Capital Requirements
The Company is required to maintain net capital in certain internationalregulated subsidiaries within a number of jurisdictions, which is met in partpartially maintained by retaining cash and cash equivalent investmentsequivalents in those jurisdictions. As a result, such subsidiaries of the Company may be restricted in itstheir ability to transfer cash between different jurisdictions.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.
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 various regulatory capital and liquid asset requirements administered by Federal banking agencies.
At December 31, 2008,2010, the Company was required to maintain approximately $172$897 million in net capital at thesein certain regulated subsidiaries, including BTC and isentities regulated by the FSA in the United Kingdom, and were in compliance with all applicable regulatory minimum net capital requirements.
Contractual Obligations, Commitments and Contingenciesrequirements.
The following table sets forth contractual obligations, commitments and contingencies by yearDuring 2011, the Company’s net capital requirements increased approximately $157 million due to increases related to certain of payment as of December 31, 2008:its European regulated legal entities.
| (Dollar amounts in millions) | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | ||||||||||||||
Contractual obligations and commitments: | |||||||||||||||||||||
Long-term borrowings1 | |||||||||||||||||||||
Long-term notes | $ | 44 | $ | 44 | $ | 44 | $ | 44 | $ | 44 | $ | 875 | $ | 1,095 | |||||||
Convertible debentures | 257 | — | — | — | — | — | 257 | ||||||||||||||
Other | 1 | 1 | — | — | — | — | 2 | ||||||||||||||
Short-term borrowings | 200 | — | — | — | — | — | 200 | ||||||||||||||
Operating leases | 62 | 58 | 55 | 50 | 47 | 274 | 546 | ||||||||||||||
Purchase obligations | 35 | 18 | 7 | 3 | — | — | 63 | ||||||||||||||
Investment / loan commitments | 9 | 49 | 16 | 1 | 34 | 192 | 301 | ||||||||||||||
Total contractual obligations and commitments | 608 | 170 | 122 | 98 | 125 | 1,341 | 2,464 | ||||||||||||||
Contingent obligations: | |||||||||||||||||||||
Contingent distribution obligations | 401 | 401 | 401 | 401 | 401 | — | 2,005 | ||||||||||||||
Contingent payments related to business acquisitions | 285 | 10 | 595 | — | — | — | 890 | ||||||||||||||
Total contractual obligations, commitments and contingent obligations2 | $ | 1,294 | $ | 581 | $ | 1,118 | $ | 499 | $ | 526 | $ | 1,341 | $ | 5,359 | |||||||
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Contractual Obligations, Commitments and Contingencies
The following table sets forth contractual obligations, commitments and contingencies by year of payment at December 31, 2010:
| (Dollar amounts in millions) | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||||||||||||||||||
Contractual obligations and commitments: | ||||||||||||||||||||||||||||
Short-term borrowings: | ||||||||||||||||||||||||||||
Principal | $ | 100 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 100 | ||||||||||||||
Convertible debentures: | ||||||||||||||||||||||||||||
Principal | 67 | — | — | — | — | — | 67 | |||||||||||||||||||||
Interest | 2 | — | — | — | — | — | 2 | |||||||||||||||||||||
Long-term borrowings: | ||||||||||||||||||||||||||||
Principal | — | 500 | — | 1,000 | — | 1,700 | 3,200 | |||||||||||||||||||||
Interest | 140 | 140 | 129 | 129 | 94 | 288 | 920 | |||||||||||||||||||||
Operating leases | 131 | 117 | 130 | 115 | 106 | 903 | 1,502 | |||||||||||||||||||||
Purchase obligations | 121 | 30 | 16 | 5 | 2 | — | 174 | |||||||||||||||||||||
Investment commitments | 183 | — | — | — | — | — | 183 | |||||||||||||||||||||
Total contractual obligations and commitments | 744 | 787 | 275 | 1,249 | 202 | 2,891 | 6,148 | |||||||||||||||||||||
Contingent obligations: | ||||||||||||||||||||||||||||
Contingent distribution obligations | 226 | 226 | 226 | — | — | — | 678 | |||||||||||||||||||||
Total contractual obligations, commitments and contingent obligations(1) | $ | 970 | $ | 1,013 | $ | 501 | $ | 1,249 | $ | 202 | $ | 2,891 | $ | 6,826 | ||||||||||||||
| (1) | As of December 31, 2010, the Company had $246 million of net unrecognized tax benefits. Due to the uncertainty of timing and amounts that will ultimately be paid, this amount has been excluded from the table above. |
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Contractual Obligations, Commitments and Contingencies (continued)
Long-termShort-term Borrowings
Long-term Notes
At December 31, 2008, long-term borrowings were $946 million. Debt service2010, the Company had $100 million outstanding under the 2007 facility with an interest rate of 0.47% and repayment requirements, assuminga maturity date of February 28, 2011.
Convertible Debentures
In February 2005, the Company’sCompany issued $250 million aggregate principal amount of convertible debentures due in 2035 and bearing interest at a rate of 2.625% Convertible Debenture due 2035 (the “convertible debentures”) are convertedper annum. Beginning in February 2009, the convertible debentures became convertible at the option of the holders at any time and on and after, February 20, 2010 the convertible debentures became callable by the Company at any time following not more than 60, but not less than, 30 days notice. On the contractual obligations table above, the remaining $67 million principal balance of the convertible debentures is assumed, although not determined, to be fully repaid in 20092011.
Long-term Borrowings
At December 31, 2010, the principal amount of long-term borrowings was $3.2 billion. Debt service and repayment requirements are $302$140 million in 2009, $452011, $640 million in 2010 and $442012, $129 million in each of 2011, 20122013, $1,129 million in 2014 and 2013.$94 million in 2015.
2017 Notes
In September 2007, the Company issued $700 million in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “Notes”“2017 Notes”). A portion of the net proceeds of the 2017 Notes was used to fund the initial cash payment for the acquisition of the fund of funds business of Quellos and the remainder was used for general corporate purposes. Interest is payable semi-annually in arrears on March 15 and September 15 of each year, or approximately $44 million per year. The 2017 Notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a “make-whole” premium.redemption price. The 2017 Notes were issued at a discount of $6 million, which is being amortized over thetheir ten-year term.
Convertible Debentures2012, 2014 and 2019 Notes
In February 2005,December 2009, the Company issued $250 million$2.5 billion in aggregate principal amount of convertible debentures dueunsecured and unsubordinated obligations. These notes were issued as three separate series of senior debt securities including $0.5 billion of 2.25% notes, $1.0 billion of 3.50% notes and $1.0 billion of 5.0% notes maturing in 2035December 2012, 2014 and bearing interest at2019, respectively. Net proceeds of this offering were used to repay borrowings under our CP program, which was used to finance a rateportion of 2.625%the BGI Transaction, and for general corporate purposes. Interest on these notes of approximately $96 million per annum. Interestyear is payable semi-annually in arrears on February 15June 10 and August 15December 10 of each year, or approximately $6.5 million per year. The convertible debentures are callable by the CompanyThese notes may be redeemed prior to maturity at any time onin whole or after February 20, 2010. In addition, the convertible debentures contain certain put and conversion provisions. However, beginning in February 2009 the convertible debentures became convertiblepart at the option of the holders. On the contractual obligations table above, the remaining $249.5Company at a “make-whole” redemption price. These notes were issued collectively at a discount of $5 million, principal balance of the convertible debentureswhich is assumed, although not determined, to be repaid in 2009.being amortized over approximately a weighted 6.6 year term.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Short-term BorrowingsContractual Obligations, Commitments and Contingencies (continued)
At December 31, 2008, the Company had $200 million outstanding under the 2007 facility with an interest rate of 0.61% and a maturity date during January 2009. During January 2009, the Company rolled over the $200 million in borrowings with an interest rate of 0.56% and maturity date during February 2009.
Operating Leases
The Company leases its primary office space under agreements that currently expire through 2023.2035. In connection with certain lease agreements, the Company is responsible for escalation payments. The contractual obligations table above includes only guaranteed minimum lease payments for such leases and does not project potential escalation or other lease-related payments. These leases are classified as operating leases and, as such, are not recorded as liabilities on the consolidated statements of financial condition.
In January 2010, the Company entered into an agreement with Mourant & Co Trustees Limited and Mourant Property Trustees Limited as Trustees of the Drapers Gardens Unit Trust, for the lease of approximately 292,418 square feet of office and ancillary (including retail) space located at Drapers Gardens, 12 Throgmorton Avenue, London, EC2, United Kingdom. The lease began on February 17, 2010 (the “Effective Date”) and will continue for 25 years, with the option to renew for an additional five-year term. The lease provides for total annual base rental payments of approximately $22 million, which is subject to increase on each fifth anniversary of the beginning of the lease. The lease included an initial rent free period for 36 months and 22 days following the Effective Date.
Purchase Obligations
In the ordinary course of business, BlackRock enters into contracts or purchase obligations with third parties whereby the third parties provide services to or on behalf of BlackRock. Purchase obligations included in the contractual obligations table above represent executory contracts, which are either non-cancelable or cancelable with a penalty. At December 31, 2008,2010, the Company’s obligations primarily reflect standard service contracts for portfolio, market data, and office related services and third party marketing and promotional services. Purchase obligations are recorded on the Company’s financial statements only after the goods orwhen services have been receivedare provided and, as such, obligations for services not received are not included in the Company’s consolidated statement of financial condition at December 31, 2008.2010.
In connection with the Drapers Gardens lease described above, the Company entered into a purchase obligation for construction services of approximately $67 million. The Company incurred $4 million of construction services during the year ended December 31, 2010. Substantially all of the remaining obligation of $63 million is expected to be incurred during 2011.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Contractual Obligations, Commitments and Contingencies (continued)
Investment /LoanInvestment/Loan Commitments
At December 31, 2008,2010, the Company had $292$183 million of various capital commitments to fund sponsored investment funds, including funds of private equity funds, real estate funds and distressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third party funds as third party non-controlling interest holders have the legal obligation to fund the respective commitments of such funds of funds. Generally, the timing of the funding of these commitments is unknown. Therefore, amountsunknown and the commitments are shown to be paid upon the expiration date of the commitment. Actual payments could be madecallable on demand at any time prior to suchthe expiration dateof the commitment and ifare therefore presented in 2011. These unfunded commitments are not called by that date, such commitments would expire. These commitments have not been recorded on the Company’s consolidated statements of financial condition at December 31, 2008.condition. The above schedule does not include potential future commitments approved by the Company’s Capital Committee, but which are not yet legally binding commitments.binding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.
At December 31, 2008, the Company had loans outstanding of approximately $167 millionPrior to a warehouse entity established for certain private equity funds of funds, which was included in due from related parties on the Company’s consolidated statement of financial condition. At December 31, 2008, the Company was not committed to make additional loans to the warehouse entity. In January 2009, approximately $29 million was repaid while the remainder is expected to be fully repaid on, or about, March 31, 2009.
At December 31, 2008,2010, the Company was committed to provide financing of up to $60 million to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that iswas managed by a subsidiary of BlackRock, of up to $60 million until March 2010.BlackRock. The financing is collateralized by a pledge by Anthracite pledgingof its ownership interest in ana real estate debt investment fund, which is also managed by a subsidiary of BlackRock. At December 31, 2008, $302010, $33.5 million of financing was outstanding and remains outstanding as of February 2011, which maturesis past its final maturity date of March 5, 2010. At December 31, 2010, the carrying value of the collateral was estimated to be zero, which resulted in April 2009 at an interest rate of 6.02%, which was includedadditional $12.5 million reduction in amounts due from related parties on the Company’s consolidated statement of financial condition. Subsequent tocondition and an equal amount recorded in general and administrative expenses on the Company’s consolidated statements of income for the year ended December 31, 2008,2010. The Company has no obligation to loan additional amounts to Anthracite borrowed an additional $3.5 million, which maturesunder this facility. Anthracite filed a voluntary petition for relief under Chapter 7 of Title 11 of the U.S. Code in April 2009, at a current interest ratethe U.S. Bankruptcy Court for the Southern District of 4.76%.New York on March 15, 2010. Recovery of any amount of the financing provided by the Company in excess of the value of the collateral is not anticipated. The $33.5 millionCompany continues to evaluate the collectability of financingthe outstanding may be renewed upon maturity for an additional period of time.borrowings.
Carried Interest Claw-back
As a general partner in certain investment funds, including private equity partnerships and certain hedge funds, the Company receivesmay receive certain carried interest cash distributions from the partnerships according to thein 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 certain return as specified in the various partnership agreements. At December 31, 2010, the Company has received less than $10 million in cash that was not recorded as revenue and is subject to claw-back.
Contingent Distribution Obligations
In November 2010, BlackRock has entered into an Amendeda second amended and Restatedrestated global distribution agreement with Merrill Lynch, which requires the Company to make payments to Merrill Lynch contingent upon sales of products and level of assets under management maintained in certain BlackRock products. The economic terms of the agreement will remain in effect until January 2014. After such term, the agreement will renew for one automatic 3-yearthree-year extension if certain conditions are satisfied. The above schedule reflects the Company’s estimateestimated payments for 2009,2011, which due to uncertainty of future sales and asset levels and future additional sales, has been held constant for 20102011 through 2013.
Contingent Payments Related to Business Acquisitions
Amounts included in the table above are additional contingent payments to be paid in cash related to its acquisitions of: (i) SSRM Holdings, Inc. and (ii) certain assets of Quellos. As the remaining contingent obligations are primarily dependent upon achievement of certain operating measures, the ultimate liabilities are not certain as of December 31, 2008 and have not been recorded on the Company’s consolidated statements of financial condition. The amount of contingent payments reflected for any year represents the maximum amount of cash that could be payable at the earliest possible date under the terms of the business purchase agreements.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Contractual Obligations, Commitments and Contingencies (continued)
Contingent Payments Related to Business Acquisitions (continued)
SSRM Holdings:
In January 2005, the Company closed its acquisition of SSRM Holdings, Inc. from MetLife for adjusted consideration of approximately $265 million in cash and 550,000 restricted shares of BlackRock common stock and certain additional contingent payments. In January 2010, the fifth anniversary of the closing of the SSR Transaction, MetLife may be entitled to receive an additional payment of up to a maximum of $10 million based on the Company’s retained AUM associated with the MetLife defined benefit and defined contribution plans.
Quellos:
In connection with the Quellos Transaction, Quellos may bewas entitled to receive two contingent payments, uponsubject to achieving certain investment advisory base and performance fee measures through December 31, 2010, totaling up to an additional $969 million in a combination of cash and stock.
The first contingent payment,During second quarter 2009, the Company determined the amount of up to $374 million, is payable in April 2009 up to 25% in BlackRock common stock and the remainder in cash. As of December 31, 2008, it is estimated that the first contingent payment will equal approximately $300to be $219 million, of which $11 million has beenwas previously paid in cash during 2008. Of the remaining $289$208 million, $217during second quarter 2009, $156 million will bewas paid in cash and $72$52 million was paid in common stock, or approximately 330,000 shares based on a price of $157.33 in April 2009. The ultimate amount of the first contingent payment will not be certain until March 31, 2009.per share.
The second contingent payment, of up to $595 million, iswould have been payable in cash in 2011. Quellos may also bewas entitled to a “catch-up” payment in 2011 if certain investment advisory base fee measures arewere met through 2010 to the extent thatas the value of the first contingent payment iswas less than $374 million. A portion of the second contingent payment, not to exceed $90 million, may bewould have been paid to Quellos based on factors including the continued employment of certain employees with BlackRock. Therefore, this portion,
The base and performance fee measures through December 31, 2010 were not to exceed $90 million, would be recorded as employee compensation.achieved, therefore, the remaining contingent payments will not occur.
On the contractual obligation table above, the maximum remaining payments are included for each contingent payment.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Liquidity and Capital Resources (continued)
Contractual Obligations, Commitments and Contingencies (continued)
The following items have not been included in the contractual obligations, commitments and contingencies table:
Impact Investing
In connection with the Impact Investing acquisition, the Company may be required to make several additional contingent payments, which are not expected to be material, upon completion of certain operating measures through 2010. Currently, the payments are anticipated to be recorded as employee compensation.
Compensation and Benefit Obligations
The Company has various compensation and benefit obligations, including bonuses, commissions and incentive payments payable, defined contribution plan matching contribution obligations, and deferred compensation arrangements, that are excluded from the table above primarily due to uncertainties in their payout periods. These arrangements are discussed in more detail in Notes 1315, Stock-Based Compensation, and 1416, Employee Benefit Plans, to the consolidated financial statements beginning on page F-1 of this Form 10-K. Accrued compensation and benefits at December 31, 20082010 totaled $826$1,520 million and included incentive compensation of $645$1,220 million, deferred compensation of $71$89 million and other compensation and benefits related obligations of $110$211 million. IncentiveSubstantially all of the incentive compensation liability was primarily paid in the first quarter of 2009,2011, while the deferred compensation obligations are generally payable over periods up to five years.
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Contractual Obligations, Commitments and Contingencies (continued)
Separate Account Liabilities
The Company’s two wholly-owned registered life insurance companycompanies in the United Kingdom maintainsmaintain separate account assets representing segregated funds held for purposes of funding individual and group pension contracts. The net investment income and net realized and unrealized gains and losses attributable to these separate account assets accrue to the contract ownerowners and, as such, an offsetting separate account liability is recorded. At December 31, 2008,2010, the Company had $2.6$121.1 billion of assets and offsetting liabilities on the consolidated statement of financial condition. The payment of these contractual obligations is inherently uncertain and varies by customer. As such, these liabilities have been excluded from the contractual obligations table above.
Indemnifications
In many of the Company’s contracts, including the BGI, MLIM and Quellos Transaction agreements, BlackRock agrees to indemnify third parties under certain circumstances. The terms of the indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined and has not been included in the table above or recorded in the Company’s consolidated statement of financial condition at December 31, 2008.2010. See further discussion in Note 1214, Commitments and Contingencies, to the consolidated financial statements beginning on page F-1 of this Form 10-K.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies
The preparation of the 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Management considers the following critical accounting policies important to understanding the consolidated financial statements. For a summary of these and additional accounting policies as well as recent accounting developments see Note 2, Significant Accounting Policies, to the consolidated financial statements beginning on page F-1 of this Form 10-K.
InvestmentsConsolidation of Sponsored Investment Funds and Securitization Products
Consolidation of Investments
sponsored investment funds and securitization products (collectively “investment products”) is determined pursuant to ASC 810,Consolidation. The accounting method used forby the Company’s investments generallyCompany is dependent upon the influence the Company has over its investee. For investments whereinvestee, the investment product. To the extent that BlackRock can exert control over the financial and operating policies of the investee,investment product, which generally exists if there is a 50% or greater voting interest or if partners or members of certain products do not have substantive rights, the investeeinvestment product is consolidated into BlackRock’s financial statements.
For investment products in which BlackRock’s voting interest is less than 50%, an analysis is performed to determine if the investment product is a variable interest entity (“VIE”) or a voting rights entity. Upon the determination that the investment product is a VIE further analysis, as discussed below, is performed to determine if BlackRock is the primary beneficiary (“PB”) of the investment product, which would result in consolidation.
Consolidation of Variable Interest Entities
Pursuant to FIN 46(R),ASC 810-10, certain investment products for certain investments wherewhich the risks and rewards of ownership are not directly linked to voting interests (“variable interest entities” or “VIEs”), an investee may be consolidateddeemed VIEs. BlackRock reviews factors, including the rights of the equity holders and obligations of equity holders to absorb losses or receive expected residual returns to determine if the investment product is a VIE. BlackRock is consideredrequired to consolidate a VIE when it is deemed to be the primary beneficiaryPB, which is evaluated continuously as facts and circumstances change.
In June 2009, the FASB issued ASU 2009-17,Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities(“ASU 2009-17”), which became effective for BlackRock on January 1, 2010. In February 2010 the FASB issued ASU 2010-10,Amendments to Statement 167 for Certain Investment Funds(“ASU 2010-10”).This ASU deferred the application of the VIE. Statement of Financial Accounting Standards (“SFAS”) No. 167,Amendments to FASB Interpretation No. 46(R), to a reporting enterprise’s interest in VIEs if certain conditions are met.
The primary beneficiaryPB of a VIE that is an investment fund meeting the conditions of ASU 2010-10 is the partyenterprise that absorbs athe majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of holding variable interests.interests (including those of related parties). Effective January 1, 2010, the PB of a VIE that does not meet the conditions for deferral in ASU 2010-10 is the enterprise that has the power to direct activities of the entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the VIE.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Consolidation of Variable Interest Entities (continued)
Significant judgment is required in the determination of whether the Company is the primary beneficiaryPB of a VIE. If the Company, andtogether with its related parties, is determined to be the primary beneficiaryPB of a VIE, the entity will be consolidated within BlackRock’s consolidated financial statements. In order to determine whether the Company is the primary beneficiaryPB of a VIE for entities that do meet the conditions of ASU 2010-10, management must make significant estimates and assumptions of probable future cash flows and assign probabilities to different cash flow scenarios. Assumptions made in such analyses 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, gain realization, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.
In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debt/loan obligations (“CDOs” or “CLOs”) that do not meet the conditions of ASU 2010-10 and sponsored investment funds, which may be considered VIEs. At December 31, 2010, the Company consolidated four VIEs, including three CLOs and one sponsored private equity fund. At December 31, 2010, the following balances related to these four VIEs were consolidated on the Company’s consolidated statement of financial condition:
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| (Dollar amounts in millions) | CLOs | Sponsored Private Equity Fund | Total Consolidated VIEs | |||||||||
Assets of consolidated VIEs: | ||||||||||||
Cash and cash equivalents | $ | 82 | $ | 11 | $ | 93 | ||||||
Bank loans, bonds and other investments | 1,278 | 34 | 1,312 | |||||||||
Liabilities of consolidated VIEs: | ||||||||||||
Borrowings | (1,278 | ) | — | (1,278 | ) | |||||||
Other liabilities | (7 | ) | — | (7 | ) | |||||||
Appropriated retained earnings | (75 | ) | — | (75 | ) | |||||||
Non-controlling interests of consolidated VIEs | — | (45 | ) | (45 | ) | |||||||
Total net interests in consolidated VIEs | $ | — | $ | — | $ | — | ||||||
As of December 31, 2010, BlackRock was the manager of over 20 CLOs/CDOs and other securitization entities, including the three aforementioned CLOs in which BlackRock, in accordance with ASU 2009-17, was determined to be the PB, which resulted in consolidation of these VIEs in the Company’s consolidated financial statements. BlackRock was deemed to be the PB because it has the power to direct the activities of the CLO that most significantly impact the entity’s economic performance and has the right to receive benefits that potentially could be significant to the VIE. At December 31, 2010, the Company had $1,360 million and $1,285 million in assets and liabilities, respectively, on its consolidated statement of financial condition related to these consolidated CLOs. In addition, the Company recorded appropriated retained earnings for the difference, as the CLO noteholders, not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLO’s assets and liabilities. Therefore, the changes in the assets and liabilities of these CLOs have no impact on net income attributable to BlackRock, Inc. or its cash flows.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
InvestmentsCritical Accounting Policies (continued)
Consolidation of InvestmentsVariable Interest Entities (continued)
At of December 31, 2008,2010, BlackRock was determined to be the Company applied an expected loss model to certain VIEs and determined that it is the primary beneficiaryPB of two enhanced cash funds and one sponsored private equity investment fund of funds resultingin which it had a non-substantive investment and was deemed to absorb the majority of the variability due to its de-facto third party relationships with other partners in the consolidationfund, which limits the ability of the fundspartners to transfer or sell their interests without BlackRock’s consent as the general partner of the fund. At December 31, 2010, the Company had recorded $11 million, $34 million and $45 million in cash and cash equivalents, private equity investments and nonredeemable non-controlling interests of consolidated VIEs, respectively, on its consolidated statement of financial condition.condition related to this VIE. The Company has no risk of loss with its involvement with this VIE. Therefore, the changes in the assets and liabilities of this VIE have no impact on net income attributable to BlackRock, Inc.
Consolidation of Voting Rights Entities
To the extent that BlackRock maintains 50% or greater voting interest of an investment product, BlackRock is deemed to have control of the product, which results in consolidation of the product into BlackRock’s financial statements.
The Company, as general partner or managing member of itscertain sponsored investment funds, generally is generally presumed to control funds that are limited partnerships or limited liability companies. Pursuant to Emerging Issues Task ForceASC 810-20, Control of Partnerships and Similar Entities (“EITF”ASC 810-20”) Issue No. 04-5,Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, the Company reviews such investment vehicles to determine if such a presumption can be overcome by determining if other non-affiliated partners or members of the limited partnership or limited liability company have the substantive ability to dissolve (liquidate) the investment vehicle, or otherwise to remove BlackRock as the general partner or managing member without cause based on a simple unaffiliated majority vote, or have other substantive participating rights. If the investment vehicle is not a VIE and the presumption of control is not overcome, the investment vehicle will be consolidated into BlackRock’s financial statements.
BlackRock acts as general partner or managing member for consolidated private equity funds. In December 2008, BlackRock took necessary steps to grant additional rights to the unaffiliated investors in three funds with net assets at December 31, 2008 of approximately $210 million. The granting of these rights resulted in the deconsolidation of such investment funds from the consolidated financial statements as of December 31, 2008.
At December 31, 2008 and 2007, as a result of consolidation of various investment products, the Company had the following balances on its consolidated statements of financial condition:
| December 31, 2008 | December 31, 2007 | |||||||
Cash and cash equivalents | $ | 61 | $ | 67 | ||||
Investments | 728 | 1,054 | ||||||
Other net assets (liabilities) | 12 | (218 | ) | |||||
Non-controlling interests | (491 | ) | (578 | ) | ||||
Total exposure to consolidated investment funds | $ | 310 | $ | 325 | ||||
The Company has retained the specialized accounting of these investment funds pursuant to EITF No. 85-12,Retention of Specialized Accounting for Investments in Consolidation.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
InvestmentsCritical Accounting Policies (continued)
Consolidation of Voting Rights Entities (continued)
At December 31, 2010 and 2009, as a result of consolidation of various investment products deemed to be voting rights entities, including products where BlackRock owns 50% of greater of the voting rights of the product, under the consolidation policies described above, the Company had the following balances on its consolidated statements of financial condition:
| (Dollar amounts in millions) | December 31, 2010 | December 31, 2009 | ||||||
Cash and cash equivalents | $ | 65 | $ | 75 | ||||
Investments: | ||||||||
Trading investments | 60 | 103 | ||||||
Other investments | 337 | 360 | ||||||
Other assets | 3 | 2 | ||||||
Other liabilities | (10 | ) | (9 | ) | ||||
Non-controlling interests | (195 | ) | (273 | ) | ||||
BlackRock’s net interests in consolidated investment funds | $ | 260 | $ | 258 | ||||
The Company has retained the specialized accounting of these investment funds pursuant to ASC 810-10. At December 31, 2009, the above balances included a consolidated sponsored investment fund that also was deemed a VIE at December 31, 2010 and is currently reported within assets and liabilities of consolidated VIEs on the consolidated statement of financial condition. This VIE, as well as three CLOs which are also VIEs, was excluded from the December 31, 2010 balances above as commencing in 2010 these balances are reported separately on the consolidated statement of financial condition.
Investments
Equity Method Investments
For equity investments where BlackRock does not control the investee, and where the Company is not the primary beneficiaryPB of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company uses the equity method of accounting. The evaluation of whether the Company exerts control or significant influence over the financial and operational policies of its investees requires significant judgment based on the facts and circumstances surrounding each individual investment. Factors considered in these evaluations may include the type of investment, the legal structure of the investee, the terms and structure of the investment agreement including investor voting or other rights, the terms of BlackRock’s advisory agreement or other agreements with the investee, any influence BlackRock may have on the governing board of the investee, the legal rights of other investors in the entity pursuant to the fund’s operating documents and the relationship between BlackRock and other investors in the entity.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Investments (continued)
Equity Method Investments (continued)
Substantially all of BlackRock’s equity method investees are investment companies which record itstheir underlying investments at fair value. Therefore, under the equity method of accounting, BlackRock’s share of the investee’s underlying net income predominantly represents fair value adjustments in the investments held by the equity method investees. BlackRock’s share of the investee’s underlying net income or loss is based upon the most currently available information and is recorded as non-operating income (expense) for investments in investment companies, or as other revenue for operating or advisory company investments, which are recorded in other assets, since such operating or advisory companies are considered to be integralconnected to BlackRock’s core business.
At December 31, 2008,2010, the Company had $501$583 million and $16$58 million of equity method investeesinvestments, including equity method investments held for deferred compensation, reflected within investments and other assets, respectively, and at December 31, 20072009 the Company had $517$401 million and $5$36 million of equity method investees reflected in investments and other assets, respectively.
Impairment of Investments
The Company’s management periodically assesses its equity method, available-for-sale, held-to-maturity and cost investments for impairment. If circumstances indicate that impairment may exist, investments are evaluated using market values, where available, or the expected future cash flows of the investment. If the undiscounted expected future cash flows are lower than the Company’s carrying value of the investment, an impairment charge is recorded to the consolidated statementsstatement of income.
When the fair value of an available-for-sale security is lower than its cost or amortized cost value, the Company evaluates the security to determine whether the impairment is considered “other-than-temporary”.
In making this determination for equity securities, the Company considers, among other factors, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its cost, the financial condition and near-term prospects of the security’s issuer and the Company’s ability and intent to hold the security for a period of time sufficient to allow for recovery of such unrealized losses. If the impairment is considered other-than-temporary, a charge is recorded to the consolidated statementsstatement of income.
TheIn making this determination for debt securities, the Company evaluates its CDO investments for impairment quarterly throughoutconsiders whether: (1) the termCompany has the intent to sell the security, (2) it is more likely than not that the Company will be required to sell the security before recovery, or (3) the Company does not expect to recover the entire amortized cost basis of the investment. The Company reviews cash flow estimates throughout the life of each CDO investment.security. If the net present value ofCompany does not intend to sell a security and it is not more likely than not that the estimated future cash flows is lower thanentity will be required to sell the carrying value ofsecurity, but the investmentsecurity has suffered a credit loss, the credit loss will be bifurcated from the total impairment and also is lower thanrecorded in earnings with the net present value of the previous estimate of cash flows, an impairment is considered other-than-temporary. The impairment loss is then recognized based on the excess of the carrying amount of the investment over its estimated fair value.remaining portion recorded in other comprehensive income.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Impairment of Investments (continued)
For the years ended December 31, 2008, 20072010, 2009 and 2006,2008, the Company recorded other-than-temporary impairments of $8less than $1 million, $16$5 million, and $2$8 million, respectively, related to debt securities and CDO available-for-sale investments.investments, which were recorded in non-operating income (expense) on the consolidated statements of income.
The $5 million of impairments in 2009 included $2 million related to credit loss impairments on debt securities. The $2 million credit loss impairment in 2009 was determined by comparing the estimated discounted cash flows versus the amortized cost for each individual security. The other-than-temporary impairments arerelated to debt securities were due to a reduction in estimated cash flows of CDO investments as well as adverse credit conditions for a debt instrument that was purchased from an enhanced cash management fund in which the Company determined that it did not have the ability to hold the securities for a period of time sufficient to allow for recovery of such unrealized losses.
EvaluationsEvaluation of securities impairments involves significant assumptions and management judgments, which could differ from actual results, and these differences could have a material impact on the Company’s consolidated statements of income.
Fair Value Measurements
BlackRock adopted Statementthe applicable provisions of Financial Accounting Standards (“SFAS”) No. 157,ASC 820-10,Fair Value Measurements and Disclosures(“SFAS No. 157”ASC 820-10”), as of January 1, 2008, which requires,require, among other things, enhanced disclosures about investmentsassets and liabilities that are measured and reported at fair value. SFAS No. 157 establishes
Hierarchy of Fair Value Inputs
The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to athe fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide enhanced disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.
Financial instrumentsAssets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs – 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 NAVs which in accordance with GAAP are calculated under fair value measures and are equal to the earnings of such funds), ETFs, and listed equities and certain debt securities.derivatives.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Fair Value Measurements (continued)
Level 2 Inputs – Inputs:
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers, for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. Assets which generally are included
Level 2 assets in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, held by a consolidated sponsored cash management fund, securities held within consolidated hedge funds, certain equity method limited partnership interests in hedge funds and mutual funds valued based on net asset values where the Company has the ability to redeem at the measurement date or in which the valuations for substantially all of the investments within the fund are based upon Level 1 or Level 2 inputs, as well asnear term without redemption restrictions, restricted public securities valued at a discount.discount, as well as over–the-counter derivatives, including interest and inflation rate swaps and foreign exchange currency contracts that have inputs to the valuations that can be generally corroborated by observable market data.
Level 3 Inputs – Inputs:
Unobservable inputs for the valuation of the asset or liability.liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. AssetsCertain investments that are valued using net asset values and that are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.
Level 3 assets in this category generally include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds.funds, direct private equity investments held within consolidated funds and certain held for sale real estate disposal assets.
The Company’s assessment
Level 3 liabilities included in this category include borrowings of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
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Critical Accounting Policies (continued)
Fair Value Measurements (continued)
BlackRock records substantially all investments on its consolidated statements of financial condition at fair value or amounts that approximate fair value. For certain investments, including investments classified as trading investments, equity method investments and consolidated sponsored investment funds, changes in fair value affect net income in the period of the change. For other investments classified as available-for-sale securities, changes in fair value are recorded as a component of stockholders’ equity and generally do not directly impact BlackRock’s net income until such investments are sold or are considered impaired (see below). Marketable securities are priced using publicly available market data. Non-marketable securities, however, generally are priced using a variety of methods and resources, including the most currently available net asset values orcollateralized loan obligations valued based upon non-binding broker quotes.
Level 3 inputs include BlackRock capital accounts of the investment, valuation services from third party providers, internal valuation models which utilize available market data and management assumptions or,for its partnership interests in the absence of other market data and resources, the fair value for an investment is estimated in good faith by the Company’s management based on a number of factors, including the liquidity, financial condition and current and projected operating performance of the investment.
Changes in fair value on approximately $1.3 billion of investments will impact the Company’s non-operating income (expense) and approximately $100 million will impact accumulated other comprehensive income. As of December 31, 2008, changes in fair value of approximately $728 million of such investments within consolidated sponsored investment funds will also impactvarious alternative investments. BlackRock’s non-controlling interests expense on the consolidated statements of income. BlackRock’s net exposure to changes in fair value of such consolidated sponsored investment funds is $310 million.
BlackRock’s $813$650 million of Level 3 investments at December 31, 20082010 primarily include co-investments in real estate equity products, private equity fund of funds and private equity funds, funds of hedge funds as well as funds that invest in distressed credit and mortgage securities.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 utilize pricingpricing/valuation information, including independent appraisals from third party sources,sources; however, in some instances current valuation information for illiquid securities or securities in markets that are not active may not be available from any third party source or fund management may conclude that the valuations that are available from third party sources are not reliable. In these instances fund management may perform model-based analytical valuations that may be used to value these investments.
During the year ended December 31, 2008, the Company reclassified approximately $29 million of net investments out of Level 3. The majority of the net reclassification was related to equity method investments which the Company uses that certain significant inputs, including performance attributes, for the fair value measurement of these investments that became observable. In addition, during the year ended December 31, 2008, the Company deconsolidated three private equity funds that held at time of deconsolidation approximately $200 million of Level 3 investments.
BlackRock reports its investments on a GAAP basis, which includes investment balances which are owned by sponsored investment funds that are 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. As a result, management reviews its investments on an “economic” basis, which eliminates the portion of investments that do not impact BlackRock’s book value. BlackRock’s management does not advocate that investors consider such non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Fair Value Measurements (continued)
Significance of Inputs
The following table represents investments measured atCompany’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.
Pricing Services and Broker Quotes
A significant amount of inputs used to value equity and debt securities are sourced from well-recognized third party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for securities that are traded in active markets and as Level 2 for other securities if the vendor uses observable inputs in determining the price. Annually, BlackRock reviews both the valuation methodology, including the general assumptions and methods used to value various asset classes, and operational process with these vendors. In addition, on a recurringquarterly basis atmeetings are held with the vendors to identify any significant changes to the vendors’ process.
In addition, quotes obtained from brokers generally are non-binding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.
Significant Transfers Into and Out of Levels 1, 2, and 3
During the year ended December 31, 2008:2010, the Company reclassified approximately $47 million of net investments out of Level 3 predominantly to Level 2. The majority of the net reclassifications were related to investments that Company values using a NAV (or a capital account) and it currently has the ability to redeem in the near term.
Changes in Valuation
Changes in value on $1,051 million of investments will impact the Company’s non-operating income (expense), $45 million will impact accumulated other comprehensive income, $431 million are held at cost or amortized cost and the remaining $13 million related to carried interest has no impact on non-operating income (expense). As of December 31, 2010, changes in fair value of approximately $397 million of such investments within consolidated sponsored investment funds will impact BlackRock’s net income (loss) attributable to non-controlling interests expense on the consolidated statements of income. BlackRock’s net exposure to changes in fair value of such consolidated sponsored investment funds is $260 million.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
(Dollar amounts in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Investments Not Held at Fair Value (3) | Investments at December 31, 2008 | ||||||||||||||
Total investments, GAAP | $ | 176 | $ | 400 | $ | 813 | $ | 40 | $ | 1,429 | |||||||||
Net assets for which the Company does not bear “economic” exposure(1) | (6 | ) | (255 | ) | (157 | ) | — | (418 | ) | ||||||||||
Net “economic” investments(2) | $ | 170 | $ | 145 | $ | 656 | $ | 40 | $ | 1,011 | |||||||||
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Critical Accounting Policies (continued)
Goodwill and Intangible Assets
At December 31, 2008,2010, the carrying amounts of the Company’s goodwill and intangible assets were as follows:
| (Dollar amounts in millions) | December 31, 2008 | December 31, 2010 | |||||
Goodwill | $ | 5,533 | $ | 12,805 | |||
Intangible assets | |||||||
Indefinite–lived | 5,378 | ||||||
Management contracts | |||||||
Mutual funds/Exchange-traded products | 10,661 | ||||||
Other collective investment funds | 3,610 | ||||||
Alternative investment funds | 917 | ||||||
Trade names/trademarks | 1,403 | ||||||
License | 6 | ||||||
Finite–lived, net of accumulated amortization | 1,063 | ||||||
Management contracts | |||||||
Institutional/Retail separate accounts | 807 | ||||||
Alternative investment accounts and funds | 104 | ||||||
Other | 4 | ||||||
Total goodwill and intangible assets | $ | 11,974 | $ | 30,317 | |||
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Goodwill and Intangible Assets (continued)
The value of contracts acquired in a business acquisition to manage assets in proprietary open-endopen- and closed-end investment funds and closed-endas well as collective trust funds without a specified termination date is classified as an indefinite-lived intangible asset. The assignment of indefinite lives to such mutualinvestment fund contracts is based upon the assumption that there is no foreseeable limit on the contract period to manage these funds due to the likelihood of continued renewal at little or no cost. Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. In accordance with SFAS No. 142,the applicable provisions of ASC 350,Intangibles – Goodwill and Other Intangible Assets (“ASC 350”), indefinite-lived intangible assets and goodwill are not amortized. Finite-lived management contracts are amortized over their remaining expected useful lives, which, at December 31, 2008,2010, ranged from 1 year3 years to 2014 years with a weighted average remaining estimated useful life of 7.76.3 years.
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Critical Accounting Policies (continued)
Goodwill and Intangible Assets (continued)
Goodwill
The Company assesses its goodwill for impairment at least annually, considering such factors as the book value and the market capitalization of the Company. AtThe impairment test performed as of July 31, 2008 the impairment test that was performed2010 indicated no impairment charges werecharge was required. The Company continues to monitor its book value per share as compared to closing prices of its common stock for potential indicators of impairment. At December 31, 20082010 the Company’s common stock closed at $134.15$190.58, which exceeded its book value per share of approximately $93 per share.$136.09 after excluding appropriated retained earnings.
IntangiblesIndefinite-lived and finite-lived intangibles
The Company assesses its indefinite-lived management contracts, trade names and licenses for impairment at least annually, considering suchvarious factors, asincluding AUM growth rates, product mix, product margins, tax rates, discount rates and projected cash flows to determine whether the values of each intangible asset are impaired and whether the indefinite-life classification is still appropriate. The fair value of indefinite-lived intangible assets is determined based on the discounted value of expected future cash flows. The fair value of finite-lived intangible assets is reviewed at least annually to determine whether circumstances exist which indicate there may be a potential impairment. In addition, if such circumstances are considered to exist, the Company will perform an impairment test, using an undiscounted cash flow analysis. If the asset is determined to be impaired, the difference between the book value of the asset and its current fair value is recognized as an expense in the period in which the impairment is determined.
Expected future cash flows are estimated using many variables which require significant management judgment, including market interest rates, equity prices, credit default ratings, discount rates, revenue multiples, inflation rates and AUM growth rates.occurs. Actual results could differ from these estimates, which could materially impact the impairment conclusion.
In both July2010, 2009 and September 2008, as well as during 2007 and 2006, the Company performed impairment tests whichthat indicated no impairment charges were required, the classification of indefinite-lived versus finite-lived intangibles was still appropriate and no changes to the expected lives of the finite-lived intangibles were required. The Company continues to monitorcontinuously monitors various factors, including AUM, for potential indicators of impairment.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Goodwill and Intangible Assets (continued)
Indefinite-lived and finite-lived intangibles (continued)
In addition, management judgment is required to estimate the period over which finite-lived intangible assets will contribute to the Company’s cash flows and the pattern in which these assets will be consumed. A change in the remaining useful life of any of these assets, or the reclassification of an indefinite-lived intangible asset to a finite-lived intangible asset, could have a significant impact on the Company’s amortization expense, which was $146$160 million, $130$147 million and $38$146 million for the years ended December 31, 2008, 20072010, 2009 and 2006,2008, respectively.
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Critical Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes under the asset and liability method prescribed by SFAS No. 109,ASC 740,Accounting for Income Taxes(“SFAS No. 109”). Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases using currently enacted tax rates. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includesof the enactment date.
BlackRock adopted the applicable provisions of FASB Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes,ASC 740 on January 1, 2007. FIN No. 482007 related to uncertainties in income taxes which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109. FIN No. 48statements. ASC 740 prescribes a threshold for measurement and recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in an income tax return. FIN No. 48ASC 740 also provides guidance on, among other things, de-recognition of deferred tax assets and liabilities and interest and penalties on uncertain tax positions.
The application of SFAS No. 109 and FIN No. 48ASC 740 requires management to make estimates of the ranges of possible outcomes, the probability of favorable or unfavorable tax outcomes and potential interest and penalties related to such unfavorable outcomes, which require significant management judgment. Actual future tax consequences ofrelating to uncertain tax positions may be materially different than the Company’s current estimates. At December 31, 2008,2010, BlackRock had $114$307 million of gross unrecognized tax benefits, of which $60$194 million, if recognized, would affect the effective tax rate.
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Income Taxes (continued)
In accordance with SFAS No. 109,ASC 740, management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred income tax assets and assess deferred income tax liabilities based on enacted tax rates for the appropriate tax jurisdictions to determine the amount of such deferred income tax assets and liabilities. At December 31, 2008,2010, the Company had net deferred tax assets of $11$10 million and net deferred tax liabilities of approximately $1,825$5,477 million on the consolidated statement of financial condition. Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances, including statutory income tax rate changes, statutory tax law changes, changes in the anticipated timing of recognition of deferred tax assets and liabilities or changes in the structure or tax status of the Company. SFAS 109ASC 740 requires the Company to assess whether a valuation allowance should be established against its deferred income tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecast of future profitability, the duration of statutory carry back and carry forward periods, the Company’s experience with tax attributes expiring unused, and tax planning alternatives.
As ofAt December 31, 2008,2010, the Company has recorded a deferred tax asset of $157$108 million for unrealized investment losses however no valuation allowance has been established because the Company expects to be able to carry back a portion of its unrealized capital losses when realized, hold certain equity method investments which include fixed income securities over a period sufficient for them to recover their unrealized losses, and generate future capital gains sufficient to offset the unrealized capital losses. Based on the weight of available evidence, it is more likely than not that the deferred tax asset will be realized. However, changes in circumstance could cause the Company to revalue its deferred tax balances with the resulting change impacting the income statement in the period of the change. Such changes may be material to the Company’s consolidated financial statements. See Note 1921, Income Taxes, to the consolidated financial statements beginning on page F-1 of this Form 10-K for further details.
Further, theThe Company records its income taxes based upon its estimated income tax liability or benefit. The Company’s actual tax liability or benefit may differ from the estimated income tax liability or benefit. The Company had current income taxes receivable of approximately $44$57 million and current income taxes payable of $120$157 million at December 31, 2008.2010.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Revenue Recognition
Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of AUM or, in the case of certain real estate separate accounts, net operating income generated by the underlying properties, and are affected by changes in AUM, including market appreciation or depreciation and net subscriptions or redemptions. Investment advisory and administration fees for mutualinvestment funds are shown net of fees waived pursuant to contractual expense limitations of the funds or voluntary waivers. Certain real estate fees are earned upon the acquisition or disposition of properties in accordance with applicable investment management agreements and are generally recognized at the closing of the respective real estate transactions.
The Company contracts with third parties, as well asincluding related parties, for various mutual fund administrationdistribution and shareholder servicing to be performed on behalf of certain non U.S.non-U.S. funds managed by the Company. Such arrangements generally are priced as a portion of the Company’s management fee paid by the fund. In certain cases, the fund takes on the primary responsibility for payment for services such that BlackRock bears no credit risk to the third party. The Company accounts for such retrocession arrangements in accordance with EITF No. 99-19,ASC 605-45,Reporting Revenue Gross as a Principal versus Net as anRecognition – Principle Agent Considerations (“ASC 605-45”), and records its investment advisory and administration base fees net of retrocessions. Retrocessions for the years ended December 31, 2010, 2009 and 2008 2007 and 2006 were $762$831 million, $780$611 million and $156$762 million, respectively. The Company has additional contracts for similar services with third parties, which due to the terms of the contracts, are recorded as portfolio administrationdistribution and servicing costs and thus not netted on the consolidated statements of income.
The Company earns revenue by lending securities on behalf of clients, primarily to brokerage institutions. Such revenues are accounted for on an accrual basis. The securities loaned are secured by collateral in the form of cash and securities, generally ranging from 102% to 112% of the value of the loaned securities. The revenue earned is shared between the Company and the funds or other third-party accounts managed by the Company from which the securities are borrowed. For the years ended December 31, 2010, 2009 and 2008, securities lending revenue totaled $325 million, $36 million and $25 million, respectively, and is recorded in investment advisory, administration fees and securities lending revenue on the consolidated statements of income.
Investment advisory, administration fees and securities lending revenue are reported together as the fees for these services often are agreed upon with clients as a bundled fee.
The Company also receivesmay receive performance fees or incentive allocations from alternativecertain actively managed investment productsfunds and certain separate accounts.separately managed accounts which are primarily alternative, equity or multi-asset class products. These performance fees generally are earned upon exceeding specified relative or absolute investment return thresholds. Such fees are recorded upon completion of the measurement periodperiods, which vary by product.product or account and could be monthly, quarterly, annually or longer. For the years ended December 31, 2008, 20072010, 2009 and 2006,2008, performance fee revenue totaled $177$540 million, $350$202 million and $242$177 million, respectively.
The
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Critical Accounting Policies (continued)
Revenue Recognition (continued)
In addition, the Company receivesmay receive carried interest in the form of an investment capital allocation or cash from certain alternative investment funds upon exceeding performance thresholds. However, BlackRock may be required to return all, or part, of such carried interest depending upon future performance of these investments.investment products in future periods. Therefore, BlackRock records carried interest subject to such claw-back provisions as revenuein investments or cash to the extent that it is distributed, on its consolidated statements of incomefinancial condition. Carried interest is realized upon the earlier of the termination of the alternative investment fund or when the likelihood of claw-back is mathematically improbable. The Company records realized carried interest as performance fees on its consolidated statements of income. The Company records a deferred carried interest liability to the extent it receives cash or capital allocations prior to meeting the revenue recognition criteria. At December 31, 20082010 and 2007,2009, the Company had $21$23 million and $29$13 million, respectively, of deferred carried interest recorded in other liabilities on the consolidated statements of financial condition. The ultimate recognition of revenue, if any, for these products is unknown.
Fees earned forBlackRock Solutions, which include advisory services, are recorded as services are performed and are determined using some, or all, of the following methods: (i) fixed fees, (ii) percentages of various attributes of advisory assets under management and (iii) performance fees if contractual thresholds are met. Revenue earned in 2008 on advisory assignments was comprised of one-time advisory and portfolio structuring fees and ongoing fees based on AUM of the respective portfolio assignment. For the years ended December 31, 2008, 20072010, 2009 and 2006,2008,BlackRock Solutionsand advisory revenue totaled $406$460 million, $198$477 million and $148$393 million, respectively.
Adjustments to revenue arising from initial estimates historically have been immaterial since the majority of BlackRock’s investment advisory and administration revenue is calculated based on the fair value of AUM and since the Company does not record performance revenues until performance thresholds have been exceeded and the likelihood of claw-back of carried interest is mathematically improbable.
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Recent Accounting Developments
EPS Impact Related to Retrospective Application of Recent Accounting Developments
Pursuant to FSP APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)(“FSP APB 14-1”), the Company will allocate a component of the initial proceeds of its convertible debentures to create a debt discount which will be amortized over the expected life of the convertible debentures.
Pursuant to FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”), the Company’s outstanding unvested stock-based payment awards are considered participating securities as the awards contain non-forfeitable rights to dividend equivalents. In accordance with FSP EITF 03-6-1, the two-class method is used to determine EPS for common stock and for participating securities. The two-class method is an earnings allocation formula that allocates distributed and undistributed earnings to each class of common shareholders and participating RSUs.
The tables below present the basic and diluted EPS impact of the retrospective application upon adoption of both FSP APB 14-1 and FSP EITF 03-6-1. The impact of SFAS No. 160 is not included below as it will not have an impact on EPS.
| (Dollar amounts in millions) | 2008 | 2007 | 2006 | |||||||||
Net income, as reported | $ | 786 | $ | 995 | $ | 323 | ||||||
Impact of FSP APB 14-1 | (2 | ) | (2 | ) | (1 | ) | ||||||
Net income, after adoption (1) | $ | 784 | $ | 993 | $ | 322 | ||||||
| Basic EPS calculation: | ||||||||||||
Distributed earnings(2) | ||||||||||||
Basic common shares | $ | 405 | $ | 344 | $ | 135 | ||||||
Basic participating RSUs | 13 | 9 | 1 | |||||||||
Total distributed earnings | $ | 418 | $ | 353 | $ | 136 | ||||||
Undistributed earnings(3) | ||||||||||||
Basic common shares | $ | 354 | $ | 624 | $ | 185 | ||||||
Basic participating RSUs | 12 | 16 | 1 | |||||||||
Total undistributed earnings | $ | 366 | $ | 640 | $ | 186 | ||||||
Total earnings allocated(4) | ||||||||||||
Basic common shares | $ | 759 | $ | 968 | $ | 320 | ||||||
Basic participating RSUs | 25 | 25 | 2 | |||||||||
Total earnings allocated | $ | 784 | $ | 993 | $ | 322 | ||||||
Weighted average number of shares(5) | ||||||||||||
Basic common shares | 129,543,443 | 128,488,561 | 80,638,167 | |||||||||
Basic participating RSUs | 4,544,062 | 3,471,939 | 525,725 | |||||||||
Total weighted average number of shares | 134,087,505 | 131,960,500 | 81,163,892 | |||||||||
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Recent Accounting Developments (continued)
EPS Impact Related to Retrospective Application of Recent Accounting Developments (continued)
Basic common earnings per share, as reported | $ | 6.07 | $ | 7.75 | $ | 4.00 | |||
Basic common earnings per share, after adoption | $ | 5.86 | $ | 7.53 | $ | 3.96 | |||
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Diluted EPS calculation: (Dollar amounts in millions) | |||||||||
| 2008 | 2007 | 2006 | |||||||
Undistributed earnings(1) | |||||||||
Basic common shares | $ | 354 | $ | 624 | $ | 185 | |||
Basic participating RSUs | 12 | 16 | 1 | ||||||
Total undistributed earnings | $ | 366 | $ | 640 | $ | 186 | |||
Total earnings allocated(2) | |||||||||
Basic common shares | $ | 759 | $ | 968 | $ | 320 | |||
Basic participating RSUs | 25 | 25 | 2 | ||||||
Total earnings allocated | $ | 784 | $ | 993 | $ | 322 | |||
Weighted average number of shares(3) | |||||||||
Basic common shares | 129,543,443 | 128,488,561 | 80,638,167 | ||||||
Other diluted shares | 1,833,074 | 2,889,500 | 2,568,340 | ||||||
Weighted average common shares outstanding | 131,376,517 | 131,378,061 | 83,206,507 | ||||||
Basic participating RSUs | 4,544,062 | 3,471,939 | 525,725 | ||||||
Total weighted average number of shares | 135,920,579 | 134,850,000 | 83,732,232 | ||||||
Diluted common earnings per share, as reported | $ | 5.91 | $ | 7.53 | $ | 3.87 | |||
Diluted common earnings per share, after adoption | $ | 5.78 | $ | 7.37 | $ | 3.84 | |||
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Recent Accounting Developments (continued)
EPS Impact Related to Retrospective Application of Recent Accounting Developments (continued)
The table below presents the impact of the retrospective application to as adjusted EPS upon adoption of both FSP APB 14-1 and FSP EITF 03-6-1.
| 2008 | 2007 | 2006 | |||||||
Earnings per share: | |||||||||
Dilutive – as adjusted, as reported | $ | 6.45 | $ | 8.17 | $ | 5.33 | |||
Dilutive – as adjusted, after adoption | $ | 6.30 | $ | 7.99 | $ | 5.30 | |||
See Note 2 to the consolidated financial statements beginning on page F-1 of this Form 10-K for further discussion on the impact of adopting FSP APB 14-1 and FSP EITF 03-6-1 as well as additional recent accounting developments.
Related Party Transactions
See related party transactions discussion in Note 15 to the consolidated financial statements beginning on page F-1 of this Form 10-K.
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| Item 7A. | 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 December 31, 2010, the majority of our 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 all investments be reviewed by the Company’s Capital Committee, which consists of 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.
AUM Market Price Risk
BlackRock’s investment management revenues 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 December 31, 2008, the majority of our investment advisory and administration fees were based on average or period end AUM of the applicable mutual 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
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, for co-investment purposes or to hedge exposure to certain deferred compensation plans.plans or for regulatory purposes. Currently, the Company has a seed capital hedging program in which it enters into total return swaps to hedge exposure to certain equity investments. At December 31, 2008,2010, the outstanding total return swaps had an aggregate notional value of approximately $49$25 million.
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued) |
Corporate Investments Portfolio Risks
At December 31, 2008,2010, approximately $728$397 million of BlackRock’s total investments were maintained in sponsored investment funds that are 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. IncludingExcluding the impact of the Federal Reserve Bank stock, carried interest, investments made to hedge exposure to certain deferred compensation plans and certain equity investments that are hedged via the seed capital hedging program, the Company’s net economic exposure to its investment portfolio is as follows:
(Dollar amounts in millions) | December 31, 2008 | December 31, 2007 | December 31, 2010 | December 31, 2009 | Variance | |||||||||||||||||||
(Dollar amounts in millions) | Amount | % Change | ||||||||||||||||||||||
Total investments | $ | 1,429 | $ | 2,000 | ||||||||||||||||||||
Consolidated sponsored investments funds | (728 | ) | (1,054 | ) | ||||||||||||||||||||
Total investments, GAAP | $ | 1,540 | $ | 1,049 | $ | 491 | 47 | % | ||||||||||||||||
Investments held by consolidated sponsored investment funds | (397 | ) | (463 | ) | 66 | 14 | % | |||||||||||||||||
Net exposure to consolidated investment funds | 310 | 325 | 260 | 258 | 2 | 1 | % | |||||||||||||||||
Total net “economic” investments | 1,011 | 1,271 | 1,403 | 844 | 559 | 66 | % | |||||||||||||||||
Federal Reserve Bank stock | (325 | ) | (10 | ) | (315 | ) | * | |||||||||||||||||
Carried interest | (13 | ) | (4 | ) | (9 | ) | 225 | % | ||||||||||||||||
Deferred compensation investments | (76 | ) | (71 | ) | (5 | ) | 7 | % | ||||||||||||||||
Hedged investments | (49 | ) | (94 | ) | (25 | ) | (36 | ) | 11 | (31 | %) | |||||||||||||
Total net “economic” investment exposure | $ | 962 | $ | 1,177 | $ | 964 | $ | 723 | $ | 241 | 33 | % | ||||||||||||
* – Not applicable or the percentage is in excess of +/- 1,000%.
The net “economic” investment exposure of the portfolio is presented in either the equity market price or the interest rate/credit spread risk disclosures below:
Equity Market Price Risk
At December 31, 2008,2010, the Company’s net exposure to market price risk in its investment portfolio iswas approximately $655$544 million of the Company’s net economic investment exposure. Investments that are subject to market price risk include private equity and real estate investments.investments, hedge funds and fund of funds, as well as mutual funds. The Company estimates that a 10% adverse change in market prices would result in a decrease of approximately $65.5$54.4 million in the carrying value of such investments.
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Interest Rate/Credit Spread Risk
At December 31, 2008,2010, the Company was exposed to interest-rate risk and credit spread risksrisk as a result of approximately $307$420 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 $2.8$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 net economic investment exposure denominated in foreign currencies, primarily the British pound sterling, euro, South Korean won and the Euro,Taiwan dollars, was $46$118 million. A 10% adverse change in foreign exchange rates would result in approximately a $4.6an $11.8 million decline in the carrying value of such investments.
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA |
The report of the independent registered public accounting firm and financial statements listed in the accompanying index are included in Item 15 of this report. See Index to the consolidated financial statements on page F-1 of this Form 10-K.
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There have been no disagreements on accounting and financial disclosure matters. BlackRock has not changed accountants in the two most recent fiscal years.
| Item 9A. | 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)15d - 15(e) under the Exchange Act) as of December 31, 2008.the end of the period covered by this annual report on Form 10-K. Based on this evaluation, BlackRock’s Chief Executive Officer and Chief Financial Officer have concluded that BlackRock’s disclosure controls and procedures were effective as of December 31, 2008.effective.
Internal Control and Financial Reporting
ThereOther than the integration of certain information technology systems and processes of the acquired BGI business to those of BlackRock, there have been no changes in internal control over financial reporting during the latest fiscal quarter ended December 31, 2008 that have materially affected or are reasonably likely to materially affect, such internal control over financial reporting.
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| Item 9A. | CONTROLS AND PROCEDURES (continued) |
Management’s Report on Internal Control Over Financial Reporting
Management of BlackRock, Inc. (the “Company”) is responsible for establishing and maintaining adequateeffective internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effectedaffected by the Company’s Boardboard of Directors,directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted accounting principles. Our internal controls over financial reporting includein the United States of America and includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted accounting principles,in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with the authorizationauthorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. ProjectionsAlso, projections of any evaluation of effectiveness of the internal control over financial reporting to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.
Based on this assessment, management concluded that, as of December 31, 2008,2010, the Company’s internal control over financial reporting is effective.
The Company’s independent registered public accounting firm has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. This report begins on page 83.
February 27, 200928, 2011
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| Item 9A. | CONTROLS AND PROCEDURES (continued) |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BlackRock, Inc.:
We have audited the internal control over financial reporting of BlackRock, Inc. and subsidiaries (the “Company”) as of December 31, 2008,2010, based on criteria established inInternal Control —– Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2010, based on the criteria established inInternal Control —– Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition as of December 31, 20082010 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended of the Company and our report dated February 27, 200928, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte & Touche LLP | ||||||
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| Item 9B. | OTHER INFORMATION |
The Company is furnishing no other information in this Form 10-K.
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information regarding directors and executive officers set forth under the captions “Item 1: Election of Directors – Information Concerning the Nominees and Directors” and “Item 1: Election of Directors – Other Executive Officers” of the Proxy Statement in connection with the 2009 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.
The information regarding compliance with Section 16(a) of the Exchange Act set forth under the caption “Item 1: Section 16(a) Beneficial Ownership Reporting Compliance” inof the Proxy Statement is incorporated herein by reference.
The information regarding BlackRock’s Code of Ethics for Chief Executive and Senior Financial Officers under the caption “Item 1: Corporate Governance Guidelines and Code of Business Conduct and Ethics” inof the Proxy Statement is incorporated herein by reference.
| Item 11. | EXECUTIVE COMPENSATION |
The information contained in the sections captioned “Item 1: Compensation of Executive Officers” and “Item 1: 20082010 Director Compensation” of the Proxy Statement is incorporated herein by reference.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information contained in the sections captioned “Item 1: Ownership of BlackRock Common and Preferred Stock” and “Equity Compensation Plan Information” of the Proxy Statement is incorporated herein by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information contained in the sections captioned “Item 1: Certain Relationships and Related Transactions” and “Item 1: Director Independence” of the Proxy Statement is incorporated herein by reference.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information regarding BlackRock’s independent auditor fees and services in the section captioned “Item 2:4: Ratification of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement is incorporated herein by reference.
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| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
1. Financial Statements
The Company’s consolidated financial statements are included beginning on pages F-1.
2. Financial Statement Schedules
Ratio of Earnings to Fixed Charges has been included as Exhibit 12.1. All other schedules have been omitted because they are not applicable, not required or the information required is included in the Company’s consolidated financial statements or notes thereto.
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| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) |
3. Exhibit Index
As used in this exhibit list, “BlackRock” refers to BlackRock, Inc. (formerly named New BlackRock, Inc. and previously, New Boise, Inc.) (Commission File No. 001-15305) and “Old BlackRock” refers to BlackRock Holdco 2, Inc. (formerly named BlackRock, Inc.) (Commission File No. 001-33099), which is the predecessor of BlackRock. The following exhibits are filed as part of this Annual Report on Form 10-K:
Please note that the agreements included as exhibits to this Form 10-K are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about BlackRock or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time.
Exhibit No. | Description | |
| | Amended and Restated Certificate of Incorporation of BlackRock. | |
| | Amended and Restated Bylaws of BlackRock. | |
| | Certificate of Designations of Series A Convertible Participating Preferred Stock of BlackRock. | |
| | Certificate of Designations of Series B Convertible Participating Preferred Stock of BlackRock. | |
| | Certificate of Designations of Series C Convertible Participating Preferred Stock of BlackRock. | |
| 3.6(3) | Certificate of Designations of Series D Convertible Participating Preferred Stock of BlackRock. | |
| 4.1(4) | Specimen of Common Stock Certificate. | |
| 4.2(5) | Indenture, dated as of February 23, 2005, between Old BlackRock and The Bank of New York (as successor-in-interest to JPMorgan Chase Bank, N.A.), as trustee, relating to the 2.625% Convertible Debentures due 2035. | |
| 4.3(5) | Form of 2.625% Convertible | |
| | First Supplemental Indenture, dated September 29, 2006, relating to the 2.625% Convertible Debentures due 2035. | |
| 4.5(6) | Indenture, dated September 17, 2007, between BlackRock and The Bank of New York, as trustee, relating to senior debt securities. | |
| 4.6(7) | Form of 6.25% Notes due 2017. | |
| Form of 2.25% Notes due 2012. | ||
| 4.8(8) | Form of 3.50% Notes due 2014. | |
| 4.9(8) | Form of 5.00% Notes due 2019. | |
| 10.1(9) | Tax Disaffiliation Agreement, dated October 6, 1999, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | |
| BlackRock, Inc. Amended and Restated 1999 Stock Award and Incentive Plan.+ | ||
| Amended and Restated BlackRock, Inc. 1999 Annual Incentive Performance Plan. + | ||
| 10.4(12) | Amendment No. 1 to the BlackRock, Inc. Amended and Restated 1999 | |
| 10.5(4) | ||
| BlackRock, Inc. | ||
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| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) |
3. Exhibit Index (continued)
Exhibit No. | Description | |
| Form of Stock Option Agreement expected to be used in connection with future grants of Stock Options under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Form of Restricted Stock Agreement expected to be used in connection with future grants of Restricted Stock under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units for long-term incentive awards under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Form of Directors’ Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Registration Rights Agreement, dated as of September 29, 2006, among BlackRock, Merrill Lynch & Co., Inc. and the PNC Financial Service Group, Inc. | ||
| Share Surrender Agreement, dated October 10, 2002 (the “Share Surrender Agreement”), among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc.+ | ||
| First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement.+ | ||
| Second Amendment, dated as of June 11, 2007, to the Share Surrender Agreement.+ | ||
| Third Amendment, dated as of February 27, 2009, to the Share Surrender Agreement. | ||
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3. Exhibit Index (continued)
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| Transition Services Agreement, dated as of September 29, 2006, by and between Merrill Lynch & Co., Inc. and BlackRock. | ||
| Asset Purchase Agreement, dated as of June 26, 2007, by and among BlackRock, BAA Holdings, LLC and Quellos Holdings, LLC. | ||
| Five-Year Revolving Credit Agreement, dated as of August 22, 2007, by and among BlackRock, Wachovia Bank, National Association, as administrative agent, swingline lender and issuing lender, Sumitomo Mitsui Banking Corporation, as Japanese Yen lender, a group of lenders, Wachovia Capital Markets, LLC and Citigroup Global Markets Inc., as joint lead arrangers and joint book managers, Citigroup Global Markets Inc., as syndication agent, and HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A., and Morgan Stanley Bank, as documentation agents. | ||
| Second Amended and Restated Global Distribution Agreement, dated as of | ||
| Amended and Restated Implementation and Stockholder Agreement, dated as of February 27, 2009, between The PNC Financial Services Group, Inc. and BlackRock. | ||
| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) |
3. Exhibit Index (continued)
Exhibit No. | Description | |
| 10.22 | Third Amended and Restated Stockholder Agreement, dated as of | |
| 10.23(22) | Stock Purchase Agreement, dated as of June 11, 2009, between The PNC Financial Services Group, Inc. and BlackRock. | |
| 10.24(23) | Commercial Paper Dealer Agreement between BlackRock and Barclays Capital Inc., dated as of October 14, 2009. | |
| 10.25(3) | Amended and Restated Stock Purchase Agreement, dated as of June 16, 2009, by and among Barclays Bank PLC, Barclays PLC (solely for the purposes of Section 6.16, Section 6.18 and Section 6.24) and BlackRock. | |
| 10.26(3) | Stockholder Agreement, dated as of December 1, 2009, by and among BlackRock, Barclays Bank PLC and Barclays BRHoldings S.à.r.l. | |
| 10.27(3) | Registration Rights Agreement, dated as of December 1, 2009, by and among BlackRock, Barclays Bank PLC and Barclays BRHoldings S.à.r.l. | |
| 10.28(24) | Lease Agreement, dated as of February 17, 2010, among BlackRock Investment Management (UK) Limited and Mourant & Co Trustees Limited and Mourant Property Trustees Limited as Trustees of the Drapers Gardens Unit Trust for the lease of Drapers Gardens, 12 Throgmorton Avenue, London, EC2, United Kingdom. | |
| 12.1 | Computation of Ratio of Earnings to Fixed Charges. | |
| 21.1 | Subsidiaries of Registrant. | |
| 23.1 | Deloitte & Touche LLP | |
| 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. | |
88
| 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. | |
3. Exhibit Index (continued)
| (1) | Incorporated by |
| Incorporated by |
| (3) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 3, 2009. |
| (4) | Incorporated by |
| (5) | Incorporated by |
| (6) |
| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) |
3. Exhibit Index (continued)
| (7) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on September 17, 2007. |
| (8) | Incorporated by |
| (9) | Incorporated by reference to Old BlackRock’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed on May 13, 1999. |
| (10) | Incorporated by |
| (11) | Incorporated by |
| Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on May 24, 2006. |
| Incorporated by |
| (14) | Incorporated by reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended |
| Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on |
| Incorporated by |
| (17) | Incorporated by reference to BlackRock’s Registration Statement on Form S-4, as amended, originally filed on June 9, 2006. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on July 2, 2007. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on August 27, 2007. |
| (20) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on November 17, 2010. |
| (21) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 17, 2009. |
| (22) | Incorporated by reference to BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended June 30, |
| (23) |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on October 20, 2009. |
| (24) | Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December |
| + | Denotes compensatory plans or arrangements |
89
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
By: | / | |
Laurence D. Fink | ||
| Chairman, Chief Executive Officer and Director
| ||
February 28, 2011
Each of the officers and directors of BlackRock, Inc. whose signature appears below, in so signing, also makes, constitutes and appoints Laurence D. Fink, Ann Marie Petach and Robert P. Connolly, his true and lawful attorneys-in-fact, with full power and substitution, for him in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments to the Annual Report on Form 10-K, with exhibits thereto and other documents connected therewith and to perform any acts necessary to be done in order to file such documents, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/ | Chairman, Chief Executive Officer and Director
| February | ||
| Laurence D. Fink | ||||
/ | Managing Director and Chief Financial Officer
| February | ||
| Ann Marie Petach | ||||
/ | Managing Director and Chief Accounting Officer
| February | ||
| Joseph Feliciani, Jr. | ||||
/ | Director | February | ||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
90
SIGNATURES (continued)Abdlatif Y. Al-Hamad
| ||||
/ | Director | February | ||
/ | Director | February | ||
| Dennis D. Dammerman | ||||
/S/ WILLIAM S. DEMCHAK | Director | February 28, 2011 | ||
| William S. Demchak | ||||
/S/ ROBERT E. DIAMOND, JR. | Director | February 28, 2011 | ||
| Robert E. Diamond, Jr. | ||||
/S/ KENNETH B. DUNN | Director | February 28, 2011 | ||
| Kenneth B. Dunn | ||||
/S/ MURRY S. GERBER | Director | February 28, 2011 | ||
| Murry S. Gerber | ||||
/S/ JAMES GROSFELD | Director | February 28, 2011 | ||
| James Grosfeld | ||||
/S/ ROBERT S. KAPITO | Director | February 28, 2011 | ||
| Robert S. Kapito | ||||
/S/ DAVID H. KOMANSKY | Director | February 28, 2011 | ||
| David H. Komansky | ||||
/S/ SALLIE L. KRAWCHECK | Director | February 28, 2011 | ||
| Sallie L. Krawcheck | ||||
SIGNATURES (continued)
/S/ MARK D. LINSZ | Director | February 28, 2011 | ||
| Mark D. Linsz | ||||
/S/ SIR DERYCK MAUGHAN | Director | February 28, 2011 | ||
| Sir Deryck Maughan | ||||
/S/ THOMAS H. O’BRIEN | Director | February 28, 2011 | ||
| Thomas H. O’Brien | ||||
/S/ LINDA GOSDEN ROBINSON | Director | February 28, 2011 | ||
| Linda Gosden Robinson | ||||
/S/ JAMES E. ROHR | Director | �� | February 28, 2011 | |
| James E. Rohr | ||||
/S/ IVAN G. SEIDENBERG | Director | February 28, 2011 | ||
| Ivan G. Seidenberg | ||||
/S/ JOHN S. VARLEY | Director | February 28, 2011 | ||
| John S. Varley | ||||
91
FINANCIAL STATEMENTS
| F-2 | ||||
| F-3 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-10 | ||||
| F-12 | ||||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BlackRock, Inc.:
We have audited the accompanying consolidated statements of financial condition of BlackRock, Inc. and subsidiaries (the “Company”) as of December 31, 20082010 and 2007,2009, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008.2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BlackRock, Inc. and subsidiaries at December 31, 20082010 and 2007,2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008,2010, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008,2010, based on the criteria established inInternal Control—Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 200928, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
F-2New York, New York
February 28, 2011
Consolidated Statements of Financial Condition
(Dollar amounts in millions, except per share data)
| December 31, | December 31, | December 31, | ||||||||||||||
| 2008 | 2007 | 2010 | 2009 | |||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 2,032 | $ | 1,656 | $ | 3,367 | $ | 4,708 | ||||||||
Accounts receivable | 901 | 1,236 | 2,095 | 1,718 | ||||||||||||
Due from related parties | 309 | 175 | 150 | 189 | ||||||||||||
Investments | 1,429 | 2,000 | 1,540 | 1,049 | ||||||||||||
Assets of consolidated variable interest entities | ||||||||||||||||
Cash and cash equivalents | 93 | — | ||||||||||||||
Bank loans and other investments | 1,312 | — | ||||||||||||||
Separate account assets | 2,623 | 4,670 | 121,137 | 119,629 | ||||||||||||
Deferred mutual fund sales commissions, net | 135 | 175 | ||||||||||||||
Property and equipment (net of accumulated depreciation of $259 and $226 at December 31, 2008 and 2007, respectively) | 260 | 266 | ||||||||||||||
Intangible assets (net of accumulated amortization of $324 and $178 at December 31, 2008 and 2007, respectively) | 6,441 | 6,553 | ||||||||||||||
Collateral held under securities lending agreements | 17,638 | 19,335 | ||||||||||||||
Deferred sales commissions, net | 66 | 103 | ||||||||||||||
Property and equipment (net of accumulated depreciation of $426 and $303 at December 31, 2010 and 2009, respectively) | 428 | 443 | ||||||||||||||
Intangible assets (net of accumulated amortization of $615 and $466 at December 31, 2010 and 2009, respectively) | 17,512 | 17,666 | ||||||||||||||
Goodwill | 5,533 | 5,520 | 12,805 | 12,680 | ||||||||||||
Other assets | 261 | 310 | 316 | 604 | ||||||||||||
Total assets | $ | 19,924 | $ | 22,561 | $ | 178,459 | $ | 178,124 | ||||||||
Liabilities | ||||||||||||||||
Accrued compensation and benefits | $ | 826 | $ | 1,087 | $ | 1,520 | $ | 1,482 | ||||||||
Accounts payable and accrued liabilities | 545 | 789 | 1,068 | 840 | ||||||||||||
Due to related parties | 103 | 114 | 57 | 505 | ||||||||||||
Short-term borrowings | 200 | 300 | 100 | 2,234 | ||||||||||||
Liabilities of consolidated variable interest entities | ||||||||||||||||
Borrowings | 1,278 | — | ||||||||||||||
Other liabilities | 7 | — | ||||||||||||||
Convertible debentures | 67 | 243 | ||||||||||||||
Long-term borrowings | 946 | 947 | 3,192 | 3,191 | ||||||||||||
Separate account liabilities | 2,623 | 4,670 | 121,137 | 119,629 | ||||||||||||
Deferred tax liabilities | 1,825 | 2,060 | ||||||||||||||
Collateral liability under securities lending agreements | 17,638 | 19,335 | ||||||||||||||
Deferred income tax liabilities | 5,477 | 5,571 | ||||||||||||||
Other liabilities | 299 | 420 | 584 | 492 | ||||||||||||
Total liabilities | 7,367 | 10,387 | 152,125 | 153,522 | ||||||||||||
Non-controlling interests | 491 | 578 | ||||||||||||||
Commitments and contingencies (Note 14) | ||||||||||||||||
Commitments and contingencies (Note 12) | ||||||||||||||||
Stockholders’ equity | ||||||||||||||||
Common stock ($0.01 par value, 500,000,000 shares authorized, 118,573,367 shares issued, 117,291,110 and 116,059,560 shares outstanding at December 31, 2008 and 2007, respectively) | 1 | 1 | ||||||||||||||
Series A participating preferred stock ($0.01 par value, 20,000,000 shares authorized and 12,604,918 shares issued and outstanding at December 31, 2008 and 2007) | — | — | ||||||||||||||
Additional paid-in capital | 10,461 | 10,274 | ||||||||||||||
Retained earnings | 1,991 | 1,622 | ||||||||||||||
Accumulated other comprehensive income (loss) | (186 | ) | 71 | |||||||||||||
Escrow shares, common, at cost (911,266 and 1,191,785 shares held at December 31, 2008 and 2007, respectively) | (143 | ) | (188 | ) | ||||||||||||
Treasury stock, common, at cost (370,991 and 1,322,022 shares held at December 31, 2008 and 2007, respectively) | (58 | ) | (184 | ) | ||||||||||||
Total stockholders’ equity | 12,066 | 11,596 | ||||||||||||||
Total liabilities, non-controlling interests and stockholders’ equity | $ | 19,924 | $ | 22,561 | ||||||||||||
Temporary equity | ||||||||||||||||
Redeemable non-controlling interests | 6 | 49 | ||||||||||||||
BlackRock, Inc.
Consolidated Statements of Financial Condition (continued)
(Dollar amounts in millions, except per share data)
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Permanent Equity | ||||||||
BlackRock, Inc. stockholders’ equity | ||||||||
Common stock, $ 0.01 par value; | 1 | 1 | ||||||
Shares authorized: 500,000,000 at December 31, 2010 and 2009; Shares issued: 131,923,624 and 62,776,777 at December 31, 2010 and 2009, respectively; Shares outstanding: 131,216,561 and 61,896,236 at December 31, 2010 and 2009, respectively; | ||||||||
Series B non-voting participating preferred stock, $0.01 par value; | 1 | 1 | ||||||
Shares authorized: 150,000,000 at December 31, 2010 and 2009; Shares issued and outstanding: 57,108,553 and 112,817,151 at December 31, 2010 and 2009, respectively; | ||||||||
Series C non-voting participating preferred stock, $0.01 par value; | — | — | ||||||
Shares authorized: 6,000,000 at December 31, 2010 and 2009; Shares issued and outstanding: 2,866,439 and 2,889,467 at December 31, 2010 and 2009, respectively; | ||||||||
Series D non-voting participating preferred stock, $0.01 par value; | — | — | ||||||
Shares authorized: 20,000,000 at December 31, 2010 and 2009; Shares issued and outstanding: 0 and 11,203,442 at December 31, 2010 and 2009, respectively; | ||||||||
Additional paid-in capital | 22,502 | 22,127 | ||||||
Retained earnings | 3,723 | 2,436 | ||||||
Appropriated retained earnings | 75 | — | ||||||
Accumulated other comprehensive loss | (96 | ) | (96 | ) | ||||
Escrow shares, common, at cost (3,603 and 868,940 shares held at December 31, 2010 and 2009, respectively) | (1 | ) | (137 | ) | ||||
Treasury stock, common, at cost (703,460 and 11,601 shares held at December 31, 2010 and 2009, respectively) | (111 | ) | (3 | ) | ||||
Total BlackRock, Inc. stockholders’ equity | 26,094 | 24,329 | ||||||
Nonredeemable non-controlling interests | 189 | 224 | ||||||
Nonredeemable non-controlling interests of consolidated variable interest entities | 45 | — | ||||||
Total permanent equity | 26,328 | 24,553 | ||||||
Total liabilities, temporary equity and permanent equity | $ | 178,459 | $ | 178,124 | ||||
See accompanying notes to consolidated financial statements.
F-3
Consolidated Statements of Income
(Dollar amounts in millions, except per share data)
| Year ended | ||||||||||||||||||||||||
| Year ended December 31, | December 31, | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2010 | 2009 | 2008 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Investment advisory and administration base fees | ||||||||||||||||||||||||
Investment advisory, administration fees and securities lending revenue | ||||||||||||||||||||||||
Related parties | $ | 2,961 | $ | 2,640 | $ | 865 | $ | 4,893 | $ | 2,616 | $ | 2,962 | ||||||||||||
Other third parties | 1,271 | 1,370 | 734 | 2,397 | 1,210 | 1,295 | ||||||||||||||||||
Total investment advisory, administration fees and securities lending revenue | 7,290 | 3,826 | 4,257 | |||||||||||||||||||||
Investment advisory performance fees | 177 | 350 | 242 | 540 | 202 | 177 | ||||||||||||||||||
Investment advisory and administration base and performance fees | 4,409 | 4,360 | 1,841 | |||||||||||||||||||||
BlackRock Solutions and advisory | 406 | 198 | 148 | 460 | 477 | 393 | ||||||||||||||||||
Distribution fees | 139 | 123 | 36 | 116 | 100 | 139 | ||||||||||||||||||
Other revenue | 110 | 164 | 73 | 206 | 95 | 98 | ||||||||||||||||||
Total revenue | 5,064 | 4,845 | 2,098 | 8,612 | 4,700 | 5,064 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Employee compensation and benefits | 1,815 | 1,767 | 934 | 3,097 | 1,802 | 1,815 | ||||||||||||||||||
Portfolio administration and servicing costs | ||||||||||||||||||||||||
Distribution and servicing costs | ||||||||||||||||||||||||
Related parties | 226 | 368 | 495 | |||||||||||||||||||||
Other third parties | 102 | 78 | 47 | 182 | 109 | 96 | ||||||||||||||||||
Related parties | 495 | 470 | 126 | |||||||||||||||||||||
Amortization of deferred mutual fund sales commissions | 130 | 108 | 30 | |||||||||||||||||||||
Amortization of deferred sales commissions | 102 | 100 | 130 | |||||||||||||||||||||
Direct fund expenses | 493 | 95 | 86 | |||||||||||||||||||||
General and administration | 745 | 870 | 417 | 1,354 | 779 | 665 | ||||||||||||||||||
Restructuring charges | 38 | — | — | — | 22 | 38 | ||||||||||||||||||
Termination of closed-end fund administration and servicing arrangements | — | 128 | — | |||||||||||||||||||||
Fee sharing payment | — | — | 34 | |||||||||||||||||||||
Amortization of intangible assets | 146 | 130 | 38 | 160 | 147 | 146 | ||||||||||||||||||
Total expenses | 3,471 | 3,551 | 1,626 | 5,614 | 3,422 | 3,471 | ||||||||||||||||||
Operating income | 1,593 | 1,294 | 472 | 2,998 | 1,278 | 1,593 | ||||||||||||||||||
Non-operating income (expense) | ||||||||||||||||||||||||
Net gain (loss) on investments | (573 | ) | 504 | 37 | 179 | 42 | (573 | ) | ||||||||||||||||
Net gain (loss) on consolidated variable interest entities | (35 | ) | — | — | ||||||||||||||||||||
Interest and dividend income | 65 | 74 | 29 | 29 | 20 | 65 | ||||||||||||||||||
Interest expense | (66 | ) | (49 | ) | (10 | ) | (150 | ) | (68 | ) | (69 | ) | ||||||||||||
Total non-operating income (expense) | (574 | ) | 529 | 56 | 23 | (6 | ) | (577 | ) | |||||||||||||||
Income before income taxes and non-controlling interests | 1,019 | 1,823 | 528 | |||||||||||||||||||||
Income before income taxes | 3,021 | 1,272 | 1,016 | |||||||||||||||||||||
Income tax expense | 388 | 464 | 189 | 971 | 375 | 387 | ||||||||||||||||||
Income before non-controlling interests | 631 | 1,359 | 339 | |||||||||||||||||||||
Non-controlling interests | (155 | ) | 364 | 16 | ||||||||||||||||||||
Net income | 2,050 | 897 | 629 | |||||||||||||||||||||
Less: | ||||||||||||||||||||||||
Net income (loss) attributable to redeemable non-controlling interests | 3 | 2 | (1 | ) | ||||||||||||||||||||
Net income (loss) attributable to nonredeemable non-controlling interests | (16 | ) | 20 | (154 | ) | |||||||||||||||||||
Net income | $ | 786 | $ | 995 | $ | 323 | ||||||||||||||||||
Net income attributable to BlackRock, Inc. | $ | 2,063 | $ | 875 | $ | 784 | ||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: | ||||||||||||||||||||||||
Basic | $ | 6.07 | $ | 7.75 | $ | 4.00 | $ | 10.67 | $ | 6.24 | $ | 5.86 | ||||||||||||
Diluted | $ | 5.91 | $ | 7.53 | $ | 3.87 | $ | 10.55 | $ | 6.11 | $ | 5.78 | ||||||||||||
Cash dividends declared and paid per share | $ | 3.12 | $ | 2.68 | $ | 1.68 | $ | 4.00 | $ | 3.12 | $ | 3.12 | ||||||||||||
Weighted-average shares outstanding: | ||||||||||||||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||
Basic | 129,543,443 | 128,488,561 | 80,638,167 | 190,554,510 | 136,669,164 | 129,543,443 | ||||||||||||||||||
Diluted | 132,996,426 | 132,088,810 | 83,358,394 | 192,692,047 | 139,481,449 | 131,376,517 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-4
Consolidated Statements of Comprehensive Income
(Dollar amounts in millions)
| Year ended | |||||||||||||||||||||||
| Year ended December 31, | December 31, | ||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2010 | 2009 | 2008 | ||||||||||||||||||
Net income | $ | 786 | $ | 995 | $ | 323 | $ | 2,050 | $ | 897 | $ | 629 | |||||||||||
Other comprehensive income: | |||||||||||||||||||||||
Net unrealized gain (loss) from available-for-sale investments, net of tax1 | (19 | ) | (3 | ) | 5 | ||||||||||||||||||
Change in net unrealized gains (losses) from available-for-sale investments, net of tax | |||||||||||||||||||||||
Unrealized holding gains (losses), net of tax | 3 | (4 | ) | (14 | ) | ||||||||||||||||||
Less: reclassification adjustment included in net income | 1 | (19 | ) | 5 | |||||||||||||||||||
Net change from available-for-sale investments, net of tax (1) | 2 | 15 | (19 | ) | |||||||||||||||||||
Minimum pension liability adjustment | (1 | ) | — | — | (1 | ) | 1 | (1 | ) | ||||||||||||||
Foreign currency translation adjustments | (237 | ) | 29 | 37 | (1 | ) | 74 | (237 | ) | ||||||||||||||
Comprehensive income | $ | 529 | $ | 1,021 | $ | 365 | 2,050 | 987 | 372 | ||||||||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests | (13 | ) | 22 | (155 | ) | ||||||||||||||||||
Comprehensive income attributable to BlackRock, Inc. | $ | 2,063 | $ | 965 | $ | 527 | |||||||||||||||||
| The tax benefit (expense) on |
See accompanying notes to consolidated financial statements.
F-5
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar amounts in millions)
| Treasury Stock | |||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock Class A&B | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Common Shares held in Escrow | Common | Class A & B | Total Equity | |||||||||||||||||||||||||||
December 31, 2005 | $ | — | $ | 1 | $ | 171 | $ | 807 | $ | 3 | $ | — | $ | — | $ | (59 | ) | $ | 923 | ||||||||||||||||
Net income | — | — | — | 323 | — | — | — | — | 323 | ||||||||||||||||||||||||||
Dividends paid | — | — | — | (136 | ) | — | — | — | — | (136 | ) | ||||||||||||||||||||||||
Conversion of class B common stock to class A common stock | — | — | (14 | ) | — | — | — | — | 14 | — | |||||||||||||||||||||||||
Issuance of common stock to Merrill Lynch | — | — | 7,719 | — | — | — | — | — | 7,719 | ||||||||||||||||||||||||||
Issuance of series A participating preferred shares to Merrill Lynch | — | — | 1,857 | — | — | — | — | — | 1,857 | ||||||||||||||||||||||||||
Conversion of class A and B stock to common stock in connection with MLIM Transaction | 1 | (1 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Conversion of treasury stock in connection with MLIM Transaction | — | — | — | — | — | — | (52 | ) | 52 | — | |||||||||||||||||||||||||
Stock-based compensation | — | — | 61 | — | — | — | — | — | 61 | ||||||||||||||||||||||||||
Treasury stock transactions | — | — | — | — | — | — | (5 | ) | (7 | ) | (12 | ) | |||||||||||||||||||||||
Tax benefits from stock-based awards | — | — | 5 | — | — | — | — | — | 5 | ||||||||||||||||||||||||||
Foreign currency translation loss | — | — | — | — | 37 | — | — | — | 37 | ||||||||||||||||||||||||||
Net unrealized gain on investments, net of tax | — | — | — | — | 5 | — | — | — | 5 | ||||||||||||||||||||||||||
December 31, 2006 | 1 | — | 9,799 | 994 | 45 | — | (57 | ) | — | 10,782 | |||||||||||||||||||||||||
January 1, 2007 Adjustment to initially apply FIN No. 48 | — | — | — | (14 | ) | — | — | — | — | (14 | ) | ||||||||||||||||||||||||
Net income | — | — | — | 995 | — | — | 995 | ||||||||||||||||||||||||||||
Dividends paid | — | — | — | (353 | ) | — | — | (353 | ) | ||||||||||||||||||||||||||
Issuance of common stock to escrow agent in connection with Quellos Transaction | — | — | 188 | — | — | (188 | ) | — | — | — | |||||||||||||||||||||||||
Stock-based compensation | — | — | 182 | — | — | — | 1 | — | 183 | ||||||||||||||||||||||||||
PNC capital contribution | — | — | 175 | — | — | — | — | — | 175 | ||||||||||||||||||||||||||
Treasury stock transactions | — | — | (187 | ) | — | — | — | (128 | ) | — | (315 | ) | |||||||||||||||||||||||
Tax benefits from stock-based awards | — | — | 119 | — | — | — | — | — | 119 | ||||||||||||||||||||||||||
Other costs associated with common stock | — | — | (2 | ) | — | — | — | — | — | (2 | ) | ||||||||||||||||||||||||
Foreign currency translation gain | — | — | — | — | 29 | — | — | — | 29 | ||||||||||||||||||||||||||
Net unrealized loss on investments, net of tax | — | — | — | — | (3 | ) | — | — | — | (3 | ) | ||||||||||||||||||||||||
December 31, 2007 | 1 | — | 10,274 | 1,622 | 71 | (188 | ) | (184 | ) | — | 11,596 | ||||||||||||||||||||||||
Net income | — | — | — | 786 | — | — | — | — | 786 | ||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | — | — | (417 | ) | — | — | — | — | (417 | ) | ||||||||||||||||||||||||
Release of common stock from escrow agent in connection with Quellos Transaction | — | — | — | — | — | 45 | — | — | 45 | ||||||||||||||||||||||||||
Stock-based compensation | — | — | 278 | — | — | — | 1 | — | 279 | ||||||||||||||||||||||||||
PNC capital contribution | — | — | 4 | — | — | — | — | — | 4 | ||||||||||||||||||||||||||
Treasury stock transactions | — | — | (140 | ) | — | — | — | 125 | — | (15 | ) | ||||||||||||||||||||||||
Tax benefits from stock-based awards | — | — | 55 | — | — | — | — | — | 55 | ||||||||||||||||||||||||||
Minimum pension liability adjustment | — | — | — | — | (1 | ) | — | — | — | (1 | ) | ||||||||||||||||||||||||
Foreign currency translation loss | — | — | (10 | ) | — | (237 | ) | — | — | — | (247 | ) | |||||||||||||||||||||||
Net unrealized loss on investments, net of tax | — | — | — | — | (19 | ) | — | — | — | (19 | ) | ||||||||||||||||||||||||
December 31, 2008 | $ | 1 | $ | — | $ | 10,461 | $ | 1,991 | $ | (186 | ) | $ | (143 | ) | $ | (58 | ) | $ | — | $ | 12,066 | ||||||||||||||
| Additional Paid-in Capital(1) | Retained Earnings | Appropriated Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Shares Held in Escrow | Treasury Stock Common | Total Stockholders’ Equity | Nonredeemable Non-controlling Interests | Nonredeemable Non-controlling Interests of Consolidated VIEs | Total Permanent Equity | Redeemable Non- controlling Interests / Temporary Equity | ||||||||||||||||||||||||||||||||||
December 31, 2007 | $ | 10,287 | $ | 1,615 | $ | — | $ | 71 | ($ | 188 | ) | ($ | 184 | ) | $ | 11,601 | $ | 549 | $ | — | $ | 12,150 | $ | 29 | ||||||||||||||||||||
Net income | — | 784 | — | — | — | — | 784 | (154 | ) | — | 630 | (1 | ) | |||||||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | (417 | ) | — | — | — | — | (417 | ) | — | — | (417 | ) | — | ||||||||||||||||||||||||||||||
Release of common stock from escrow agent in connection with Quellos Transaction | — | — | — | — | 45 | — | 45 | — | — | 45 | — | |||||||||||||||||||||||||||||||||
Stock-based compensation | 278 | — | — | — | — | 1 | 279 | — | — | 279 | — | |||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | 4 | — | — | — | — | — | 4 | — | — | 4 | — | |||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | (140 | ) | — | — | — | — | 125 | (15 | ) | — | — | (15 | ) | — | ||||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 55 | — | — | — | — | — | 55 | — | — | 55 | — | |||||||||||||||||||||||||||||||||
Minimum pension liability adjustment | — | — | — | (1 | ) | — | — | (1 | ) | — | — | (1 | ) | — | ||||||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions)—non-controlling interest holders | — | — | — | — | — | — | — | 36 | — | 36 | (243 | ) | ||||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | — | — | — | — | — | — | — | (203 | ) | — | (203 | ) | 481 | |||||||||||||||||||||||||||||||
Other change in non-controlling interests | — | — | — | — | — | — | — | (3 | ) | — | (3 | ) | — | |||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (10 | ) | — | — | (237 | ) | — | — | (247 | ) | — | — | (247 | ) | — | |||||||||||||||||||||||||||||
Change in net unrealized gain (loss) from available-for-sale investments, net of tax | — | — | — | (19 | ) | — | — | (19 | ) | — | — | (19 | ) | — | ||||||||||||||||||||||||||||||
December 31, 2008 | $ | 10,474 | $ | 1,982 | $ | — | ($ | 186 | ) | ($ | 143 | ) | ($ | 58 | ) | $ | 12,069 | $ | 225 | $ | — | $ | 12,294 | $ | 266 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-6
| (1) | Includes $1 of common stock at December 31, 2008. |
BlackRock, Inc.
Consolidated Statements of Changes in Equity
(Dollar amounts in millions)
| Additional Paid-in Capital(1) | Retained Earnings | Appropriated Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Shares Held in Escrow | Treasury Stock Common | Total Stockholders’ Equity | Nonredeemable Non-controlling Interests | Nonredeemable Non-controlling Interests of Consolidated VIEs | Total Permanent Equity | Redeemable Non- controlling Interests / Temporary Equity | ||||||||||||||||||||||||||||||||||
December 31, 2008 | $ | 10,474 | $ | 1,982 | $ | — | ($ | 186 | ) | ($ | 143 | ) | ($ | 58 | ) | $ | 12,069 | $ | 225 | $ | — | $ | 12,294 | $ | 266 | |||||||||||||||||||
Net income | — | 875 | — | — | — | — | 875 | 20 | — | 895 | 2 | |||||||||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | (421 | ) | — | — | — | — | (421 | ) | — | — | (421 | ) | — | ||||||||||||||||||||||||||||||
Release of common stock from escrow agent in connection with Quellos Transaction | — | — | — | — | 6 | — | 6 | — | — | 6 | — | |||||||||||||||||||||||||||||||||
Stock-based compensation | 316 | — | — | — | — | 1 | 317 | — | — | 317 | — | |||||||||||||||||||||||||||||||||
Issuance of shares to Barclays | 8,529 | — | — | — | — | — | 8,529 | — | — | 8,529 | — | |||||||||||||||||||||||||||||||||
Issuance of shares to institutional investors | 2,800 | — | — | — | — | — | 2,800 | — | — | 2,800 | — | |||||||||||||||||||||||||||||||||
Issuance of common shares for contingent consideration | 43 | — | — | — | — | — | 43 | — | — | 43 | — | |||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | 6 | — | — | — | — | — | 6 | — | — | 6 | — | |||||||||||||||||||||||||||||||||
Merrill Lynch capital contribution | 25 | — | — | — | — | — | 25 | — | — | 25 | — | |||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | (78 | ) | — | — | — | — | 54 | (24 | ) | — | — | (24 | ) | — | ||||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 14 | — | — | — | — | — | 14 | — | — | 14 | — | |||||||||||||||||||||||||||||||||
Minimum pension liability adjustment | — | — | — | 1 | — | — | 1 | — | — | 1 | — | |||||||||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions)—non-controlling interest holders | — | — | — | — | — | — | — | (8 | ) | — | (8 | ) | (247 | ) | ||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment | — | — | — | — | — | — | — | (9 | ) | — | (9 | ) | 28 | |||||||||||||||||||||||||||||||
Other change in non-controlling interests | — | — | — | — | — | — | — | (4 | ) | — | (4 | ) | — | |||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 74 | — | — | 74 | — | — | 74 | — | |||||||||||||||||||||||||||||||||
Change in net unrealized gain (loss) from available-for-sale investments, net of tax | — | — | — | 15 | — | — | 15 | — | — | 15 | — | |||||||||||||||||||||||||||||||||
December 31, 2009 | $ | 22,129 | $ | 2,436 | $ | — | ($ | 96 | ) | ($ | 137 | ) | ($ | 3 | ) | $ | 24,329 | $ | 224 | $ | — | $ | 24,553 | $ | 49 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
| (1) | Includes $1 of common stock at December 31, 2009 and 2008, respectively and $1 of preferred stock at December 31, 2009. |
| (2) | Includes $12 of redeemable non-controlling interests acquired in the BGI Transaction on December 1, 2009. |
BlackRock, Inc.
Consolidated Statements of Changes in Equity
(Dollar amounts in millions)
| Additional Paid-in Capital(1) | Retained Earnings | Appropriated Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Shares Held in Escrow | Treasury Stock Common | Total Stockholders’ Equity | Nonredeemable Non-controlling Interests | Nonredeemable Non-controlling Interests of Consolidated VIEs | Total Permanent Equity | Redeemable Non- controlling Interests / Temporary Equity | ||||||||||||||||||||||||||||||||||
December 31, 2009 | $ | 22,129 | $ | 2,436 | $ | — | ($ | 96 | ) | ($ | 137 | ) | ($ | 3 | ) | $ | 24,329 | $ | 224 | $ | — | $ | 24,553 | $ | 49 | |||||||||||||||||||
January 1, 2010 initial recognition of ASU 2009-17 | — | — | 114 | — | — | — | 114 | (49 | ) | 49 | 114 | — | ||||||||||||||||||||||||||||||||
Net income | — | 2,063 | — | — | — | — | 2,063 | 19 | (35 | ) | 2,047 | 3 | ||||||||||||||||||||||||||||||||
Allocation of losses of consolidated collateralized loan obligations | — | — | (39 | ) | — | — | — | (39 | ) | — | 39 | — | — | |||||||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | (776 | ) | — | — | — | — | (776 | ) | — | — | (776 | ) | — | ||||||||||||||||||||||||||||||
Release of common stock from escrow agent in connection with Quellos Transaction | — | — | — | — | 136 | — | 136 | — | — | 136 | — | |||||||||||||||||||||||||||||||||
Stock-based compensation | 444 | — | — | — | — | 1 | 445 | — | — | 445 | — | |||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | 5 | — | — | — | — | — | 5 | — | — | 5 | — | |||||||||||||||||||||||||||||||||
Merrill Lynch capital contribution | 10 | — | — | — | — | — | 10 | — | — | 10 | — | |||||||||||||||||||||||||||||||||
Exchange of common stock for preferred shares series B | 128 | — | — | — | — | (128 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | (202 | ) | — | — | — | — | 93 | (109 | ) | — | — | (109 | ) | — | ||||||||||||||||||||||||||||||
Other stock repurchases | — | — | — | — | — | (140 | ) | (140 | ) | — | — | (140 | ) | — | ||||||||||||||||||||||||||||||
Convertible debt conversions, net of tax | (54 | ) | — | — | — | — | 66 | 12 | — | — | 12 | — | ||||||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 44 | — | — | — | — | — | 44 | — | — | 44 | — | |||||||||||||||||||||||||||||||||
Minimum pension liability adjustment | — | — | — | (1 | ) | — | — | (1 | ) | — | — | (1 | ) | — | ||||||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions)—non-controlling interest holders | — | — | — | — | — | — | — | (6 | ) | (8 | ) | (14 | ) | 124 | ||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | — | — | — | — | — | — | — | — | — | — | (170 | ) | ||||||||||||||||||||||||||||||||
Other changes in non-controlling interests | — | — | — | — | — | — | — | 1 | — | 1 | — | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | (1 | ) | — | — | (1 | ) | — | — | (1 | ) | — | ||||||||||||||||||||||||||||||
Change in net unrealized gains (losses) from available-for-sale investments, net of tax | — | — | — | 2 | — | — | 2 | — | — | 2 | — | |||||||||||||||||||||||||||||||||
December 31, 2010 | $ | 22,504 | $ | 3,723 | $ | 75 | ($ | 96 | ) | ($ | 1 | ) | ($ | 111 | ) | $ | 26,094 | $ | 189 | $ | 45 | $ | 26,328 | $ | 6 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
| (1) | Includes $1 of common stock and $1 of preferred stock at December 31, 2010 and 2009, respectively. |
Consolidated Statements of Cash Flows
(Dollar amounts in millions)
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2010 | 2009 | 2008 | |||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||
Net income | $ | 786 | $ | 995 | $ | 323 | $ | 2,050 | $ | 897 | $ | 629 | ||||||||||||
Adjustments to reconcile net income to cash from operating activities: | ||||||||||||||||||||||||
Depreciation and other amortization | 232 | 199 | 73 | |||||||||||||||||||||
Amortization of deferred mutual fund sales commissions | 130 | 108 | 30 | |||||||||||||||||||||
Non-controlling interests | (155 | ) | 364 | 16 | ||||||||||||||||||||
Depreciation and amortization | 310 | 239 | 236 | |||||||||||||||||||||
Amortization of deferred sales commissions | 102 | 100 | 130 | |||||||||||||||||||||
Stock-based compensation | 278 | 188 | 120 | 445 | 317 | 278 | ||||||||||||||||||
Deferred income tax benefit | (232 | ) | (105 | ) | (43 | ) | ||||||||||||||||||
Deferred income tax expense (benefit) | 3 | (89 | ) | (234 | ) | |||||||||||||||||||
Net (gains) losses on non-trading investments | 216 | (442 | ) | (4 | ) | (62 | ) | (20 | ) | 216 | ||||||||||||||
Purchases of investments within consolidated funds | (127 | ) | (870 | ) | — | (26 | ) | (41 | ) | (127 | ) | |||||||||||||
Proceeds from sale of investments within consolidated funds | 342 | 597 | — | |||||||||||||||||||||
Proceeds from sales and maturities of investments within consolidated funds | 54 | 285 | 342 | |||||||||||||||||||||
Assets and liabilities of consolidated VIEs: | ||||||||||||||||||||||||
Change in cash and cash equivalents | (45 | ) | — | — | ||||||||||||||||||||
Net (gains) losses within consolidated VIEs | 35 | — | — | |||||||||||||||||||||
Net (purchases)/proceeds within consolidated VIEs | 44 | — | — | |||||||||||||||||||||
(Earnings) losses from equity method investees | 294 | (84 | ) | (6 | ) | (141 | ) | (30 | ) | 294 | ||||||||||||||
Distributions of earnings from equity method investees | 28 | 16 | 2 | 14 | 18 | 28 | ||||||||||||||||||
Other adjustments | 13 | 2 | (3 | ) | (1 | ) | 3 | 13 | ||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||||||
Accounts receivable | 339 | (273 | ) | (9 | ) | (364 | ) | (223 | ) | 339 | ||||||||||||||
Due from related parties | (112 | ) | (4 | ) | (75 | ) | 45 | 159 | (112 | ) | ||||||||||||||
Deferred mutual fund sales commissions | (90 | ) | (72 | ) | (3 | ) | ||||||||||||||||||
Deferred sales commissions | (65 | ) | (68 | ) | (90 | ) | ||||||||||||||||||
Investments, trading | 265 | (45 | ) | (87 | ) | (118 | ) | (53 | ) | 265 | ||||||||||||||
Other assets | 115 | (80 | ) | (15 | ) | 236 | (50 | ) | 115 | |||||||||||||||
Accrued compensation and benefits | (237 | ) | 172 | 226 | 52 | (218 | ) | (237 | ) | |||||||||||||||
Accounts payable and accrued liabilities | (227 | ) | (33 | ) | 1 | 164 | 165 | (227 | ) | |||||||||||||||
Due to related parties | 7 | (138 | ) | 175 | (356 | ) | (10 | ) | 7 | |||||||||||||||
Other liabilities | 51 | 92 | — | 112 | 18 | 51 | ||||||||||||||||||
Cash flows from operating activities | 1,916 | 587 | 721 | 2,488 | 1,399 | 1,916 | ||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||
Purchases of investments | (417 | ) | (521 | ) | (213 | ) | (656 | ) | (73 | ) | (417 | ) | ||||||||||||
Purchases of disposal group | (59 | ) | — | — | ||||||||||||||||||||
Purchases of assets held for sale | (1 | ) | (2 | ) | (59 | ) | ||||||||||||||||||
Proceeds from sale of disposal group | 41 | — | — | 2 | — | 41 | ||||||||||||||||||
Proceeds from sale of investments | 122 | 266 | 26 | |||||||||||||||||||||
Proceeds from sales and maturities of investments | 181 | 260 | 122 | |||||||||||||||||||||
Distributions of capital from equity method investees | 15 | 7 | — | 53 | 89 | 15 | ||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | (3 | ) | (117 | ) | 2 | (52 | ) | 27 | (3 | ) | ||||||||||||||
Acquisitions, net of cash acquired and purchase price contingencies | (16 | ) | (592 | ) | 272 | |||||||||||||||||||
Acquisitions, net of cash acquired, and contingent payments | (23 | ) | (5,755 | ) | (16 | ) | ||||||||||||||||||
Purchases of property and equipment | (77 | ) | (111 | ) | (84 | ) | (131 | ) | (65 | ) | (77 | ) | ||||||||||||
Cash flows from investing activities | (394 | ) | (1,068 | ) | 3 | (627 | ) | (5,519 | ) | (394 | ) | |||||||||||||
F-7
BlackRock, Inc.
Consolidated Statements of Cash Flows (continued)
(Dollar amounts in millions)
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2010 | 2009 | 2008 | |||||||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||
Repayments of short-term borrowings | (400 | ) | — | — | (2,134 | ) | — | (400 | ) | |||||||||||||||
Proceeds from short-term borrowings | 300 | 300 | — | — | 2,034 | 300 | ||||||||||||||||||
Repayments of long-term borrowings | (1 | ) | — | — | — | — | (1 | ) | ||||||||||||||||
Repayments of convertible debt | (176 | ) | (7 | ) | — | |||||||||||||||||||
Proceeds from long-term borrowings | — | 694 | — | — | 2,495 | — | ||||||||||||||||||
Cash dividends paid | (419 | ) | (353 | ) | (136 | ) | (776 | ) | (422 | ) | (419 | ) | ||||||||||||
Proceeds from stock options exercised | 24 | 70 | 3 | 10 | 18 | 24 | ||||||||||||||||||
Reissuance of treasury stock | 6 | 7 | 5 | |||||||||||||||||||||
Purchases of treasury stock | (46 | ) | (383 | ) | (31 | ) | ||||||||||||||||||
Net subscriptions received/(distributions paid) from non-controlling interests holders | (207 | ) | 400 | 68 | ||||||||||||||||||||
Issuance of common stock | — | — | 1 | |||||||||||||||||||||
Proceeds from issuance of common stock | 6 | 2,804 | 6 | |||||||||||||||||||||
Repurchases of common stock | (264 | ) | (46 | ) | (46 | ) | ||||||||||||||||||
Merrill Lynch capital contribution | 10 | 25 | — | |||||||||||||||||||||
Net (redemptions/distributions paid)/subscriptions received from non-controlling interests holders | 110 | (255 | ) | (207 | ) | |||||||||||||||||||
Excess tax benefit from stock-based compensation | 59 | 119 | 5 | 44 | 33 | 59 | ||||||||||||||||||
Net proceeds/(repayments) of borrowings by consolidated sponsored investment funds | (203 | ) | 114 | — | ||||||||||||||||||||
Other financing activities | — | (9 | ) | — | ||||||||||||||||||||
Net borrowings/(repayment of borrowings) by consolidated sponsored investment funds | — | 70 | (203 | ) | ||||||||||||||||||||
Cash flows from financing activities | (887 | ) | 959 | (85 | ) | (3,170 | ) | 6,749 | (887 | ) | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (259 | ) | 18 | 37 | (32 | ) | 47 | (259 | ) | |||||||||||||||
Net increase in cash and cash equivalents | 376 | 496 | 676 | (1,341 | ) | 2,676 | 376 | |||||||||||||||||
Cash and cash equivalents, beginning of year | 1,656 | 1,160 | 484 | 4,708 | 2,032 | 1,656 | ||||||||||||||||||
Cash and cash equivalents, end of year | $ | 2,032 | $ | 1,656 | $ | 1,160 | $ | 3,367 | $ | 4,708 | $ | 2,032 | ||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||||||||||
Supplemental disclosure of cash flow information is as follows: | ||||||||||||||||||||||||
Cash paid for: | ||||||||||||||||||||||||
Interest | $ | 146 | $ | 52 | $ | 63 | ||||||||||||||||||
Interest on borrowings of consolidated VIEs | $ | 53 | $ | — | $ | — | ||||||||||||||||||
Income taxes | $ | 583 | $ | 503 | $ | 644 | ||||||||||||||||||
Supplemental schedule of non-cash investing and financing transactions is as follows: | ||||||||||||||||||||||||
Issuance of common stock | $ | 266 | $ | 767 | $ | 136 | ||||||||||||||||||
Issuance of preferred stock | $ | — | $ | 7,842 | $ | — | ||||||||||||||||||
Increase (decrease) in non-controlling interests due to net consolidation/(deconsolidation) of sponsored investment funds | ($ | 170 | ) | $ | 7 | $ | 280 | |||||||||||||||||
Contingent common stock payment related to Quellos transaction | $ | — | $ | 43 | $ | — | ||||||||||||||||||
Increase (decrease) in borrowings due to consolidation of VIEs | $ | 1,157 | $ | — | $ | — | ||||||||||||||||||
Common stock released from escrow agent in connection with Quellos transaction | $ | 136 | $ | 6 | $ | 45 | ||||||||||||||||||
Supplemental disclosure of cash flow information is as follows:See accompanying notes to consolidated financial statements.
| Year ended December 31, | |||||||||
| 2008 | 2007 | 2006 | |||||||
Cash paid for interest | $ | 63 | $ | 30 | $ | 8 | |||
Cash paid for income taxes | $ | 644 | $ | 376 | $ | 154 | |||
F-8
Supplemental schedule of non-cash investing and financing transactions is as follows:
| Year ended December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||
Common and preferred stock issued in MLIM Transaction | $ | — | $ | — | $ | 9,577 | ||||
Issuance of treasury stock | $ | 136 | $ | 179 | $ | 15 | ||||
Increase (decrease) in investments due to net consolidations of sponsored investment funds | $ | 285 | $ | (1,150 | ) | $ | 275 | |||
Increase (decrease) in non-controlling interests due to net consolidations of sponsored investment funds | $ | 280 | $ | (1,295 | ) | $ | 163 | |||
PNC LTIP capital contributions | $ | 4 | $ | 175 | $ | — | ||||
Common stock released from escrow agent in connection with Quellos Transaction | $ | 45 | $ | — | $ | — | ||||
F-9
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)1. Introduction and Basis of Presentation
Business
BlackRock, Inc. (together, with its subsidiaries, and predecessors, unless the context otherwise indicates, “BlackRock” or the “Company”) provides diversified investment management services to institutional clients, intermediary and to individual investors through various investment vehicles. Investment management services primarily consist of the active management of equity, fixed income, multi-asset class, alternative investment and cash management and equity client accounts, the managementproducts. BlackRock offers its investment products in a variety of a number ofvehicles, including open-end and closed-end mutual fund familiesfunds,iShares® exchange-traded funds (“ETFs”), collective investment trusts and other non-U.S. equivalent products serving the institutional and retail markets, and the management of alternative funds developed to serve various customer needs.separate accounts. In addition, BlackRock provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.
On September 29, 2006, pursuant to the Transaction Agreement and PlanJanuary 1, 2009, Bank of Merger (the “Transaction Agreement”America Corporation (“Bank of America”), acquired Merrill Lynch & Co., Inc. (“Merrill Lynch”) contributed the entities and assets that constituted its investment management business (the “MLIM Business”) to BlackRock via a capital contribution. In exchange for this contribution, BlackRock issued to Merrill Lynch 52,395,082 shares of common stock and 12,604,918 shares of series A non-voting participating preferred shares, representing a 45% voting interest and approximately 49.3% of the fully-diluted capital stock at such date (such transactions, collectively, referred to as the “MLIM Transaction”). Prior to the MLIM Transaction, the Company was owned approximately 69% by The PNC Financial Services Group, Inc. (“PNC”). PNC’s ownership was reduced to approximately 34% of the total capital stock as a result of the MLIM Transaction.
On October 1, 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”) for up to $1,719 (the “Quellos Transaction”). BlackRock paid Quellos $563 in cash and issued 1,191,785 shares of BlackRock common stock valued at $188. The common stock will be held in escrow for up to three years and is available to satisfy certain indemnification obligations of Quellos under the asset purchase agreement. The Quellos business was combined with the existing BlackRock fund of funds business and the combined platform comprises one of the largest fund of funds platforms in the world.
On January 1, 2009, Bank of America (“Bank of America”) acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and The PNC Financial Services Group, Inc. (“PNC”) pursuant to which on February 27, 2009 itMerrill Lynch and PNC each exchanged a portion of theits BlackRock common stock it held for an equal number of shares of non-voting preferred stock. (SeeSee Note 15, Related Party Transactions,19, Capital Stock, for more details on these transactions.
On December 1, 2009, BlackRock completed its acquisition of Barclays Global Investors (“BGI”) from Barclays Bank PLC (“Barclays”) (the “BGI Transaction”). In exchange for BGI, BlackRock paid approximately $6.65 billion in cash and issued capital stock valued at $8.53 billion comprised of 3,031,516 shares of BlackRock common stock and 34,535,255 shares of BlackRock Series B and D non-voting participating preferred stock. See Note 3, Mergers and Acquisitions, for more details on this transaction.
On November 15, 2010, Bank of America and PNC sold 58,737,122 shares of BlackRock’s common stock, which included 56,407,040 shares of common stock that converted from non-voting preferred stock. In connection with this transaction, BlackRock entered into an exchange agreement with PNC pursuant to which PNC agreed to exchange 11,105,000 shares of BlackRock non-voting preferred stock they held for common stock.
On December 31, 2010, equity ownership of BlackRock was as follows:
| Voting Common Stock | Capital Stock (1) | |||||||
PNC | 25.3 | % | 20.3 | % | ||||
Barclays | 2.3 | % | 19.6 | % | ||||
Bank of America/Merrill Lynch | 0.0 | % | 7.1 | % | ||||
Other | 72.4 | % | 53.0 | % | ||||
| 100.0 | % | 100.0 | % | |||||
| (1) | Includes outstanding common and non-voting preferred stock only. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
1. Introduction and Basis of Presentation (continued)
Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Non-controlling interests on the consolidated statements of financial condition include the portion of consolidated sponsored investment funds in which the Company does not have a direct equity ownership. All significantSignificant accounts and transactions between consolidated entities have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications
F-10
BlackRock, Inc.2. Significant Accounting Policies
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Cash and Cash Equivalents
Cash and cash equivalents primarily consists of cash, money market funds and short-term, highly liquid investments with original maturities, at date of purchase, of three months or less in which the Company is exposed to market and credit risk. Cash and cash equivalent balances that are legally restricted from use by the Company are recorded in other assets on the consolidated statements of financial condition. Cash balances maintained by consolidated investmentssponsored investment funds are not considered legally restricted and are included in cash and cash equivalents on the consolidated statements of financial condition.
Investments
Consolidation
The accounting method used for the Company’s equity investments is generally dependent upon the influence the Company has over its investee. For investments where BlackRock can exert control over the financial and operating policies of the investee, which generally exists if there is a 50% or greater voting interest, the investee is Effective January 1, 2010, cash balances maintained by consolidated into BlackRock’s financial statements. For certain investments where the risks and rewards of ownership are not directly linked to voting interests (“variable interest entities” or “VIEs”), an investee may beentities are included in assets of consolidated if BlackRock, with its related parties, is considered the primary beneficiary of the investee. The primary beneficiary determination will consider not only BlackRock’s equityvariable interest but the benefits and risks associated with non-equity components of the Company’s relationship with the investee, including capital support agreements, debt, investment advisory and other similar arrangements, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46(R),Consolidation of Variable InterestEntities (“FIN No. 46(R)”).
Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 04-5,Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,the Company, as general partner or managing member of its funds, generally is presumed to control funds that are limited partnerships or limited liability companies that are not deemed to be VIEs. The Company reviews such investment vehicles to determine if such a presumption can be overcome by determining if third party partners or members of the limited partnership or limited liability company have the substantive ability to dissolve (liquidate) the investment vehicle, or otherwise to remove BlackRock as the general partner or managing member without cause, or have substantive participating rights.
F-11
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Investments (continued)
Consolidated Sponsored Investment Funds
From time to time, the Company will maintain a controlling interest in a sponsored investment fund. All of the investments held by consolidated sponsored investment funds are carried at fair value, with corresponding changes in the investments’ fair values reflected in non-operating income in the Company’s consolidated statements of income. In the absence of a publicly available market value, fair value for such investments are estimated in good faith by the Company’s management based on such factors as the liquidity, financial condition and current and projected operating performance of the investment and, in the case of private investment fund investments, the fund’s net asset value. When the Company no longer controls these funds due to reduced ownership percentage or other reasons, the funds are deconsolidated and accounted for under another accounting method. In addition, changes in fair value of certain illiquid investments held by these funds, including direct investments in equity or debt securities of privately held companies and certain real estate products, are recorded based upon the most current information available at the time, which may precede the date of the statement of financial position, considering any significant changes in the operations of the investment.
Upon consolidation of various sponsored investment funds,entities on the Company’s consolidated statements of financial condition, the Company retains the specialized accounting of these funds pursuant to EITF No. 85-12,condition.
Retention of Specialized Accounting for Investments in Consolidation.
Investments in Debt and Marketable Equity Securities
BlackRock holds debt and marketable equity investments which, pursuant to Statement of Financial Accounting Standards Codification (“SFAS”ASC”) No. 115,320-10,Accounting for Certain Investments in– Debt and Equity Securities, are classified as trading, available-for-sale, or held-to-maturity based on the Company’s intent to sell the security or, for a debt security, the Company’s intent and ability to hold the debt security to maturity.
Trading securities are those investments whichthat are purchased principally for the purpose of selling them in the near term. Trading securities are carried at fair value on the consolidated statements of financial condition with changes in fair value recorded in non-operating income in(expense) on the consolidated statements of income during the period of the change.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Investments (continued)
Available-for-sale securities are those securities whichthat are not classified as trading securities or held-to-maturity.held-to-maturity securities. Available-for-sale securities are carried at fair value on the consolidated statements of financial condition with changes in fair value recorded in the accumulated other comprehensive income component of stockholders’ equity in the period of the change. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income to non-operating income (expense) on the Company’s consolidated statements of income.
Held-to-maturity debt securities are recorded at amortized cost inon the consolidated statements of financial condition. At December 31, 2008 and 2007, BlackRock did not own any held-to-maturity investments.
F-12
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except per share data or as otherwise noted)
Investments (continued)
Equity Method
For equity investments where BlackRock does not control the investee, and where it is not the primary beneficiary of a VIE,variable interest entity (“VIE”), but can exert significant influence over the financial and operating policies of the investee, the Company usesfollows the equity method of accounting.accounting in accordance with ASC 323,Investments-Equity Method and Joint Ventures. Under the equity method of accounting, BlackRock’s share of the investee’s underlying net income or loss on investment funds is recorded as net gain (loss) on investments within non-operating income for investments in funds(expense) and as other revenue for operating or advisory company investments since such operating or advisory companies are considered to be integral toan extension of BlackRock’s core business. The net income of the investee is recorded based upon the most current information available at the time, which may precede the date of the statement of financial condition. Distributions received from the investment reduce the Company’s investment balance.
Cost Method
For equity investments where BlackRock neither controls nor has significant influence over the investee and which are non-marketable, the investments are accounted for using the cost method of accounting. Under the cost method, dividends received from the investment are recorded as non-operating income.
Collateralized Debt Obligations
The Company’s investments in collateralized debt obligations (“CDOs”) are recorded at fair value and the dividend income from these CDOs is accounted for in accordance with EITF No. 99-20,Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets(“EITF 99-20”). Under EITF No. 99-20, dividend income on the Company’s CDOs is recorded based upon projected investment yield. Expected future cash flows for the CDOs are reviewed quarterly and changes in the yield are recorded prospectively. Dividend income for these investments is recorded inwithin non-operating income on the consolidated statements of income.(expense).
Impairments
The Company’s management periodically assesses its equity method, available-for-sale and cost method of accounting investments for impairment. If circumstances indicate that impairment may exist, investments are evaluated using fair values, where available, or the expected future cash flows of the investment. If the undiscounteddiscounted expected future cash flows are lower than the Company’s carrying value of the investment, an impairment charge is recorded in non-operating income in(expense) on the consolidated statements of income.
F-13
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except per share data or as otherwise noted)
Investments (continued)
Impairments (continued)
When the fair value of available-for-sale securities is lower than its cost, the Company evaluates the securities to determine whether the impairment is considered to be “other-than-temporary.”
In making this determination, for equity securities, the Company considers, among other factors, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its cost, the financial condition and near-term prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery.recovery of such unrealized losses. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in(expense) on the consolidated statements of income.
The Company reviews its CDO investments for impairment quarterly throughout the term of the investment. The Company reviews cash flow estimates throughout the life of each CDO investment. If the net present value of the estimated future cash flows is lower than the carrying value of the investment and the estimated future cash flows are lower than the previous estimate of cash flows, an impairment is considered to be other-than-temporary. The impairment loss is recognized based on the excess of the carrying amount of the investment over its estimated fair value.
Goodwill and Intangible Assets
Goodwill includes goodwill and assembled workforce. Intangible assets are comprised of indefinite-lived intangible assets and finite-lived intangible assets. The value of contracts to manage assets in proprietary open-end funds and closed-end funds without a specified termination date is classified as an indefinite-lived intangible asset. The assignment of indefinite lives to such contracts is based upon the assumption that there is no foreseeable limit on the contract period to manage these funds due to the likelihood of continued renewal at little or no cost. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, indefinite-lived intangible assets and goodwill are not amortized.
The Company assesses its goodwill, indefinite-lived management contracts and finite-life management contracts for impairment at least annually. In its assessment of goodwill for impairment the Company considers such factors as the book value and market capitalization of the Company. In its assessment of indefinite-lived management contracts, the Company considers such factors as assets under management, product mix, product margins and projected cash flows to determine whether the values of each asset are impaired and whether the indefinite-life classification is still appropriate. The fair value of indefinite-lived intangible assets and goodwill is determined based on the discounted value of expected future cash flows. The fair value of finite-lived management contracts and their remaining useful life is reviewed at least annually to determine if circumstances exist which may indicate a potential impairment. In addition, if circumstances exist, the Company will perform an impairment test, using an undiscounted cash flow analysis. If the asset is determined to be impaired, the difference between the book value of the asset and its current fair value would be recognized as an expense in the period in which the impairment is determined.
F-14
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except per share data or as otherwise noted)
2. Significant Accounting Policies |
Goodwill and Intangible Assets (continued)
ChangeInvestments (continued)
Impairments (continued)
In making this determination for debt securities, the Company considers whether: (1) the Company has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) the Company does not expect to recover the entire amortized cost basis of the security. If the Company does not intend to sell a security and it is not more likely than not that it will be required to sell the security, but the security has suffered a credit loss, the credit loss will be bifurcated from the total impairment and recorded in Methodearnings with the remaining portion recorded in other comprehensive income.
Consolidation
The accounting method used for the Company’s equity investments is dependent upon the influence the Company has over its investee, the investment product. To the extent that BlackRock can exert control over the financial and operating policies of Applyingthe investee, which generally exists if there is a 50% or greater voting interest or if partners or members of certain products do not have substantive rights, the investee is consolidated into BlackRock’s financial statements.
For investment products in which BlackRock’s voting interest is less than 50%, an Accounting Principleanalysis is performed to determine if the investment product is a variable interest entity (“VIE”) or a voting rights entity. Upon the determination that the investment product is a VIE further analysis, as discussed below, is performed to determine if BlackRock is the primary beneficiary (“PB”) of the investment product, which would result in consolidation.
Consolidation of Variable Interest Entities
During 2007,Pursuant to ASC 810-10,Consolidation(“ASC 810-10”), certain investment products for which the risks and rewards of ownership are not directly linked to voting interests, may be deemed VIEs. BlackRock reviews factors, including the rights of the equity holders and obligations of equity holders to absorb losses or receive expected residual returns to determine if the investment product is a VIE. BlackRock is required to consolidate a VIE when it is deemed to be the PB, which is evaluated continuously as facts and circumstances change.
In June 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17,Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities(“ASU 2009-17”), which became effective for BlackRock on January 1, 2010. In February 2010 the FASB issued ASU 2010-10,Amendments to Statement 167 for Certain Investment Funds(“ASU 2010-10”).This ASU defers the application of Statement of Financial Accounting Standards (“SFAS”) No. 167 (“SFAS No. 167”),Amendments to FASB Interpretation No. 46(R),to a reporting enterprise’s interest in VIEs if certain conditions are met. See Accounting Policies Adopted in the Year Ended December 31, 2010 below for more information.
The PB of a VIE that does not meet the conditions of ASU 2010-10 is the enterprise that has the power to direct activities of the entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the VIE.
The PB of a VIE that meets the conditions of ASU 2010-10 is the enterprise that has a variable interest (or combination of variable interests, including those of related parties) that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Consolidation (continued)
Consolidation of Voting Rights Entities
To the extent that BlackRock maintains 50% or greater voting interest of an investment product, BlackRock is deemed to have control of the product, which results in consolidation of the product into BlackRock’s financial statements.
The Company, as general partner or managing member of certain sponsored investment funds, generally is presumed to control funds that are limited partnerships or limited liability companies. Pursuant to ASC 810-20, Control of Partnerships and Similar Entities (“ASC 810-20”), the Company changedreviews such investment vehicles to determine if such a presumption can be overcome by determining if other non-affiliated partners or members of the limited partnership or limited liability company have the substantive ability to dissolve (liquidate) the investment vehicle, or otherwise to remove BlackRock as the general partner or managing member without cause based on a simple unaffiliated majority vote, or have other substantive participating rights. If the investment vehicle is not a VIE and the presumption of control is not overcome, the investment vehicle will be consolidated into BlackRock’s financial statements.
From time to time, the Company will maintain a controlling interest in a sponsored investment fund. All of the underlying investments held by consolidated sponsored investment funds are carried at fair value, with corresponding changes in the investments’ fair values reflected in non-operating income (expense) on the Company’s consolidated statements of income. In the absence of a publicly available market value, the fair value for such underlying investments is estimated in good faith by the Company’s management based on such factors as the liquidity, financial condition and current and projected operating performance of the investment and, in the case of private investment fund investments, the fund’s net asset value. When the Company no longer controls these funds due to reduced ownership percentage or other reasons, the funds are deconsolidated and accounted for under another investment accounting method. In addition, changes in fair value of certain illiquid investments held by these funds, including direct investments in equity or debt securities of privately held companies and certain real estate products, are recorded based upon the most current information available at the time, which may precede the date of its annual impairment tests for goodwill and indefinite-lived intangible assets to July 31st in order to provide additional time for testing due to the significant increase in these assets as a resultstatement of recent acquisitions. The Company’s management believes that this change in the methodfinancial condition
Upon consolidation of applying an accounting principle is preferable under the circumstances and does not result in adjustments tovarious sponsored investment funds on the Company’s consolidated statements of financial statements when applied retrospectively, nor would it resultcondition, the Company retains the specialized accounting principles of the underlying funds pursuant to ASC 810-10.
Separate Account Assets and Liabilities
Two wholly-owned subsidiaries of the Company in the delay, accelerationUnited Kingdom are registered life insurance companies that maintain separate accounts representing segregated funds held for purposes of funding individual and group pension contracts, and equal and offsetting separate account non-financial liabilities. The separate account assets are not subject to general claims of the creditors of BlackRock. These accounts and the related liabilities are recorded as separate account assets and separate account liabilities on the Company’s consolidated statements of financial condition in accordance with the ASC 944-80,Financial Services – Separate Accounts.
The net investment income and net realized and unrealized gains and losses attributable to separate account assets supporting individual and group pension contracts accrue directly to the contract owner and are not reported as revenue or avoidance of recording a potential future impairment. This change in the method of applying SFAS No. 142 had no impactnon-operating income (expense) on the consolidated statements of incomeincome. Policy administration and management fees associated with separate account products are included in investment advisory, administration fees and securities lending revenue on the consolidated statements of income.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Collateral Assets Held and Liabilities Under Securities Lending Agreements
The Company facilitates securities lending arrangements whereby securities held by separate account assets maintained by the life insurance companies are lent to third parties. In exchange, the Company receives collateral, principally cash and securities, with minimums generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. Under the Company’s securities lending arrangements, the Company can resell or re-pledge the collateral and the borrower can re-sell or re-pledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore these transactions are not reported as sales under ASC 860,Transfers and Servicing.
As a result of the Company’s ability to resell or re-pledge the collateral, the Company records on its consolidated statements of financial condition the collateral received under these arrangements (both cash and non-cash) as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. At December 31, 2010 and 2009, the fair value of loaned securities held by separate account assets was approximately $16.1 billion and $18.0 billion, respectively, and the collateral held under these securities lending agreements was approximately $17.6 billion and $19.3 billion, respectively. During the years ended December 31, 2007 or 2006.
The impairment tests performed as of July 31, 20082010 and 2007 indicated that no impairment charges were required. Due to the recent capital market events,2009, the Company performed an additional impairment test ashad not sold or re-pledged any of September 30, 2008 which indicated no impairment charges were required.the collateral received under these arrangements.
Deferred Mutual Fund Sales Commissions
The Company holds the rights to receive certain cash flows from sponsored mutual funds sold without a front-end sales charge (“back-end load shares”). The faircarrying value of these deferred mutual fund commissions is being amortized over periods between one and six years. The Company receives distribution fees from these funds and contingent deferred sales commissions (“CDSCs”) upon shareholder redemption of certain back-end load shares.shares, which are recorded within distribution fees on the consolidated statements of income. Upon receipt of CDSCs, the Company records revenue and the remaining unamortized deferred sales commission is expensed.
In April 2007, the Company acquired from a subsidiary of PNC certain distribution financing arrangements to receive certain cash flows from sponsored open-ended mutual funds sold without a front-end sales charge. The fair value of these assets was capitalized and is being amortized over periods up to six years. The Company also acquired the rights to related distribution fees from these funds and CDSCs upon shareholder redemption of certain back-end load shares prior to the end of the contingent deferred sales period. The Company paid $34 in exchange for the above rights, which is reflected on the consolidated statement of cash flows as an acquisition within investing activities.
The Company periodically reviews the carrying value of deferred mutual fund commission assets to determine whether a significant decline in the equity or bond markets or other events or circumstances indicate that an impairment in value may have occurred. If indicators of a potential impairment exist, the Company compares the carrying value of the asset to the estimated future net undiscounted cash flows related to the asset. If such assessments indicate that estimated future net undiscounted cash flows will not be sufficient to recover the recorded carrying value, the assets are adjusted to their estimated fair value. No such impairments were recorded for the years ended December 31, 2008, 20072010, 2009 or 2006.2008.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation generally is recorded using the straight-line method over the estimated useful lives of the various classes of property and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the remaining lease term.
F-15
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)2. Significant Accounting Policies (continued)
Property and Equipment (continued)
Software Costs
BlackRock develops a variety of risk management, investment analytic and investment system services for its customers, as well as for internal use, utilizing proprietary software whichthat is hosted and maintained by BlackRock. The Company follows AICPA Statement of PositionASC 350-40,Internal-Use Software (“SOP”ASC 350-40”) 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.. SOP 98-1ASC 350-40 requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. Capitalized software costs are included within property and equipment on the consolidated statements of financial condition and are amortized beginning when the software project is complete and put into production over the estimated useful life of the software of three years.
Separate AccountGoodwill and Intangible Assets and Liabilities
A wholly-owned subsidiaryGoodwill represents the excess cost of a business acquisition over the fair value of the Companynet assets acquired. The value of an assembled workforce is subsumed in the United Kingdomgoodwill as is it not a registered life insurance company that maintains separate accounts representing segregated funds held for purposes of funding individual and group pension contracts. The separate accountseparable identifiable intangible asset. Intangible assets are not subject to general claimscomprised of the creditors of BlackRock. These accounts and the related liabilities are recorded as separate accountindefinite-lived intangible assets and separate account liabilitiesfinite-lived intangible assets. The value of contracts to manage assets in proprietary open-end funds, closed-end funds and collective trust funds without a specified termination date is classified as an indefinite-lived intangible asset. The assignment of indefinite lives to such contracts primarily is based upon the following: a) the assumption that there is no foreseeable limit on the consolidated statements of financial condition in accordance withcontract period to manage these funds; b) the AICPAAuditCompany expects to, and Accounting Guide: Life and Health Insurance Entities.
The net investment income and net realized and unrealized gains and losses attributablehas the ability to, separate account assets supporting individual and group pension contracts accrue directlycontinue to operate these products indefinitely; c) the contract ownerproducts have multiple investors and are not reportedreliant on a single investor or small group of investors for their continued operation; d) current competitive factors and economic conditions do not indicate a finite life; and e) there is a high likelihood of continued renewal based on historical experience. In addition, trade names/trademarks are considered indefinite-lived intangibles as revenuethey are expected to generate cash flows indefinitely.
In accordance with ASC 350,Intangibles – Goodwill and Other(“ASC 350”), indefinite-lived intangible assets and goodwill are not amortized. The value of contracts for separately managed accounts and certain alternative funds which have finite lives are amortized over the expected life of the contracts.
The Company assesses its goodwill, indefinite-lived management contracts, trade names/trademarks and licenses for impairment at least annually. In its assessment of goodwill for impairment, the Company considers such factors as the book value and market capitalization of the Company. In its assessment of indefinite-lived management contracts and trade names/trademarks, the Company considers various factors including assets under management, product mix, operating margins, tax rates, discount rates and projected cash flows to determine whether the values of each asset are impaired and whether the indefinite-life classification is still appropriate. The fair value of indefinite-lived intangible assets is determined based on the discounted value of expected future cash flows.
The fair value of finite-lived management contracts and their remaining useful life is reviewed at least annually to determine if circumstances exist which may indicate a potential impairment. In addition, if circumstances exist, the Company will perform an impairment test, using an undiscounted cash flow analysis. If the asset is determined to be impaired, the difference between the book value of the asset and its current fair value would be recognized as an expense in the consolidated statements of income. Policy administration and management fees associated with separate account products are includedperiod in investment advisory and administration fees inwhich the consolidated statements of income.impairment is determined.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Assets and Liabilities to be Disposed of by Sale
In the course of the business of establishing real estate and private equity sponsoredother alternative investment funds, the Company may purchase land, properties and third party private equity fundsother assets while incurring liabilities directly associated with the assets, together a disposal group, with the intention to sell the disposal group to a third party.sponsored investment funds upon their launch. In accordance with the provisions of SFAS No. 144,ASC 360-10,Accounting for the Impairment or Disposal of Long-lived AssetsProperty, Plant, and Equipment,, the Company treats these assets and liabilities as a “disposal group”, measured at the lower of the carrying amount or fair value. Losses are recognized for any initial or subsequent write-down to fair value and gains are recognized for any subsequent increase in fair value, but not in excess of the cumulative loss previously recognized.
During the year ended December 31, 2010, the disposal group assets were sold and the liabilities were settled. At December 31, 2008,2009, the Company held disposal group assets of $64$46 million which were reported in other assets and related liabilities of $63$45 million which were reported in other assets and other liabilities respectively, on its consolidated statementstatements of financial condition. Disposal group liabilities include approximately $58 of borrowings directly associated with the disposal group assets. During the year ended December 31, 2008,2009, the Company recorded lossesa net loss of $14$2 million, within non-operating income (expense) on its consolidated statementstatements of income related to the disposal group.group and did not record any adjustments in 2010.
Convertible Debt Instruments
F-16
According to the requirements within ASC 810-10, the Company reports non-controlling interests as equity, separate from the parent’s equity, on the consolidated statements of financial condition. In addition, the Company’s consolidated net income on the consolidated statements of income includes the income/(loss) attributable to non-controlling interest holders of the Company’s consolidated sponsored investment funds and collateralized loan obligations (“CLOs”). Income/(loss) attributable to non-controlling interests are not adjusted for income taxes for consolidated sponsored investment funds and CLOs that are treated as pass-through entities for tax purposes.
Classification and Measurement of Redeemable Securities
The provisions of ASC 480-10,Distinguishing Liabilities from Equity, require temporary equity classification for instruments that are currently redeemable or convertible for cash or other assets at the option of the holder. The Company includes redeemable non-controlling interests related to certain consolidated sponsored investment funds in temporary equity on the Company’s consolidated statements of financial condition.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)2. Significant Accounting Policies (continued)
Non-controlling interestsAppropriated Retained Earnings
Non-controlling interestsUpon adoption of ASU 2009-17, BlackRock consolidated three CLOs and recorded a cumulative effect adjustment to appropriated retained earnings on the consolidated statementsstatement of income includesfinancial condition equal to the income/(loss) allocated to non-controlling interest holdersdifference between the fair value of the Company’s consolidated sponsored investment funds. Non-controllingCLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders, not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. Subsequent to adoption of ASU 2009-17, the net change in the fair value of the CLOs’ assets and liabilities has been recorded as net income (loss) attributable to nonredeemable non-controlling interests are not adjustedand as an adjustment to appropriated retained earnings. See Accounting Policies Adopted in the Year Ended December 31, 2010 below for taxes on consolidated sponsored investment funds that are treated as pass-through entities for tax purposes.more information.
Treasury Stock
The Company records common stock purchased for treasury at cost. At the date of subsequent reissuance, the treasury stock account is reduced by the cost of such stock on the average cost method.
Revenue Recognition
Investment Advisory, Administration Fees and Securities Lending Revenue
Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of the assets under management (“AUM”) or, in the case of certain real estate clients, net operating income generated by the underlying properties. Investment advisory and administration fees are affected by changes in AUM, including market appreciation or depreciation, foreign exchange translation and net subscriptions or redemptions. Investment advisory and administration fees for mutualinvestment funds are shown net of fees waived pursuant to contractual expense limitations of the funds or voluntary waivers. Certain real estate fees are earned upon the acquisition or disposition of properties in accordance with applicable investment management agreements and are generally recognized at the closing of the respective real estate transactions.
The Company contracts with third parties and related parties for various mutual fund administrationdistribution and shareholder servicing to be performed on behalf of certain funds managed by the Company. Such arrangements generally are priced as a portion of the Company’s management fee paid by the fund. In certain cases, the fund takes on the primary responsibility for payment for services such that BlackRock bears no credit risk to the third party. The Company accounts for such retrocession arrangements in accordance with EITF No. 99-19,ASC 605-45,Reporting Revenue Gross as aRecognition – Principal versus Net as an Agent Considerations,, and has recorded its management fees net of retrocessions. Retrocessions for the years ended December 31, 2010, 2009 and 2008 2007were $831 million, $611 million and 2006 were $762 $780 and $156,million, respectively, and were reflected net in investment advisory, administration fees and administration base feessecurities lending revenue on the consolidated statements of income.
The Company also earns revenue by lending securities on behalf of clients, primarily to brokerage institutions. Such revenues are accounted for on an accrual basis. The revenue earned on the collateral is shared between the Company and funds or other third-party accounts managed by the Company from which the securities are borrowed.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Revenue Recognition (continued)
Performance Fees
The Company receives performance fees or an incentive allocation from alternative investment products and certain separateseparately managed accounts. These performance fees are earned upon exceeding specified relative and/or absolute investment return thresholds. Such fees are recorded upon completion of the measurement period which varies by product.product or account.
The Company receives carried interest from certain alternative investments upon exceeding performance thresholds. BlackRock may bemaybe required to return all, or part, of such carried interest depending upon future performance of these investments. Therefore, BlackRock records carried interest subject to such claw-back provisions as revenuein investments, or cash to the extent that it is distributed, on its consolidated statements of incomefinancial condition. Carried interest is realized upon the earlier of the termination of the alternative investment fund or when the likelihood of claw-back is mathematically improbable. The Company records realized carried interest as performance fees on its consolidated statements of income. The Company records a deferred carried interest liability to the extent it receives cash or capital allocations prior to meeting the revenue recognition criteria. At December 31, 20082010 and 2007,2009, the Company had $21$23 million and $29,$13 million, respectively, of deferred carried interest recorded in other liabilities on the consolidated statements of financial condition.
F-17
BlackRock Inc.Solutions and Advisory
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Revenue Recognition (continued)
BlackRock provides a variety of market risk management, investment analytic, enterprise investment system and financial markets advisory services to financial institutions, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts and government agencies. These services are provided under the brand nameBlackRock Solutions® and include a wide array of risk management services, valuation of illiquid securities, disposition and workouts,workout assignments (including long-term portfolio liquidation assignments), strategic planning and execution, and enterprise investment system outsourcing forto clients. Fees earned forBlackRock Solutionsand advisory services are recorded as services are performed and are determined using some, or all, of the following methods: (i) fixed fees, (ii) percentages of various attributes of advisory AUM and (iii) performance fees if contractual thresholds are met. The fees earned forBlackRock Solutionsand advisory services are recorded inBlackRock Solutionsand advisory on the consolidated statements of income.
Other Revenue
The Company also earns other advisory service fees whichfor transition management services comprised of referral fees or agency commissions from acting as an introducing broker-dealer in buying and selling securities on behalf of the Company’s customers. Commissions related to transition management services are recorded on a trade-date basis as securities transactions occur and are reflected in other revenue on the consolidated statements of income whenincome.
The Company earns commissions revenue upon the sale of unit trusts and Class A mutual funds. Revenue is recorded at the time of the sale of the product.
Other revenue also includes equity method investment earnings related to operating advisory company investments and marketing fees earned for services to distribute Barclays iPath products, which are completed.related to exchange-traded notes issued by Barclays.
Stock-based CompensationBlackRock, Inc.
Effective January 1, 2003,Notes to the Company adopted the fair value recognition provisions of SFAS No. 123,Consolidated Financial Statements
2. Significant Accounting for Stock-BasedPolicies (continued)
Stock-based Compensation, prospectively to all employee awards granted, modified, or settled after January 1, 2003. Awards under the Company’s stock-based compensation plans generally vest over periods ranging from one to five years.
In December 2004, the FASB issued SFAS No. 123(R),Share-Based Payment(“SFAS No. 123(R)”). This statement revised SFAS No. 123 and superseded Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees. The Company adopted SFAS No. 123(R) on January 1, 2006, usingapplies the modified-prospective transition approach, with no cumulative effect on net income. The statement establishesrequirements within ASC 718-10,Compensation – Stock Compensation(“ASC 718-10”), which establish standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. ThatThe cost is recognized over the period during which an employee is required to provide service (usually the vesting period) in exchange for the stock award. The adoption of SFAS No. 123(R) reduced 2006 pre-tax net income and net income by approximately $13 and $8, respectively, and affected earnings per share by approximately $0.10 per basic share and $0.09 per diluted share. The impact of the adoption of SFAS No. 123(R) was immaterial to the Company’s consolidated statement of cash flows.
F-18
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Stock-based Compensation (continued)
The Company measures the grant-date fair value of employee share options and similar instruments using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost is recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The grant-date fair value of restricted stock units is calculated using the Company’s share price on the date of grant. Compensation cost is recorded by the Company on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award is, in-substance, multiple awards. Awards under the Company’s stock-based compensation plans vest over periods ranging from one to five years. ExpenseCompensation cost is reduced by the number of awards expected to be forfeited prior to vesting. Forfeiture estimates generally are derived using historical forfeiture information, where available, and are reviewed for reasonableness at least annually.
The Company amortizes the grant-date fair value of stock-based compensation awards made to retirement eligible employees over the required service period. Upon notification of retirement, the Company accelerates the unamortized portion of the award over the contractually-required retirement notification period, if applicable.
The Company pays cash dividend equivalents that are not subject to vesting on outstanding restricted stock units (“RSUs”) granted prior to 2009. SFAS No. 123(R)ASC 718-10 requires dividend equivalents on RSUs expected to be forfeited to be included in compensation and benefits expense. Dividend equivalents on participating shares expected to vest are charged torecorded in retained earnings.
Portfolio AdministrationDistribution and Servicing Costs
Portfolio administrationDistribution and servicing costs include payments to third parties and affiliates, including Bank of America/Merrill Lynch, PNC and PNC,Barclays, primarily associated with the administrationdistribution and servicing of client investments in certain BlackRock products. Portfolio administrationDistribution and servicing costs are expensed when incurred.
Direct Fund Expenses
F-19
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)2. Significant Accounting Policies (continued)
Leases
The Company accounts for its operating leases, which may include escalations, in accordance with SFAS No. 13,ASC 840-10,Accounting for Leases. The Company expenses the lease payments associated with operating leases evenly during the lease term (including rent-free periods), beginning on the commencement of the lease term.
Foreign Exchange
Monetary assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the date of the consolidated statements of financial condition. Non-monetary assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at historical exchange rates. Revenues and expenses are translated at average exchange rates during the period. Gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in accumulated other comprehensive income, a separate component of stockholders’ equity on the consolidated statements of financial condition. Gains or losses resulting from foreign currency transactions are included in general and administration expense on the consolidated statements of income. For the years ended December 31, 2010, 2009 and 2008, the Company recorded gains/(losses) from foreign currency transactions of $6 million, ($11) million and $50 million, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method prescribed by SFAS No. 109,ASC 740-10,Accounting for Income Taxes(“SFAS No. 109”ASC 740-10”). Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using currently enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in income in the period that includes the enactment date.
Management periodically assesses the recoverability of its deferred income tax assets based upon expected future earnings, taxable income in prior carryback years, future deductibility of the asset, changes in applicable tax laws and other factors. If management determines that it is not more likely than not that the deferred tax asset will be fully recoverable in the future, a valuation allowance maywill be established for the difference between the asset balance and the amount expected to be recoverable in the future. This allowance will result in a charge to income tax expense on the Company’s consolidated statements of income. Further, the Company records its income taxes receivable and payable based upon its estimated income tax liability.
BlackRock adopted the provisions of FIN No. 48,Accounting for Uncertainty in Income Taxes(“FIN No. 48”) on January 1, 2007. FIN No. 48ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109. FIN No. 48 prescribesby prescribing a threshold for measurement and recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in an income tax return. FIN No. 48ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Excess tax benefits and shortfalls related to stock-based compensation are recognized as additional paid inpaid-in capital and subsequent to the adoption of SFAS No. 123(R) excess tax benefits are reflected as financing cash flows on the consolidated statements of cash flows. If the Company does not have additional paid-in capital credits (cumulative tax benefits recorded to additional paid-in capital), the Company will record an expense for any deficit between the recorded tax benefit and tax return benefit. At December 31, 2008,2010 and 2009, BlackRock had excess additional paid-in capital credits to absorb potential future deficits between recorded tax benefits and tax return benefits.
F-20
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)2. Significant Accounting Policies (continued)
Earnings per Share (“EPS”)
EPS is calculated pursuant to the two-class method as defined in ASC 260-10,Earnings per Share (“ASC 260-10”), which specifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents are considered participating securities and should be included in the computation of EPS pursuant to the two-class method.
The Company presents both basic and diluted EPS amounts. Basic earnings per shareEPS is calculated by dividing net income applicabledistributed and undistributed earnings allocated to common stockholdersshareholders, excluding participating securities, by the weighted averageweighted-average number of common shares outstanding. The Company’s participating securities consist of common stockits unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the impact of other potentially dilutive shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the total weighted average number of shares of common stock and common stock equivalents outstanding during the period. Diluted earnings per share are computedperiod using the treasury stocktwo-class method.
Due to the similarities in terms betweenamong BlackRock series A, B, C and D non-voting participating preferred stock issued to Merrill Lynch in the MLIM Transaction and the Company’s common stock, the Company considers theeach series Aof non-voting participating preferred stock to be a common stock equivalentequivalents for purposes of earnings per common share calculations.
In accordance with SFAS No. 128,Earnings per Share(“SFAS No. 128”),ASC 260-10, shares of the Company’s common stock are not included in basic earnings per common share until contingencies are resolved and the shares are released. Shares of the Company’s common stock are not included in diluted earnings per common share unless the contingency has been met assuming that the contingency period ended on the date of the consolidated statement of financial condition.
Business Segments
The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company operates in one business segment as defined in SFAS No. 131,ASC 280-10,Disclosures About Segments of an Enterprise and Related InformationSegment Reporting (“ASC 280-10”).
Fair Value MeasurementsBlackRock, Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Business Combinations
The Company accounts for business combinations in accordance with the requirements of ASC 805,Business Combinations (“ASC 805”). The fundamental requirement of ASC 805 is that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. The provisions within ASC 805 further define the acquirer, establish the acquisition date and broaden the scope of transactions that qualify as business combinations.
Additionally, the requirements within ASC 805 change the fair value measurement provisions for assets acquired, liabilities assumed and any non-controlling interest in the acquiree, provide guidance for the measurement of fair value in a step acquisition, change the requirements for recognizing assets acquired and liabilities assumed subject to contingencies, provide guidance on recognition and measurement of contingent consideration and require that acquisition-related costs of the acquirer generally be expensed as incurred. Reversal of valuation allowances related to acquired deferred tax assets and changes to liabilities for unrecognized tax benefits related to tax positions assumed in business combinations that settled prior to the adoption of the new requirements within ASC 805 affected goodwill. If such valuation allowances reverse or liabilities change subsequent to the adoption of the new requirements within ASC 805, such changes will affect the income tax provision in the period of reversal or change.
The Company adopted the requirements within ASC 805 on January 1, 2009. The adoption of the new requirements within ASC 805 impacted the Company’s consolidated financial statements for the year ended December 31, 2009 as the Company completed its acquisition of BGI during 2009 and certain acquisition related costs were expensed as incurred.
In addition, in accordance with the requirements of ASC 805, certain line items on the consolidated statement of financial condition, including goodwill, intangible assets, and deferred tax liabilities, have been retrospectively adjusted as of December 31, 2009 to reflect new information obtained about facts that existed as of December 1, 2009, the BGI acquisition date. See Note 3, Mergers and Acquisitions, for a summary of the changes in 2010 to the BGI purchase price allocation.
BlackRock, adopted SFAS No. 157,Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Fair Value Measurements(“SFAS No. 157”
ASC 820-10,Fair Value Measurements and Disclosures (“ASC 820-10”) as of January 1, 2008, which, requires among other things, enhanced disclosures about investmentsassets and liabilities that are measured and reported at fair value. SFAS No. 157 establishes
Hierarchy of Fair Value Inputs
The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requiresrequire companies to disclose the fair value of their financial instruments according to athe fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide enhancedadditional disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. See Accounting Policies Adopted in the Year Ended December 31, 2010 below for more information on additional fair value disclosure requirements adopted in 2010.
Financial instrumentsAssets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs – 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 NAVs which in accordance with GAAP are calculated under fair value measures and are equal to the earnings of such funds), ETFs, equities and certain debt securities.derivatives.
F-21
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Fair Value Measurements (continued)
Level 2 Inputs – Inputs:
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers, for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. Assets which generally are includedAs a practical expedient, the Company relies on the net asset values (“NAVs”) (or its equivalents) of certain investments as their fair value.
Level 2 assets in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, held by a consolidated sponsored cash management fund, securities held within consolidated hedge funds, certain equity method limited partnership interests in hedge funds in whichand mutual funds valued based on NAV where the valuations for substantially all ofCompany has the investmentsability to redeem at the measurement date or within the fund are based upon Level 1 or Level 2 inputs, as well asnear term without redemption restrictions, restricted public securities valued at a discount.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.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Fair Value Measurements (continued)
Level 3 Inputs – Inputs:
Unobservable inputs for the valuation of the asset or liability.liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. AssetsCertain investments that are valued using a NAV and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.
Level 3 assets in this category generally include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds.funds, direct private equity investments held within consolidated funds, bank loans and certain held for sale real estate disposal assets.
Level 3 inputs include BlackRock capital accounts of BlackRock’s interest for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity.equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, including independent appraisals, from third party sources, however,sources. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third party source or fund management may conclude that the valuations that are available from third party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.
Level 3 liabilities included in this category include borrowings of consolidated collateralized loan obligations valued based upon non-binding single broker quotes.
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.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Fair Value Option
In February 2007,ASC 825-10,Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies to irrevocably elect fair value as the FASB issued SFAS No. 159,The Fair Value Optioninitial and subsequent accounting measurement attribute for Financial Assetscertain financial assets and Financial Liabilities(“SFAS No. 159”). SFAS No. 159liabilities. ASC 825-10 permits entities to chooseelect to measure eligible financial assets and liabilities at fair value.value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis, must be applied to an entire instrument and it is irrevocable once elected. Assets and liabilities measured at fair value pursuant to SFAS No. 159ASC 825-10 are required to be reported separately in the statement of financial condition from those instruments measured using another accounting method. TheIn 2010, the Company adopted SFAS No. 159 on January 1, 2008, however, elected not to apply the fair value option to any of its eligible financial assets or liabilities at that date. Therefore, the adoption of SFAS No. 159 had no impact on the Company’s consolidated financial statements. The Company may elect the fair value option for any future eligible financialcertain assets orand liabilities upon their initial recognition.
F-22
BlackRock, Inc.of consolidated CLOs. See Accounting Policies Adopted in the Year Ended December 31, 2010 below for more information.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Disclosure of Fair Value
SFAS No. 107,Disclosure about Fair Value of Financial Instruments, requiresThe disclosure requirements within ASC 825-10 require disclosure of estimated fair values of certain financial instruments, both on and off the consolidated statements of financial condition. For financial instruments recognized at fair value in the statement of financial position, the disclosure requirements of SFAS No. 157ASC 820-10 also apply.
The methods and assumptions are set forth below:
Cash and cash equivalents are carried at either cost or amortized cost which approximates fair value due to their short term maturities. Money market funds are valued through the use of quoted market prices, or $1.00, which generally is the net asset value of the fund.
The carrying amounts of receivables, accounts payable and accrued liabilities are carried at cost which approximatesapproximate fair value due to their short maturities.
The fair value of marketable investments is based on quoted market prices.prices or broker quotes. If investments are not readily marketable, fair values primarily are primarily determined based on net asset values (or capital accounts) of investments in limited partnerships/limited liability companies or by the Company based on management’s assumptions or estimates, taking into consideration financial information of the investment, the industry of the investment, market indices or valuation services from third party service providers. At December 31, 2008,2010, with the exception of certain equity and cost method investments and carried interest that are not accounted for under a fair value measure, the carrying value of investments approximated fair value (Seevalue. See Note 5).7, Fair Value Disclosures, for further discussion.
Derivative Instruments and Hedging ActivitiesBlackRock, Inc.
SFAS No. 133,Notes to the Consolidated Financial Statements
2. Significant Accounting for Policies (continued)
Derivative Instruments and Hedging Activities
ASC 815-10,Derivatives and Hedging(“SFAS No. 133”ASC 815-10”), as amended, establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts and for hedging activities. SFAS No. 133ASC 815-10 generally requires an entity to recognize all derivatives as either assets or liabilities inon the consolidated statements of financial condition and to measure those investments at fair value.
The Company does not use derivative financial instruments for trading or speculative purposes. The Company uses derivative financial instruments primarily for purposes of hedging (a) exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities and (b) market exposures for certain investments. Derivative financial instruments are not entered into for trading or speculative purposes. The Company may also use derivatives within separate account assets and liabilities, which are segregated funds held for purposes of funding individual and group pension contracts, or in connection with capital support agreements with affiliated investment companies. CertainIn 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 recognized in current earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities inor hedged investments, on the consolidated statements of income.
ReclassificationsComprehensive Income Attributable to BlackRock
Certain items previously reportedSubsequent to the issuance of BlackRock’s second quarter 2010 Form 10-Q, filed with the SEC on August 6, 2010, the Company determined that pursuant to ASC 810, it should have presented the amount of comprehensive income attributable to non-controlling interests and comprehensive income attributable to BlackRock on its consolidated statements of comprehensive income and it mislabeled total comprehensive income as being attributable to BlackRock. The affected periods include each of the two years in the period ended December 31, 2009. The accompanying Consolidated Statements of Comprehensive Income for years ended December 31, 2009 and 2008 have been reclassifiedcorrected to conforminclude the required information as the Company believes this correction was not material to the current year presentation.consolidated financial statements taken as a whole.
Subsequent Events
F-23
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)2. Significant Accounting Policies (continued)
Recent Accounting DevelopmentsPolicies Adopted in the Year Ended December 31, 2010
AmendmentsNew Consolidation Guidance for Variable Interest Entities
In June 2009, the Financial Accounting Standards Board (“FASB”) issued ASU 2009-17, which amended the consolidation guidance for VIEs. The amendments include: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the PB of a VIE, which requires that the PB have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that potentially could be significant to the Impairment GuidanceVIE, and (3) the requirement to continually reassess the PB of EITF 99-20a VIE.
In January 2009,February 2010, the FASB issued Staff Position (“FSP”) EITF 99-20-1,Amendments to the Impairment Guidance of EITF Issue No. 99-20, (“FSP EITF 99-20-1”). FSP EITF 99-20-1 amends EITF Issue No. 99-20, to allow for an entity to exercise its own judgment in arriving at estimates of future cash flows and assess the probability of collecting all cash flows rather than relying solely on the assumptions used by market participants. FSP EITF 99-20-1 is effective for interim and annual periods ending after December 15, 2008. Retroactive application of FSP EITF 99-20-1 is prohibited. The adoption of FSP EITF 99-20-1 did not materially impact BlackRock’s consolidated financial statements.
Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8,Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”)ASU 2010-10. FSP FAS 140-4 and FIN 46(R)-8 amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require public entities to provide additional disclosures about transferors’ continuing involvements with transferred financial assets. It also amends FIN 46(R) to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about its involvement with variable interest entities. The FSP is effective for reporting periods ending after December 15, 2008. The adoption of the additional disclosure requirements of FSP FAS 140-4 and FIN 46(R)-8 did not materially impact BlackRock’s consolidated financial statements.
Fair Value Measurements
In February 2008, the FASB issued FSP FAS 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13(“FSP FAS 157-1”) and FSP FAS 157-2,Effective Date of FASB Statement No. 157. (“FSP FAS 157-2”). FSP FAS 157-1 amends SFAS No. 157 to exclude from its scope transactions accounted for in accordance with SFAS No. 13,Accounting for Leases, and its related interpretive accounting pronouncements. FSP FAS 157-2 delays the effective date ofThis ASU defers the application of SFAS No. 157167 for a reporting enterprise’s interest in an entity if all of the following conditions are met:
(1) the entity either has all of the attributes of an investment company, as specified in ASC 946-10,Financial Services-Investment Companies (“ASC 946-10”) or it is industry practice to fiscal years beginning after November 15, 2008apply measurement principles for all non-financialfinancial reporting that are consistent with those in ASC 946-10; (2) the entity is not a securitization entity, an asset-backed financing entity, or an entity formerly considered a qualifying special-purpose entity, and (3) the reporting enterprise does not have an explicit or implicit obligation to fund losses of the entity that could potentially be significant to the entity.
In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with the requirements of Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
The amendments in ASU 2010-10 clarify that for entities that do not qualify for the deferral, related parties should be considered when evaluating each of the criteria for determining whether a decision maker or service provider fee represents a variable interest.
An entity that qualifies for the deferral will continue to be assessed for consolidation under the overall guidance on variable interest entities in ASC 810, (before its amendment by SFAS No. 167) or other applicable consolidation guidance, including guidance for the consolidation of partnerships in ASC 810. The amendment does not defer the disclosure requirements of ASU 2009-17.
On January 1, 2010, upon adoption of ASU 2009-17, the Company determined it was the PB of three CLOs, which resulted in consolidation of these CLOs on the Company’s consolidated financial statements. Upon consolidation, the Company elected the fair value option for eligible financial assets and liabilities recognized or disclosed at fairto mitigate accounting mismatches between the carrying value inof the financial statements on a non-recurring basis. Non-recurring non-financial assets and liabilities include goodwill, indefinite-lived intangible assets, long-lived assets and finite-lived intangible assets each measured at fair value for purposes of impairment testing; asset retirement and guarantee obligations initially measured at fair value; and those assets and liabilities initially measured at fair value in a business combination or asset purchase. The Company does not expect that theto achieve operational simplifications. Upon adoption of the provisions of FSP FAS 157-2 for non-recurring non-financial assets and liabilities will have a material impact on its consolidated financial statements.
In October 2008, the FASB issued FSP FAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active(“FSP FAS 157-3”), which became effective upon issuance, including prior periods for which financial statements have not been issued. FSP FAS 157-3 clarifies the application of SFAS No. 157, in a market that is not active. The impact toASU 2009-17, the Company recorded a cumulative effect adjustment to appropriated retained earnings of adopting FSP FAS 157-3 in its determination of fair values at December 31, 2008 did not have a material impact on its consolidated financial statements.$114 million.
F-24
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
2. Significant Accounting Policies |
Recent Accounting Developments (continued)
Non-Controlling InterestsAccounting Policies Adopted in the Year Ended December 31, 2010 (continued)
Improving Disclosures about Fair Value Measurements
In December 2007,January 2010, the FASB issued SFAS No. 160,ASU 2010-06,Noncontrolling InterestsFair Value Measurements and Disclosures(“ASU 2010-06”). ASU 2010-06 amended ASC 820-10 to require new disclosures with regards to significant transfers into and out of Levels 1 and 2. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in Consolidated Financial Statements – an amendmenteither Level 2 or Level 3. The new disclosures and clarifications of ARB No. 51. (“SFAS No. 160”). SFAS No. 160 establishes accountingexisting disclosures were effective for interim and annual reporting standards for a non-controlling interest in a subsidiaryperiods beginning after December 15, 2009. The adoption on January 1, 2010 of the additional disclosure requirements of ASU 2010-06 did not materially impact BlackRock’s financial statement disclosures.
Recent Accounting Pronouncements Not Yet Adopted
Additional Level 3 Fair Value Rollforward Disclosures
In addition, ASU 2010-06 requires separate disclosures about purchases, sales, issuances and for the deconsolidation of a subsidiary and clarifies that a non-controlling interest in a subsidiary is an ownership interestother settlements in the consolidated entity that should be reported as equity, separate from the parent’s equity,rollforward of activity in the consolidated financial statements. In addition, consolidated net income should be adjusted to include the net income attributed to the non-controlling interests. SFAS No. 160 isLevel 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires retrospectiveyears. The adoption of the presentation andadditional Level 3 rollforward disclosure requirements for existing non-controlling interests. All other requirements of SFAS No. 160 shall be applied prospectively. The Company is currently evaluating the potentialnot expected to materially impact of SFAS No. 160 on its consolidatedBlackRock’s financial statements. However, these changes will not impact EPS as the net income attributed to the non-controlling interests will be excluded from the basic and diluted EPS calculations.statement disclosures.
Business Combinations
In December 2007, the FASB issued SFAS No. 141 (revised),Business Combinations(“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141,Business Combinations(”SFAS No. 141”), while retaining the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) further defines the acquirer, establishes the acquisition date and broadens the scope of transactions that qualify as business combinations.
Additionally, SFAS No. 141(R) changes the fair value measurement provisions for assets acquired, liabilities assumed and any non-controlling interest in the acquiree, provides guidance for the measurement of fair value in a step acquisition, changes the requirements for recognizing assets acquired and liabilities assumed subject to contingencies, provides guidance on recognition and measurement of contingent consideration and requires that acquisition-related costs of the acquirer generally be expensed as incurred. Liabilities for unrecognized tax benefits related to tax positions assumed in business combinations that settled prior to the adoption of SFAS No. 141(R), affected goodwill. If such liabilities reverse subsequent to the adoption of SFAS No. 141(R), such reversals will affect the income tax provision in the period of reversal. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company currently is evaluating the impact of the adoption of SFAS No. 141(R) on its consolidated financial statements and on potential future business combinations.
F-25
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Recent Accounting Developments (continued)
Disclosures about Derivative Instruments3. Mergers and Acquisitions
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133Barclays Global Investors (“SFAS No. 161”). SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 specifically requires enhanced disclosures addressing: a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The additional disclosure requirements of SFAS No. 161 are not expected to materially impact BlackRock’s consolidated financial statements.
Useful Life of Intangible Assets
In April 2008, the FASB issued FSP FAS 142-3,DeterminationOn December 1, 2009, BlackRock acquired from Barclays all of the Useful Lifeoutstanding equity interests of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amendssubsidiaries of Barclays conducting the factors that should be consideredinvestment management business of BGI in developing renewal or extension assumptions used to determine the useful lifeexchange for an aggregate of a recognized intangible asset under SFAS No. 142,Goodwill37,566,771 shares of BlackRock common stock and Other Intangible Assets (“SFAS No. 142”). FSP FAS 142-3 requires that an entity shall consider its own experienceparticipating preferred stock and $6.65 billion in renewing similar arrangements. FSP FAS 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure thecash. The fair value of the asset under SFAS No. 141(R) and other GAAP. FSP FAS 142-3 is effective for financial statements37,566,771 shares at closing, on December 1, 2009, was $8.53 billion, at a price of $227.08 per share, the closing price of BlackRock’s common stock on November 30, 2009.
The shares of capital stock issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluatingto Barclays pursuant to the impact of adopting FSP FAS 142-3 on its consolidated financial statements.
Disclosures about Credit Derivatives
In September 2008, the FASB issued FSP 133-1 and FIN 45-4,Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133and FASB Interpretation No. 45; and ClarificationBGI Transaction represented approximately 4.8% of the Effective Dateoutstanding shares of FASB Statement No. 161(“FSP FAS 133-1common stock and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embeddedapproximately an aggregate 19.8% economic interest in hybrid instruments. FSP FAS 133-1 and FIN 45-4 also amend FASB Interpretation No. 45 (“FIN 45”),Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others, to require additional disclosure aboutBlackRock immediately following the current statusclosing of the payment/performance risktransaction. Barclays generally is restricted from purchasing additional shares of a guarantee. The provisionsBlackRock common or preferred stock if it would result in Barclays holding more than 4.9% of the FSP that amend SFAS 133total voting power of BlackRock or more than 19.9% of the total capital stock of BlackRock on a fully diluted basis. In addition, after the close of the BGI Transaction, Barclays was restricted from transferring 100% of its BlackRock capital stock for one year after closing and FIN 45 are effective50% of its BlackRock capital stock for reporting periods ending after November 15, 2008. the second year, without the prior written consent of BlackRock.
The additional disclosure requirementscash portion of FSP FAS 133-1the purchase price was funded through a combination of existing cash, issuance of short-term debt backed by a short-term credit facility which was arranged by Barclays, a related party, and FIN 45-4 did not materially impact BlackRock’s consolidated financial statements.subsequently terminated upon the issuance of long-term notes in December 2009, and proceeds from the private issuance of 19,914,652 shares of common and preferred stock, at a price of $140.60, to a group of institutional investors, including PNC.
F-26
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Recent Accounting Developments3. Mergers and Acquisitions (continued)
Meaning of Indexed to a Company’s Own Stock
In June 2008, the FASB issued EITF No. 07-5,Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own StockBarclays Global Investors (continued) ("EITF 07-5"). EITF 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. To meet the definition of “indexed to its own stock,” an instrument's contingent exercise provisions must not be based on an observable market other than the market for the issuer’s stock, and its settlement amount must be based only on those variables that are inputs to the fair value of a “fixed-for-fixed” forward or option on an entity’s equity shares. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect the adoption to change the classification or measurement of its financial statements.
Convertible Debt Instruments
In May 2008, the FASB issued FSP APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 specifies that for convertible debt instruments that may be settled in cash upon conversion, issuers of such instruments should separately account for the liability and equity components in the statement of financial condition. The excess of the initial proceeds of the convertible debt instrument over the amount allocated to the liability component creates a debt discount which should be amortized as interest expense over the expected life of the liability. FSP APB 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and is to be applied retrospectively. At December 31, 2008 the Company had $249 principal amount of convertible debentures outstanding, which were issued in February 2005, bear interest at a rate of 2.625%, and are due in 2035. The Company will retroactively adopt FSP APB 14-1 on January 1, 2009. The Company does not expect the impact to its December 31, 2008 and 2007 statement of financial conditions to be material. See below for the estimated retrospective EPS impact of adopting FSP APB 14-1.
Earnings Per Share
In June 2008, the FASB issued FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(“FSP EITF 03-6-1”). FSP EITF 03-6-1 specifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents are considered participating securities and should be included in the computation of EPS pursuant to the two-class method as defined in SFAS No. 128. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. All prior period EPS data presented must be adjusted retrospectively. Prior to 2009, the Company awarded restricted stock and restricted stock units with nonforfeitable dividend equivalent rights. The Company will retroactively adopt FSP EITF 03-6-1 on January 1, 2009. See below for the estimated retrospective EPS impact of adopting FSP EITF 03-6-1.
F-27
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Recent Accounting Developments (continued)
Retrospective Impact of Adoption of FSP APB 14-1 and FSP EITF 03-6-1
The retrospective impact of adopting FSP APB 14-1 and FSP EITF 03-6-1 to diluted EPS for common shares in 2006, 2007 and 2008 is a decline of $0.03, $0.16, and $0.13, respectively.
Impact Investing
In August 2008, the Company acquired Impact Investing, an Australia based software development company specializing in equity portfolio management and analytical software tools. The maximum total consideration to be paid over two years is not expected to be material to the Company’s consolidated financial statements.
Quellos Group
On October 1, 2007, the Company closed the Quellos Transaction and paid Quellos $562 in cash and issued 1,191,785 shares of BlackRock common stock, valued at $188. The common stock was placed in escrow for up to three years and is available to satisfy certain indemnification obligations of Quellos under the asset purchase agreement. The value of the common stock consideration was determined using the average closing price of BlackRock’s common stock ten days before the Quellos Transaction announcement date. In April 2008, 280,519 common shares were released to Quellos in accordance with the Quellos asset purchase agreement, which resulted in an adjustment to the recognized purchase price.
In addition, Quellos may receive two contingent payments, upon achieving certain investment advisory base and performance fee measures through December 31, 2010, totaling up to $969 in a combination of cash and stock. The first contingent payment, of up to $374, is payable through 2009, up to 25% in BlackRock common stock based on a price of $157.33 per share, and the remainder in cash. The second contingent payment, of up to $595, is based on investment advisory fees through 2010 and is payable in cash in 2011. Quellos may also be entitled to a “catch-up” payment in 2011 if certain investment advisory base fee measures are met though 2010 to the extent that the value of the first contingent payment is less than $374 million.
The QuellosBGI Transaction was accounted for under the purchaseacquisition method of accounting in accordance with SFAS No. 141.ASC 805. Accordingly, the purchase price was allocated to the assets acquired and liabilities and non-controlling interests assumed based upon their estimated fair values at the date of the transaction. TheSubstantially all of the excess if any, of the final purchase price which may include contingent consideration payments, over the fair value of assets acquired and liabilities and non-controlling interests assumed will bewas recorded as non-deductible goodwill.
A summary of the initial and revised fair values of the assets acquired and liabilities and non-controlling interests assumed on December 1, 2009 in this acquisition is as follows:
| (Dollar amounts in millions) | Initial Estimate of Fair Value | Purchase Price Adjustments | Revised Estimate of Fair Value | |||||||||
Accounts receivable | $ | 593 | ($ | 12 | ) | $ | 581 | |||||
Investments | 125 | — | 125 | |||||||||
Separate account assets | 116,301 | — | 116,301 | |||||||||
Collateral held under securities lending agreements | 23,498 | — | 23,498 | |||||||||
Property and equipment | 205 | (2 | ) | 203 | ||||||||
Finite-lived intangible management contracts (intangible assets) | 163 | (7 | ) | 156 | ||||||||
Indefinite-lived intangible management contracts (intangible assets) | 9,785 | 25 | 9,810 | |||||||||
Trade names / trademarks (indefinite-lived intangible assets) | 1,403 | — | 1,403 | |||||||||
Goodwill | 6,842 | 110 | 6,952 | |||||||||
Other assets | 366 | 16 | 382 | |||||||||
Separate account liabilities | (116,301 | ) | — | (116,301 | ) | |||||||
Collateral liability under securities lending agreements | (23,498 | ) | — | (23,498 | ) | |||||||
Deferred income tax liabilities | (3,799 | ) | (45 | ) | (3,844 | ) | ||||||
Accrued compensation and benefits | (885 | ) | — | (885 | ) | |||||||
Other liabilities assumed | (660 | ) | (85 | ) | (745 | ) | ||||||
Non-controlling interest assumed | (12 | ) | — | (12 | ) | |||||||
Total consideration, net of cash acquired | $ | 14,126 | $ | — | $ | 14,126 | ||||||
Summary of consideration, net of cash acquired: | ||||||||||||
Cash paid | $ | 6,650 | $ | — | $ | 6,650 | ||||||
Cash acquired | (1,055 | ) | — | (1,055 | ) | |||||||
Capital stock at fair value | 8,531 | — | 8,531 | |||||||||
Total cash and stock consideration | $ | 14,126 | $ | — | $ | 14,126 | ||||||
F-28
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Quellos Group3. Mergers and Acquisitions (continued)
A summaryBarclays Global Investors (continued)
The fair value of acquired trade names/trademarks was determined using a royalty rate based primarily on normalized marketing and promotion expenditures to develop and support the brands globally.
Helix Financial Group LLC
In January 2010, the Company completed the acquisition of substantially all of the recorded fair values at October 1, 2007net assets of theHelix Financial Group LLC, which provides advisory, valuation and analytics solutions to commercial real estate lenders and investors (the “Helix Transaction”). The assets acquired and liabilities assumed, in thisas well as the total consideration paid for the acquisition, which includes (i) adjustments made subsequentwere not material to the Company’s original estimates and (ii) adjustments to goodwill related to tax benefits realized from tax-deductible goodwill in excess of the initial book goodwill established is as follows:
| Adjusted Estimate of Fair Value | ||||
Investments | $ | 20 | ||
Property and equipment | 9 | |||
Other assets | 4 | |||
Goodwill | 61 | |||
Finite-life intangible management contracts | 161 | |||
Indefinite-life intangible management contracts | 658 | |||
Liabilities assumed | (28 | ) | ||
Due to Quellos | (13 | ) | ||
Deferred tax liabilities | (291 | ) | ||
Total purchase price, including transaction costs | $ | 581 | ||
Summary of consideration, net of cash acquired: | ||||
Cash paid | $ | 573 | ||
Cash acquired | (49 | ) | ||
Other capitalized transaction costs | 12 | |||
Common stock release of 280,519 shares from escrow agent | 45 | |||
Total consideration | $ | 581 | ||
Finite-life intangible management contracts have a weighted average estimated useful life of approximately 7.5 years and are amortized on the straight-line method.
As contingencies are resolved, BlackRock common shares held in escrow may be released from escrow. In April 2008, 280,519 common shares were released from escrow to Quellos in accordance with the Quellos asset purchase agreement, which resulted in an adjustment to the recognized purchase price. As additional shares held in escrow are released, and if contingent consideration payments are made to Quellos, additional purchase price consideration or employee compensation will be recorded.
Adjustments to goodwill related to tax benefits realized from tax-deductible goodwill in excess of the initial book goodwill established are not reflected in the table above. (See Note 9)
F-29
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
consolidated financial statements.
Fund of Hedge FundsPrimasia Investment Trust Co., LTD.
On April 30, 2003, the Company purchased an 80% interest in an investment manager of a hedge fund of funds for approximately $4 in cash. OnIn October 1, 2007, the Company paid $27 in cash to purchase the remaining 20% of the investment manager. The purchase price of the remaining interest was performance-based and was not subject to a maximum, minimum or the continued employment of former employees of the investment manager with the Company. As a result of the transaction in October 2007, $21 and $8 of additional goodwill and indefinite-life intangible assets, respectively, was recorded.
Merrill Lynch Investment Managers
On September 29, 2006,2010, the Company completed the MLIM Transaction and issued 52,395,082 shares of BlackRock common stock and 12,604,918 of series A non-voting participating preferred stock to Merrill Lynch in consideration for the MLIM Business. Total consideration issued to Merrill Lynch was $9,089, net of cash acquired, including capitalized transaction costs. The Company’s consolidated financial statements include the accounts of the MLIM Business subsequent to September 29, 2006.
In connection with the MLIM Transaction, Merrill Lynch and PNC each have entered into stockholder agreements with BlackRock. These agreements were amended and restated as of February 27, 2009 and the following paragraphs describe certain key provisions of the stockholder agreements as amended and restated.
Pursuant to the terms of its amended and restated stockholder agreement, Merrill Lynch is restricted from owning more than 4.9% of total voting power of the capital stock of BlackRock or more than 49.8% of the fully diluted capital stock of BlackRock. Pursuant to the terms of its amended and restated stockholder agreement, PNC is restricted from owning more than 49.9% of the total voting power of the capital stock of BlackRock or more than 38% of the fully diluted capital stock of BlackRock.
In addition to the ownership restrictions described above, the stockholder agreements include the following additional provisions, among others:
Both Merrill Lynch and PNC generally are restricted from purchasing additional shares of BlackRock common stock if it would result in either exceeding their respective ownership caps;
Merrill Lynch is restricted from transferring any common stock or the series B non-voting participating preferred stock for a period of three years after the third anniversary of the closing of the MLIM Transaction without the prior consent of BlackRock;
PNC, and Merrill Lynch after the third anniversary of the closing of the MLIM Transaction, are subject to additional transfer restrictions designed to ensure that no party acquires a significant holding of voting stock;
Merrill Lynch and PNC are required to vote their shares in accordance with the BlackRock Board of Directors’ recommendations to the extent consistent with the provisions of the stockholder agreements; and
Certain fundamental transactions may not be entered into without prior approvalacquisition of all of the independent directors thennet assets of Primasia Investment Trust Co., LTD., which sells offshore mutual funds in office, or at least two-thirds of the directors then in office. Additionally, BlackRock may not enter into certain actions without prior approval of Merrill Lynch and PNC.
F-30
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Merrill Lynch Investment Managers (continued)
Taiwan (the “Primasia Transaction”). The series A non-voting participating preferred stock:
was non-voting except as otherwise provided by applicable law;
participated in dividends, on a basis generally equal to the common stock;
granted the holder the right to receive dividends in common stock (subject to applicable ownership restrictions) or in cash;
benefited from a liquidation preference of $0.01 per share; and
was mandatorily convertible to BlackRock common stock upon transfer to an unrelated party.
The MLIM Transaction was accounted for under the purchase method of accounting in accordance with SFAS No. 141. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed, based upon their estimated fair values atas well as the date of the transaction. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The value of thetotal consideration paid for the net assets acquired was determined using the average closing price of BlackRock’s common stock two days before, the day of and two days after the MLIM Transaction announcement date of February 15, 2006 in accordance with EITF No. 99-12,Determination of the Market Price of Acquirer Securities Issued in a Purchase Business Combination. Both the common stock and the series A non-voting participating preferred stockacquisition, were valued at a price of $147.34 per share since both classes of stock participate equally in dividends and have transfer restrictions.
The Company also amended and restated its stockholder agreement with Merrill Lynch in July 2008. These changes are subsumed within the amendment and restated version discussed above. The Company also amended and restated its global distribution agreement with Merrill Lynch in July 2008.
On January 1, 2009, Bank of America acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and PNC pursuant to which on February 27, 2009 it exchanged a portion of the BlackRock common stock it held for an equal number of shares of non-voting preferred stock. (See Note 15, Related Party Transactions, for more details on these transactions.)
F-31
BlackRock, Inc.
Notesnot material to the Consolidated Financial StatementsCompany’s consolidated financial statements.
(Dollar amounts in millions, except share data or as otherwise noted)4. Investments
Nomura BlackRock Asset Management
On September 29, 2006, BlackRock acquired the remaining 50% interest in Nomura BlackRock Asset Management Co., Ltd. (“NBAM”) that was held by its joint venture partner, Nomura Asset Management Co., Ltd. (“Nomura”), for a purchase price of five billion Japanese yen (approximately $42), subject to certain adjustment provisions. Prior to the NBAM transaction, NBAM was consolidated in the Company’s financial statements under FIN No. 46(R), as a result of the preferential payments received by a BlackRock subsidiary which resulted in BlackRock being considered the primary beneficiary of NBAM.
A summary of the carrying value of total investments is as follows:
| (Dollar amounts in millions) | December 31, 2010 | December 31, 2009 | ||||||||||||
Available-for-sale investments | $ | 45 | $ | 73 | ||||||||||
Held-to-maturity investments | 100 | 29 | ||||||||||||
Trading investments: | ||||||||||||||
Consolidated sponsored investment funds | 60 | 103 | ||||||||||||
Other equity and debt securities | 22 | 22 | ||||||||||||
Deferred compensation plan mutual fund investments | 49 | 42 | ||||||||||||
| Carrying Value | ||||||||||||||
| December 31, 2008 | December 31, 2007 | |||||||||||||
Available-for-sale investments | $ | 101 | $ | 264 | ||||||||||
Trading investments | 122 | 395 | ||||||||||||
Total trading investments | 131 | 167 | ||||||||||||
Other investments: | ||||||||||||||
Consolidated sponsored investment funds (non cash management funds) | 349 | 760 | ||||||||||||
Consolidated sponsored cash management funds | 326 | — | ||||||||||||
Consolidated sponsored investment funds | 337 | 360 | ||||||||||||
Equity method investments | 501 | 517 | 556 | 372 | ||||||||||
Deferred compensation plan hedge fund investments | 30 | 60 | ||||||||||||
Cost method | — | 4 | ||||||||||||
Deferred compensation plan hedge fund equity method investments | 27 | 29 | ||||||||||||
Carried interest | 13 | 4 | ||||||||||||
Cost method investments | 331 | 15 | ||||||||||||
Total other investments | 1,206 | 1,341 | 1,264 | 780 | ||||||||||
Total investments | $ | 1,429 | $ | 2,000 | $ | 1,540 | $ | 1,049 | ||||||
At December 31, 2008,2010, the Company had $728consolidated $397 million of totalinvestments held by consolidated sponsored investment funds (non-VIEs) of which $60 million and $337 million were classified as trading investments and other investments, respectively.
At December 31, 2009, the Company consolidated $463 million of investments held by consolidated sponsored investment funds of which $53$103 million and $675$360 million were classified as trading investments and other investments, respectively. Other investments at December 31, 2009 included $40 million related to a consolidated VIE, which has been reclassified prospectively as of January 1, 2010 to bank loans and other investments of consolidated VIEs on the consolidated statement of financial condition.
F-32
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)4. Investments (continued)
Available-for-sale investmentsInvestments
A summary of the cost and carrying value of investments classified as available-for-sale, is as follows:
| (Dollar amounts in millions) | |||||||||||||||||||||||||||||
| Gross Unrealized | Carrying Value | Gross Unrealized | Carrying Value | ||||||||||||||||||||||||||
December 31, 2008 | Cost | Gains | Losses | ||||||||||||||||||||||||||
December 31, 2010 | Cost | Gains | Losses | Carrying Value | |||||||||||||||||||||||||
Total available-for-sale investments: | |||||||||||||||||||||||||||||
Available-for-sale investments: | |||||||||||||||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||
Sponsored investment funds | $ | 109 | $ | — | $ | (16 | ) | $ | 93 | $ | 33 | $ | 4 | ($ | 1 | ) | $ | 36 | |||||||||||
Collateralized debt obligations | 6 | — | (2 | ) | 4 | ||||||||||||||||||||||||
Other debt securities | 4 | — | — | 4 | |||||||||||||||||||||||||
Collateralized debt obligations (“CDOs”) | 2 | — | — | 2 | |||||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||||||||
Mortgage debt | 4 | 2 | — | 6 | |||||||||||||||||||||||||
Asset-backed debt | 1 | — | — | 1 | |||||||||||||||||||||||||
Total available-for-sale investments | $ | 119 | $ | — | $ | (18 | ) | $ | 101 | $ | 40 | $ | 6 | ($ | 1 | ) | $ | 45 | |||||||||||
December 31, 2007 | |||||||||||||||||||||||||||||
| Gross Unrealized | Carrying Value | ||||||||||||||||||||||||||||
Total available-for-sale investments: | |||||||||||||||||||||||||||||
December 31, 2009 | Cost | Gains | Losses | Carrying Value | |||||||||||||||||||||||||
Available-for-sale investments: | |||||||||||||||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||
Sponsored investment funds | $ | 246 | $ | 6 | $ | (1 | ) | $ | 251 | $ | 53 | $ | 2 | ($ | 1 | ) | $ | 54 | |||||||||||
Collateralized debt obligations | 10 | — | — | 10 | 2 | — | — | 2 | |||||||||||||||||||||
Other | 3 | — | — | 3 | |||||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||||||||
Mortgage debt | 6 | 1 | — | 7 | |||||||||||||||||||||||||
Asset-backed debt | 10 | — | — | 10 | |||||||||||||||||||||||||
Total available-for-sale investments | $ | 259 | $ | 6 | $ | (1 | ) | $ | 264 | $ | 71 | $ | 3 | ($ | 1 | ) | $ | 73 | |||||||||||
Available-for-sale investments include seed investments in BlackRock sponsored investment funds and debt securities received upon closure of certain funds in lieu of the Company’s remaining investment in the funds and securities purchased upon closure from an enhanced cash fund.
During the years ended December 31, 2008, 20072010, 2009 and 2006,2008, the Company recorded other-than temporaryother-than-temporary impairments of $7, $16less than $1 million, $5 million, and $8 million, respectively, which were recorded in non-operating income (expense) on the consolidated statements of income. The other-than-temporary impairments in 2009 included $2 respectively,million related to othercredit loss impairments on debt securities, and CDO available-for-sale investments.which were determined by comparing the estimated discounted cash flows versus the amortized cost for each individual security.
The Company has reviewed the gross unrealized losses of $18 at$1 million as of December 31, 20082010 related to available-for-sale investments, ofequity securities, which $4 had been in a loss position for greater than twelve months, and determined that these unrealized losses were not other-than-temporary primarily because the Company has the ability and intent to hold the securities for a period of time sufficient to allow for recovery of such unrealized losses. As a result, the Company recorded no additionaldid not record impairments on such equity securities.
F-33
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)4. Investments (continued)
Available-for-sale investmentsInvestments (continued)
The cost and fair value of debt securities classified as available-for-sale at December 31, 2010 and 2009 by maturity date were as follows:
| (Dollar amounts in millions) | 1 Year or less | After 1 Year through 5 Years | After 5 Years through 10 Years | After 10 Years | Total | |||||||||||||||
December 31, 2010 | ||||||||||||||||||||
Mortgage debt | $ | — | $ | — | $ | 1 | $ | 3 | $ | 4 | ||||||||||
Asset-backed debt | — | — | — | 1 | 1 | |||||||||||||||
Cost | $ | — | $ | — | $ | 1 | $ | 4 | $ | 5 | ||||||||||
Fair value | $ | — | $ | — | $ | 1 | $ | 6 | $ | 7 | ||||||||||
December 31, 2009 | ||||||||||||||||||||
Mortgage debt | $ | 2 | $ | 2 | $ | 2 | $ | — | $ | 6 | ||||||||||
Asset-backed debt | — | — | — | 10 | 10 | |||||||||||||||
Cost | $ | 2 | $ | 2 | $ | 2 | $ | 10 | $ | 16 | ||||||||||
Fair value | $ | 2 | $ | 2 | $ | 3 | $ | 10 | $ | 17 | ||||||||||
A summary of sale activity in the Company’s available-for-sale securities during the years ended December 31, 2008, 20072010, 2009 and 20062008 is shown below.
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | 2008 | |||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||
Sales proceeds (including unsettled transactions) | $ | 57 | $ | 112 | $ | 7 | ||||||||||||||||
Sales proceeds | $ | 42 | $ | 100 | $ | 57 | ||||||||||||||||
Net realized gain (loss): | ||||||||||||||||||||||
Gross realized gains | $ | 2 | $ | 8 | $ | 1 | $ | 3 | $ | 3 | $ | 2 | ||||||||||
Gross realized losses | (7 | ) | — | — | (1 | ) | (8 | ) | (7 | ) | ||||||||||||
Net realized gain (loss) | $ | (5 | ) | $ | 8 | $ | 1 | $ | 2 | ($ | 5 | ) | ($ | 5 | ) | |||||||
BlackRock, Inc.
Notes to the Consolidated Financial Statements
4. Investments (continued)
Held-to-Maturity Investments
A summary of the carrying value of held-to-maturity investments is as follows:
| Carrying Value | ||||||||
| (Dollar amounts in millions) | December 31, 2010 | December 31, 2009 | ||||||
Held-to-maturity investments: | ||||||||
Foreign government debt | $ | 100 | $ | 28 | ||||
U.S. government debt | — | 1 | ||||||
Total held-to-maturity investments | $ | 100 | $ | 29 | ||||
Held-to-maturity investments include debt instruments held for regulatory purposes and the amortized cost (the carrying value) of these investments approximates fair value.
The amortized cost and fair value of debt securities classified as held-to-maturity at December 31, 2010 and 2009 by maturity date were as follows:
| (Dollar amounts in millions) | 1 Year or less | After 1 Year through 5 Years | After 5 Years through 10 Years | After 10 Years | Total | |||||||||||||||
December 31, 2010 | ||||||||||||||||||||
Foreign government debt | $ | 18 | $ | 76 | $ | — | $ | 6 | $ | 100 | ||||||||||
Fair value | $ | 18 | $ | 76 | $ | — | $ | 6 | $ | 100 | ||||||||||
December 31, 2009 | ||||||||||||||||||||
Foreign government debt | $ | 23 | $ | — | $ | — | $ | 5 | $ | 28 | ||||||||||
U.S. government debt | 1 | — | — | — | 1 | |||||||||||||||
Total | $ | 24 | $ | — | $ | — | $ | 5 | $ | 29 | ||||||||||
Fair value | $ | 24 | $ | — | $ | — | $ | 5 | $ | 29 | ||||||||||
BlackRock, Inc.
Notes to the Consolidated Financial Statements
4. Investments (continued)
Trading and other investmentsInvestments
A summary of the cost and carrying value of trading and other investments is as follows:
| December 31, 2008 | December 31, 2007 | December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||
| Cost | Carrying Value | Cost | Carrying Value | Carrying | Carrying | |||||||||||||||||||||||
| (Dollar amounts in millions) | Cost | Value | Cost | Value | ||||||||||||||||||||||||
Trading investments: | ||||||||||||||||||||||||||||
Deferred compensation plan mutual fund investments | $ | 32 | $ | 29 | $ | 40 | $ | 45 | $ | 45 | $ | 49 | $ | 49 | $ | 42 | ||||||||||||
Equity securities | 109 | 75 | 103 | 116 | 37 | 45 | 112 | 97 | ||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||
Municipal debt | 9 | 7 | 240 | 234 | 10 | 10 | 10 | 11 | ||||||||||||||||||||
Foreign government debt | 8 | 7 | — | — | — | — | 15 | 15 | ||||||||||||||||||||
Corporate debt | 1 | 1 | — | — | 25 | 27 | 1 | 1 | ||||||||||||||||||||
U.S. government debt | 3 | 3 | — | — | — | — | 1 | 1 | ||||||||||||||||||||
Total trading investments | $ | 162 | $ | 122 | $ | 383 | $ | 395 | $ | 117 | $ | 131 | $ | 188 | $ | 167 | ||||||||||||
Other investments: | ||||||||||||||||||||||||||||
Consolidated sponsored investment funds (non cash management) | $ | 376 | $ | 349 | $ | 721 | $ | 760 | ||||||||||||||||||||
Consolidated sponsored cash management funds | 333 | 326 | — | — | ||||||||||||||||||||||||
Equity method | 752 | 501 | 446 | 517 | ||||||||||||||||||||||||
Deferred compensation plan hedge fund investments | 39 | 30 | 32 | 60 | ||||||||||||||||||||||||
Cost method | — | — | 4 | 4 | ||||||||||||||||||||||||
Total other investments | $ | 1,500 | $ | 1,206 | $ | 1,203 | $ | 1,341 | ||||||||||||||||||||
F-34
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
TradingAt December 31, 2010, trading investments include $24 million of equity and other investments (continued)
Trading investments include$36 million of debt securities held by consolidated sponsored investment funds, $49 million of certain deferred compensation plan mutual fund investments equity and debt securities within certain consolidated sponsored investment funds and$22 million of equity and debt securities held in separate investment accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.
Other Investments
A summary of the cost and carrying value of other investments is as follows:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| (Dollar amounts in millions) | Cost | Carrying Value | Cost | Carrying Value | ||||||||||||
Other investments: | ||||||||||||||||
Consolidated sponsored investment funds | $ | 319 | $ | 337 | $ | 380 | $ | 360 | ||||||||
Equity method | 569 | 556 | 499 | 372 | ||||||||||||
Deferred compensation plan hedge fund equity method investments | �� | 20 | 27 | 28 | 29 | |||||||||||
Carried interest | — | 13 | — | 4 | ||||||||||||
Cost method investments: | ||||||||||||||||
Federal Reserve Bank stock | 325 | 325 | 10 | 10 | ||||||||||||
Other | 6 | 6 | 5 | 5 | ||||||||||||
Total cost method investments | 331 | 331 | 15 | 15 | ||||||||||||
Total other investments | $ | 1,239 | $ | 1,264 | $ | 922 | $ | 780 | ||||||||
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 include BlackRock’s direct investment in BlackRock sponsored investment products.
Carried interest represents allocations to BlackRock general partner capital accounts for certain funds. These balances are subject to change upon cash distributions, additional allocations, or reallocations back to limited partners within the respective funds.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
4. Investments (continued)
Other Investments (continued)
Cost method investments include non-marketable securities, including $325 million of Federal Reserve Bank stock at December 31, 2010, which is held for regulatory purposes and is restricted from sale. As of December 31, 2010, there were no indicators of impairments on these investments.
5. Equity Method Investments
BlackRock invests in hedge funds, funds of hedge funds, real estate funds and private equity fundsinvestments to establish a performance track record or for co-investment purposes. BlackRock accounts for certain of these investments under the equity method of accounting in addition to other accounting methods. BlackRock’s ownership percentage in its equity method investees range up to 49%.
Substantially all of its equity method investments are investment companies which record their underlying investments at fair value. BlackRock’s share of the investee’s underlying net income or loss is recorded as non-operating income (expense). The Company’s maximum exposure to loss is generally limited to its equity interest.
At December 31, 20082010 and 2009, the Company held the following equity method investments in hedge funds/funds of funds, real estate and private equity funds of approximately $273, $151 and $77, respectively.
In aggregate, the funds in which BlackRock had an equity methodits sponsored investment had net assets of approximately $12.2 billion at December 31, 2008 and net losses of approximately $6.8 billion for the year ended December 31, 2008. At December 31, 2007, in aggregate, the equity method investees had approximately $13.7 billion of net assets and approximately $1.9 billion of net income for the year ended December 31, 2007. The majority of the net assets of the equity method investees are comprised of investments held for capital appreciation offset by borrowings.
Maturity dates
The carrying value of debt securities, classified as available-for-sale, trading and other investments, by maturity at December 31, 2008 and 2007 is as follows:products:
| Carrying Value | ||||||
Maturity date | December 31, 2008 | December 31, 2007 | ||||
<1 year | $ | 329 | $ | — | ||
>1-5 years | 2 | 10 | ||||
>5-10 years | 3 | 29 | ||||
>10 years | 14 | 195 | ||||
Total | $ | 348 | $ | 234 | ||
At December 31, 2008, the debt securities in the table above primarily consisted of floating rate notes and asset backed securities held by two consolidated sponsored cash management funds and municipal, corporate, U.S. and foreign government debt securities held by other sponsored investment products that are consolidated in the Company’s consolidated statements of financial condition.
| December 31, 2010 | Year Ended December 31, 2010 | |||||||||||||||||||
| Net | BlackRock’s | Average Ownership | Net Income | BlackRock’s | ||||||||||||||||
| (Dollar amounts in millions) | Assets(1) | Investments | % | (Loss) | Portion | |||||||||||||||
Investments: | ||||||||||||||||||||
Private equity | $ | 1,853 | $ | 87 | 5 | % | $ | 187 | $ | 8 | ||||||||||
Real estate funds | 2,681 | 54 | 2 | % | 471 | 11 | ||||||||||||||
Hedge funds/Funds of hedge funds | 12,221 | 331 | 3 | % | 3,187 | 84 | ||||||||||||||
Other investments | 393 | 111 | 28 | % | 13 | 5 | ||||||||||||||
Total | $ | 17,148 | $ | 583 | $ | 3,858 | $ | 108 | ||||||||||||
| December 31, 2009 | Year Ended December 31, 2009 | |||||||||||||||||||
| Net | BlackRock’s | Average Ownership | Net Income | BlackRock’s | ||||||||||||||||
| (Dollar amounts in millions) | Assets(1) | Investments | % | (Loss) | Portion | |||||||||||||||
Investments: | ||||||||||||||||||||
Private equity | $ | 574 | $ | 38 | 7 | % | $ | 23 | $ | 2 | ||||||||||
Real estate funds | 1,365 | 43 | 3 | % | (1,588 | ) | (108 | ) | ||||||||||||
Hedge funds/Funds of hedge funds | 11,450 | 319 | 3 | % | 2,984 | 120 | ||||||||||||||
Other investments | 434 | 1 | <1 | % | — | — | ||||||||||||||
Total | $ | 13,823 | $ | 401 | $ | 1,419 | $ | 14 | ||||||||||||
F-35
| (1) | The majority of the net assets of the equity method investees are comprised of investments held for capital appreciation offset by liabilities, which may include borrowings. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts5. Equity Method Investments (continued)
In addition, due to BlackRock’s ownership levels, BlackRock has equity method investments in millions, except share data or as otherwise noted)various operating advisory entities held for strategic purposes related to BlackRock’s core business, which are recorded in other assets. The table below includes BlackRock’s approximate 40% investment in DSP BlackRock Investment Managers Pvt. Ltd and its 42% investment in Private National Mortgage Acceptance Company, LLC.
| (Dollar amounts in millions) | ||||||||
Equity Method Investees | December 31, 2010 | December 31, 2009 | ||||||
Assets | $ | 181 | $ | 99 | ||||
Liabilities | 51 | 18 | ||||||
Equity | $ | 130 | $ | 81 | ||||
BlackRock’s investments (1) | $ | 56 | $ | 34 | ||||
| Year ended December 31, 2010 | Year ended December 31, 2009 | |||||||
Net income (loss) of equity method investees | $ | 40 | $ | 31 | ||||
BlackRock’s portion | $ | 17 | $ | 14 | ||||
|
BlackRock, Inc.
Notes to the Consolidated Financial Statements
Impact of6. Consolidated Sponsored Investment Funds
The Company consolidates certain sponsored investment funds primarily because it is deemed to control such investmentsfunds in accordance with GAAP. The investments that are owned by these consolidated sponsored investment funds are classified as other or trading investments. At December 31, 20082010 and 2007,2009, the following table presents the balances related to these consolidated funds that were consolidated inincluded on the consolidated statements of financial condition:condition as well as BlackRock’s net interest in these funds:
| December 31, 2008 | December 31, 2007 | |||||||
Cash and cash equivalents | $ | 61 | $ | 67 | ||||
Investments | 728 | 1,054 | ||||||
Other net assets (liabilities) | 12 | (218 | ) | |||||
Non-controlling interests | (491 | ) | (578 | ) | ||||
Total net interests in consolidated investment funds | $ | 310 | $ | 325 | ||||
| (Dollar amounts in millions) | December 31, 2010 | December 31, 2009 | ||||||
Cash and cash equivalents | $ | 65 | $ | 75 | ||||
Investments: | ||||||||
Trading investments | 60 | 103 | ||||||
Other investments | 337 | 360 | ||||||
Other assets | 3 | 2 | ||||||
Other liabilities | (10 | ) | (9 | ) | ||||
Non-controlling interests | (195 | ) | (273 | ) | ||||
BlackRock’s net interests in consolidated investment funds | $ | 260 | $ | 258 | ||||
BlackRock acts as general partner or managing member forAt December 31, 2009, the above balances included a consolidated sponsored private equity funds. In December 2007, BlackRock took necessary steps to grant additional rights toinvestment fund that was also deemed a VIE. This VIE, as well as three consolidated CLOs, which are also VIEs, were excluded from the unaffiliated investors in 14 funds with net assets at December 31, 2007 of approximately $1,000. In December 2008, BlackRock took necessary steps to grant additional rights to2010 balances in the unaffiliated investors in three funds with net assets at December 31, 2008 of approximately $210. BlackRock deconsolidatedtable above. See Note 8, Variable Interest Entities, for further discussion on these sponsored investment funds upon the grant of these additional rights.consolidated products.
BlackRock’s total exposure to consolidated sponsored investment funds of $310$260 million and $325$258 million at December 31, 20082010 and 2007,2009, respectively, represents the fair value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income (expense) and partially offset in net income (loss) attributable to non-controlling interests. Approximately $6 and $210 of borrowings by consolidated sponsored investment funds at December 31, 2008 and 2007, respectively, is included in other liabilities oninterests for the consolidated statements of financial condition.portion not attributable to BlackRock.
The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in its operations.
F-36
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Assets7. Fair Value Disclosures
Fair Value Hierarchy
Total assets measured at fair value on a recurring basis of $140,460 million at December 31, 20082010 were as follows:
| 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, 2008 | |||||||||||
Assets: | |||||||||||||||
| Investments: | |||||||||||||||
Available-for-sale | $ | 63 | $ | 34 | $ | 4 | $ | — | $ | 101 | |||||
Trading | 113 | 9 | — | — | 122 | ||||||||||
Other investments: | |||||||||||||||
Consolidated sponsored investment funds (non cash management funds) | — | 21 | 328 | — | 349 | ||||||||||
Consolidated sponsored cash management funds | — | 326 | — | — | 326 | ||||||||||
Equity method investments | — | — | 461 | 40 | 501 | ||||||||||
Deferred compensation plan hedge fund investments | — | 10 | 20 | — | 30 | ||||||||||
Total investments | 176 | 400 | 813 | 40 | 1,429 | ||||||||||
Separate account assets | 2,461 | 85 | 4 | 73 | 2,623 | ||||||||||
Other assets(2) | — | 9 | 64 | — | 73 | ||||||||||
Total assets measured at fair value | $ | 2,637 | $ | 494 | $ | 881 | $ | 113 | $ | 4,125 | |||||
| Assets measured at fair value | ||||||||||||||||||||
| (Dollar amounts in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Assets Not Held at Fair Value (1) | December 31, 2010 | |||||||||||||||
Assets: | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||
Equity securities (funds and CDOs) | $ | 36 | $ | — | $ | 2 | $ | — | $ | 38 | ||||||||||
Debt securities | — | 7 | — | — | 7 | |||||||||||||||
Total available-for-sale | 36 | 7 | 2 | — | 45 | |||||||||||||||
Held-to-maturity: | ||||||||||||||||||||
Debt securities | — | — | — | 100 | 100 | |||||||||||||||
Total held-to-maturity | — | — | — | 100 | 100 | |||||||||||||||
Trading: | ||||||||||||||||||||
Deferred compensation plan mutual funds investments | 49 | — | — | — | 49 | |||||||||||||||
Equity securities | 36 | 9 | — | — | 45 | |||||||||||||||
Debt securities | — | 37 | — | — | 37 | |||||||||||||||
Total trading | 85 | 46 | — | — | 131 | |||||||||||||||
Other investments: | ||||||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||
Hedge funds / Funds of funds | — | 1 | 19 | — | 20 | |||||||||||||||
Private / public equity | 18 | — | 299 | — | 317 | |||||||||||||||
Total consolidated sponsored investment funds | 18 | 1 | 318 | — | 337 | |||||||||||||||
Equity method: | ||||||||||||||||||||
Hedge funds / Funds of hedge funds | — | 44 | 226 | 34 | 304 | |||||||||||||||
Private equity investments | — | — | 68 | 20 | 88 | |||||||||||||||
Real estate funds | — | 8 | 36 | 10 | 54 | |||||||||||||||
Fixed income mutual funds | 103 | — | — | — | 103 | |||||||||||||||
Equity / Multi-asset class mutual funds | 7 | — | — | — | 7 | |||||||||||||||
Total equity method | 110 | 52 | 330 | 64 | 556 | |||||||||||||||
Deferred compensation plan hedge fund equity method investments | — | 27 | — | — | 27 | |||||||||||||||
Carried interest | — | — | — | 13 | 13 | |||||||||||||||
Cost method investments | — | — | — | 331 | 331 | |||||||||||||||
Total investments | 249 | 133 | 650 | 508 | 1,540 | |||||||||||||||
Separate account assets: | ||||||||||||||||||||
Equity securities | 79,727 | 3 | 4 | — | 79,734 | |||||||||||||||
Debt securities | — | 36,415 | 170 | — | 36,585 | |||||||||||||||
Derivatives | 1 | 1,598 | — | — | 1,599 | |||||||||||||||
Money market funds | 2,549 | — | — | — | 2,549 | |||||||||||||||
Other | — | — | — | 670 | 670 | |||||||||||||||
Total separate account assets | 82,277 | 38,016 | 174 | 670 | 121,137 | |||||||||||||||
Collateral held under securities lending agreements | ||||||||||||||||||||
Equity securities | 15,237 | — | — | — | 15,237 | |||||||||||||||
Debt securities | — | 2,401 | — | — | 2,401 | |||||||||||||||
Total collateral held under securities lending agreements | 15,237 | 2,401 | — | — | 17,638 | |||||||||||||||
Other assets(2) | — | 11 | — | — | 11 | |||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||
Bank loans | — | 1,130 | 32 | — | 1,162 | |||||||||||||||
Bonds | — | 113 | — | — | 113 | |||||||||||||||
Private / public equity | 4 | 3 | 30 | — | 37 | |||||||||||||||
Total assets of consolidated VIEs | 4 | 1,246 | 62 | — | 1,312 | |||||||||||||||
Total | $ | 97,767 | $ | 41,807 | $ | 886 | $ | 1,178 | $ | 141,638 | ||||||||||
(1) |
|
(2) | Includes company-owned and split-dollar life insurance policies. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
7. Fair Value Disclosures (continued)
Fair Value Hierarchy (continued)
Liabilities measured at fair value on a recurring basis at December 31, 2010 were as follows:
| (Dollar amounts in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | December 31, 2010 | ||||||||||||
Liabilities: | ||||||||||||||||
Borrowings of consolidated VIEs | $ | — | $ | — | $ | 1,278 | $ | 1,278 | ||||||||
Collateral liability under securities lending agreements | 15,237 | 2,401 | — | 17,638 | ||||||||||||
Other liabilities(1) | — | 3 | — | 3 | ||||||||||||
Total liabilities measured at fair value | $ | 15,237 | $ | 2,404 | $ | 1,278 | $ | 18,919 | ||||||||
| (1) | Includes credit default swap (Pillars) recorded within other liabilities on the consolidated statement of financial condition. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
7. Fair Value Disclosures (continued)
Fair Value Hierarchy (continued)
Total assets and liabilities measured at fair value on a recurring basis of $139,226 million and $19,335 million, respectively, at December 31, 2009 were as follows:
| Assets and liabilities measured at fair value | ||||||||||||||||||||
| (Dollar amounts in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Assets Not Held at Fair Value (1) | December 31, 2009 | |||||||||||||||
Assets: | ||||||||||||||||||||
Investments: | ||||||||||||||||||||
Available-for-sale | $ | 53 | $ | 20 | $ | — | $ | — | $ | 73 | ||||||||||
Held-to-maturity | — | — | — | 29 | 29 | |||||||||||||||
Trading | 118 | 49 | — | — | 167 | |||||||||||||||
Other investments: | ||||||||||||||||||||
Consolidated sponsored investment funds | 22 | — | 338 | — | 360 | |||||||||||||||
Equity method | — | 1 | 330 | 41 | 372 | |||||||||||||||
Deferred compensation plan hedge fund equity method investments | — | 14 | 15 | — | 29 | |||||||||||||||
Carried interest | — | — | — | 4 | 4 | |||||||||||||||
Cost method investments | — | — | — | 15 | 15 | |||||||||||||||
Total investments | 193 | 84 | 683 | 89 | 1,049 | |||||||||||||||
Separate account assets | 99,983 | 17,599 | 1,292 | 755 | 119,629 | |||||||||||||||
Collateral held under securities lending agreements | 11,580 | 7,755 | — | — | 19,335 | |||||||||||||||
Other assets(2) | — | 11 | 46 | — | 57 | |||||||||||||||
Total | $ | 111,756 | $ | 25,449 | $ | 2,021 | $ | 844 | $ | 140,070 | ||||||||||
Liabilities: | ||||||||||||||||||||
Collateral liability under securities lending agreements | $ | 11,580 | $ | 7,755 | $ | — | $ | — | $ | 19,335 | ||||||||||
| (1) | Comprised of investments held at cost, amortized cost, carried interest and equity method investments, which include investment companies, and other assets which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures, therefore, the Company’s investment in such equity method investees may not represent fair value. |
| (2) | Includes disposal group assets and company-owned and split-dollar life insurance policies. |
F-37
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)7. Fair Value Disclosures (continued)
Separate Account Assets |
ABlackRock Pensions Limited and BlackRock Asset Management Pensions Limited, both wholly-owned subsidiarysubsidiaries of the Company, is aare registered life insurance companycompanies that maintainsmaintain separate account assets, representing segregated funds held for purposes of funding individual and group pension contracts, and equal and offsetting separate account non-financial liabilities. At December 31, 2008 and 2007, the Level 3 separate account assets were approximately $4 and $12, respectively. The changes in Level 3 assets primarily relate to purchases, sales and gains/(losses). The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract ownerowners and are not reported as non-operating income (expense) on the Company’s consolidated statements of income.
Money Market Funds within Cash and Cash Equivalents
At December 31, 2010 and 2009, approximately $87 million and $1.4 billion, respectively, of money market funds were recorded within cash and cash equivalents on the Company’s consolidated statements of financial condition. Money market funds are valued through the use of quoted market prices (a Level 1 input), or $1.00, which generally is the net asset value of the fund.
Level 3 Assets
Level 3 assets recorded within investments, which includesinclude equity method investments orand consolidated investments of real estate funds, private equity funds and funds of private equity funds, are valued based upon valuations, including capital accounts, received from internal as well as third party fund managers. Fair valuations atof the underlying funds are based on a combination of methods, which may include third-party independent appraisals and discounted cash flow techniques. Direct investments in private equity companies held by funds of private equity funds are valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third party financing, changes in valuations of comparable peer companies, and the business environment of the companies and market indices, among other factors. See Note 2
Level 3 assets recorded within separate account assets include single broker non-binding quotes for further detailfixed income securities and equity securities which have unobservable inputs due to certain corporate actions.
Level 3 assets of consolidated VIEs include bank loans valued based on single broker non-binding quotes and direct private equity investments and private equity funds valued based upon valuations received from internal as well as third party fund managers, which may be adjusted by using the fair value policies byreturns of certain market indices.
Level 3 Liabilities
Level 3 liabilities recorded as borrowings of consolidated VIEs include CLO borrowings valued based upon single broker non-binding quotes.
BlackRock, Inc.
Notes to the underlying funds.Consolidated Financial Statements
7. Fair Value Disclosures (continued)
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Year Ended December 31, 2010
| (Dollar amounts in millions) | December 31, 2009 | Realized and unrealized gains / (losses), net | Purchases, sales, other settlements and issuances, net | Net transfers in and/or out of Level 3 | December 31, 2010 | Total net gains (losses) included in earnings(1) | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
Equity securities (funds and CDOs) | $ | — | $ | 1 | ($ | 1 | ) | $ | 2 | $ | 2 | $ | — | |||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||||||
Hedge funds / Funds of funds | 26 | 1 | (8 | ) | — | 19 | 1 | |||||||||||||||||
Private equity | 312 | 44 | (54 | ) | (3 | ) | 299 | 44 | ||||||||||||||||
Equity method: | ||||||||||||||||||||||||
Hedge funds / Funds of hedge funds | 247 | 36 | (26 | ) | (31 | ) | 226 | 34 | ||||||||||||||||
Private equity investments | 47 | 8 | 13 | — | 68 | 6 | ||||||||||||||||||
Real estate funds | 36 | 17 | (17 | ) | — | 36 | 10 | |||||||||||||||||
Deferred compensation plan hedge funds | 15 | — | — | (15 | ) | — | — | |||||||||||||||||
Total Level 3 investments | 683 | 107 | (93 | ) | (47 | ) | 650 | 95 | ||||||||||||||||
Separate account assets: | ||||||||||||||||||||||||
Equity securities | 5 | 29 | (93 | ) | 63 | 4 | ||||||||||||||||||
Debt securities | 1,287 | 60 | 284 | (1,461 | ) | 170 | ||||||||||||||||||
Total Level 3 separate account assets | 1,292 | 89 | 191 | (1,398 | ) | 174 | n/a | (2) | ||||||||||||||||
Other assets | 46 | (8 | ) | (38 | ) | — | — | — | ||||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||||||
Bank loans | — | — | — | 32 | 32 | |||||||||||||||||||
Private equity | — | 3 | 27 | — | 30 | |||||||||||||||||||
Total Level 3 assets of consolidated VIEs | — | 3 | 27 | 32 | 62 | n/a | (3) | |||||||||||||||||
Total Level 3 assets | $ | 2,021 | $ | 191 | $ | 87 | ($ | 1,413 | ) | $ | 886 | |||||||||||||
Liabilities: | ||||||||||||||||||||||||
Borrowings of consolidated VIEs | $ | — | ($ | 121 | ) | $ | 1,157 | $ | — | $ | 1,278 | n/a | (3) | |||||||||||
n/a – not applicable
| (1) | Earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date. |
| (2) | The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owners and are not reported on the Company’s consolidated statements of income. |
| (3) | The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s consolidated statements of income. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
7. Fair Value Disclosures (continued)
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis for the Year Ended December 31, 20082009
| Investments | Other Assets | |||||||
December 31, 2007 | $ | 1,240 | $ | — | ||||
Realized and unrealized gains / (losses), net | (409 | ) | (16 | ) | ||||
Purchases, sales, other settlements and issuances, net | 11 | 2 | ||||||
Net transfers in and/or out of Level 3 | (29 | ) | 78 | |||||
December 31, 2008 | $ | 813 | $ | 64 | ||||
Total net (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date | $ | (366 | ) | $ | (17 | ) | ||
| (Dollar amounts in millions) | December 31, 2008 | Realized and unrealized gains / (losses), net | Purchases, sales, other settlements and issuances, net | Net transfers in and/or out of Level 3 | December 31, 2009 | Total net gains (losses) included in earnings(1) | ||||||||||||||||||
Investments | $ | 813 | $ | 45 | ($ | 153 | ) | ($ | 22 | ) | $ | 683 | $ | 92 | ||||||||||
Other assets | 64 | (20 | ) | 2 | — | 46 | (20 | ) | ||||||||||||||||
Separate account assets | 4 | 8 | 1,276 | 4 | 1,292 | n/a | (2) | |||||||||||||||||
Total Level 3 assets | $ | 881 | $ | 33 | $ | 1,125 | ($ | 18 | ) | $ | 2,021 | $ | 72 | |||||||||||
n/a – not applicable
| (1) | Earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date. |
| (2) | The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owners and are not reported on the Company’s consolidated statements of income. |
Realized and Unrealized Gains / (Losses) for Level 3 Assets and Liabilities
Realized and unrealized gains and losses/ (losses) recorded for Level 3 assets and liabilities are reported in non-operating income (expense) on the Company’s consolidated statements of income. Non-controlling interest expense is recordedA portion of net income (loss) for consolidated investments and all of the net income (loss) for consolidated VIEs is allocated to non-controlling interests to reflect the portion of gains and lossesnet income (loss) not attributable to the Company.
The Company transfers assetsSignificant Transfers in and/or out of Level 3Levels
Transfers in and/or out of Levels are reflected as of the beginning of the period when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable / unobservable, or when the Company determines it has the ability, or no longer has the ability, to redeem in the near term certain investments that the Company values using a NAV (or a capital account), or when the book value of certain equity method investments no longer represents fair value as determined under fair value methodologies.
Separate Account Assets
In the year ended December 31, 2010 there were $1.5 billion of net transfers out of Level 3 to Level 2 related to debt securities held within separate account assets. The net transfers in Levels were primarily due to availability of observable market inputs, including additional inputs from pricing vendors and brokers.
In the year ended December 31, 2010 there were $63 million of net transfers of equity securities held within separate account assets into Level 3 from Level 1 and Level 2. The net transfers into Level 3 were primarily due to market inputs no longer being considered observable.
Significant Other Settlements in 2010
F-38
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts7. Fair Value Disclosures (continued)
Investments in millions, exceptCertain Entities that Calculate Net Asset Value Per Share
As a practical expedient to value certain investments, the Company relies on net asset values as the fair value for certain investments. The following table lists information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a net asset value per share data or as otherwise noted)(or its equivalent) at December 31, 2010:
| (Dollar amounts in millions) | Ref | Fair Value | Total Unfunded Commitments | Redemption | Redemption | |||||||||
Trading: | ||||||||||||||
Equity | (a) | $ | 9 | $ | — | Daily (100%) | none | |||||||
Consolidated sponsored investment funds: | ||||||||||||||
Private equity funds of funds | (b) | 247 | 62 | n/r | n/r | |||||||||
Other funds of hedge funds | (c) | 3 | — | Quarterly (84%) Annual (16%) | 30 – 90 days | |||||||||
Equity method:(1) | ||||||||||||||
Hedge funds/funds of hedge funds | (d) | 269 | 9 | Monthly (1%), Quarterly (17%) n/r (82%) | 15 – 90 days | |||||||||
Private equity funds | (e) | 68 | 57 | n/r | n/r | |||||||||
Real estate funds | (f) | 44 | 52 | Quarterly (18%) n/r (82%) | 60 days | |||||||||
Deferred compensation plan hedge fund investments | (g) | 27 | — | Monthly (11%), Quarterly (89%) | 60 – 90 days | |||||||||
Consolidated VIE: | ||||||||||||||
Private equity funds | (h) | 29 | 2 | n/r | n/r | |||||||||
Total | $ | 696 | $ | 182 | ||||||||||
n/r – not redeemable
| (1) | Comprised of equity method investments, which include investment companies, which in accordance with GAAP account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees approximates fair value. |
| (a) | This category includes several consolidated offshore feeder funds that invest in master funds with multiple equity strategies to diversify risks. The fair values of the investments in this category have been estimated using the net asset value of master offshore funds held by the feeder funds. Investments in this category generally can be redeemed at any time, as long as there are no restrictions in place by the underlying master funds. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
7. Fair Value Disclosures (continued)
Investments in Certain Entities that Calculate Net Asset Value Per Share (continued)
| This category includes the underlying third party private equity funds within consolidated BlackRock sponsored private equity funds of funds. The fair values of the investments in the third party funds have been estimated using the net asset value of the Company’s ownership interest in partners’ capital in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption, however, for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately 8 years. Total remaining unfunded commitments to other third party funds is $62 million. The Company is contractually obligated to fund only $42 million to the consolidated funds, while the remaining unfunded balances in the table above are required to be funded by capital contributions from non-controlling interest holders. |
| (c) | This category includes several consolidated funds of hedge funds that invest in multiple strategies to diversify risks. The fair values of the investments in this category have been estimated using the net asset value of the fund’s ownership interest in partners’ capital of each fund in the portfolio. Investments in this category generally can be redeemed, as long as there are no restrictions in place by the underlying funds. |
| (d) | This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit and mortgage instruments and other third party hedge funds. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital. It is estimated that the investments in the funds that are not subject to redemptions will be liquidated over a weighted-average period of less than 7 years. |
| (e) | This category includes several private equity funds that initially invest in non-marketable securities of private companies, which ultimately may become public in the future. The fair values of these investments have been estimated using the net asset value of the Company’s ownership interest in partners’ capital as well as other performance inputs. The Company’s investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the private equity funds. It is estimated that the investment in these funds will be liquidated over a weighted-average period of approximately 5 years. |
| (f) | This category includes several real estate funds that invest primarily to acquire, expand, renovate, finance, hold for investment, and ultimately sell income-producing apartment properties or to capitalize on the distress in the residential real estate market. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital. The majority of the Company’s investments in these funds is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the real estate funds. It is estimated that the investments in these funds will be liquidated over a weighted-average period of approximately 7 years. |
| (g) | This category includes investments in certain hedge funds that invest in energy and health science related equity securities. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital as well as performance inputs. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
7. Fair Value Disclosures (continued)
Investments in Certain Entities that Calculate Net Asset Value Per Share (continued)
| (h) | This category includes the underlying third party private equity funds within one consolidated BlackRock sponsored private equity fund of funds. The fair values of the investments in the third party funds have been estimated using the net asset value of the Company’s ownership interest in partners’ capital in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption, however for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately 5 years. Total remaining unfunded commitments to other third party funds is $2 million, which are required to be funded by capital contributions from non-controlling interest holders. |
Fair Value Option
Upon consolidation of three CLOs on January 1, 2010, the Company elected to adopt the fair value option provisions for eligible assets and liabilities, including bank loans and borrowings of the CLOs. To the extent there is a difference between the change in fair value of the assets and liabilities, the difference will be reflected as net income (loss) attributable to nonredeemable non-controlling interests on the consolidated statements of income and offset by a change in appropriated retained earnings on the consolidated statements of financial condition.
The following table presents, as of December 31, 2010, the fair value of those assets and liabilities selected for fair value accounting:
| (Dollar amounts in millions) | December 31, 2010 | |||
CLO Bank Loans: | ||||
Aggregate principal amounts outstanding | $ | 1,245 | ||
Fair value | $ | 1,162 | ||
Aggregate unpaid principal balance in excess of fair value | $ | 83 | ||
Unpaid principal balance of loans more than 90 days past due | $ | 3 | ||
Aggregate fair value of loans more than 90 days past due | $ | 1 | ||
Aggregate unpaid principal balance in excess of fair value for loans more than 90 days past due | $ | 2 | ||
CLO Borrowings: | ||||
Aggregate principal amounts outstanding | $ | 1,430 | ||
Fair value | $ | 1,278 | ||
The principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2019.
During the year ended December 31, 2010, the change in fair value of the bank loans, along with the bonds held at fair value, resulted in a $148 million gain, which was offset by a $175 million loss in the fair value of the CLO borrowings. The net loss was recorded in net gain (loss) on consolidated VIEs on the consolidated statement of income. The change in fair value of the assets and liabilities includes interest income and expense, respectively.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
8. Variable Interest Entities
In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debt obligationsCDOs/CLOs and sponsored investment funds, thatwhich may be considered VIEs. The Company receives managementadvisory 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 engages inenters into these variable interests principally to address client needs through the launch of such investment vehicles. The VIEs are primarily financed via capital contributed by equity and debt holders. The Company’s involvement in financing the operations of the VIEs is limited to its equity interests, unfunded capital commitments for certain sponsored investment funds and its capital support agreements for two enhanced cash funds.interests.
The primary beneficiaryPB of a VIE that is an investment fund that meets the conditions of ASU 2010-10 is the partyenterprise that absorbshas a variable interest (or combination of variable interests, including those of related parties) that will absorb a majority of the entity’s expected losses, receivesreceive a majority of the entity’s expected residual returns or both as a result of holding variable interests.both. In order to determine whether the Company is the primary beneficiaryPB of a VIE, management must make significant estimates and assumptions of probable future cash flows and assign probabilities to different cash flow scenarios.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, gainpre-payments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.
Effective January 1, 2010, the PB of a CDO/CLO or other entity that is a VIE that does not meet the conditions of ASU 2010-10 is the enterprise that has the power to direct activities of the entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the entity.
VIE’sVIEs in which BlackRock is the Primary Beneficiary
At December 31, 2010
At December 31, 2008, the Company2010, BlackRock was the primary beneficiary of threefour VIEs, which resultedincluded three CLOs in consolidationwhich it did not have an investment, however, BlackRock, as the collateral manager, was deemed to have both the power to control the activities of threethe CLOs and the right to receive benefits that could potentially be significant to the VIE. In addition, BlackRock was the primary beneficiary of one sponsored investment funds (including two cash management funds and one private equity investment fund of funds). Creditorsin which it had a non-substantive investment, which absorbed the majority of the variability due to its de-facto third party relationships with other partners in the fund. The assets of these VIEs doare not available to creditors of the Company. In addition, the investors in these VIEs have no recourse to the credit of the Company.
During 2008, At December 31, 2010, the Company determined it became the primary beneficiary of two enhanced cash management funds as a result of concluding that under various cash flow scenarios it absorbed the majority of the variabilityfollowing balances related to cover expected losses in the funds due to its equity ownership percentage of the funds along with its obligation underthese four VIEs were consolidated on the Company’s capital support agreements with the funds which were established to cover potential realized losses within the funds. During 2008, the Company contributed $1 to the cash management funds to cover realized losses. Asconsolidated statement of December 31, 2008, under the terms of the capital support agreements, BlackRock was obligated to cover realized losses of up to $45.financial condition:
| (Dollar amounts in millions) | December 31, 2010 | |||
Assets of consolidated VIEs: | ||||
Cash and cash equivalents | $ | 93 | ||
Bank loans, bonds and other investments | 1,312 | |||
Liabilities of consolidated VIEs: | ||||
Borrowings | (1,278 | ) | ||
Other liabilities | (7 | ) | ||
Appropriated retained earnings | (75 | ) | ||
Non-controlling interests of consolidated VIEs | (45 | ) | ||
Total net interests in consolidated VIEs | $ | — | ||
F-39
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)8. Variable Interest Entities (continued)
VIEs in which BlackRock is the Primary Beneficiary (continued)
As ofAt December 31, 20082010 (continued)
| VIE Net Assets That the | Maximum Risk of Loss | |||||||||||
| Company Consolidates | Equity Interests | Capital Support Agreements | Total | |||||||||
Sponsored cash management funds | $ | 328 | $ | 88 | $ | 45 | $ | 133 | ||||
Other sponsored investment funds | 55 | — | — | — | ||||||||
Total | $ | 383 | $ | 88 | $ | 45 | $ | 133 | ||||
AsFor the year ended December 31, 2010, the Company recorded non-operating expense of $35 million offset by a result$35 million net loss attributable to nonredeemable non-controlling interests on the Company’s consolidated statements of consolidatingincome.
At December 31, 2010, bank loans, bonds and other investments of consolidated VIEs were $1,162 million, $113 million, and $37 million, respectively. The weighted-average maturity of the threebank loans and bonds was approximately 4.2 years.
At December 31, 2009
At December 31, 2009, BlackRock was the PB of one VIE, a sponsored private equity investment funds,fund in which it did not have a substantive investment, due to its de-facto third party relationships with other partners in the fund. Due to the consolidation of this VIE, at December 31, 2008,2009, the Company recorded $383$54 million of net assets, primarily comprised of investments and cash and cash equivalents which in consolidation isequivalents. These net assets were offset by $319$54 million of nonredeemable non-controlling interests, which reflect the equity ownership of third parties, on itsthe Company’s consolidated statements of financial condition. For the year ended December 31, 2008,2009, the Company recorded a non-operating expense of $12$4 million offset by a $13 gain in$4 million net loss attributable to nonredeemable non-controlling interests on its consolidated statements of income.
The maximum risk of loss related to the capital support agreements in the table of above reflect the Company’s total obligation under the capital support agreements with the two enhanced cash funds. The fair value of the capital support agreements recorded at December 31, 2008 and 2007 was $18 and $12, respectively.
As of December 31, 2007
| VIE Net Assets That the | Maximum Risk of Loss | ||||||||
| Company Consolidates | Equity Interests | Total | |||||||
Sponsored investment funds | $ | 96 | $ | — | $ | — | |||
At December 31, 2007 the Company consolidated one sponsored investment fund with net assets of $96, primarily consisting of cash and cash equivalents and investments offset by $96 of non-controlling interests to reflect the equity ownership of third parties. For the year ended December 31, 2007, the Company recorded non-operating income of $30 offset by $30 of non-controlling interests expense on its consolidated statements of income.
F-40
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
VIEs in which BlackRockthe Company holds significant variable interests or is the sponsor that holds a variable interest but is not the Primary Beneficiary of the VIE
At December 31, 20082010 and 2007,2009, the Company’s carrying value of assets and liabilities and its maximum risk of loss related to VIEs in which it holds a significant variable interest or is the sponsor that holds a variable interest, but for which it was not the primary beneficiary,PB, were as follows:
As ofAt December 31, 20082010
| VIE Assets That the | VIE Liabilities That the | Variable Interests on the Statement of Financial Condition | |||||||||||||||||
| Company Does Not Consolidate | Company Does Not Consolidate | Investments | Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss | ||||||||||||||
CDOs | $ | 6,660 | $ | 14,487 | $ | 4 | $ | 5 | $ | (1 | ) | $ | 25 | ||||||
Sponsored cash management funds | 733 | — | — | — | — | — | |||||||||||||
Other sponsored investment funds | 5,813 | 440 | 9 | 9 | (6 | ) | 18 | ||||||||||||
Total | $ | 13,206 | $ | 14,927 | $ | 13 | $ | 14 | $ | (7 | ) | $ | 43 | ||||||
| (Dollar amounts in millions) | Variable Interests on the Consolidated Statement of Financial Condition | |||||||||||||||
| Investments | Advisory Fee Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss | |||||||||||||
CDOs/CLOs | $ | 2 | $ | 3 | ($ | 3 | ) | $ | 22 | |||||||
Other sponsored investment funds: | ||||||||||||||||
Collective trusts | — | 188 | — | 188 | ||||||||||||
Private equity funds | 14 | — | (7 | ) | 14 | |||||||||||
Other | 14 | 52 | — | 66 | ||||||||||||
Total | $ | 30 | $ | 243 | ($ | 10 | ) | $ | 290 | |||||||
BlackRock, Inc.
Notes to the Consolidated Financial Statements
8. Variable Interest Entities (continued)
VIEs in which the Company holds significant variable interests or is the sponsor that holds a variable interest but is not the Primary Beneficiary of the VIE (continued)
The size of the net assets of the VIEs that the Company does not consolidate related to CDOs/CLOs, collective trust funds and other sponsored investment funds were as follows:
CDOs/CLOs - approximately ($4) billion, comprised of approximately $7 billion of assets at fair value and $11 billion of liabilities, primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders.
Other sponsored investments funds – approximately $1.6 trillion to $1.7 trillion of net assets
This amount includes approximately $1.2 trillion of collective trusts. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts.
The net assets of these VIEs primarily are primarily comprised of cash and cash equivalents and investments and theoffset by liabilities are primarily comprised of debt obligations (CDO debt holders) and various accruals.accruals for the sponsored investment vehicles.
At December 31, 2008,2010, BlackRock’s maximum risk of loss associated with these VIEs primarily relates to: (i) BlackRock’s equity investments, (ii) managementadvisory fee receivables and (iii) the$17 million of credit protection sold by BlackRock to a third party in a synthetic CDO transaction (see Note 7 for further information).transaction.
As ofAt December 31, 20072009
| (Dollar amounts in millions) | Variable Interests on the Consolidated Statement of Financial Condition | ||||||||||||||||||||||||||||||||||
| VIE Assets That the | VIE Liabilities That the | Variable Interests on the Statement of Financial Condition | Investments | Advisory Fee Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss | |||||||||||||||||||||||||||||
| Company Does Not Consolidate | Company Does Not Consolidate | Investments | Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss | ||||||||||||||||||||||||||||||
CDOs | $ | 12,891 | $ | 16,516 | $ | 11 | $ | 8 | $ | 5 | $ | 40 | |||||||||||||||||||||||
Sponsored cash management funds | 7,365 | — | 88 | — | — | 188 | |||||||||||||||||||||||||||||
CDOs/CLOs | $ | 2 | $ | 2 | ($ | 3 | ) | $ | 21 | ||||||||||||||||||||||||||
Other sponsored investment funds | 7,896 | 363 | 13 | 5 | (4 | ) | 18 | 14 | 254 | (7 | ) | 268 | |||||||||||||||||||||||
Total | $ | 28,152 | $ | 16,879 | $ | 112 | $ | 13 | $ | 1 | $ | 246 | $ | 16 | $ | 256 | ($ | 10 | ) | $ | 289 | ||||||||||||||
The size of the net assets of the VIEs that the Company does not consolidate related to CDOs/CLOs, collective trust funds and other sponsored investment funds were as follows:
F-41CDOs/CLOs - approximately ($8) billion, comprised of approximately $10 billion of assets at fair value and $18 billion of liabilities, primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders.
Other sponsored investments funds – approximately $1.5 trillion to $1.6 trillion of net assets
This amount includes approximately $1.1 trillion of collective trusts. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts.
The net assets of these VIEs primarily are comprised of cash and cash equivalents and investments offset by liabilities primarily comprised of various accruals for the sponsored investment vehicles.
At December 31, 2009, BlackRock’s maximum risk of loss associated with these VIEs primarily relates to: (i) BlackRock’s investments, (ii) advisory fee receivables and (iii) $17 million of credit protection sold by BlackRock to a third party in a synthetic CDO transaction.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
The assets of the VIEs are primarily comprised of cash9. Derivatives and cash equivalents and investments and the liabilities are primarily comprised of debt obligations (CDO debt holders) and various accruals of the sponsored investment funds.Hedging
At December 31, 2007, BlackRock’s maximum risk of loss associated with these VIE’s primarily relates to: (i) BlackRock’s equity investments, (ii) management fee receivables, (iii) credit protection sold by BlackRock in a synthetic CDO transaction (see Note 7 for further information) and (iv) the impact of the Company’s obligation under the capital support agreements which were established in support of two enhanced cash funds.
For the years ended December 31, 20082010 and 2007,2009, the Company did not hold any derivatives designated in a formal hedge relationship under SFAS No. 133.ASC 815-10.
During 2007, the Company commenced a program to enter into a series of total return swaps to economically hedge against market price exposures with respect to certain seed investments in sponsored investment products. At December 31, 2010, the Company had six outstanding total return swaps with two counterparties with an aggregate notional value of approximately $25 million. At December 31, 2009, the Company had seven outstanding total return swaps with two counterparties with an aggregate notional value of approximately $36 million.
By using derivative financial instruments, the Company exposes itself to market and counterparty risk. Market risk from forward foreign currency exchange contracts is the effect on the value of a financial instrument that results from a change in currency exchange rates. The Company manages certain exposure to market risk associated with foreign currency exchange contracts by establishing and monitoring parameters that limit the types and degrees of market risk that may be undertaken. For the year ended December 31, 2008, the change in fair value of foreign exchange forward contracts was not material to the Company’s consolidated financial statements.
During 2007, the Company entered into a series of total return swaps to economically hedge market price exposures with respect to seed investments in sponsored investment products. At December 31, 2008,2010, the Company did not have any outstanding total return swapsforward foreign currency exchange contracts. At December 31, 2009, the Company had two outstanding forward foreign currency exchange contracts with two counterparties with an aggregate notional value of approximately $49 and net realized and unrealized gains of approximately $33 for the year ended December 31, 2008. The net gains were included in non-operating income (expense) in the Company’s consolidated statements of income.$100 million.
In December 2007, BlackRock entered into capital support agreements, up to $100 million, with two enhanced cash funds. These capital support agreements were backed by letters of credit issued under BlackRock’s revolving credit facility. In December 2008, the capital support agreements were modified to be up to $45 million and were no longer backed by the letters of credit. See Note 11, Borrowings, for further discussion.In 2009, the capital support agreements were terminated, due to the closure of the related funds. During the twelve months ended December 31, 2008,2009, the Company provided approximately $1$4 million of capital contributions to these twothe funds under the capital support agreements. BlackRock determined that the capital support agreements qualified as derivatives under SFAS No. 133. At December 31, 2008 and 2007, the fair value of the derivative liabilities related to the capital support agreements for the two funds totaled approximately $18 and $12, respectively. The fair value of these liabilities will increase or decrease as BlackRock’s obligations under the capital support agreements fluctuate based on the fair value of the derivatives. Due to consolidation of these two funds at December 31, 2008, the derivative liability was eliminated against the receivableASC 815-10. Upon closure of the funds onin 2009, the consolidated statements of financial condition.
F-42
BlackRock, Inc.
Notesliability decreased $11 million to zero and the Consolidated Financial Statements
(Dollar amountschange in millions, except share data or as otherwise noted)
the liability was included in general and administration expenses.
The Company acts as the portfolio manager in a series of credit default swap transactions, referred to collectively as the Pillars synthetic CDO transaction ("Pillars"(“Pillars”). The Company has entered into a credit default swap with Citibank, N.A. (“Citibank”), providing Citibank credit protection of approximately $17 million, representing the Company’s maximum risk of loss with respect to the provision of credit protection. The Company’s management has performed an assessment of its variable interest in Pillars (a collateral management agreement and the credit default swap) under FIN 46(R)ASC 810-10 and has concluded the Company is not Pillars’ primary beneficiary.PB. Pursuant to SFAS No. 133,ASC 815-10, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement. For
On behalf of clients of the year ended December 31, 2008,Company’s registered life insurance companies that maintain separate accounts representing segregated funds held for the purpose of funding individual and group pension contracts, the Company recorded a net loss of $4invests in non-operating income (expense) in the consolidated statement of income related tovarious derivative instruments, which may include futures and forward foreign currency exchange contracts and interest accrued offset by the change in the fair value of the credit default swap. At December 31, 2008, the fair value of the Pillars credit default swap was approximately $0.5rate and was included in other liabilities on the consolidated statement of financial condition.inflation rate swaps.
The Company may, at times, consolidateconsolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the fund’s investment strategy. SuchThe change in fair value of such derivatives, arewhich is recorded in non-operating income (expense), was not material to the Company’s consolidated financial statements.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
9. Derivatives and Hedging (continued)
The following table presents fair value as of December 31, 2010 of derivative instruments not designated as hedging instruments:
Assets | Liabilities | |||||||||||
| (Dollar amounts in millions) | Balance Sheet | Fair Value | Balance Sheet | Fair Value | ||||||||
Credit default swap (Pillars) | Other assets | $ | — | Other liabilities | $ | 3 | ||||||
Separate account derivatives | Separate account assets | 1,599 | Separate account liabilities | 1,599 | ||||||||
Total | $ | 1,599 | $ | 1,602 | ||||||||
The following table presents fair value as of December 31, 2009 of derivative instruments not designated as hedging instruments:
Assets | Liabilities | |||||||||||
| (Dollar amounts in millions) | Balance Sheet | Fair Value | Balance Sheet | Fair Value | ||||||||
Credit default swap (Pillars) | Other assets | $ | — | Other liabilities | $ | 3 | ||||||
Separate account derivatives | Separate account assets | 1,501 | Separate account liabilities | 1,501 | ||||||||
Total | $ | 1,501 | $ | 1,504 | ||||||||
The following table presents gains (losses) recognized in income on derivative instruments for the years ended December 31, 2010 and 2009:
| (Dollar amounts in millions) | Income Statement Location | 2010 | 2009 | |||||||
Foreign currency exchange contracts | General and administration expense | ($ | 5 | ) | $ | — | ||||
Total return swaps | Non-operating income (expense) | (2 | ) | (10 | ) | |||||
Credit default swap (Pillars) | Non-operating income (expense) | — | (2 | ) | ||||||
Capital support agreements | General and administration expense | — | 7 | |||||||
Total | ($ | 7 | ) | ($ | 5 | ) | ||||
Net realized and unrealized gains and losses attributable to derivatives held by separate account assets and liabilities accrue directly to the contract owners and are not reported in the Company’s consolidated statements of income.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
10. Property and Equipment
Property and equipment consists of the following:
| Estimated useful life - in years | December 31, | |||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||
| (Dollar amounts in millions) | Estimated useful life - in years | December 31, | ||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||
Property and equipment: | ||||||||||||||||||||
Land | N/A | $ | 4 | $ | 4 | N/A | $ | 4 | $ | 4 | ||||||||||
Building | 39 | 17 | 17 | 39 | 17 | 17 | ||||||||||||||
Building improvements | 15 | 12 | 12 | 15 | 13 | 13 | ||||||||||||||
Leasehold improvements | 1-15 | 156 | 145 | 1-15 | 352 | 324 | ||||||||||||||
Equipment and computer software | 3-5 | 257 | 255 | 3-5 | 368 | 304 | ||||||||||||||
Furniture and fixtures | 3-7 | 47 | 51 | 2-7 | 74 | 69 | ||||||||||||||
Construction in progress | N/A | 26 | 8 | N/A | 26 | 15 | ||||||||||||||
Gross property and equipment | 519 | 492 | 854 | 746 | ||||||||||||||||
Less: accumulated depreciation | 259 | 226 | 426 | 303 | ||||||||||||||||
Property and equipment, net | $ | 260 | $ | 266 | $ | 428 | $ | 443 | ||||||||||||
N/A -– Not applicableApplicable
Qualifying software costs of approximately $39 million, $31 million and $28 $25 and $12million have been capitalized within equipment and computer software for the years ended December 31, 2008, 20072010, 2009 and 2006,2008, respectively, and are being amortized over an estimated useful life of three years.
Depreciation expense was $145 million, $85 million and $84 $68 and $35million for the years ended December 31, 2008, 20072010, 2009 and 2006,2008, respectively.
F-43
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
11. Goodwill
Goodwill activity during the years ended December 31, 20082010 and 20072009 was as follows:
| 2008 | 2007 | |||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
Beginning of year balance | $ | 5,520 | $ | 5,257 | $ | 12,680 | $ | 5,533 | ||||||||
Goodwill acquired related to: | ||||||||||||||||
Quellos | 55 | 27 | ||||||||||||||
Fund of hedge funds manager | — | 21 | ||||||||||||||
Impact Investing | 4 | — | ||||||||||||||
BGI(1) | — | 6,952 | ||||||||||||||
Other | — | 1 | 8 | — | ||||||||||||
Total goodwill acquired | 59 | 49 | 8 | 6,952 | ||||||||||||
Goodwill adjustments related to: | ||||||||||||||||
MLIM | — | 212 | ||||||||||||||
Quellos | (41 | ) | (5 | ) | 117 | 185 | ||||||||||
NBAM | — | 6 | ||||||||||||||
Other | (5 | ) | 1 | |||||||||||||
SSR / Other | — | 10 | ||||||||||||||
Total goodwill adjustments | (46 | ) | 214 | 117 | 195 | |||||||||||
End of year balance | $ | 5,533 | $ | 5,520 | $ | 12,805 | $ | 12,680 | ||||||||
| (1) | December 31, 2009 goodwill has been retrospectively adjusted by $110 million to reflect new information obtained about facts that existed as of December 1, 2009, the BGI acquisition date. |
During the year ended December 31, 2008,2010, goodwill increased by $13. Approximately $55 was recorded as additional goodwill due to the$125 million. The increase resulted from a $136 million release of 280,519 common shares to Quellos, which were held in escrow in accordanceconnection with the Quellos asset purchase agreementTransaction and an $11 additional cash payment due to achieving certain revenue measures. This increase was partiallythe Helix Transaction, offset by a decline in goodwill of approximately $21 as a result of the Company’s review of the Quellos purchase price allocation primarily in the three months ended March 31, 2008 and a decrease of approximately $20 related to tax benefits realized from tax-deductible goodwill in excess of book goodwill.
At December 31, 2008,2010, the balance of the Quellos tax-deductible goodwill in excess of book goodwill was approximately $409.$353 million. Goodwill related to the Quellos Transaction will continue to be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill.goodwill from the Quellos Transaction.
In AugustThe impairment tests performed for goodwill as of July 31, 2010, 2009 and 2008 theindicated that no impairment charges were required. The Company acquired Impact Investing, an Australia based software development company specializing in equity portfolio management and analytical software tools. The total considerationcontinuously monitors its book value per share as compared to be paid is not expected to be material toclosing prices of its common stock for potential indicators of impairment. As of December 31, 2010 the Company’s consolidated financial statements.common stock closed at $190.58, which exceeded its book value per share of approximately $136.09 after excluding appropriated retained earnings.
F-44
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
12. Intangible Assets
Intangible assets at December 31, 20082010 and 20072009 consisted of the following:
| Remaining Weighted- | Remaining Weighted-Average Estimated Useful Life | December 31, 2010 | |||||||||||||||||||||||||
| Average | December 31, 2008 | ||||||||||||||||||||||||||
| Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||
| (Dollar amounts in millions) | Remaining Weighted-Average Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||||||
Acquired management contracts: | |||||||||||||||||||||||||||
Mutual funds | N/A | $ | 4,461 | $ | — | $ | 4,461 | ||||||||||||||||||||
Alternative investment products | N/A | 917 | — | 917 | |||||||||||||||||||||||
Mutual funds/Exchange-traded products | N/A | $ | 10,661 | $ | — | $ | 10,661 | ||||||||||||||||||||
Other collective investment funds | N/A | 3,610 | — | 3,610 | |||||||||||||||||||||||
Alternative investment funds | N/A | 917 | — | 917 | |||||||||||||||||||||||
Trade names / trademarks | N/A | 1,403 | — | 1,403 | |||||||||||||||||||||||
License | N/A | 6 | — | 6 | |||||||||||||||||||||||
Total indefinite-lived intangible assets | 5,378 | — | 5,378 | 16,597 | — | 16,597 | |||||||||||||||||||||
Finite-lived intangible assets: | |||||||||||||||||||||||||||
Acquired management contracts: | |||||||||||||||||||||||||||
Institutional | 7.5 | 833 | 206 | 627 | |||||||||||||||||||||||
Retail | 8.7 | 348 | 71 | 277 | |||||||||||||||||||||||
Alternative investment products | 6.6 | 200 | 47 | 153 | |||||||||||||||||||||||
Institutional / Retail separate accounts | 6.5 | 1,341 | 534 | 807 | |||||||||||||||||||||||
Alternative investment accounts and funds | 5.0 | 183 | 79 | 104 | |||||||||||||||||||||||
Other(1) | 9.6 | 6 | — | 6 | 7.6 | 6 | 2 | 4 | |||||||||||||||||||
Total finite-lived intangible assets | 7.7 | 1,387 | 324 | 1,063 | 6.3 | 1,530 | 615 | 915 | |||||||||||||||||||
Total intangible assets | $ | 6,765 | $ | 324 | $ | 6,441 | $ | 18,127 | $ | 615 | $ | 17,512 | |||||||||||||||
| Remaining Weighted-Average Estimated Useful Life | December 31, 2009 | ||||||||||||||||||||||||||
| (Dollar amounts in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||||||
Acquired management contracts: | |||||||||||||||||||||||||||
Mutual funds/Exchange-traded products(2) | N/A | $ | 10,661 | $ | — | $ | 10,661 | ||||||||||||||||||||
Other collective investment funds(2) | N/A | 3,610 | — | 3,610 | |||||||||||||||||||||||
Alternative investment funds | N/A | 917 | — | 917 | |||||||||||||||||||||||
Trade names / trademarks | N/A | 1,403 | — | 1,403 | |||||||||||||||||||||||
Total indefinite-lived intangible assets | 16,591 | — | 16,591 | ||||||||||||||||||||||||
Finite-lived intangible assets: | |||||||||||||||||||||||||||
Acquired management contracts: | |||||||||||||||||||||||||||
Institutional / Retail separate accounts(2) | 7.4 | 1,345 | 403 | 942 | |||||||||||||||||||||||
Alternative investment accounts and funds | 5.1 | 190 | 62 | 128 | |||||||||||||||||||||||
Other(1) | 8.6 | 6 | 1 | 5 | |||||||||||||||||||||||
Total finite-lived intangible assets | 7.2 | 1,541 | 466 | 1,075 | |||||||||||||||||||||||
Total intangible assets | $ | 18,132 | $ | 466 | $ | 17,666 | |||||||||||||||||||||
| Remaining Weighted- | |||||||||||
| Average | December 31, 2007 | ||||||||||
| Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||
Indefinite-lived intangible assets: | |||||||||||
Acquired management contracts: | |||||||||||
Mutual funds | N/A | $ | 4,461 | $ | — | $ | 4,461 | ||||
Alternative investment products | N/A | 890 | — | 890 | |||||||
Total indefinite-lived intangible assets | 5,351 | — | 5,351 | ||||||||
Finite-lived intangible assets: | |||||||||||
Acquired management contracts: | |||||||||||
Institutional | 8.5 | 832 | 119 | 713 | |||||||
Retail | 9.7 | 348 | 39 | 309 | |||||||
Alternative investment products | 7.6 | 195 | 17 | 178 | |||||||
Other(1) | 1.0 | 5 | 3 | 2 | |||||||
Total finite-lived intangible assets | 8.7 | 1,380 | 178 | 1,202 | |||||||
Total intangible assets | $ | 6,731 | $ | 178 | $ | 6,553 | |||||
N/A – Not Applicable
(1) | Other represents intellectual |
| (2) | Indefinite-lived and |
N/A - Not applicable
Amortization expense for finite-lived intangible assets was $146, $130 and $38 in 2008, 2007 and 2006, respectively.
F-45
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)12. Intangible Assets (continued)
Amortization expense for finite-lived intangible assets was $160 million, $147 million and $146 million in 2010, 2009 and 2008, respectively. The impairment tests performed for intangible assets as of July 31, 2010, 2009 and 2008 indicated that no impairment charges were required.
Finite-Lived Acquired Management Contracts
In January 2005, the Company acquired $63 in finite-life management contracts from MetLife, related to $48 in contracts with institutional separate accounts, $9 in contracts with real estate equity funds and $6 in contracts with CDOs. The initial useful lives of these finite-life acquired management contracts ranged from 5 to 20 years.
On September 29, 2006,December 2009, in conjunction with the MLIMBGI Transaction, the Company acquired finite-life$156 million of finite-lived management contracts valued at $1,135, primarily associated with $771 of contracts with institutional separate accounts, $348 of contracts with retail separate accounts, $11 of private equity accounts and $5 in trade name intangibles. The initiala weighted-average estimated useful life of these finite-life management contracts was approximately 10.1 years.
On September 29, 2006, in conjunction with the NBAM transaction, the Company acquired $13 of finite-life management contracts, primarily associated of institutional fixed income accounts. The initial weighted-average useful life of these finite-life management contracts was approximately nine years.
On October 1, 2007, in conjunction with the Quellos Transaction, the Company acquired $161 of finite-life management contracts, primarily associated with private equity, fund of funds and other contracts. The initial weighted-average useful life of these finite-life management contracts was approximately 7.5 years.
In August 2008, in conjunction with the Impact Investing transaction, the Company acquired $7 of finite-life contracts associated primarily of $1 of institutional equity accounts and $6 for intellectual property. The initial weighted-average useful life of these finite-life management contracts was approximately 9.510 years.
Estimated amortization expense for finite-lived intangible assets for each of the five succeeding years is as follows:
2009 | $ | 145 | |||||
2010 | 143 | ||||||
| (Dollar amounts in millions) | |||||||
Year | Amount | ||||||
2011 | 140 | $ | 156 | ||||
2012 | 139 | 155 | |||||
2013 | 139 | 155 | |||||
2014 | 148 | ||||||
2015 | 119 | ||||||
Indefinite-Lived Acquired Management Contracts
F-46
On December 1, 2009, in conjunction with the BGI Transaction, the Company acquired trade names/trademarks related toiShares®/LifePath®valued at $1.403 billion. The fair value was determined using a royalty rate primarily based on normalized marketing and promotion expenditures to develop and support the brands globally.
Indefinite-Lived Acquired License
In 2010, in conjunction with the Primasia Transaction, the Company acquired a license to develop mutual funds in Taiwan.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or13. Borrowings
Short-Term Borrowings
The carrying value of short-term borrowings included the following:
| (Dollar amounts in millions) | ||||||||
| December 31, 2010 | December 31, 2009 | |||||||
Commercial paper program | $ | — | $ | 2,034 | ||||
2007 Revolving credit facility | 100 | 200 | ||||||
Total short-term borrowings | $ | 100 | $ | 2,234 | ||||
Commercial Paper Program
On October 14, 2009, BlackRock established a commercial paper program (the “CP Program”) under which the Company may issue unsecured commercial paper notes (the “CP Notes”) on a private placement basis up to a maximum aggregate amount outstanding at any time of $3 billion. The initial proceeds of the commercial paper issuances were used for the financing of a portion of the BGI Transaction. Subsidiaries of Bank of America and Barclays, as otherwise noted)well as other third parties, act as dealers under the CP Program. The CP Program is supported by the 2007 revolving credit facility.
The Company began issuance of CP Notes under the CP Program on November 4, 2009. During 2010 all CP Notes outstanding as of December 31, 2009 have been repaid and as of December 31, 2010, BlackRock did not have any outstanding CP Notes.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
13. Borrowings (continued)
Short-Term Borrowings (continued)
Indefinite-Lived Acquired Management Contracts2007 Revolving Credit Facility
On January 31, 2005, the Company acquired $229 in indefinite-life management contracts in the SSR Holdings, Inc. (“SSR”) transaction, consisting of $188 in contracts with mutual funds and $41 in contracts with alternative investment funds.
On September 29, 2006, in conjunction with the MLIM Transaction, the Company acquired indefinite-life management contracts valued at $4,477 consisting of $4,271 for all retail mutual funds and $206 of alternative investment products.
On October 1, 2007, in conjunction with the Quellos Transaction, the Company acquired $631 in indefinite-life management contracts associated with alternative investment products.
On October 1, 2007, the Company purchased the remaining 20% of an investment manager of a fund of hedge funds. In conjunction with this transaction, the Company recorded $8 in additional indefinite-life management contracts associated with alternative investment products.
Short-Term Borrowings
In December 2006, the Company entered into an unsecured revolving credit facility with a syndicate of banking institutions. This facility, as amended in February 2007 (the “2006 facility”), permitted the Company to borrow up to $800.
In August 2007, the Company terminated the 2006 facility and entered into a new five year $2,500five-year $2.5 billion unsecured revolving credit facility (the “2007 facility”), which permits the Company to request an additional $500 million of borrowing capacity, subject to lender credit approval, up to a maximum of $3,000.$3.0 billion. The 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at December 31, 2008.2010.
The 2007 facility was used to refinance the 2006 facility and provideprovides back-up liquidity, fundfunds ongoing working capital for general corporate purposes and fundfunds various investment opportunities. At December 31, 2008,2010, the Company had $200$100 million outstanding under the 2007 facility with an interest rate of 0.61%0.47% and a maturity date during January 2009. During January 2009, the Company rolled over the $200 in borrowings with an interest rate of 0.56% and a maturity date during February 2009.28, 2011.
Lehman Commercial Paper Inc. has a $140 million participation under the 2007 Facility;facility; however BlackRock does not expect that Lehman Commercial Paper Inc. will honor its commitment to fund additional amounts. Bank of America has a $140 million participation under the 2007 facility.
Japan Commitment-line
In December 2007, in order to support two enhanced cash funds that BlackRock manages, BlackRock elected to procure two letters of credit under the existing 2007 facility in an aggregate amount of $100. In December 2008, the letters of credit were terminated.
In June 2008,September 2010, BlackRock Japan Co., Ltd., a wholly ownedwholly-owned subsidiary of the Company, entered intorenewed a five billion Japanese yen commitment-line agreement with a banking institution (the “Japan Commitment-line”). The term of the renewed Japan Commitment-line is one year and interest will accrue interest on outstanding borrowings at the applicable Japanese short-term prime rate. The Japan Commitment-line is intended to provide liquidity and flexibility for operating requirements in Japan. At December 31, 2008,2010, the Company had no borrowings outstanding onunder the Japan Commitment-line.
F-47
BlackRock, Inc.Convertible Debentures
Notes toThe maturity amount and carrying value of the Consolidated Financial Statements
(Dollar amounts2.625% convertible debentures due in millions, except share data or as otherwise noted)
Long-Term Borrowings
Long-term borrowings2035 included the following:
| December 31, | ||||||
| 2008 | 2007 | |||||
6.25% Senior notes due in 2017 | $ | 695 | $ | 695 | ||
2.625% Convertible debentures due in 2035 | 249 | 250 | ||||
Other | 2 | 2 | ||||
Total long-term borrowings | $ | 946 | $ | 947 | ||
At December 31, 2008, the estimated fair value of the senior notes and convertible debentures was $655 and $344, respectively. The fair value for the senior notes and convertible debentures was estimated using an applicable bond index and market prices at the end of December 31, 2008.
Long-term notes
In September 2007, the Company issued $700 in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “Notes”). The Notes were issued at a discount of $6, which is being amortized over their ten-year term. The Company incurred approximately $4 in debt issuance costs, which are included in other assets on the consolidated statements of financial condition and are being amortized over the term of the Notes.
Convertible debentures
| (Dollar amounts in millions) | ||||||||
| December 31, 2010 | December 31, 2009 | |||||||
Maturity amount / Carrying value | $ | 67 | $ | 243 | ||||
Fair value | $ | 128 | $ | 486 | ||||
In February 2005, the Company issued $250 aggregate principal amountmillion of convertible debentures (the “Debentures”), due in 2035 and bearing interest at a rate of 2.625% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year,year.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
13. Borrowings (continued)
Convertible Debentures (continued)
The Company retrospectively adopted the requirements of ASC 470-20 on January 1, 2009 (see Note 2, Significant Accounting Policies, for further discussion) resulting in a total cumulative impact of a $9 million reduction to retained earnings at December 31, 2008. The effective borrowing rate for nonconvertible debt at the time of issuance was estimated to be 4.3%, which resulted in $18 million of the $250 million initial aggregate principal amount of the Debentures issued, or $12 million after tax, being attributable to equity. The Company recognized interest expense of $2 million, $10 million and commenced August 15, 2005.$10 million for years ended December 31, 2010, 2009 and 2008, respectively, comprised of $2 million, $6 million and $7 million related to the coupon and less than $1 million, $4 million and $3 million related to amortization of the discount for the years ended December 31, 2010, 2009, and 2008 respectively. As of March 31, 2010, the initial $18 million debt discount was fully amortized.
Prior to February 15, 2009, the Debentures may becould have been convertible at the option of the holder at a December 31, 2008 conversion rate of 9.9639 shares of common stock per one dollar principal amount of Debentures under certain circumstances. The Debentures will be convertible into cash and, in some situations as described below, additional shares of the Company’s common stock, if during the five business day period after any five consecutive trading day period the trading price per Debenture for each day of such period is less than 103% of the product of the last reported sales price of BlackRock’s common stock and the conversion rate of the DebenturesCommencing on each such day or upon the occurrence of certain other corporate events, such as a distribution to the holders of BlackRock common stock of certain rights, assets or debt securities, if the Company becomes party to a merger, consolidation or transfer of all or substantially all of its assets or a change of control of the Company. On and after February 15, 2009, the Debentures will be convertible into cash at any time prior to maturity at the option of the holder the Debentures became convertible into cash and in some situations as described below, additional shares of the Company’s common stock at the current conversion rate.
F-48
BlackRock, Inc.
Notes to During the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Long-Term Borrowings: (continued)
Convertible debentures (continued)year ended December 31, 2010, holders of $176 million of Debentures converted their holdings into cash and approximately 942,000 shares.
At the time the Debentures are tendered for conversion, for each one dollar principal amount of Debentures converted, a holder shall be entitled to receive cash and shares of BlackRock common stock, if any, the aggregate value of which (the “conversion value”) will be determined by multiplying the applicable conversion rate by the average of the daily volume weighted average price of BlackRock common stock for each of the ten consecutive trading days beginning on the second trading day immediately following the day the Debentures are tendered for conversion (the “ten day“ten-day weighted average price”). The Company will deliver the conversion value to holders as follows: (1) an amount in cash (the “principal return”) equal to the lesser of (a) the aggregate conversion value of the Debentures to be converted and (b) the aggregate principal amount of the Debentures to be converted, and (2) if the aggregate conversion value of the Debentures to be converted is greater than the principal return, an amount in shares (the “net shares”), determined as set forth below, equal to such aggregate conversion value less the principal return (the “net share amount”). The number of net shares to be paid will be determined by dividing the net share amount by the ten-day weighted average price. In lieu of delivering fractional shares, the Company will deliver cash based on the ten-day weighted average price.
The conversion rate for the Debentures is subject to adjustments upon the occurrence of certain corporate events, such as a change of control of the Company eachor payment of quarterly dividends greater than $0.30 per share, the issuance of certain rights or warrants to holders of, or subdivisions on, BlackRock’s common stock, a distribution of assets or indebtedness to holders of BlackRock common stock or a tender offer on the common stock. The conversion rate adjustments vary depending upon the specific corporate event necessitating the adjustment and serve to ensure that any economic gains realized by the Company’s stockholders are shared with the holders of the Debentures.share. The initial conversion rate of 9.7282 was determined by the underwriters based on market conditions and has been subsequently revised to 9.963910.2628 as a result of dividends paid by the Company that were in excess of $0.30 per share.
If
BlackRock, Inc.
Notes to the effective date or anticipated effective date of certain transactions that constitute a change of control occurs on or prior to February 15, 2010, under certain circumstances, the Company will provide for a make-whole amount by increasing, for a certain time period, the conversion rate by a number of additional shares of common stock for any conversion ofConsolidated Financial Statements
13. Borrowings (continued)
Convertible Debentures in connection with such transactions. The amount of additional shares will be determined based on the price paid per share of BlackRock common stock in the transaction constituting a change of control and the effective date of such transaction. However, if such transaction constitutes a public acquirer change of control, the Company may elect to issue shares of the acquiring company rather than BlackRock shares.(continued)
Beginning on February 20, 2010, the Company maywas able to redeem any of the Debentures at a redemption price of 100% of their principal amount, plus accrued and unpaid interest, including contingent interest and accrued and unpaid liquidated damages, if any.any, upon not more than 60 but not less than 30 days notice. Holders of the Debentures have the right to require the Company to repurchase the Debentures for cash on February 15, 2010, 2015, 2020, 2025 and 2030. In addition, holders of the Debentures may require the Company to repurchase the Debentures for cash at a repurchase price equal to 100% of their principal amount plus accrued and unpaid interest, including contingent interest and accrued and unpaid liquidated damages, if any, (i) upon a change of control of the Company or (ii) if BlackRock’s common stock is neither listed for trading on the New York Stock Exchange nor approved for trading on the NASDAQ.
Long-Term Borrowings
F-49
| (Dollar amounts in millions) | ||||||||||||||||||||
| 2.25% Notes due 2012 | 3.50% Notes due 2014 | 6.25% Notes due 2017 | 5.00% Notes due 2019 | Total Long-term Borrowings | ||||||||||||||||
Maturity amount | $ | 500 | $ | 1,000 | $ | 700 | $ | 1,000 | $ | 3,200 | ||||||||||
Unamortized discount | (1 | ) | (1 | ) | (4 | ) | (2 | ) | (8 | ) | ||||||||||
Carrying value | $ | 499 | $ | 999 | $ | 696 | $ | 998 | $ | 3,192 | ||||||||||
Fair value | $ | 511 | $ | 1,040 | $ | 789 | $ | 1,041 | $ | 3,381 | ||||||||||
2017 Notes
In September 2007, the Company issued $700 million in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “2017 Notes”). Interest is payable semi-annually in arrears on March 15 and September 15 of each year, or approximately $44 million per year. The 2017 Notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a “make-whole” redemption price. The 2017 Notes were issued at a discount of $6 million, which is being amortized over their ten-year term. The Company incurred approximately $4 million of debt issuance costs, which are being amortized over ten years. As of December 31, 2010, $3 million of unamortized debt issuance costs were included in other assets on the consolidated statement of financial condition.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
13. Borrowings (continued) |
Long-Term Borrowings: (continued)
Convertible debenturesLong-Term Borrowings (continued)
The
2012, 2014 and 2019 Notes
In December 2009, the Company is obligated to pay contingent interest, which is the amount of interest payable to holders of the Debentures for any six-month period from February 15 to August 15 or from August 15 to February 15, with the initial six-month period commencing February 15, 2010, if the trading price of the Debentures for each of the ten trading days immediately preceding the first day of the applicable six-month period equals 120% or more of theissued $2.5 billion in aggregate principal amount of unsecured and unsubordinated obligations. These notes were issued as three separate series of senior debt securities including $0.5 billion of 2.25% notes, $1.0 billion of 3.50% notes and $1.0 billion of 5.0% notes maturing in December 2012, 2014 and 2019, respectively. Net proceeds of this offering were used to repay borrowings under the Debentures. During any period when contingent interestCP Program, which was used to finance a portion of the BGI Transaction, and for general corporate purposes. Interest on these notes is payable the contingent interest payablesemi-annually in arrears on June 10 and December 10 of each year in an amount of approximately $96 million per Debenture will equal 0.25% of the average trading price of the Debentures during the ten trading days immediately preceding the first day of the applicable six-month interest period.
On October 16, 2008, the Debentures became convertibleyear. These notes may be redeemed prior to maturity at any time in whole or in part at the option of the holders into cash and sharesCompany at a “make-whole” redemption price. These notes were issued collectively at a discount of $5 million which is being amortized over the respective terms of the Company’s common stock, afternotes. The Company incurred approximately $13 million of debt issuance costs, which are being amortized over the trustee determined thatrespective terms of these notes. As of December 31, 2010, $11 million of unamortized debt issuance costs were included in other assets on the trading price forconsolidated statement of financial condition.
The carrying value and fair value of long-term borrowings estimated using market prices at December 31, 2009 included the debentures on each day of a five consecutive trading day period was less than 103% of the product of the last reported sale price of the Company’s common stock on such date and the conversion rate on such date. The conversion period ended on October 30, 2008 after the Debentures failed to satisfy the trading price condition on October 24, 2008. During the conversion period holders of $0.5 of Debentures elected to convert their holdings into cash and shares.following:
| (Dollar amounts in millions) | ||||||||||||||||||||
| 2.25% Notes due 2012 | 3.50% Notes due 2014 | 6.25% Notes due 2017 | 5.00% Notes due 2019 | Total Long-term Borrowings | ||||||||||||||||
Maturity amount | $ | 500 | $ | 1,000 | $ | 700 | $ | 1,000 | $ | 3,200 | ||||||||||
Unamortized discount | (1 | ) | (1 | ) | (4 | ) | (3 | ) | (9 | ) | ||||||||||
Carrying value | $ | 499 | $ | 999 | $ | 696 | $ | 997 | $ | 3,191 | ||||||||||
Fair value | $ | 497 | $ | 987 | $ | 751 | $ | 987 | $ | 3,222 | ||||||||||
14. Commitments and Contingencies
Operating Lease Commitments
The Company leases its primary office space under agreements which expire through 2023.2035. Future minimum commitments under these operating leases are as follows:
| (Dollar amounts in millions) | |||||||
Year | Amount | Amount | |||||
2009 | $ | 62 | |||||
2010 | 58 | ||||||
2011 | 55 | $ | 131 | ||||
2012 | 50 | 117 | |||||
2013 | 47 | 130 | |||||
2014 | 115 | ||||||
2015 | 106 | ||||||
Thereafter | 274 | 903 | |||||
| $ | 546 | $ | 1,502 | ||||
Rent expense and certain office equipment expense under agreements amounted to $158 million, $87 million and $92 $85 and $43million for the years ended December 31, 2008, 20072010, 2009 and 2006,2008, respectively.
The above lease commitments include facilities which currently are leased from Merrill Lynch, a related party to BlackRock. Future lease commitments on such leases are $2 in 2009, $1 in 2010, $1 in 2011, $1 in 2012 and $1 in 2013, and $3 thereafter.
F-50
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)14. Commitments and Contingencies (continued)
Purchase Commitments
Investment / Loan Commitments
During 2010, the Company entered into a purchase obligation for construction services related to Drapers Gardens of approximately $67 million. The Company has certainincurred $4 million of construction services, which is recorded in property and equipment, during the year ended December 31, 2010 resulting in a remaining obligation of approximately $63 million.
Investment Commitments
At December 31, 2010, the Company had $183 million of various capital commitments to fund sponsored investment and loan commitments relating primarily to real estate products, hedge funds, including funds of private equity funds, real estate funds and a warehouse entity established for certain private equitydistressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third party funds as third party non-controlling interest holders have the legal obligation to fund the respective commitments of such funds of funds. Dates shown below representGenerally, the expiration datestiming of the commitments. Amounts to be funded generallyfunding of these commitments is unknown and the commitments are callable on demand at any pointtime prior to the expiration of the commitment. These unfunded commitments are not recorded on the Company’s consolidated statements of financial condition. These commitments do not include potential future commitments approved by the Company’s Capital Committee, but which are not yet legally binding. The Company hasintends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.
BlackRock, Inc.
Notes to the following unfunded investment and loan commitments at December 31, 2008:Consolidated Financial Statements
Year of Expiration | Amount | ||
2009 | $ | 9 | |
2010 | 49 | ||
2011 | 16 | ||
2012 | 1 | ||
2013 | 34 | ||
Thereafter | 192 | ||
Total | $ | 301 | |
14. Commitments and Contingencies (continued)
Contingencies
Contingent Payments Related to Business Acquisitions
On October 1, 2007, the Company acquired the fund of funds business of Quellos. As part of this transaction, Quellos (See Note 3). Quellos may beis entitled to receive two contingent payments upon achieving certain investment advisory revenue measures through December 31, 2010, totaling up to an additional $969 million in a combination of cash and stock. The first contingent payment of up to $374, is payablewas paid in 2009 up to 25% in BlackRock common stock and the remainder in cash. The second contingent payment, of up to $595 ismillion, would have been payable in cash in 2011.
During 2009, the Company determined the first contingent payment to be $219 million, of which $11 million was previously paid in cash during 2008. Of the remaining $208 million, $156 million was paid in cash and $52 million was paid in common stock, or approximately 330,000 shares based on a price of $157.33 per share. Quellos may also bewas entitled to a “catch-up” payment related to the first contingent payment if certain performance measures arewere met in 2011 to the extent that2010 as the value of the first contingent payment iswas less than $374.$374 million. At December 31, 2010, the base and performance fee measures were not achieved and therefore the remaining contingent payments will not occur.
In connection with the Impact Investing acquisition, the Company may be required to make several additional contingent payments upon completion of certain operating measures through 2010, totaling up to $12. Currently, the payments are anticipated to be recorded as employee compensation.
On January 31, 2005, the Company closed the acquisition of SSR, the holding company of State Street Research &and Management Company, and SSR Realty Advisors, Inc. (renamed BlackRock Realty Advisors, Inc., “Realty”), from MetLife, Inc. (“MetLife”) for an adjusted purchase price of $265which closed in cash and 550,000 shares of BlackRock restricted common stock. The stock purchase agreement provides for two contingent payments. ForJanuary 2005, the firstCompany made a final contingent payment MetLife received 32.5%in August 2010 of performance fees earned, as of March 31, 2006, from a large institutional real estate client. In 2006, the Company incurred and paid a fee sharing expense of $34 related to this arrangement. For the second contingent payment, on the fifth anniversary of the closing of the SSR Transaction, MetLife may receive an additional payment up to a maximum of $10approximately $8 million based on the Company’s retained AUMassets under management associated with the MetLife, Inc. defined benefit and defined contribution plans
F-51
BlackRock, Inc.plans.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Capital Support Agreements
In December 2007, BlackRock entered into capital support agreements, up to $100 million, with two enhanced cash funds. Pursuant to theThese capital support agreements BlackRock has agreed to make subsequent capital contributions to the funds to cover realized losses, up to $100, related to specified securities heldwere backed by the two enhanced cash funds. The termsletters of credit issued under BlackRock’s revolving credit facility. In December 2008, the capital support agreements were renewed in December 2008modified to cover realized lossesbe up to $45 million and will expire atwere no longer backed by the endletters of each calendar month unless renewed by BlackRock.credit. In January and May 2009, onethe capital support agreement wasagreements were terminated due to the closure of the related funds. During the six months ended June 30, 2009, the Company provided approximately $4 million of capital contributions to the funds leaving only oneunder the capital support agreement, with a total $20 potentialagreements. At December 31, 2008, the derivative liability for the fair value of the capital support agreements for the two funds totaled approximately $18 million. The fair value of these liabilities increased and decreased as BlackRock’s obligation outstanding.under the guarantee fluctuated based on the fair value of the derivative. Upon closure of the funds, the liability decreased $11 million to zero, while the change in the liability was included in general and administration expenses.
Other Contingent Payments
The Company acts as the portfolio manager in a series of credit default swap transactions and has a maximum potential exposure of $17 million under a credit default swap between the Company and Citibank. See Note 79, Derivatives and Hedging, for further discussion of this transaction and the related commitment.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
14. Commitments and Contingencies (continued)
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 cooperate with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations and other litigation arising in connection with BlackRock’s activities. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which potentially could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.
Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits will have a material adverse effect on BlackRock’s earnings, financial position, or cash flows, although, at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations in any future reporting period.
Indemnifications
In the ordinary course of business, BlackRock enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.
Under the Transaction Agreementtransaction agreement in the MLIM Transaction, the Company has agreed to indemnify Merrill Lynch for losses it may incur arising from (1) any alleged or actual breach, failure to comply, violation or other deficiency with respect to any regulatory or fiduciary requirements relating to the operation of BlackRock’s business, (2) any fees or expenses incurred or owed by BlackRock to any brokers, financial advisors or comparable other persons retained or employed by BlackRock in connection with the MLIM Transaction, and (3) certain specified tax covenants.
Under the transaction agreement in the BGI Transaction, the Company has agreed to indemnify Barclays for losses it may incur arising from (1) breach by the Company of certain representations, (2) breach by the Company of any covenant in the agreement, (3) liabilities of the entities acquired in the transaction other than liabilities assumed by Barclays or for which it is providing indemnification, and (4) certain taxes.
Management believes that the likelihood of any liability arising under thesethe MLIM Transaction or the BGI Transaction indemnification provisions is remote. Management cannot estimate any potential maximum exposure due both to the remoteness of any potential claims and the fact that items that would be included within any such calculated claim would be beyond the control of BlackRock. Consequently, no liability has been recorded on the consolidated statements of financial condition.
F-52
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
| 15. Stock-Based Compensation |
The components of the Company’s stock-based compensation expense are comprised of the following:
| Year ended December 31, | |||||||||||||||||||||
| (Dollar amounts in millions) | Year ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2010 | 2009 | 2008 | ||||||||||||||||
Stock-based compensation: | |||||||||||||||||||||
Restricted stock and RSUs | $ | 209 | $ | 122 | $ | 48 | $ | 375 | $ | 246 | $ | 209 | |||||||||
Long-term incentive plans funded by PNC | 58 | 59 | 59 | ||||||||||||||||||
Stock options | 10 | 13 | 13 | 12 | 12 | 10 | |||||||||||||||
Long-term incentive plans funded by PNC | 59 | 53 | 50 | ||||||||||||||||||
ESPP and other | — | — | 9 | ||||||||||||||||||
Total stock-based compensation | $ | 278 | $ | 188 | $ | 120 | $ | 445 | $ | 317 | $ | 278 | |||||||||
Stock Award and Incentive Plan
Pursuant to the BlackRock, Inc. 1999 Stock Award and Incentive Plan (the “Award Plan”), options to purchase shares of the Company’s common stock at an exercise price not less than the market value of BlackRock’s common stock on the date of grant in the form of stock options, restricted stock or RSUs may be granted to employees and non-employee directors. A maximum of 17,000,00027,000,000 shares of common stock are authorized for issuance under the Award Plan. Of this amount, 4,381,6469,957,638 shares remain available for future awards at December 31, 2008.2010. Upon exercise of employee stock options, the issuance of restricted stock or the vesting of RSUs, the Company issues shares out of treasury, to the extent available.
F-53
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Stock Options
Stock option grants were made to certain employees pursuant to the Award Plan in 1999 through 2003. Options granted have a ten-year life, vest ratably over periods ranging from two to five years and become exercisable upon vesting. Prior to the January 2007 grant described below, the Company had not granted any stock options since 2003. Stock option activity for the years ended December 31, 2008, 2007 and 2006 is summarized below:
Outstanding at | Shares under option | Weighted average exercise price | ||||
December 31, 2005 | 4,577,641 | $ | 36.81 | |||
Exercised | (113,572 | ) | $ | 33.23 | ||
Forfeited | (6,400 | ) | $ | 37.36 | ||
December 31, 2006 | 4,457,669 | $ | 36.90 | |||
Granted | 1,545,735 | $ | 167.76 | |||
Exercised | (1,899,239 | ) | $ | 36.96 | ||
Forfeited | (3,000 | ) | $ | 37.36 | ||
December 31, 2007 | 4,101,165 | $ | 86.19 | |||
Exercised | (662,013 | ) | $ | 36.36 | ||
Forfeited | (298,635 | ) | $ | 167.76 | ||
December 31, 2008(1) | 3,140,517 | $ | 88.82 | |||
|
|
The aggregate intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $113, $268 and $12, respectively.
F-54
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Stock Options (continued)
Stock options outstanding and exercisable at December 31, 2008 are as follows:
| Options Outstanding | Options Exercisable | ||||||||||||||||
Exercise | Options Outstanding | Weighted Average Remaining Life (years) | Weighted Average Exercise Price | Options Exercisable | Weighted Average Exercise Price | Weighted Average Remaining Life (years) | Aggregate Intrinsic Value of Exercisable Shares | ||||||||||
| (per share) | |||||||||||||||||
| $14.00 | 80,636 | 0.75 | $ | 14.00 | 80,636 | $ | 14.00 | 0.75 | $ | 9,688 | |||||||
| $37.36 | 1,603,781 | 3.79 | $ | 37.36 | 1,603,781 | $ | 37.36 | 3.79 | 155,230 | ||||||||
| $43.31 | 212,000 | 1.96 | $ | 43.31 | 212,000 | $ | 43.31 | 1.96 | 19,258 | ||||||||
| $167.76 | 1,244,100 | 8.09 | $ | 167.76 | — | — | — | ||||||||||
| 3,140,517 | 5.29 | $ | 88.82 | 1,896,417 | $ | 37.03 | 3.45 | $ | 184,176 | ||||||||
On January 31, 2007, the Company awarded options to purchase 1,545,735 shares of BlackRock common stock to certain executives as long-term incentive compensation. The options vest on September 29, 2011, provided that the Company has actual GAAP earnings per share of at least $5.20 in 2009, $5.52 in 2010 or $5.85 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards. The options have a strike price of $167.76, which was the closing price of the shares on the grant date. Fair value, as calculated in accordance with a modified Black-Scholes model, was approximately $45.88 per option. The fair value of the options is being amortized over the vesting period as exceeding the performance hurdles was deemed probable of occurring.
Assumptions used in calculating the grant-date fair value for the stock options issued in January 2007 were as follows:
| ||
| ||
| ||
| ||
|
F-55
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Stock Options (continued)
The Company’s expected option term was derived using the mathematical average between the earliest vesting date and the option expiration date in accordance with SEC Staff Accounting Bulletin No. 107. The Company’s expected stock volatility assumption was based upon historical stock price fluctuations of BlackRock’s common stock. The dividend yield assumption was derived using estimated dividends over the expected term and the stock price at the date of grant. The risk free interest rate is based on the U.S. Treasury yield at date of grant.
The year 2008 included a cumulative adjustment to the estimated forfeiture rate for unvested stock options as a result of additional data on actual forfeiture activity.
As of December 31, 2008, the Company had $32 in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 2.8 years.
Restricted Stock and RSUs
Pursuant to the Award Plan, restricted stock grants and RSUs may be granted to certain employees. RestrictedSubstantially all restricted stock was issued for stock awards prior to 2006. RSUs were issued for the majority of grants in 2006, 2007 and 2008. These restricted shares and RSUs vest over periods ranging from one to five years and are expensed onusing the straight-line method over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. Dividend equivalents onPrior to 2009, the Company awarded restricted stock and RSUs with nonforfeitable dividend equivalent rights. Restricted stock and RSUs awarded in 2009 and 2010 are paid to employees based onnot considered participating securities as the dividend payment date.equivalents are subject to forfeiture prior to vesting of the award.
F-56
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)15. Stock-Based Compensation (continued)
Restricted Stock and RSUs (continued)
Restricted stock and RSU activity for the years ended December 31, 2008, 20072010, 2009 and 20062008 is summarized below:
Outstanding at | Unvested Restricted Stock and Units | Weighted Average Grant Date Fair Value | Restricted Stock and Units | Weighted Average Grant Date Fair Value | ||||||||||
December 31, 2005 | 291,648 | $ | 71.30 | |||||||||||
Granted | 1,341,975 | $ | 137.97 | |||||||||||
Converted | (113,456 | ) | $ | 68.15 | ||||||||||
Forfeited | (4,277 | ) | $ | 113.13 | ||||||||||
December 31, 2006 | 1,515,890 | $ | 130.49 | |||||||||||
Granted | 2,551,913 | $ | 167.64 | |||||||||||
Converted | (274,164 | ) | $ | 104.15 | ||||||||||
Forfeited | (84,631 | ) | $ | 159.95 | ||||||||||
December 31, 2007 | 3,709,008 | $ | 158.01 | 3,709,008 | $ | 158.01 | ||||||||
Granted | 1,618,161 | $ | 201.80 | 1,618,161 | $ | 201.80 | ||||||||
Converted | (468,046 | ) | $ | 146.69 | (468,046 | ) | $ | 146.69 | ||||||
Forfeited | (255,170 | ) | $ | 163.64 | (255,170 | ) | $ | 163.64 | ||||||
December 31, 2008(1) | 4,603,953 | $ | 174.24 | |||||||||||
December 31, 2008 | 4,603,953 | $ | 174.24 | |||||||||||
Granted | 1,869,849 | $ | 118.43 | |||||||||||
Converted | (894,909 | ) | $ | 178.53 | ||||||||||
Forfeited | (218,430 | ) | $ | 157.21 | ||||||||||
December 31, 2009 | 5,360,463 | $ | 154.75 | |||||||||||
Granted | 3,283,321 | $ | 228.77 | |||||||||||
Converted | (1,400,390 | ) | $ | 156.09 | ||||||||||
Forfeited | (500,925 | ) | $ | 198.86 | ||||||||||
December 31, 2010 (1) | 6,742,469 | $ | 187.24 | |||||||||||
(1) | At December 31, |
The Company values restricted stock and RSUs at their grant-date fair value as measured by BlackRock’s common stock price. In January 2006, the Company issued approximately 299,400 RSUs to certain employees at a total fair value of approximately $34. The awards vest evenly over three years. In November 2006, the Company granted approximately 1,013,600 RSUs, which vest after five years as incentive awards to former MLIM employees remaining with BlackRock after the closing of the MLIM Transaction.
On January 25, 2007, the Company issued approximately 901,200 RSUs to employees in conjunction with their annual incentive compensation awards. The RSU awards vest over three years through January 2010. The value of the RSUs was calculated using BlackRock’s closing stock price on the date of grant, or $169.70. The grant date fair value of the RSUs is being amortized into earnings on the straight-line method over the requisite service period, net of expected forfeitures, for each separately vesting portion of the award as if the award was, in substance, multiple awards. In addition, in January 2007, the Company granted 1,559,022 of RSUs as long-term incentive compensation, which will be funded by shares currently held by PNC.
In January 2008 and 2009, the Company granted under the Award Plan 295,633 and 23,417 RSUs, respectively, as long-term incentive compensation, which will be partially funded by shares currently held by PNC (seeLong-Term Incentive Plans Funded by PNC below). The awards cliff vest five years from the date of grant.
F-57
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Restricted Stock and RSUs (continued)
In January 2008 and 2009, the Company granted 1,212,759 and 1,789,685 RSUs, respectively, to employees as part of annual incentive compensation under the Award Plan that vest ratably over three years from the date of grant.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
15. Stock-Based Compensation (continued)
Restricted Stock and RSUs (continued)
In January 2010, the Company granted the following awards under the Award Plan:
846,884 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant.
256,311 RSUs to employees that cliff vest on January 31, 2012, the end of the service condition, as BlackRock had actual GAAP EPS in excess of $6.13 in 2010. The RSUs may not be sold before the one-year anniversary of the vesting date.
1,497,222 RSUs to employees that vest 50% on both January 31, 2013 and 2014, the end of the service condition, as BlackRock had actual GAAP EPS in excess of $6.13 in 2010.
124,575 shares of restricted common stock to employees that vest in tranches on January 31, 2010, 2011 and 2012. The restricted common stock may not be sold before the one-year anniversary of each vesting date.
In May 2010, the Company granted 198,977 RSUs to employees that cliff vest on January 31, 2012, the end of the service condition, as BlackRock had actual GAAP EPS in excess of $6.13 in 2010. The RSUs may not be sold before the one-year anniversary of the vesting date.
At December 31, 2008,2010, there was $403 of$528 million in total unrecognized stock-based compensation costexpense related to unvested restricted stock and RSUs. The unrecognized compensation cost is expected to be recognized over athe remaining weighted averageweighted-average period of 2.51.4 years.
In January 2011, the Company granted the following awards under the Award Plan:
1,594,259 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant.
609,733 RSUs to employees that cliff vest 100% on January 31, 2014.
Long-Term Incentive Plans Funded by PNC
Under a share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”). In February 2009, the share surrender agreement was amended for PNC to provide BlackRock series C non-voting participating preferred stock to fund the remaining committed shares.
The BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan (the “2002 LTIP Awards”) permitted the grant of up to $240 million in deferred compensation awards, of which the Company previously granted approximately $233.$233 million. Approximately $208 million of the 2002 LTIP Awards were paid in January 2007. The 2002 LTIP Awards were payablesettled for approximately 16.7% in cash and the remainder in approximately 1 million shares of BlackRock common stock contributed by PNC and distributed to plan participants. Approximately $11During the year ended December 31, 2010, the remaining $6 million of previously issued 2002 LTIP Awards will resultwere settled in the settlement ofcash and BlackRock shares held by PNC through 2010 at a conversion price approximating the market price on the settlement date. The fair value of the remaining 2002 LTIP Awards are accrued prior to settlement over the remaining service period in accrued compensation and benefits on the consolidated statements of financial condition.
The settlement of the 2002 LTIP Awards in January 2007 resulted in the surrender by PNC of approximately 1,000,000 shares of BlackRock stock. Under the terms of the 2002 LTIP Awards, employees elected to put approximately 95% of the stock portion of the awards back to the Company at a total fair market value of approximately $166. On the payment date, the Company recorded a capital contribution from PNC for the amount of shares funded by PNC. For the shares not put back
BlackRock, Inc.
Notes to the Company, no dilution resulted from the delivery of stock pursuant to the awards since they were funded by shares heldConsolidated Financial Statements
15. Stock-Based Compensation (continued)
Long-Term Incentive Plans Funded by PNC and were issued and outstanding at December 31, 2006. Put elections made by employees were accounted for as treasury stock repurchases and are accretive to the Company’s earnings per share. The shares repurchased were retained as treasury stock.(continued)
During 2007, the Company granted additional long-term incentive awards, out of the Award Plan, of approximately 1,600,0001.6 million RSUs, that will be settled using BlackRock shares held by PNC in accordance with the share surrender agreement. The RSU awards will vest on September 29, 2011, provided thatthe end of the service condition, as BlackRock hashad actual GAAP earnings per shareEPS in excess of at least $5.20, in 2009, $5.52 in 2010 or $5.85 in 2011 or has attained an alternativethe applicable performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards.in 2009. The value of the RSUs was calculated using BlackRock’s closing stock price on the date of grant. The grant date fair value of the RSUs is being amortized as an expense onusing the straight-line method over the vesting period, net of expected forfeitures. The maximum value of awards that may be funded by PNC, prior to the earlier of September 29, 2011 or the date the performance criteria are met, is approximately $271 million, all of which has beenwas granted as of December 31, 2008.2009.
Subsequent to September 29, 2011, the remaining shares committed by PNC, shares, of approximately 1,400,000,1.3 million, would be available forto fund future long-term incentive awards.
Stock Options
F-58
Outstanding at | Shares under option | Weighted average exercise price | ||||||
December 31, 2007 | 4,101,165 | $ | 86.19 | |||||
Exercised | (662,013 | ) | $ | 36.36 | ||||
Forfeited | (298,635 | ) | $ | 167.76 | ||||
December 31, 2008 | 3,140,517 | $ | 88.82 | |||||
Exercised | (490,617 | ) | $ | 34.92 | ||||
Forfeited | (8,064 | ) | $ | 167.76 | ||||
December 31, 2009 | 2,641,836 | $ | 98.59 | |||||
Exercised | (288,100 | ) | $ | 39.35 | ||||
Forfeited | (9,002 | ) | $ | 167.76 | ||||
December 31, 2010 (1) | 2,344,734 | $ | 105.60 | |||||
| (1) | At December 31, 2010, approximately 2.3 million options were vested or are expected to vest. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)15. Stock-Based Compensation (continued)
Stock Options (continued)
Employee The aggregate intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008 was $46 million, $63 million and $113 million, respectively.
Stock Purchase Planoptions outstanding and exercisable at December 31, 2010 were as follows:
Through August 2006,
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||
| (Dollar amounts in millions, | ||||||||||||||||||||||||||||||
| except per share data) | Weighted | Weighted | Aggregate | |||||||||||||||||||||||||||
| Exercise Prices | Options Outstanding | Average Remaining Life (years) | Weighted Average Exercise Price | Options Exercisable | Weighted Average Exercise Price | Average Remaining Life (years) | Intrinsic Value of Exercisable Shares | |||||||||||||||||||||||
| (per share) | ||||||||||||||||||||||||||||||
| $ | 37.36 | 1,117,700 | 1.79 | $ | 37.36 | 1,117,700 | $ | 37.36 | 1.79 | $ | 171 | |||||||||||||||||||
| $ | 167.76 | 1,227,034 | 6.09 | $ | 167.76 | 45,023 | $ | 167.76 | 6.09 | 1 | ||||||||||||||||||||
| 2,344,734 | 4.04 | $ | 105.60 | 1,162,723 | $ | 42.41 | 1.96 | $ | 172 | |||||||||||||||||||||
As of December 31, 2010, the termsCompany had $9 million in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining period of the BlackRock 0.8 years.
Employee Stock Purchase Plan (“ESPP”) allowed eligible employees to purchase shares of the Company’s common stock at 85% of the lesser of fair market value on the first or last day of each six-month offering period. Eligible employees could not purchase more than 500 shares of common stock in any six-month offering period. In addition, for any calendar year in which the option to purchase shares is outstanding, Section 423(b)(8) of the Internal Revenue Code restricts an ESPP participant from purchasing more than $25 thousand worth of common stock based on its fair market value. The Company used the fair value method of measuring compensation cost pursuant to SFAS No. 123 and incurred ESPP-related compensation expense of approximately $1 during the year ended December 31, 2006.
The ESPP was suspended in August 2006 and amended effective January 2007.
Effective January 2007, the terms of the amended ESPP allowallows eligible employees to purchase the Company’s common stock at 95% of the fair market value on the last day of each three-month offering period. In accordance with SFAS No. 123R, ASC 718-10,Compensation – Stock Compensation,the Company willdoes not record compensation expense related to employees purchasing shares under the amended ESPP.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
16. Employee Benefit Plans
Involuntary Deferred Compensation PlanPlans
Effective January 2002, the Company adopted an Involuntary Deferred Compensation Plan (“IDCP”) for the purpose of providing deferred compensation and retention incentives to key officers and employees. The IDCP provided for a mandatory deferral of up to 15% of annual incentive compensation. For annual incentive awards for fiscal years prior to 2005, the mandatory deferral was matched by BlackRock in an amount equal to 20% of the deferral for employees with total compensation above certain levels. The matching contribution related to the mandatory deferral vests on the third anniversary of the deferral date. The Company funds the obligation through a rabbi trust established on behalf of the participants in the plan. No mandatory deferrals under the IDCP have been made since the annual incentive awards for fiscal year 2004.
During 2008, the IDCP was liquidated and all assets were distributed to the existing participants.
Voluntary Deferred Compensation Plan
Effective January 2002, theThe Company adopted a Voluntary Deferred Compensation Plan (“VDCP”) whichthat allows participants to elect to defer between 1% and 100% of that portion of the employee’stheir annual cash incentive compensation not mandatorily deferred under the IDCP or the Company’s RSUs.compensation. The participants must specify a deferral period of one, three, five or ten years. The Company funds the obligation through the establishment of a rabbi trust on behalf of the participants in the plan.plan’s participants.
Rabbi Trust
The rabbi trust established for the IDCP and VDCP, with assets totaling $49$66 million and $67$57 million as of December 31, 20082010 and 2007,2009, respectively, is reflected in investments on the Company’s consolidated statements of financial condition. Such investments are classified as trading and other investments. The corresponding liability balance of $41$66 million and $60$57 million as of December 31, 20082010 and 20072009, respectively, is reflected inon the Company’s consolidated statements of financial condition as accrued compensation and benefits. Earnings in the rabbi trust, including unrealized appreciation or depreciation, are reflected as non-operating income or loss(expense) and changes in the corresponding liability are reflected as employee compensation and benefits expense inon the accompanying consolidated statements of income.
F-59
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)16. Employee Benefit Plans (continued)
Deferred Compensation Plans (continued)
Defined BenefitOther Deferred Compensation Plans
Certain employeesThe Company has additional compensation plans for the purpose of providing deferred compensation and retention incentives to certain employees. For these plans, the final value of the Company participate in PNC’s non-contributory defined benefit pension plan. Effective July 1, 2004, PNC froze all accrued benefits relateddeferred amount to BlackRock participants under this plan and closed this plan to new BlackRock participants. Effective September 29, 2006,be distributed upon vesting is associated with the Company paid PNC $2 to assume all future liabilities under the Plan. BlackRock recorded pension expenses related to this planreturns of $0, $0 and $1certain investment funds. The liability balances for the years ended December 31, 2008, 2007 and 2006, respectively.
Through the MLIM Transaction, the Company assumed several defined benefit pension plans in Japan, Germany, Luxembourg and Jersey. All accrued benefits under these defined benefit plans are currently frozen and the plans are closed to new participants. In 2008 the defined benefit pension values in Luxembourg were transferred into a new defined contribution plan for such employees, removing future liabilities. Otherwise, participant benefits under the plans will not change with salary increases or additional years of service. The liabilities assumed under these plans were recorded as part of the purchase price allocation for the MLIM Transaction (see Note 3)$13 million and are immaterial to the Company’s 2008 and 2007 consolidated statements of financial condition.
Pension benefit costs for the State Street Research & Management Retirement Plan (“SSRM Plan”) are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension benefit costs may occur in the future due to changes in these assumptions, changes in the number of plan participants and changes in plan asset levels.
Effective July 1, 2007, the Company terminated the SSRM Plan. Upon termination of the SSRM Plan, participants were eligible to elect to receive a distribution of their benefits in the form of a one-time lump sum payment or an annuity, to be purchased from an insurer at market rates. Additional costs of termination were not material to the Company’s consolidated financial statements. The Company made a final contribution in connection with the termination of the SSRM Plan in the third quarter of 2008 of approximately $1 and distributed the remaining assets in the third quarter of 2008.
F-60
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Defined Contribution Plans
Until September 30, 2006, the Company’s employees participated in PNC’s Incentive Savings Plan (“ISP”), a defined contribution plan. Under the ISP, employee contributions of up to 6% of eligible compensation, as defined by the plan and subject to Internal Revenue Code limitations, were matched by the Company at 100%. Effective in October 2006, the Company established the BlackRock Retirement Savings Plan (“BRSP”). Active employee accounts in the ISP were transferred directly to the BRSP in October 2006. Under the BRSP, employee contributions of up to 6% of eligible compensation, as defined by the plan and subject to Internal Revenue Code limitations, are matched by the Company at 50%. As part of the BRSP, the Company also will make an annual retirement contribution on behalf of each eligible participant equal to no less than 3% of eligible compensation, plus an additional amount, determined in the discretion of the Company, not to exceed 2% of eligible compensation for a total contribution of no more than 5% of eligible compensation. The BRSP and ISP expense for the Company was $53, $31, and $11 for the years ended December 31, 2008, 2007 and 2006, respectively. Contributions to the ISP were matched by shares of BlackRock’s common stock in 2006. 500,000 shares of BlackRock’s common stock have been reserved for the ISP, of which approximately 493,000 shares have been issued$38 million as of December 31, 2008. Contributions to2010 and 2009, respectively, and are reflected in the BRSP are made in cash. Investments in BlackRock stock were transferredCompany’s statements of financial condition as accrued compensation and benefits. In January 2011, the Company granted approximately $36 million of additional deferred compensation which will fluctuate with investment returns and will vest ratably over three years from the ISP to the BRSP; however, no new investments in BlackRock stock or matching contributionsdate of stock are available in the BRSP.
BlackRock Investment Management (UK) Limited (“BIM”), a wholly-owned subsidiary of the Company, contributes to the BlackRock Group Personal Pension Plan a defined contribution plan for all employees of BIM. BIM contributes between 6% and 15% of each employee’s eligible compensation.
The Company assumed two 401(k) Plans covering employees of SSR and Realty (the “Research Plan” and “Realty Plan,” respectively) as a result of the SSR Transaction. Effective with the closing of the SSR Transaction, contributions ceased for all participants in the Research Plan and selected participants in the Realty Plan and the Research Plan was closed to new participants. All participants for which contributions ceased in either the Research Plan or Realty Plan, participated in the ISP through September 30, 2006 and became participants of the BRSP thereafter. For all employees who were active participants in the Realty Plan, employee contributions of up to 3% of eligible compensation, as well as an additional 50% of the next 2% of eligible compensation, subject to Internal Revenue Code limitations, were matched by the Company.
Effective November 1, 2007, the Company merged the assets of the Research Plan and select participant accounts of the Realty Plan into the BRSP.
F-61
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Deferred Compensation Plansgrant.
SSR and Realty havehad deferred compensation plans (collectively, the “SSR New Plan”) whichthat allowed participants to elect to defer a portion of their annual incentive compensation or commissions for either a fixed term or until retirement and invest the funds in specified investments. SSR has funded a portion of the obligation through the purchase of company-owned life insurance (“COLI”) policies to the benefit of SSR. The COLI assets are carried at fair value on the consolidated statementstatements of financial condition, and at December 31, 2008,2010 and 2009, the value of the COLI assets was $8$11 million and was$11 million, respectively, which were recorded in other assets. Changes in the cash surrender value of the COLI policies are recorded to non-operating income in(expense) on the consolidated statements of income. In addition, the Company has recorded a related obligation to repay the deferred incentive compensation, plus applicable earnings, to employees, which totaled $9$10 million and was$11 million which were recorded in accrued compensation and benefits on the consolidated statementstatements of financial condition as of December 31, 2008.2010 and 2009, respectively. Changes in the Company’s obligationobligations under the SSR New Plan,these plans, as a result of appreciation or depreciation of the underlying investments in an employee’s account, are recorded as compensation and benefits expense inon the consolidated statements of income. Effective March 2004 the SSR New PlanBoth plans no longer allowedallow participants to defer a portion of their annual incentive compensation or commissions.
Prior to 2003, SSR sponsored a deferred compensation plan (the “SSR Old Plan”) under which eligible participants could defer annual incentive compensation and commissions for either a fixed term or until retirement. Obligations under this plan were funded through split-dollar life insurance policies acquired by SSR
BlackRock, Inc.
Notes to the benefitConsolidated Financial Statements
16. Employee Benefit Plans (continued)
Defined Contribution Plans
BlackRock Retirement Savings Plan
Certain of the respective participant. SSR is entitledCompany’s employees participate in the BlackRock Retirement Savings Plan (“BRSP”). Under the BRSP, employee contributions of up to 6% of eligible compensation, as defined by the return of any premium paidplan and subject to Internal Revenue Code limitations (“IRC”), are matched by the Company at 50%. As part of the BRSP, the Company also will make an annual retirement contribution on behalf of each eligible participant equal to no less than 3% of eligible compensation, plus an additional amount, determined at the discretion of the Company, not to exceed 2% of eligible compensation for a total contribution of no more than 5% of eligible compensation, who has attained one year of service and as such, premiums paid are recorded by SSR as a receivable fromremain employed with the participant. AtCompany through the end of a participant’s deferral period,the plan year. The BRSP expense for the Company was $35 million, $24 million and $33 million for the years ended December 31, 2010, 2009 and 2008, respectively. Contributions to the BRSP are made in cash and no new investments in BlackRock stock or matching contributions of stock are available in the BRSP.
Effective January 1, 2011, all amounts advancedU.S. employees, including U.S. legacy BGI employees, will participate in the BRSP. All plan assets in the two legacy BGI plans, including the 401K Plan and Retirement Plan (see below), were merged into the BRSP on January 1, 2011. Under the combined BRSP, employee contributions of up to 8% of eligible compensation, as defined by SSR under the SSR Old Planplan and subject to IRC limitations, will be applied first againstmatched by the obligationCompany at 50%. In addition, the Company will continue to repay premiums advancedmake an annual retirement contribution to eligible participants equal to 3-5% of eligible compensation.
BlackRock Institutional Trust Company 401(k) Savings Plan (formerly the BGI 401(k) Savings Plan)
The Company assumed a 401(k) Plan (the “BGI Plan”) covering employees of former BGI as a result of the BGI Transaction. As part of the BGI Plan, employee contributions for participants with at least one year of service were matched at 200% of participants’ pre-tax contributions up to 2% of base salary and overtime, and matched 100% of the next 2% of base salary and overtime, as defined by SSR, with any remaining value accruingthe plan and subject to IRC limitations. The maximum matching contribution a participant would have received is an amount equal to 6% of base salary up to the benefit of the employee. All obligations under the SSR OldIRC limitations. The BGI Plan are convertible to obligations under the SSR New Plan at the election of the participant at the respective insurance policy’s cash surrender value. At December 31, 2008, the receivables from employees and obligations under the SSR Old Plan were $1.
Post-retirement Benefits
Until December 31, 2006, PNC provided certain post-retirement health care and life insurance benefits for certain eligible employees. As of December 31, 2006, the Company transferred all future liability under this plan to PNC for $2. Expenses for post-retirement benefits allocated to the Company by PNC were $1expense was $12 million for the year ended December 31, 2006. No separate2010 and immaterial to the Company’s consolidated financial obligation datastatements for the year ended December 31, 2009. Effective January 1, 2011, the net assets of this plan merged into the BRSP.
BlackRock Institutional Trust Company is availableRetirement Plan (formerly the BGI Retirement Plan)
The Company assumed a defined contribution money purchase pension plan (“BGI Retirement Plan”) as a result of the BGI Transaction. All salaried employees of former BGI and its participating affiliates who were U.S. residents on the U.S. payroll were eligible to participate. For participants earning less than $100,000 in base salary, the Company contributed 6% of a participant’s total compensation (base salary, overtime and performance bonus) up to $100,000. For participants earning $100,000 or more in base salary, the Company contributed 6% of a participant’s base salary and overtime up to the IRC limitation of $245,000 in 2010. These contributions were 25% vested once the participant has completed two years of service and then vested at a rate of 25% for each additional year of service completed. Employees with respectfive or more years of service under the Retirement Plan were 100% vested in their entire balance. The Retirement Plan expense was $13 million for the year ended December 31, 2010 and immaterial to the Company’s consolidated financial statements for the year ended December 31, 2009. Effective January 1, 2011, the net assets of this plan merged into the BRSP.
BlackRock Group Personal Pension Plan
BlackRock Investment Management (UK) Limited (“BIM”), a wholly-owned subsidiary of the Company, contributes to the BlackRock Group Personal Pension Plan, a defined contribution plan for all employees of BIM. BIM contributes between 6% and 15% of each employee’s eligible compensation. The expense for this plan was $22 million, $13 million and $16 million for the years ended December 31, 2010, 2009 and 2008, respectively.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
16. Employee Benefit Plans (continued)
Defined Benefit Plans
In 2009, prior to the BGI Transaction, the Company had several defined benefit pension plans in Japan, Germany, Luxembourg and Jersey. All accrued benefits under these defined benefit plans are currently frozen and the plans are closed to new participants. In 2008, the defined benefit pension values in Luxembourg were transferred into a new defined contribution plan for such employees, removing future liabilities. Participant benefits under the plans will not change with salary increases or additional years of service.
Through the BGI Transaction, the Company assumed defined benefit pension plans in Japan and Germany which are closed to new participants. During 2010, these plans merged into the legacy BlackRock plans in Japan (the “Japan Plan”) and Germany. At December 31, 2010 and 2009, the plan assets for these plans were approximately $19 million and $10 million, respectively, and the unfunded obligations were less than $6 million and $3 million, respectively, which were recorded in accrued compensation and benefits on the consolidated statements of financial condition. Benefit payments for the next five years and in aggregate for the five years thereafter are not expected to be material.
Defined benefit plan assets for the Japan Plan of approximately $16 million are invested using a total return investment approach whereby a mix of equity securities, debt securities and other investments are used to preserve asset values, diversify risk and achieve the target investment return benchmark. Investment strategies and asset allocations are based on consideration of plan liabilities and the funded status of the plan. Investment performance and asset allocation are measured and monitored on an ongoing basis. The current target allocations for the plan assets are 45-50% for U.S. and international equity securities, 50-55% for U.S. and international fixed income securities and 0-5% for cash and cash equivalents.
The table below provides the fair value of the defined benefit Japan Plan assets at December 31, 2010 by asset category. The table also identifies the level of inputs used to determine the fair value of assets in each category.
| (Dollar amounts in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | December 31, 2010 | |||||||||
Cash and cash equivalents | $ | 9 | $ | — | $ | 9 | ||||||
Equity securities | 4 | — | 4 | |||||||||
Fixed income securities | — | 3 | 3 | |||||||||
Fair value of plan assets | $ | 13 | $ | 3 | $ | 16 | ||||||
BlackRock, Inc.
Notes to the Consolidated Financial Statements
16. Employee Benefit Plans (continued)
Defined Benefit Plans (continued)
The assets and unfunded obligation for the defined benefit pension plan in Germany and Jersey were immaterial to the Company’s consolidated financial statements at December 31, 2010.
Post-retirement Benefit Plans
Prior to the BGI Transaction, the Company had requirements to deliver post-retirement medical benefits to a closed population based in the United Kingdom and through the BGI Transaction, the Company assumed a post-retirement benefit plan to a closed population of former BGI employees in the United Kingdom. For the years ended December 31, 2010, 2009 and 2008, expenses and unfunded obligations for these benefits were immaterial to the Company’s consolidated financial statements.
In addition, in conjunction withthrough the MLIMBGI Transaction, the Company assumed a requirement to deliver post-retirement medical benefits to a closed population basedof former BGI employees in the United Kingdom.States. At December 31, 2010 and 2009, the accumulated benefit obligation for this unfunded plan, which is included in accrued compensation and benefits on the consolidated statements of financial condition, was approximately $7 million and $14 million, respectively. For the yearsyear ended December 31, 2008, 2007 and 2006,2010, expenses for these benefits were immaterial to the Company’s consolidated financial statements. The post-retirement medical plan costs are developed from actuarial valuations that include key assumptions, including the discount rate and health care cost trends. Changes in retiree medical plan benefit costs may occur in the future due to changes in these assumptions, changes in the number of plan participants and increases in the cost of healthcare. Benefit payments for the next five years and in aggregate for the five years thereafter are not expected to be material. The estimated impact of a one percentage-point change in the discount rate would be a change of less than $100 thousand on 2010 pension expense and would change the projected benefit obligation by less than $1 million.
F-62
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
17. Related Party Transactions
Determination of Related Parties
As a result of the MLIMBGI Transaction, (see Note 3 for further discussion), Merrill LynchBarclays acquired approximately 49.3%19.8% of the total capital stock of BlackRock on a fully diluted basis.BlackRock. See Note 3, Mergers and Acquisitions, for further discussion. The Company has considered Merrill Lynch,Barclays, along with its affiliates, ato be related partyparties in accordance with SFAS No. 57,ASC 850-10,Related Party Disclosures(“ASC 850-10”), since the closing of the MLIMBGI Transaction based on its level of capital stock ownership. At December 31, 2008, Merrill Lynch2010, Barclays owned approximately 44.2%2.3% of the Company’s voting common stock and held approximately 48.2%19.6% of the total capital stock.
As a result of the MLIM Transaction in 2006, the Company considered Merrill Lynch (a subsidiary of Bank of America), along with its affiliates, to be related parties based on its level of ownership. Subsequent to the secondary offering in November 2010 by Bank of America of shares of the Company’s stock, Bank of America owned 0% of the Company’s voting common stock and held approximately 7.1% of the total capital stock, on a fully diluted basis.and therefore, subsequent revenues and expenses after the secondary offering related to Bank of America and its affiliates are no longer considered related party transactions.
For the years ended December 31, 2008, 20072010, 2009 and 2006,2008, the Company considered PNC, along with its affiliates, to be related parties based on their collectivethe level of its ownership of BlackRock capital stock of approximately 69% through September 29, 2006.stock. At December 31, 2008,2010, PNC owned approximately 36.5%25.3% of the Company’s voting common stock on a fully diluted basis.
In connection with the closingand held approximately 20.3% of the SSR Transaction in January 2005, MetLife was issued 550,000 shares of restricted BlackRock common stock (see Note 12 for further discussion). The Company has considered MetLife a related party since January 2005 because of this level of ownership and because of the significance of the revenue earned by BlackRock from MetLife. Subsequent to the MLIM Transaction, however, MetLife’s ownership interest in the Company has decreased to less than 1% of the Company’s total capital stock and the revenue earned by BlackRock from MetLife has decreased as a percentage of the Company’s total revenue due to the significant increase in the Company’s revenue. Consequently, the Company has not considered MetLife to be a related party since December 31, 2006.
For the year ended December 31, 2005, the Company considered Nomura to be a related party because the Company and Nomura were joint venture partners, each holding a 50% interest in NBAM, and as a result of the significance of revenues earned by the Company from Nomura. On September 29, 2006, the Company purchased Nomura’s 50% interest in NBAM (see Note 3 for additional information) and the Company’s revenue increased significantly as a result of the MLIM Transaction. Consequently, the Company has not considered Nomura to be a related party since December 31, 2006.stock.
For the years ended December 31, 2008, 20072010, 2009 and 2006,2008, the Company considers itsthe registered investment companies that it manages, which include mutual funds and exchanged-traded funds, to be related parties as a result of the Company’s advisory relationship. In addition, equity method investments are considered related parties in accordance with ASC 850-10 due to the Company’s influence over the financial and operating policies of the investee.
F-63
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)17. Related Party Transactions (continued)
Investment Advisory and Administration Fees from Related Parties
Revenues for services provided by the Company to these and other related parties are as follows:
| (Dollar amounts in millions) | Year ended December 31, | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Investment advisory, administration fees and securities lending revenue: | ||||||||||||
Bank of America and affiliates | $ | 37 | $ | 48 | $ | 76 | ||||||
PNC and affiliates | 4 | 3 | 8 | |||||||||
Barclays and affiliates | 14 | 2 | — | |||||||||
Anthracite Capital, Inc. | 4 | 1 | 14 | |||||||||
Registered investment companies/Equity method investees | 4,833 | 2,561 | 2,864 | |||||||||
Other | 1 | 1 | — | |||||||||
Total investment advisory and administration fees | 4,893 | 2,616 | 2,962 | |||||||||
Investment advisory performance fees (equity method investees) | 39 | 35 | — | |||||||||
BlackRock Solutions and advisory: | ||||||||||||
Bank of America and affiliates | 1 | 2 | — | |||||||||
PNC and affiliates | 9 | 8 | 11 | |||||||||
Equity method investees | 17 | 21 | 19 | |||||||||
Other | — | — | 1 | |||||||||
TotalBlackRock Solutions and advisory | 27 | 31 | 31 | |||||||||
Other revenue: | ||||||||||||
Bank of America and affiliates | 4 | 13 | 10 | |||||||||
PNC and affiliates | 4 | 3 | — | |||||||||
Barclays and affiliates | 35 | 2 | — | |||||||||
Equity method investees | 22 | 15 | 1 | |||||||||
Other | 1 | 1 | 2 | |||||||||
Total other revenue | 66 | 34 | 13 | |||||||||
Total revenue from related parties | $ | 5,025 | $ | 2,716 | $ | 3,006 | ||||||
The Company provides investment advisory and administration services to its openopen- and closed-end funds and other commingled or pooled funds and separate accounts in which related parties invest. In addition, the Company provides investment advisory and administration services to certain Bank of America/Merrill Lynch, subsidiaries,Barclays and PNC subsidiaries, MetLife sponsored variable annuities and separate accounts and Nomura and its affiliates for a feefees based on AUM. Further, the Company provides risk management services to PNC.
RevenuesPNC and Bank of America/Merrill Lynch. The Company contracts with Bank of America/Merrill Lynch for services providedvarious mutual fund distribution and shareholder servicing to be performed on behalf of certain non-U.S. funds managed by the Company. The Company records its investment advisory and administration fees net of retrocessions. Such retrocession arrangements paid to theseBank of America and other related parties are as follows:affiliates during 2010 prior to the offering, 2009 and 2008 were $88 million, $85 million and $118 million, respectively.
| Year ended December 31, | |||||||||
| 2008 | 2007 | 2006 | |||||||
Investment advisory and administration fees: | |||||||||
Merrill Lynch and affiliates | $ | 75 | $ | 89 | $ | 20 | |||
PNC and affiliates | 8 | 9 | 13 | ||||||
MetLife and affiliates | — | — | 62 | ||||||
Nomura and affiliates | — | — | 6 | ||||||
Anthracite Capital, Inc. | 14 | — | — | ||||||
Mutual funds/Equity method investees | 2,864 | 2,542 | 764 | ||||||
Total investment advisory and administration fees | 2,961 | 2,640 | 865 | ||||||
BlackRock Solutionsand advisory: | |||||||||
Merrill Lynch and affiliates | 7 | 5 | 1 | ||||||
PNC and affiliates | 11 | 5 | 5 | ||||||
Other | 20 | 1 | — | ||||||
TotalBlackRock Solutions and advisory | 38 | 11 | 6 | ||||||
Other revenue: | |||||||||
Merrill Lynch and affiliates | 4 | 11 | 1 | ||||||
PNC and affiliates | — | — | 1 | ||||||
Other | 3 | 1 | — | ||||||
Total other revenue | 7 | 12 | 2 | ||||||
Total revenue from related parties | $ | 3,006 | $ | 2,663 | $ | 873 | |||
F-64
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)17. Related Party Transactions (continued)
Aggregate Expenses for Transactions with Related Parties
Aggregate expenses included in the consolidated statements of income for transactions with related parties are as follows:
| (Dollar amounts in millions) | Year ended December 31, | |||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Expenses with related parties: | ||||||||||||
Distribution and servicing costs | ||||||||||||
Bank of America and affiliates | $ | 214 | $ | 349 | $ | 464 | ||||||
PNC and affiliates | 11 | 19 | 30 | |||||||||
Barclays and affiliates | 1 | — | — | |||||||||
Other | — | — | 1 | |||||||||
Total distribution and servicing costs | 226 | 368 | 495 | |||||||||
Direct fund expenses | ||||||||||||
Bank of America and affiliates | 10 | — | — | |||||||||
Barclays and affiliates | 6 | — | — | |||||||||
Total direct fund expenses | 16 | — | — | |||||||||
General and administration expenses | ||||||||||||
Bank of America and affiliates | 11 | 7 | 13 | |||||||||
Barclays and affiliates | 14 | 3 | — | |||||||||
Anthracite Capital, Inc. | 14 | 31 | — | |||||||||
Other registered investment companies | 33 | 31 | 21 | |||||||||
Support of two private sponsored enhanced cash funds / Other | — | 1 | 10 | |||||||||
Total general and administration expenses | 72 | 73 | 44 | |||||||||
Total expenses with related parties | $ | 314 | $ | 441 | $ | 539 | ||||||
Certain Agreements and Arrangements with Merrill Lynch and PNC
Global Distribution Agreement
On September 29, 2006, BlackRock entered into a global distribution agreement with Merrill Lynch. Lynch
The global distribution agreement provides a framework under which Merrill Lynch provides portfolio administrationdistribution and servicing of client investments in certain BlackRock investment advisory products (including those of the former MLIM Business).products. Pursuant to the global distribution agreement, Merrill Lynch has agreed to cause each of its distributors to continue distributing BlackRock covered products and covered products of the former MLIM Business that it distributed as of February 15, 2006 on the same economic terms as were in effect on February 15, 2006 or as the parties otherwise agree. For new covered products introduced by BlackRock to Merrill Lynch for distribution that do not fall within an existing category, type or platform of covered products distributed by Merrill Lynch, the Merrill Lynch distributors must be offered the most favorable economic terms offered by BlackRock to other distributors of the same product. If a covered product that does not fall within an existing category, type or platform of covered products distributed by Merrill Lynch becomes part of a group or program of similar products distributed by the Merrill Lynch distributors, some of which are sponsored by managers other than BlackRock, the economic terms offered by Merrill Lynch distributors to BlackRock for the distribution of such covered products must be at least as favorable as the most favorable economic terms to which any such product is entitled.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
17. Related Party Transactions (continued)
Certain Agreements and Arrangements with Merrill Lynch and PNC (continued)
July 2008 Changes to Stockholder and Global Distribution Agreements
In July 2008, the Company entered into an amended and restated stockholder agreement and an amended and restated global distribution agreement with Merrill Lynch.
These changes to the stockholder agreement with Merrill Lynch, among other items, (i) provide Merrill Lynch with additional flexibility to form or acquire asset managers substantially all of the business of which is devoted to non-traditional investment management strategies such as short selling, leverage, arbitrage, specialty finance and quantitatively-driven structured trades; (ii) expand the definition of change in control of Merrill Lynch to include the disposition of two-thirds or more of its Global Private ClientWealth & Investment Management business; (iii) extend the general termination date to the later of July 16, 2013 or the date Merrill Lynch’s beneficial ownership of BlackRock voting securities falls below 20%; and (iv) clarify certain other provisions in the agreement.
The changes in the global distribution agreement in relation to the prior agreement, among other things, (i) provide for an extension of the term to five years from the date of a change in control of Merrill Lynch (to January 1, 2014 following Bank of America’s acquisition of Merrill Lynch) and one automatic 3-year extension if certain conditions are satisfied; (ii) strengthen the obligations of Merrill Lynch to achieve revenue neutrality across the range of BlackRock products distributed by Merrill Lynch if the pricing or structure of particular products is required to be changed; (iii) obligate Merrill Lynch to seek to obtain distribution arrangements for BlackRock products from buyers of any portion of its distribution business on the same terms as the global distribution agreement for a period of at least 3 years; and (iv) restrict the manner in which products managed by alternative asset managers in which Merrill Lynch has an interest may be distributed by Merrill Lynch.
In connection with the closings under the exchange agreements, on February 27, 2009, BlackRock entered into a second amended and restated stockholder agreement with Merrill Lynch and an amended and restated implementation and stockholder agreement with PNC, and a third amendment to the share surrender agreement with PNC. See Note 19, Capital Stock, for further discussion.
The changes contained in the amended and restated stockholder agreement with Merrill Lynch, in relation to the prior agreement, among other things, (i) revised the definitions of “Fair Market Value,” “Ownership Cap” and “Significant Stockholder”; and (ii) amended or supplemented certain other definitions and provisions therein to incorporate series B preferred stock and series C preferred stock, respectively. The changes contained in the amended and restated stockholder agreement with PNC, in relation to the prior agreement, among other things, (i) revised the definitions of “Fair Market Value,” “Ownership Cap,” “Ownership Percentage,” “Ownership Threshold” and “Significant Stockholder”; and (ii) amended or supplemented certain other provisions therein to incorporate series B preferred stock and series C preferred stock, respectively.
The amendment to the share surrender agreement with PNC provided for the substitution of series C preferred stock for the shares of common stock subject to the share surrender agreement.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
17. Related Party Transactions (continued)
Certain Agreements and Arrangements with Merrill Lynch and PNC (continued)
June 2009 Changes to Stockholder Agreements
In connection with the BGI Transaction, certain additional amendments were made to the amended and restated stockholder agreements with Merrill Lynch and PNC.
The amended and restated stockholder agreement with Merrill Lynch was changed to, among other things, (i) amend or supplement certain definitions and provisions therein to incorporate series D participating preferred stock, (ii) amend the provision relating to the composition of BlackRock’s Board of Directors and (iii) add certain provisions relating to the U.S. Bank Holding Company Act.
The amended and restated stockholder agreement with PNC was changed to, among other things, (i) revise the definitions of “Ownership Cap” and “Ownership Threshold,” (ii) amend or supplement certain other definitions and provisions therein to incorporate series D participating preferred stock, (iii) provide that none of the transfer restriction provisions set forth in the amended and restated stockholder agreement with PNC apply to the shares purchased by PNC as part of the financing for the BGI Transaction, (iv) amend the provision relating to the composition of BlackRock’s Board of Directors and (v) provide that the amended and restated stockholder agreement with PNC shall terminate upon the later of (A) the five year anniversary of the amended and restated stockholder agreement with PNC and (B) the first date on which PNC and its affiliates beneficially own less than 5% of the outstanding BlackRock capital stock, subject to certain other conditions specified therein.
November 2010 Changes to Stockholder and Global Distribution Agreements with Merrill Lynch
In November 2010, in connection with the secondary offering by Bank of America of shares of BlackRock’s common stock, the Company entered into an amended and restated stockholder agreement and an amended and restated global distribution agreement with Merrill Lynch.
The changes to the stockholder agreement with Merrill Lynch provides, among other things, for the following: (i) a reduction in the number of directors Merrill Lynch is entitled to designate upon its holding falling below 10% and 5% thresholds, (ii) a reduction of the cap on total ownership of BlackRock capital stock, (iii) restrictions on Merrill Lynch transferring any shares until November 15, 2011 and (iv) the setting of a termination date of the agreement to July 31, 2013.
This amendment to the global distribution agreement clarifies certain economic arrangements with respect to revenue neutrality across BlackRock products distributed by Merrill Lynch.
The total amount of related party transactions expensed by BlackRock duringthrough November 2010, and full year 2009 and 2008 and 2007 relatingrelated to Merrill Lynch portfolio administrationdistribution and servicing of products covered by the global distribution agreement, including mutual funds, separate accounts, liquidity funds, alternative investments and insurance products, was approximately $210 million, $337 million and $456 and $437,million, respectively.
F-65
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)17. Related Party Transactions (continued)
Certain Agreements and Arrangements with Merrill Lynch and PNC (continued)
Other Agreements
In connection with the MLIM Transaction, Merrill Lynch agreed that it will provide reimbursement to BlackRock for employee incentive awards issued to former MLIM employees who became BlackRock employees subsequent to the MLIM Transaction. Reimbursements will amount to 50% of the total amount of awards to former MLIM employees between $100 million and $200 million. The Company is entitled to invoice Merrill Lynch following its determination of the portion of awards entitled to reimbursement for a given calendar year. Through January 2007, the Company had issued total eligible incentive compensation to qualified employees in excess of $200 million. In 2010 and 2009, Merrill Lynch reimbursed $10 million and $25 million, respectively, to BlackRock for employee incentive awards issued to former MLIM employees who became BlackRock employees subsequent to the MLIM Transaction. Upon receipt, the reimbursements were recorded as capital contributions.
Merrill Lynch and certain of its affiliates have been engaged by the Company to provide recordkeeping, administration and trustee services to the BRSP. The compensation to Merrill Lynch and its affiliates for these services paid by the Company was not material.
Certain Agreements and Arrangements with Barclays
ExchangeBarclays Amended and Restated Stock Purchase Agreement
On November 30, 2009, BlackRock, Barclays Bank PLC and Barclays PLC (for limited purposes) entered into an Amended and Restated Stock Purchase Agreement (the “Amended and Restated Stock Purchase Agreement”). The Amended and Restated Stock Purchase Agreement amended and restated the terms of the Stock Purchase Agreement, dated as of June 16, 2009, by and among BlackRock, Barclays and Barclays PLC (for limited purposes), which provided for the acquisition by BlackRock of BGI from Barclays. The revised terms relate, among other things, to the amount of cash and capital required to be held by the various BGI entities at the closing of the acquisition and to the post-closing purchase price adjustment mechanism. On December 1, 2009, BlackRock completed its acquisition of BGI pursuant to the Amended and Restated Stock Purchase Agreement.
Barclays Stockholder Agreement
In connection with the completion of its acquisition of BGI, BlackRock entered into a Stockholder Agreement, dated as of December 1, 2009 (the “Barclays Stockholder Agreement”), with Barclays and Barclays BR Holdings S.à.r.l. (“BR Holdings”, and together with Barclays, the “Barclays Parties”). Pursuant to the terms of the Barclays Stockholder Agreement, the Barclays Parties agreed, among other things, to certain transfer and voting restrictions with respect to shares of BlackRock common stock and preferred stock owned by them and their affiliates, to limits on the ability of the Barclays Parties and their affiliates to acquire additional shares of BlackRock common stock and preferred stock and to certain other restrictions. In addition, the Barclays Stockholder Agreement contains certain provisions relating to the composition of BlackRock’s board of directors, including a requirement that BlackRock’s board must consist of not more than 19 directors, with two directors designated by the Barclays Parties.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
17. Related Party Transactions (continued)
Certain Agreements and Arrangements with Barclays (continued)
Other Agreements
Barclays and certain of its affiliates have been engaged by the Company to provide the use of certain indices for certain BlackRock investments funds and for a fee to provide indemnification to clients related to potential losses in connection with lending of client securities. For the year ended December 31, 2010, fees incurred for these agreements were $14 million and amounts during the year ended December 31, 2009 were not material.
Certain Agreements with Merrill Lynch, PNC and Barclays
Concurrent with the secondary offering, BlackRock, Merrill Lynch, PNC and Barclays agreed with the underwriters in such transactions subject to certain limited exceptions, not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 90 days after November 8, 2010 without first obtaining the written consent of Merrill Lynch. This lock-up provision expired on February 8, 2011. Additionally, Merrill Lynch agreed to an additional lock-up period of 12 months following the closing of the secondary offering, which occurred on November 15, 2010, subject to certain limited exceptions, pursuant to the amended and restated stockholder agreement with BlackRock.
Receivables and Payables with Related Parties
Due from related parties was $150 million and $189 million at December 31, 2010 and 2009, respectively, and primarily represented a tax indemnification asset due from Barclays, receivables for investment advisory and administration services provided by BlackRock, and other receivables from certain investment products managed by BlackRock. Due from related parties at December 31, 2010 included $71 million due from certain funds, $69 million of a tax indemnification asset due from Barclays and $10 million in receivables from PNC and Barclays. Due from related parties at December 31, 2009 included $72 million of a tax indemnification asset due from Barclays, $57 million due from certain funds, $48 million in receivables from Bank of America/Merrill Lynch, PNC and Barclays and a $12.5 million carrying value in loan receivables from Anthracite Capital, Inc. (“Anthracite”) (see below).
Accounts receivable at December 31, 2010 and 2009 includes $559 million and $492 million, respectively, related to receivables from BlackRock mutual funds andiShares for investment advisory and administration services.
Due to related parties was $57 million and $505 million at December 31, 2010 and 2009, respectively, and primarily represented assumed liabilities from the BGI Transaction. Due to related parties at December 31, 2010 included $41 million and $15 million payable to Barclays and certain investment products managed by BlackRock, respectively. The payable at December 31, 2010 to Barclays included non-interest bearing notes assumed by BlackRock at the close of the BGI Transaction related to certain acquired tax receivables and other contractual items. Due to related parties at December 31, 2009 included $408 million and $95 million payable to Barclays and Merrill Lynch, respectively. The payable at December 31, 2009 to Barclays included non-interest bearing notes assumed by BlackRock at the close of the BGI Transaction related to certain acquired tax receivables and other contractual items.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
17. Related Party Transactions (continued)
Loan Commitments with Anthracite
Prior to March 31, 2010, the Company was committed to provide financing of up to $60 million to Anthracite, a specialty commercial real estate finance company that was managed by a subsidiary of BlackRock. The financing is collateralized by a pledge by Anthracite of its ownership interest in a real estate debt investment fund, which is managed by a subsidiary of BlackRock. At December 31, 2010, $33.5 million of financing was outstanding and remains outstanding as of February 2011, which is past its final maturity date of March 5, 2010. At December 31, 2010, the carrying value of the collateral was estimated to be zero, which resulted in an additional $12.5 million reduction in amounts due from related parties on the Company’s consolidated statement of financial condition and an equal amount recorded in general and administrative expenses on the Company’s consolidated statement of income for the year ended December 31, 2010. The Company has no obligation to loan additional amounts to Anthracite under this facility. Anthracite filed a voluntary petition for relief under Chapter 7 of Title 11 of the U.S. Code in the U.S. Bankruptcy Court for the Southern District of New York on March 15, 2010. Recovery of any amount of the financing provided by the Company in excess of the value of the collateral is not anticipated. The Company continues to evaluate the collectability of the outstanding borrowings.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
18. 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.
Banking Regulatory Requirements
BlackRock Institutional Trust Company, N.A. (“BTC”), a wholly-owned subsidiary of the Company, is chartered as a national bank whose powers are limited to trust activities. BTC is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, BTC must meet specific capital guidelines that invoke quantitative measures of BTC’s assets, liabilities, and certain off-balance sheet items as calculated under the regulatory accounting practices. BTC’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulators to ensure capital adequacy require BTC to maintain a minimum Tier 1 capital and Tier 1 leverage ratio, as well as Tier 1 and Total risk-based capital ratios. Based on BTC’s calculations as of December 31, 2010 and 2009, it exceeded the applicable capital adequacy requirements.
| (Dollar amounts in millions) | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 874 | 103.3 | % | $ | 68 | 8.0 | % | $ | 85 | 10.0 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) | $ | 874 | 103.3 | % | $ | 34 | 4.0 | % | $ | 51 | 6.0 | % | ||||||||||||
Tier 1 capital (to average assets) | $ | 874 | 55.1 | % | $ | 64 | 4.0 | % | $ | 79 | 5.0 | % | ||||||||||||
Broker-dealers
BlackRock Investments, LLC, BlackRock Capital Markets, LLC, BlackRock Execution Services and BlackRock Fund Distribution Company are registered broker-dealers and wholly-owned subsidiaries of BlackRock that are subject to the Uniform Net Capital requirements under the Securities Exchange Act of 1934, which requires maintenance of certain minimum net capital levels.
Capital Requirements as of December 31, 2010
At December 31, 2010, the Company was required to maintain approximately $897 million in net capital in certain regulated subsidiaries, including BTC, entities regulated by the FSA in the United Kingdom, and the broker-dealers and is in compliance with all applicable regulatory minimum net capital requirements.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
19. Capital Stock
Capital Stock Authorized
BlackRock’s authorized common stock, $0.01 par value, was 500,000,000 shares at December 31, 2010 and 2009. At December 31, 2010 and 2009, BlackRock had 20,000,000 series A non-voting participating preferred shares, $0.01 par value, authorized. At December 31, 2010 and 2009, BlackRock had 150,000,000 series B non-voting participating preferred shares, $0.01 par value, authorized. At December 31, 2010 and 2009, BlackRock had 6,000,000 series C non-voting participating preferred shares, $0.01 par value, authorized. At December 31, 2010 and 2009, BlackRock had 20,000,000 series D non-voting participating preferred shares, $0.01 par value, authorized.
Common Shares Held in Escrow
On October 1, 2007, the Company acquired the fund of funds business of Quellos. The Company issued 1,191,785 shares of BlackRock common stock that were placed into an escrow account. In April 2008, November 2009 and October 2010, 280,519, 42,326, and 865,337, respectively, of common shares were released to Quellos in accordance with the Quellos asset purchase agreement, which resulted in an adjustment to the recognized purchase price and had a dilutive effect subsequent to the release. The remaining 3,603 common shares may have a dilutive effect in future periods based on the timing of the release of shares from the escrow account in accordance with the Quellos asset purchase agreement.
February 2009 Capital Exchanges
On January 1, 2009, Bank of America acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and PNC pursuant to which each agreed to exchange a portion of the BlackRock common stock it held for an equal number of shares of non-voting participating preferred stock. On February 27, 2009, Merrill Lynch exchanged (i) 49,865,000 shares of BlackRock’s common stock for a like number of shares of BlackRock’s series B non-voting participating preferred stock, and (ii) 12,604,918 shares of BlackRock’s series A preferred stock for a like number of shares of series B preferred stock.stock, and PNC exchanged (i) 17,872,000 shares of BlackRock’s common stock for a like number of shares of series B non-voting preferred stock and (ii) 2,889,6472,889,467 shares of BlackRock’s common stock for a like number of shares of BlackRock’s Seriesseries C non-voting participating preferred stock. Following
Below is a summary description of the closing of these exchanges on February 27, 2009, Merrill Lynch owned approximately 4.9% of BlackRock’s votingseries B and C preferred stock and PNC owned approximately 46.5% of BlackRock’s voting stock. The capital stock held by Bank of America/Merrill Lynch and PNCissued in BlackRock remained largely unchanged at approximately 47.4% and 31.5% on a fully diluted basis, respectively.the exchanges.
The series B non-voting participating preferred stock:
is non-voting except as otherwise provided by applicable law;
participates in dividends on a basis generally equal to the common stock;
grants the holder the right to receive dividends in common stock (subject to applicable ownership restrictions) or in cash;
benefits from a liquidation preference of $0.01 per share; and
is mandatorily convertible to BlackRock common stock upon transfer to an unrelated party.
The series C non-voting participating preferred stock:
is non-voting except as otherwise provided by applicable law;
participates in dividends on a basis generally equal to the common stock;
grants the holder the right to receive dividends in common stock (subject to applicable ownership restrictions) or in cash;
benefits from a liquidation preference of $40.00 per share; and
is only convertible to BlackRock common stock upon the termination of the obligations of PNC under its share surrender agreement with BlackRock.
F-66
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)19. Capital Stock (continued)
2009 Capital Stock Activities Related to BGI Transaction
In June and December 2009 the Company raised capital from third party investors via a private placement of 19,914,652 shares of capital stock, at an agreed upon fixed price of $140.60 per share, to finance the cash consideration of the BGI Transaction. The issuance price of $140.60 was based on the valuation of the Company’s common shares for a 10 day period prior to the announcement of the BGI Transaction less an agreed upon discount. Subsequent to the determination of the issuance price the number of share to be issued were fixed.
In June 2009, the Company issued to an institutional investor 2,133,713 shares of BlackRock’s common stock at $140.60 per share. The $300 million proceeds from this issuance was used to fund a portion of the purchase of BGI. See Note 3, Mergers and Acquisitions, for further discussion.
On December 1, 2009, pursuant to separate stock purchase agreements entered into on June 11, 2009 and June 12, 2009, as amended, BlackRock sold an aggregate of 8,637,519 shares of common stock, 5,587,232 shares of series B non-voting participating preferred stock and 3,556,188 shares of series D non-voting participating preferred stock (collectively, the “Financing Shares”) to certain institutional investors, including the sale of the 3,556,188 shares of series D non-voting participating preferred stock to PNC, each at a price of $140.60 per share. The Company received approximately $2.5 billion in total consideration from the sale of the Financing Shares, which was also used to fund the cash portion of the purchase of BGI.
At the close of the BGI Transaction on December 1, 2009, the Company issued 3,031,516 common shares, and 26,888,001 and 7,647,524 of series B and D non-voting participating preferred stock, respectively, to Barclays as part of the consideration for the purchase of BGI.
Other AgreementsJanuary 2010 Capital Exchange
In January 2010, 600,000 common shares were exchanged for Series B preferred stock and all 11,203,442 Series D preferred stock outstanding at December 31, 2009 were exchanged for Series B preferred stock.
November 2010 Capital Exchanges
On September 29, 2006,November 15, 2010, the Company announced the closing of the secondary offerings by Bank of America and PNC of 58,737,122 shares of BlackRock’s common stock, which included 56,407,040 shares of common stock issued upon the conversion of BlackRock’s series B non-voting participating preferred stock. Concurrently with the secondary offerings, BlackRock entered into a transition services agreement with Merrill Lynchissued 11,105,000 shares of common stock to PNC in exchange for an equal number of shares of series B non-voting participating preferred stock.
Cash Dividends for Common and its controlled affiliates to allow BlackRock to transition from relying on Merrill Lynch for various functions for the former MLIM business and to allow Merrill Lynch to transition from relying on the former MLIM Business for various functions. The pricing for such services is required to be consistent with historical practices. The total amount expensed by BlackRock forPreferred Shares / RSUs
During the years ended December 31, 2010, 2009 and 2008, 2007the Company paid cash dividends of $4.00 per share (or $776 million), $3.12 per share (or $422 million) and 2006 relating to the transition services agreement with Merrill Lynch was approximately $1, $5 and $6,$3.12 per share (or $419 million), respectively.
In connection with the MLIM Transaction, Merrill Lynch has agreed that it will provide reimbursement to BlackRock for employee incentive awards issued to former MLIM employees who became BlackRock employees subsequent to the MLIM Transaction. Reimbursements will amount to 50% of the total amount of awards to former MLIM employees between $100 and $200. The Company is entitled to invoice Merrill Lynch following its determination of the portion of awards entitled to reimbursement for a given calendar year. Through January 2007, the Company had issued total eligible incentive compensation to qualified employees in excess of $200 per year and intends to seek reimbursement from Merrill Lynch for an appropriate portion of these awards. Contributions made by Merrill Lynch will be recorded as capital contributions when received.
Effective September 29, 2006, the Company leases certain office buildings from Merrill Lynch. The lease agreements expire by 2018. Rent expense of $5, $18 and $4 for the years ended December 31, 2008, 2007 and 2006, respectively, was recorded related to office buildings leased from Merrill Lynch.
Merrill Lynch and certain of its affiliates have been engaged by the Company to provide recordkeeping, administration and trustee services to the BRSP. The compensation to Merrill Lynch and its affiliates for these services paid by the Company was not material.
Termination of Closed-end Fund and Servicing Arrangements
On September 28, 2007, the Company insourced certain closed-end fund administration and servicing arrangements in place with Merrill Lynch. In connection with this insourcing, the Company terminated 40 agreements with Merrill Lynch with original terms ranging from 30 to 40 years and made a one-time payment to Merrill Lynch of $128 on October 31, 2007. The payment is reported as “termination of closed-end fund administration and servicing arrangements” on the consolidated statement of income. As a result of these terminations, Merrill Lynch was discharged of any further duty to provide the services and BlackRock was discharged from any further payment obligation.
Certain Agreements and Arrangements with MetLife
During 2006, the Company incurred a fee sharing payment of $34 payable to MetLife based upon certain contractual arrangements entered into in conjunction with the SSR Transaction. See Note 12 for further information.
F-67
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Aggregate Expenses for Transactions with Related Parties19. Capital Stock (continued)
Aggregate expenses included in the consolidated statements of income for transactions with related parties are as follows:
| Year ended December 31, | |||||||||
| 2008 | 2007 | 2006 | |||||||
Expenses with related parties: | |||||||||
Portfolio administration and servicing costs | |||||||||
Merrill Lynch and affiliates | $ | 464 | $ | 444 | $ | 96 | |||
PNC and affiliates | 30 | 23 | 24 | ||||||
Other | 1 | 3 | 6 | ||||||
| 495 | 470 | 126 | |||||||
General and administration | |||||||||
Merrill Lynch and affiliates | 13 | 48 | 11 | ||||||
PNC and affiliates | — | — | 2 | ||||||
MetLife and affiliates | — | — | 4 | ||||||
Support of two private sponsored enhanced cash funds | 10 | 36 | — | ||||||
Other mutual fund related | 21 | 9 | 1 | ||||||
| 44 | 93 | 18 | |||||||
Termination of closed-end fund administration and servicing arrangements with Merrill Lynch | — | 128 | — | ||||||
Fee sharing payment—MetLife | — | — | 34 | ||||||
Total expenses with related parties | $ | 539 | $ | 691 | $ | 178 | |||
F-68
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
Receivables and Payables with Related Parties
Due from related parties was $309 and $175 at December 31, 2008 and 2007, respectively, and primarily represented receivables for investment advisory and administration services provided by BlackRock, and loan receivables and unsettled redemptions from a warehouse entity established to launch certain private equity funds and Anthracite Capital, Inc. (“Anthracite”) (see below) managed by BlackRock. Due from related parties at December 31, 2008 included $200 and $40 in loan receivables and unsettled redemptions, respectively, from certain investment products and $20 in receivables from Merrill Lynch and PNC. Due from related parties at December 31, 2007 included $80 in loan receivables from certain investment products, $15 in receivables from PNC and $43 in receivables from Merrill Lynch and affiliates.
Accounts receivable at December 31, 2008 and 2007 includes $253 and $388, respectively, related to receivables from BlackRock mutual funds for investment advisory and administration services.
Due to related parties was $103 and $114 at December 31, 2008 and 2007, respectively, including $78 payable to Merrill Lynch and $5 payable to PNC and its affiliates at December 31, 2008. Due to related parties as of December 31, 2007 included $96 payable to Merrill Lynch and its affiliates and $3 payable to PNC and its affiliates. The payable to Merrill Lynch and its affiliates primarily includes acquired payables and accrued liabilities under the global distribution agreement and the transition services agreement. The payable to PNC and its affiliates represents fund administration and servicing costs.
Loan Commitment with Anthracite
At December 31, 2008, the Company was committed to provide financing of up to $60, until March 2010, to Anthracite, a specialty commercial real estate finance company that is managed by a subsidiary of BlackRock. The financing is collateralized by Anthracite pledging its ownership interest in an investment fund which is also managed by a subsidiary of BlackRock. At December 31, 2008, $30 of financing was outstanding, which matures in 2009 at an interest rate of 6.02% and which was included in due from related parties on the Company’s consolidated statement of financial condition. Subsequent to December 31, 2008, Anthracite borrowed an additional $3.5, which matures in April 2009 at a current interest rate of 4.76%.
The Company is required to maintain net capital in certain jurisdictions, which is met in part by retaining cash and cash equivalent investments in those jurisdictions. As a result, the Company may be restricted in its ability to transfer cash between different jurisdictions. Additionally, transfer of cash between international jurisdictions, including repatriation to the United States, may have adverse tax consequences that could discourage such transfers. At December 31, 2008, the Company was required to maintain approximately $172 in net capital at these subsidiaries and was in compliance with all applicable regulatory minimum net capital requirements.
BlackRock Investments, Inc. and BlackRock Capital Markets LLC, are registered broker-dealers and wholly-owned subsidiaries of BlackRock that are subject to the Uniform Net Capital requirements under the Securities Exchange Act of 1934, which requires maintenance of certain minimum net capital levels.
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BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
On September 29, 2006, the Company completed the MLIM Transaction and issued 52,395,082 shares of BlackRock common stock and 12,604,918 of series A non-voting participating preferred shares to Merrill Lynch in consideration for the MLIM business. In conjunction with the MLIM Transaction, all existing class A and class B common stockholders exchanged their shares for the newly issued common stock of the Company. All such shares contain the same voting rights.
BlackRock’s authorized common stock, $0.01 par value, was 500,000,000 shares at December 31, 2008. BlackRock’s authorized Series A non-voting participating preferred stock, $0.01 par value, was 20,000,000 shares at December 31, 2008 and 2007.
The series A non-voting participating preferred stock:
except as otherwise provided by applicable law, is non-voting;
participates in dividends on a basis generally equal to the common stock;
grants the holder the option to receive dividends in common stock (subject to applicable ownership restrictions) or in cash;
benefits from a liquidation preference of $0.01 per share; and
is mandatorily convertible to BlackRock common stock upon transfer to an unrelated party.
On October 1, 2007, the Company acquired the fund of funds business of Quellos (See Note 3). The Company issued 1,191,785 shares of BlackRock common stock that were placed into an escrow account. The common shares held in escrow had no dilutive effect for 2007. In April 2008, 280,519 common shares were released to Quellos in accordance with the Quellos asset purchase agreement, which resulted in an adjustment to the recognized purchase price and had a dilutive effect in 2008. The remaining 911,266 common shares may have a dilutive effect in future periods based on the timing of the release of shares from the escrow account in accordance with the Quellos asset purchase agreement.
On January 1, 2009, Bank of America acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and PNC pursuant to which on February 27, 2009 it exchanged a portion of the BlackRock common stock it held for an equal number of shares of non-voting preferred stock. (See Note 15, Related Party Transactions, for more details on these transactions.)
During the years ended December 31, 2008, 2007 and 2006, the Company paid cash dividends of $3.12 per common/preferred share (or $419), $2.68 per common/preferred share (or $353) and $1.68 per common/preferred share (or $136), respectively.
F-70
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
The Company’s common and preferred shares issued and outstanding and related activity consist of the following:
| Shares Issued | Shares Outstanding | |||||||||||||||||||||||
| Common Shares Class A&B | Common Shares | Escrow Shares | Treasury Shares Class A&B | Treasury Shares | Preferred Shares Series A | Common Shares Class A&B | Common Shares | Preferred Shares Series A | ||||||||||||||||
January 1, 2006 | 65,092,589 | — | — | (1,091,771 | ) | — | — | 64,000,818 | — | — | ||||||||||||||
Conversion of class B stock to class A stock | (154,181 | ) | — | — | 154,181 | — | — | — | — | — | ||||||||||||||
Issuance of class A common stock | 48,094 | — | — | 179,604 | — | — | 227,698 | — | — | |||||||||||||||
Treasury stock transactions | — | — | — | (190,081 | ) | `— |
| — | (190,081 | ) | — | — | ||||||||||||
Conversion of class A common stock to common stock | (20,072,356 | ) | 20,072,356 | — | — | — | — | (20,072,356 | ) | 20,072,356 | — | |||||||||||||
Conversion of class B common stock to common stock | (44,914,146 | ) | 44,914,146 | — | — | — | — | (44,914,146 | ) | 44,914,146 | — | |||||||||||||
Issuance of preferred series A stock | — | — | — | — | — | 12,604,918 | — | — | 12,604,918 | |||||||||||||||
Issuance of common stock | — | 52,395,080 | — | — | (24,618 | ) | — | — | 52,370,462 | — | ||||||||||||||
Conversion of class A treasury stock to treasury shares | — | — | — | 141,400 | (141,400 | ) | — | 141,400 | (141,400 | ) | — | |||||||||||||
Conversion of class B treasury stock to treasury shares | — | — | — | 806,667 | (806,667 | ) | — | 806,667 | (806,667 | ) | — | |||||||||||||
December 31, 2006 | — | 117,381,582 | — | — | (972,685 | ) | 12,604,918 | — | 116,408,897 | 12,604,918 | ||||||||||||||
Issuance of common stock | — | — | — | — | 2,089,341 | — | — | 2,089,341 | — | |||||||||||||||
Issuance of common stock to escrow agent in connection with Quellos Transaction | — | 1,191,785 | (1,191,785 | ) | — | — | — | — | — | — | ||||||||||||||
PNC capital contribution | — | — | — | — | (966,512 | ) | — | — | (966,512 | ) | — | |||||||||||||
Treasury stock transactions | — | — | — | — | (1,472,166 | ) | — | — | (1,472,166 | ) | — | |||||||||||||
December 31, 2007 | — | 118,573,367 | (1,191,785 | ) | — | (1,322,022 | ) | 12,604,918 | — | 116,059,560 | 12,604,918 | |||||||||||||
Issuance of common stock | — | — | — | — | 1,191,668 | — | — | 1,191,668 | — | |||||||||||||||
Release of common stock from escrow agent | — | — | 280,519 | — | — | — | — | 280,519 | — | |||||||||||||||
PNC capital contribution | — | — | — | — | (25,072 | ) | — | — | (25,072 | ) | — | |||||||||||||
Treasury stock transactions | — | — | — | — | (215,565 | ) | — | — | (215,565 | ) | — | |||||||||||||
December 31, 2008 | — | 118,573,367 | (911,266 | ) | — | (370,991 | ) | 12,604,918 | — | 117,291,110 | 12,604,918 | |||||||||||||
| Shares Issued | Shares Outstanding | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares | Escrow Common Shares | Treasury Common Shares | Preferred Shares Series A | Preferred Shares Series B | Preferred Shares Series C | Preferred Shares Series D | Common Shares | Preferred Shares Series A | Preferred Shares Series B | Preferred Shares Series C | Preferred Shares Series D | |||||||||||||||||||||||||||||||||||||
January 1, 2008 | 118,573,367 | (1,191,785 | ) | (1,322,022 | ) | 12,604,918 | — | — | — | 116,059,560 | 12,604,918 | — | — | — | ||||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions and convertible debt conversions | — | — | 976,103 | — | — | — | — | 976,103 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Release of common stock from escrow agent in connection with Quellos Transaction | — | 280,519 | — | — | — | — | — | 280,519 | — | — | �� | — | — | |||||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | — | — | (25,072 | ) | — | — | — | — | (25,072 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||
December 31, 2008 | 118,573,367 | (911,266 | ) | (370,991 | ) | 12,604,918 | — | — | — | 117,291,110 | 12,604,918 | — | — | — | ||||||||||||||||||||||||||||||||||
Issuance of shares to institutional investors | 10,771,232 | — | — | — | 5,587,232 | — | 3,556,188 | 10,771,232 | — | 5,587,232 | — | 3,556,188 | ||||||||||||||||||||||||||||||||||||
Issuance of shares to Barclays | 3,031,516 | — | — | — | 26,888,001 | — | 7,647,254 | 3,031,516 | — | 26,888,001 | — | 7,647,254 | ||||||||||||||||||||||||||||||||||||
Issuance of common shares for contingent consideration | 330,341 | — | — | — | — | — | — | 330,341 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Release of common stock from escrow agent in connection with Quellos Transaction | — | 42,326 | — | — | — | — | — | 42,326 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions and convertible debt conversions | 696,788 | — | 410,789 | — | — | — | — | 1,107,577 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Exchange of preferred shares series A for series B | — | — | — | (12,604,918 | ) | 12,604,918 | — | — | — | (12,604,918 | ) | 12,604,918 | — | — | ||||||||||||||||||||||||||||||||||
Exchange of common shares for preferred shares series B | (67,737,000 | ) | — | — | — | 67,737,000 | — | — | (67,737,000 | ) | — | 67,737,000 | — | — | ||||||||||||||||||||||||||||||||||
Exchange of common shares for preferred shares series C | (2,889,467 | ) | — | — | — | — | 2,889,467 | — | (2,889,467 | ) | — | — | 2,889,467 | — | ||||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | — | — | (51,399 | ) | — | — | — | — | (51,399 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||
December 31, 2009 | 62,776,777 | (868,940 | ) | (11,601 | ) | — | 112,817,151 | 2,889,467 | 11,203,442 | 61,896,236 | — | 112,817,151 | 2,889,467 | 11,203,442 | ||||||||||||||||||||||||||||||||||
Release of common stock from escrow agent in connection with Quellos Transaction | — | 865,337 | — | — | — | — | — | 865,337 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Other stock repurchases | — | — | (896,102 | ) | (896,102 | ) | ||||||||||||||||||||||||||||||||||||||||||
Exchange of common stock for preferred shares series B | — | (600,000 | ) | — | 600,000 | — | — | (600,000 | ) | — | 600,000 | — | — | |||||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions and convertible debt conversions | 1,634,807 | — | 804,243 | — | — | — | — | 2,439,050 | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Exchange of preferred shares series D for series B | — | — | — | — | 11,203,442 | — | (11,203,442 | ) | — | — | 11,203,442 | — | (11,203,442 | ) | ||||||||||||||||||||||||||||||||||
Exchange of preferred shares series B for common shares | 67,512,040 | — | — | — | (67,512,040 | ) | — | — | 67,512,040 | — | (67,512,040 | ) | — | — | ||||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | — | — | — | — | (23,028 | ) | — | — | — | — | (23,028 | ) | — | |||||||||||||||||||||||||||||||||||
December 31, 2010 | 131,923,624 | (3,603 | ) | (703,460 | ) | — | 57,108,553 | 2,866,439 | — | 131,216,561 | — | 57,108,553 | 2,866,439 | — | ||||||||||||||||||||||||||||||||||
F-71
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
20. Restructuring Charges
During the fourth quarter of 2008, the Company reduced its workforce globally by approximately 9%. This action was the result of a cost cutting initiative designed to streamline operations, enhance competitiveness and better position the Company in the asset management marketplace. The Company recorded a pre-tax restructuring charge of approximately $38 million ($26 million after-tax) for the year ended December 31, 2008. This charge was comprised of $34 million of severance and associated outplacement costs, $3 million of expenses related to the accelerated amortization of previously granted equity-based compensation awards, and $1 million of expenses related to legal services for the year ended December 31, 2008.
During 2009, the Company continued to reduce its workforce globally. This action was the result of business reengineering efforts designed to streamline operations, enhance competitiveness and better position the Company in the asset management marketplace. The Company recorded a pre-tax restructuring charge of $22 million ($14 million after-tax) for the three months ended March 31, 2009. This charge was comprised of $15 million of severance and associated outplacement costs, $4 million of property costs associated with the lease payments for the remaining term in excess of the estimated sublease proceeds and $3 million of expenses related to the accelerated amortization of previously granted equity-based compensation awards.
The following table presents a rollforward of the Company’s restructuring liability, which is included within other liabilities on the Company’s consolidated statementstatements of financial condition at December 31, 2008.condition:
| (Dollar amounts in millions) | ||||||||
Liability as of December 31, 2007 | $ | — | $ | — | ||||
Additions | 35 | 38 | ||||||
Cash payments | (14 | ) | (14 | ) | ||||
Accelerated amortization of equity-based awards | (3 | ) | ||||||
Liability as of December 31, 2008 | $ | 21 | 21 | |||||
Additions | 22 | |||||||
Cash payments | (34 | ) | ||||||
Accelerated amortization of equity-based awards | (3 | ) | ||||||
Liability as of December 31, 2009 | $ | 6 | ||||||
Cash payments | (4 | ) | ||||||
Liability as of December 31, 2010 | $ | 2 | ||||||
BlackRock, Inc.
Notes to the Consolidated Financial Statements
21. Income Taxes
The components of income tax expense for the years ended December 31, 2008, 20072010, 2009 and 2006,2008, are as follows:
| Year ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Current income tax expense: | ||||||||||||
Federal | $ | 396 | $ | 327 | $ | 184 | ||||||
State and local | 49 | 48 | 22 | |||||||||
Foreign | 175 | 194 | 26 | |||||||||
Total net current income tax expense | 620 | 569 | 232 | |||||||||
Deferred income tax expense (benefit): | ||||||||||||
Federal | (159 | ) | (38 | ) | (26 | ) | ||||||
State and local | (21 | ) | (9 | ) | (11 | ) | ||||||
Foreign | (52 | ) | (58 | ) | (6 | ) | ||||||
Total net deferred income tax expense (benefit) | (232 | ) | (105 | ) | (43 | ) | ||||||
Total income tax expense | $ | 388 | $ | 464 | $ | 189 | ||||||
F-72
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | 2008 | |||||||||
Current income tax expense: | ||||||||||||
Federal | $ | 708 | $ | 342 | $ | 396 | ||||||
State and local | 60 | 36 | 49 | |||||||||
Foreign | 200 | 86 | 175 | |||||||||
Total net current income tax expense | 968 | 464 | 620 | |||||||||
Deferred income tax expense (benefit): | ||||||||||||
Federal | 28 | (7 | ) | (160 | ) | |||||||
State and local | 10 | (60 | ) | (21 | ) | |||||||
Foreign | (35 | ) | (22 | ) | (52 | ) | ||||||
Total net deferred income tax expense (benefit) | 3 | (89 | ) | (233 | ) | |||||||
Total income tax expense | $ | 971 | $ | 375 | $ | 387 | ||||||
Income tax expense has been based on the following components of income before taxes:taxes, less net income (loss) attributable to non-controlling interests:
| Year ended December 31, | Year ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | |||||||||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | 2008 | ||||||||||||||||||
Domestic | $ | 657 | $ | 736 | $ | 448 | $ | 2,258 | $ | 899 | $ | 654 | |||||||||
Foreign | 517 | 723 | 64 | 776 | 351 | 517 | |||||||||||||||
Total | $ | 1,174 | $ | 1,459 | $ | 512 | $ | 3,034 | $ | 1,250 | $ | 1,171 | |||||||||
BlackRock, Inc.
Notes to the Consolidated Financial Statements
21. Income Taxes (continued)
A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows:
| Year ended December 31, | Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2008 | % | 2007 | % | 2006 | % | ||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | 2010 | % | 2009 | % | 2008 | % | |||||||||||||||||||||||||||||||||||||||
Statutory income tax expense | $ | 411 | 35 | % | $ | 511 | 35 | % | $ | 179 | 35 | % | $ | 1,062 | 35 | % | $ | 438 | 35 | % | $ | 410 | 35 | % | |||||||||||||||||||||
Increase (decrease) in income taxes resulting from: | |||||||||||||||||||||||||||||||||||||||||||||
Change in deferred foreign taxes for tax rate changes | — | — | (50 | ) | (4 | ) | — | — | |||||||||||||||||||||||||||||||||||||
State and local taxes (net of federal benefit) | 53 | 2 | 21 | 2 | 25 | 2 | |||||||||||||||||||||||||||||||||||||||
Impact of foreign, state, and local tax rate changes on deferred taxes | (27 | ) | (1 | ) | (45 | ) | (4 | ) | — | — | |||||||||||||||||||||||||||||||||||
Effect of foreign tax rates | (37 | ) | (3 | ) | (36 | ) | (2 | ) | 5 | 1 | (145 | ) | (4 | ) | (81 | ) | (6 | ) | (37 | ) | (3 | ) | |||||||||||||||||||||||
State and local taxes (net of federal benefit) | 25 | 2 | 39 | 3 | 16 | 3 | |||||||||||||||||||||||||||||||||||||||
Change in deferred state and local taxes for tax rate changes | — | — | — | — | (11 | ) | (2 | ) | |||||||||||||||||||||||||||||||||||||
Other | (11 | ) | (1 | ) | — | — | — | — | 28 | — | 42 | 3 | (11 | ) | (1 | ) | |||||||||||||||||||||||||||||
Income tax expense | $ | 388 | 33 | % | $ | 464 | 32 | % | $ | 189 | 37 | % | $ | 971 | 32 | % | $ | 375 | 30 | % | $ | 387 | 33 | % | |||||||||||||||||||||
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Company’s consolidated financial statements. These temporary differences result in taxable or deductible amounts in future years.
The components of deferred income tax assets and liabilities are shown below:
F-73
| December 31, | ||||||||
| (Dollar amounts in millions) | 2010 | 2009(1) | ||||||
Deferred income tax assets: | ||||||||
Compensation and benefits | $ | 374 | $ | 399 | ||||
Unrealized investment losses | 108 | 155 | ||||||
Loss carryforwards | 67 | 40 | ||||||
Other | 186 | 134 | ||||||
Gross deferred tax assets | 735 | 728 | ||||||
Less: deferred tax valuation allowances | (78 | ) | (71 | ) | ||||
Deferred tax assets net of valuation allowances | 657 | 657 | ||||||
Deferred income tax liabilities: | ||||||||
Goodwill and acquired indefinite-lived intangibles | 5,813 | 5,829 | ||||||
Acquired finite-lived intangibles | 271 | 325 | ||||||
Other | 40 | 53 | ||||||
Gross deferred tax liabilities | 6,124 | 6,207 | ||||||
Net deferred tax (liabilities) | ($ | 5,467 | ) | ($ | 5,550 | ) | ||
| (1) | Certain line items on the consolidated statement of financial condition, including deferred tax assets and deferred tax liabilities, have been retrospectively adjusted as of December 31, 2009 to reflect new information obtained about facts that existed as of December 1, 2009, the BGI acquisition date. |
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)21. Income Taxes (continued)
The components of deferred tax assets and liabilities are shown below:
| December 31, | ||||||||
| 2008 | 2007 | |||||||
Deferred tax assets: | ||||||||
Compensation and benefits | $ | 216 | $ | 147 | ||||
Unrealized investment losses | 157 | — | ||||||
Other | 65 | 85 | ||||||
Gross deferred tax asset | 438 | 232 | ||||||
Deferred tax liabilities: | ||||||||
Goodwill and acquired intangibles | 2,199 | 2,246 | ||||||
Other | 53 | 37 | ||||||
Gross deferred tax liability | 2,252 | 2,283 | ||||||
Net deferred tax (liabilities) | ($ | 1,814 | ) | ($ | 2,051 | ) | ||
Deferred income tax assets and liabilities are recorded net when related to the same tax jurisdiction. At December 31, 2008,2010, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $11$10 million and $1,825,$5,477 million, respectively. At December 31, 2007,2009, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $9$21 million and $2,060,$5,571 million, respectively.
DuringThe United Kingdom in the third quarter of 2007,2010 and New York City in the United Kingdom and Germanythird quarter of 2009 enacted legislation to reducereducing corporate income tax rates, effectivewhich resulted in April and January 2008, respectively. As a result, the Company revalued its deferred tax liabilities attributable to these jurisdictions and recorded a one-timerevaluation of certain net deferred income tax liabilities primarily related to acquired intangible assets, which resulted in a $30 million and a $45 million tax benefit, respectively.
The Company had a deferred income tax asset related to unrealized investment losses of $51 in 2007.
approximately $108 million and $155 million as of December 31, 2010 and 2009, respectively, reflecting the Company’s conclusion that based on the weight of available evidence, it is more likely than not that the deferred tax asset will be realized. During 2008, the Company incurred investment losses of $573 million primarily related to unrealized losses on investments. Substantially all of the investment losses relate to investments held by subsidiaries in the United States. After considerationthe allocation of net loss attributable to non-controlling interests of $155 million, the net unrealized loss on investments was $418.$418 million. A portion of the net loss is expected to be ordinary if recognized and, as result, will not be subject to any limitations. Realized capital losses may be carried back three years and carried forward five years and offset against realized capital gains for federal income tax purposes. The Company expects to be able to carry back a portion of its unrealized capital losses when realized, hold certain fixed income securities over a period sufficient for them to recover their unrealized losses, and to generate future capital gains sufficient to offset the unrealized capital losses. The
At December 31, 2010 and 2009, the Company has establishedhad available state net operating loss carry forwards of $182 million and $568 million, respectively, which will expire on or before 2032. As of December 31, 2010, the Company had a foreign net operating loss carryforwards of $84 million of which $42 million expires on or before 2017 and the balance will carry forward indefinitely. In addition, at December 31, 2010 and 2009, the Company had U.S. capital loss carryforwards of $90 million which were acquired in the BGI Transaction and will expire on or before 2013.
At December 31, 2010 and 2009, the Company had $78 million and $71 million of valuation allowances for deferred income tax asset of approximately $157 reflecting the Company’s conclusion that basedassets, respectively, recorded on the weightconsolidated statements of available evidence, it is more likely than not thatfinancial condition. The year over year increase in the valuation allowance primarily related to certain foreign deferred income tax asset will be realized.assets.
Goodwill recorded in connection with the Quellos Transaction has been reduced during the period by the amount of tax benefit realized from tax-deductible goodwill. (SeeSee Note 9)11, Goodwill, for further discussion.
F-74
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)21. Income Taxes (continued)
At December 31, 2008, the Company had a $14 valuation allowance recorded on the consolidated statements of financial condition. At December 31, 2007, the Company had a $15 valuation allowance recorded in the consolidated statements of financial condition. The year over year decrease in valuation allowance primarily relates to the 2008 utilization of state net operating losses partially offset by an increase in valuation allowance for foreign deferred tax assets.
Current income taxes are recorded net in the consolidated statements of financial condition when related to the same tax jurisdiction. TheAs of December 31, 2010, the Company had current income taxes receivable and payable of $44$57 million and $120,$157 million, respectively, as of December 31, 2008 recorded in other assets and accounts payable and accrued liabilities, respectively. TheAs of December 31, 2009, the Company had current income taxes receivable and payable of $47$292 million and $228,$86 million, respectively, as of December 31, 2007 recorded in other assets and accounts payable and accrued liabilities, respectively.
We doThe Company does not provide the deferred taxes on the excess of the financial reporting over tax basis on ourits investments in foreign subsidiaries that are essentially permanent in duration. The excess totaled $561$1,297 million and $778 million as of December 31, 2008.2010 and 2009, respectively. The determination of the additional deferred income taxes that haveon the excess has not been provided because it is not practicable due to the complexities associated with its hypothetical calculation.
BlackRock adopted the provisions of FIN No. 48 on January 1, 2007. As a result ofPursuant to the adoption of FIN 48, the Company recognized approximately $15 in increased income tax reservesASC 740-10 related to uncertain tax positions. Approximately $14 of this increase related touncertainty in income taxes, that would affectsee the effective tax rate if recognized, and this portion was accounted for as a reduction to the January 1, 2007 balance in retained earnings. The remaining $1 balance, if disallowed, would not affect the annual effective tax rate. Total gross unrecognized tax benefits at January 1, 2007 were approximately $52. The total amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate at January 1, 2007, was approximately $26.
The following tabular reconciliation which presents the total amounts of gross unrecognized tax benefits:
| 2008 | 2007 | |||||||
Balance at January 1 | $ | 66 | $ | 52 | ||||
Additions for tax positions of prior years | 12 | 1 | ||||||
Reductions for tax positions of prior years | (2 | ) | (11 | ) | ||||
Additions based on tax positions related to current year | 42 | 24 | ||||||
Lapse of statute of limitations | — | — | ||||||
Settlements | (7 | ) | — | |||||
Foreign exchange translation | 3 | — | ||||||
Balance at December 31 | $ | 114 | $ | 66 | ||||
F-75
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions) | 2010 | 2009 | 2008 | |||||||||
Balance at January 1 | $ | 285 | $ | 114 | $ | 66 | ||||||
Additions for tax positions of prior years | 10 | 11 | 12 | |||||||||
Reductions for tax positions of prior years | (17 | ) | (1 | ) | (2 | ) | ||||||
Additions based on tax positions related to current year | 35 | 63 | 42 | |||||||||
Lapse of statute of limitations | (8 | ) | — | — | ||||||||
Settlements | (2 | ) | (16 | ) | (7 | ) | ||||||
Foreign exchange translation | — | (3 | ) | 3 | ||||||||
Positions assumed in BGI Transaction | 4 | 117 | — | |||||||||
Balance at December 31 | $ | 307 | $ | 285 | $ | 114 | ||||||
Included in the balance of unrecognized tax benefits at December 31, 20082010, 2009 and 2007,2008, respectively, are $194 million, $184 million and $60 and $41million of tax benefits that, if recognized, would affect the effective tax rate.
The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued interest and penalties of $8 million during 2010 and in total, as of December 31, 2010, has recognized a liability for interest and penalties of $56 million. During 2009, the Company accrued interest and penalties of $8 million and in total, as of December 31, 2009, has recognized a liability for interest and penalties of $48 million, of which $28 million was assumed in the BGI Transaction. During 2008, the Company accrued interest and penalties of $5 during 2008million and in total, as of December 31, 2008, has recognized a liability for interest of $11. During 2007, the Company accrued interest of $2 and in total, as of December 31, 2007, had recognized a liability for interest and penalties of $6.$11 million.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
21. Income Taxes (continued)
Pursuant to the Amended and Restated Stock Purchase Agreement, the Company has been indemnified by Barclays for $69 million of unrecognized tax benefits.
BlackRock is subject to U.S. federal income tax as well as income tax in multiple jurisdictions. The tax years after 20042005 remain open to U.S. federal, state and local income tax examination, and the tax years after 20052006 remain open to income tax examination in the United Kingdom. With few exceptions, as of December 31, 2008,2010, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2004.2006. The Internal Revenue Service (“IRS”) is currently examining the Company’s 2006 and 2007 tax years and management expects that examination to conclude during 2011. In February 2011, the Company however,received a notice of proposed adjustments from the IRS. Management does not anticipate that its resolution would result in a material change to its consolidated financial statements. The Company is currently under audit in several jurisdictions. During 2008, the Company received notification from the Internal Revenue Service that it will conduct an examination of BlackRock’s federal tax returnstate and the audit cycle is expected to include the 2006, 2007 and 2008 tax years.foreign jurisdictions.
As of December 31, 2008,2010, it is reasonably possible the total amounts of unrecognized tax benefits will increase or decrease within the next twelve months. Until formal resolutions are reached betweenmonths due to completion of tax authorities’ exams or the Company andexpiration of statues of limitations. Management estimates that the existing liability for uncertain tax authorities,positions could decrease by approximately $15 million to $25 million within the determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not practicable.next twelve months. The Company does not anticipate that any possible adjustments resulting from these audits would result in a material change to its consolidated financial statements.
Prior to September 29, 2006, BlackRock had filed selected state and municipal income tax returns with one or more PNC subsidiaries on a combined or unitary basis. When BlackRock was included in a group’s combined or unitary state or municipal income tax filing with PNC subsidiaries, BlackRock’s share of the liability generally was an allocation to BlackRock of a percentage of the total tax liability based upon BlackRock’s level of activity in such state or municipality. PNC and BlackRock have entered into a tax disaffiliation agreement that sets forth each party’s rights and obligations with respect to income tax payments and refunds and addresses related matters such as the filing of tax returns and the conduct of audits or other proceedings involving claims made by taxing authorities. As such, the Company may be responsible for its pro rata share of tax positions taken by PNC for unaudited tax years which may be subsequently challenged by taxing authorities. Management does not anticipate that any such amounts would be material to the Company’s operations, financial position or cash flows.
F-76
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
22. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:EPS:
| Year ended December 31, | |||||||||
| 2008 | 2007 | 2006 | |||||||
Net income | $ | 786 | $ | 995 | $ | 323 | |||
Basic weighted-average shares outstanding | 129,543,443 | 128,488,561 | 80,638,167 | ||||||
Dilutive potential shares from stock options and restricted stock units | 2,791,990 | 2,447,727 | 2,207,139 | ||||||
Dilutive potential shares from convertible debt | 254,284 | 1,033,789 | 513,088 | ||||||
Dilutive potential shares from acquisition-related contingent stock payments | 406,709 | 118,733 | — | ||||||
Dilutive weighted-average shares outstanding | 132,996,426 | 132,088,810 | 83,358,394 | ||||||
Basic earnings per share | $ | 6.07 | $ | 7.75 | $ | 4.00 | |||
Diluted earnings per share | $ | 5.91 | $ | 7.53 | $ | 3.87 | |||
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions, except per share data) | 2010 | 2009 | 2008 | |||||||||
Net income attributable to BlackRock, Inc. | $ | 2,063 | $ | 875 | $ | 784 | ||||||
Less: | ||||||||||||
Dividends distributed to common shares | 764 | 412 | 406 | |||||||||
Dividends distributed to participating RSUs | 12 | 10 | 13 | |||||||||
Undistributed net income attributable to BlackRock, Inc. | 1,287 | 453 | 365 | |||||||||
Percentage of undistributed net income allocated to common shares(a) | 98.6 | % | 97.3 | % | 96.6 | % | ||||||
Undistributed net income allocated to common shares | 1,269 | 441 | 353 | |||||||||
Plus: | ||||||||||||
Common share dividends | 764 | 412 | 406 | |||||||||
Net income attributable to common shares | $ | 2,033 | $ | 853 | $ | 759 | ||||||
Weighted-average shares outstanding | 190,554,510 | 136,669,164 | 129,543,443 | |||||||||
Basic earnings per share attributable to BlackRock, Inc., common stockholders: | $ | 10.67 | $ | 6.24 | $ | 5.86 | ||||||
BlackRock, Inc.
Notes to the Consolidated Financial Statements
22. Earnings Per Common Share (continued)
The following table sets forth the computation of diluted EPS:
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions, except per share data) | 2010 | 2009 | 2008 | |||||||||
Net income attributable to BlackRock, Inc. | $ | 2,063 | $ | 875 | $ | 784 | ||||||
Less: | ||||||||||||
Dividends distributed to common shares | 764 | 412 | 406 | |||||||||
Dividends distributed to participating RSUs | 12 | 10 | 13 | |||||||||
Undistributed net income attributable to BlackRock, Inc. | 1,287 | 453 | 365 | |||||||||
Percentage of undistributed net income allocated to common shares(a) | 98.6 | % | 97.3 | % | 96.6 | % | ||||||
Undistributed net income allocated to common shares | 1,269 | 441 | 353 | |||||||||
Plus: | ||||||||||||
Common share dividends | 764 | 412 | 406 | |||||||||
Net income attributable to common shares | $ | 2,033 | $ | 853 | $ | 759 | ||||||
Weighted-average common shares outstanding | 190,554,510 | 136,669,164 | 129,543,443 | |||||||||
Dilutive effect of: | ||||||||||||
Stock options and non-participating RSUs | 1,751,487 | 1,519,570 | 1,172,081 | |||||||||
Convertible debt | 386,050 | 1,292,715 | 254,284 | |||||||||
Acquisition-related contingent stock payments | — | — | 406,709 | |||||||||
Total diluted weighted-average shares outstanding | 192,692,047 | 139,481,449 | 131,376,517 | |||||||||
Dilutive earnings per share attributable to BlackRock, Inc., common stockholders: | $ | 10.55 | $ | 6.11 | $ | 5.78 | ||||||
| (a) | Allocation to common shareholders is based on the total of common and participating security shareholders (which represent unvested RSUs that contain nonforfeitable rights to dividends). At December 31, 2010, 2009 and 2008, outstanding participating securities were 2.8 million, 3.8 million and 4.5 million, respectively. |
Basic EPS is calculated pursuant to the two-class method to determine income attributable to common shareholders. Basic EPS is calculated by dividing net distributed and undistributed earnings allocated to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS includes the determinants of basic EPS and in addition, reflects the impact of other potentially dilutive shares, including RSU awards that do not contain nonforfeitable rights to dividends, unexercised stock options and convertible debentures. The dilutive effect of participating securities is calculated under the more dilutive of either the treasury method or the two-class method.
Due to the similarities in terms between BlackRock series A, B, C and D non-voting participating preferred stock and the Company’s common stock, the Company considers the series A, B, C and D non-voting participating preferred stock to be a common stock equivalent for purposes of earnings per shareEPS calculations. As such, the Company has included the outstanding series A, B, C and D non-voting participating preferred stock and dividends paid for these series in the calculation of average basic and diluted shares outstanding for the years ended December 31, 2008, 20072010, 2009 and 2006.2008.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
22. Earnings Per Common Share (continued)
For the year ended December 31, 2010, 1,198,856 RSUs were excluded from the calculation of diluted EPS because to include them would have an anti-dilutive effect. For the years ended December 31, 2009 and 2008, 2007,1,240,998 and 2006, 1,336,911 1,545,735, and 0 stock options, respectively, were excluded from the calculation of diluted earnings per share because to include them would have an anti-dilutive effect.
Shares issued in acquisitionQuellos Transaction
On October 1, 2007, the Company acquired the fund of funds business of Quellos (See Note 3).Quellos. The Company issued 1,191,785 shares of BlackRock common stock that were placed into an escrow account. The common shares issued had no dilutive effect for 2007. In April 2008, 280,519total, 1,188,182 common shares were released to Quellos in accordance with the Quellos asset purchase agreement, which resulted in an adjustmentbetween April 2008 and October 2010 and became dilutive subsequent to the recognized purchase price and had a dilutive effect in 2008.respective release dates. The remaining 911,2663,603 common shares may have a dilutive effect in future periods based on the timing of the release of shares from the escrow account in accordance with the Quellos asset purchase agreement. The release of the remaining escrow shares could begin to occur in 2009 and be completed in 2010.
F-77
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)
23. Segment Information
The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company believes it operates in one business segment in accordance with SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information.ASC 280-10.
The following table illustrates investment advisory, and administration basefees, securities lending revenue and performance fees,BlackRock Solutions and advisory, distribution fees and other revenue for the years ended December 31, 2008, 20072010, 2009 and 2006.2008.
| (Dollar amounts in millions) | Year ended December 31, | ||||||||||||||||||||
| Year ended December 31, | 2010 | 2009 | 2008 | ||||||||||||||||||
Equity | $ | 4,055 | $ | 1,468 | $ | 1,701 | |||||||||||||||
Fixed income | 1,531 | 921 | 879 | ||||||||||||||||||
Multi-asset class | 773 | 499 | 527 | ||||||||||||||||||
Alternatives | 961 | 515 | 619 | ||||||||||||||||||
Cash management | 510 | 625 | 708 | ||||||||||||||||||
| 2008 | 2007 | 2006 | |||||||||||||||||||
Fixed income | $ | 896 | $ | 906 | $ | 596 | |||||||||||||||
Equity and balanced | 2,196 | 2,325 | 645 | ||||||||||||||||||
Cash management | 708 | 520 | 203 | ||||||||||||||||||
Alternative investment products | 609 | 609 | 397 | ||||||||||||||||||
Total investment advisory and administration fees | 4,409 | 4,360 | 1,841 | ||||||||||||||||||
Total investment advisory, administration fees, securities lending revenue and performance fees | 7,830 | 4,028 | 4,434 | ||||||||||||||||||
BlackRock Solutions and advisory | 406 | 198 | 148 | 460 | 477 | 393 | |||||||||||||||
Distribution fees | 139 | 123 | 36 | 116 | 100 | 139 | |||||||||||||||
Other revenue | 110 | 164 | 73 | 206 | 95 | 98 | |||||||||||||||
Total revenue | $ | 5,064 | $ | 4,845 | $ | 2,098 | $ | 8,612 | $ | 4,700 | $ | 5,064 | |||||||||
The following table illustrates the Company’s total revenue and long-lived assets, including goodwill and property and equipment for the years ended December 2008, 20072010, 2009 and 20062008 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the customer is sourced orresides.
(Dollar amounts in millions) Revenue | 2010 | % of Total | 2009 | % of Total | 2008 | % of Total | ||||||||||||||||||
Americas | $ | 5,824 | 67 | % | $ | 3,309 | 70 | % | $ | 3,438 | 68 | % | ||||||||||||
Europe | 2,300 | 27 | % | 1,179 | 25 | % | 1,360 | 27 | % | |||||||||||||||
Asia-Pacific | 488 | 6 | % | 212 | 5 | % | 266 | 5 | % | |||||||||||||||
Total revenue | $ | 8,612 | 100 | % | $ | 4,700 | 100 | % | $ | 5,064 | 100 | % | ||||||||||||
The following table illustrates the Company’s long-lived assets, including goodwill and property and equipment at December 31, 2010, 2009 and 2008 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.
| 2008 | % of total | 2007 | % of total | 2006 | % of total | |||||||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||||
North America | $ | 3,438 | 68 | % | $ | 3,070 | 63 | % | $ | 1,715 | 82 | % | ||||||||||||||||||||||||||||||
Europe | 1,360 | 27 | % | 1,490 | 31 | % | 321 | 15 | % | |||||||||||||||||||||||||||||||||
Asia-Pacific | 266 | 5 | % | 285 | 6 | % | 62 | 3 | % | |||||||||||||||||||||||||||||||||
Total revenues | $ | 5,064 | 100 | % | $ | 4,845 | 100 | % | $ | 2,098 | 100 | % | ||||||||||||||||||||||||||||||
Long-Lived Assets | ||||||||||||||||||||||||||||||||||||||||||
North America | $ | 5,714 | 99 | % | $ | 5,695 | 98 | % | $ | 5,408 | 99 | % | ||||||||||||||||||||||||||||||
(Dollar amounts in millions) Long-lived Assets | 2010 | % of Total | 2009 | % of Total | 2008 | % of Total | ||||||||||||||||||||||||||||||||||||
Americas | $ | 13,092 | 99 | % | $ | 12,983 | 99 | % | $ | 5,714 | 99 | % | ||||||||||||||||||||||||||||||
Europe | 27 | 0 | % | 35 | 1 | % | 30 | 0 | % | 42 | — | % | 46 | — | % | 27 | — | % | ||||||||||||||||||||||||
Asia-Pacific | 52 | 1 | % | 56 | 1 | % | 34 | 1 | % | 99 | 1 | % | 94 | 1 | % | 52 | 1 | % | ||||||||||||||||||||||||
Total long-lived assets | $ | 5,793 | 100 | % | $ | 5,786 | 100 | % | $ | 5,472 | 100 | % | $ | 13,233 | 100 | % | $ | 13,123 | 100 | % | $ | 5,793 | 100 | % | ||||||||||||||||||
North AmericaAmericas primarily is comprised of the United States, Canada, Brazil and Mexico, while Europe primarily is comprised of the United Kingdom and Asia-Pacific primarily is comprised of Japan, Australia and Hong Kong.
F-78
BlackRock, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, except share data or as otherwise noted)24. Selected Quarterly Financial Data (unaudited)
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||||||||||
2008 | ||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) 2010 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||||||||||||||
Revenue | $ | 1,300 | $ | 1,387 | $ | 1,313 | $ | 1,064 | $ | 1,995 | $ | 2,032 | $ | 2,092 | $ | 2,493 | ||||||||||||
Operating income | $ | 396 | $ | 405 | $ | 454 | $ | 338 | $ | 654 | $ | 697 | $ | 707 | $ | 940 | ||||||||||||
Net income | $ | 242 | $ | 274 | $ | 218 | $ | 53 | $ | 428 | $ | 389 | $ | 584 | $ | 649 | ||||||||||||
Net income attributable to BlackRock, Inc. | $ | 423 | $ | 432 | $ | 551 | $ | 657 | ||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: | ||||||||||||||||||||||||||||
Basic | $ | 1.87 | $ | 2.12 | $ | 1.68 | $ | 0.41 | $ | 2.20 | $ | 2.23 | $ | 2.85 | $ | 3.39 | ||||||||||||
Diluted | $ | 1.82 | $ | 2.05 | $ | 1.62 | $ | 0.40 | $ | 2.17 | $ | 2.21 | $ | 2.83 | $ | 3.35 | ||||||||||||
Weighted-average shares outstanding: | ||||||||||||||||||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||||||
Basic | 128,904,253 | 129,569,325 | 129,793,939 | 129,888,110 | 189,676,023 | 190,975,161 | 190,494,905 | 191,057,374 | ||||||||||||||||||||
Diluted | 132,876,553 | 133,526,713 | 134,012,819 | 133,403,419 | 192,152,251 | 192,569,539 | 192,326,841 | 193,478,460 | ||||||||||||||||||||
Dividend Declared Per Share | $ | 0.78 | $ | 0.78 | $ | 0.78 | $ | 0.78 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | ||||||||||||
Common stock price per share: | ||||||||||||||||||||||||||||
High | $ | 231.99 | $ | 227.51 | $ | 249.37 | $ | 195.00 | $ | 243.80 | $ | 212.27 | $ | 172.87 | $ | 193.74 | ||||||||||||
Low | $ | 165.72 | $ | 171.86 | $ | 156.20 | $ | 94.78 | $ | 200.56 | $ | 143.01 | $ | 138.42 | $ | 161.53 | ||||||||||||
Close | $ | 204.18 | $ | 177.00 | $ | 194.50 | $ | 134.15 | $ | 217.76 | $ | 143.40 | $ | 170.25 | $ | 190.58 | ||||||||||||
2007 | ||||||||||||||||||||||||||||
2009 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||||||||||||||
Revenue | $ | 1,005 | $ | 1,097 | $ | 1,298 | $ | 1,444 | $ | 987 | $ | 1,029 | $ | 1,140 | $ | 1,544 | ||||||||||||
Operating income | $ | 272 | $ | 282 | $ | 272 | $ | 468 | $ | 271 | $ | 261 | $ | 357 | $ | 389 | ||||||||||||
Net income | $ | 195 | $ | 222 | $ | 255 | $ | 322 | $ | 62 | $ | 244 | $ | 334 | $ | 257 | ||||||||||||
Net income attributable to BlackRock, Inc. | $ | 84 | $ | 218 | $ | 317 | $ | 256 | ||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: | ||||||||||||||||||||||||||||
Basic | $ | 1.52 | $ | 1.73 | $ | 1.99 | $ | 2.51 | $ | 0.63 | $ | 1.62 | $ | 2.31 | $ | 1.65 | ||||||||||||
Diluted | $ | 1.48 | $ | 1.69 | $ | 1.94 | $ | 2.43 | $ | 0.62 | $ | 1.59 | $ | 2.27 | $ | 1.62 | ||||||||||||
Weighted-average shares outstanding: | ||||||||||||||||||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||||||
Basic | 128,809,726 | 128,544,894 | 128,161,027 | 128,449,943 | 130,216,218 | 130,928,926 | 133,266,379 | 152,062,468 | ||||||||||||||||||||
Diluted | 131,895,570 | 131,383,470 | 131,316,455 | 132,578,679 | 131,797,189 | 133,364,611 | 135,902,241 | 155,040,242 | ||||||||||||||||||||
Dividend Declared Per Share | $ | 0.67 | $ | 0.67 | $ | 0.67 | $ | 0.67 | $ | 0.78 | $ | 0.78 | $ | 0.78 | $ | 0.78 | ||||||||||||
Common stock price per share: | ||||||||||||||||||||||||||||
High | $ | 180.30 | $ | 162.83 | $ | 179.97 | $ | 224.54 | $ | 143.32 | $ | 183.80 | $ | 220.17 | $ | 241.66 | ||||||||||||
Low | $ | 151.32 | $ | 143.69 | $ | 139.20 | $ | 172.18 | $ | 88.91 | $ | 119.12 | $ | 159.45 | $ | 206.00 | ||||||||||||
Close | $ | 156.31 | $ | 156.59 | $ | 173.41 | $ | 216.80 | $ | 130.04 | $ | 175.42 | $ | 216.82 | $ | 232.20 | ||||||||||||
The fourthfirst quarter of 2008 includes2009 included the impact of a $38$22 million pre-tax expense related to restructuring charges.
The second, third and fourth quarters of 2009 included $15 million, $16 million and $152 million of pre-tax BGI transaction and integration costs, respectively.
The fourth quarter of 2009 included incremental revenue and expenses related to the operations of BGI in December 2009, and subsequent quarters in 2010 included the full effect of the operations of BGI.
The third quarter of 2007 includes the impact of2010 and 2009 included a $128 pre-tax expense related to the termination of administration$30 million and servicing arrangements with Merrill Lynch and a $51$45 million tax benefit resulting from a decrease in deferred income taxes duerelated to enacted legislation during the quarter reducing corporate income taxes in the United Kingdom and Germany.New York City income tax law changes, respectively.
F-79The first, second and third quarters of 2010 included $52 million, $32 million and $6 million of pre-tax BGI integration costs, respectively.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
25. Subsequent Events
Additional Subsequent Event Review
In addition to the subsequent events included in the notes to the consolidated financial statements, the Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosures.
EXHIBIT INDEX
Please note that the agreements included as exhibits to this Form 10-K are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about BlackRock or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time.
Exhibit No. | Description | |
| | Amended and Restated Certificate of Incorporation of BlackRock. | |
| | Amended and Restated Bylaws of BlackRock. | |
| | Certificate of Designations of Series A Convertible Participating Preferred Stock of BlackRock. | |
| | Certificate of Designations of Series B Convertible Participating Preferred Stock of BlackRock. | |
| | Certificate of Designations of Series C Convertible Participating Preferred Stock of BlackRock. | |
| 3.6(3) | Certificate of Designations of Series D Convertible Participating Preferred Stock of BlackRock. | |
| 4.1(4) | Specimen of Common Stock Certificate. | |
| 4.2(5) | Indenture, dated as of February 23, 2005, between Old BlackRock and The Bank of New York (as successor-in-interest to JPMorgan Chase Bank, N.A.), as trustee, relating to the 2.625% Convertible Debentures due 2035. | |
| 4.3(5) | Form of 2.625% Convertible | |
| | First Supplemental Indenture, dated September 29, 2006, relating to the 2.625% Convertible Debentures due 2035. | |
| 4.5(6) | Indenture, dated September 17, 2007, between BlackRock and The Bank of New York, as trustee, relating to senior debt securities. | |
| 4.6(7) | Form of 6.25% Notes due 2017. | |
| Form of 2.25% Notes due 2012. | ||
| 4.8(8) | Form of 3.50% Notes due 2014. | |
| 4.9(8) | Form of 5.00% Notes due 2019. | |
| 10.1(9) | Tax Disaffiliation Agreement, dated October 6, 1999, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | |
| BlackRock, Inc. Amended and Restated 1999 Stock Award and Incentive Plan.+ | ||
| Amended and Restated BlackRock, Inc. 1999 Annual Incentive Performance Plan. + | ||
| 10.4(12) | Amendment No. 1 to the BlackRock, Inc. Amended and Restated 1999 | |
| 10.5(4) | ||
EXHIBIT INDEX (continued)
|
| |
| BlackRock, Inc. Voluntary Deferred Compensation Plan, as amended and restated as of January 1, 2005.+ |
EXHIBIT INDEX (continued)
Exhibit No. | Description | |
| Form of Stock Option Agreement expected to be used in connection with future grants of Stock Options under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Form of Restricted Stock Agreement expected to be used in connection with future grants of Restricted Stock under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units for long-term incentive awards under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Form of Directors’ Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+ | ||
| Registration Rights Agreement, dated as of September 29, 2006, among BlackRock, Merrill Lynch & Co., Inc. and the PNC Financial Service Group, Inc. | ||
| Share Surrender Agreement, dated October 10, 2002 (the “Share Surrender Agreement”), among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc.+ | ||
| First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement.+ | ||
| Second Amendment, dated as of June 11, 2007, to the Share Surrender Agreement.+ | ||
| Third Amendment, dated as of February 27, 2009, to the Share Surrender Agreement.+ | ||
EXHIBIT INDEX (continued)
|
| |
| Transition Services Agreement, dated as of September 29, 2006, by and between Merrill Lynch & Co., Inc. and BlackRock. | ||
| Asset Purchase Agreement, dated as of June 26, 2007, by and among BlackRock, BAA Holdings, LLC and Quellos Holdings, LLC. | ||
| Five-Year Revolving Credit Agreement, dated as of August 22, 2007, by and among BlackRock, Wachovia Bank, National Association, as administrative agent, swingline lender and issuing lender, Sumitomo Mitsui Banking Corporation, as Japanese Yen lender, a group of lenders, Wachovia Capital Markets, LLC and Citigroup Global Markets Inc., as joint lead arrangers and joint book managers, Citigroup Global Markets Inc., as syndication agent, and HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A., and Morgan Stanley Bank, as documentation agents. | ||
| Second Amended and Restated Global Distribution Agreement, dated as of | ||
| Amended and Restated Implementation and Stockholder Agreement, dated as of February 27, 2009, between The PNC Financial Services Group, Inc. and BlackRock. | ||
EXHIBIT INDEX (continued)
Exhibit No. | Description | |
| 10.22 | Third Amended and Restated Stockholder Agreement, dated as of | |
| 10.23(22) | Stock Purchase Agreement, dated as of June 11, 2009, between The PNC Financial Services Group, Inc. and BlackRock. | |
| 10.24(23) | Commercial Paper Dealer Agreement between BlackRock and Barclays Capital Inc., dated as of October 14, 2009. | |
| 10.25(3) | Amended and Restated Stock Purchase Agreement, dated as of June 16, 2009, by and among Barclays Bank PLC, Barclays PLC (solely for the purposes of Section 6.16, Section 6.18 and Section 6.24) and BlackRock. | |
| 10.26(3) | Stockholder Agreement, dated as of December 1, 2009, by and among BlackRock, Barclays Bank PLC and Barclays BRHoldings S.à.r.l. | |
| 10.27(3) | Registration Rights Agreement, dated as of December 1, 2009, by and among BlackRock, Barclays Bank PLC and Barclays BRHoldings S.à.r.l. | |
| 10.28(24) | Lease Agreement, dated as of February 17, 2010, among BlackRock Investment Management (UK) Limited and Mourant & Co Trustees Limited and Mourant Property Trustees Limited as Trustees of the Drapers Gardens Unit Trust for the lease of Drapers Gardens, 12 Throgmorton Avenue, London, EC2, United Kingdom. | |
| 12.1 | Computation of Ratio of Earnings to Fixed Charges. | |
| 21.1 | Subsidiaries of Registrant. | |
| 23.1 | Deloitte & Touche LLP Consent. | |
| 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. | |
EXHIBIT INDEX (continued)
| (1) | Incorporated by |
| Incorporated by |
| (3) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 3, 2009. |
| (4) | Incorporated by |
| (5) | Incorporated by |
| (6) |
EXHIBIT INDEX (continued)
| (7) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on September 17, 2007. |
| (8) | Incorporated by |
| (9) | Incorporated by reference to Old BlackRock’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed on May 13, 1999. |
| (10) | Incorporated by |
| (11) | Incorporated by |
| Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on May 24, 2006. |
| Incorporated by |
| (14) | Incorporated by reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended |
| Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on |
| Incorporated by |
| (17) | Incorporated by reference to BlackRock’s Registration Statement on Form S-4, as amended, originally filed on June 9, 2006. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on July 2, 2007. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on August 27, 2007. |
| (20) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on November 17, 2010. |
| (21) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 17, 2009. |
| (22) | Incorporated by reference to BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended June 30, |
| (23) |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on |
| (24) | Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2009. |
| + | Denotes compensatory plans or arrangements |