UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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, 20122014
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 Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
55 East 52nd Street, New York, NY 10055
(Address of Principal Executive Offices)
(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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 ¨ No x
The aggregate market value of the voting common stock and non-votingnonvoting common stock equivalents held by non-affiliatesnonaffiliates of the registrant as of June 30, 20122014 was approximately $28.7$52.6 billion.
As of January 31, 2013,2015, there were 169,961,312165,405,059 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 20132015 annual meeting of stockholders to be held on May 30, 201328, 2015 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.
BlackRock, Inc.
TABLE OF CONTENTSTable of Contents
OverviewPART I
OVERVIEW
BlackRock, Inc. (NYSE: BLK;(together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) is the world’s largesta leading publicly traded investment management firm with employees in 30 countries that serve clients in over 100 countries across the globe. We provide a broad range of investment and risk management services and had $3.792$4.652 trillion of assets under management (“AUM”) at December 31, 2012. 2014. With employees in more than 30 countries who serve clients in over 100 countries across the globe, BlackRock provides a broad range of investment and risk management services to institutional and retail clients worldwide.
Our clientsdiverse platform of active (alpha) and index (beta) investment strategies across asset classes enables the Company to tailor investment outcomes and asset allocation solutions for clients. Our product offerings include retail, high net worthsingle- and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. Products are offered directly and through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds,iShares® exchange-traded funds (“HNW”ETFs”), separate accounts, collective investment funds and other pooled investment vehicles. We also offer ourBlackRock Solutions® (“BRS”) investment and risk management technology platform,Aladdin®, risk analytics and advisory services and solutions to a broad base of institutional investors, comprised of pension funds, official institutions, endowments, insurance companies, corporations, financial institutions, central banks and sovereign wealth funds.investors. The Company is highly regulated and serves its clients as a fiduciary. We do not engage in proprietary trading activities that could conflict with the interests of our clients.
Our unique platform enables usBlackRock serves a diverse mix of institutional and retail clients across the globe. Clients include tax-exempt institutions, such as defined benefit and defined contribution pension plans, charities, foundations and endowments; official institutions, such as central banks, sovereign wealth funds, supranationals and other government entities; taxable institutions, including insurance companies, financial institutions, corporations and third-party fund sponsors, and retail investors.
BlackRock maintains a significant global sales and marketing presence that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to offer 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, alternatives and/or money market instruments. We offer our productsinvestors directly and through intermediaries in a variety of vehicles, including open-endfinancial professionals and closed-end mutual funds,iShares® exchange-traded funds (“ETFs”)pension consultants, and other exchange-traded products (together with ETFs, “ETPs”), collective investment funds and separate accounts. We also offer our BlackRock Solutions® (“BRS”) investment systems, risk management and advisory services primarily to institutional investors.establishing third-party distribution relationships.
BlackRock is an independent, publicly traded company, with no single majority shareholder and a majorityover two-thirds of independent directors on its Board of Directors.Directors consisting of independent directors. At December 31, 2012,2014, The PNC Financial Services Group, Inc. (“PNC”) owned approximately 20.8%held 21.0% of BlackRock’s voting common sharesstock and 22.0% of BlackRock’s capital stock, which includes outstanding common stock and approximately 21.9% of total capitalnonvoting preferred stock.
Management seeks to achieve attractive returns for stockholders over time by, among other things, capitalizing on the following factors:
the Company’s focus on strong performance providing alpha for active products and limited or no tracking error for passive products;
the Company’s positioning in the face of macro challenges driving trends in investor behavior, including the secular shift to passive investing and ETPs, a focus on income and retirement, and barbelling of risk using passive and high alpha products including alternatives;
the Company’s global presence and commitment to best practices around the world, with approximately 45% of employees outside the United States supporting local investment capabilities and serving clients, and approximately 44% of total AUM managed for clients domiciled outside the United States; and
the growing recognition of the global BlackRock brand, and the depth and breadth of the Company’s intellectual capital.
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.
The Company’s ability to increase revenue, earnings and stockholder value over time is predicated on its ability to generate new business, including business in BRS 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 attract, develop and retain talented professionals is critical to the Company’s long-term success.
Financial Highlights
| Selected GAAP Financial Results | ||||||||||||||||||||||||||||
| (Dollar amounts in millions, except per share amounts) | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 5-Year CAGR(4) | |||||||||||||||||||||
Total revenue | $ | 9,337 | $ | 9,081 | $ | 8,612 | $ | 4,700 | $ | 5,064 | $ | 4,845 | 14 | % | ||||||||||||||
Operating income | $ | 3,524 | $ | 3,249 | $ | 2,998 | $ | 1,278 | $ | 1,593 | $ | 1,294 | 22 | % | ||||||||||||||
Operating margin | 37.7 | % | 35.8 | % | 34.8 | % | 27.2 | % | 31.5 | % | 26.7 | % | 7 | % | ||||||||||||||
Non-operating income (expense)(1) | $ | (36 | ) | $ | (116 | ) | $ | 36 | $ | (28 | ) | $ | (422 | ) | $ | 162 | (174 | %) | ||||||||||
Net income attributable to BlackRock, Inc. | $ | 2,458 | $ | 2,337 | $ | 2,063 | $ | 875 | $ | 784 | $ | 993 | 20 | % | ||||||||||||||
Diluted earnings per common share | $ | 13.79 | $ | 12.37 | $ | 10.55 | $ | 6.11 | $ | 5.78 | $ | 7.37 | 13 | % | ||||||||||||||
FINANCIAL HIGHLIGHTS
| Selected Non-GAAP Financial Results | ||||||||||||||||||||||||||||
| (Dollar amounts in millions, except per share amounts) | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 5-Year CAGR(4) | |||||||||||||||||||||
As adjusted(2): | ||||||||||||||||||||||||||||
Operating income | $ | 3,574 | $ | 3,392 | $ | 3,167 | $ | 1,570 | $ | 1,662 | $ | 1,518 | 19 | % | ||||||||||||||
Operating margin(3) | 40.4 | % | 39.7 | % | 39.3 | % | 38.2 | % | 38.7 | % | 37.4 | % | 2 | % | ||||||||||||||
Non-operating income (expense)(1) | $ | (42 | ) | $ | (113 | ) | $ | 25 | $ | (46 | ) | $ | (384 | ) | $ | 150 | (178 | %) | ||||||||||
Net income attributable to BlackRock, Inc. | $ | 2,438 | $ | 2,239 | $ | 2,139 | $ | 1,021 | $ | 856 | $ | 1,077 | 18 | % | ||||||||||||||
Diluted earnings per common share | $ | 13.68 | $ | 11.85 | $ | 10.94 | $ | 7.13 | $ | 6.30 | $ | 7.99 | 11 | % | ||||||||||||||
| (in millions, except per share data) | 2014 | 2013 | 2012 | 2011 | 2010 | 5-Year CAGR(4) | ||||||||||||||||||
Total revenue | $ | 11,081 | $ | 10,180 | $ | 9,337 | $ | 9,081 | $ | 8,612 | 19 | % | ||||||||||||
Operating income | $ | 4,474 | $ | 3,857 | $ | 3,524 | $ | 3,249 | $ | 2,998 | 28 | % | ||||||||||||
Operating margin | 40.4 | % | 37.9 | % | 37.7 | % | 35.8 | % | 34.8 | % | 8 | % | ||||||||||||
Nonoperating income (expense)(1) | $ | (49 | ) | $ | 97 | $ | (36 | ) | $ | (116 | ) | $ | 36 | n/a | ||||||||||
Net income attributable to BlackRock, Inc. | $ | 3,294 | $ | 2,932 | $ | 2,458 | $ | 2,337 | $ | 2,063 | 30 | % | ||||||||||||
Diluted earnings per common share | $ | 19.25 | $ | 16.87 | $ | 13.79 | $ | 12.37 | $ | 10.55 | 26 | % | ||||||||||||
| (in millions, except per share data) | 2014 | 2013 | 2012 | 2011 | 2010 | 5-Year CAGR(4) | ||||||||||||||||||
As adjusted(2): | ||||||||||||||||||||||||
Operating income | $ | 4,563 | $ | 4,024 | $ | 3,574 | $ | 3,392 | $ | 3,167 | 24 | % | ||||||||||||
Operating margin(2) | 42.9 | % | 41.4 | % | 40.4 | % | 39.7 | % | 39.3 | % | 2 | % | ||||||||||||
Nonoperating income (expense)(1) | $ | (56 | ) | $ | 7 | $ | (42 | ) | $ | (113 | ) | $ | 25 | n/a | ||||||||||
Net income attributable to BlackRock, Inc. (3) | $ | 3,310 | $ | 2,882 | $ | 2,438 | $ | 2,239 | $ | 2,139 | 27 | % | ||||||||||||
Diluted earnings per common share(3) | $ | 19.34 | $ | 16.58 | $ | 13.68 | $ | 11.85 | $ | 10.94 | 22 | % | ||||||||||||
| — not applicable |
| (1) | Net of net income (loss) attributable to |
| (2) | BlackRock reports its financial results in accordance with accounting principles generally accepted in the United States |
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| (3) | Net income attributable to BlackRock, Inc., as adjusted, and diluted earnings per common share, as adjusted exclude the after-tax impact of the items listed above and also include the effect on deferred income tax expense attributable to changes in corporate income tax rates as a result of income tax law changes and a state tax election. |
| (4) | Percentage represents compounded annual growth |
See reconciliation to GAAP measures in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures for further information on as adjusted items.
Assets Under Management
A summary of theThe Company’s AUM by product type for the years 20072010 through 20122014 is presented below:
AUM by Asset Class
December 31,below.
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | 2011 | 2010 | 5-Year CAGR(1) | ||||||||||||||||||||||||||||||||||||||||||
Equity | $ | 1,845,501 | $ | 1,560,106 | $ | 1,694,467 | $ | 1,536,055 | $ | 203,292 | $ | 362,705 | $ | 2,451,111 | $ | 2,317,695 | $ | 1,845,501 | $ | 1,560,106 | $ | 1,694,467 | 10 | % | ||||||||||||||||||||||||
Fixed income | 1,259,322 | 1,247,722 | 1,141,324 | 1,055,627 | 481,365 | 510,207 | 1,393,653 | 1,242,186 | 1,259,322 | 1,247,722 | 1,141,324 | 6 | % | |||||||||||||||||||||||||||||||||||
Multi-asset class | 267,748 | 225,170 | 185,587 | 142,029 | 77,516 | 98,623 | ||||||||||||||||||||||||||||||||||||||||||
Multi-asset | 377,837 | 341,214 | 267,748 | 225,170 | 185,587 | 22 | % | |||||||||||||||||||||||||||||||||||||||||
Alternatives | 109,795 | 104,948 | 109,738 | 102,101 | 61,544 | 71,771 | 111,240 | 111,114 | 109,795 | 104,948 | 109,738 | 2 | % | |||||||||||||||||||||||||||||||||||
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Long-term | 3,482,366 | 3,137,946 | 3,131,116 | 2,835,812 | 823,717 | 1,043,306 | 4,333,841 | 4,012,209 | 3,482,366 | 3,137,946 | 3,131,116 | 9 | % | |||||||||||||||||||||||||||||||||||
Cash management | 263,743 | 254,665 | 279,175 | 349,277 | 338,439 | 313,338 | 296,353 | 275,554 | 263,743 | 254,665 | 279,175 | (3 | )% | |||||||||||||||||||||||||||||||||||
Advisory | 45,479 | 120,070 | 150,677 | 161,167 | 144,995 | — | 21,701 | 36,325 | 45,479 | 120,070 | 150,677 | (33 | )% | |||||||||||||||||||||||||||||||||||
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Total | $ | 3,791,588 | $ | 3,512,681 | $ | 3,560,968 | $ | 3,346,256 | $ | 1,307,151 | $ | 1,356,644 | $ | 4,651,895 | $ | 4,324,088 | $ | 3,791,588 | $ | 3,512,681 | $ | 3,560,968 | 7 | % | ||||||||||||||||||||||||
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| (1) | Percentage represents CAGR over a five-year period (2009-2014). |
Component Changeschanges in AUM by Asset Class
Five Years Endedproduct type for the five years ended December 31, 20122014 are presented below.
| (Dollar amounts in millions) | 12/31/2007 | Net New Business | Acquired AUM, net(1) | Market / FX App (Dep) | 12/31/2012 | 5-Year CAGR(2) | ||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | December 31, 2009 | Net Inflows (Outflows) | Adjustment/ Acquisition(1) | Market Change | FX Impact | December 31, 2014 | 5-Year CAGR | |||||||||||||||||||||||||||||||||||||||||||||
Equity | $ | 362,705 | $ | 185,225 | $ | 1,053,952 | $ | 243,619 | $ | 1,845,501 | 38 | % | $ | 1,536,055 | $ | 270,872 | $ | (125,860 | ) | $ | 831,522 | $ | (61,478 | ) | $ | 2,451,111 | 10 | % | ||||||||||||||||||||||||
Fixed income | 510,207 | (588 | ) | 502,520 | 247,183 | 1,259,322 | 20 | % | 1,055,627 | 82,232 | (14,270 | ) | 297,702 | (27,638 | ) | 1,393,653 | 6 | % | ||||||||||||||||||||||||||||||||||
Multi-asset class | 98,623 | 101,866 | 39,909 | 27,350 | 267,748 | 22 | % | |||||||||||||||||||||||||||||||||||||||||||||
Multi-asset | 142,029 | 156,003 | 9,499 | 83,397 | (13,091 | ) | 377,837 | 22 | % | |||||||||||||||||||||||||||||||||||||||||||
Alternatives | 71,771 | (8,801 | ) | 55,734 | (8,909 | ) | 109,795 | 9 | % | 102,101 | (11,759 | ) | 18,956 | 4,298 | (2,356 | ) | 111,240 | 2 | % | |||||||||||||||||||||||||||||||||
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Long-term | 1,043,306 | 277,702 | 1,652,115 | 509,243 | 3,482,366 | 27 | % | 2,835,812 | 497,348 | (111,675 | ) | 1,216,919 | (104,563 | ) | 4,333,841 | 9 | % | |||||||||||||||||||||||||||||||||||
Cash management | 313,338 | (102,727 | ) | 53,616 | (484 | ) | 263,743 | (3 | %) | 349,277 | (43,523 | ) | (5,914 | ) | 3,182 | (6,669 | ) | 296,353 | (3 | )% | ||||||||||||||||||||||||||||||||
Advisory | — | 39,935 | (10 | ) | 5,554 | 45,479 | NM | 161,167 | (137,078 | ) | (10 | ) | 1,136 | (3,514 | ) | 21,701 | (33 | )% | ||||||||||||||||||||||||||||||||||
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Total | $ | 1,356,644 | $ | 214,910 | $ | 1,705,721 | $ | 514,313 | $ | 3,791,588 | 23 | % | $ | 3,346,256 | $ | 316,747 | $ | (117,599 | ) | $ | 1,221,237 | $ | (114,746 | ) | $ | 4,651,895 | 7 | % | ||||||||||||||||||||||||
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Amounts include acquisition adjustments and reclassification of certain AUM acquired from BGI in December |
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AUM represents the broad ranges of financial assets we manage for clients on a discretionary basis pursuant to investment management agreements that are expected to continue for at least 12 months. In general, reported AUM reflects the valuation methodology that 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-discretionarynondiscretionary advice, or assets that we are retained to manage on a short-term, temporary basis.
Investment management fees are typically expressed as a percentage of AUM. We also earn performance fees on certain portfolios relative to an agreed-upon benchmark or return hurdle. On some products, we also may earn securities lending fees. In addition, BlackRock offers its
proprietaryAladdin® investment system as well
as risk management, outsourcing and advisory services, to institutional investors under the BRS name. Revenue for these services may be based on several criteria including value of positions, number of users, accomplishment of specific deliverables or other objectives.
At December 31, 2012,2014, total AUM was $3.792$4.652 trillion, representing a compounded annual growth rateCAGR of 23%7% over the last five years. AUM growth during the period was achieved through the combination of net market valuation gains, net new business and acquisitions, including BGI, which added approximately $1.844 trillion of AUM in December 2009 and Claymore and SRPEP, which added $13.7 billion of AUM in 2012. These acquisitions significantly changed our2012, and Credit Suisse and MGPA, which collectively added $26.9 billion of AUM in 2013. Our AUM mix from predominantly active fixed income and equity in 2007 toencompasses a broadly diversified product range, as described below.
The Company considers the categorization of its AUM by client type, product type, investment style client type and client region useful to understanding its business. The following discussion of the Company’s AUM will be organized as follows:
| Client Type | Product Type | Client Region | |||
¨ Retail | ||||||
¨ iShares | ||||||
| ¨ Multi-asset | ¨ Asia-Pacific | ||||
| ¨ Alternatives | ||||||
| Cash Management |
CLIENT TYPE
Our organizational structure was designed to ensure that strong investment performance is our highest priority, and that we best align with our clients’ needs to capitalize on broader industry trends. Furthermore, our structure
facilitates strong teamwork globally across both functions and regions in order to enhance our ability to leverage best practices to serve our clients and continue to develop our talent. Specifically, our investments functions are split into five distinct strategies: Alpha, Beta, Multi-Asset, Alternatives and Trading/Liquidity.
We serve a diverse mix of institutional and retail clients across the globe. Clients include tax-exempt institutions, such as defined benefit and defined contribution pension plans, charities, foundations and endowments; official institutions, such as central banks, sovereign wealth funds, supranationals and other government entities; taxable
institutions, including insurance companies, financial institutions, corporations and third-party fund sponsors, and retail investors.iShares is presented as a separate client type below, with investments iniShares by institutions and retail clients excluded from figures and discussions in their respective sections below.
AUM by investment style and client type at December 31, 2014 is presented below.
| (in millions) | Retail | iShares | Institutional | Total | ||||||||||||
Active | $ | 494,455 | $ | — | $ | 959,160 | $ | 1,453,615 | ||||||||
Non-ETF Index | 39,874 | — | 1,816,124 | 1,855,998 | ||||||||||||
iShares | — | 1,024,228 | — | 1,024,228 | ||||||||||||
Long-term | 534,329 | 1,024,228 | 2,775,284 | 4,333,841 | ||||||||||||
Cash management | 41,841 | — | 254,512 | 296,353 | ||||||||||||
Advisory | — | — | 21,701 | 21,701 | ||||||||||||
Total AUM | $ | 576,170 | $ | 1,024,228 | $ | 3,051,497 | $ | 4,651,895 | ||||||||
Retail
BlackRock serves retail investors globally through a wide array of vehicles across the active and passive spectrum, including separate accounts, open-end and closed-end funds, unit trusts and private investment funds. Retail 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 $440.2
billion, or 82%, of retail long-term AUM at year-end, with the remainder invested in private investment funds and separately managed accounts (“SMAs”). The majority (93%) of long-term retail AUM is invested in active products, although this is impacted byiShares being shown separately. Retail represented 12% of long-term AUM at December 31, 2014 and 35% of long-term base fees for 2014.
Component changes in retail AUM for 2014 are presented below.
| (in millions) | December 31, 2013 | Net Inflows | Market Change | FX | December 31, 2014 | |||||||||||||||
Equity | $ | 203,035 | $ | 1,582 | $ | 1,831 | $ | (6,003 | ) | $ | 200,445 | |||||||||
Fixed income | 151,475 | 36,995 | 3,698 | (2,348 | ) | 189,820 | ||||||||||||||
Multi-asset class | 117,054 | 13,366 | (4,080 | ) | (999 | ) | 125,341 | |||||||||||||
Alternatives | 16,213 | 3,001 | 152 | (643 | ) | 18,723 | ||||||||||||||
Total Retail | $ | 487,777 | $ | 54,944 | $ | 1,601 | $ | (9,993 | ) | $ | 534,329 | |||||||||
The retail client base is diversified geographically, with 71% of long-term AUM managed for investors based in the Americas, 23% in EMEA and 6% in Asia-Pacific at year-end 2014.
| • | U.S. retail long-term net inflows of $31.6 billion, or 10% organic growth, were led by fixed income inflows of $23.3 billion. Fixed income net inflows were diversified across exposures and products, with strong flows into our unconstrained, high yield and core bond offerings. Multi-asset class net inflows of $6.7 billion were driven by demand for our Multi-Asset Income fund, which had $5.0 billion of net inflows. Our suite of retail alternatives mutual funds continued to gain traction, raising $2.7 billion of net inflows, and we remain committed to broadening the distribution of alternatives funds to bring institutional-quality alternatives products to retail investors. Net inflows across fixed income, multi-asset class and alternatives were partially offset by equity net outflows of $1.0 billion, driven by historical |
performance-related redemptions from U.S. large cap equities, but we continue to make progress on the reinvigoration and globalization of our fundamental active equity business. |
| • | International retail long-term net inflows of $23.4 billion, representing 15% organic growth, were positive across major regions and diversified across asset classes. Fixed income products generated net inflows of $13.7 billion, led by short duration and unconstrained strategies as investors looked to manage duration and generate yield in their portfolios. Multi-asset class net inflows of $6.7 billion were driven by flows into the cross-border versions of our Global Allocation and Multi-Asset Income funds. Equity net inflows of $2.6 billion reflected strong flows into index mutual funds, partially offset by outflows from our European Equities suite, due to macro headwinds as European market sentiment declined. |
iShares
iShares is the leading ETF provider in the world, with $1.0 trillion of AUM at December 31, 2014 and was the top asset gatherer globally in 20141 with $100.6 billion of net inflows for an organic growth rate of 11%. Equity net inflows of $59.6 billion were driven by flows into the Core Series and into funds with broad U.S. equity market exposures, partially offset by outflows from emerging markets products. Fixed income net inflows of $40.0 billion were diversified across exposures and product lines, with European-listediShares raising $16.6 billion, or 41%, of fixed income net inflows.iShares multi-asset class and alternatives funds contributed a combined $1.0 billion of net inflows, primarily into commodities.iShares represented 24% of long-term AUM at December 31, 2014 and 35% of long-term base fees for 2014.
Component changes iniShares AUM for 2014 are presented below.
| (in millions) | December 31, 2013 | Net Inflows | Market Change | FX | December 31, 2014 | |||||||||||||||
Equity | $ | 718,135 | $ | 59,626 | $ | 26,517 | $ | (14,211 | ) | $ | 790,067 | |||||||||
Fixed income | 178,835 | 40,007 | 4,905 | (6,076 | ) | 217,671 | ||||||||||||||
Multi-asset class | 1,310 | 439 | 37 | (13 | ) | 1,773 | ||||||||||||||
Alternatives(1) | 16,092 | 529 | (1,722 | ) | (182 | ) | 14,717 | |||||||||||||
TotaliShares | $ | 914,372 | $ | 100,601 | $ | 29,737 | $ | (20,482 | ) | $ | 1,024,228 | |||||||||
| (1) | Amounts include commodityiShares. |
Our broadiShares product range offers investors a precise, transparent and efficient way to tap market returns and gain access to a full range of asset classes and global markets that have been difficult for many investors to access, as well as the liquidity required to make adjustments to their exposures quickly and cost-efficiently.
| • | U.S. iShares AUM ended at $752.0 billion with $80.6 billion of net inflows driven by strong demand for U.S. equities as well as a diverse range of fixed income products.2 During the fourth quarter of 2012, we debuted the Core Series in the United States and in 2014 we doubled the range by adding 10 funds, as buy-and-hold investors increasingly turn toiShares to efficiently construct larger portions of their portfolios. The U.S. Core Series again demonstrated solid results in its second full year, raising $25.7 billion in net inflows, primarily in U.S. equity and U.S. aggregate bond exposures. |
| • | International iShares AUM ended at $272.2 billion with robust net new business of $20.0 billion led by fixed income net inflows of $17.0 billion, primarily into yield-focused categories including investment grade corporate and emerging markets debt.2 In 2014, we expanded our international presence and offerings among buy-and-hold investors through the launches of Core Series product lines in Canada and Europe. |
ProductsInstitutional
BlackRock’s institutional AUM is well diversified by both product and region, and we serve institutional investors on six continents in sub-categories including: pensions, endowments and foundations, official institutions, and financial institutions.
| 1 | Source: BlackRock; Bloomberg |
| 2 | RegionaliShares amounts based on jurisdiction of product, not underlying client |
Component changes in Institutional AUM for 2014 are presented below.
| (in millions) | December 31, 2013 | Net Inflows (Outflows) | Market Change | FX | December 31, 2014 | |||||||||||||||
Active: | ||||||||||||||||||||
Equity | $ | 138,726 | $ | (18,648 | ) | $ | 9,935 | $ | (4,870 | ) | $ | 125,143 | ||||||||
Fixed income | 505,109 | (6,943 | ) | 34,062 | (13,638 | ) | 518,590 | |||||||||||||
Multi-asset class | 215,276 | 15,835 | 23,435 | (11,633 | ) | 242,913 | ||||||||||||||
Alternatives | 73,299 | (664 | ) | 1,494 | (1,615 | ) | 72,514 | |||||||||||||
Active subtotal | 932,410 | (10,420 | ) | 68,926 | (31,756 | ) | 959,160 | |||||||||||||
Index: | ||||||||||||||||||||
Equity | 1,257,799 | 9,860 | 102,549 | (34,752 | ) | 1,335,456 | ||||||||||||||
Fixed income | 406,767 | 26,347 | 56,086 | (21,628 | ) | 467,572 | ||||||||||||||
Multi-asset class | 7,574 | (735 | ) | 1,652 | (681 | ) | 7,810 | |||||||||||||
Alternatives | 5,510 | 656 | (693 | ) | (187 | ) | 5,286 | |||||||||||||
Index subtotal | 1,677,650 | 36,128 | 159,594 | (57,248 | ) | 1,816,124 | ||||||||||||||
Total Institutional | $ | 2,610,060 | $ | 25,708 | $ | 228,520 | $ | (89,004 | ) | $ | 2,775,284 | |||||||||
Institutional active AUM ended 2014 at $959.2 billion, up $26.8 billion, or 3%, since year-end 2013. Institutional active represented 22% of long-term AUM and 20% of long-term base fees. Growth in AUM reflected continued strength in multi-asset class products with net inflows of $15.8 billion largely from defined contribution plans into target date offerings. Multi-asset class net inflows were offset by equity net outflows of $18.6 billion, with 63% of outflows coming from fundamental strategies. Fixed income net outflows of $6.9 billion were primarily due to several large client-specific asset allocation decisions and corporate actions such as client acquisitions. These events offset positive momentum in credit mandates. Alternatives net outflows of $0.7 billion included $3.1 billion of return of capital; excluding return of capital, alternatives net inflows of $2.4 billion were led by inflows into hedge fund and private equity solutions.
Institutional index AUM totaled $1.816 trillion at December 31, 2014, reflecting net inflows of $36.1 billion. Flows were led by fixed income with net inflows of $26.3 billion, primarily into local currency, U.S. targeted duration and global bond mandates, reflecting solutions-based LDI activity and portfolio rebalancing. Equities saw net inflows of $9.9 billion, primarily into global mandates, as clients increasingly looked to use passive vehicles for broad macro exposure. Institutional index represented 42% of long-term AUM at December 31, 2014 and accounted for 10% of long-term base fees for 2014.
The Company’s institutional clients consist of the following:
| • | Pensions, Foundations and Endowments. BlackRock is among the largest managers of pension plan assets in the world with $1.877 trillion, or 68%, of long-term |
institutional AUM managed for defined benefit, defined contribution and other pension plans for corporations, governments and unions at December 31, 2014. The market landscape is shifting from defined benefit to defined contribution, driving strong flows in our defined contribution channel, which had $29.3 billion of long-term net inflows for the year, or 6% organic growth, driven by continued demand for ourLifePath® target-date suite. We ended 2014 with $599.2 billion in defined contribution AUM, and remain well positioned to capitalize on the on-going evolution of the defined contribution market and demand for outcome-oriented investments. An additional $55.6 billion, or 2% of long-term institutional AUM, was managed for other tax-exempt investors, including charities, foundations and endowments. |
| • | Official Institutions. We also managed $228.8 billion, or 8%, of long-term institutional AUM for official institutions, including central banks, sovereign wealth funds, supranationals, multilateral entities and government ministries and agencies at year-end 2014. These clients often require specialized investment advice, the use of customized benchmarks and training support. |
| • | Financial and Other Institutions. BlackRock is a top independent manager of assets for insurance companies, which accounted for $233.7 billion, or 8%, of institutional long-term AUM at year-end 2014. Assets managed for other taxable institutions, including corporations, banks and third-party fund sponsors for which we provide sub-advisory services, totaled $379.9 billion, or 14%, of long-term institutional AUM at year-end. |
PRODUCT TYPE
Component changes in AUM by product type and investment style for 20122014 are presented below.
| (Dollar amounts in millions) | 12/31/2011 | Net New Business | Net Acquired | Market /FX App (Dep) | 12/31/2012 | |||||||||||||||||||||||||||||||||||
| (in millions) | December 31, 2013 | Net Inflows (Outflows) | Market Change | FX | December 31, 2014 | |||||||||||||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||||||||||
Active | $ | 275,156 | $ | (18,111 | ) | $ | — | $ | 30,170 | $ | 287,215 | $ | 317,262 | $ | (24,882 | ) | $ | 9,867 | $ | (9,445 | ) | $ | 292,802 | |||||||||||||||||
iShares | 419,651 | 52,973 | 3,517 | 58,507 | 534,648 | 718,135 | 59,626 | 26,517 | (14,211 | ) | 790,067 | |||||||||||||||||||||||||||||
Non-ETF index | 1,282,298 | 17,676 | 104,448 | (36,180 | ) | 1,368,242 | ||||||||||||||||||||||||||||||||||
Equity subtotal | 2,317,695 | 52,420 | 140,832 | (59,836 | ) | 2,451,111 | ||||||||||||||||||||||||||||||||||
Fixed income: | ||||||||||||||||||||||||||||||||||||||||
Active | 614,804 | 892 | — | 40,635 | 656,331 | 652,209 | 27,694 | 36,942 | (15,521 | ) | 701,324 | |||||||||||||||||||||||||||||
iShares | 153,802 | 28,785 | 3,026 | 7,239 | 192,852 | 178,835 | 40,007 | 4,905 | (6,076 | ) | 217,671 | |||||||||||||||||||||||||||||
Non-ETF index | 411,142 | 28,705 | 56,904 | (22,093 | ) | 474,658 | ||||||||||||||||||||||||||||||||||
Fixed income subtotal | 1,242,186 | 96,406 | 98,751 | (43,690 | ) | 1,393,653 | ||||||||||||||||||||||||||||||||||
Multi-asset class | 225,170 | 15,817 | 78 | 26,683 | 267,748 | 341,214 | 28,905 | 21,044 | (13,326 | ) | 377,837 | |||||||||||||||||||||||||||||
Alternatives: | ||||||||||||||||||||||||||||||||||||||||
Core | 63,647 | (3,922 | ) | 6,166 | 2,476 | 68,367 | 85,026 | 3,061 | 1,808 | (1,889 | ) | 88,006 | ||||||||||||||||||||||||||||
Currency and commodities | 41,301 | (1,547 | ) | 860 | 814 | 41,428 | 26,088 | 461 | (2,577 | ) | (738 | ) | 23,234 | |||||||||||||||||||||||||||
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Sub-total | 1,793,531 | 74,887 | 13,647 | 166,524 | 2,048,589 | |||||||||||||||||||||||||||||||||||
Non-ETP Index: | ||||||||||||||||||||||||||||||||||||||||
Equity | 865,299 | 19,154 | 95 | 139,090 | 1,023,638 | |||||||||||||||||||||||||||||||||||
Fixed income | 479,116 | (96,506 | ) | — | 27,529 | 410,139 | ||||||||||||||||||||||||||||||||||
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Sub-total non-ETP index | 1,344,415 | (77,352 | ) | 95 | 166,619 | 1,433,777 | ||||||||||||||||||||||||||||||||||
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Alternatives subtotal | 111,114 | 3,522 | (769 | ) | (2,627 | ) | 111,240 | |||||||||||||||||||||||||||||||||
Long-term | 3,137,946 | (2,465 | ) | 13,742 | 333,143 | 3,482,366 | 4,012,209 | 181,253 | 259,858 | (119,479 | ) | 4,333,841 | ||||||||||||||||||||||||||||
Cash management | 254,665 | 5,048 | — | 4,030 | 263,743 | 275,554 | 25,696 | 715 | (5,612 | ) | 296,353 | |||||||||||||||||||||||||||||
Advisory | 120,070 | (74,540 | ) | — | (51 | ) | 45,479 | 36,325 | (13,173 | ) | 1,109 | (2,560 | ) | 21,701 | ||||||||||||||||||||||||||
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Total AUM | $ | 3,512,681 | $ | (71,957 | ) | $ | 13,742 | $ | 337,122 | $ | 3,791,588 | $ | 4,324,088 | $ | 193,776 | $ | 261,682 | $ | (127,651 | ) | $ | 4,651,895 | ||||||||||||||||||
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At year-end 2012, products invested primarily in long-term assets represented 92% of total AUM, or $3.482 trillion, of which 53% were equity mandates, 36% fixed income accounts, 8% multi-asset class portfolios and 3% alternative investments. The remaining AUM was in cash management products and advisory mandates representing long-term portfolio liquidation assignments. Net new business in long-term products totaled $107.7 billion excluding the effect of two large, low-fee non-ETP index fixed income outflows from two institutional clients of $36.0 billion in the first quarter of 2012 and $74.2 billion in the third quarter of 2012. Net inflows in long-term products, excluding these outflows, were augmented by net inflows into cash management products. Long-term and cash product net inflows were offset by advisory distributions due to the successful completion of asset dispositions related to the three Maiden Lane vehicles associated with the Federal Reserve Bank of New York,
marking the repayment of all senior and junior obligations of the three vehicles and the generation of net gains benefiting the U.S. public.
Long-term product offerings include active and passive (index)index strategies. Our active strategies seek to earn attractive returns in excess of a market benchmark or performance hurdle (alpha) while maintaining an appropriate risk profile. We offer two types of active strategies: those that rely primarily on fundamental research and those that utilize primarily quantitative models to drive portfolio construction. In contrast, passiveindex strategies seek to closely track the returns of a corresponding index, (beta), generally by investing in substantially the same underlying securities within the index or in a subset of those securities selected to approximate a similar risk and return profile of the index. PassiveIndex strategies include both our institutional non-ETPnon-ETF index products andiShares ETPs.ETFs.
Although many clients use both active and passiveindex strategies, the application of these strategies differs greatly.may differ. For example, clients may 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 of index AUM.class. In addition, institutional non-ETPnon-ETF index assignments tend to be very large (multi-billion dollars) and typically reflect low fee rates. This has the potential to exaggerate the significance of net flows in institutional index products on BlackRock’s revenues and earnings.
Equity
Year-end 20122014 equity AUM of $1.845$2.451 trillion increased by $285.4$133.4 billion, or 18%6%, from the end of 2011, largely2013 due to flows into regional, country-specific and global mandates and the effect of higher market valuations. Equity AUM growth included $54.0 billion in net new business of $52.4 billion and $3.6 billion in new assets related to the acquisitionnet market appreciation and foreign exchange movements of Claymore.$81.0 billion. Net new business of $54.0 billion wasinflows were driven by net inflows of $53.0$59.6 billion and $19.1$17.7 billion intoiShares and non-ETPnon-ETF index accounts, respectively. PassiveIndex inflows were offset by active net outflows of $18.1$24.9 billion, with net outflows of $10.0$18.0 billion and $8.1$6.9 billion from fundamental and scientific active equity products, respectively.
Passive strategies represented 84% of equity AUM with the remaining 16% in active mandates. Institutional investors represented 62% of equity AUM, whileiShares, and retail and HNW represented 29% and 9%, respectively. At year-end 2012, 63% of equity AUM was managed for clients in the Americas (defined as the United States, Caribbean, Canada, Latin America and Iberia) compared with 28% and 9% managed for clients in EMEA and Asia-Pacific, respectively.
BlackRock’s effective fee rates fluctuate due to changes in AUM mix. Approximately half of BlackRock’s equity AUM is
tied to international markets, including emerging markets, which tend to have higher fee rates than similar U.S. equity strategies. Accordingly, fluctuations in international equity markets, which do not consistently move in tandem with U.S. markets, may have a greater impact on BlackRock’s effective equity fee rates and revenues.
Fixed Income
Fixed income AUM ended 20122014 at $1.259$1.394 trillion, rising $11.6increasing $151.5 billion, or 1%12%, relative tofrom December 31, 2011. Growth2013. The increase in AUM reflected $43.3 billion in net new business, excluding the two large previously mentioned low-fee outflows, $75.4 billion in market and foreign exchange gains and $3.0 billion in new assets related to Claymore. Net new business was led by flows into domestic specialty and global bond mandates, with net inflows of $28.8 billion, $13.6 billion and $3.1 billion intoiShares, non-ETP index and model-based products, respectively, partially offset by net outflows of $2.2 billion from fundamental strategies.
Fixed Income AUM was split between passive and active strategies with 48% and 52%, respectively. Institutional investors represented 74% of fixed income AUM whileiShares and retail and HNW represented 15% and 11%, respectively. At year-end 2012, 59% of fixed income AUM was managed for clients in the Americas compared with 33% and 8% managed for clients in EMEA and Asia-Pacific, respectively.
Multi-Asset Class
Component Changes in Multi-Asset Class AUM
| (Dollar amounts in millions) | 12/31/2011 | Net New Business | Net Acquired | Market /FX App (Dep) | 12/31/2012 | |||||||||||||||
Asset allocation | $ | 126,067 | $ | 1,575 | $ | 78 | $ | 12,440 | $ | 140,160 | ||||||||||
Target date/risk | 49,063 | 14,526 | — | 6,295 | 69,884 | |||||||||||||||
Fiduciary | 50,040 | (284 | ) | — | 7,948 | 57,704 | ||||||||||||||
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Multi-asset | $ | 225,170 | $ | 15,817 | $ | 78 | $ | 26,683 | $ | 267,748 | ||||||||||
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Multi-asset class AUM totaled $267.7 billion at year-end 2012, up 19%, or $42.6 billion, reflecting $15.8$96.4 billion in net new business and $26.7$55.1 billion in portfolio valuation gains. net market appreciation and foreign exchange movements. In 2014, net new business was diversified across fixed income offerings, with strong flows into our unconstrained, total return and high yield products. Flagship funds in these product areas include our unconstrained Strategic Income Opportunities and Fixed Income Global Opportunities funds, with net inflows of $13.3 billion and $4.2 billion, respectively; our Total Return fund with net inflows of $2.1 billion; and our High Yield Bond fund with net inflows of $2.1 billion. Fixed income net inflows were positive across investment styles, withiShares,non-ETF index, and active net inflows of $40.0 billion, $28.7 billion and $27.7 billion, respectively.
Multi-Asset Class
BlackRock’s multi-asset class team manages a variety of balanced funds and bespoke mandates for a diversified client base that leverages 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.
At December 31, 2012, institutional investors represented 66% of
Component changes in multi-asset class AUM while retail and HNW accounted for the remaining AUM. Additionally, 58% of multi-asset class AUM is managed for clients based in the Americas with 37% and 5% managed for clients in EMEA and Asia-Pacific, respectively. 2014 are presented below.
| (in millions) | December 31, 2013 | Net Inflows (Outflows) | Market Change | FX Impact | December 31, 2014 | |||||||||||||||
Asset allocation and balanced | $ | 169,604 | $ | 18,387 | $ | (827 | ) | $ | (4,132 | ) | $ | 183,032 | ||||||||
Target date/risk | 111,408 | 10,992 | 7,083 | (872 | ) | 128,611 | ||||||||||||||
Fiduciary | 60,202 | (474 | ) | 14,788 | (8,322 | ) | 66,194 | |||||||||||||
Multi-asset | $ | 341,214 | $ | 28,905 | $ | 21,044 | $ | (13,326 | ) | $ | 377,837 | |||||||||
Flows reflected ongoing institutional demand for our solutions-based advice in an increasingly
challenging investment environment with $15.0$15.1 billion, or 95%52%, of net inflows coming from institutional clients, with the remaining $0.8 billion, or 5%, generated by retail and HNW clients. Defined contribution plans of institutional clients remained a significant driver of flows. This client group added $13.1flows, and contributed $12.8 billion ofto institutional multi-asset class net new business in 2012. During the year, Americas2014, primarily into target date and target risk product offerings. Retail net inflows of $18.5$13.4 billion were partially offsetdriven by net outflows of $2.6particular demand for our Multi-Asset Income fund, which raised $6.3 billion collectively from EMEA and Asia-Pacific clients.in 2014.
The Company’s multi-asset strategies include the following:
| • | Asset allocation and balanced products represented |
| • | Target date and target risk products |
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| • | Fiduciary management services |
Alternatives
Component Changes in Alternatives AUM
| (Dollar amounts in millions) | 12/31/2011 | Net New Business | Net Acquired | Market /FX App (Dep) | 12/31/2012 | |||||||||||||||
Core | $ | 63,647 | $ | (3,922 | ) | $ | 6,166 | $ | 2,476 | $ | 68,367 | |||||||||
Currency and commodities | 41,301 | (1,547 | ) | 860 | 814 | 41,428 | ||||||||||||||
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Alternatives | $ | 104,948 | $ | (5,469 | ) | $ | 7,026 | $ | 3,290 | $ | 109,795 | |||||||||
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Alternatives AUM totaled $109.8 billion at year-end 2012, up $4.8 billion, or 5%, reflecting $3.3 billion in portfolio valuation gains
BlackRock Alternative Investors (“BAI”) focuses on sourcing and $7.0 billion in new assets relatedmanaging high-alpha investments with lower correlation to the acquisitions of SRPEP, which deepened our alternatives footprint in the European and Asianpublic markets and Claymore.developing a holistic approach to address client needs in alternatives investing. Our alternatives products fall into two main categories — core
and currency and commodities. Core alternative outflowsincludes hedge funds, hedge fund and private equity solutions (funds of $3.9 billion were driven almost exclusively by return of capital to clients. Currency net outflows of $5.0 billion were partially offset by net inflows of $3.5 billion intoiShares commodity funds.funds), opportunistic private equity and credit, real estate and infrastructure offerings. The products offered under the BAI umbrella are described below.
Component changes in alternatives AUM for 2014 are presented below.
| (in millions) | December 31, 2013 | Net Inflows (Outflows) | Market change | FX impact | December 31, 2014 | Memo Return of | ||||||||||||||||||
Core: | ||||||||||||||||||||||||
Alternative Solutions | $ | 131 | $ | 378 | $ | 25 | $ | (6 | ) | $ | 528 | $ | — | |||||||||||
Hedge Funds: | ||||||||||||||||||||||||
Direct Hedge Fund Strategies | 31,525 | 1,539 | (28 | ) | (1,040 | ) | 31,996 | — | ||||||||||||||||
Hedge Fund Solutions | 16,941 | 1,981 | 756 | (95 | ) | 19,583 | (229 | ) | ||||||||||||||||
Hedge Funds Subtotal | 48,466 | 3,520 | 728 | (1,135 | ) | 51,579 | (229 | ) | ||||||||||||||||
Illiquid and Opportunistic: | ||||||||||||||||||||||||
Private Equity Solutions | 11,895 | 732 | (92 | ) | (195 | ) | 12,340 | (565 | ) | |||||||||||||||
Opportunistic Private Equity and Credit Strategies | 522 | 249 | 31 | — | 802 | (247 | ) | |||||||||||||||||
Illiquid and Opportunistic Subtotal | 12,417 | 981 | (61 | ) | (195 | ) | 13,142 | (812 | ) | |||||||||||||||
Real Assets: | ||||||||||||||||||||||||
Real Estate | 23,407 | (2,031 | ) | 1,177 | (552 | ) | 22,001 | (2,370 | ) | |||||||||||||||
Infrastructure | 605 | 213 | (61 | ) | (1 | ) | 756 | |||||||||||||||||
Real Assets Subtotal | 24,012 | (1,818 | ) | 1,116 | (553 | ) | 22,757 | (2,370 | ) | |||||||||||||||
Core Subtotal | 85,026 | 3,061 | 1,808 | (1,889 | ) | 88,006 | (3,411 | ) | ||||||||||||||||
Currency and commodities | 26,088 | 461 | (2,577 | ) | (738 | ) | 23,234 | — | ||||||||||||||||
Alternatives | $ | 111,114 | $ | 3,522 | $ | (769) | $ | (2,627) | $ | 111,240 | $ | (3,411) | ||||||||||||
| (1) | Return of capital is included in outflows. |
We continued to make significant investments insee momentum across our alternatives platform as demonstrated bybusiness, particularly within our acquisition of SRPEP, successful closes on the renewable power initiative and our build out of an alternatives retail platform, which now stands at nearly $10.0$18.7 billion in AUM.AUM, and in illiquid alternatives where we raised $5.8 billion of new commitments in 2014 across a variety of strategies, including private equity and hedge fund solutions, opportunistic credit, renewable power, and infrastructure debt. At year-end, we had $8.9 billion of unfunded commitments, which are expected to be deployed in future years; these commitments are not included in AUM until they are invested.
We believe that as alternatives become more conventional and investors adapt their asset allocation strategies to best meet their investment objectives, they will further increase their use of alternative investments to complement core holdings.holdings, and as a top 10 alternative provider3 our highly diversified $111.2 billion alternatives franchise is well positioned to meet growing demand from both institutional and retail investors.
Institutional investors represented 69%, or $75.8 billion, of alternatives AUM with retail and HNW investors comprising an additional 9%, or $9.7 billion, at year-end 2012.iSharesCore. commodity products accounted for the remaining $24.3 billion, or 22%, of AUM at year-end. Alternative clients are geographically diversified with 56%, 26%, and 18% of clients located in the Americas, EMEA and Asia-Pacific, respectively.
The BlackRock Alternative Investors (“BAI”) group coordinates our alternative investment efforts, including
product management, business development and client service. Our alternatives products fall into two main categories – core, which includes hedge funds, funds of funds (hedge funds and private equity) and real estate offerings, and currency and commodities. The products offered under the BAI umbrella are described below.
Core.
| • | Alternative Solutions represent holistic, multi-dimensional alternatives mandates that bring together a range of alternative assets and strategies in a single operationally efficient and cost-effective portfolio solution. In 2014, alternative solutions portfolios raised $0.4 billion of net inflows and $0.9 billion of commitments. |
| • | Hedge Funds |
| • |
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| • | Real |
Currency and Commodities.
AUM in currency and commodities strategies totaled $41.4 billion at year-end 2012, flatdeclined 11% from year-end 2011,2013, reflecting net outflowsportfolio valuation declines of $1.5 billion, primarily from active currency and currency overlays, and $0.8 billion of market and foreign exchange gains. Claymore also contributed $0.9 billion of AUM.$3.3 billion. Currency and commodities products include a range of active and passive products. OuriShares commodities products represented $24.3$14.7 billion of AUM, including $0.7 billion acquired from Claymore, and are not eligible for performance fees.
| 3 | Source: Towers Watson, July 2014 |
Cash Management
Cash management AUM totaled $263.7$296.4 billion at December 31, 2012,2014, of which $109.7 billion was in prime strategies, up $9.1$20.8 billion, or 4%8%, from year-end 2011.2013. Cash management products include taxable and tax-exempt money market funds and customized separate accounts. Portfolios may beare denominated in U.S. dollar, EuroCanadian dollar, Australian dollar, euro or British pound.
At year-end 2012, 84% of cash AUM was managed for institutions and 16% for retail and HNW investors. The investor base was also predominantly in the Americas, with 69% of AUM managed for investors in the Americas and 31% for clients in other regions, mostly EMEA-based. We generated net inflows of $5.0$25.7 billion during 2012, reflecting continued uncertainty around future regulatory changes and2014, a challenging investingperiod marked by a near zero interest rate environment. To meet investor needs, we sought to provideWe provided new solutions and choices for our clients by launching short duration products into meet their existing cash investment needs and are actively repositioning and streamlining our product lineup to meet the United States, which both immediately address the challengefuture requirements of a continuing low interest rate environment and will also be important investment options shouldclients given announced regulatory changes occur.
to U.S. money market funds. In the EMEA business, and in particular forEurope, we continue to be a market leader highlighted by our Euro product set, we have taken action to ensure that we can provide effective cash management solutions in the face of a potentially negative yield environment by taking steps to launch new products and re-engineer our existing product set.
iShares
Our industry-leading U.S. and internationaliShares ETP suite is discussed below.
Component Changes in AUM – iShares
| (Dollar amounts in millions) | 12/31/2011 | Net New Business | Net Acquired | Market /FX App (Dep) | 12/31/2012 | |||||||||||||||
Equity | $ | 419,651 | $ | 52,973 | $ | 3,517 | $ | 58,507 | $ | 534,648 | ||||||||||
Fixed income | 153,802 | 28,785 | 3,026 | 7,239 | 192,852 | |||||||||||||||
Multi-asset class | 562 | 178 | 78 | 51 | 869 | |||||||||||||||
Alternatives | 19,341 | 3,232 | 701 | 1,064 | 24,338 | |||||||||||||||
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Long-term | $ | 593,356 | $ | 85,168 | $ | 7,322 | $ | 66,861 | $ | 752,707 | ||||||||||
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The ETP industry experienced a banner year as annual inflow records from 2008 were broken in the United States, the Asia-Pacific region and on a global basis, propelled by exceptional growth in fixed income and emerging markets equity products1. The industry saw $260 billion1 of net new business, representing 17% in organic growth during 2012, with year-end AUM totaling $1.902 trillion1.
The global growthimplementation of the ETP market reflects both continued adoption and new product introductionreverse distribution mechanism in our euro funds when faced with investor product preferences driven to varying degrees by performance (as measured by tracking error, which is the difference between net returns on the ETP and the corresponding targeted index), liquidity (bid-ask spread), tax-efficiency, transparency and client service. Fixed income and emerging markets were drivers of industry growth. Fixed income ETPs globally gathered a record $70 billion of net inflows, $54 billion of which was U.S.-listed, led by investment grade and high yield demand as investors shunned the record low yields of government securities in favor of higher yielding products. Both developed and emerging markets equity ETPs saw strong inflows in 2012 as central banks around the world continued to pump liquidity into the global economy via asset purchase programs and accommodative monetary policy to help spur economic growth. U.S. equity ETPs globally had inflows of $116 billion, $82 billion of which was into U.S.-listed funds, and emerging markets equity ETPs globally had $55 billion of net inflows, $30 billion of which was into U.S.-listed funds.1negative rates.
iShares is the leading ETP provider in the world, with $752.7 billion of AUM at December 31, 2012, which increased $159.4 billion, or 27%, since year-end 2011.iShares was the top asset gatherer globally in 20121 with $85.2 billion of net inflows for an organic growth rate of 14%, with additional AUM growth of $66.9 billion due to market valuation improvements. During 2012,iShares introduced 85 new ETPs, acquired Claymore’s 35 ETPs in Canada and continued our dual commitment to innovation and responsible product structuring. CLIENT REGION
Our broad product range offers investors a precise, transparent and low-cost way to tap market returns and gain access to a full range of asset classes and global markets that have been difficult or expensive for many investors to access until now, as well as the liquidity required to make adjustments to their exposures quickly and cost-efficiently.
At year-end,iShares AUM included $534.7 billion, or 71%, in equity offerings, $192.9 billion, or 26%, in fixed income ETPs and $25.2 billion, or 3%, in multi-asset class and alternative investments.iShares equity AUM increased $115.0 billion, or 27%, from year-end 2011, with $53.0 billion in net inflows and $58.5 billion of market and
foreign exchange valuation gains.iShares fixed income AUM rose $39.1 billion, or 25%, over the previous year, with 74% of the increase being driven by $28.8 billion of net inflows.iShares multi-asset class and alternatives AUM grew by $5.3 billion, or 27%, with $3.4 billion of net inflows, predominantly into gold commodity products resulting from a macro environment dominated by accommodative monetary policies and resulting currency debasement with an additional $1.1 billion of market and foreign exchange valuation gains.
iShares offers the most diverse product set in the industry with 621 ETPs at year-end 2012 and serves the broadest client base, covering 27 countries on five continents including North America, South America, Europe, Asia and Australia.iShares was the ETP leader in asset gathering in 2012 with four of the top ten products and the highest number of leading products as measured by total assets, with five of the top ten1. Notwithstanding an increase in the number of ETP products offered in the industry,iShares continued to maintain the largest share of global AUM with 39% at December 31, 20121.
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In addition, we were the largest ETP manager in Latin America with over 85% of AUM at December 31, 20121. We continue to look for opportunities to further diversify product offerings in key strategic focus areas including attractive, high-growth markets both organically and
through acquisitions as demonstrated by our acquisition of Claymore and our 2013 agreement with Credit Suisse to acquire their ETF business, the closing of which is subject to customary closing conditions.
In general, we expect to maintain relatively stable pricing, so long as it is supported by performance and theiShares value proposition, although we continually seek to achieve efficiencies and pass them on to our clients.
Clients
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 HNW investors. We also serve both institutional and retail and HNW investors who acquireiShares on exchanges worldwide.iShares is presented under “Products” above, with investments iniShares by institutions and retail and HNW clients excluded from figures and discussions in their respective sections below.
AUM by Style & Client Type
December 31, 2012
| (Dollar amounts in millions) | Institutional | Retail/HNW | iShares | Total | ||||||||||||
Active | $ | 884,695 | $ | 396,599 | — | $ | 1,281,294 | |||||||||
Non-ETP index | 1,441,480 | 6,885 | — | 1,448,365 | ||||||||||||
iShares | — | — | 752,707 | 752,707 | ||||||||||||
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Long-term | 2,326,175 | 403,484 | 752,707 | 3,482,366 | ||||||||||||
Cash management | 221,447 | 42,296 | — | 263,743 | ||||||||||||
Advisory | 45,466 | 13 | — | 45,479 | ||||||||||||
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Total | $ | 2,593,088 | $ | 445,793 | $ | 752,707 | $ | 3,791,588 | ||||||||
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In 2012, we completed an internal reorganization of the firm, structuring ourselves to ensure that strong investment performance is our highest priority, and better align with our clients’ needs to capitalize on broader industry trends. Specifically, we organized the client side of our business into two groups: one comprising Retail andiShares and another comprising Institutional andBlackRock Solutions. The separation of the client
functions into these two teams allows us to better focus on the unique needs of these client groups by bringing the full capabilities of the firm to bear in an organized, cohesive approach. Additionally, we split our investments functions into five distinct strategies: Alpha, Beta, Multi-Asset, Alternatives and Trading/Liquidity. This new organizational structure allows us to enhance our focus on performance and client engagement.
Institutional Investors (excluding Investments in iShares)
Institutional Long-Term AUM by Asset Class, Style & Client Region
December 31, 2012
| (Dollar amounts in millions) | Americas | EMEA | Asia-Pacific | Total | ||||||||||||
Active: | ||||||||||||||||
Equity | $ | 51,242 | $ | 54,499 | $ | 23,283 | $ | 129,024 | ||||||||
Fixed income | 336,998 | 126,530 | 54,575 | 518,103 | ||||||||||||
Multi-asset class | 77,105 | 83,797 | 5,805 | 166,707 | ||||||||||||
Alternatives | 32,362 | 20,507 | 17,992 | 70,861 | ||||||||||||
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Equity | 580,605 | 318,862 | 117,613 | 1,017,080 | ||||||||||||
Fixed income | 132,150 | 235,875 | 41,918 | 409,943 | ||||||||||||
Multi-asset class | 950 | 4,434 | 4,161 | 9,545 | ||||||||||||
Alternatives | 1,464 | 3,325 | 123 | 4,912 | ||||||||||||
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Long-term institutional | $ | 1,212,876 | $ | 847,829 | $ | 265,470 | $ | 2,326,175 | ||||||||
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Long-term assets managed for institutional investors totaled $2.326 trillion, or 61%, of total AUM at year-end 2012. During the year, net outflows in long-term products totaled $99.2 billion, which includes two large low-fee non-ETP index fixed income outflows from two institutional clients totaling $110.2 billion. Excluding these outflows, long-term net new business from institutional clients totaled $11.0 billion with investment performance, market appreciation and foreign exchange valuation gains contributing $237.9 billion to AUM growth.
BlackRock’s institutional AUM is well diversified by both product and region, with 49% of long-term AUM in equities, 40% in fixed income, 8% in multi-asset class and 3% in alternatives. We serve institutional investors on six continents, with 52% of long-term AUM managed on behalf of investorsfootprints in the Americas, 37% in EMEA and 11% in Asia-Pacific. Institutional AUM is further diversified by investment style and by sub-categories: pensions, endowments and foundations, official institutions, and financial institutions, as described below.
The mix by investment style was 38% active and 62% passive (excluding institutional investors iniShares). As noted earlier, non-ETP index accounts tend to be larger institutional mandates managed for relatively low fee rates and subject to higher turnover.
A discussion of the Company’s Institutional AUM is presented below:
Institutional active AUM ended the quarter at $884.7 billion, up $53.4 billion, or 6%, since year-end 2011, earning base fees of $1.8 billion. Institutional active represented 25% of long-term firm AUM and 23% of long-term base fees. Growth in AUM included market and investment performance gains of $71.3 billion and continued strength in multi-asset class products with net inflows of $12.3 billion largely into defined contribution plans, target date and asset allocation offerings. Multi-asset net inflows were offset by equity net outflows of $14.1 billion, which were split between active fundamental and scientific active equity, and fixed income net outflows of $15.1 billion, reflecting outflows from U.S. core and local currency mandates. Core alternatives net outflows were $0.3 billion, excluding $3.9 billion of return of capital.
Institutional non-ETP index AUM totaled $1.441 trillion at December 31, 2012, reflecting net outflows of $75.1 billion, which included two large low-fee fixed income outflows from two clients of $36.0 billion and $74.2 billion. Excluding these outflows, net new business was $35.0 billion, with market and foreign exchange valuation gains contributing $166.6 billion to AUM growth. The shift to passive strategies has proven to be a significant and long-term trend in the
industry. Flows were led by equities with net inflows of $20.5 billion with flows primarily into global mandates as clients increasingly looked to use passive vehicles for macro exposure as they modestly re-risked. In 2012, institutional non-ETP index equity AUM crossed the $1 trillion threshold. Excluding the two previously mentioned outflows, fixed income garnered net inflows of $13.6 billion, led by flows into U.S. sector specialty and global bond mandates. While institutional non-ETP index represented 41% of long-term firm AUM, it accounted for 11% of long-term base fees.
The Company’s institutional clients consist of the following:
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Retail and HNW Investors (Excluding Investments in iShares)
Retail / HNW Long-Term AUM by Asset Class & Client Region
December 31, 2012
| (Dollar amounts in millions) | Americas | EMEA | Asia-Pacific | Total | ||||||||||||
Equity | $ | 94,805 | $ | 53,140 | $ | 16,803 | $ | 164,748 | ||||||||
Fixed income | 121,640 | 11,444 | 5,341 | 138,425 | ||||||||||||
Multi-asset class | 76,714 | 9,538 | 4,374 | 90,626 | ||||||||||||
Alternatives | 4,865 | 3,577 | 1,243 | 9,685 | ||||||||||||
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Long-term retail/HNW | $ | 298,024 | $ | 77,699 | $ | 27,761 | $ | 403,484 | ||||||||
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BlackRock serves retail and HNW investors globally through separate accounts, open-end and closed-end funds, unit trusts and private investment funds. At December 31, 2012, long-term assets managed for retail and HNW investors totaled $403.5 billion, up 11%, or $40.1 billion, versus year-end 2011. During the year, net inflows of $11.6 billion in long-term products were augmented by market valuation improvements of $28.3 billion.
Retail and HNW 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 $322.4 billion, or 80%, of retail and HNW long-term AUM at year-end, with the remainder invested in private investment funds and separately managed accounts. The product mix is well diversified, with 41% of long-term AUM in equities, 34% in fixed income, 23% in multi-asset class and 2% in alternatives. The vast majority (98%) of long-term AUM is invested in active products, although this is partially inflated by the fact thatiShares is shown separately, since we do not identify all of the underlying investors.
The client base is also diversified geographically, with 74% of long-term AUM managed for investors based in the Americas, 19% in EMEA and 7% in Asia-Pacific at year-end 2012.
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Global Clientele
Our footprint in each of these regions reflectsreflect 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.
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AUM by product type and client region at December 31, 2014 is presented below.
| (in millions) | Americas | EMEA | Asia-Pacific | Total | ||||||||||||
Equity | $ | 1,583,532 | $ | 655,985 | $ | 211,594 | $ | 2,451,111 | ||||||||
Fixed income | 774,296 | 502,324 | 117,033 | 1,393,653 | ||||||||||||
Multi-asset class | 237,436 | 119,353 | 21,048 | 377,837 | ||||||||||||
Alternatives | 56,668 | 36,817 | 17,755 | 111,240 | ||||||||||||
Long-term | 2,651,932 | 1,314,479 | 367,430 | 4,333,841 | ||||||||||||
Cash management | 199,887 | 92,795 | 3,671 | 296,353 | ||||||||||||
Advisory | 15,534 | 6,167 | — | 21,701 | ||||||||||||
Total | $ | 2,867,353 | $ | 1,413,441 | $ | 371,101 | $ | 4,651,895 | ||||||||
Component changes in AUM by client region for 2014 are presented below.
| (in millions) | December 31, 2013 | Net Inflows | Market Change | FX Impact | December 31, 2014 | |||||||||||||||
Americas | $ | 2,655,529 | $ | 109,142 | $ | 114,734 | $ | (12,052 | ) | $ | 2,867,353 | |||||||||
EMEA | 1,335,777 | 53,935 | 114,446 | (90,717 | ) | 1,413,441 | ||||||||||||||
Asia-Pacific | 332,782 | 30,699 | 32,502 | (24,882 | ) | 371,101 | ||||||||||||||
Total | $ | 4,324,088 | $ | 193,776 | $ | 261,682 | $ | (127,651 | ) | $ | 4,651,895 | |||||||||
Americas.Americas. At year-end 2012, assets managed on behalf of clients domiciled in the Americas totaled $2.326 trillion, or 61%, of total AUM, up $203.0 billion, or 10%, since year-end 2011. Net
Long-term net new business in long-term products of $69.8$107.3 billion was positive across all asset classes, with net inflows of $46.2 billion, $38.9 billion, $20.5 billion and $1.7 billion in cash management of $1.9 billion was offset by planned advisory distributions of $72.4 billion, primarily due to the successful completion of asset dispositions related to the Maiden Lane vehicles. Market valuation gains contributed an additional $195.7 billion to AUM growth.fixed income, equity, multi-asset class and alternatives products, respectively. During the year, we served clients through offices in 3032 states in the United States as well as Canada, Mexico, Brazil, Chile, Colombia and Spain.
EMEA. AUM for clients based in EMEA ended the year at $1.158 trillion, or 31%, of total AUM, an increase of $131.3 billion from year-end 2011.
During the year, clients awarded us long-term net new business of $9.0$42.0 billion, including inflows from investors in 2223 countries across the region. In the first quarter 2012, flows were impacted by one $36.0 billion low-fee institutional index fixed income redemption from a single client relating to the client’s decision to insource. Excluding this redemption, EMEA net new business was $45.0 billion, led by equityfixed income net inflows of $32.7$43.1 billion, as clients slowly began to re-risk in the face of improving confidence in European markets.reflecting
strong solutions-based LDI activity. Our offerings include fund families in the United Kingdom, the Netherlands, Luxembourg and Dublin andiShares listed on stock exchanges throughout Europe as well as separate accounts and pooled investment products.
Asia-Pacific.Asia-Pacific.
Clients in the Asia-Pacific region are served through offices in Japan, Australia, Hong Kong, Malaysia, Singapore, Taiwan, and Korea and joint ventures in China, and a joint venture in India. At December 31, 2012, we managed $306.8Long-term net new business of $31.9 billion was driven by fixed income, equity and multi-asset class net inflows of AUM for clients in the region, a decrease of 15%, or $55.4$14.4 billion, from year-end 2011. Net$12.5 billion and $5.4 billion, respectively, partially offset by alternatives net outflows of $80.3 billion included one large low-fee institutional index fixed income redemption. Market and investment performance were favorable with $24.9 billion of gains.$0.4 billion.
Investment Performance
INVESTMENT PERFORMANCE
Investment performance across active and passive products as of December 31, 20122014 was as follows:
| One-year period | Three-year period | Five-year period | One-year period | Three-year period | Five-year period | |||||||||||||||||||
Fixed Income: | ||||||||||||||||||||||||
Actively managed products above benchmark or peer median | ||||||||||||||||||||||||
Taxable | 83 | % | 78 | % | 64 | % | 72 | % | 91 | % | 87 | % | ||||||||||||
Tax-exempt | 67 | % | 64 | % | 77 | % | 57 | % | 70 | % | 74 | % | ||||||||||||
Passively managed products within or above tolerance | 95 | % | 97 | % | 90 | % | ||||||||||||||||||
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Index products within or above tolerance | 98 | % | 98 | % | 98 | % | ||||||||||||||||||
Equity: | ||||||||||||||||||||||||
Actively managed products above benchmark or peer median | ||||||||||||||||||||||||
Fundamental | 30 | % | 38 | % | 46 | % | 37 | % | 48 | % | 41 | % | ||||||||||||
Scientific | 85 | % | 89 | % | 88 | % | 85 | % | 86 | % | 97 | % | ||||||||||||
Passively managed products within or above tolerance | 96 | % | 97 | % | 96 | % | ||||||||||||||||||
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Multi-Asset*: | ||||||||||||||||||||||||
Actively managed products above benchmark or peer median | 38 | % | 27 | % | 81 | % | ||||||||||||||||||
Index products within or above tolerance | 94 | % | 98 | % | 97 | % | ||||||||||||||||||
Product Performance Notes.Notes. Past performance is not indicative of future results. TheExcept as specified, the performance information shown is based on preliminarily available data. The 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 and HNW separate accounts and funds located globally with respect to benchmark comparisons, as determined using objectively based internal parameters, using the most current verified information available as of December 31, 2012.
Accounts2014 and is based on preliminary data available at that time. The performance data shown reflects information for all actively and passively managed equity and fixed income accounts, including U.S. registered investment companies, European-domiciled retail funds and separate accounts for which performance data is available, including performance data for high net worth accounts available as of November 30, 2014. The performance data does not include accounts terminated prior to December 31, 2012 are2014 and accounts for which data has not included. In addition, accounts that have notyet been verified as of January 29, 2013 have not been included.verified. If such terminated and other accounts had been included, the performance informationdata provided may have substantially differed substantially from that shown. The performance information does not include funds or accounts that
Performance comparisons shown are not measured against a benchmark, any benchmark-based alternatives product, private equity products, CDOs, or liquidation accounts managed by BlackRock’s FMA group. Comparisons are based on gross-of-fee performancegross-of-fees for U.S. retail, institutional and HNWhigh net worth separate accounts andas well as EMEA institutional separate accounts, and net-of-fee performance for EMEA basedEuropean domiciled retail products.funds. The performance tracking informationshown for institutional non-ETP index accounts is based on gross-of-fee performance
as of December 31, 2012, and includes all institutional accounts and alliShares funds globally using an index strategy. AUM information is based on AUM available as of December 31, 2014 for each account or fund in the asset class shown without adjustment for overlapping management of the same account or fund asfund. Fund performance reflects the reinvestment of December 31, 2012. The information reported may differ slightly from that reported previously due to the increased number of accounts that have been verified since the last performance disclosure. BlackRock considers these differences to be not material.dividends and distributions.
The sourceSource 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. Fund performance reflects the reinvestment of dividends and distributions, but does not reflect sales charges.
BlackRock SolutionsBLACKROCK SOLUTIONS
BlackRock SolutionsBRS offers investment management technology systems, risk management services and advisory services on a fee basis. At December 31, 2012, approximately $13.7 trillion of positions were processed on ourAladdin is our proprietary technology platform, which serves as the investmentrisk management system for both BlackRock and a growing number of sophisticated institutional investors around the world. BRS also offers comprehensive risk reporting capabilities 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. BRS’ Financial Markets Advisory (“FMA”) group provides services such as valuation and risk assessment of illiquid assets, portfolio restructuring, workouts and dispositions of distressed assets and financial and balance sheet strategies, for a wide range of global clients.
In the face of increasing regulatory scrutiny, clients have increased their focus on risk management and demand for BRS services continues to be robust. During 2012, BRS added 43 net new assignments and ended the year with record revenues of $518 million. $635 million were up 10% year-over-year. OurAladdin business, which represented 75% of BRS revenue for the year, continues to benefit from trends favoring global investment platform consolidation and multi-asset risk solutions.Aladdin business assignments are typically long-term contracts that provide significant recurring revenue.
Our FMA group continued to post strong revenues, even as the business transitions from a “crisis management” emphasis to a more institutionalized advisory business model, with a strong focus on helping clients navigate and implement requirements for the evolving regulatory environment. Advisory AUM decreased 40% to $21.7 billion, driven by $13.2 billion of planned client distributions reflecting our continued success in disposing of assets for clients at, or above, targeted levels.
At year-end, BRS served 169 clients, including banks, insurance companies, official institutions, pension funds, asset managers and other institutional investors across North America, Europe, Asia and Australia.
OurAladdin business posted strong annual growth of 16%. In 2012, we added $3.5 trillion in new assets to theAladdin platform with the addition of 16 clients and expansion of 10 existing client mandates. We now have 51Aladdin clients and $14 trillion of assets on the platform with the average size of theAladdin client growing substantially in the last year.Aladdin assignments are long-term contracts that provide significant levels of recurring revenue.
In FMA, the nature of assignments is shifting to longer-term advisory and risk monitoring engagements. Advisory AUM decreased 62% to $45.5 billion, driven by $74.5 billion of planned client distributions reflecting our continued success in disposing of assets for clients at, or above, targeted levels.
Securities LendingSECURITIES LENDING
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. The cash management team invests the cash we receive as collateral for securities on loan in other portfolios. Fees for securities lending can be structured as a share of earnings and/or as a management fee based on 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 being managed. The value of the collateral is not included in AUM.
Outstanding loan balances ended the year at approximately $134$187 billion, up from $122$156 billion at year-end 2011. Spreads were approximately flat compared to 2011,2013. Liability spreads declined from 2013 levels, as lending premiums increased and offset declining cash reinvestment spreads. Thethe proportion of “special collateral,” securities commanding premium lending fees, grew slowly through the year,declined due to low idiosyncratic risk, low single stock volatility and started 2012 above the 2011 average.lack of M&A activity.
BlackRock employs a conservative investment style for cash and securities lending collateral that emphasizes quality, liquidity and superior client service through all market cycles.interest rate risk management. Disciplined risk management, including a rigorous credit surveillance process, is an integral part of the investment process. BlackRock’s Cash Management RiskCredit 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. 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.
RiskRISK & Quantitative AnalysisQUANTITATIVE ANALYSIS
Across all asset classes, in addition to the efforts of the portfolio management teams, the Risk & Quantitative Analysis (“RQA”) group at BlackRock draws on extensive analytical systems and proprietary and third-party data to identify, measure and manage a wide range of risks. RQA provides risk management advice and independent risk oversight of the investment management processes, identifies and helps manage counterparty and operational risks, coordinates standards for firm wide investment performance measurement and determines risk management-related analytical and information requirements. Where appropriate, RQA will work with portfolio managers and developers to facilitate the development or improvement of risk models and analytics.
CompetitionCOMPETITION
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 managedindex 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. 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.
Geographic InformationGEOGRAPHIC INFORMATION
At December 31, 2012,2014, BlackRock hadserved clients in overmore than 100 countries across the globe, including the United States, the United Kingdom and Japan. See Note 22,Segment Information, contained in Part II, Item 8 of this filing for more information.
The following table illustrates the Company’s total revenue for 2012, 2011 and 2010 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the customer resides.EMPLOYEES
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Revenue | 2012 | 2011 | 2010 | |||||||||
Americas | $ | 6,429 | $ | 6,064 | $ | 5,824 | ||||||
Europe | 2,460 | 2,517 | 2,300 | |||||||||
Asia-Pacific | 448 | 500 | 488 | |||||||||
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Total revenue | $ | 9,337 | $ | 9,081 | $ | 8,612 | ||||||
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The following table illustrates the Company’s long-lived assets, including goodwill and property and equipment at December 31, 2012, 2011 and 2010 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.
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Long-lived Assets | 2012 | 2011 | 2010 | |||||||||
Americas | $ | 13,238 | $ | 13,133 | $ | 13,092 | ||||||
Europe | 166 | 123 | 42 | |||||||||
Asia-Pacific | 63 | 73 | 99 | |||||||||
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Total long-lived assets | $ | 13,467 | $ | 13,329 | $ | 13,233 | ||||||
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Americas primarily comprises the United States, Canada, Brazil and Mexico, while Europe primarily comprises the United Kingdom. Asia-Pacific primarily comprises Japan, Australia and Hong Kong.
Employees
At December 31, 2012,2014, BlackRock had a total of approximately 10,50012,200 employees, including approximately 4,8005,800 located in offices outside the United States. Consistent with our commitment to continually expand and enhance our talent base to support our clients, we added approximately 400800 employees during the year, including in strategic focus areas such as business operations, Aladdin applications development,iShares, alternatives, institutional sales and Asia.areas.
RegulationREGULATION
Virtually all aspects of BlackRock’s business are subject to various laws and regulations both in and outsidearound the United States,world, some of which are summarized below. These laws and regulations are primarily intended to protect investment advisory clients, investors in registered and unregistered investment companies, trust customers of BlackRock Institutional Trust Company, N.A. (“BTC”), PNC and its bank subsidiaries and their customers and the financial system. Under these laws and regulations, agencies that regulate investment advisers, investment funds and financial and bank holding companies and their subsidiaries, such as BlackRockother individuals and its subsidiaries,entities have broad administrative powers, including the power to limit, restrict or prohibit the regulated entity or person 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. fines both for individuals and the Company.
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, does not purport to be complete and is current only as of the date of this report.
GLOBAL REGULATORY REFORM
RegulatoryDodd-Frank Wall Street Reform and Consumer Protection Act
In July 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 fully implemented. The continued adoptionmany of these regulations and decisions will in large measure determinewhich have been adopted. As the impact of the DFA on BlackRock and other financial services firms. The DFA may significantly change BlackRock’s operating environment and the financial markets in general in unpredictable ways. Itthese rules will become evident over time, it is not yet possible to predict the ultimate effects that the DFA, or subsequent implementing regulations and decisions, will have upon BlackRock’s business, financial condition, and results of operations. Among
Systemically Important Financial Institution Review
Under the potential impacts, provisions of the DFA, referred to as the Volcker Rule could, to the extent the final Volcker Rule is determined to apply to BlackRock’s activities, affect the extent to which BlackRock invests in and transacts with certain of its investment funds, including private equity funds, hedge funds and fund of funds platforms. The impact of the Volcker Rule on liquidity and pricing in the broader financial markets is unknown at this time. For a further discussion of the Volcker Rule, see “Item 1A – Risk Factors – Legal and Regulatory Risks.” In addition, BlackRock could be designated a systemically important financial institution (“SIFI”) and become subject to direct supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). On July 31, 2014, the Financial Stability Oversight Council (“FSOC”) principals directed the staff to undertake a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management industry, and on December 18, 2014 the FSOC issued a Request for Information related to this analysis.
In addition, on January 8, 2014, the Financial Stability Board (“FSB”) and the International Organisation of Securities Commissions (“IOSCO”) issued a consultative document on proposed methodologies to identify nonbank/noninsurance global systemically important financial institutions (“G-SIFI”). A second FSB-IOSCO consultation is expected to be released in the near future.
If BlackRock were designated a SIFI or G-SIFI, it could bebecome subject to enhanced prudential, capital, supervisory and other requirements, such as risk-based capital requirements;requirements, leverage limits;limits, liquidity requirements;requirements, resolution plan and credit exposure report requirements;requirements, concentration limits;limits, a contingent capital requirement;requirement, enhanced public disclosures;disclosures, short-term debt limits;limits and overall risk management requirements. Further, new regulations under the DFA, relatingRequirements such as these, which were designed to regulationregulate banking institutions, would likely need to be modified to be applicable to an asset manager such as BlackRock. No proposals have been made indicating how such measures would be adapted for asset managers.
Securities and Exchange Commission Review of swaps and derivatives, will impact the manner by which BlackRock and BlackRock-advised funds and accounts use and trade swaps and other derivatives, andAsset Managers
BlackRock’s business may significantly increase the costs of derivatives trading. Similarly, BlackRock’s management of funds and accounts that use and trade swaps and derivatives couldalso be adversely impacted by recently adopted changes toSecurities and Exchange Commission (“SEC”) regulatory initiatives. For example, on December 11, 2014 the Commodity Futures Trading Commission’s (the “CFTC”) regulations. These rule changes include those concerning, among other things, the registration and regulation of commodity pool operators and commodity trading advisors (and the accompanying registration and regulation of such entities by the National Futures Association (the “NFA”)), the registration status of dealer counterparties and other counterparties who are major participants in the swap markets, and requirements concerning mandatory clearing of certain swap transactions. Jurisdictions outside the United States
in which BlackRock operates are also in the process of devising or considering more pervasive regulation of many elementsChair of the financial services industry,SEC announced that she is recommending that the SEC enhance its oversight of asset managers by (i) expanding and updating data requirements with which could have a similar impact on BlackRockasset managers must comply, (ii) improving fund level controls, including those related to liquidity levels and the broader markets.
The DFAnature of specific instruments and (iii) ensuring that asset management firms have appropriate transition plans in place to deal with market stress events or situations where an investment adviser is no longer able to serve its regulations, and otherclients. Although these recommendations have not yet resulted in any proposed rules, any additional SEC oversight or the introduction of any new lawsreporting, disclosure or regulations, or changes in enforcement of existing laws or regulations,control requirements could materially and adversely impact the scope or profitability of BlackRock’s business activities; require BlackRock to change certain business practices; divert management’s time and attention from BlackRock’s business activities to compliance activities; and expose BlackRock to additional compliance costs (including compliance and tax costs) and liabilities, as well as reputational harm. For example, in additionmay require the Company to change how it operates its business.
Money Market Fund Reform
In July 2014, the SEC adopted rule amendments designed to reform the regulatory changes mandated by the DFA, the Securities and Exchange Commission (the “SEC”) continues to review the role of and risks related to,structure governing money market funds and has indicatedto address the perceived systemic risks that it may adopt additional regulations. Somesuch funds present. The new rules require institutional prime and institutional municipal money market funds to employ a floating net asset value method of pricing, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rules also provide for new tools for the funds’ boards designed to address liquidity shocks, including liquidity fees and redemption gates. The rules do not apply to government
(non-municipal) and retail money market funds, except that retail money market funds must comply with liquidity fees and redemption gate requirements. The potential impact of the proposed changes, if adopted, could significantly alterrules that affect the structure of the funds, which have a two-year compliance period, on BlackRock’s business remains untested; they may, however, reduce the attractiveness of certain money market fund products and the entire money market fund industry. In 2012, the Officefunds to investors.
Regulation of the Comptroller of the Currency of the United States (the “OCC”) amended the regulations governing bank-maintained short-term investment funds (“STIFs”) to include new disclosure requirements regarding portfolio holdings and to more closely align portfolio limitations, such as maximum weighted average maturity and weighted average life, with those applicable to SEC registered money market funds. Similarly, the SEC continues to review the distribution fees paid to mutual fund distributors under Rule 12b-1 under the Investment Company Act of 1940 (the “Investment Company Act”), which are important to a number of the mutual funds BlackRock manages. Any changes to 12b-1 fees would alter the way BlackRock’s distribution partners distribute BlackRock products. Additionally, theDerivatives
The SEC, the Internal Revenue Service (“IRS”) and the CFTCCommodity Futures Trading Commission (“CFTC”) each continue to review the use of futures, swaps and other derivatives by mutual funds, and suchfunds. Such reviews could result in regulations that further limit the use of futures and derivativessuch products by mutual funds. If adopted, these limitations could require BlackRock to change certain mutual fund business practices or to register additional entities with the CFTC, which could result in additional costs and/or restrictions. In addition, BlackRock has begun reportingalso reports certain information about a number of its private funds to the SEC and certain information about a number of its commodity pools to the CFTC, pursuant tounder systemic risk reporting requirements adopted by both agencies, whichagencies. These reporting obligations have required, and will continue to require, investments in people and systems to assure timely and accurate reporting. Still another
Further, the full implementation of regulations under the DFA relating to regulation of swaps and derivatives will impact the manner in which BlackRock-advised funds and accounts use and trade swaps and other derivatives, increasing the costs of derivatives trading for BlackRock’s clients. For example, CFTC, and eventually SEC rules and regulations applicable to offshore funds, accounts and counterparties will require BlackRock to build and implement new compliance monitoring procedures to address the enhanced level of oversight to which it will be subject. These rule changes also introduce new requirements for centrally clearing certain swap, and eventually security-based swap, transactions and for executing certain swap, and eventually security-based swap, transactions on or through CFTC or SEC-registered trading venues. Jurisdictions outside the United States in which BlackRock operates also have adopted and implemented, or are in the regulatory landscape wasprocess of considering, adopting or implementing more pervasive regulation of many elements of the IRS’financial services industry, which could further impact BlackRock and the broader markets. This includes the implementation of mandated central clearing of swaps in the European Union (“EU”) and the implementation of trade reporting, documentation, central clearing and other requirements in various jurisdictions globally.
Regulation of ETFs
Globally, regulators are examining the potential risks in ETFs and may impose additional regulations on ETFs. Depending on the outcome of this analysis, these products may be restricted in some ways and may require BlackRock to incur additional compliance expenses, which may adversely affect the Company’s business.
Benchmark Reform
The IOSCO published principles for regulatory oversight of financial benchmarks in 2013, with standards applying to methodologies for benchmark calculation, and transparency and governance issues in the benchmarking process; some national and regional regulators are currently reviewing how
to apply these principles, with a draft European Regulation published in September 2013. Similarly, in July 2014, the FSB published a report aimed at reforming major interest rate benchmarks. These regulations may result in business disruptions, which could adversely impact the value of assets in which asset managers, including BlackRock, have invested directly or on behalf of their clients. To the extent the regulations strictly control the activities of financial services firms, could make it more difficult for BlackRock to conduct certain businesses.
Taxation
BlackRock’s global business may be impacted by the Foreign Account Tax Compliance Act (“FATCA”). FATCA, which was enacted in 2010 and is intended to address tax compliance issues associated with U.S. taxpayers with foreign accounts. FATCA requires foreign
financial institutions to report to the IRS information about financial accounts held by U.S. taxpayers and imposesintroduced expansive new investor onboarding, withholding documentation and reporting requirements on foreignrules aimed at ensuring U.S. persons with financial institutions. Final regulations were issued byassets outside of the IRS on January 17, 2013, with the earliest effective dates beginning in January 1, 2014.United States pay appropriate taxes. In many instances, however, the precise nature of what needs to be implemented will be governed by bilateral Intergovernmental Agreements (“IGAs”) between the United States and the countries in which BlackRock does business. ManyWhile many of these IGAs have been put into place, others have yet to be concluded. The FATCA rules will impact both U.S. and non-U.S. funds and subject BlackRock to extensive additional administrative burdens. The Organization for Economic Co-operation and Development has also recently launched a base erosion and profit shifting (“BEPS”) proposal that aims to rationalize tax treatment across jurisdictions. If the BEPS proposal becomes the subject of legislative action in the format proposed, it could have unintended taxation consequences for collective investment vehicles and the Company’s tax position, which could adversely affect BlackRock’s financial condition.
In addition, certain individual EU Member States, such as France and Italy, have enacted national financial transaction taxes (“FTTs”). There has also been renewed momentum by several other Member States to introduce FTTs, which would impose taxation on a broad range of financial instrument and derivatives transactions. In general, any tax on securities and derivatives transactions would impact investors and would likely have a negative impact on the liquidity of the securities and derivatives markets, could diminish the attractiveness of certain types of products that we manage in those countries and could cause clients to shift assets away from such products. An FTT could significantly increase the operational costs of our entering into, on behalf of our clients, securities and derivatives transactions that would be subjected to an FTT, which could adversely impact our financial results and clients’ performance results.
BlackRock’s business could also be impacted to the extent there are other changes to tax laws. For example, the administration recently announced its proposed U.S. federal budget, which called for new industry fees for financial firms. To the extent such fees are adopted and found to apply to BlackRock, they could adversely affect the Company’s financial results.
Regulation of Securities Lending
In its 2014 Annual Report, the FSOC identified securities lending indemnification by asset managers as a potential systemic risk that required further review and monitoring. In addition, in January 2015, the European Parliament published its draft report on the European Commission’s proposal for a European regulation on the reporting and transparency of securities financing transactions (“SFT”).
The SFT regulation aims to improve the transparency surrounding SFTs and limit the perceived risks of SFTs by, among other things, requiring central reporting of SFTs, requiring disclosure of SFTs to investors and imposing minimum requirements relating to the difference in prices at which a market maker can buy and sell a security in SFTs. If the recent scrutiny of securities lending practices results in new regulatory requirements or reporting obligations, BlackRock may be required to modify its securities lending activities or introduce additional compliance measures, which will subject the Company to incur significant administrativeadditional expenses.
Volcker Rule
Provisions of the DFA referred to as the “Volcker Rule” place limitations on the ability of banks and compliance coststheir subsidiaries to engage in proprietary trading and to invest in and transact with certain private investment funds, including hedge funds, private equity funds and funds of funds (collectively “covered funds”). Because the Federal Reserve currently treats BlackRock as a nonbank subsidiary of PNC, BlackRock may be required to conform its activities to the requirements of the Volcker Rule. The Volcker Rule’s restrictions would, among other things, limit BlackRock’s ability to invest in covered funds and require BlackRock to remove its name from the names of its covered funds, which could subject clientsthe Company to U.S. tax withholding.additional expense. The Volcker Rule may also require BlackRock to sell certain seed and co-investments that it holds in covered funds, potentially at a discount to existing carrying value, depending on market conditions. The Volcker Rule may also reduce the level of market making and liquidity activities of several of BlackRock’s trading counterparties, which may adversely impact the liquidity and, in some cases, the pricing of various financial instruments in which BlackRock client accounts invest. For a further discussion of the Volcker Rule, see “Item 1A — Risk Factors — Legal and Regulatory Risks.”
AnMarkets in Financial Instrument Directives
BlackRock is also subject to numerous regulatory reform initiatives in Europe. For example, after the United Kingdom and other European jurisdictions in which BlackRock has a presence implemented the Markets in Financial Instruments Directive (“MiFID”) rules (described more particularly under “— European Regulation” below) into national legislation, these jurisdictions recently began the additional process of changesimplementing MiFID 2 and a new Markets in Financial Instruments Regulation. MiFID 2 builds upon many of the regulatory landscapeinitiatives introduced through MiFID, which focused primarily on equities, to encourage trading across all asset classes to migrate on to open and transparent markets. MiFID 2, which will come into full effect in Europe isJanuary 2017, will be implemented through a number of more detailed directives, regulations and technical standards to be made by the European UnionCommission and by the European Securities and Markets Authority (“EU”ESMA”). It is expected that MiFID 2 will have significant and wide-ranging impacts on EU securities and derivatives markets. In particular, there will be (i) enhanced governance and investor protection standards, (ii) prescriptive rules on portfolio management firms’ ability to receive and pay for investment research relating to all asset classes, (iii) enhanced regulation of algorithmic trading, (iv) the movement of trading in certain shares and derivatives on to regulated execution venues, (v) the extension of pre- and post-trade transparency requirements to wider categories of financial instruments, (vi) restrictions on the use of so-called dark pool trading, (vii) the creation of a new type of trading venue called the
Organized Trading Facility for non-equity financial instruments, (viii) commodity derivative position limits and reporting requirements, (ix) a move away from vertical silos in execution, clearing and settlement, (x) an enhanced role for ESMA in supervising EU securities and derivatives markets and (xi) new requirements regarding non-EU investment firms’ access to EU financial markets. Implementation of these measures will have direct and indirect impacts on the Company and its subsidiaries and may require significant changes to client servicing models.
Alternative Investment Fund Managers Directive
BlackRock’s European business is impacted by the EU Alternative Investment Fund Managers Directive (“AIFMD”), which became effective on July 21, 2011 and is required to be implemented by EU member states by July 22, 2013.2011. The AIFMD regulates managers of, and service providers to, a broad range of alternative investment funds (“AIFs”) domiciled within and (depending on the precise circumstances) outside the EU. The AIFMD also regulates the marketing of all AIFs inside the European Economic Area (the “EEA”(“EEA”). In general, theThe AIFMD is expected to have a staged implementation between mid-2013 andbeing implemented in stages, which run through 2018. Compliance with the AIFMD’s requirements may restrict AIFalternative investment fund marketing and will placeimpose additional compliance and disclosure obligations regarding remuneration, capital requirements, leverage, valuation, stakes in EU companies, depositaries, the domicile of custodians and liquidity management.management on BlackRock. These new compliance and disclosure obligations and the associated risk management and reporting requirements will subject BlackRock to additional expenses.
Globally,Undertakings for Collective Investment in Transferable Securities
The EU has also adopted directives on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS”) as regards depositary functions, remuneration policies and sanctions. The latest initiative in this area, UCITS V, which became effective in September 2014, seeks to align the depositary regime, remuneration rules and sanctioning powers of regulators are examiningunder the potential risksUCITS Directive with the requirements of the AIFMD. UCITS V is required to be adopted in the national law of each EU member state during the second quarter of 2016. Similarly, in August 2014 ESMA revised the guidelines it initially published in 2012 on ETFs and may impose additional regulations on ETFs, includingother UCITS funds. The guidelines introduced new collateral management requirements to promote increased transparency and to limit the ability of ETFs to utilize derivatives. The International Organization of Securities Commissions is also examining the appropriate level of regulatory oversight of financial benchmarks, whether standards should apply to methodologies for benchmark calculation, and transparency and governance issuesUCITS funds concerning collateral received in the benchmarking process. Anycontext of these regulatoryderivatives using Efficient Portfolio Management (“EPM”) techniques (including securities
lending) and over-the-counter derivative transactions. These rules, which are now in effect, required BlackRock to make a series of 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,its collateral management arrangements applicable to the extentEPM of its UCITS fund ranges. Compliance with the regulations strictly control the activities of financial services firms, could make it more difficult forUCITS directives will cause BlackRock to conduct certain businesses or distinguish itself from competitors.incur additional expenses associated with new risk management and reporting requirements.
Additional legislation, changes inExtension of Retail Distribution Review
BlackRock must also comply with newly implemented retail distribution rules promulgated by regulatorsaimed at enhancing consumer protections, overhauling mutual fund fee structures and self-regulatory organizations, or changesincreasing professionalism in the interpretation or enforcement of existing lawsretail investment sector. The rules were originally introduced in the United Kingdom and regulations may directly affect the method of operationhave since been introduced in other jurisdictions where BlackRock operates. Similarly, MiFID 2 will contain a ban on certain advisers recovering commissions and other
and profitability of BlackRock. BlackRock’s profitability also could be materially and adversely affected by modification of thenonmonetary benefits from fund managers. These rules, and regulations that impact the business and financial communities in general, includingif implemented, may lead to changes to the laws governing taxation, antitrust regulationfees and electronic commerce. See the “–Non-U.S. Regulation” section below for a further discussion of regulatory reforms being considered and/or adopted outside of the United States.commissions BlackRock is able to charge to its clients, as well as to its client servicing and distribution models.
EXISTING U.S. RegulationREGULATION - OVERVIEW
BlackRock and certain of its U.S. subsidiaries are currently subject to extensive regulation, primarily at the federal level, by the SEC, the Department of Labor (the “DOL”), the Federal Reserve, the OCC,Office of the Comptroller of the Currency (“OCC”), the Financial Industry Regulatory Authority (“FINRA”), the NFA,National Futures Association (“NFA”), the CFTC and other government agencies and regulatory bodies. Certain of BlackRock’s U.S. subsidiaries are also subject to various anti-terrorist financing, privacy, anti-money laundering regulations and economic sanctions laws and regulations established by various agencies.
The Investment Advisers Act of 1940 (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 (the “Investment Company Act”) imposes stringent governance, compliance, operational, disclosure and related obligations on registered investment companies and their investment advisers 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 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.
BlackRock’s trading and investment activities for client accounts are regulated under the Securities Exchange Act of 1934 (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 requirements (e.g., short sale limits, volume limitations and reporting obligations) and market regulation policies in the United States and globally. Depending on the scopeViolation of the rules to be adopted by the SEC, provisions added to the Exchange Act by the DFA may require certain BlackRock subsidiaries to register as municipal advisors 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. Violationany of these laws and regulations could result in restrictions on the Company’s activities and damage its reputation. Furthermore, the SEC has recently promulgated new rules that give effect to a section of the DFA that requires municipal advisors (as that term is defined in the statute) to register with the SEC. The new rules require entities that provide certain types of advice to, or on behalf of, or solicit municipal entities or certain other persons, to register with the SEC and the Municipal Securities Rulemaking Board (“MSRB”) as municipal advisors, thereby subjecting those entities to new or additional regulation by the SEC and MSRB. BlackRock has registered one of its subsidiaries, BTC, as a municipal advisor under these new rules.
BlackRock manages a variety of private pools of capital, including hedge funds, funds of hedge funds, private equity funds, CDOs,collateralized debt obligations (“CDOs”), collateralized loan obligations (“CLOs”), 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, 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 (“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.
BlackRock has seven subsidiaries that are registered as commodity pool operators (“CPOs”) and/or commodity trading advisors with the CFTC and are members of the NFA. Additional BlackRock entities may need to register as a CPO or commodity trading advisor as a result of recently enacted regulatory changes by the CFTC. 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. ThreeTwo of BlackRock’s other subsidiaries, BlackRock Investments, LLC (“BRIL”), BlackRock Capital Markets, LLC and BlackRock Execution Services, are registered with the SEC as broker-dealers and are member-firms of
FINRA. Each broker-dealer has a membership agreement with FINRA that limits the scope of such broker-dealer’s permitted activities. BRIL is also an approved person with the New York Stock Exchange (“NYSE”) and a member of the Municipal Securities Rulemaking Board (“MSRB”)MSRB, subject to MSRB rules.
U.S. Banking Regulation
PNC is a bank holding company and regulated as a “financial holding company” by the Federal Reserve under the Bank Holding Company Act of 1956 (the “BHC Act”). As described in “Item 1-Business”, PNC owns approximately 22% of BlackRock’s capital stock. Based on PNC’s interests in and relationships withthe Federal Reserve’s interpretation of the BHC Act, the Federal Reserve currently takes the position that this ownership interest causes BlackRock BlackRock is deemed to be treated as a non-banknonbank subsidiary of PNC and is therefore subjectfor purposes of the BHC Act, thereby subjecting BlackRock to banking regulation, including the supervision and regulation of the Federal Reserve and to most banking laws, regulations and orders that apply to PNC, including the Volcker Rule. The supervision and regulation of PNC and its subsidiaries under applicable banking laws is intended primarily for the protection of its banking subsidiaries, its depositors, the Deposit Insurance Fund of the Federal Deposit Insurance Corporation, and the financial system as a whole, rather than for the protection of stockholders, creditors or clients of PNC or BlackRock. PNC’s relationships and good standing with its 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.
BlackRock generally may conduct only activities that are authorized for a financial holding 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, only to the extent consistent with applicable law and regulatory interpretations. Based on the Federal Reserve’s position that BlackRock is a nonbank subsidiary of PNC, the Federal 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, and there are limits on the ability of bank subsidiaries of PNC to extend credit to or conduct other transactions with BlackRock or its funds. PNC and its 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. Furthermore, the Federal Reserve has broad enforcement authority over nonbank subsidiaries, including the power to prohibit them from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound practice. The Federal 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 nonbank subsidiaries.
Any failure of 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 PNC or one of PNC’s bank subsidiaries to remain “well capitalized” and “well managed,” by any examination downgrade of one of PNC’s bank subsidiaries, or by any failure of one of PNC’s bank subsidiaries to maintain a satisfactory rating under the Community Reinvestment Act.
One of BlackRock’s subsidiaries, BTC, is organized as a limited purpose national trust company that does not accept deposits or make commercial loans and which 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 stockholders.
BlackRock generally may conduct only activities that are authorized for a “financial holding 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, only to the extent consistent with applicable law and regulatory
interpretations. The Federal 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 PNC to extend credit to or conduct other transactions with BlackRock or its funds. PNC and its 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 Federal Reserve has broad enforcement authority over BlackRock, including the power to prohibit BlackRock from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound practice in conducting BlackRock’s business. The Federal 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.
Any failure of 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 PNC’s bank subsidiaries to remain “well capitalized,” by any examination downgrade of one of PNC’s bank subsidiaries, or by any failure of one of PNC’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 also requiring the holding company to remain “well capitalized” and “well managed.”
Non-U.S. RegulationEXISTING INTERNATIONAL REGULATION — OVERVIEW
BlackRock’s international operations are subject to the laws and regulations of non-U.S.a number of international jurisdictions, and non-U.S.as well as oversight by numerous regulatory agencies and bodies and, in certain cases,those jurisdictions. In some instances, they are also affected by U.S. laws and regulations that have extra-territorial application. As
Below is a summary of certain international regulatory standards to which BlackRock continuesis subject. It is not meant to expand itsbe comprehensive as there are parallel legal and regulatory arrangements in force in many jurisdictions where BlackRock’s subsidiaries conduct business.
Of note among the various other international presence, a numberregulations to which BlackRock is subject, are the extensive and increasingly stringent regulatory reporting requirements that necessitate the monitoring and reporting of its subsidiariesissuer exposure levels (thresholds) across the holdings of managed funds and international operations have become subject to regulatory frameworks comparable toaccounts and those affecting its operations inof the United States.Company.
European Regulation
The Financial ServicesConduct Authority (the “FSA”(“FCA”) currently regulates certain BlackRock subsidiaries in the United Kingdom. It also regulates those U.K. subsidiaries’ branches established in other European countries and the U.K. branches of certain of BlackRock’s U.S. subsidiaries. In addition, the Prudential Regulation Authority (the “PRA”) regulates one BlackRock U.K. subsidiary. Authorization by the FSAFCA and the PRA is required to conduct anycertain financial services related business in the United Kingdom under the Financial Services and Markets Act 2000. The FSA’sFCA’s rules madeadopted under that Act govern the majority of a firm’s capital resources requirements, senior management
arrangements, conduct of business, interaction with clients, and systems and controls.controls, whereas the rules of the PRA focus solely on the prudential requirements that apply to the Company’s U.K.-regulated insurance subsidiary. The FSA alsoFCA supervises the Company’s U.K.-regulated subsidiaries underthrough a “closecombination of proactive engagement, event-driven and continuous” regime – which include regular visitsreactive supervision and meetings with senior management and control functions –thematic based reviews in order to monitor the Company’s compliance with regulatory requirements. Breaches of the FSA’sFCA’s rules may result in a wide range of disciplinary actions against the Company’s U.K.-regulated subsidiaries. In April 2013, the FSA is expected to be replaced by Prudential Regulation Authority and the Financial Conduct Authority. Pending formal implementation, the FSA has introduced a shadow internal structure in anticipation of the creation of the Prudential Regulation Authority and the Financial Conduct Authority, and the Bank of England has created an interim Financial Policy Committee.subsidiaries and/or its employees.
In addition, to the above, the Company’s U.K.-regulated subsidiaries and other European subsidiaries and branches, must comply with the pan-European regulatory regime established by the Markets in Financial Instruments Directive (“MiFID”),MiFID, which became effective on November 1, 2007 and regulates the provision of investment services and activities throughout the EEA, as well aswider EEA. MiFID, the Capital Requirements Directive,scope of which delineates regulatory capital requirements.is being enhanced through MiFID 2 which is described more particularly under “— Global Regulatory Reform” above, sets out detailed requirements governing the organization and conduct of business of investment firms and regulated markets. It also includes pre- and post-trade transparency requirements for equity markets and extensive transaction reporting requirements.
The United Kingdom has adopted Certain BlackRock entities must also comply with the MiFID rules into national legislation and FSA regulations, as have those other European jurisdictions in which BlackRock has a presence (excluding Switzerland which is not part of the EU or EEA). A review of MiFID by the European Commission has led to the publication of a draft amendmentU.K.’s Consolidated Life Directive and a draft new Markets in Financial Instruments Regulation. The proposals, if implemented, are likely to result in changes to pre- and post-trade reporting obligations and an expansion of the types of instruments subject to these requirements. They may affect the buying and selling of derivatives by moving most derivative trading onto regulated trading venues and may control the activities of algorithmic trading. The proposals may also result in changes to conduct of business requirements including selling practices, intermediary inducements and client categorization. The proposals also envisage giving the European Commission power to ban certain products and services. A further European Commission Regulation, the European Market Infrastructure Regulation (“EMIR”), was adopted in August 2012, and requires the central clearing of standardized OTC derivatives and the mandatory reporting of all derivative contracts. Some of the EMIR technical standards have recently been finalized and the remainder are expected to be finalized in 2013.
Insurance Mediation Directive. In addition, the FSA has finalized rules relating to its retail distribution review.relevant entities must comply with revised obligations on capital resources for banks and certain investment firms (the Capital Requirements Directive), which became effective in January 2014. These rules, which came into effectinclude requirements not only on December 31, 2012, have changed how retail clients pay for investment advice given in respectcapital, but address matters of all retail investment products, including open-endgovernance and closed-end funds, structured products and insurance-based savings products.remuneration as well. The FSA is also considering further rules that would ban payments by product providers to distribution platforms for both advised and non-advised business.
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 updatedobligations introduced through these directives regulations and recommendations of which the MiFID review (mentioned above) was a part. These, together with the changes contemplated by the AIFMD (mentioned above), will have direct and indirect effects on BlackRock’s operations in the EEA.
The European Commission has also published proposals to replace the Market Abuse Directive with a regulation on insider dealing and market manipulation and with an accompanying directive on criminal sanctions. 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, which will have a direct effect on some of BlackRock’s European operations.
The next iteration of the Undertakings for Collective Investment in Transferable Securities Directive (“UCITS IV”),BlackRock’s EU-regulated subsidiaries are additionally subject to an EU regulation on OTC derivatives, central counterparties and trade repositories, which was required to be adopted in August 2012 and which requires (i) the national lawcentral clearing of each EU member state by July 1, 2011. The United Kingdom has adopted UCITS IV requirements into national legislationstandardized OTC derivatives, (ii) the application of risk-mitigation techniques to non-centrally cleared OTC derivatives and FSA regulation. Luxembourg and Ireland have also adopted UCITS IV into their national legislation. However, several other EU member states are still(iii) the reporting of all derivative contracts from February 2014.
Regulation in various stages of the adoption process. UCITS IV introduced new requirements including a requirement on 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, including UCITS V, which addresses, among other items, custodial liability, and UCITS VI, which includes proposals on depositaries, money market funds and product management.
Proposals on packaged retail investment products (“PRIPs”) are to be implemented through the strengthening of MiFID standards (for non-insurance PRIPs), revisions to the Insurance Mediation Directive’s selling standard (for all insurance-based PRIPs) and new investor disclosure requirements for all PRIPs though a separate EU legislative process.
Certain individual EU Member States, such as France and Italy, have enacted national financial transaction taxes (“FTTs”), and a group of Member States also could adopt an FTT under an EU Enhanced Cooperation procedure that would apply only in those Member States. In general, any tax on securities and derivatives transactions would likely have a negative impact on the liquidity of the securities and derivatives markets, could diminish the attractiveness of certain types of products that we manage in those countries and could cause clients to shift assets away from such products. An FTT could significantly increase the operational costs of our entering into, on behalf of our clients, securities and derivatives transactions that would be subjected to an FTT, which would adversely impact our revenues.
For the insurance sector the Solvency II process will increase the amount of capital that insurers will have to set aside and will have an indirect effect on fund managers with insurance clients. The Solvency II process has been delayed from an original compliance date of January 1, 2014; no new timetable has been currently proposed.
In addition to the FSA, the activities of certain BlackRock subsidiaries, branches, and representative offices are overseen by financial services regulators in Germany, The Netherlands, Ireland, Luxembourg, Switzerland, Isle of Man, Jersey, France, Belgium, Italy, Poland, South Africa, Spain and 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 subject certain BlackRock subsidiaries to net capital requirements. Other BlackRock subsidiaries, branches, and representative offices are regulated in Japan, Australia, China, Hong Kong, Singapore, Taiwan, South Korea, India, Dubai, Cayman Islands, Brazil, Chile, Mexico and Canada.Asia-Pacific Region
In Japan, a BlackRock subsidiary is 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. This Japanese subsidiary also holds a license for real estate brokerage activity which subjects it to the regulations set forth in the Real Estate Brokerage Business Act.
In Australia, BlackRock’s subsidiaries are subject to various Australian federal and state laws and certain subsidiaries are regulated by the Australian Securities and Investments Commission (“ASIC”) and the Australian Prudential Regulation Authority (“APRA”). ASIC regulates companies and financial services in Australia and is responsible for promoting investor, creditor and consumer protection. 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 the 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 regulates, among others, offers of investments to the public and provides for the licensing of intermediaries. The SFO is administered by the Securities and Futures Commission (the “SFC”). The SFC is also empowered under the SFO to establish standards for compliance as well as codes and guidelines. The relevant BlackRock subsidiaries and the employees conducting any of the regulated activities specified in the SFO are required to be licensed with the SFC, and are subject to the rules, codes and guidelines issued by the SFC from time to time.SFC. Failure to comply with the applicable laws, regulations, codes and guidelines issued by the SFC could result in the suspension or revocations of the licenses granted by the SFC.
ThereBlackRock’s operations in Taiwan are parallel legalregulated by the Taiwan Financial Supervisory Commission, which is responsible for regulating securities markets (including the Taiwan Stock Exchange and regulatory arrangementsthe Taiwan Futures Exchange), the banking industry and the insurance sector. Other financial regulators oversee BlackRock subsidiaries, branches, and representative offices across the Asia Pacific region, including in forceSingapore and South Korea. Regulators in manythese jurisdictions have authority with respect to financial services including, among other non-U.S. jurisdictions where BlackRock’sthings, the authority to grant or cancel required licenses or registrations. In addition, these regulators may subject certain BlackRock subsidiaries are authorized to conduct business.net capital requirements.
Available InformationAVAILABLE 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 at http://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, Nominating and Governance
Committee and Risk 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 at http://www.sec.gov.
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, operating and operatingcompliance risks, BlackRock’s business, financial condition, operating results or non-operatingand nonoperating results could be materially adversely affected orand the Company’s stock price could decline as a result of any of these risks and uncertainties, including the following risks.ones discussed below.
Risks Related to BlackRock’s Business and CompetitionMARKET AND COMPETITION RISKS
Changes in the value levels of the capital,equity, debt, real estate, commodities, or currency markets or other asset classesmarkets could leadcause assets under management (“AUM”), revenue and earnings to a decline in revenues and earnings.decline.
BlackRock’s investment management revenues arerevenue is primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees which are normally expressed as a percentage of returns to the returns earned on AUM. Movementsclient. Numerous factors, including price movements in the equity, debt commodity,or currency markets, or in the price of real estate, commodities or alternative investment market prices, interest rates or foreign exchange ratesinvestments in which BlackRock invests, could cause:
the value of AUM, to decrease;
or the returns realizedBlackRock realizes on AUM, to decrease;
clients to withdrawthe withdrawal of funds from BlackRock’s products in favor of products in markets that they perceive offer greater opportunity that BlackRock may not serve;
clients to rebalancethe rebalancing of assets away frominto BlackRock products that BlackRock manages into products that it may not manage;
clients to rebalance assets away from products that earn higher fees into products with lower fees; and
an impairment to the value of intangible assets and goodwill.goodwill; or
The occurrence of any of these events could result in lower investment advisory, administration and performance fees or earnings andmay cause the Company’s stock priceAUM, revenue and earnings to decline.
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.
BlackRock derives a substantial portion of its revenue from its investment advisory business. The advisory or management contracts BlackRock has entered into with its clients, including the agreements that govern many of BlackRock’s investment funds, provide investors or, in some cases, the independent directors of private investment funds, with significant latitude to terminate such contracts, withdraw funds or liquidate funds by simple majority vote with limited notice or penalty, or to remove BlackRock as the funds’ investment advisor (or equivalent). BlackRock also manages its U.S. mutual funds, closed-end and exchange-traded funds under management contracts that must be renewed and approved annually by the funds’ respective boards of directors, a majority of whom are independent from the Company. If a number of BlackRock’s clients terminate their contracts, remove BlackRock from advisory roles, liquidate funds or fail to renew management contracts on favorable terms, the fees or carried interest BlackRock earns could be reduced, which may cause its AUM, revenue and earnings to decline.
Increased competition may cause BlackRock’s AUM, revenue and earnings to decline.
The investment management industry is highly competitive and has relatively low barriers to entry. BlackRock competes based on a number of factors including: investment performance, the level of fees charged, the quality and diversity of services and products provided, name recognition and reputation, and the ability to develop new investment strategies and products to meet the changing needs of investors. Increased competition on the basis of any of these factors, including competition leading to fee reductions on existing or future new business, could cause the Company’s AUM, revenue and earnings to decline.
The impairment or failure of other financial institutions may cause BlackRock’s AUM, revenue and earnings to decline.
BlackRock’s investment management activities expose the products and accounts it manages to many different industries and counterparties, including brokers and dealers, commercial and investment banks, clearing organizations, mutual and hedge funds, and other institutional clients. Transactions with counterparties expose the products and accounts BlackRock manages to credit risk in the event the applicable counterparty defaults. Although BlackRock regularly assesses risks posed by its counterparties, such counterparties may be subject to sudden swings in the financial and credit markets that may impair their ability to perform or they may otherwise fail to meet their obligations to BlackRock. Any such impairment or failure could negatively impact the performance of products or accounts managed by BlackRock, which could lead to the loss of clients and may cause BlackRock’s AUM, revenue and earnings to decline.
The failure or negative performance of products offered by competitors may cause AUM in similar BlackRock products to decline irrespective of BlackRock’s performance.
Many competitors offer similar products to those offered by BlackRock and the failure or negative performance of competitors’ products could lead to a loss of confidence in similar BlackRock products, irrespective of the performance
of such products. Any loss of confidence in a product type could lead to withdrawals, redemptions and liquidity issues in such products, which may cause the Company’s AUM, revenue and earnings to decline.
Changes in the value of seed and co-investments that BlackRock owns could affect our nonoperating income and could increase the volatility of our earnings.
At December 31, 2014, BlackRock’s net economic investment exposure of approximately $1.3 billion in its investments (see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations-Investments”) primarily resulted from co-investments and seed investments in its sponsored investment funds. Movements in the equity, debt or currency markets, or in the price of real estate, commodities or alternative investments, could lower the value of these investments, increase the volatility of BlackRock’s earnings and may cause earnings to decline.
RISKS RELATED TO INVESTMENT PERFORMANCE
Poor investment performance could lead to the loss of clients and a decline in revenuesmay cause AUM, revenue and earnings.earnings to decline.
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 revenuescause AUM, revenue and cause earnings to decline as a result of:
existing clients withdrawing fundsclient withdrawals in favor of better performing products, which could result in lower investment advisory and administration fees;
the diminishing ability to attract additional funds from existing and new clients;
the Company earning minimal or no performance fees; and
an impairment to the value of intangible assets and goodwill.
The determination to provide support to particular products from time to time or provide securities lending indemnifications may reduce earnings or other investments
BlackRock may, at its option, from time to time support investment products through capital or credit support. Such support and indemnifications utilize capital that would otherwise be available for other corporate purposes. Losses or prohibitions on such support and indemnifications, or failure to have or devote sufficient capital to support products and securities lending, could have an adverse impact on revenues and earnings.
On behalf of certain clients, BlackRock lends securities to highly rated banks and broker-dealers. In these securities lending transactions, the borrower is required to provide
and maintain collateral at or above regulatory minimums. Securities on loan are marked to market daily to determine if the borrower is required to pledge additional collateral. BlackRock has issued certain indemnifications to certain securities lending clients against potential loss resulting from a borrower’s failure to fulfill its obligations should the value of the collateral pledged by the borrower at the time of default be insufficient to cover the borrower’s obligations under the securities lending agreement. These indemnifications cover only the collateral shortfall described above, and do not guarantee, assume or otherwise insure the investment performance or return of any cash collateral vehicle into which securities lending cash collateral is invested. The amount of securities on loan as of December 31, 2012 and subject to indemnification was $99.5 billion. BlackRock held, as agent, cash and securities totaling $104.8 billion as collateral for indemnified securities on loan at December 31, 2012. BlackRock expects indemnified balances to increase over time.
While the collateral pledged by a borrower is intended to be sufficient to offset the borrower’s obligations to return securities borrowed in the event of a borrower default, BlackRock can give no assurance that the collateral pledged by the borrower will be sufficient to fulfill such obligations. If the amount of pledged collateral is not sufficient to fulfill obligations to a client for whom BlackRock has provided indemnification, BlackRock would be responsible for the amount of the shortfall, which could result in additional costs to BlackRock that cannot be estimated with certainty at this time.
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, 2012, BlackRock’s net economic investment exposure of approximately $1.2 billion in its investments (see “Item 7A – Quantitative and Qualitative Disclosures About Market Risk”) primarily resulted from co-investments and seed investments in its sponsored investment funds. A decline in the prices of equity or debt securities, 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 an increase in the volatility of BlackRock’s earnings.
Continued capital losses on investments could have adverse income tax consequences.
The Company may generate realized and unrealized capital lossesreturns 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 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, clearing organizations, 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. While BlackRock regularly conducts assessments of such risk posed by its counterparties, the risk of non-performance by such parties is subject to sudden swings in the financial and credit markets, including the effects of the European sovereign debt crisis and/or a collapse of the Eurozone financial system. There is no assurance that any such losses would not materially and adversely impact BlackRock’s revenues and earnings.
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 the Company’s AUM, revenues and earnings.
Loss of 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 personnel could have a 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 due to various circumstances such as adverse market conditions or poor performance.
Additionally, BlackRock manages its U.S. mutual funds, closed-end 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 such 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.
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 BlackRock as 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.
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 typically 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 industry, including the offering of exchange-traded funds, is highly competitive and has relatively low barriers to entry. To the extent that BlackRock 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.
Performance fees may increase volatility of both revenue and earnings volatility.earnings.
A portion of the Company’s revenuesBlackRock’s revenue is derived from performance fees on investment and risk management advisory assignments. Performance fees represented $463$550 million, or 5%, of total revenue for the year ended December 31, 2012. 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.2014. Generally, the Company is entitled to a performance feesfee only if the agreement pursuant to which it is managing the assets provides for one and if returns on the related portfoliosportfolio exceed agreed-upon periodic or cumulative return targets. If these targets are not exceeded, a performance feesfee 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 returnsperiods, which could cause AUM, revenue and the timing of revenue recognition, causing earnings to be more volatile.decline.
Additional acquisitions may decrease earningsFailure to identify errors in the quantitative models BlackRock utilizes to manage its business could adversely impact product performance and harm the Company’s competitive position.client relationships.
BlackRock employs a variety of strategies intendedvarious quantitative models to enhance earningssupport its investment decisions and expandallocations, including those related to risk assessment, portfolio management, trading
and hedging activities and product offeringsvaluations. Any errors in order to improve profit margins. These strategiesthe underlying models or model assumptions could have included hiring smaller-sized investment teams, acquisitions of investment management businesses, such as the MLIM, Quellosunanticipated and BGI transactionsadverse consequences on BlackRock’s business and other small and medium-sized strategic acquisitions. These strategies may not be effective, andreputation.
TECHNOLOGY AND OPERATIONAL RISKS
A failure to successfully develop and implement these strategies may decrease earnings and harmin BlackRock’s operational systems or infrastructure, including business continuity plans, could disrupt operations, damage the Company’s competitive position in the investment management industry. In the event BlackRock pursues additional acquisitions, itreputation and may not be ablecause BlackRock’s AUM, revenue and earnings to find suitable businesses to acquire at acceptable prices, and it may not be able to successfully integrate or realize the intended benefits from such acquisitions.decline.
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, and office space, is vital to the
competitiveness of its business. Moreover a significant portion of BlackRock’s critical business operations are concentrated in a limited number of geographic areas, including San Francisco, New York, London and Gurgaon. The failure to maintain an adequate infrastructure commensurate with the size and scope of itsBlackRock’s business, including any expansion, could impede the Company’s productivity and growth, which could cause the Company’s earnings or stock price to decline. Additionally, the overall stability of the euro could pose operational risks to the Company or the funds and accounts that it manages asoccurrence of a result of the adverse impacts that such issues may have on the Company’s trading, clearing,business outage or counterparty relationships.
Failure to maintain adequate business continuity plans could haveevent outside BlackRock’s control, including a material adverse impact on BlackRock and its products.
A significant portion of BlackRock’s critical business operations is concentrated in a few geographic areas, including San Francisco, California, New York, New York and London, England. A major earthquake, hurricane, fire, terrorist act, pandemic or other catastrophic event in any location at which BlackRock maintains a major presence, could materially impact operations, result in disruption to the business. The failure of the Companybusiness or impede its growth. Notwithstanding BlackRock’s efforts to maintain updated adequateensure business continuity, if it fails to keep business continuity plans up-to-date or if such plans, including secure backupback-up facilities and systems and personnel could impedethe availability of back-up employees, are improperly implemented or deployed during a disruption, the Company’s ability to operate upon a disruption,could be adversely impacted which could cause AUM, revenue and earnings to decline or could impact the Company’s earnings or stock priceability to decline.
Operating in international markets increases BlackRock’s operational,comply with regulatory and other risks.
As a result of BlackRock’s extensive international business activities, the Company faces increased operational, regulatory,obligations leading to 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 andharm, regulatory fines or sanctions, which could cause the Company’s earnings or stock price to decline.and sanctions.
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 in providing the sophisticated risk analytics incorporated into BlackRock’sAladdin technology platform that support investment advisory and BRS clients. Moreover, the Company’s technological and software advantage is dependent on a number of third parties who provide various types of data and software. 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 and BRS 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 and cyber security policies, procedures and capabilities could disrupt operations and cause financial losses that could result in a decrease inmay cause BlackRock’s AUM, revenue and earnings or stock price.to decline.
BlackRock is dependent on the effectiveness of itsthe information and cyber security policies, procedures and capabilities it maintains 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, 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 client or competitive information and could result in material financial loss, loss of competitive position, regulatory actions, breach of client contracts, reputational harm or legal liability, which, in turn, could cause BlackRock’s AUM, revenue and earnings to decline.
Failure to maintain Aladdin’s competitive position in a declinedynamic market for risk analytics could lead to a loss of clients and could impede BlackRock’s productivity and growth.
The sophisticated risk analytics that BlackRock provides via theAladdintechnology platform to support investment advisory and BRS clients are a key element to BlackRock’s competitive success. BlackRock relies on its ability, as well as the ability of a number of third parties who provide it with various types of data and software, to maintain a robust and
secure technological framework to maximize the benefit of theAladdin platform. 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 and BRS clients. In addition, there can be no assurance that the Company will be able to continue to deliver a competitive product in a dynamic market for risk analytics or be able to effectively protect and enforce its intellectual property rights in these systems and processes.
Operating risks associated with BlackRock’s securities lending program may result in client losses, and in certain circumstances, potential financial liabilities for the Company.
BlackRock lends securities to banks and broker-dealers on behalf of certain of its clients. In these securities lending transactions, the borrower is required to provide and maintain collateral at or above regulatory minimums. Securities on loan are marked to market daily to determine if the borrower is required to pledge additional collateral. BlackRock must manage this process and is charged with mitigating the associated operational risks. The failure of the Company’s controls to mitigate such operational risks could result in financial losses for the Company’s clients that participate in its securities lending programs (separate from the risks of collateral investments). Additionally, in certain circumstances, the Company could potentially be held liable for the failure to manage any such risks.
BlackRock indemnifies certain securities lending clients for specified losses as a result of a borrower default.
BlackRock indemnifies certain of its securities lending clients for specified losses that might occur upon the default of a borrower. These indemnities are designed to cover a client’s potential shortfall where the value of the collateral pledged by a defaulting borrower in connection with a securities lending agreement is less than the amount needed to repurchase the securities loaned to such a defaulting borrower. Where the collateral is in the form of cash, the indemnities BlackRock provides do not guarantee, assume or otherwise insure the investment performance or return of any cash collateral vehicle into which that cash collateral is invested. The amount of securities on loan as of December 31, 2014 and subject to indemnification was $145.7 billion. BlackRock held, as agent, cash and securities totaling $155.8 billion as collateral for indemnified securities on loan at December 31, 2014. Significant borrower defaults coupled with collateral shortfalls could result in material liabilities under these indemnities, which may cause the Company’s AUM, revenue and earnings to decline.
BlackRock’s decision to provide support to particular products from time to time, or stockthe inability to provide support, may cause AUM, revenue and earnings to decline.
BlackRock may, at its option, from time to time support investment products through capital or other credit support. Such support may utilize capital and liquidity that would otherwise be available for other corporate purposes. Losses on such support, as well as regulatory restrictions on our ability to provide such support or the failure to have available or devote sufficient capital or liquidity to support products, may cause AUM, revenue and earnings to decline.
Failure to maintain adequate corporate and contingent liquidity may cause BlackRock’s AUM, liquidity and earnings to decline, as well as harm its prospects for growth.
BlackRock’s ability to meet anticipated cash needs depends upon a number of factors, including its ability to maintain and grow AUM, its creditworthiness and operating cash flows. Failure to maintain adequate liquidity could lead to unanticipated costs and force BlackRock to revise existing strategic and business initiatives. BlackRock’s access to equity and debt markets and its ability to issue public or private debt, or secure lines of credit or commercial paper back-up lines, on reasonable terms may be limited by adverse market conditions, a reduction in its long- or short-term credit ratings as well as changes in government regulations, including tax and interest rates. Failure to obtain funds and/or financing, or any adverse change to the cost of obtaining such funds and/or financing, could cause BlackRock’s AUM, revenue and earnings to decline, curtail its operations and limit or impede its prospects for growth.
Fraud, or the circumvention of controls and risk management policies, could have an adverse effect on BlackRock’s reputation, which may cause the Company’s AUM, revenue and earnings to decline.
Although BlackRock has adopted a comprehensive risk management process and continues to enhance various controls, procedures, policies and systems to monitor and manage risks, it cannot assure that such controls, procedures, policies and systems will successfully identify and manage internal and external risks to its businesses. BlackRock is subject to the risk that its employees, contractors or other third parties may deliberately seek to circumvent established controls to commit fraud or act in ways that are inconsistent with the Company’s controls, policies and procedures. Persistent or repeated attempts involving fraud, conflicts of interests or circumvention of policies and controls could have an adverse effect on BlackRock’s reputation, which could cause costly regulatory inquiries and may cause the Company’s AUM, revenue and earnings to decline.
BlackRock may be unable to develop new products and services and the development of new products and services may expose BlackRock to additional costs or operational risk.
BlackRock’s financial performance depends, in part, on its ability to develop, market and manage new investment products and services. The development and introduction of new products and services requires continued innovative efforts on the part of BlackRock and may require significant time and resources as well as ongoing support and investment. Substantial risk and uncertainties are associated with the introduction of new products and services, including the implementation of new and appropriate operational controls and procedures, shifting client and market preferences, the introduction of competing products or services and compliance with regulatory requirements. A failure to continue to innovate to introduce new products and services or to successfully manage the risks associated with such products and services may cause BlackRock’s costs to fluctuate, which may cause its AUM, revenue and earnings to decline.
The failure to recruit and retain employees and develop and implement effective executive succession could lead to the loss of clients and may cause AUM, revenue and earnings to decline.
BlackRock’s success is largely dependent on the talents and efforts of its highly skilled workforce and the Company’s ability to plan for the future long-term growth of the business by identifying and developing those employees who can ultimately transition into key roles within BlackRock. The market for qualified fund managers, investment analysts, financial advisers and other professionals is competitive, and factors that affect BlackRock’s ability to attract and retain such employees include the Company’s reputation, the compensation and benefits it provides, and its commitment to effectively managing executive succession, including the development and training of qualified individuals. In addition, a percentage of the deferred compensation that BlackRock pays to its employees is tied to the Company’s share price. As such, if BlackRock’s share price were to decrease materially, the retention value of such deferred compensation would decrease. There can be no assurance that the Company will continue to be successful in its efforts to recruit and retain employees and effectively manage executive succession. If BlackRock is unable to attract and retain talented individuals, or if it fails to effectively manage executive succession, the Company’s ability to compete effectively and retain its existing clients may be materially impacted.
Future inorganic transactions may harm the Company’s competitive or financial position if they are not successful.
BlackRock employs a variety of organic and inorganic strategies intended to enhance earnings, increase product offerings, access new clients and expand into new geographies. Inorganic strategies have included hiring smaller-sized investment teams, and acquiring investment management businesses and other small and medium-sized companies. Inorganic transactions involve a number of financial, accounting, tax, regulatory and operational challenges and uncertainties, including in some cases the assumption of pre-existing liabilities. Any failure to identify and mitigate these risks through due diligence and indemnification provisions could adversely impact BlackRock’s reputation, may cause its AUM, revenue and earnings to decline, and may harm the Company’s competitive position in the investment management industry. Moreover, there can be no assurances that BlackRock will be able to successfully integrate or realize the intended benefits from future inorganic transactions.
Operating in international markets increases BlackRock’s operational, regulatory and other risks.
As a result of BlackRock’s extensive international operations, the Company faces associated operational, regulatory, reputational, political and foreign exchange rate risks, many of which are outside of the Company’s control. The failure of the Company’s systems of internal control to mitigate such risks, or of its operating infrastructure to support its global activities, could result in operational failures and regulatory fines or sanctions, which could cause the Company’s AUM, revenue and earnings to decline.
RISKS RELATED TO BLACKROCK’S KEY VENDOR AND DISTRIBUTION RELATIONSHIPS
The failure of a key vendor to BlackRock to fulfill its obligations could have a material adverse effect on BlackRockBlackRock’s reputation or business, which may cause the Company’s AUM, revenue and its products.earnings to decline.
BlackRock depends on a number of key vendors for various fund administration, accounting, custody, risk analytics, market data, market indices and transfer agent roles and other distribution and operational needs. The failure or inability of BlackRock to diversify its sources for key services or the failure of any key vendorsvendor to fulfill theirits obligations could lead to operational and regulatory issues for the Company, and inincluding with respect to certain of its products, which could result in financial losses forreputational harm and may cause BlackRock’s AUM, revenue and earnings to decline.
Any disruption to the CompanyCompany’s distribution channels may cause BlackRock’s AUM, revenue and its clients.earnings to decline.
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 securityrelies on a timely basis; and (iii) errors in the settlementnumber of securities, daily mark-to-market valuations and collateral collection. The failure of the Company’s controlsthird parties to mitigate these risks could result in financial losses for the Company’s clients that participate in its securities lending programs as well as for the Company.
Risks Related to Relationships with Bank of America/Merrill Lynch, PNC and Other 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 providesprovide distribution, portfolio administration and servicing for certain BlackRock investment management products and services through itstheir various distribution channels. The Company may not be successful in distributing products through In particular, BlackRock entered into a global distribution agreement with Bank of America/Merrill Lynch or in distributing2006, which is subject to renegotiation at the end of 2016. BlackRock’s ability to maintain strong relationships with its products and services through other third-party distributors.distributors is material to the Company’s future performance. If BlackRock is unable to distribute its products and services successfully, or if it experiences an increase in distribution-related costs, or if it is unable to replace or renew existing distribution arrangements, BlackRock’s AUM, revenue and earnings may decline.
LEGAL AND REGULATORY RISKS
BlackRock is subject to extensive and pervasive regulation around the world.
BlackRock’s business resultsis subject to extensive regulation around the world. These regulations subject BlackRock’s business activities to a pervasive array of operations or financial conditionincreasingly detailed operational requirements, compliance with which is costly, time-consuming and complex. BlackRock may be materiallyadversely affected by its failure to comply with current laws and adversely affected.regulations or by changes in the interpretation or enforcement of existing laws and regulations. Challenges associated with interpreting regulations issued in numerous countries in a globally consistent manner may add to such risks, if regulators in different jurisdictions have inconsistent views or provide only limited regulatory guidance. In particular, violation of applicable laws or regulations could result in fines, temporary or permanent prohibition of certain activities, reputational harm and related client terminations, suspensions of employees or revocation of their licenses, suspension or termination of investment adviser, broker-dealer or other registrations, or suspension or termination of bank charter or other sanctions, which could have a material adverse effect on BlackRock’s reputation or business and may cause the Company’s AUM, revenue and earnings to decline. For a more extensive discussion of the laws, regulations and regulators to which BlackRock is subject, see “Item 1 – Business – Regulation.”
LossRegulatory reforms in the United States and internationally expose BlackRock and its clients to increasing regulatory scrutiny.
In recent years a number of market share within Merrill Lynch’s Global Wealth & Investment Managementproposals for regulatory reform have been introduced and it is expected that the level of
regulatory scrutiny to which BlackRock is subject will continue to increase. See “Item 1 – Business – Regulation.” A number of regulatory reforms that have been proposed may require BlackRock to alter its business or operating activities, which could be time-consuming and costly and which may impede the Company’s growth and may cause AUM, revenue and earnings to decline. Regulatory reform may also impact BlackRock’s banking, insurance company and pension fund clients, which could cause them to change their investment strategies or allocations in manners that may be adverse to BlackRock. Key regulatory reforms that may impact the Company include:
| • | Designation as a systemically important financial institution: Under the DFA, the Federal Reserve is charged with establishing enhanced regulatory requirements for nonbank financial institutions which have been designated as “systemically important” by the FSOC. In addition, the FSB and IOSCO have issued a consultative document on proposed methodologies to identify nonbank/noninsurance G-SIFIs. Although BlackRock has not been designated as a SIFI or G-SIFI, if it is designated as such in the future, it is likely to become subject to enhanced prudential, capital, supervisory and other requirements. Requirements such as these, which were designed to regulate banking institutions, would need to be modified to be applicable to an asset manager such as BlackRock. No proposals have been made indicating how such measures would be adapted for asset managers. |
| • | The Volcker Rule: Provisions of the DFA referred to as the “Volcker Rule” created a new section of the BHC Act that places limitations on the ability of banks and their subsidiaries to engage in proprietary trading and to invest in and transact with certain private investment funds, including hedge funds, private equity funds and funds of funds (collectively “covered funds”). Complying with the Volcker Rule may reduce the level of market making and liquidity activities of several of BlackRock’s trading counterparties, which may adversely impact the liquidity and, in some cases, the pricing of various financial instruments in which BlackRock client accounts invest. Because the Federal Reserve currently treats BlackRock as a nonbank subsidiary of PNC, BlackRock may be required to conform its activities to the requirements of the Volcker Rule. On December 18, 2014, the Federal Reserve announced a second extension to the Volcker Rule conformance period, giving banking entities until July 21, 2016, to conform investments in and relationships with covered funds and foreign funds that were in place prior to December 31, 2013 (“legacy covered funds”). The Federal Reserve also announced its intention to act in the future to grant banking entities an additional one-year extension of the conformance period until July 21, 2017, to conform ownership interests in and relationships with these legacy covered funds. The Volcker Rule’s restrictions would, among other things, limit BlackRock’s ability to invest in covered funds and require BlackRock to remove its name from the names of its covered funds. The Volcker Rule may also require BlackRock to sell certain seed and co-investments that it holds in covered funds, potentially at a discount to existing carrying value, depending on market conditions. |
| • | Money market mutual fund reform: Approximately 3% of BlackRock’s AUM as of December 31, 2014, consisted of assets in U.S. money market funds, of which institutional prime or institutional municipal money market funds (including offshore funds that feed into such money market funds) comprised approximately 2%. In July 2014, the SEC adopted rule amendments designed to reform the regulatory structure governing money market funds and to address the perceived systemic risks that such funds present. The new rules require institutional prime and institutional municipal money market funds to employ a floating net asset value method of pricing, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rules also provide for new tools for the funds’ boards designed to address liquidity shocks, including liquidity fees and redemption gates. The rules do not apply to government (non-municipal) and retail money market funds, except that retail money market funds must comply with liquidity fees and redemption gate requirements. The potential impact of the rules that affect the structure of the funds, which have a two-year compliance period, on BlackRock’s business remains untested; they may, however, reduce the attractiveness of certain money market funds to investors. |
| • | Regulation of swaps and derivatives: The implementation of DFA regulations, similar regulations in the EU and other global jurisdictions relating to swaps and derivatives could impact the manner in which BlackRock-advised funds and accounts use and trade swaps and other derivatives, increasing the costs of derivatives trading for BlackRock’s clients. Various global rules and regulations applicable to the use of financial products by funds, accounts and counterparties that have been adopted or proposed will require BlackRock to build and implement new compliance monitoring procedures to address the enhanced level of oversight to which it and its clients will be subject. These rules will also introduce new central clearing requirements for certain swap transactions and will require that certain swaps be executed only on or through electronic trading venues (as opposed to over the phone or other execution methods), with which BlackRock will have to comply. The new rules and regulations may produce regulatory inconsistencies in global derivatives trading rules and will increase the operational and legal risks with which BlackRock will have to contend. |
| • | Increased international regulatory scrutiny: In addition to the extensive scrutiny BlackRock faces from U.S.-based regulators, the Company and its subsidiaries are also subject to the authority of numerous governmental and regulatory bodies globally, in particular in Europe and the Asia-Pacific region. These regulators have imposed numerous regulations, guidelines and standards on the activities of BlackRock and its subsidiaries covering a variety of areas, including capital resources requirements, marketing activities, client and investor protections, senior management arrangements and enhanced system and control requirements. In the event that BlackRock or any of its subsidiaries fails to comply with these often complex guidelines, regulations and standards, the regulators have broad powers to suspend or revoke any licenses they may have granted and/or to impose sanctions or fines. |
| • | European Union Directives: In the aftermath of the financial crisis, the European Commission (“EC”) initiated a plan for EU financial reform, including a number of consultations and initiatives intended to improve retail investor protections, which the EC reflected in new or updated Directives and regulations. The resulting review of MiFID, introduction of AIFMD, the introduction of MiFID 2 and the revision of the UCITS Directive have increased the compliance, disclosure and other obligations BlackRock faces in the European Economic Area. Once fully implemented, these Directives will have significant and wide-ranging impacts on EU securities and derivatives markets, which will directly and indirectly impact BlackRock’s EU-regulated subsidiaries and other group companies. |
| • | Extension of Retail Distribution Review rules to new markets:BlackRock must also comply with newly implemented retail distribution rules aimed at enhancing consumer protections, overhauling mutual fund fee structures and increasing professionalism in the retail investment sector. The rules were originally introduced in the United Kingdom and have since been introduced in other jurisdictions where BlackRock operates. Similarly, MiFID 2 will contain a ban on certain advisers recovering commissions and other nonmonetary benefits from fund managers. These rules, if implemented, may lead to changes to the fees and commissions BlackRock is able to charge to its clients, as well as to its client servicing and distribution models. |
Legal proceedings could cause the Company’s AUM, revenue and earnings to decline.
BlackRock is subject to a number of sources of potential legal liability and the Company, certain of the investment funds it manages and certain of its subsidiaries and employees have been named as defendants in various legal actions, including arbitrations, class actions and other litigation arising in connection with BlackRock’s activities. Certain of BlackRock’s subsidiaries and employees are also subject to periodic examination, special inquiries and potential proceedings by regulatory authorities, including the SEC, OCC, DOL, CFTC and FCA. Similarly, from time to time, BlackRock receives subpoenas or other requests for information from various U.S. and non-U.S. governmental and regulatory authorities in connection with certain industry-wide, company-specific or other investigations or proceedings. These examinations, inquiries and proceedings, have in the past and could in the future, if compliance failures or other violations are found, cause the relevant regulator to institute proceedings and impose sanctions for violations. Any such action may also result in litigation by investors in BlackRock’s funds, other BlackRock clients or by BlackRock’s shareholders, which could harm operatingthe Company’s reputation and may cause its AUM, revenue and earnings to decline, potentially harm the investment returns of the applicable fund, or result in the Company being liable to the funds for damages.
In addition, when clients retain BlackRock to manage their assets or provide them with products or services, they typically specify contractual requirements or guidelines that BlackRock must observe in the provision of its services. A failure to comply with these guidelines or requirements could expose BlackRock to lawsuits, harm its reputation or cause clients to withdraw assets or terminate contracts, any of which could cause the Company’s AUM, revenue and earnings to decline.
As BlackRock’s business continues to grow, the Company must routinely address conflicts of interest, as well as the perception of conflicts of interest, between itself and its clients or employees. In addition, the SEC and other regulators have increased their scrutiny of potential conflicts. BlackRock has procedures and controls in place that are designed to detect and address these issues. However, appropriately dealing with conflicts of interest is complex and if the Company fails, or appears to fail, to appropriately deal with any conflict of interest, it may face reputational damage, litigation, regulatory proceedings, or penalties or other sanctions, any of which may cause BlackRock’s AUM, revenue and earnings to decline.
BlackRock is subject to banking regulations that may limit its business activities.
As described in “Item 1-Business-Regulation”, PNC owns approximately 22% of BlackRock’s capital stock. Based on the Federal Reserve’s interpretation of the BHC Act, the Federal Reserve currently takes the position that this ownership interest causes BlackRock to be treated as a nonbank subsidiary of PNC for purposes of the BHC Act, thereby subjecting BlackRock to banking regulation, including the supervision and regulation of the Federal Reserve. Such banking regulation limits the activities and the types of businesses that a nonbank subsidiary may conduct. The Federal Reserve has broad enforcement authority over nonbank subsidiaries, including the power to prohibit them from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound practice, and to impose substantial fines and other penalties for violations. PNC is regulated as a “financial holding company” under the BHC Act, which allows PNC and BlackRock to engage in a much broader set of activities than would otherwise be permitted under the BHC Act; any failure of PNC to maintain its status as a financial holding company could result in substantial limitations on certain BlackRock activities and its growth. In addition to being subject to capital requirements established by the OCC, BlackRock’s trust bank subsidiary, which is organized as a national bank, is separately subject to banking regulation 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 ownership reporting requirements could result in harm to BlackRock’s reputation and may cause its AUM, revenue and earnings to decline.
Of note among the various international regulations to which BlackRock is subject, are the extensive and increasingly stringent regulatory reporting requirements that necessitate the monitoring and reporting of issuer exposure levels (thresholds) across the holdings of managed funds and accounts and those of the Company. The specific triggers and the reporting methods that these threshold filings entail vary significantly by regulator and across jurisdictions. BlackRock continues to invest in technology, training and its employees to enhance its monitoring and reporting functions and improve the timeliness and accuracy of its disclosures. Despite these investments, the complexity of the various threshold reporting requirements combined with the breadth of the assets managed by the Company and high volume of securities trading have caused errors and omissions to occur in the past, and pose a risk that errors or omissions will occasionally occur in the future. Any such errors may expose BlackRock to monetary penalties, which
could, have an adverse effect on BlackRock’s reputation and may cause its AUM, revenue and earnings to decline.
New tax legislation or changes in U.S. and foreign tax laws and regulations or challenges to BlackRock’s historical taxation practices may adversely affect BlackRock’s effective tax rate, business and overall financial condition.
BlackRock’s businesses may be affected by new tax legislation or regulations, or the modification of existing tax laws and regulations, by U.S. or non-U.S. authorities. In particular, FATCA has introduced expansive new investor onboarding, withholding and reporting rules aimed at ensuring U.S. persons with financial assets outside of the United States pay appropriate taxes. The FATCA rules will impact both U.S. and non-U.S. funds and subject BlackRock to extensive additional administrative burdens. Similarly, there has been renewed momentum by several EU Member States to introduce an FTT, which would impose taxation on a broad range of financial instrument and derivatives transactions. If introduced as proposed, FTTs could have an adverse effect on BlackRock’s financial results and on clients’ performance results. In addition, the Organization for Economic Co-operation and Development recently launched a base erosion and profit shifting proposal that aims to rationalize tax treatment across jurisdictions. If the BEPS proposal becomes the subject of legislative action in the format proposed it could have unintended taxation consequences for collective investment vehicles and the Company’s tax position, which could adversely affect BlackRock’s financial condition.
AThe Company also manages significant assets in products and accounts that have specific tax and after-tax related objectives, which could be adversely impacted by changes in tax policy, particularly with respect to U.S. municipal income, U.S. individual income tax rate on qualified dividends and, globally, alternative products. Additionally, any new legislation, modification or interpretation of tax laws could impact BlackRock’s corporate tax position. The application of complex tax regulations involves numerous uncertainties and in the normal course of business, U.S. and non-U.S. tax authorities may review and challenge BlackRock’s historical tax positions. These challenges may result in adjustments to BlackRock’s tax position, or impact the timing or amount of, taxable income, deductions or other tax allocations, which may adversely affect BlackRock’s effective tax rate and overall financial condition.
RISKS RELATED TO BLACKROCK’S SIGNIFICANT SHAREHOLDER
PNC owns a large portion of BlackRock’s revenue has historically come from AUM generatedcapital stock. Future sales of our common stock in the public market by Merrill Lynch’s Global Wealth & Investment Management (“GWIM”) business. BlackRock’s ability to maintain a strong relationship within GWIM is material to the Company’s future performance. If oneCompany or PNC could adversely affect the trading price of our common stock.
As of December 31, 2014, PNC owned 22% of the Company’s competitors gains significant additionalcapital stock. Sales of a substantial number of shares of our common stock in the public market, share withinor the GWIM retail channel atperception that these sales might occur, could cause the expensemarket price of BlackRock, then BlackRock’s business, results of operations or financial condition may be negatively impacted.our common stock to decline.
PNC has agreed to vote as a stockholder in accordance with the recommendation of BlackRock’s Board of Directors, and certain actions will require special board approval or the prior approval of PNC and Merrill Lynch.PNC.
As discussed in our proxy statement, PNC has agreed to vote all of its voting shares in accordance with the recommendation of BlackRock’s Board of Directors in accordance with the provisions of its stockholder agreement
with BlackRock. As a consequence, if the shares held by PNC 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 have a substantial number of shares voted in accordance with the determinationsdetermination of the BlackRock Board of 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. At December 31, 2012, PNC owned approximately 20.8% of BlackRock’s voting common stock.
As discussed in our proxy statement, pursuant to our stockholder agreement with PNC, the following may not be done without prior approval of all of the independent directors, or at least two-thirds of the directors, then in office:
appointment of a new Chief Executive Officer of BlackRock;
any merger, issuance of shares or similar transaction in which beneficial ownership of a majority of the total voting power of BlackRock capital stock would be held by persons different than those currently holding such majority of the total voting power, or any sale of all or substantially all assets of BlackRock;
any acquisition of any person or business which has a consolidated net income after taxes for its preceding fiscal year that equals or exceeds 20% of BlackRock’s consolidated net income after taxes for its preceding fiscal year if such acquisition involves the current or potential issuance of BlackRock capital stock constituting more than 10% of the total voting power of BlackRock capital stock issued and outstanding immediately after completion of such acquisition;
any acquisition of any person or business constituting a line of business that is materially different from the lines of business BlackRock and its controlled affiliates are engaged in at that time if such acquisition involves consideration in excess of 10% of the total assets of BlackRock on a consolidated basis;
except for repurchases otherwise permitted under their respectivethe stockholder agreements,agreement, any repurchase by BlackRock or any subsidiary of shares of BlackRock capital stock such that after giving effect to such repurchase BlackRock and its subsidiaries shall have repurchased more than 10% of the total voting power of BlackRock capital stock within the 12-month period ending on the date of such repurchase;
any amendment to BlackRock’s certificate of incorporation or bylaws;
or
any matter requiring stockholder approval pursuant to the rules of the NYSE; or
any amendment, modification or waiver of any restriction or prohibition on Merrill Lynch or its affiliates provided for under its stockholder agreements.
Additionally, BlackRock may not enter into any of the following transactions without the prior approval of PNC:
any sale of any subsidiary of BlackRock, the annualized revenuesrevenue of which, together with the
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for so long as BlackRock is a subsidiary of PNC for purposes of the BHC Act, entering into any business or activity that is prohibited for any such subsidiary under the BHC Act;
any amendment, modification, repeal or waiver of BlackRock’s certificate of incorporation or bylaws that would be viewed by a reasonable person as being adverse to the rights of PNC or more favorable to the rights of any stockholder beneficially owning greater than 20% of BlackRock capital stock, or any settlement or consent in a regulatory enforcement matter that would be reasonably likely to cause PNC or any of its affiliates to suffer regulatory disqualification, suspension of registration or license or other material adverse regulatory consequences; or
a voluntary bankruptcy or similar filing by BlackRock.
As discussed in our proxy statement, under BlackRock’s stockholder agreement with Merrill Lynch, which terminates on July 31, 2013, BlackRock may not enter into any of the following transactions without the prior approval of Merrill Lynch:Item 1B. Unresolved Staff
Comments
any amendment, modification or waiver of any provision of a stockholder agreement between BlackRock and PNC or any stockholder beneficially owning greater than 20% of BlackRock capital stock that would be viewed by a reasonable person as being adverse to Merrill Lynch or materially more favorable to the rights of PNC or other stockholder beneficially owning greater than 20% of BlackRock capital stock than to Merrill Lynch;
any amendment, modification, repeal or waiver of BlackRock’s certificate of incorporation or bylaws that would be viewed by a reasonable person as being adverse to the rights of Merrill Lynch or more favorable to the rights of PNC or other stockholder beneficially owning greater than 20% of BlackRock capital stock, or any settlement or consent in a regulatory enforcement matter that would be
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any acquisition which would be reasonably likely to require Merrill Lynch to register with the Federal Reserve as a bank holding company or become subject to regulation under the BHC Act, the Change of Bank Control Act of 1978 or Section 10 of the Homeowners Loan Act of 1934; or
a voluntary bankruptcy or similar filing by BlackRock.
Currently, Merrill Lynch and its affiliates own ade minimis number of shares of our capital stock.
PNC and several other institutional stockholders own a large portion of BlackRock’s capital stock. Future sales of our common stock in the public market by the Company or its large stockholders could adversely affect the trading price of our common stock.
As of December 31, 2012, PNC owned 21.9% of the Company’s capital stock and several other institutional holders own in excess of 5% of BlackRock shares. The Company has entered into a registration rights agreement with PNC. The registration rights agreement, which includes customary “piggyback” registration provisions, may continue to allow PNC to cause us to file one or more registration statements for the resale of its 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 “Item 1 – Business – Regulation.” Violation of applicable laws or regulations could result in fines, temporary or permanent prohibition of the engagement in certain activities, reputational harm and related client terminations, 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 internationally.
As previously mentioned, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”) was signed into law. 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. BlackRock is continuing to review the impact of the legislation and related rule-making will have on its business, financial condition and results of operations.
The business impact of the DFA and its regulations, and other new laws or regulations, including those affecting money market funds, or changes in enforcement of existing laws or regulations in the United States or internationally, 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).
The DFA charges the Board of Governors of the Federal Reserve System (the “Federal Reserve”) with establishing enhanced regulatory requirements for non-bank financial institutions designated as “systemically important” by the Financial Stability Oversight Council (“FSOC”). Among the potential impacts of the DFA, if BlackRock were designated a systemically important financial institution (a “SIFI”), it could be subject to these enhanced prudential, supervisory and other requirements, which, individually or in the aggregate, could adversely impact BlackRock’s business and operations.
Provisions of the DFA referred to as the “Volcker Rule” place limitations on the ability of banks, and their subsidiaries and affiliates, to engage in proprietary trading and to invest in and transact with certain investment funds, including hedge funds, private equity funds and funds of those funds (collectively “covered funds”). It is expected that the Volcker Rule will apply to BlackRock by virtue of BlackRock’s relationship to PNC, and BlackRock could become subject to similar limitations if it is designated a SIFI. The Volcker Rule became effective on July 21, 2012; however, final implementing regulations have not yet been issued. Entities subject to the Volcker Rule will have until at least July 21, 2014 to come into compliance with the provisions of the Volcker Rule. To the extent the Volcker Rule applies to BlackRock, it would limit BlackRock’s ability to make and retain investments in covered funds, require BlackRock to remove its name from the name of its covered funds, and limit investments in covered funds by
BlackRock employees, among other restrictions. Depending on the final implementation of the Volcker Rule and the granting of extensions, BlackRock could be required to sell certain seed and co-investments that it holds, including at a discount, depending on market conditions. The scope of the definition of “covered funds” is not yet known, and therefore these restrictions could apply to funds other than those commonly referred to as hedge funds and private equity funds. These limitations and restrictions could disadvantage BlackRock against those competitors that are not subject to the Volcker Rule in the ability to attract clients into BlackRock covered funds and to retain employees.
Regulatory authorities, including the Securities and Exchange Commission (the “SEC”), the FSOC and the International Organization of Securities Commissions, continue to focus on the need for additional regulations for money market mutual funds. In November 2012, the FSOC issued proposed recommendations for money market mutual fund reform for public comment, which closed on February 15, 2013. The FSOC recommendations included floating the net asset value of funds, requiring net asset value buffers and requiring that a portion of redemptions be held back by stable net asset value funds for a period of time, the retention of capital and liquidity gates and/or redemption fees. If adopted by the SEC, these proposals could significantly affect money market fund products and the entire money market fund industry. In light of the uncertainty regarding what changes may ultimately be adopted in a final SEC rule, we cannot predict what investor appetite will be for money market mutual fund products following the adoption of any such reforms or the impact of such reforms on BlackRock.
In 2012, the Office of the Comptroller of the Currency of the United States (the “OCC”) amended the regulations governing bank-maintained short-term investment funds (“STIFs”) to include new disclosure requirements regarding portfolio holdings and to more closely align portfolio limitations, such as maximum weighted average maturity and weighted average life, with those applicable to SEC registered money market funds. As a result of the new OCC rules, BlackRock chose to sell certain securities held within certain STIFs during the fourth quarter of 2012 and to make a one-time contribution to the STIFs to maintain the value of the funds while ensuring compliance with the OCC rules. As a result of the security sales, these STIFs are currently in compliance with the new OCC rules. The ultimate result of these rule changes is uncertain.
Further, regulations under the DFA relating to regulation of swaps and derivatives could impact the manner by which BlackRock-advised funds and accounts use and trade swaps and other derivatives, and could significantly increase the costs of derivatives trading conducted by
BlackRock on behalf of its clients. BlackRock will also need to build new compliance mechanisms to monitor compliance with SEC and Commodity Futures Trading Commission (“CFTC”) rules concerning, among other things, the registration and regulation of commodity pool operators and commodity trading advisors (and the accompanying registration and regulation of such entities by the National Futures Association), the registration status of dealer counterparties and other counterparties who are major swap participants in the swap markets, and requirements concerning mandatory clearing of certain swap transactions. BlackRock, on behalf of its clients, is also preparing for mandated central clearing of swaps and mandated trading venue requirements.
In addition, BlackRock has begun reporting certain information about a number of its private funds to the SEC and certain information about a number of its commodity pools to the CFTC, pursuant to systemic risk reporting requirements adopted by both agencies, which have required, and will continue to require, investments in people and systems to assure timely and accurate reporting.
The SEC, the Internal Revenue Service and the CFTC each continue to review the use of futures and derivatives by mutual funds, which could result in regulations that further limit the use of futures and derivatives by mutual funds. If adopted, these limitations could require BlackRock to change certain mutual fund business practices or to register additional entities with the CFTC, which could result in additional costs and/or restrictions.
In addition, 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 of which the review of the Markets in Financial Instruments Directive (“MiFID”) was a part. These, together with the changes contemplated by the Alternative Investment Fund Managers Directive (“AIFMD”), will have direct and indirect effects on BlackRock’s operations in the European Economic Area, including increased compliance, disclosure and other obligations, which could impact BlackRock’s ability to expand in these markets.
The foregoing regulatory changes, and other reforms globally, could also lead to business disruptions, could adversely impact the value of assets in which BlackRock has invested 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 business activities or distinguish itself from competitors. See “Item 1 – Business – Regulation” above for additional information regarding certain laws and regulations that affect BlackRock’s business.
Failure to comply with the Investment Advisers Act of 1940 (the “Advisers Act”) and the Investment Company Act of 1940 (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 and compliance requirements, on investment advisers to registered investment companies. The failure of any of the relevant 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 the Employee Retirement Income Security Act of 1974 (“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 the 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.
BlackRock is subject to banking regulations that may limit its business activities.
Because the total equity ownership interest of PNC in BlackRock exceeds certain thresholds, BlackRock is deemed to be a non-bank subsidiary of PNC, which is regulated as a financial holding company under the Bank Holding Company Act of 1956. As a non-bank subsidiary of PNC, BlackRock is subject to banking regulation, including the supervision and regulation of the Federal Reserve.
Such banking regulation limits the activities and the types of businesses that BlackRock may conduct. The Federal Reserve has broad enforcement authority over BlackRock, including the power to prohibit BlackRock from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound practice, and to impose substantial fines and other penalties for violations. Any failure of PNC to maintain its status as a financial holding company could result in substantial limitations on certain BlackRock activities and its growth. In addition, BlackRock’s trust bank subsidiary is subject to regulation by the OCC, and is subject to capital requirements established by the OCC. The OCC has broad enforcement authority over BlackRock’s trust bank subsidiary. Also, provisions of the DFA referred to as the Volcker Rule could, to the extent the final Volcker Rule is determined to apply to BlackRock’s activities, affect the method by which BlackRock invests in and operates its investment funds, including private equity funds, hedge funds and fund of funds platforms. Being subject to banking regulation, including potentially the Volcker Rule, 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 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 made under that Act 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.
In addition, these subsidiaries, and other European subsidiaries, branches or representative offices, must comply with the pan-European regime established by MiFID, which regulates the provision of investment services and activities throughout the EEA, as well as the Capital Requirements Directive, which delineates regulatory capital requirements. As discussed under “Item 1 - 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. The AIFMD, which became effective on July 21, 2011, is required to be
implemented by EU member states by July 22, 2013. Compliance with the AIFMD’s requirements may restrict alternative investment funds marketing and place additional compliance and disclosure obligations regarding remuneration, capital requirements, leverage, valuation, stakes in EU companies, depositaries, the domicile of custodians and liquidity management. UCITS IV was required to be adopted in the national law of each EU member state by July 1, 2011. UCITS IV was adopted into national law by the United Kingdom prior to the deadline but several other EU member states are still in various stages of the adoption process. There are also European Commission consultations in process that are intended to improve retail investor protection including UCITS V, which addresses, among other items, custodial liability. Recent proposals on packaged retail investment products (“PRIPs”) are to be implemented through the strengthening of MiFID standards (for non-insurance PRIPs), revisions to the Insurance Mediation Directive’s selling standard (for all insurance-based PRIPs) and new investor disclosure requirements for all PRIPs through a separate EU legislative process. In the United Kingdom, the Bribery Act 2010 came into force in July 2011 and has required the implementation of 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 were published in 2011, with implementation at the end of 2012. In a similar area, a further European Commission Regulation, the European Market Infrastructure Regulation (“EMIR”), was adopted in August 2012, and requires the central clearing of standardized OTC derivatives and the mandatory reporting of all derivative contracts. Some of the EMIR technical standards have recently been finalized and the remainder are expected to be finalized in 2013.
In Japan, a BlackRock subsidiary is 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, 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 subsidiaries are subject to various Australian federal and state laws and certain subsidiaries are regulated by the Australian Securities and Investments Commission (“ASIC”) and the Australian Prudential Regulation Authority. 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 the 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 regulates, among others, offers of investments to the public and provides for the licensing of intermediaries. The SFO is administered by the Securities and Futures Commission (the “SFC”). The SFC is also empowered under the SFO to establish standards for compliance as well as codes and guidelines. The relevant BlackRock subsidiaries and the employees conducting any of the regulated activities specified in the SFO are required to be licensed with the SFC, and are subject to the rules, codes and guidelines issued by the SFC from time to time. Failure to comply with the applicable laws, regulations, codes and guidelines issued by the SFC could result in the suspension or revocations of the licenses granted by the SFC.
There are similar 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. 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.
Legal proceedings could adversely affect operating results, financial condition and cash flows 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. and 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.
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.
BlackRock’s principal office, which is leased, is located at 55 East 52nd Street, New York, New York. BlackRock leases additional office space in New York City at 40 East 52nd Street and throughout the world, including Boston, Chicago, Edinburgh, Gurgaon (India), Hong Kong, London, Melbourne, Munich, Princeton (New Jersey), San Francisco, Seattle, Singapore, Sydney, Taipei and Tokyo. The Company also owns an 84,500 square foot office building in Wilmington (Delaware).
From time to time, BlackRock receives subpoenas or other requests for information from various U.S. federal, state governmental and domestic and international regulatory authorities in connection with certain industry-wide or other investigations or proceedings. It is BlackRock’s policy to cooperate fully with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations and other litigation arising in connection with BlackRock’s
activities. Additionally, certain of theBlackRock-sponsored investment funds that the Company manages are subject to lawsuits, any of which potentially could harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.
Italian Securities Regulator Proceeding
The Italian securities regulator, Commissione Nazionale per le Societa e la Borsa (“Consob”), initiated a civil proceeding on January 3, 2014 against Nigel Bolton, a portfolio manager and head of BlackRock Investment Management (UK) Limited’s European Equity Team (“EET”), in connection with the sale of shares in the Italian oil and gas services company Saipem, SpA in January 2013.
Consob alleges that Mr. Bolton, on behalf of certain BlackRock clients, sold, or influenced the sale of, approximately 10.7 million shares of Saipem using material, non-public information thereby avoiding client losses of over€ 114.5 million. The EET’s sale of Saipem shares occurred between January 25 and January 29, 2013, and Saipem announced negative news following the market close on January 29, 2013. While BlackRock is not charged in the proceeding, it may be liable for the actions of its employee.
BlackRock conducted a thorough investigation and found no evidence to support the allegations. As a result of the investigation, BlackRock believes that the sale of Saipem shares was made as a fiduciary based on publicly available information that was widely disseminated in the marketplace, including negative publicity and a third-party analyst research report reducing earnings estimates, which was issued to the market before trading on January 25, 2013.
Consob also alleges that BlackRock declined to provide Consob with information and was an obstacle to Consob’s investigation. BlackRock believes it has fully cooperated with Consob, and it will continue to do so.
While under Italian law the potential penalty could be greater than the loss actually avoided, BlackRock believes that Mr. Bolton ultimately will not be found liable and, as a result, neither Mr. Bolton nor BlackRock will incur any penalty.
SEC Enforcement Matter
In June 2012, BlackRock Advisors, LLC (“BlackRock Advisors”), a subsidiary of BlackRock, announced that its then-employee Daniel J. Rice III would, among other things, no longer serve as a portfolio manager for the BlackRock Energy & Resources Portfolio in order to address any perception of a potential conflict of interest as a result of his personal investments and involvement in a family business, Rice Energy LP and related entities. BlackRock Advisors further announced that Mr. Rice would retire from BlackRock Advisors, which he did in December 2012.
The staff of the U.S. Securities and Exchange Commission (“SEC”) commenced an investigation into this matter in 2012. On June 17, 2014, BlackRock Advisors received a written “Wells Notice” from the SEC staff indicating the staff’s preliminary determination to recommend to the Commission that the SEC file an action against BlackRock Advisors.
BlackRock Advisors has reached an agreement with the SEC staff, subject to approval by the Commission, to resolve the investigation. No assurance can be given that the settlement will be accepted by the Commission. The Company does not expect the agreement with the SEC staff to have a material adverse effect on the Company’s financial results or operations.
All Legal Proceedings
Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits will have a material effect on BlackRock’s results of operations, financial position, or cash flows. However, there is no assurance as to whether any such pending or threatened matters will have a material effect on BlackRock’s results of operations, financial position or cash flows in any future reporting period. Due to uncertainties surrounding the outcome of these matters, management cannot reasonably estimate the possible loss or range of loss that may arise from these matters.
PART II
Part IIItem 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, 2013,2015, there were 339293 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 | Closing Price | Cash Dividend Declared | ||||||||||||||
| High | Low | |||||||||||||||
2012 | ||||||||||||||||
First Quarter | $ | 205.60 | $ | 179.13 | $ | 204.90 | $ | 1.50 | ||||||||
Second Quarter | $ | 206.57 | $ | 163.37 | $ | 169.82 | $ | 1.50 | ||||||||
Third Quarter | $ | 183.00 | $ | 164.06 | $ | 178.30 | $ | 1.50 | ||||||||
Fourth Quarter | $ | 209.29 | $ | 177.17 | $ | 206.71 | $ | 1.50 | ||||||||
2011 | ||||||||||||||||
First Quarter | $ | 209.77 | $ | 179.52 | $ | 201.01 | $ | 1.375 | ||||||||
Second Quarter | $ | 207.42 | $ | 183.51 | $ | 191.81 | $ | 1.375 | ||||||||
Third Quarter | $ | 199.10 | $ | 140.22 | $ | 148.01 | $ | 1.375 | ||||||||
Fourth Quarter | $ | 179.77 | $ | 137.00 | $ | 178.24 | $ | 1.375 | ||||||||
| Common Stock Price Ranges | Closing Price | Cash Dividend Declared | ||||||||||||||
| High | Low | |||||||||||||||
2014 | ||||||||||||||||
First Quarter | $ | 323.89 | $ | 286.39 | $ | 314.48 | $ | 1.93 | ||||||||
Second Quarter | $ | 319.85 | $ | 293.71 | $ | 319.60 | $ | 1.93 | ||||||||
Third Quarter | $ | 336.47 | $ | 301.10 | $ | 328.32 | $ | 1.93 | ||||||||
Fourth Quarter | $ | 364.40 | $ | 303.91 | $ | 357.56 | $ | 1.93 | ||||||||
2013 | ||||||||||||||||
First Quarter | $ | 258.70 | $ | 212.77 | $ | 256.88 | $ | 1.68 | ||||||||
Second Quarter | $ | 291.69 | $ | 245.30 | $ | 256.85 | $ | 1.68 | ||||||||
Third Quarter | $ | 286.62 | $ | 255.26 | $ | 270.62 | $ | 1.68 | ||||||||
Fourth Quarter | $ | 316.47 | $ | 262.75 | $ | 316.47 | $ | 1.68 | ||||||||
BlackRock’s closing common stock price as of February 27, 201326, 2015 was $241.07.$375.02.
DividendsDIVIDENDS
On January 16, 2013,14, 2015, the Board of Directors approved BlackRock’s quarterly dividend of $1.68$2.18 to be paid on March 25, 201324, 2015 to stockholders of record at the close of business on March 7, 2013.6, 2015.
PNC and their respective affiliates along with other institutional investors that hold non-votingreceives dividends on shares of nonvoting participating preferred stock, receive dividends on these shares, which are equivalent to the dividends received by common stockholders.
Issuer Purchases of Equity Securities
ISSUER PURCHASES OF EQUITY SECURITIES
During the three months ended December 31, 2012,2014, 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 Programs(1) | |||||||||||||
October 1, 2012 through October 31, 2012 | 199,312 | $ | 187.87 | 189,000 | 3,404,900 | |||||||||||
November 1, 2012 through November 30, 2012 | 644,724 | $ | 191.16 | 642,000 | 2,762,900 | |||||||||||
December 1, 2012 through December 31, 2012 | 48,029 | $ | 197.54 | 37,500 | 2,725,400 | |||||||||||
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Total | 892,065 | $ | 190.77 | 868,500 | ||||||||||||
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| 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, 2014 through October 31, 2014 | 275,496 | (2) | $ | 322.87 | 273,317 | 3,822,099 | ||||||||||
November 1, 2014 through November 30, 2014 | 412,392 | (2) | $ | 349.79 | 411,970 | 3,410,129 | ||||||||||
December 1, 2014 through December 31, 2014 | 65,410 | (2) | $ | 356.69 | 49,662 | 3,360,467 | ||||||||||
Total | 753,298 | $ | 340.54 | 734,949 | ||||||||||||
| (1) | In January |
| (2) | Includes purchases made by the Company primarily to satisfy income tax withholding obligations of employees and members of |
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 7.7,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) | 2012 | 2011 | 2010(1) | 2009 | 2008 | |||||||||||||||
Income statement data: | ||||||||||||||||||||
Revenue | ||||||||||||||||||||
Related parties(2) | $ | 5,501 | $ | 5,431 | $ | 5,025 | $ | 2,716 | $ | 3,006 | ||||||||||
Other third parties | 3,836 | 3,650 | 3,587 | 1,984 | 2,058 | |||||||||||||||
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Total revenue | 9,337 | 9,081 | 8,612 | 4,700 | 5,064 | |||||||||||||||
Expenses | ||||||||||||||||||||
Restructuring charges | — | 32 | — | 22 | 38 | |||||||||||||||
Other operating expenses | 5,813 | 5,800 | 5,614 | 3,400 | 3,433 | |||||||||||||||
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Total expenses | 5,813 | 5,832 | 5,614 | 3,422 | 3,471 | |||||||||||||||
Operating income | 3,524 | 3,249 | 2,998 | 1,278 | 1,593 | |||||||||||||||
Total non-operating income (expense) | (54 | ) | (114 | ) | 23 | (6 | ) | (577 | ) | |||||||||||
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Income before income taxes | 3,470 | 3,135 | 3,021 | 1,272 | 1,016 | |||||||||||||||
Income tax expense | 1,030 | 796 | 971 | 375 | 387 | |||||||||||||||
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Net income | 2,440 | 2,339 | 2,050 | 897 | 629 | |||||||||||||||
Less: Net income (loss) attributable to non-controlling interests | (18 | ) | 2 | (13 | ) | 22 | (155 | ) | ||||||||||||
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Net income attributable to BlackRock, Inc. | $ | 2,458 | $ | 2,337 | $ | 2,063 | $ | 875 | $ | 784 | ||||||||||
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Per share data:(3) | ||||||||||||||||||||
Basic earnings | $ | 14.03 | $ | 12.56 | $ | 10.67 | $ | 6.24 | $ | 5.86 | ||||||||||
Diluted earnings | $ | 13.79 | $ | 12.37 | $ | 10.55 | $ | 6.11 | $ | 5.78 | ||||||||||
Book value(4) | $ | 148.20 | $ | 140.07 | $ | 136.09 | $ | 128.86 | $ | 92.91 | ||||||||||
Common and preferred cash dividends | $ | 6.00 | $ | 5.50 | $ | 4.00 | $ | 3.12 | $ | 3.12 | ||||||||||
| December 31, | ||||||||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | 2009(1) | 2008 | |||||||||||||||
Balance sheet data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,606 | $ | 3,506 | $ | 3,367 | $ | 4,708 | $ | 2,032 | ||||||||||
Goodwill and intangible assets, net | 30,312 | 30,148 | 30,317 | 30,346 | 11,974 | |||||||||||||||
Total assets(5) | 200,451 | 179,896 | 178,459 | 178,124 | 19,924 | |||||||||||||||
Less: | ||||||||||||||||||||
Separate account assets(6) | 134,768 | 118,871 | 121,137 | 119,629 | 2,623 | |||||||||||||||
Collateral held under securities lending agreements(6) | 23,021 | 20,918 | 17,638 | 19,335 | — | |||||||||||||||
Consolidated investment vehicles(7) | 2,813 | 2,006 | 1,610 | 282 | 502 | |||||||||||||||
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Adjusted total assets | $ | 39,849 | $ | 38,101 | $ | 38,074 | $ | 38,878 | $ | 16,799 | ||||||||||
Short-term borrowings | $ | 100 | $ | 100 | $ | 100 | $ | 2,234 | $ | 200 | ||||||||||
Convertible debentures | — | — | 67 | 243 | 245 | |||||||||||||||
Long-term borrowings | 5,687 | 4,690 | 3,192 | 3,191 | 697 | |||||||||||||||
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Total borrowings | $ | 5,787 | $ | 4,790 | $ | 3,359 | $ | 5,668 | $ | 1,142 | ||||||||||
Total stockholders’ equity | $ | 25,403 | $ | 25,048 | $ | 26,094 | $ | 24,329 | $ | 12,069 | ||||||||||
Assets under management: Equity: Active iShares Fixed income: Active iShares Multi-asset class Alternatives(8): Core Currency and commodities(9) Sub-total Non-ETF Index: Equity Fixed Income Sub-total Non-ETF Index Long-term Cash management Sub-total Advisory(10) Total Income statement data: Revenue Related parties(1) Other third parties Total revenue Expense Restructuring charges Other operating expenses Total expenses Operating income Total nonoperating income (expense) Income before income taxes Income tax expense Net income Less: Net income (loss) attributable to noncontrolling interests Net income attributable to BlackRock, Inc. Per share data:(2) Basic earnings Diluted earnings Book value(3) Cash dividends declared and paid per share December 31, (Dollar amounts in millions) 2012 2011 2010 2009(1) 2008 $ 287,215 $ 275,156 $ 334,532 $ 348,574 $ 152,216 534,648 419,651 448,160 381,399 — 656,331 614,804 592,303 595,580 477,492 192,852 153,802 123,091 102,490 — 267,748 225,170 185,587 142,029 77,516 68,367 63,647 63,603 66,058 60,954 41,428 41,301 46,135 36,043 590 2,048,589 1,793,531 1,793,411 1,672,173 768,768 1,023,638 865,299 911,775 806,082 51,076 410,139 479,116 425,930 357,557 3,873 1,433,777 1,344,415 1,337,705 1,163,639 54,949 3,482,366 3,137,946 3,131,116 2,835,812 823,717 263,743 254,665 279,175 349,277 338,439 3,746,109 3,392,611 3,410,291 3,185,089 1,162,156 45,479 120,070 150,677 161,167 144,995 $ 3,791,588 $ 3,512,681 $ 3,560,968 $ 3,346,256 $ 1,307,151 Year ended December 31, (in millions, except per share data) 2014 2013 2012 2011 2010 $ 6,994 $ 6,260 $ 5,501 $ 5,431 $ 5,025 4,087 3,920 3,836 3,650 3,587 11,081 10,180 9,337 9,081 8,612 — — — 32 — 6,607 6,323 5,813 5,800 5,614 6,607 6,323 5,813 5,832 5,614 4,474 3,857 3,524 3,249 2,998 (79 ) 116 (54 ) (114 ) 23 4,395 3,973 3,470 3,135 3,021 1,131 1,022 1,030 796 971 3,264 2,951 2,440 2,339 2,050 (30 ) 19 (18 ) 2 (13 ) $ 3,294 $ 2,932 $ 2,458 $ 2,337 $ 2,063 $ 19.58 $ 17.23 $ 14.03 $ 12.56 $ 10.67 $ 19.25 $ 16.87 $ 13.79 $ 12.37 $ 10.55 $ 164.06 $ 156.69 $ 148.20 $ 140.07 $ 136.09 $ 7.72 $ 6.72 $ 6.00 $ 5.50 $ 4.00
| (1) |
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BlackRock’s related party revenue includes fees for services provided to registered investment companies that it manages, which include mutual funds and exchange-traded funds, as a result of the Company’s advisory relationship. In addition, equity method investments are considered related parties due to the Company’s influence over the financial and operating policies of the investee. See Note |
Participating preferred stock is considered to be a common stock equivalent for purposes of earnings per share calculations. |
Total BlackRock stockholders’ equity, excluding appropriated retained earnings, divided by total common and preferred shares outstanding at December 31 of the respective year-end. |
| December 31, | ||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Balance sheet data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 5,723 | $ | 4,390 | $ | 4,606 | $ | 3,506 | $ | 3,367 | ||||||||||
Goodwill and intangible assets, net | 30,305 | 30,481 | 30,312 | 30,148 | 30,317 | |||||||||||||||
Total assets(1) | 239,808 | 219,873 | 200,451 | 179,896 | 178,459 | |||||||||||||||
Less: | ||||||||||||||||||||
Separate account assets(2) | 161,287 | 155,113 | 134,768 | 118,871 | 121,137 | |||||||||||||||
Collateral held under securities lending agreements(2) | 33,654 | 21,788 | 23,021 | 20,918 | 17,638 | |||||||||||||||
Consolidated investment vehicles(3) | 3,787 | 2,714 | 2,813 | 2,006 | 1,610 | |||||||||||||||
Adjusted total assets | $ | 41,080 | $ | 40,258 | $ | 39,849 | $ | 38,101 | $ | 38,074 | ||||||||||
Short-term borrowings | $ | — | $ | — | $ | 100 | $ | 100 | $ | 100 | ||||||||||
Convertible debentures | — | — | — | — | 67 | |||||||||||||||
Long-term borrowings | 4,938 | 4,939 | 5,687 | 4,690 | 3,192 | |||||||||||||||
Total borrowings | $ | 4,938 | $ | 4,939 | $ | 5,787 | $ | 4,790 | $ | 3,359 | ||||||||||
Total BlackRock, Inc. stockholders’ equity | $ | 27,366 | $ | 26,460 | $ | 25,403 | $ | 25,048 | $ | 26,094 | ||||||||||
Assets under management: | ||||||||||||||||||||
Equity: | ||||||||||||||||||||
Active | $ | 292,802 | $ | 317,262 | $ | 287,215 | $ | 275,156 | $ | 334,532 | ||||||||||
iShares | 790,067 | 718,135 | 534,648 | 419,651 | 448,160 | |||||||||||||||
Non-ETF index | 1,368,242 | 1,282,298 | 1,023,638 | 865,299 | 911,775 | |||||||||||||||
Equity subtotal | 2,451,111 | 2,317,695 | 1,845,501 | 1,560,106 | 1,694,467 | |||||||||||||||
Fixed income: | ||||||||||||||||||||
Active | 701,324 | 652,209 | 656,331 | 614,804 | 592,303 | |||||||||||||||
iShares | 217,671 | 178,835 | 192,852 | 153,802 | 123,091 | |||||||||||||||
Non-ETF index | 474,658 | 411,142 | 410,139 | 479,116 | 425,930 | |||||||||||||||
Fixed income subtotal | 1,393,653 | 1,242,186 | 1,259,322 | 1,247,722 | 1,141,324 | |||||||||||||||
Multi-asset | 377,837 | 341,214 | 267,748 | 225,170 | 185,587 | |||||||||||||||
Alternatives: | ||||||||||||||||||||
Core | 88,006 | 85,026 | 68,367 | 63,647 | 63,603 | |||||||||||||||
Currency and commodities(4) | 23,234 | 26,088 | 41,428 | 41,301 | 46,135 | |||||||||||||||
Alternatives subtotal | 111,240 | 111,114 | 109,795 | 104,948 | 109,738 | |||||||||||||||
Long-term | 4,333,841 | 4,012,209 | 3,482,366 | 3,137,946 | 3,131,116 | |||||||||||||||
Cash management | 296,353 | 275,554 | 263,743 | 254,665 | 279,175 | |||||||||||||||
Advisory(5) | 21,701 | 36,325 | 45,479 | 120,070 | 150,677 | |||||||||||||||
Total | $ | 4,651,895 | $ | 4,324,088 | $ | 3,791,588 | $ | 3,512,681 | $ | 3,560,968 | ||||||||||
Includes separate account assets that are segregated funds held for purposes of funding individual and group pension contracts and collateral held under securities lending agreements related to these assets that have equal and offsetting amounts recorded in liabilities and ultimately do not impact BlackRock’s stockholders’ equity or cash flows. |
Equal and offsetting amounts, related to separate account assets and collateral held under securities lending agreements, are recorded in liabilities. |
Includes assets held by consolidated variable interest entities and consolidated sponsored investments funds. |
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Amounts include commodityiShares. |
Advisory AUM represents long-term portfolio liquidation assignments. |
Forward-looking Statements
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” and similar expressions.
BlackRock cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
In addition to risk factors previously disclosed in BlackRock’s Securities and Exchange Commission (“SEC”) reports and those identified elsewhere in this report, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes and volatility in political, economic or industry conditions, the interest rate environment, foreign exchange rates or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management;management (“AUM”); (3) the relative and absolute investment performance of BlackRock’s investment products; (4) the impact of increased competition; (5) the
impact of future acquisitions or divestitures; (6) the unfavorable resolution of legal proceedings; (7) the extent and timing of any share repurchases; (8) the impact, extent and timing of technological changes and the adequacy of intellectual property, information and informationcyber security protection; (9) the impact of legislative and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock or The PNC Financial Services Group, Inc. (“PNC”); (10) terrorist activities, international hostilities and natural disasters, which may adversely affect the
general economy, domestic and local financial and capital markets, specific industries or BlackRock; (11) the ability to attract and retain highly talented professionals; (12) fluctuations in the carrying value of BlackRock’s economic investments; (13) the impact of changes to tax legislation, including income, payroll and transaction taxes, and taxation on products or transactions, which could affect the value proposition to clients and, generally, the tax position of the Company; (14) BlackRock’s success in maintaining the distribution of its products; (15) the impact of BlackRock electing to provide support to its products from time to time and any potential liabilities related to securities lending or other indemnification obligations; and (16) the impact of problems at other financial institutions or the failure or negative performance of products at other financial institutions.
OverviewOVERVIEW
BlackRock, Inc. (“BlackRock”(together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) is the world’s largesta leading publicly traded investment management firm. BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, the Netherlands, Japan, Hong Kong, Singapore, Australia and Germany. At December 31, 2012, the Company managed $3.792firm with $4.652 trillion of assets under management (“AUM”) on behalf of institutional and individual investors worldwide. The Company provides a wide array of products, including passively and actively managed products in various equity, fixed income, multi-asset class, alternative investment and cash management products. BlackRock offers clients diversified access to global markets through separate accounts, collective investment trusts, open-end and closed-end mutual funds, exchange-traded products, hedge funds and funds of funds. BlackRock also provides global advisory services for private investment funds and retail products. The Company’s non-U.S. investment funds are based in a number of domiciles and cover a range of asset classes, including equities, fixed income, cash management and alternatives. In addition,BlackRock Solutions® provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.
In the United States, retail offerings include various open-end and closed-end funds, includingiShares®, the global product leader in exchange-traded products for institutional, retail and HNW investors. There were 621iShares productsAUM at December 31, 2012 compared with 504 at December 31, 2011 globally across equities, fixed2014. With approximately 12,200 employees in more than 30 countries, BlackRock provides a broad range of investment and risk management services to institutional and retail clients worldwide.
For further information see Note 1,Introduction and Basis of Presentation, in the notes to the consolidated financial statements beginning on page F-1 of this Form 10-K.
income and commodities, which trade like common stocks on 20 exchanges worldwide.iSharesAUM totaled $752.7 billion at December 31, 2012. The BlackRock Global Funds, the Company’s primary retail fund group offered outside the United States, are authorized for distribution in 35 jurisdictions worldwide. Additional fund offerings include structured products, real estate funds, hedge funds, hedge funds of funds, private equity funds and funds of funds, managed futures funds and exchange-traded products. These products are sold to both U.S. and non-U.S. HNW, retail and institutional investors in a wide variety of active and passive strategies covering 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, HNW individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presence both inside and outside the United States that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships. BlackRock also distributes its products and services through Merrill Lynch under a
global distribution agreement in effect until January 2014. After such term, the agreement will renew for one automatic three-year extension if certain conditions are met.
On May 29, 2012, BlackRock completed a secondary offering of 26,211,335 shares of common stock held by Barclays Bank PLC (“Barclays”) at a price of $160.00 per share, which included 23,211,335 shares of common stock issued upon the conversion of Series B Convertible Participating Preferred Stock (“Series B Preferred”) by a subsidiary of Barclays. Upon completion of this offering, BlackRock repurchased 6,377,552 shares directly from Barclays at a price of $156.80 per share (consisting of 6,346,036 shares of Series B Preferred and 31,516 shares of common stock). The total transactions, including the full exercise of the underwriters’ option to purchase 2,621,134 additional shares in the secondary offering, amounted to 35,210,021 shares, resulting in Barclays exiting its entire ownership position in BlackRock.
On December 31, 2012, PNC held 20.8% of the Company’s voting common stock and 21.9% of the Company’s capital stock, which includes outstanding common and non-voting preferred stock.
Financial information concerning the Company’s results of operations for the 12 months ended December 31, 2012 (“2012”), December 31, 2011 (“2011”) and December 31, 2010 (“2010”) are discussed below.
Executive Summary
| (Dollar amounts in millions, except per share data) | 2012 | 2011 | 2010 | |||||||||
GAAP basis: | ||||||||||||
Total revenue | $ | 9,337 | $ | 9,081 | $ | 8,612 | ||||||
Total expenses | 5,813 | 5,832 | 5,614 | |||||||||
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Operating income | $ | 3,524 | $ | 3,249 | $ | 2,998 | ||||||
Operating margin | 37.7 | % | 35.8 | % | 34.8 | % | ||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests(1) | (36 | ) | (116 | ) | 36 | |||||||
Income tax expense | (1,030 | ) | (796 | ) | (971 | ) | ||||||
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Net income attributable to BlackRock | $ | 2,458 | $ | 2,337 | $ | 2,063 | ||||||
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% attributable to common shares | 99.9 | % | 99.1 | % | 98.6 | % | ||||||
Net income attributable to common shares | $ | 2,455 | $ | 2,315 | $ | 2,033 | ||||||
Diluted EPS components: | ||||||||||||
Operating income | $ | 13.65 | $ | 11.60 | $ | 10.28 | ||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests(1) | (0.14 | ) | (0.41 | ) | 0.12 | |||||||
Income tax benefit | 0.28 | 1.18 | 0.15 | |||||||||
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Diluted earnings per common share | $ | 13.79 | $ | 12.37 | $ | 10.55 | ||||||
Effective tax rate | 29.5 | % | 25.4 | % | 32.0 | % | ||||||
As adjusted(2): | ||||||||||||
Total revenue | $ | 9,337 | $ | 9,081 | $ | 8,612 | ||||||
Total expenses | 5,763 | 5,689 | 5,445 | |||||||||
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Operating income | $ | 3,574 | $ | 3,392 | $ | 3,167 | ||||||
Operating margin | 40.4 | % | 39.7 | % | 39.3 | % | ||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests(1) | (42 | ) | (113 | ) | 25 | |||||||
Income tax expense | (1,094 | ) | (1,040 | ) | (1,053 | ) | ||||||
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Net income attributable to BlackRock | $ | 2,438 | $ | 2,239 | $ | 2,139 | ||||||
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% attributable to common shares | 99.9 | % | 99.1 | % | 98.6 | % | ||||||
Net income attributable to common shares | $ | 2,435 | $ | 2,218 | $ | 2,109 | ||||||
Diluted EPS components: | ||||||||||||
Operating income | $ | 13.84 | $ | 12.12 | $ | 10.85 | ||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests(1) | (0.16 | ) | (0.40 | ) | 0.09 | |||||||
Income tax benefit | — | 0.13 | — | |||||||||
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Diluted earnings per common share | $ | 13.68 | $ | 11.85 | $ | 10.94 | ||||||
Effective tax rate | 31.0 | % | 31.7 | % | 33.0 | % | ||||||
Other: | ||||||||||||
Assets under management (end of period) | $ | 3,791,588 | $ | 3,512,681 | $ | 3,560,968 | ||||||
Diluted weighted-average common shares outstanding(3) | 178,017,679 | 187,116,410 | 192,692,047 | |||||||||
Shares outstanding (end of period) | 171,215,729 | 178,309,109 | 191,191,553 | |||||||||
Book value per share(4) | $ | 148.20 | $ | 140.07 | $ | 136.09 | ||||||
Cash dividends declared and paid per share | $ | 6.00 | $ | 5.50 | $ | 4.00 | ||||||
EXECUTIVE SUMMARY
| (in millions, except per share data) | 2014 | 2013 | 2012 | |||||||||
GAAP basis: | ||||||||||||
Total revenue | $ | 11,081 | $ | 10,180 | $ | 9,337 | ||||||
Total expense | 6,607 | 6,323 | 5,813 | |||||||||
Operating income | $ | 4,474 | $ | 3,857 | $ | 3,524 | ||||||
Operating margin | 40.4 | % | 37.9 | % | 37.7 | % | ||||||
Nonoperating income (expense), less net income (loss) attributable to noncontrolling | (49 | ) | 97 | (36 | ) | |||||||
Income tax expense | (1,131 | ) | (1,022 | ) | (1,030 | ) | ||||||
Net income attributable to BlackRock | $ | 3,294 | $ | 2,932 | $ | 2,458 | ||||||
% attributable to common shares | 100.0 | % | 100.0 | % | 99.9 | % | ||||||
Net income attributable to common shares | $ | 3,294 | $ | 2,932 | $ | 2,455 | ||||||
Diluted earnings per common share | $ | 19.25 | $ | 16.87 | $ | 13.79 | ||||||
Effective tax rate | 25.6 | % | 25.8 | % | 29.5 | % | ||||||
As adjusted(2): | ||||||||||||
Total revenue | $ | 11,081 | $ | 10,180 | $ | 9,337 | ||||||
Total expense | 6,518 | 6,156 | 5,763 | |||||||||
Operating income | $ | 4,563 | $ | 4,024 | $ | 3,574 | ||||||
Operating margin | 42.9 | % | 41.4 | % | 40.4 | % | ||||||
Nonoperating income (expense), less net income (loss) attributable to noncontrolling | (56 | ) | 7 | (42 | ) | |||||||
Income tax expense | (1,197 | ) | (1,149 | ) | (1,094 | ) | ||||||
Net income attributable to BlackRock | $ | 3,310 | $ | 2,882 | $ | 2,438 | ||||||
% attributable to common shares | 100.0 | % | 100.0 | % | 99.9 | % | ||||||
Net income attributable to common shares | $ | 3,310 | $ | 2,882 | $ | 2,435 | ||||||
Diluted earnings per common share | $ | 19.34 | $ | 16.58 | $ | 13.68 | ||||||
Effective tax rate | 26.6 | % | 28.5 | % | 31.0 | % | ||||||
Other: | ||||||||||||
Assets under management (end of period) | $ | 4,651,895 | $ | 4,324,088 | $ | 3,791,588 | ||||||
Diluted weighted-average common shares outstanding(3) | 171,112,261 | 173,828,902 | 178,017,679 | |||||||||
Common and preferred shares outstanding (end of period) | 166,921,863 | 168,724,763 | 171,215,729 | |||||||||
Book value per share(4) | $ | 164.06 | $ | 156.69 | $ | 148.20 | ||||||
Cash dividends declared and paid per share | $ | 7.72 | $ | 6.72 | $ | 6.00 | ||||||
| (1) | Net of net income (loss) attributable to |
| (2) | As adjusted items are described in more detail inNon-GAAP Financial Measures. |
| (3) |
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| (4) | Total BlackRock stockholders’ equity, excluding an appropriated retained deficit of $19 million for 2014 and appropriated retained earnings of $22 million and $29 million for 2013 and 2012, respectively, divided by total common and preferred shares outstanding at December 31 of the respective year-end. |
2014 COMPARED WITH 2013
2012 Compared with 2011.
GAAP. Operating income of $3,524$4,474 million and operating margin of 37.7% increased $275$617 million and 190 bps, respectively, from 20112013, reflecting growth in base fees andBlackRock Solutions and advisory revenue, partially offset by higher expense. The Company’s 2014 expense reflected higher revenue-related expense, including compensation and direct fund expense. Expense for 2014 also included a $50 million reduction of an indemnification asset recorded in general and administration expense (offset by a $50 million tax benefit—seeIncome Tax Expense withinDiscussion of Financial Results for more information) and $11 million of closed-end fund launch costs. The 2013 expense included $124 million of expense related to the Charitable Contribution described below and $18 million of closed-end fund launch costs.
Nonoperating income (expense), less net income (loss) attributable to NCI, decreased $146 million from 2013. The prior year included a $39 million noncash, nonoperating pre-tax gain related to the carrying value of the Company’s equity method investment as a result of an initial public offering of PennyMac Financial Services, Inc. (the “PennyMac IPO”). In addition, in 2013, the Company made a charitable contribution of approximately six million units of the Company’s investment in PennyMac to a donor advised fund (the “Charitable Contribution”). In connection with the Charitable Contribution, the Company also recorded a noncash, nonoperating pre-tax gain of $80 million related to the contributed investment. The decrease in nonoperating income (expense) also reflected net lower returns on the co-investment and seed portfolio and higher interest expense resulting from a long-term debt issuance in March 2014, partially offset by the positive impact of the monetization of a nonstrategic, opportunistic private equity investment during 2014.
Income tax expense of $1,131 million included $94 million of tax benefits, including the $50 million tax benefit mentioned above. Income tax expense for 2014 and 2013 reflected the revaluation of deferred income tax liabilities related to intangible assets and goodwill. Income tax expense for 2014 included a $9 million net noncash tax benefit arising primarily from state and local income tax changes and a $73 million net tax benefit related to several favorable nonrecurring items. Income tax expense for 2013 included a $69 million noncash tax benefit, primarily related to legislation enacted in the United Kingdom and state and local income tax changes. In addition, 2013 income tax expense included a tax benefit of approximately $48 million recognized in connection with the Charitable Contribution, a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards, and benefits from certain nonrecurring items.
Earnings per diluted common share rose $2.38, or 14%, from 2013 due to higher net income and the benefit of share repurchases.
As Adjusted. Operating income of $4,563 million and operating margin of 42.9% increased $539 million and 150 basis points, respectively, from 2013. The current year results excluded a $50 million general and administrative expense related to the reduction of an indemnification asset. The 2014 income tax expense included a $73 million net tax benefit and excluded a $50 million tax benefit associated with the reduction of the same indemnification asset and $9 million of net noncash benefits described above. The 2013 results excluded the financial impact of the Charitable Contribution, but included the $39 million pre-tax nonoperating gain related to the PennyMac IPO. The 2013 income tax expense included a tax benefit of approximately $29 million and benefits from certain nonrecurring items and excluded the $69 million net noncash benefit, described above. Earnings per diluted common share rose $2.76, or 17%, from 2013.
2013 COMPARED WITH 2012
GAAP. Operating income of $3,857 million increased $333 million from 2012, reflecting growth in base fees, strong performance fees and higher.BlackRock Solutions and advisory revenue, partially offset by higher expenses, primarily due to the previously mentioned $124 million expense related to the Charitable Contribution and higher revenue-related expense. Operating income in 2012 included a $30 million charge related to a contribution to certain of the Company’s bank-managed short-term investment funds (“STIFs”). Non-operatingNonoperating income (expense), less net income (loss) attributable to non-controlling interests)NCI, increased $133 million due to the $39 million pre-tax gain related to the PennyMac IPO and the $80 million duerelated to the Charitable Contribution and higher net positive marks on investments in 2012during 2013 compared with 2011, partially offset by higher interest expense resulting from long-term debt issuances in May 2012 and May 2011. In 2012, income2012. Income tax expense included a $21$69 million net noncash benefit related to the resolution of certain outstanding tax positionsfor 2013 and a $50$30 million net non-cashnoncash benefit for 2012. The net noncash benefits for both periods primarily related to the revaluation of certain deferred income tax liabilities, including tax legislation enacted in the United Kingdom and thedomestic state and local income tax effect resulting from changes in the Company’s organizational structure.changes. In 2011,addition, 2013 income tax expensesexpense included a $24tax benefit of approximately $48 million recognized in connection with the Charitable Contribution, a tax benefit relatedof approximately $29 million, primarily due to the resolutionrealization of certain outstanding tax positionsloss carryforwards and $198 million of net non-cash tax benefits due to a state tax election and enacted U.K., Japan, U.S. state and local tax legislation.from certain
nonrecurring items. Earnings per diluted common share rose $1.42 from 2011$3.08, or 22%, compared with 2012 due to higher net income and the benefit of share repurchases. During 2012, the Company repurchased 9.1 million shares.
As AdjustedAdjusted.. Operating income of $3,574$4,024 million and operating margin of 40.4%41.4% increased $182$450 million and 70 bps,100 basis points, respectively, from 2011 reflecting higher revenues. Operating income on an as adjusted basis excluded non-GAAP expense adjustments totaling $502012. The current year results included the previously mentioned $39 million in 2012 and $143 million in 2011. Non-operating income (expense), less net income (loss) attributablepre-tax nonoperating gain related to non-controlling interests) increased $71 million.the PennyMac IPO. Income tax expense on an as adjusted basisincluded a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards, and benefits from certain nonrecurring items and excluded the $50$69 million net noncash benefit in 2013 and $198the $30 million non-cash benefits fornet noncash benefit in 2012 and 2011, respectively, described above. Earnings per diluted common share rose $1.83$2.90, or 21%, from 2011 reflecting2012. The financial impact related to the improvement in net income and the benefit of share repurchases.Charitable Contribution has been excluded from as adjusted results for 2013.
SeeNon-GAAP Financial Measures for further information on as adjusted items.
2011 Compared with 2010.
GAAP. Operating income of $3,249 million and operating margin of 35.8% increased $251 million and 100 bps, respectively, from 2010 reflecting higher base fees and higherBlackRock Solutions and advisory revenue, partially offset by lower performance fees and higher operating expenses related to business growth. Operating income and operating margin in 2011 also reflected $63 million of U.K. lease exit costs related to the Company’s exit from two London locations and $32 million of restructuring
charges. Results for 2010 included $90 million of Barclays Global Investors (“BGI”) integration costs. Non-operating income (expense), less net income (loss) attributable to non-controlling interests) decreased $152 million due to lower net positive marks on investments compared with 2010 and higher interest expense resulting from long-term debt issuances in May 2011. Income tax expense in 2011 included the previously mentioned $24 million benefit and $198 million of net non-cash tax benefits. In 2010, income tax expense included a $30 million net non-cash benefit related to the revaluation of certain net deferred income tax liabilities primarily related to acquired intangible assets due to enacted U.K. tax legislation. In addition, 2010 included the effect of favorable tax rulings and the resolution of certain outstanding tax positions. Earnings per diluted common share rose $1.82 from 2010.
As Adjusted. Operating income of $3,392 million and operating margin of 39.7% increased $225 million and 40 bps, respectively, from 2010 reflecting higher revenues, partially offset by net increases in operating expenses as discussed above. Operating income on an as adjusted basis excluded non-GAAP expense adjustments totaling $143 million in 2011 and $169 million in 2010. Non-operating income (expense), less net income (loss) attributable to non-controlling interests) decreased $138 million. Income tax expense on an as adjusted basis excluded the $198 million and $30 million non-cash benefits in 2011 and 2010, respectively, described above. Earnings per diluted common share rose $0.91 from 2010.
For further discussion of BlackRock’s revenue, expenses, non-operatingexpense, nonoperating results and income tax expense, seeDiscussion of Financial Results herein.
Business OutlookBUSINESS OUTLOOK
BlackRock’s highly diversified multi-product platform was created to meet the needs of its clients in all market environments. BlackRock offers clients a broad range of equity, fixed income, multi-assetis positioned to provide active and alternativeindex investment products designed to track various indices (beta), achieve returns in excess of specified benchmarks (alpha) or deliver absolute returns. The diversity of BlackRock’s investment platform,solutions across asset classes investment styles and geographies – combined withand leverageBlackRock Solutions’ world-class risk management, analytics and advisory expertise – positionscapabilities on behalf of clients. BlackRock serves a diverse mix of institutional and retail clients across the Company wellglobe, including investors iniShares ETFs, maintaining differentiated client relationships and a fiduciary focus.
BlackRock’s Retail strategy is focused on an outcome-oriented approach to meet the needs of clients in 2013creating client solutions, including active, index and beyond and to continue to attract asset flows as investor needs and sentiment evolve.
BlackRock ended 2012 with record assets under management (“AUM”) of $3.792 trillion as clients sought efficient tools and innovative solutions to meet their investment objectives over both the short and long term. The Company experienced strong client demand for exchange traded funds and products (“ETFs” and “ETPs”, respectively), alternative and emerging market investment products, high-yielding income strategies, outcome-oriented solutions and retirement-related products, and enhanced distribution. In the Company expects this demandUnited States, BlackRock is leveraging its integrated wholesaler force to continue into 2013.
In early 2013,further penetrate wirehouse distribution platforms and gain share amongst registered investment advisors. Internationally, BlackRock continues to see signsdiversify the range of an improvinginvestment solutions available to clients, penetrate new distribution channels and capitalize on regulatory change impacting retrocession arrangements.
iShares growth strategy is centered on increasing global economy. While this offers the potential for greater financialiShares market stability, politicalshare and regulatory dynamics, persistent low interest rates and protracted periods of heightened volatility will continue to pose challenges in the investment landscape.driving global market expansion. BlackRock will continueseek to monitorachieve these factors activelygoals by pursuing global growth themes in 2013, along with global creditclient and monetary policies (including quantitative easingproduct segments including core investments, financial instruments and the direction of interest rates)precision exposures.
BlackRock believes Institutional results will be driven by strength in specialty areas, including Defined Contribution, Financial Institutions, Official Institutions and their effects on corporate earnings growth.
While investing for stable income remains a core objective for many of its clients, Foundations, Family Offices and Endowments; deepening client relationships through effective cross-selling efforts; enhancing BlackRock’s solutions-oriented approach and leveragingBlackRock expects clients – particularly in its institutional business – to trend towards barbelling their risk profile through the combination of activeSolutions’ analytical and index strategies and the use of alternative and multi-asset investment solutions, complemented with access to BlackRock’s risk management tools and advisory services.expertise.
AUM and FlowsAssuming a stable market environment, BlackRock anticipates that organic growth, coupled with the benefits of scale, should result in increasing operating margins over time.
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BlackRock believes alternative investments will continue to become more important for both institutionalthat earnings growth and retail clients seeking highershareholder returns through alpha-generating products. Several of BlackRock’s single strategy hedge funds are top performers in the industry and are well positioned to grow in 2013.
Cash management assets may decline from year-end levels if clients begin to re-risk their portfolios in the search for yield or equity return opportunities amid continued low interest rates, including in the United States where the Federal Reserve expects rates to remain low until 2014. BlackRock’s diversified global product offerings, record of client service and independent advisory capabilities may enable it to retain a portion of these assets.
Regulatory Reform
BlackRock will continue to monitor the evolving regulatory landscape and to assess its influence on the competitive environment, including on liquidity and trading costs, which may present risks as well as opportunities for BlackRock and its clients.
Performance fees and BRS/advisory fees
BlackRock improved investment performance in key areas such as fixed income and scientific active equity in 2012 and strong investment performance will againshould also be a priority in 2013. Higher market levels and investment performance may continue to enablepositively impacted by the Company’s alternative investment productscommitment to contribute additional performance fee revenue.
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Future opportunitiesa consistent and predictable capital management strategy.
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Non-GAAP Financial MeasuresNON-GAAP FINANCIAL MEASURES
BlackRock reports its financial results in accordance with GAAP; however, management believes evaluating the Company’s ongoing operating results may be enhanced if
investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
Computations for all periods are derived from the consolidated statements of income as follows:
(1) Operating income, as adjusted, and operating margin, as adjusted:
Operating income, as adjusted, equals operating income, GAAP basis, excluding certain items management deems non-recurring,nonrecurring, recurring infrequently 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 (net of distribution and servicing costs and amortization of deferred sales commissions) used for operating margin measurement, as indicated in the table below.
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | |||||||||
Operating income, GAAP basis | $ | 3,524 | $ | 3,249 | $ | 2,998 | ||||||
Non-GAAP expense adjustments: | ||||||||||||
BGI transaction/integration costs | ||||||||||||
Employee compensation and benefits | — | — | 25 | |||||||||
General and administration | — | — | 65 | |||||||||
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Total BGI transaction/integration costs | — | — | 90 | |||||||||
U.K. lease exit costs | (8 | ) | 63 | — | ||||||||
Contribution to STIFs | 30 | — | — | |||||||||
Restructuring charges | — | 32 | — | |||||||||
PNC LTIP funding obligation | 22 | 44 | 58 | |||||||||
Merrill Lynch compensation contribution | — | 7 | 10 | |||||||||
Compensation expense related to appreciation (depreciation) on deferred compensation plans | 6 | (3 | ) | 11 | ||||||||
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Operating income, as adjusted | 3,574 | 3,392 | 3,167 | |||||||||
Closed-end fund launch costs | 22 | 26 | 15 | |||||||||
Closed-end fund launch commissions | 3 | 3 | 2 | |||||||||
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Operating income used for operating margin measurement | $ | 3,599 | $ | 3,421 | $ | 3,184 | ||||||
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Revenue, GAAP basis | $ | 9,337 | $ | 9,081 | $ | 8,612 | ||||||
Non-GAAP adjustments: | ||||||||||||
Distribution and servicing costs | (364 | ) | (386 | ) | (408 | ) | ||||||
Amortization of deferred sales commissions | (55 | ) | (81 | ) | (102 | ) | ||||||
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Revenue used for operating margin measurement | $ | 8,918 | $ | 8,614 | $ | 8,102 | ||||||
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Operating margin, GAAP basis | 37.7 | % | 35.8 | % | 34.8 | % | ||||||
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Operating margin, as adjusted | 40.4 | % | 39.7 | % | 39.3 | % | ||||||
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value. Management believes operating income, as adjusted, and operating margin, as adjusted, are effective indicators of BlackRock’s financial performance over time and, therefore, provide useful disclosure to investors.
Operating income, as adjusted:
| (in millions) | 2014 | 2013 | 2012 | |||||||||
Operating income, GAAP basis | $ | 4,474 | $ | 3,857 | $ | 3,524 | ||||||
Non-GAAP expense adjustments: | ||||||||||||
PNC LTIP funding obligation | 32 | 33 | 22 | |||||||||
Reduction of indemnification asset | 50 | — | — | |||||||||
Charitable Contribution | — | 124 | — | |||||||||
U.K. lease exit costs | — | — | (8 | ) | ||||||||
Contribution to STIFs | — | — | 30 | |||||||||
Compensation expense related to appreciation (depreciation) on deferred compensation plans | 7 | 10 | 6 | |||||||||
Operating income, as adjusted | 4,563 | 4,024 | 3,574 | |||||||||
Closed-end fund launch costs | 10 | 16 | 22 | |||||||||
Closed-end fund launch commissions | 1 | 2 | 3 | |||||||||
Operating income used for operating margin measurement | $ | 4,574 | $ | 4,042 | $ | 3,599 | ||||||
Revenue, GAAP basis | $ | 11,081 | $ | 10,180 | $ | 9,337 | ||||||
Non-GAAP adjustments: | ||||||||||||
Distribution and servicing costs | (364 | ) | (353 | ) | (364 | ) | ||||||
Amortization of deferred sales commissions | (56 | ) | (52 | ) | (55 | ) | ||||||
Revenue used for operating margin measurement | $ | 10,661 | $ | 9,775 | $ | 8,918 | ||||||
Operating margin, GAAP basis | 40.4 | % | 37.9 | % | 37.7 | % | ||||||
Operating margin, as adjusted | 42.9 | % | 41.4 | % | 40.4 | % | ||||||
expenses incurred in conjunction with the BGI acquisition from Barclays. U.K. lease exit costs represent costs to exit two locations in London in the third quarter 2011. The amount in 2012 represents an adjustment related to the estimated costs initially recorded in third quarter 2011. The contribution to STIFs represents a one-time contribution to certain of the Company’s bank-managed STIFs (seeLiquidity and Capital Resources for more information). Restructuring charges consist of compensation costs and professional fees.
The portion of compensation expense associated with certain long-term incentive plans (“LTIP”) funded, or to be funded, through share distributions to participants of BlackRock stock held by PNC and a Merrill Lynch & Co., Inc. (“Merrill Lynch”) cash compensation contribution, has been excluded because it ultimately does not impact BlackRock’s book value. TheIn 2014, general and administration expense relating to the reduction of an indemnification asset has been excluded since it is directly offset by a tax benefit of the same amount and, consequently, does not impact BlackRock’s book value. In 2013, the $124 million expense related to the Merrill Lynch cash compensation contribution ceased at the end of third quarter 2011. As of first quarter 2012, all of the Merrill Lynch contributions had been received.
Compensation expense associated with appreciation (depreciation) on investments related to certain BlackRock deferred compensation plansCharitable Contribution has been excluded from operating income, as returns on investments set aside for these plans, which substantially offset this expense, areadjusted, due to its nonrecurring nature and because the noncash, nonoperating pre-tax gain of $80 million directly related to the contributed PennyMac investment is reported in non-operatingnonoperating income (expense). The U.K. lease exit amount in 2012 represents an adjustment related to the estimated lease exit costs initially recorded in 2011 and the contribution to STIFs represents a contribution to certain of the Company’s bank-managed STIFs. Both the U.K. lease exit amount and contribution to STIFs
have been excluded from operating income, as adjusted due to their nonrecurring nature. Compensation expense associated with appreciation (depreciation) on investments related to certain BlackRock deferred compensation plans has been excluded as returns on investments set aside for these plans, which substantially offset this expense, are reported in nonoperating income (expense). |
Management believes operating income exclusive of these items is a useful measure in evaluating BlackRock’s operating performance and helps enhance the comparability of this information for the reporting periods presented.
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 the exclusion of 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.
measures in evaluating BlackRock’s financial performance. The non-GAAP measure by itself may pose limitations because it does not include all of BlackRock’s revenue and expense. |
Operating income used for measuring operating margin, as adjusted, is equal to operating income, as adjusted, excluding the financial performanceimpact of BlackRock. The non-GAAP measure by itself may pose limitationsclosed-end fund launch costs and related commissions. Management believes the exclusion of such costs and related commissions is useful because it doesthese costs can fluctuate considerably and revenue associated with the expenditure of these costs will not include all of the Company’s revenues and expenses.fully impact BlackRock’s results until future periods.
Revenue used for operating margin, as adjusted, excludes distribution and servicing costs paid to related parties and other third parties. Management believes the exclusion of such costs is useful because it creates consistency in the treatment for certain contracts for similar services, which due to the terms of the contracts, are accounted for under GAAP on a net basis within investment advisory, administration fees and securities lending revenue. Amortization of deferred sales commissions is excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, substantially offset distribution fee revenue earned by the Company.Company earns. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such offsetting revenues.revenue.
Non-operating(2) Nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, is presented below.
Nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, equals nonoperating income (expense), GAAP basis, less net income (loss) attributable to NCI, adjusted for compensation expense associated with (appreciation) depreciation on investments related to certain BlackRock deferred compensation plans. The compensation expense offset is recorded in operating income. This compensation expense has been
included in non-operatingnonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, to offset returns on investments set aside for these plans, which are reported in non-operatingnonoperating income (expense), GAAP basis.
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | |||||||||
Non-operating income (expense), GAAP basis | $ | (54 | ) | $ | (114 | ) | $ | 23 | ||||
Less: Net income (loss) attributable to NCI | (18 | ) | 2 | (13 | ) | |||||||
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Non-operating income (expense)(1) | (36 | ) | (116 | ) | 36 | |||||||
Compensation expense related to (appreciation) depreciation on deferred compensation plans | (6 | ) | 3 | (11 | ) | |||||||
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Non-operating income (expense), less net income (loss) attributable to NCI, as adjusted | $ | (42 | ) | $ | (113 | ) | $ | 25 | ||||
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Management believes non-operatingnonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, provides comparability of this information among reporting periods and is an effective measure for reviewing BlackRock’s non-operatingnonoperating contribution to its results. As compensation expense associated with (appreciation) depreciation on investments related to certain deferred compensation plans, which is included in operating income, substantially offsets the gain (loss) on the investments set aside for these plans, management
believes non-operatingnonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, provides a useful measure, for both management and investors, of BlackRock’s non-operatingnonoperating results that impact book value. During 2013, the noncash, nonoperating pre-tax gain of $80 million related to the contributed PennyMac investment has been excluded from nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted due to its nonrecurring nature and because the more than offsetting associated Charitable Contribution expense of $124 million is reported in operating income.
| (in millions) | 2014 | 2013 | 2012 | |||||||||
Nonoperating income (expense), GAAP basis | $ | (79 | ) | $ | 116 | $ | (54) | |||||
Less: Net income (loss) attributable to NCI | (30 | ) | 19 | (18 | ) | |||||||
Nonoperating income (expense), net of NCI | (49 | ) | 97 | (36 | ) | |||||||
Gain related to Charitable Contribution | — | (80 | ) | — | ||||||||
Compensation expense related to (appreciation) depreciation on deferred compensation plans | (7 | ) | (10 | ) | (6 | ) | ||||||
Nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted | $ | (56 | ) | $ | 7 | $ | (42 | ) | ||||
(3) Net income attributable to BlackRock, as adjusted:
Management believes 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-recurringnonrecurring items, charges that ultimately will not impact BlackRock’s book value or certain tax items that do not impact cash flow.
| (Dollar amounts in millions, except per share data) | 2012 | 2011 | 2010 | |||||||||
Net income attributable to BlackRock, GAAP basis | $ | 2,458 | $ | 2,337 | $ | 2,063 | ||||||
Non-GAAP adjustments, net of tax:(d) | ||||||||||||
BGI transaction/integration costs | — | — | 59 | |||||||||
U.K. lease exit costs | (5 | ) | 43 | — | ||||||||
Contribution to STIFs | 21 | — | — | |||||||||
Restructuring charges | — | 22 | — | |||||||||
PNC LTIP funding obligation | 14 | 30 | 40 | |||||||||
Merrill Lynch compensation contribution | — | 5 | 7 | |||||||||
Income tax law changes/election | (50 | ) | (198 | ) | (30 | ) | ||||||
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Net income attributable to BlackRock, as adjusted | $ | 2,438 | $ | 2,239 | $ | 2,139 | ||||||
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Allocation of net income, as adjusted, to common shares(e) | $ | 2,435 | $ | 2,218 | $ | 2,109 | ||||||
Diluted weighted-average common shares outstanding(f) | 178,017,679 | 187,116,410 | 192,692,047 | |||||||||
Diluted earnings per common share, GAAP basis(f) | $ | 13.79 | $ | 12.37 | $ | 10.55 | ||||||
Diluted earnings per common share, as adjusted(f) | $ | 13.68 | $ | 11.85 | $ | 10.94 | ||||||
| (in millions, except per share data) | 2014 | 2013 | 2012 | |||||||||
Net income attributable to BlackRock, GAAP basis | $ | 3,294 | $ | 2,932 | $ | 2,458 | ||||||
Non-GAAP adjustments, net of tax: | ||||||||||||
PNC LTIP funding obligation | 25 | 23 | 14 | |||||||||
Income tax matters | (9 | ) | (69 | ) | (50 | ) | ||||||
Amount related to the Charitable Contribution | — | (4 | ) | — | ||||||||
U.K. lease exit costs | — | — | (5 | ) | ||||||||
Contribution to STIFs | — | — | 21 | |||||||||
Net income attributable to BlackRock, as adjusted | $ | 3,310 | $ | 2,882 | $ | 2,438 | ||||||
Allocation of net income, as adjusted, to common shares(4) | $ | 3,310 | $ | 2,882 | $ | 2,435 | ||||||
Diluted weighted-average common shares outstanding(5) | 171.1 | 173.8 | 178.0 | |||||||||
Diluted earnings per common share, GAAP basis(5) | $ | 19.25 | $ | 16.87 | $ | 13.79 | ||||||
Diluted earnings per common share, as adjusted(5) | $ | 19.34 | $ | 16.58 | $ | 13.68 | ||||||
See note (a) Operatingaforementioned discussion regarding operating income, as adjusted, and operating margin, as adjusted, for information on BGI transaction/integration costs,the PNC LTIP funding obligation, Charitable Contribution, U.K. lease exit costs and contribution to STIFs, restructuring charges,STIFs.
For each period presented, the non-GAAP adjustments, including the PNC LTIP funding obligation, U.K. lease exit costs and Merrill Lynch compensation contribution.
During 2012, incomecontribution to STIFs were tax changes included adjustments relatedeffected at the respective blended rates applicable to the adjustments. Amounts for 2013 included a tax benefit of approximately $48 million recognized in connection with the Charitable Contribution. The tax benefit has been excluded from net income attributable to BlackRock, Inc., as adjusted due to the nonrecurring nature of the Charitable Contribution.
Non-GAAP adjustments for 2014, 2013 and 2012 reflected the revaluation of certain deferred income tax liabilities duerelated to intangible assets and/or goodwill. The amount for 2014 included a $9 million net noncash tax benefit arising primarily from state and local income tax changes. The amount for 2013 included a $69 million noncash tax benefit, primarily related to legislation enacted in the United Kingdom and state and local income tax changes. The amount for 2012 included a $50 million noncash tax benefit, primarily related to the effect of legislation enacted in the United Kingdom and the state and local income tax effect resulting from changes in the Company’s organizational structure. During 2011Such amounts for 2014, 2013 and 2010, income tax changes included adjustments related to the revaluation of certain deferred income tax liabilities due to a state tax election and enacted U.K., Japan, U.S. state and local tax legislation. The resulting decrease in income taxes has2012 have been excluded from net income attributable to BlackRock, Inc., as adjusted results as these items dothey will not have a cash flow impact and to ensure comparability among periods presented.
| Amounts for 2012 exclude net income attributable to participating securities (see below). |
| Prior to 2013, certain unvested RSUs |
Assets Under Management
AUM for reporting purposes generally is based upon how investment advisory and administration fees are
calculated for each portfolio. Net asset values, total assets, committed assets or other measures may be used to determine portfolio AUM.
| December 31, | Variance | |||||||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||
Equity: | ||||||||||||||||||||
Active | $ | 287,215 | $ | 275,156 | $ | 334,532 | 4 | % | (18 | %) | ||||||||||
iShares | 534,648 | 419,651 | 448,160 | 27 | % | (6 | %) | |||||||||||||
Fixed income: | ||||||||||||||||||||
Active | 656,331 | 614,804 | 592,303 | 7 | % | 4 | % | |||||||||||||
iShares | 192,852 | 153,802 | 123,091 | 25 | % | 25 | % | |||||||||||||
Multi-asset class | 267,748 | 225,170 | 185,587 | 19 | % | 21 | % | |||||||||||||
Alternatives: | ||||||||||||||||||||
Core | 68,367 | 63,647 | 63,603 | 7 | % | — | % | |||||||||||||
Currency and commodities(1) | 41,428 | 41,301 | 46,135 | — | % | (10 | %) | |||||||||||||
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Sub-total | 2,048,589 | 1,793,531 | 1,793,411 | 14 | % | — | % | |||||||||||||
Non-ETF Index | ||||||||||||||||||||
Equity | 1,023,638 | 865,299 | 911,775 | 18 | % | (5 | %) | |||||||||||||
Fixed Income | 410,139 | 479,116 | 425,930 | (14 | %) | 12 | % | |||||||||||||
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Sub-total Non-ETF Index | 1,433,777 | 1,344,415 | 1,337,705 | 7 | % | 1 | % | |||||||||||||
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Long-term | 3,482,366 | 3,137,946 | 3,131,116 | 11 | % | — | % | |||||||||||||
Cash management | 263,743 | 254,665 | 279,175 | 4 | % | (9 | %) | |||||||||||||
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Sub-total | 3,746,109 | 3,392,611 | 3,410,291 | 10 | % | (1 | %) | |||||||||||||
Advisory(2) | 45,479 | 120,070 | 150,677 | (62 | %) | (20 | %) | |||||||||||||
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Total | $ | 3,791,588 | $ | 3,512,681 | $ | 3,560,968 | 8 | % | (1 | %) | ||||||||||
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Mix of Assets Under Management –AUM and Net Inflows (Outflows) by Asset ClassClient Type
| 2012 | 2011 | 2010 | ||||||||||
Equity: | ||||||||||||
Active | 8 | % | 8 | % | 9 | % | ||||||
iShares | 14 | % | 12 | % | 13 | % | ||||||
Fixed income: | ||||||||||||
Active | 17 | % | 18 | % | 17 | % | ||||||
iShares | 5 | % | 4 | % | 3 | % | ||||||
Multi-asset class | 7 | % | 6 | % | 5 | % | ||||||
Alternatives: | ||||||||||||
Core | 2 | % | 2 | % | 2 | % | ||||||
Currency and commodities(1) | 1 | % | 1 | % | 1 | % | ||||||
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Sub-total | 54 | % | 51 | % | 50 | % | ||||||
Non-ETF Index | ||||||||||||
Equity | 27 | % | 25 | % | 26 | % | ||||||
Fixed Income | 11 | % | 14 | % | 12 | % | ||||||
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Sub-total Non-ETF Index | 38 | % | 39 | % | 38 | % | ||||||
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Long-term | 92 | % | 90 | % | 88 | % | ||||||
Cash management | 7 | % | 7 | % | 8 | % | ||||||
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Sub-total | 99 | % | 97 | % | 96 | % | ||||||
Advisory(2) | 1 | % | 3 | % | 4 | % | ||||||
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Total | 100 | % | 100 | % | 100 | % | ||||||
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| AUM | Net Inflows (Outflows) | |||||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | 2014 | 2013 | 2012(1) | ||||||||||||||||||
Retail | $ | 534,329 | $ | 487,777 | $ | 403,484 | $ | 54,944 | $ | 38,804 | $ | 11,556 | ||||||||||||
iShares | 1,024,228 | 914,372 | 752,706 | 100,601 | 63,971 | 85,167 | ||||||||||||||||||
Institutional: | ||||||||||||||||||||||||
Active | 959,160 | 932,410 | 884,695 | (10,420 | ) | (928 | ) | (24,046 | ) | |||||||||||||||
Index | 1,816,124 | 1,677,650 | 1,441,481 | 36,128 | �� | 15,266 | (75,142 | ) | ||||||||||||||||
Institutional subtotal | 2,775,284 | 2,610,060 | 2,326,176 | 25,708 | 14,338 | (99,188 | ) | |||||||||||||||||
Long-term | 4,333,841 | 4,012,209 | 3,482,366 | 181,253 | 117,113 | (2,465 | ) | |||||||||||||||||
Cash management | 296,353 | 275,554 | 263,743 | 25,696 | 10,056 | 5,048 | ||||||||||||||||||
Advisory(2) | 21,701 | 36,325 | 45,479 | (13,173 | ) | (7,442 | ) | (74,540 | ) | |||||||||||||||
Total | $ | 4,651,895 | $ | 4,324,088 | $ | 3,791,588 | $ | 193,776 | $ | 119,727 | $ | (71,957 | ) | |||||||||||
AUM and Net Inflows (Outflows) by Product Type
| AUM | Net Inflows (Outflows) | |||||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | 2014 | 2013 | 2012(1) | ||||||||||||||||||
Equity | $ | 2,451,111 | $ | 2,317,695 | $ | 1,845,501 | $ | 52,420 | $ | 69,257 | $ | 54,016 | ||||||||||||
Fixed income | 1,393,653 | 1,242,186 | 1,259,322 | 96,406 | 11,508 | (66,829 | ) | |||||||||||||||||
Multi-asset | 377,837 | 341,214 | 267,748 | 28,905 | 42,298 | 15,817 | ||||||||||||||||||
Alternatives | ||||||||||||||||||||||||
Core | 88,006 | 85,026 | 68,367 | 3,061 | 2,703 | (3,922 | ) | |||||||||||||||||
Currency and commodities(3) | 23,234 | 26,088 | 41,428 | 461 | (8,653 | ) | (1,547 | ) | ||||||||||||||||
Subtotal | 111,240 | 111,114 | 109,795 | 3,522 | (5,950 | ) | (5,469 | ) | ||||||||||||||||
Long-term | 4,333,841 | 4,012,209 | 3,482,366 | 181,253 | 117,113 | (2,465 | ) | |||||||||||||||||
Cash management | 296,353 | 275,554 | 263,743 | 25,696 | 10,056 | 5,048 | ||||||||||||||||||
Advisory(2) | 21,701 | 36,325 | 45,479 | (13,173 | ) | (7,442 | ) | (74,540 | ) | |||||||||||||||
Total | $ | 4,651,895 | $ | 4,324,088 | $ | 3,791,588 | $ | 193,776 | $ | 119,727 | $ | (71,957 | ) | |||||||||||
| (1) |
|
|
The following table presents the component changes in BlackRock’s AUM for 2012, 2011 and 2010.
| December 31, | ||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | |||||||||
Beginning assets under management | $ | 3,512,681 | $ | 3,560,968 | $ | 3,346,256 | ||||||
Net subscriptions (redemptions)(1) | ||||||||||||
Long-term(2) | (2,465 | ) | 67,349 | 131,206 | ||||||||
Cash management | 5,048 | (22,899 | ) | (61,424 | ) | |||||||
Advisory(3) | (74,540 | ) | (29,903 | ) | (12,021 | ) | ||||||
|
|
|
|
|
| |||||||
Total net subscriptions (redemptions) | (71,957 | ) | 14,547 | 57,761 | ||||||||
BGI merger-related outflows(4) | — | (28,251 | ) | (120,969 | ) | |||||||
Acquisitions(5) | 13,742 | — | (6,160 | ) | ||||||||
Market appreciation (depreciation) | 321,377 | (27,513 | ) | 266,981 | ||||||||
Foreign exchange(6) | 15,745 | (7,070 | ) | 17,099 | ||||||||
|
|
|
|
|
| |||||||
Total change | 278,907 | (48,287 | ) | 214,712 | ||||||||
|
|
|
|
|
| |||||||
Ending assets under management | $ | 3,791,588 | $ | 3,512,681 | $ | 3,560,968 | ||||||
|
|
|
|
|
| |||||||
|
Amounts include the effect of two single client low-fee institutional index fixed income outflows of $36.0 billion and $74.2 |
Advisory AUM represents long-term portfolio liquidation assignments. Outflows include planned client distributions. |
Amounts include |
The following table presents the component changes in BlackRock’s AUM for 2014, 2013 and 2012.
| December 31, | ||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||
Beginning assets under management | $ | 4,324,088 | $ | 3,791,588 | $ | 3,512,681 | ||||||
Net inflows (outflows) | ||||||||||||
Long-term(1) | 181,253 | 117,113 | (2,465 | ) | ||||||||
Cash management | 25,696 | 10,056 | 5,048 | |||||||||
Advisory(2) | (13,173 | ) | (7,442 | ) | (74,540 | ) | ||||||
Total net inflows (outflows) | 193,776 | 119,727 | (71,957 | ) | ||||||||
Acquisitions(3) | — | 26,932 | 13,742 | |||||||||
Market change | 261,682 | 398,707 | 321,377 | |||||||||
FX impact(4) | (127,651 | ) | (12,866 | ) | 15,745 | |||||||
Total change | 327,807 | 532,500 | 278,907 | |||||||||
Ending assets under management | $ | 4,651,895 | $ | 4,324,088 | $ | 3,791,588 | ||||||
| In 2012, amounts include the effect of two single client low-fee institutional index fixed income outflows of $36.0 billion and $74.2 billion. |
| (2) | Advisory AUM represents long-term portfolio liquidation assignments. Outflows include planned client distributions. |
| (3) | Amounts include AUM acquired from the Company’s acquisition of MGPA in October 2013 of $11.0 billion, the Credit Suisse ETF franchise in July 2013 (the “Credit Suisse ETF Transaction”) of $16.0 billion, the Swiss Re Private Equity Partners acquisition (the “SRPEP Transaction”) in September 2012 of $6.2 billion and the Claymore Investments, Inc. acquisition (the “Claymore Transaction”) in March 2012 of $7.6 |
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, by developing new products and newoptimizing distribution capabilities and by continuing appropriate acquisitions.capabilities.
Component Changes in AUM for 2014
The following table presents the component changes in BlackRock’s AUM by client type and product for 2012.2014.
| (Dollar amounts in millions) | December 31, 2011 | Net subscriptions (redemptions)(1) | Acquisitions(2) | Market appreciation (depreciation) | Foreign exchange(3) | December 31, 2012 | ||||||||||||||||||
Equity: | ||||||||||||||||||||||||
Active | $ | 275,156 | $ | (18,111 | ) | $ | — | $ | 28,550 | $ | 1,620 | $ | 287,215 | |||||||||||
iShares | 419,651 | 52,973 | 3,517 | 56,433 | 2,074 | 534,648 | ||||||||||||||||||
Fixed income: | ||||||||||||||||||||||||
Active | 614,804 | 892 | — | 40,524 | 111 | 656,331 | ||||||||||||||||||
iShares | 153,802 | 28,785 | 3,026 | 6,325 | 914 | 192,852 | ||||||||||||||||||
Multi-asset class | 225,170 | 15,817 | 78 | 25,072 | 1,611 | 267,748 | ||||||||||||||||||
Alternatives: | ||||||||||||||||||||||||
Core | 63,647 | (3,922 | ) | 6,166 | 2,266 | 210 | 68,367 | |||||||||||||||||
Currency and commodities(4) | 41,301 | (1,547 | ) | 860 | 1,307 | (493 | ) | 41,428 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 1,793,531 | 74,887 | 13,647 | 160,477 | 6,047 | 2,048,589 | ||||||||||||||||||
Non-ETF Index | ||||||||||||||||||||||||
Equity | 865,299 | 19,154 | 95 | 138,730 | 360 | 1,023,638 | ||||||||||||||||||
Fixed Income | 479,116 | (96,506 | ) | — | 20,991 | 6,538 | 410,139 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Sub-total Non-ETF Index | 1,344,415 | (77,352 | ) | 95 | 159,721 | 6,898 | 1,433,777 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Long-term | 3,137,946 | (2,465 | ) | 13,742 | 320,198 | 12,945 | 3,482,366 | |||||||||||||||||
Cash management | 254,665 | 5,048 | — | 1,983 | 2,047 | 263,743 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Sub-total | 3,392,611 | 2,583 | 13,742 | 322,181 | 14,992 | 3,746,109 | ||||||||||||||||||
Advisory(5) | 120,070 | (74,540 | ) | — | (804 | ) | 753 | 45,479 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 3,512,681 | $ | (71,957 | ) | $ | 13,742 | $ | 321,377 | $ | 15,745 | $ | 3,791,588 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
December 31, 2013 December 31, 2014 Retail: Equity Fixed income Multi-asset Alternatives Retail subtotal iShares: Equity Fixed income Multi-asset Alternatives iShares subtotal Institutional: Active: Equity Fixed income Multi-asset Alternatives Active subtotal Index: Equity Fixed income Multi-asset Alternatives Index subtotal Institutional subtotal Long-term Cash management Advisory(3) Total(in millions) Net
inflows
(outflows) Market
change FX
impact(1) Full Year
Average
AUM(2) $ 203,035 $ 1,582 $ 1,831 $ (6,003 ) $ 200,445 $ 207,280 151,475 36,995 3,698 (2,348 ) 189,820 170,490 117,054 13,366 (4,080 ) (999 ) 125,341 123,619 16,213 3,001 152 (643 ) 18,723 18,487 487,777 54,944 1,601 (9,993 ) 534,329 519,876 718,135 59,626 26,517 (14,211 ) 790,067 751,830 178,835 40,007 4,905 (6,076 ) 217,671 199,410 1,310 439 37 (13 ) 1,773 1,535 16,092 529 (1,722 ) (182 ) 14,717 16,453 914,372 100,601 29,737 (20,482 ) 1,024,228 969,228 138,726 (18,648 ) 9,935 (4,870 ) 125,143 131,779 505,109 (6,943 ) 34,062 (13,638 ) 518,590 515,411 215,276 15,835 23,435 (11,633 ) 242,913 233,729 73,299 (664 ) 1,494 (1,615 ) 72,514 73,075 932,410 (10,420 ) 68,926 (31,756 ) 959,160 953,994 1,257,799 9,860 102,549 (34,752 ) 1,335,456 1,305,930 406,767 26,347 56,086 (21,628 ) 467,572 440,047 7,574 (735 ) 1,652 (681 ) 7,810 7,001 5,510 656 (693 ) (187 ) 5,286 6,061 1,677,650 36,128 159,594 (57,248 ) 1,816,124 1,759,039 2,610,060 25,708 228,520 (89,004 ) 2,775,284 2,713,033 4,012,209 181,253 259,858 (119,479 ) 4,333,841 $ 4,202,137 275,554 25,696 715 (5,612 ) 296,353 36,325 (13,173 ) 1,109 (2,560 ) 21,701 $ 4,324,088 $ 193,776 $ 261,682 $ (127,651 ) $ 4,651,895
| (1) |
|
|
Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. |
|
Advisory AUM represents long-term portfolio liquidation assignments. |
AUM increased $278.9 billion, or 8%, to $3.792 trillion at December 31, 2012 from $3.513 trillion at December 31, 2011. The increase in AUM was driven largely by market gains and positive net new business, excluding the effect of two single client low-fee, institutional index fixed income outflows of $36.0 billion and $74.2 billion in first quarter 2012 and third quarter 2012, respectively. Total flows included $74.5 billion of planned advisory distributions and acquired AUM related to the SRPEP and the Claymore Transactions of $13.7 billion.
Net market appreciation of $321.4 billion reflected growth in U.S. and global equity markets and $67.8 billion appreciation in fixed income products across the majority of strategies.
The $15.7 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 pound sterling and the euro, partially offset by the strengthening of the U.S. dollar against the Japanese yen.
The following table presents the component changes in BlackRock’s AUM by product for 2011.2014.
| (Dollar amounts in millions) | December 31, 2010 | Net subscriptions (redemptions)(1) | BGI merger- related outflows(2) | Market appreciation (depreciation) | Foreign exchange(3) | December 31, 2011 | ||||||||||||||||||||||||||||||||||||||||||
| (in millions) | December 31, 2013 | Net inflows (outflows) | Market change | FX impact(1) | December 31, 2014 | Full Year Average AUM(2) | ||||||||||||||||||||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||||||||||||||||||
Active | $ | 334,532 | $ | (22,876 | ) | $ | (6,943 | ) | $ | (29,793 | ) | $ | 236 | $ | 275,156 | $ | 317,262 | $ | (24,882 | ) | $ | 9,867 | $ | (9,445 | ) | $ | 292,802 | $ | 310,551 | |||||||||||||||||||
iShares | 448,160 | 24,612 | — | (49,863 | ) | (3,258 | ) | 419,651 | 718,135 | 59,626 | 26,517 | (14,211 | ) | 790,067 | 751,830 | |||||||||||||||||||||||||||||||||
Non-ETF index | 1,282,298 | 17,676 | 104,448 | (36,180 | ) | 1,368,242 | 1,334,438 | |||||||||||||||||||||||||||||||||||||||||
Equity subtotal | 2,317,695 | 52,420 | 140,832 | (59,836 | ) | 2,451,111 | 2,396,819 | |||||||||||||||||||||||||||||||||||||||||
Fixed income: | ||||||||||||||||||||||||||||||||||||||||||||||||
Active | 592,303 | (17,398 | ) | (413 | ) | 40,366 | (54 | ) | 614,804 | 652,209 | 27,694 | 36,942 | (15,521 | ) | 701,324 | 680,078 | ||||||||||||||||||||||||||||||||
iShares | 123,091 | 26,876 | — | 4,824 | (989 | ) | 153,802 | 178,835 | 40,007 | 4,905 | (6,076 | ) | 217,671 | 199,410 | ||||||||||||||||||||||||||||||||||
Multi-asset class | 185,587 | 42,654 | — | (401 | ) | (2,670 | ) | 225,170 | ||||||||||||||||||||||||||||||||||||||||
Non-ETF index | 411,142 | 28,705 | 56,904 | (22,093 | ) | 474,658 | 445,870 | |||||||||||||||||||||||||||||||||||||||||
Fixed income subtotal | 1,242,186 | 96,406 | 98,751 | (43,690 | ) | 1,393,653 | 1,325,358 | |||||||||||||||||||||||||||||||||||||||||
Multi-asset | 341,214 | 28,905 | 21,044 | (13,326 | ) | 377,837 | 365,884 | |||||||||||||||||||||||||||||||||||||||||
Alternatives: | ||||||||||||||||||||||||||||||||||||||||||||||||
Core | 63,603 | 48 | (152 | ) | 179 | (31 | ) | 63,647 | 85,026 | 3,061 | 1,808 | (1,889 | ) | 88,006 | 87,689 | |||||||||||||||||||||||||||||||||
Currency and commodities(4) | 46,135 | (3,818 | ) | — | (1,462 | ) | 446 | 41,301 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Subtotal | 1,793,411 | 50,098 | (7,508 | ) | (36,150 | ) | (6,320 | ) | 1,793,531 | |||||||||||||||||||||||||||||||||||||||
Non-ETF Index | ||||||||||||||||||||||||||||||||||||||||||||||||
Equity | 911,775 | 22,403 | (20,630 | ) | (48,402 | ) | 153 | 865,299 | ||||||||||||||||||||||||||||||||||||||||
Fixed Income | 425,930 | (5,152 | ) | (113 | ) | 55,463 | 2,988 | 479,116 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Sub-total Non-ETF Index | 1,337,705 | 17,251 | (20,743 | ) | 7,061 | 3,141 | 1,344,415 | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Currency and commodities(3) | 26,088 | 461 | (2,577 | ) | (738 | ) | 23,234 | 26,387 | ||||||||||||||||||||||||||||||||||||||||
Alternatives subtotal | 111,114 | 3,522 | (769 | ) | (2,627 | ) | 111,240 | 114,076 | ||||||||||||||||||||||||||||||||||||||||
Long-term | 3,131,116 | 67,349 | (28,251 | ) | (29,089 | ) | (3,179 | ) | 3,137,946 | 4,012,209 | 181,253 | 259,858 | (119,479 | ) | 4,333,841 | $ | 4,202,137 | |||||||||||||||||||||||||||||||
Cash management | 279,175 | (22,899 | ) | — | 128 | (1,739 | ) | 254,665 | 275,554 | 25,696 | 715 | (5,612 | ) | 296,353 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Sub-total | 3,410,291 | 44,450 | (28,251 | ) | (28,961 | ) | (4,918 | ) | 3,392,611 | |||||||||||||||||||||||||||||||||||||||
Advisory(5) | 150,677 | (29,903 | ) | — | 1,448 | (2,152 | ) | 120,070 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Advisory(4) | 36,325 | (13,173 | ) | 1,109 | (2,560 | ) | 21,701 | |||||||||||||||||||||||||||||||||||||||||
Total | $ | 3,560,968 | $ | 14,547 | $ | (28,251 | ) | $ | (27,513 | ) | $ | (7,070 | ) | $ | 3,512,681 | $ | 4,324,088 | $ | 193,776 | $ | 261,682 | $ | (127,651 | ) | $ | 4,651,895 | ||||||||||||||||||||||
|
|
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|
|
| |||||||||||||||||||||||||||||||||||||||||||
| (1) |
|
|
Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. |
Average AUM is calculated as the average of the month-end spot AUM amounts for the trailing thirteen months. |
| (3) | Amounts include commodityiShares. |
Advisory AUM represents long-term portfolio liquidation assignments. |
AUM decreased approximately $48.3increased $327.8 billion, or 1%8%, to $3.513$4.652 trillion at December 31, 20112014 from $3.561$4.324 trillion at December 31, 2010.2013. The declineincrease in AUM was primarily attributable to $34.6 billion indriven by net market appreciation of $261.7 billion and foreign exchange valuation declines, $29.9net inflows of $193.8 billion, of advisory distributions and $22.9 billion of cash management net outflows, partially offset by $67.3 billion of long-term net new business, before giving effect to the final BGI merger-related outflows of $28.3 billion recorded in the first half of 2011.foreign exchange movements.
Net market depreciationappreciation of $27.5$261.7 billion included $128.1$140.8 billion of depreciationgrowth in equity products resulting from the decline in globalprimarily due to
higher U.S. equity partially offset bymarkets, and appreciation of $98.8 billion and $21.0 billion in fixed income and multi-asset products, respectively, across the majority of $100.7 billion.strategies.
The $7.1AUM decreased $127.7 billion net decrease in AUM from converting non-U.S. dollar denominated AUM into U.S. dollars wasforeign exchange movements, primarily due toresulting from the strengthening of the U.S. dollar against the euro, the British pound sterling and the Japanese yen.
Component Changes in AUM for 2013
The following table presents the component changes in AUM by client type and product for 2013.
| (in millions) | December 31, 2012 | Net inflows (outflows) | Adjustments(1) | Acquisitions(2) | Market change | FX impact(3) | December 31, 2013 | Full Year Average AUM(4) | ||||||||||||||||||||||||
Retail: | ||||||||||||||||||||||||||||||||
Equity | $ | 164,748 | $ | 3,641 | $ | 13,066 | $ | — | $ | 20,743 | $ | 837 | $ | 203,035 | $ | 173,886 | ||||||||||||||||
Fixed income | 138,425 | 14,197 | 3,897 | — | (5,338 | ) | 294 | 151,475 | 143,929 | |||||||||||||||||||||||
Multi-asset | 90,626 | 14,821 | 2,663 | — | 9,039 | (95 | ) | 117,054 | 102,276 | |||||||||||||||||||||||
Alternatives | 9,685 | 6,145 | — | 136 | 136 | 111 | 16,213 | 12,585 | ||||||||||||||||||||||||
Retail subtotal | 403,484 | 38,804 | 19,626 | 136 | 24,580 | 1,147 | 487,777 | 432,676 | ||||||||||||||||||||||||
iShares: | ||||||||||||||||||||||||||||||||
Equity | 534,648 | 74,119 | — | 13,021 | 95,335 | 1,012 | 718,135 | 620,113 | ||||||||||||||||||||||||
Fixed income | 192,852 | (7,450 | ) | — | 1,294 | (8,477 | ) | 616 | 178,835 | 186,264 | ||||||||||||||||||||||
Multi-asset | 869 | 355 | — | — | 96 | (10 | ) | 1,310 | 1,115 | |||||||||||||||||||||||
Alternatives | 24,337 | (3,053 | ) | — | 1,645 | (6,863 | ) | 26 | 16,092 | 20,084 | ||||||||||||||||||||||
iShares subtotal | 752,706 | 63,971 | — | 15,960 | 80,091 | 1,644 | 914,372 | 827,576 | ||||||||||||||||||||||||
Institutional: | ||||||||||||||||||||||||||||||||
Active: | ||||||||||||||||||||||||||||||||
Equity | 129,024 | (16,504 | ) | — | — | 27,930 | (1,724 | ) | 138,726 | 131,254 | ||||||||||||||||||||||
Fixed income | 518,102 | (3,560 | ) | — | — | (6,247 | ) | (3,186 | ) | 505,109 | 504,769 | |||||||||||||||||||||
Multi-asset | 166,708 | 28,955 | 3,335 | — | 14,193 | 2,085 | 215,276 | 184,958 | ||||||||||||||||||||||||
Alternatives | 70,861 | (9,819 | ) | — | 10,836 | 2,593 | (1,172 | ) | 73,299 | 68,364 | ||||||||||||||||||||||
Active subtotal | 884,695 | (928 | ) | 3,335 | 10,836 | 38,469 | (3,997 | ) | 932,410 | 889,345 | ||||||||||||||||||||||
Index: | ||||||||||||||||||||||||||||||||
Equity | 1,017,081 | 8,001 | (18,238 | ) | — | 260,333 | (9,378 | ) | 1,257,799 | 1,145,499 | ||||||||||||||||||||||
Fixed income | 409,943 | 8,321 | (4,723 | ) | — | (4,840 | ) | (1,934 | ) | 406,767 | 405,502 | |||||||||||||||||||||
Multi-asset | 9,545 | (1,833 | ) | — | — | 476 | (614 | ) | 7,574 | 8,913 | ||||||||||||||||||||||
Alternatives | 4,912 | 777 | — | — | (259 | ) | 80 | 5,510 | 5,440 | |||||||||||||||||||||||
Index subtotal | 1,441,481 | 15,266 | (22,961 | ) | — | 255,710 | (11,846 | ) | 1,677,650 | 1,565,354 | ||||||||||||||||||||||
Institutional subtotal | 2,326,176 | 14,338 | (19,626 | ) | 10,836 | 294,179 | (15,843 | ) | 2,610,060 | 2,454,699 | ||||||||||||||||||||||
Long-term | 3,482,366 | 117,113 | — | 26,932 | 398,850 | (13,052 | ) | 4,012,209 | $ | 3,714,951 | ||||||||||||||||||||||
Cash management | 263,743 | 10,056 | — | — | 395 | 1,360 | 275,554 | |||||||||||||||||||||||||
Advisory(5) | 45,479 | (7,442 | ) | — | — | (538 | ) | (1,174 | ) | 36,325 | ||||||||||||||||||||||
Total | $ | 3,791,588 | $ | 119,727 | $ | — | $ | 26,932 | $ | 398,707 | $ | (12,866 | ) | $ | 4,324,088 | |||||||||||||||||
| (1) | Amounts include $19.6 billion of AUM related to fund ranges reclassed from institutional to retail and $6.0 billion of AUM reclassed from non-ETF index equity and fixed income to multi-asset. |
| (2) | Amounts represent $16.0 billion of AUM acquired in the Credit Suisse ETF Transaction in July 2013 and $11.0 billion of AUM acquired in the MGPA acquisition in October 2013. |
| (3) | Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. |
| (4) | Average AUM is calculated as the average of the month-end spot AUM amounts for the trailing thirteen months. |
| (5) | Advisory AUM represents long-term portfolio liquidation assignments. Outflows include planned client distributions. |
The following table presents component changes in AUM by product for 2013.
| (in millions) | December 31, 2012 | Net inflows (outflows) | Adjustments(1) | Acquisitions(2) | Market change | FX impact(3) | December 31, 2013 | Full Year Average AUM(4) | ||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||
Active | $ | 287,215 | $ (15,377 | ) | $ | — | $ | — | $ | 46,530 | $ | (1,106 | ) | $ | 317,262 | $ | 295,776 | |||||||||||||||
iShares | 534,648 | 74,119 | — | 13,021 | 95,335 | 1,012 | 718,135 | 620,113 | ||||||||||||||||||||||||
Non-ETF index | 1,023,638 | 10,515 | (5,172 | ) | — | 262,476 | (9,159 | ) | 1,282,298 | 1,154,863 | ||||||||||||||||||||||
Equity subtotal | 1,845,501 | 69,257 | (5,172 | ) | 13,021 | 404,341 | (9,253 | ) | 2,317,695 | 2,070,752 | ||||||||||||||||||||||
Fixed income: | ||||||||||||||||||||||||||||||||
Active | 656,331 | 10,443 | — | — | (11,584 | ) | (2,981 | ) | 652,209 | 648,143 | ||||||||||||||||||||||
iShares | 192,852 | (7,450 | ) | — | 1,294 | (8,477 | ) | 616 | 178,835 | 186,264 | ||||||||||||||||||||||
Non-ETF index | 410,139 | 8,515 | (826 | ) | — | (4,841 | ) | (1,845 | ) | 411,142 | 406,057 | |||||||||||||||||||||
Fixed income subtotal | 1,259,322 | 11,508 | (826 | ) | 1,294 | (24,902 | ) | (4,210 | ) | 1,242,186 | 1,240,464 | |||||||||||||||||||||
Multi-asset | 267,748 | 42,298 | 5,998 | — | 23,804 | 1,366 | 341,214 | 297,262 | ||||||||||||||||||||||||
Alternatives: | ||||||||||||||||||||||||||||||||
Core | 68,367 | 2,703 | — | 10,972 | 3,012 | (28) | 85,026 | 73,827 | ||||||||||||||||||||||||
Currency and commodities(5) | 41,428 | (8,653 | ) | — | 1,645 | (7,405 | ) | (927 | ) | 26,088 | 32,646 | |||||||||||||||||||||
Alternatives subtotal | 109,795 | (5,950 | ) | — | 12,617 | (4,393 | ) | (955 | ) | 111,114 | 106,473 | |||||||||||||||||||||
Long-term | 3,482,366 | 117,113 | — | 26,932 | 398,850 | (13,052 | ) | 4,012,209 | $ | 3,714,951 | ||||||||||||||||||||||
Cash management | 263,743 | 10,056 | — | — | 395 | 1,360 | 275,554 | |||||||||||||||||||||||||
Advisory(6) | 45,479 | (7,442 | ) | — | — | (538 | ) | (1,174 | ) | 36,325 | ||||||||||||||||||||||
Total | $ | 3,791,588 | $ | 119,727 | $ | — | $ | 26,932 | $ | 398,707 | $ | (12,866 | ) | $ | 4,324,088 | |||||||||||||||||
| (1) | Amounts include $6.0 billion of AUM reclassed from non-ETF index equity and fixed income to multi-asset. |
| (2) | Amounts represent $16.0 billion of AUM acquired in the Credit Suisse ETF Transaction in July 2013 and $11.0 billion of AUM acquired in the MGPA acquisition in October 2013. |
| (3) | Foreign exchange reflects the impact of converting non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. |
| (4) | Average AUM is calculated as the average of the month-end spot AUM amounts for the trailing thirteen months. |
| (5) | Advisory AUM represents long-term portfolio liquidation assignments. Outflows include planned client distributions. |
| (6) | Amounts include commodityiShares. |
AUM increased $532.5 billion, or 14%, to $4.324 trillion at December 31, 2013 from $3.792 trillion at December 31, 2012. The increase in AUM was driven by net market appreciation of $398.7 billion, net inflows of $119.7 billion and acquired AUM related to the MGPA acquisition and the Credit Suisse ETF Transaction, partially offset by foreign exchange movements.
Net market appreciation of $398.7 billion included $404.3 billion from equity products, primarily due to positive movements in U.S. and global equity markets.
The $12.9 billion decrease in AUM from foreign exchange movements was due to the strengthening of the U.S. dollar, primarily against the Japanese yen and the Canadian dollar, partially offset by the weakening of the U.S. dollar against the Japanese yen.British pound and the euro.
Discussion of Financial ResultsDISCUSSION OF FINANCIAL RESULTS
Introduction
BlackRock derives a substantial portion of its revenue from investment advisory and administration fees, which are recognized as the services are performed. Such fees are primarily based on pre-determinedpredetermined percentages of the market value of AUM or percentages of committed capital during investment periods of certain alternative products and are affected by changes in AUM, including market appreciation or depreciation, foreign exchange translation
and net subscriptionsinflows or redemptions.outflows. Net subscriptionsinflows or redemptionsoutflows 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 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.highly rated banks and broker-dealers. The securities loaned are secured by collateral in the form of cash or securities, with minimum collateral generally ranging from approximately 102% to 112% of the value of the loaned securities. TheGenerally, 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. Historically, securities lending revenue in the second quarter exceeds the other quarters during the year.year driven by higher seasonal demand.
Investment advisory agreements for certain separate accounts and investment funds 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 and when investment performance exceeds a contractual threshold. As such, the
timing of recognition of performance fees may increase the volatility of BlackRock’s revenue and earnings. Historically, theThe magnitude of performance fees incan fluctuate quarterly due to the timing of carried interest recognition on alternative products; however the third and fourth quarters generally exceeds the first two calendar quarters inhave a year due to the greater number of nonalternative products with performance measurement periods that end on either September 30 or December 31.
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 Solutions and include a wide array of risk management services, valuation services related to illiquid securities, disposition and workout assignments (including long-term portfolio liquidation assignments), strategic planning and execution, and enterprise investment system outsourcing to clients. Approximately $14 trillion of positions are processed on theThe Company’sAladdin® operating platform which serves as the investment/risk solutions system for BlackRock and other institutional investors. Fees earned forBlackRock Solutions and advisory services are determined using some, or all, of the following methods: (i) percentages of various attributes of advisory AUM or value of positions on theAladdin platform, (ii) fixed fees and (iii) performance fees if contractual thresholds are met.
BlackRock 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.
The Company earns fees for transition management services primarily comprised of commissions from acting as an introducinga broker-dealer in connection with buying and selling securities on behalf of its customers. Commissions related to transition management services are recorded on a trade-date basis as securities transactions occur.
The Company also earns revenue related to operating advisory companycertain strategic investments accounted for as equity method investments.
Operating expenses reflectexpense reflects employee compensation and benefits, distribution and servicing costs, amortization of deferred sales commissions, direct fund expenses,expense, general and administration expensesexpense and amortization of finite-lived intangible assets.
Employee compensation and benefits expense includes salaries, commissions, temporary help, deferred and incentive compensation, employer payroll taxes, severance and related benefit costs.
Direct fund expensesexpense primarily consist of third-party non-advisory expensesnonadvisory expense 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,expense, audit and tax services as well as other fund-related expensesexpense directly attributable to the non-advisorynonadvisory operations of the fund. These expenses may vary
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General and administration expenses includeexpense includes marketing and promotional, occupancy and office-related costs, portfolio services (including clearing expensesexpense related to transition management services), technology, professional services, communications, closed-end fund launch costs and other general and administration expenses,expense, including the impact of foreign currency remeasurement.
Non-operatingApproximately 75% of the Company’s revenue is generated in U.S. dollars. The Company’s revenue and expense generated in foreign currencies (primarily the euro and British pound) are impacted by foreign exchange rates. Any effect of foreign exchange rate change on revenue is partially offset by a change in expense driven by the Company’s considerable non-dollar expense base related to its operations outside the United States.
Nonoperating 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 seed and co-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 activities that could conflict with the interests of its clients.
In addition, non-operatingnonoperating income (expense) includes the impact of changes in the valuations of consolidated sponsored investment funds and consolidated collateralized loan obligations (“CLOs”). The portion of non-operatingnonoperating income (expense) not attributable to BlackRock is allocated to NCI on the consolidated statements of income.
Revenue
| Variance | ||||||||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||
Investment advisory, administration fees and securities lending revenue: | ||||||||||||||||||||
Equity: | ||||||||||||||||||||
Active | $ | 1,753 | $ | 1,967 | $ | 1,848 | $ | (214 | ) | $ | 119 | |||||||||
iShares | 1,941 | 1,847 | 1,660 | 94 | 187 | |||||||||||||||
Fixed income: | ||||||||||||||||||||
Active | 1,182 | 1,104 | 1,047 | 78 | 57 | |||||||||||||||
iShares | 441 | 317 | 263 | 124 | 54 | |||||||||||||||
Multi-asset class | 957 | 894 | 740 | 63 | 154 | |||||||||||||||
Alternatives: | ||||||||||||||||||||
Core | 525 | 557 | 522 | (32 | ) | 35 | ||||||||||||||
Currency and commodities | 131 | 136 | 110 | (5 | ) | 26 | ||||||||||||||
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Sub-total | 6,930 | 6,822 | 6,190 | 108 | 632 | |||||||||||||||
Non-ETF Index: | ||||||||||||||||||||
Equity | 552 | 488 | 424 | 64 | 64 | |||||||||||||||
Fixed income | 229 | 203 | 166 | 26 | 37 | |||||||||||||||
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Sub-total Non-ETF Index | 781 | 691 | 590 | 90 | 101 | |||||||||||||||
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Long-term | 7,711 | 7,513 | 6,780 | 198 | 733 | |||||||||||||||
Cash management | 361 | 383 | 510 | (22 | ) | (127 | ) | |||||||||||||
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Total base fees | 8,072 | 7,896 | 7,290 | 176 | 606 | |||||||||||||||
Investment advisory performance fees: | ||||||||||||||||||||
Equity | 88 | 145 | 123 | (57 | ) | 22 | ||||||||||||||
Fixed income | 48 | 35 | 55 | 13 | (20 | ) | ||||||||||||||
Multi-asset class | 15 | 20 | 33 | (5 | ) | (13 | ) | |||||||||||||
Alternatives | 312 | 171 | 329 | 141 | (158 | ) | ||||||||||||||
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Total | 463 | 371 | 540 | 92 | (169 | ) | ||||||||||||||
BlackRock Solutionsand advisory | 518 | 510 | 460 | 8 | 50 | |||||||||||||||
Distribution fees | 71 | 100 | 116 | (29 | ) | (16 | ) | |||||||||||||
Other revenue | 213 | 204 | 206 | 9 | (2 | ) | ||||||||||||||
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Total revenue | $ | 9,337 | $ | 9,081 | $ | 8,612 | $ | 256 | $ | 469 | ||||||||||
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Revenue
The following table presents the Company’s revenue for 2014, 2013 and 2012.
| (in millions) | 2014 | 2013 | 2012 | |||||||||
Investment advisory, administration fees and securities lending revenue: | ||||||||||||
Equity: | ||||||||||||
Active | $ | 1,844 | $ | 1,741 | $ | 1,753 | ||||||
iShares | 2,705 | 2,390 | 1,941 | |||||||||
Non-ETF index | 677 | 594 | 552 | |||||||||
Equity subtotal | 5,226 | 4,725 | 4,246 | |||||||||
Fixed income: | ||||||||||||
Active | 1,396 | 1,269 | 1,182 | |||||||||
iShares | 484 | 464 | 441 | |||||||||
Non-ETF index | 260 | 238 | 229 | |||||||||
Fixed income subtotal | 2,140 | 1,971 | 1,852 | |||||||||
Multi-asset | 1,204 | 1,039 | 957 | |||||||||
Alternatives: | ||||||||||||
Core | 638 | 576 | 525 | |||||||||
Currency and commodities | 89 | 107 | 131 | |||||||||
Alternatives subtotal | 727 | 683 | 656 | |||||||||
Long-term | 9,297 | 8,418 | 7,711 | |||||||||
Cash management | 292 | 321 | 361 | |||||||||
Total base fees | 9,589 | 8,739 | 8,072 | |||||||||
Investment advisory performance fees: | ||||||||||||
Equity | 111 | 91 | 88 | |||||||||
Fixed income | 31 | 25 | 48 | |||||||||
Multi-asset | 32 | 24 | 15 | |||||||||
Alternatives | 376 | 421 | 312 | |||||||||
Total | 550 | 561 | 463 | |||||||||
BlackRock Solutionsand advisory | 635 | 577 | 518 | |||||||||
Distribution fees | 70 | 73 | 71 | |||||||||
Other revenue | 237 | 230 | 213 | |||||||||
Total revenue | $ | 11,081 | $ | 10,180 | $ | 9,337 | ||||||
The table below lists the asset type mix of investment advisory, administration fees and securities lending revenue (collectively “base fees”) and mix of average AUM by asset class:
| Mix of Base Fees | Mix of Average AUM by Asset Class(1) | Mix of Base Fees | Mix of Average AUM by Asset Class(1) | |||||||||||||||||||||||||||||||||||||||||||||||
| 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Active | 22 | % | 25 | % | 25 | % | 8 | % | 9 | % | 10 | % | 18 | % | 20 | % | 22 | % | 7 | % | 7 | % | 8 | % | ||||||||||||||||||||||||||
iShares | 23 | % | 23 | % | 23 | % | 13 | % | 13 | % | 12 | % | 28 | % | 26 | % | 23 | % | 17 | % | 16 | % | 13 | % | ||||||||||||||||||||||||||
Non-ETF index | 7 | % | 7 | % | 7 | % | 30 | % | 29 | % | 26 | % | ||||||||||||||||||||||||||||||||||||||
Equity subtotal | 53 | % | 53 | % | 52 | % | 54 | % | 52 | % | 47 | % | ||||||||||||||||||||||||||||||||||||||
Fixed income: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Active | 15 | % | 14 | % | 14 | % | 18 | % | 18 | % | 19 | % | 15 | % | 15 | % | 15 | % | 15 | % | 16 | % | 18 | % | ||||||||||||||||||||||||||
iShares | 5 | % | 4 | % | 4 | % | 5 | % | 4 | % | 4 | % | 5 | % | 5 | % | 5 | % | 4 | % | 5 | % | 5 | % | ||||||||||||||||||||||||||
Multi-asset class | 12 | % | 11 | % | 10 | % | 7 | % | 6 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
Non-ETF index | 3 | % | 3 | % | 3 | % | 10 | % | 10 | % | 13 | % | ||||||||||||||||||||||||||||||||||||||
Fixed income subtotal | 23 | % | 23 | % | 23 | % | 29 | % | 31 | % | 36 | % | ||||||||||||||||||||||||||||||||||||||
Multi-asset | 13 | % | 12 | % | 12 | % | 8 | % | 7 | % | 7 | % | ||||||||||||||||||||||||||||||||||||||
Alternatives: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Core | 7 | % | 7 | % | 7 | % | 2 | % | 2 | % | 2 | % | 7 | % | 7 | % | 7 | % | 2 | % | 2 | % | 2 | % | ||||||||||||||||||||||||||
Currency and commodities | 2 | % | 2 | % | 2 | % | 1 | % | 1 | % | 1 | % | 1 | % | 1 | % | 2 | % | 1 | % | 1 | % | 1 | % | ||||||||||||||||||||||||||
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Sub-total | 86 | % | 86 | % | 85 | % | 54 | % | 53 | % | 53 | % | ||||||||||||||||||||||||||||||||||||||
Non-ETF Index: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Equity | 7 | % | 6 | % | 6 | % | 27 | % | 26 | % | 26 | % | ||||||||||||||||||||||||||||||||||||||
Fixed income | 3 | % | 3 | % | 2 | % | 12 | % | 13 | % | 12 | % | ||||||||||||||||||||||||||||||||||||||
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Sub-total Non-ETF Index: | 10 | % | 9 | % | 8 | % | 39 | % | 39 | % | 38 | % | ||||||||||||||||||||||||||||||||||||||
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Alternatives subtotal | 8 | % | 8 | % | 9 | % | 3 | % | 3 | % | 3 | % | ||||||||||||||||||||||||||||||||||||||
Long-term | 96 | % | 95 | % | 93 | % | 93 | % | 92 | % | 91 | % | 97 | % | 96 | % | 96 | % | 94 | % | 93 | % | 93 | % | ||||||||||||||||||||||||||
Cash management | 4 | % | 5 | % | 7 | % | 7 | % | 8 | % | 9 | % | 3 | % | 4 | % | 4 | % | 6 | % | 7 | % | 7 | % | ||||||||||||||||||||||||||
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Total excluding Advisory AUM | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||||
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| (1) | Average AUM |
In 2012, non-ETF Index equity and fixed income were 10% of total base fees; however, AUM associated with these base fees represented 39% of total average AUM. In 2011, non-ETF Index equity and fixed income were 9% of total base fees; however, AUM associated with these base fees represented 39% of total average AUM.
20122014 Compared with 2011.2013
RevenuesRevenue increased $256$901 million, or 3%9%, from 2013, reflecting growth in 2012 reflecting market growth, positive flows, improvements in securities lending revenuemarkets, long-term net inflows and strength in performance fees.BlackRock Solutions and advisory revenue.
Investment Advisory, Administration Fees and Securities Lending Revenue.Investment advisory, administration fees and securities lending revenue of $9,589 million for 2014 increased $850 million from $8,739 million in 2013 due to higher long-term average AUM, reflecting organic growth and market appreciation. Securities lending fees increased $30 million from 2013 to $477 million in 2014.
BlackRock Solutions and advisory revenue in 2014 totaled $635 million compared with $577 million in 2013. The current year reflected higher revenue fromAladdin mandates and higher revenue from advisory assignments.BlackRock Solutions and advisory revenue included $474 million inAladdin business revenue compared with $433 million in 2013.
2013 Compared with 2012
Revenue increased $843 million, or 9%, from 2012, reflecting growth in markets, long-term net inflows and strength in performance fees andBlackRock Solutions and advisory revenue.
Investment advisory, administration fees and securities lending revenue of $8,739 million for 2013 increased $667 million from $8,072 million in 2012 compared with $7,896 milliondue to growth in 2011. The current year reflected an improvement in securities lending revenue and higher advisory fees reflecting higher long-term average AUM. Securities lending fees were $510decreased $63 million from 2012 to $447 million in 2012 compared2013 driven by lower spreads consistent with $397 million in 2011, reflecting higher lending rates andindustry trends, partially offset by an increase in average balances of securities on loan.
Performance Fees.Investment advisory performance fees were $561 million in 2013 compared with $463 million in 2012, compared with $371 million in 2011, primarily reflecting higher performance fees from alternative products, including fund of funds and single-strategy hedge funds. Both years reflected significant fees from a disposition-relatedthe liquidation of opportunistic fund, which were partially offset by lower fees from equity products.funds.
BlackRock Solutions and Advisory.BlackRock Solutions and advisory revenue in 2012 increased $82013 totaled $577 million or 2%, from 2011, primarily due to higher revenue from Aladdin mandates partially offset by the run off of revenues associatedcompared with a lower level of advisory assets and lower one-term revenue from advisory assignments.
Distribution Fees. Distribution fees of $71$518 million in 2012 decreased $292012. The amount for 2013 reflected a $49 million or 29%, from $100increase inAladdin business revenue to $433 million in 2011, primarily due to lower AUM in certain share classes ofBlackRock Funds.and higher advisory assignments revenue.
Other Revenue.revenue Other revenue increased $9$17 million, largely reflecting higher transition management service fees and higher earnings from certain operating advisory company investments, partially offset by lower sales commissionsstrategic investments.
Expense
The following table presents the Company’s expenses for 2014, 2013 and marketing fees earned for services to distributeiPath® products.2012.
2011
| (in millions) | 2014 | 2013 | 2012 | |||||||||
Expense, GAAP: | ||||||||||||
Employee compensation and benefits | $ | 3,829 | $ | 3,560 | $ | 3,287 | ||||||
Distribution and servicing costs | 364 | 353 | 364 | |||||||||
Amortization of deferred sales commissions | 56 | 52 | 55 | |||||||||
Direct fund expense | 748 | 657 | 591 | |||||||||
General and administration: | ||||||||||||
Marketing and promotional | 413 | 409 | 384 | |||||||||
Occupancy and office related | 267 | 277 | 248 | |||||||||
Portfolio services | 215 | 203 | 196 | |||||||||
Technology | 164 | 160 | 150 | |||||||||
Professional services | 126 | 128 | 114 | |||||||||
Communications | 39 | 37 | 39 | |||||||||
Regulatory, filing and license fees | 36 | 31 | 17 | |||||||||
Closed-end fund launch costs | 10 | 16 | 22 | |||||||||
Charitable Contribution | — | 124 | — | |||||||||
Reduction of indemnification asset | 50 | — | — | |||||||||
Other general and administration | 133 | 155 | 189 | |||||||||
Total general and administration expense | 1,453 | 1,540 | 1,359 | |||||||||
Amortization of intangible assets | 157 | 161 | 157 | |||||||||
Total expense, GAAP | $ | 6,607 | $ | 6,323 | $ | 5,813 | ||||||
Less non-GAAP expense adjustments: | ||||||||||||
Employee compensation and benefits: | ||||||||||||
PNC LTIP funding obligation | 32 | 33 | 22 | |||||||||
Compensation expense related to appreciation (depreciation) on deferred compensation plans | 7 | 10 | 6 | |||||||||
Subtotal | 39 | 43 | 28 | |||||||||
General and administration: | ||||||||||||
Reduction of indemnification asset | 50 | — | — | |||||||||
Charitable Contribution | — | 124 | — | |||||||||
U.K. lease exit costs | — | — | (8 | ) | ||||||||
Contribution to STIFs | — | — | 30 | |||||||||
Subtotal | 50 | 124 | 22 | |||||||||
Total non-GAAP expense adjustments | 89 | 167 | 50 | |||||||||
Expense, as adjusted: | ||||||||||||
Employee compensation and benefits | 3,790 | 3,517 | 3,259 | |||||||||
Distribution and servicing costs | 364 | 353 | 364 | |||||||||
Amortization of deferred sales commissions | 56 | 52 | 55 | |||||||||
Direct fund expense | 748 | 657 | 591 | |||||||||
General and administration | 1,403 | 1,416 | 1,337 | |||||||||
Amortization of intangible assets | 157 | 161 | 157 | |||||||||
Total expense, as adjusted | $ | 6,518 | $ | 6,156 | $ | 5,763 | ||||||
2014 Compared with 2010.2013
RevenuesGAAP. Expense increased $469$284 million, or 5%4%, in 2011 largely reflecting a $606 million increase in total investment advisory, administration fees and securities lending revenue, partially offset by lower performance fees of $169 million.
Investment Advisory, Administration Fees and Securities Lending Revenue. Investment advisory, administration fees and securities lending revenue totaled $7,896 million in 2011 compared with $7,290 million in 2010. 2011 reflected an improvement in base fees primarily due to growth in long-term average AUM, which included the benefit of net new business, partially offset by a decline in fees from cash management products due to lower average AUM and higher fee waivers. Securities lending fees were $397 million in 2011 compared with $325 million in 2010, reflecting an increase in average balances of securities on loan and higher lending rates.
Performance Fees.Investment advisory performance fees were $371 million in 2011 compared with $540 million in 2010,2013, primarily reflecting lower performance fees from alternative strategies,higher revenue-related expenses, including multi-strategy and single-strategy equity and fixed income hedge funds and opportunistic funds. The decrease was partially offset by higher performance fees due to strong relative performance from regional/country and global equity strategies.
BlackRock Solutions and Advisory. BlackRock Solutions and advisory revenue in 2011 increased $50 million, or 11%, from 2010, largely driven by on-going and additionalAladdin mandates and advisory assignments.
Distribution Fees. Distribution fees of $100 million in 2011 decreased $16 million, or 14%, from $116 million in 2010, primarily due to lower AUM in certain share classes ofBlackRock Funds.
Expenses
| Variance | ||||||||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | 2012 Vs. 2011 | 2011 Vs. 2010 | |||||||||||||||
Expenses, GAAP: | ||||||||||||||||||||
Employee compensation and benefits | $ | 3,287 | $ | 3,199 | $ | 3,097 | $ | 88 | $ | 102 | ||||||||||
Distribution and servicing costs | 364 | 386 | 408 | (22 | ) | (22 | ) | |||||||||||||
Amortization of deferred sales commissions | 55 | 81 | 102 | (26 | ) | (21 | ) | |||||||||||||
Direct fund expenses | 591 | 563 | 493 | 28 | 70 | |||||||||||||||
General and administration: | ||||||||||||||||||||
Marketing and promotional | 384 | 315 | 328 | 69 | (13 | ) | ||||||||||||||
Occupancy and office related | 248 | 373 | 317 | (125 | ) | 56 | ||||||||||||||
Portfolio services | 196 | 189 | 177 | 7 | 12 | |||||||||||||||
Technology | 150 | 146 | 152 | 4 | (6 | ) | ||||||||||||||
Professional services | 114 | 139 | 115 | (25 | ) | 24 | ||||||||||||||
Communications | 39 | 40 | 49 | (1 | ) | (9 | ) | |||||||||||||
Regulatory, filing and license fees | 17 | 16 | 34 | 1 | (18 | ) | ||||||||||||||
Charitable contributions | 6 | 7 | 26 | (1 | ) | (19 | ) | |||||||||||||
Closed-end fund launch costs | 22 | 26 | 15 | (4 | ) | 11 | ||||||||||||||
Other general and administration | 183 | 164 | 141 | 19 | 23 | |||||||||||||||
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Total general and administration expenses | 1,359 | 1,415 | 1,354 | (56 | ) | 61 | ||||||||||||||
Restructuring charges | — | 32 | — | (32 | ) | 32 | ||||||||||||||
Amortization of intangible assets | 157 | 156 | 160 | 1 | (4 | ) | ||||||||||||||
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Total expenses, GAAP | $ | 5,813 | $ | 5,832 | $ | 5,614 | $ | (19 | ) | $ | 218 | |||||||||
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Less non-GAAP expense adjustments: | ||||||||||||||||||||
Employee compensation and benefits: | ||||||||||||||||||||
BGI integration costs | — | — | 25 | — | (25 | ) | ||||||||||||||
PNC LTIP funding obligation | 22 | 44 | 58 | (22 | ) | (14 | ) | |||||||||||||
Merrill Lynch compensation contribution | — | 7 | 10 | (7 | ) | (3 | ) | |||||||||||||
Compensation expense related to appreciation (depreciation) on deferred compensation plans | 6 | (3 | ) | 11 | 9 | (14 | ) | |||||||||||||
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Sub-total | 28 | 48 | 104 | (20 | ) | (56 | ) | |||||||||||||
General and administration: | ||||||||||||||||||||
BGI integration costs | — | — | 65 | — | (65 | ) | ||||||||||||||
U.K. lease exit costs | (8 | ) | 63 | — | (71 | ) | 63 | |||||||||||||
Contribution to STIFs | 30 | — | — | 30 | — | |||||||||||||||
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Sub-total | 22 | 63 | 65 | (41 | ) | (2 | ) | |||||||||||||
Restructuring charges | — | 32 | — | (32 | ) | 32 | ||||||||||||||
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Total non-GAAP expense adjustments | 50 | 143 | 169 | (93 | ) | (26 | ) | |||||||||||||
Expenses, as adjusted: | ||||||||||||||||||||
Employee compensation and benefits | 3,259 | 3,151 | 2,993 | 108 | 158 | |||||||||||||||
Distribution and servicing costs | 364 | 386 | 408 | (22 | ) | (22 | ) | |||||||||||||
Amortization of deferred sales commissions | 55 | 81 | 102 | (26 | ) | (21 | ) | |||||||||||||
Direct fund expenses | 591 | 563 | 493 | 28 | 70 | |||||||||||||||
General and administration | 1,337 | 1,352 | 1,289 | (15 | ) | 63 | ||||||||||||||
Amortization of intangible assets | 157 | 156 | 160 | 1 | (4 | ) | ||||||||||||||
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Total expenses, as adjusted | $ | 5,763 | $ | 5,689 | $ | 5,445 | $ | 74 | $ | 244 | ||||||||||
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2012 Compared with 2011.
Total GAAP expenses decreased $19 million to $5,813 million in 2012 from $5,832 million in 2011. 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 $74 million. The increase in total expenses, as adjusted, is primarily attributable to increases in employee compensation and benefits and direct fund expenses, partially offset byexpense and a $50 million reduction in amortization of deferred sales commissions, distribution and servicing costs and general and administration expenses.an indemnification asset. Expense for 2013 included the $124 million expense related to the Charitable Contribution.
Employee Compensation and Benefits.
GAAP.Employee compensation and benefits expense increased $88$269 million, or 3%8%, to $3,287$3,829 million in 20122014 from $3,199$3,560 million in 2011. Employees at December 31, 2012 totaled approximately 10,500 compared with approximately 10,100 at December 31, 2011.
As Adjusted. Employee compensation2013, reflecting higher headcount and benefits, as adjusted, increased by $108 million, reflecting a $104 million increase inhigher incentive compensation driven by higher operating income, including higher performance fees.income. Employees at December 31, 2014 totaled approximately 12,200 compared with approximately 11,400 at December 31, 2013.
Distribution and Servicing Costs.Distribution and servicing costs decreased $22 million, or 6%, to totaled $364 million in 2012 from $3862014 compared with $353 million in 2011. The $22 million decrease related to lower service fees from variable annuities and lower cash management-related distribution costs.2013. These costs included payments to Bank of America/Merrill Lynch under thea global distribution agreement PNC and Barclays,payments to PNC, as well as other third parties, primarily associated with the distribution and servicing of client investments in certain BlackRock products.
Distribution and servicing costs for 20122014 and 20112013 included $195$183 million and $207$184 million, respectively, of costs attributable to Bank of America and affiliates.America/Merrill Lynch.
Amortization of Deferred Sales Commissions.Direct fund expenseAmortization of deferred sales commissions decreased $26 increased $91 million, or 32%, to $55 million in 2012 from $81 million in 2011,reflecting higher average AUM, primarily related to lower sales in certain share classes of U.S. open-end mutual funds.
Direct Fund Expenses. In 2012, direct fund expenses increased $28 million from 2011 million, primarily reflecting growth in average AUM for the funds (predominantlyiShares,) where BlackRock pays certain non-advisory expensesnonadvisory expense of the funds.
General and Administration Expenses.
GAAP.General and administration expensesexpense decreased $56$87 million, or 4%, to $1,359 million in 2012 from $1,415 million in 2011. Lower occupancy and office-related expenses, primarily due to $63the $124 million of U.K. lease exit costsrelated to the Charitable
Contribution incurred in the third quarter 2011,2013 and lower professional services costs contributed to the overall net decrease in general and administration expenses. The decrease in general and administration expenses wasforeign currency remeasurement, partially offset by higher marketing and promotional expenses in connection with the brand campaign and a one-time contribution to STIFs (seeLiquidity and Capital Resources for more information).$50 million reduction of an indemnification asset.
Non-GAAP Adjustments. In 2012, general and administration expenses included the previously mentioned contribution to STIFs. In 2011, general and administration expenses included $63 million of U.K. lease exit costs related to the Company’s exit from two London locations. The adjustment for U.K. lease exit costs in 2012 represents an adjustment to the estimated costs initially recorded in 2011. These amounts were excluded from as adjusted general and administrative expenses.
As Adjusted. General and administration expenses, as adjusted, of $1,337 million decreased $15 million in 2012 from $1,352 million in 2011. Lower occupancy and office-related expenses, professional fees and consulting expenses contributed to the overall decrease in as adjusted general and administration expenses. The decrease in as adjusted general and administration expenses was partially offset by higher marketing and promotional expenses in connection with the brand campaign.
2011 Compared with 2010.Adjusted
Total GAAP expenses increased $218 million, or 4%, to $5,832 million in 2011 from $5,614 million in 2010. Excluding certain items deemed non-recurring by management or transactions that ultimately will not affect the Company’s book value, total expenses,. Expense, as adjusted, increased $244$362 million, or 4%.6%, to $6,518 million in 2014 from $6,156 million in 2013. The increase in total expenses,expense, as adjusted, is primarily attributable to increaseshigher employee compensation and benefits and direct fund expense. Amounts related to the reduction of the indemnification asset and the Charitable Contribution have been excluded from as adjusted results.
2013 Compared with 2012
GAAP. Expense increased $510 million, or 9%, from 2012, primarily reflecting higher revenue-related expense and the $124 million expense related to the Charitable Contribution.
Employee compensation and benefits expense increased $273 million, or 8%, to $3,560 million in 2013 from $3,287 million in 2012, reflecting higher headcount and higher incentive compensation driven by higher operating income, including higher performance fees. Employees at December 31, 2013 totaled approximately 11,400 compared with approximately 10,500 at December 31, 2012.
Distribution and servicing costs totaled $353 million in 2013 compared with $364 million in 2012. These costs included payments to Bank of America/Merrill Lynch under a global distribution agreement and payments to PNC, as well as other third parties, primarily associated with the distribution and servicing of client investments in certain BlackRock products. Distribution and servicing costs for 2013 and 2012 included $184 million and $195 million, respectively, attributable to Bank of America/Merrill Lynch.
Direct fund expense increased $66 million, reflecting higher average AUM, primarily related toiShares, where BlackRock pays certain nonadvisory expense of the funds.
General and administration expense increased $181 million, largely driven by the $124 million expense related to the Charitable Contribution, higher marketing and promotional costs and various lease exit costs. The full year 2012 included a one-time $30 million contribution to STIFs.
As Adjusted. Expense, as adjusted, increased $393 million, or 7%, to $6,156 million in 2013 from $5,763 million in 2012. The increase in total expense, as adjusted, is primarily attributable to higher employee compensation and benefits, direct fund expensesexpense and general and administration expenses, partially offset by a reduction in distribution and servicing costs and amortization of deferred sales commissions.expense.
Employee Compensation and Benefits.NONOPERATING RESULTS
GAAP. Employee compensation and benefits expense increased $102 million, or 3%, to $3,199 million in 2011 from $3,097 million in 2010. Employees at December 31, 2011 totaled approximately 10,100 compared with approximately 9,100 at December 31, 2010.
As Adjusted. Employee compensation and benefits, as adjusted, increased by $158 million, reflecting a $164 million increase in base salaries due to an increase in the number of employees and salary levels, and a $41 million increase in other compensation, including payroll taxes, benefits, and commissions. These increases were partially offset by a $47 million decrease in incentive compensation.
Distribution and Servicing Costs.Distribution and servicing costs decreased $22 million, or 5%, to $386 million in 2011 from $408 million in 2010. The $22 million decrease related to lower cash management-related costs of $45 million, reflecting lower average AUM and higher yield-support waivers resulting in lower levels of distribution costs, partially offset by higher costs due to increases in average AUM for open-end and closed-end funds, separate accounts and variable annuities.
Distribution and servicing costs in 2011 included $207 million of costs attributable to Bank of America/Merrill Lynch and affiliates, and $3 million of costs attributable to PNC and affiliates compared with $246 million and $10 million, respectively, in 2010. Distribution and servicing costs related to other third parties, including Barclays, increased $24 million to $176 million in 2011 from $152 million in 2010 due to an expansion of distribution platforms and higher long-term AUM.
Amortization of Deferred Sales Commissions.Amortization of deferred sales commissions decreased $21 million, or 21%, to $81 million in 2011 from $102 million in 2010. Lower sales in certain share classes of U.S. open-end mutual funds contributed to the decline.
Direct Fund Expenses. Direct fund expenses increased $70 million reflecting growth in average AUM for the funds (predominantlyiShares) where BlackRock pays certain non-advisory expenses of the funds.
General and Administration Expenses.
GAAP. General and administration expenses increased $61 million, or 5%, to $1,415 million in 2011 from $1,354
million in 2010. Higher occupancy and office-related expenses (including $63 million of U.K. lease exit costs), higher professional services costs and other general and administration expenses contributed to the overall net increase in general and administration expenses. The $23 million increase in other general and administration expenses reflected higher VAT expense and recruiting costs in 2011 offset by the non-recurrence of other general and administration provisions recorded in 2010 related to an outstanding loan to Anthracite Capital Inc. The increase in general and administration expenses was partially offset by a decrease in charitable contributions as well as a decrease in regulatory, filing and licenses fees, primarily due to a $20 million 2010 U.K. industry regulatory assessment.
Non-GAAP Adjustments. In 2011 general and administration expenses included the previously mentioned $63 million of U.K. lease exit costs. In 2010, general and administration expenses included $65 million of BGI integration costs primarily consisting of $33 million of marketing and promotional costs, $12 million of professional services and $12 million of occupancy costs. These amounts were excluded from as adjusted general and administrative expenses.
As Adjusted. General and administration expenses, as adjusted, of $1,352 million increased $63 million, or 5%, in 2011 from $1,289 million in 2010. The increase was primarily due to higher VAT expense, an increase in professional services costs, and higher marketing and promotional costs, partially offset by the non-recurrence of costs recorded in 2010 related to an outstanding loan to Anthracite Capital, Inc.
In addition, general and administration expenses, as adjusted, reflected higher marketing and promotional costs in 2011.
Restructuring Charges.In 2011, BlackRock recorded pre-tax restructuring charges of $32 million, primarily related to severance, accelerated amortization of certain previously granted stock awards, and legal and outplacement costs, associated with a reduction in work force and reengineering efforts.
Non-operating Results
Non-operatingNonoperating income (expense), less net income (loss) attributable to NCI for 2012, 20112014, 2013 and 20102012 was as follows:
| Variance | ||||||||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||
Non-operating income (expense), GAAP basis | $ | (54 | ) | $ | (114 | ) | $ | 23 | $ | 60 | $ | (137 | ) | |||||||
Less: Net income (loss) attributable to NCI(1) | (18 | ) | 2 | (13 | ) | (20 | ) | 15 | ||||||||||||
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Non-operating income (expense)(2) | (36 | ) | (116 | ) | 36 | 80 | (152 | ) | ||||||||||||
Compensation expense related to (appreciation) depreciation on deferred compensation plans | (6 | ) | 3 | (11 | ) | (9 | ) | 14 | ||||||||||||
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Non-operating income (expense), as adjusted(2) | $ | (42 | ) | $ | (113 | ) | $ | 25 | $ | 71 | $ | (138 | ) | |||||||
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| (in millions) | 2014 | 2013 | 2012 | |||||||||
Nonoperating income (expense), GAAP basis | $ | (79 | ) | $ | 116 | $ | (54) | |||||
Less: Net income (loss) attributable to NCI(1) | (30 | ) | 19 | (18 | ) | |||||||
Nonoperating income (expense)(2) | (49 | ) | 97 | (36 | ) | |||||||
Gain related to the Charitable Contribution | — | (80 | ) | — | ||||||||
Compensation expense related to (appreciation) depreciation on deferred compensation plans | (7 | ) | (10 | ) | (6 | ) | ||||||
Nonoperating income (expense), as adjusted(2) | $ | (56 | ) | $ | 7 | $ | (42 | ) | ||||
| (1) | Amounts included losses of |
| (2) | Net of net income (loss) attributable to NCI. |
The components of non-operatingnonoperating income (expense), less net income (loss) attributable to NCI for 2012, 20112014, 2013 and 20102012 were as follows:
| Variance | ||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | 2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||
Net gain (loss) on investments(1) | ||||||||||||||||||||||||||||||||
Private equity | $ | 36 | $ | 36 | $ | 31 | $ | — | $ | 5 | $ | 69 | $ | 52 | $ | 36 | ||||||||||||||||
Real estate | 14 | 10 | 17 | 4 | (7 | ) | 16 | 24 | 14 | |||||||||||||||||||||||
Distressed credit/mortgage funds | 69 | (13 | ) | 66 | 82 | (79 | ) | |||||||||||||||||||||||||
Distressed credit/mortgage funds/opportunistic funds | 34 | 40 | 69 | |||||||||||||||||||||||||||||
Hedge funds/funds of hedge funds | 20 | (5 | ) | 18 | 25 | (23 | ) | 21 | 25 | 20 | ||||||||||||||||||||||
Other investments(2) | (2 | ) | 1 | 14 | (3 | ) | (13 | ) | 7 | 16 | (2 | ) | ||||||||||||||||||||
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Sub-total | 137 | 29 | 146 | 108 | (117 | ) | ||||||||||||||||||||||||||
Subtotal | 147 | 157 | 137 | |||||||||||||||||||||||||||||
Gain related to the PennyMac IPO | — | 39 | — | |||||||||||||||||||||||||||||
Gain related to the Charitable Contribution | — | 80 | — | |||||||||||||||||||||||||||||
Investments related to deferred compensation plans | 6 | (3 | ) | 11 | 9 | (14 | ) | 7 | 10 | 6 | ||||||||||||||||||||||
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Total net gain (loss) on investments | 143 | 26 | 157 | 117 | (131 | ) | 154 | 286 | 143 | |||||||||||||||||||||||
Interest and dividend income | 36 | 34 | 29 | 2 | 5 | 29 | 22 | 36 | ||||||||||||||||||||||||
Interest expense | (215 | ) | (176 | ) | (150 | ) | (39 | ) | (26 | ) | (232 | ) | (211 | ) | (215 | ) | ||||||||||||||||
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Net interest expense | (179 | ) | (142 | ) | (121 | ) | (37 | ) | (21 | ) | (203 | ) | (189 | ) | (179 | ) | ||||||||||||||||
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Total non-operating income (expense)(1) | (36 | ) | (116 | ) | 36 | 80 | (152 | ) | ||||||||||||||||||||||||
Total nonoperating income (expense)(1) | (49 | ) | 97 | (36 | ) | |||||||||||||||||||||||||||
Gain related to the Charitable Contribution | — | (80 | ) | — | ||||||||||||||||||||||||||||
Compensation expense related to (appreciation) depreciation on deferred compensation plans | (6 | ) | 3 | (11 | ) | (9 | ) | 14 | (7 | ) | (10 | ) | (6 | ) | ||||||||||||||||||
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Non-operating income (expense), as adjusted(1) | $ | (42 | ) | $ | (113 | ) | $ | 25 | $ | 71 | $ | (138 | ) | |||||||||||||||||||
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Nonoperating income (expense), as adjusted(1) | $ | (56 | ) | $ | 7 | $ | (42 | ) | ||||||||||||||||||||||||
| (1) | Net of net income (loss) attributable to NCI. |
| (2) | Amount included net gains (losses) related to equity and fixed income investments, and BlackRock’s seed capital hedging program. |
20122014 Compared with 2011.2013
Net gains on investments increased $117of $154 million in 2014 decreased $132 million from 2011 due2013. Net gains on investments in 2013 included the noncash, nonoperating pre-tax gain of $80 million related to higher netthe Charitable Contribution and the $39 million pre-tax gain related to the PennyMac IPO. Net gains on investments in 2014 included the positive marks in 2012 compared with 2011.impact of the monetization of a nonstrategic, opportunistic private equity investment.
Net interest expense increased $14 million from 2011,2013 primarily due to higher interest expense resulting from a long-term debt issuancesissuance in May 2011March 2014.
2013 Compared with 2012
Net gains on investments of $286 million in 2013 increased $143 million from 2012 due to the $39 million pre-tax gain related to the PennyMac IPO and May 2012. the $80 million pre-tax gain related to the Charitable Contribution and higher net positive marks.
Net interest expense increased $10 million from 2012 primarily due to lower dividend income.
For further information on the Company’s long-term debt, seeLiquidity and Capital Resources herein.
2011 Compared with 2010.
Net gains on investments decreased $131 million during 2011 due to lower net positive marks in 2011 compared with 2010.
Net interest expense increased $21 million, or 17%, from 2010 primarily due to long-term debt issuances in May 2011, partially offset by higher interest and dividend income.
Income Tax Expense
| GAAP | As adjusted | GAAP | As adjusted | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||||||||||
Income before income taxes(1) | $ | 3,488 | $ | 3,133 | $ | 3,034 | $ | 3,532 | $ | 3,279 | $ | 3,192 | $ | 4,425 | $ | 3,954 | $ | 3,488 | $ | 4,507 | $ | 4,031 | $ | 3,532 | ||||||||||||||||||||||||
Income tax expense | $ | 1,030 | $ | 796 | $ | 971 | $ | 1,094 | $ | 1,040 | $ | 1,053 | $ | 1,131 | $ | 1,022 | $ | 1,030 | $ | 1,197 | $ | 1,149 | $ | 1,094 | ||||||||||||||||||||||||
Effective tax rate | 29.5 | % | 25.4 | % | 32.0 | % | 31.0 | % | 31.7 | % | 33.0 | % | 25.6 | % | 25.8 | % | 29.5 | % | 26.6 | % | 28.5 | % | 31.0 | % | ||||||||||||||||||||||||
| (1) | Net of net income (loss) attributable to NCI. |
The Company’s tax rate is affected by tax rates in foreign jurisdictions and the relative amount of income earned in those jurisdictions, which the Company expects to be fairly consistent in the near term. The significant foreign jurisdictions, which have lower statutory tax rates than the U.S. federal statutory rate of 35%, include the United Kingdom, Luxembourg, Canada and the Netherlands. U.S. income taxes were not provided for certain undistributed foreign earnings intended to be indefinitely reinvested outside the United States.
2014. The GAAP effective tax rate of 25.6% for 2014 reflected the revaluation of deferred income tax liabilities related to intangible assets and goodwill. Income tax expense for 2014 included a $9 million net noncash benefit arising primarily from state and local income tax changes, which has been excluded from as adjusted results as it will not have a cash flow impact and to ensure comparability among periods presented.
In addition, 2014 included a $94 million tax benefit, primarily due to the resolution of certain outstanding tax matters related to the acquisition of BGI. In connection with the acquisition, BlackRock recorded a $50 million indemnification asset for unrecognized tax benefits. Due to the resolution of such tax matters in 2014, BlackRock recorded $50 million of general and administration expense to reflect the reduction of the indemnification asset and an offsetting $50 million tax benefit. The $50 million general and administrative expense and $50 million tax benefit have been excluded from as adjusted results as there is no impact on BlackRock’s book value.
The current year also included a $73 million net tax benefit related to several favorable nonrecurring items.
The as adjusted effective tax rate of 26.6% for 2014 included the tax benefit of approximately $73 million related to certain favorable nonrecurring items and excluded the $9 million net noncash benefit and $50 million tax benefit mentioned above.
2013. The GAAP effective tax rate of 25.8% for 2013 reflected a $69 million net noncash benefit primarily related to the revaluation of certain deferred income tax liabilities related to intangible assets and goodwill, including the effect of legislation enacted in the United Kingdom and domestic state and local income tax changes. In addition, 2013 included a tax benefit of approximately $48 million recognized in connection with the Charitable Contribution and a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards, and benefits from certain nonrecurring items.
The as adjusted effective tax rate of 28.5% for 2013 reflected a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards, and benefits from certain nonrecurring items and excluded the $69 million net noncash benefit and the $48 million tax benefit related to the Charitable Contribution mentioned above.
2012. The GAAP effective tax rate of 29.5% for 2012 includedreflected a $21 million benefit related to the resolution of certain outstanding tax positions and a $50 million net non-cashnoncash benefit related to the revaluation of certain deferred income tax liabilities, including the effect of tax legislation enacted in the United Kingdom and the state and local income tax effect resulting from changes in the Company’s organizational structure.
The as adjusted effective tax rate of 31.0% for 2012 excluded the $50 million net non-cashnoncash tax benefit mentioned above.
2011.The GAAP effective tax rate of 25.4% for 2011 included a $24 million benefit related to the resolution of certain outstanding tax positions and $198 million of net non-cash tax benefits due to a state tax election and enacted U.K., Japan, U.S. state and local tax legislation.BALANCE SHEET OVERVIEW
The 2011 as adjusted effective tax rate of 31.7% included the $24 million benefit related to the revaluation of certain deferred income tax liabilities and excluded the $198 million net non-cash benefit.
2010. The GAAP effective tax rate of 32.0% for 2010 included a $30 million non-cash tax benefit related to the revaluation of certain net deferred income tax liabilities primarily related to acquired intangible assets due to enacted U.K. tax legislation. In addition, 2010 included the effect of favorable tax rulings and the resolution of certain outstanding tax positions.
The as adjusted effective tax rate of 33.0% for 2010 excluded the $30 million non-cash tax benefit mentioned above.
Balance Sheet Overview
As Adjusted Balance Sheet
The following table presents a reconciliation of the Company’s consolidated statement of financial condition presented on a GAAP basis to the Company’s consolidated statement of financial condition, excluding the impact of separate account assets and separate account collateral held under securities lending agreements (directly related to lending securities held by separate account assets)securities) and separate account liabilities and separate account collateral liabilities under securities lending agreements, consolidated variable interest entities (“VIEs”)VIEs and consolidated sponsored investment funds.
The Company presents the as adjusted balance sheet as additional information to enable investors to eliminate gross presentation ofexclude certain assets that have equal and offsetting liabilities or non-controllingnoncontrolling interests andthat ultimately do not have an impact on stockholders’ equity (excluding appropriated retained earnings related to consolidated collateralized loan obligations)obligations (“CLOs”)) or cash flows. Management reviewsviews the Company’s as adjusted balance sheet, a non-GAAP financial measure, as an economic presentation of itsthe Company’s total assets and liabilities; however, it does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
Separate Account Assets and Liabilities and Separate Account Collateral Held under Securities Lending Agreements
The separateSeparate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. In accordance with GAAP, theThe Company records equal and offsetting separate account liabilities. The separate account assets are not available to creditors of the Company and the holders of the pension contracts have no recourse to the Company’s assets. The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the Company’s consolidated statements of income. While
BlackRock has no economic interest in these assets or liabilities, BlackRock earns an investment advisory fee for the service of managing these assets on behalf of the clients.
In addition, the Company records on its consolidated statements of financial condition the separate account collateral received under BlackRock Life Limited securities lending arrangements as its own asset in addition to an equal and offsetting separate account collateral liability for the obligation to return the collateral. The collateral is not available to creditors of the Company, and the borrowers under the securities lending arrangements have no recourse to the Company’s assets.
Consolidated VIEs
At December 31, 2012,2014, BlackRock’s consolidated VIEs included multiple CLOs and one private investment fund. The assets of these VIEs are not available to creditors of the Company and the Company has no obligation to settle the liabilities of the VIEs. While BlackRock has no material economic interest in these assets or liabilities, BlackRock earns an investment advisory fee, as well as a potential performance fee, for the service of managing these assets on behalf of clients.
Consolidated Sponsored Investment Funds
The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds. 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 the Company’s operations.
| December 31, 2012 | ||||||||||||||||||||
| Segregated client assets generating advisory fees in which BlackRock has no economic interest or liability | ||||||||||||||||||||
| (Dollar amounts in millions) | GAAP Basis | Separate Account Assets/ Collateral | Consolidated VIEs | Consolidated Sponsored Investment Funds | As Adjusted | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,606 | $ | — | $ | — | $ | 133 | $ | 4,473 | ||||||||||
Accounts receivable | 2,250 | — | — | — | 2,250 | |||||||||||||||
Investments | 1,750 | — | — | 94 | 1,656 | |||||||||||||||
Assets of consolidated VIEs | 2,561 | — | 2,561 | — | — | |||||||||||||||
Separate account assets and collateral held under securities lending agreements | 157,789 | 157,789 | — | — | — | |||||||||||||||
Other assets(1) | 1,183 | — | — | 25 | 1,158 | |||||||||||||||
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Sub-total | 170,139 | 157,789 | 2,561 | 252 | 9,537 | |||||||||||||||
Goodwill and intangible assets, net | 30,312 | — | — | — | 30,312 | |||||||||||||||
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Total assets | $ | 200,451 | $ | 157,789 | $ | 2,561 | $ | 252 | $ | 39,849 | ||||||||||
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Liabilities | ||||||||||||||||||||
Accrued compensation and benefits | $ | 1,547 | $ | — | $ | — | $ | — | $ | 1,547 | ||||||||||
Accounts payable and accrued liabilities | 1,055 | — | — | — | 1,055 | |||||||||||||||
Borrowings(2) | 5,787 | — | — | — | 5,787 | |||||||||||||||
Liabilities of consolidated VIEs | 2,505 | — | 2,505 | — | — | |||||||||||||||
Separate account liabilities and collateral liabilities under securities lending agreements | 157,789 | 157,789 | — | — | — | |||||||||||||||
Deferred income tax liabilities | 5,293 | — | — | — | 5,293 | |||||||||||||||
Other liabilities(3) | 858 | — | — | 65 | 793 | |||||||||||||||
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Total liabilities | 174,834 | 157,789 | 2,505 | 65 | 14,475 | |||||||||||||||
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Equity | ||||||||||||||||||||
Total stockholders’ equity(4) | 25,403 | — | 29 | — | 25,374 | |||||||||||||||
Non-controlling interests | 214 | — | 27 | 187 | — | |||||||||||||||
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Total equity | 25,617 | — | 56 | 187 | 25,374 | |||||||||||||||
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Total liabilities and equity | $ | 200,451 | $ | 157,789 | $ | 2,561 | $ | 252 | $ | 39,849 | ||||||||||
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| December 31, 2014 | ||||||||||||||||||||
Segregated client assets generating advisory fees in which BlackRock has no economic interest or liability | ||||||||||||||||||||
| (in millions) | GAAP Basis | Separate Account Assets/ Collateral | Consolidated VIEs | Consolidated Sponsored Investment Funds | As Adjusted | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 5,723 | $ | — | $ | — | $ | 120 | $ | 5,603 | ||||||||||
Accounts receivable | 2,120 | — | — | — | 2,120 | |||||||||||||||
Investments | 1,921 | — | — | 17 | 1,904 | |||||||||||||||
Assets of consolidated VIEs | 3,630 | — | 3,630 | — | — | |||||||||||||||
Separate account assets and collateral held under securities lending agreements | 194,941 | 194,941 | — | — | — | |||||||||||||||
Other assets(1) | 1,168 | — | — | 20 | 1,148 | |||||||||||||||
Subtotal | 209,503 | 194,941 | 3,630 | 157 | 10,775 | |||||||||||||||
Goodwill and intangible assets, net | 30,305 | — | — | — | 30,305 | |||||||||||||||
Total assets | $ | 239,808 | $ | 194,941 | $ | 3,630 | $ | 157 | $ | 41,080 | ||||||||||
Liabilities | ||||||||||||||||||||
Accrued compensation and benefits | $ | 1,865 | $ | — | $ | — | $ | — | $ | 1,865 | ||||||||||
Accounts payable and accrued liabilities | 1,035 | — | — | — | 1,035 | |||||||||||||||
Liabilities of consolidated VIEs | 3,634 | — | 3,634 | — | — | |||||||||||||||
Borrowings | 4,938 | — | — | — | 4,938 | |||||||||||||||
Separate account liabilities and collateral liabilities under securities lending agreements | 194,941 | 194,941 | — | — | — | |||||||||||||||
Deferred income tax liabilities | 4,989 | — | — | — | 4,989 | |||||||||||||||
Other liabilities | 886 | — | — | 18 | 868 | |||||||||||||||
Total liabilities | 212,288 | 194,941 | 3,634 | 18 | 13,695 | |||||||||||||||
Equity | ||||||||||||||||||||
Total stockholders’ equity(2) | 27,366 | — | (19 | ) | — | 27,385 | ||||||||||||||
Noncontrolling interests | 154 | — | 15 | 139 | — | |||||||||||||||
Total equity | 27,520 | — | (4 | ) | 139 | 27,385 | ||||||||||||||
Total liabilities and equity | $ | 239,808 | $ | 194,941 | $ | 3,630 | $ | 157 | $ | 41,080 | ||||||||||
| (1) | Amounts include |
| (2) |
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GAAP amount includes |
The following table presents selected significant components of BlackRock’s GAAP consolidated statements of financial condition at December 31, 2012 and December 31, 2011:
| December 31, 2012 | December 31, 2011 | Variance | ||||||||||||||
| (Dollar amounts in millions) | Amount | % Change | ||||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 4,606 | $ | 3,506 | $ | 1,100 | 31 | % | ||||||||
Accounts receivable | 2,250 | 1,960 | 290 | 15 | % | |||||||||||
Investments | 1,750 | 1,631 | 119 | 7 | % | |||||||||||
Goodwill and intangible assets, net | 30,312 | 30,148 | 164 | 1 | % | |||||||||||
Other assets(1) | 1,183 | 1,169 | 14 | 1 | % | |||||||||||
Liabilities: | ||||||||||||||||
Accrued compensation and benefits | 1,547 | 1,383 | 164 | 12 | % | |||||||||||
Accounts payable and accrued liabilities | 1,055 | 923 | 132 | 14 | % | |||||||||||
Borrowings(2) | 5,787 | 4,790 | 997 | 21 | % | |||||||||||
Deferred income tax liabilities | 5,293 | 5,323 | (30 | ) | (1 | %) | ||||||||||
Other liabilities(3) | 858 | 743 | 115 | 15 | % | |||||||||||
Stockholders’ equity | 25,403 | 25,048 | 355 | 1 | % | |||||||||||
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The following discussion summarizes the significant changes in assets and liabilities.liabilities on a GAAP basis. Please see the consolidated statements of financial condition as of December 31, 2014 and 2013 contained in Part II, Item 8 of this filing. The discussion does not include changes related to assets and liabilities that are equal and offsetting and have no impact on BlackRock’s stockholders’ equity.
Cash and Cash Equivalents.Assets.Cash and cash equivalents at December 31, 20122014 and December 31, 20112013 included $133$120 million and $196$114 million, respectively, of cash held by consolidated sponsored investment funds respectively. See(seeLiquidity and Capital Resources for details on the change in cash and cash equivalents during 2012.2014).
Accounts Receivable.Accounts receivable at December 31, 2012 increased $2902014 decreased $127 million from December 31, 2011, primarily reflecting higher receivables resulting from an increase in base fees related2013 due to AUM growth and higher performance fees, and an increasea decrease in unit trust receivables substantially(substantially offset by an increasedecrease in unit trust payables recorded within accounts payable and accrued liabilities.liabilities) and lower performance fee receivables. Investments decreased $230 million from December 31, 2013 (for more information see Investments herein). Goodwill and intangible assets decreased $176 million from December 31, 2013, primarily due to $157 million of amortization of intangible assets. Other assets (including property, plant and equipment) decreased $49 million from
Investments.BlackRock reports itsDecember 31, 2013, primarily related to a decrease in property and equipment due to depreciation and the reduction of an indemnification asset, partially offset by higher earnings from certain strategic investments onand an increase in current taxes receivable.
Liabilities. Accrued compensation and benefits at December 31, 2014 increased $118 million from December 31, 2013, primarily due to 2014 incentive compensation accruals. Accounts payable and accrued liabilities at December 31, 2014 decreased $49 million from December 31, 2013 due to lower unit trust payables (substantially offset by an decrease in unit trust receivables recorded within accounts receivable) and a GAAP basis, which includesdecrease in current income taxes payable, partially offset by increased accruals, including direct fund expense.
Net deferred income tax liabilities at December 31, 2014 decreased $96 million, primarily due to the effects of temporary differences associated with stock compensation, investment income, and goodwill and intangibles. Other liabilities decreased $118 million from December 31, 2013, primarily resulting from a decrease in uncertain tax positions and a decrease in other operating liabilities.
Investments
Investments totaled $1,921 million at December 31, 2014 and $2,151 million at December 31, 2013. Investments include consolidated investments that are held by sponsored investment funds deemed to be controlled by BlackRock in accordance with GAAP. As a result, managementBlackRock. Management reviews BlackRock’s investments on an “economic” basis, which eliminates the portion of investments that dodoes not impact BlackRock’s book value.value or net income attributable to BlackRock. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
The Company presents total investments, as adjusted, to enable investors to understand the portion of its investments that areis owned by the Company, net of NCI, as a gauge to measure the impact of changes in net non-operatingnonoperating gain (loss) on investments to net income (loss) attributable to BlackRock.
The Company further presents total net “economic” investment exposure, net of deferred compensation investments and hedged investments, to reflect another gauge for investors as the economic impact of investments held pursuant to deferred compensation arrangements is substantially offset by a change in compensation expense and the impact of hedged investments is substantially mitigated by total return swap hedges. Carried interest capital allocations are excluded as there is no impact to BlackRock’s stockholders’ equity until such amounts are realized as performance fees. Finally, the Company’s regulatory investment in Federal Reserve Bank stock, which is not subject to market or interest rate risk, is excluded from the Company’s net economic investment exposure.
| (Dollar amounts in millions) | December 31, 2012 | December 31, 2011 | ||||||||||||||
| (in millions) | December 31, 2014 | December 31, 2013 | ||||||||||||||
Total investments, GAAP | $ | 1,750 | $ | 1,631 | $ | 1,921 | $ | 2,151 | ||||||||
Investments held by consolidated sponsored investment funds(1) | (524 | ) | (587 | ) | (713 | ) | (826 | ) | ||||||||
Net exposure to consolidated investment funds | 430 | 475 | 696 | 732 | ||||||||||||
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Total investments, as adjusted | 1,656 | 1,519 | 1,904 | 2,057 | ||||||||||||
Federal Reserve Bank stock(2) | (89 | ) | (328 | ) | ||||||||||||
Federal Reserve Bank stock | (92 | ) | (90 | ) | ||||||||||||
Carried interest | (85 | ) | (21 | ) | (85 | ) | (103 | ) | ||||||||
Deferred compensation investments | (62 | ) | (65 | ) | (85 | ) | (97 | ) | ||||||||
Hedged investments | (209 | ) | (43 | ) | (323 | ) | (184 | ) | ||||||||
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Total “economic” investment exposure | $ | 1,211 | $ | 1,062 | $ | 1,319 | $ | 1,583 | ||||||||
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| (1) | At December 31, |
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Total investments, as adjusted, at December 31, 2012 increased $137 million from December 31, 2011, resulting from $765 million of purchases/capital contributions, $185 million from positive market valuations and earnings from equity method investments, and $64 million from net additional carried interest capital allocations, partially offset by $742 million of sales/maturities and $135 million of distributions representing return of capital and return on investments.
The following table represents the carrying value of investments,the Company’s economic investment exposure, by asset type, at December 31, 20122014 and December 31, 2011:2013:
| (Dollar amounts in millions) | December 31, 2012 | December 31, 2011 | Variance | |||||||||||||||||||||
| Amount | % Change | |||||||||||||||||||||||
| (in millions) | December 31, 2014 | December 31, 2013 | ||||||||||||||||||||||
Private equity | $ | 298 | $ | 306 | $ | (8 | ) | (3 | %) | $ | 314 | $ | 328 | |||||||||||
Real estate | 122 | 108 | 14 | 13 | % | 117 | 125 | |||||||||||||||||
Distressed credit/mortgage funds | 214 | 217 | (3 | ) | (1 | %) | ||||||||||||||||||
Distressed credit/mortgage funds/opportunistic funds | 61 | 148 | ||||||||||||||||||||||
Hedge funds/funds of hedge funds | 159 | 167 | (8 | ) | (5 | %) | 228 | 348 | ||||||||||||||||
Other investments(1) | 418 | 264 | 154 | 58 | % | 599 | 634 | |||||||||||||||||
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Total “economic” investment exposure | $ | 1,211 | $ | 1,062 | $ | 149 | 14 | % | $ | 1,319 | $ | 1,583 | ||||||||||||
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| (1) | Other investments primarily include seed investments in fixed income |
As adjusted investment activity for 2014 was as follows:
| (in millions) | ||||
Investments, as adjusted, December 31, 2013 | $ | 2,057 | ||
Purchases/capital contributions | 787 | |||
Sales/maturities | (833 | ) | ||
Distributions(1) | (255 | ) | ||
Market valuations/earnings from equity method investments | 166 | |||
Carried interest capital allocations | (18 | ) | ||
Investments, as adjusted, December 31, 2014 | $ | 1,904 | ||
| (1) | Amounts include distributions representing return of capital and return on investments. |
The following table represents investments, as adjusted at December 31, 2012:2014:
| (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, 2012 | |||||||||||||||||||||||||||||||||||
| (in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant (Level 3) | Other Investments Not Held at Fair Value(1) | Investments at December 31, 2014 | |||||||||||||||||||||||||||||||||||
Total investments, as adjusted(2) | $ | 541 | $ | 196 | $ | 548 | $ | 371 | $ | 1,656 | $ | 691 | $ | 470 | $ | 470 | $ | 273 | $ | 1,904 | ||||||||||||||||||||
| (1) | Amount includes investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment |
| (2) | Amounts include |
Goodwill and Intangible Assets.Goodwill and intangible assets at December 31, 2012 increased $164 million from December 31, 2011, primarily due to the SRPEP and Claymore Transactions, partially offset by $157 million of amortization expense.LIQUIDITY AND CAPITAL RESOURCES
Other Assets.Other assets at December 31, 2012 increased $14 million from December 31, 2011, primarily related to higher earnings from certain operating advisory company investments and an increase in property and equipment, partially offset by a decline in receivables from related parties and lower current income taxes receivable.
Accrued Compensation and Benefits.Accrued compensation and benefits at December 31, 2012 increased $164 million from December 31, 2011, primarily related to higher 2012 incentive compensation accruals.
Accounts Payable and Accrued Liabilities.Accounts payable and accrued liabilities at December 31, 2012 increased $132 million from December 31, 2011, due to higher unit trust payables (substantially offset by an increase in unit trust receivables recorded within accounts receivable), increased accruals, including direct
fund expenses and marketing and higher current income taxes payable.
Borrowings. Borrowings at December 31, 2012 increased $997 million from December 31, 2011 primarily resulting from $1.5 billion of net proceeds from new issuances of long-term borrowings, partially offset by repayments of $500 million.
Deferred Income Tax Liabilities.Net deferred income tax liabilities at December 31, 2012 decreased $30 million, primarily as a result of the effects of temporary differences associated with deferred stock compensation and investment income offset by the Claymore Transaction. In addition, the decrease related to the revaluation of certain deferred income tax liabilities due to tax legislation enacted in the United Kingdom and the state and local income tax effect resulting from changes in the Company’s organizational structure.
Other Liabilities.Other liabilities at December 31, 2012 increased $115 million from December 31, 2011, primarily resulting from an increase in deferred carried interest, liabilities of consolidated funds and other operating liabilities.
Stockholders’ Equity.Total stockholders’ equity at December 31, 2012 increased $355 million from December 31, 2011, resulting from $2.5 billion of net income attributable to BlackRock, $451 million of stock-based compensation expense, $64 million excess tax benefits from vested stock-based compensation, $53 million of foreign currency translation adjustments and $56 million of issuances of common shares related to employee stock transactions. The increase in stockholders’ equity was partially offset by $1.7 billion of share repurchases and $1.1 billion of cash dividend payments.
Liquidity and Capital Resources
BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds and VIEs
In accordance with GAAP, BlackRock consolidates certain BlackRockof its sponsored investment funds and CLOs,
notwithstanding the fact BlackRock may only have a minority interest, if any, in these funds or CLOs. As a result, BlackRock’sthe consolidated statements of cash flows include the cash flows of consolidated sponsored investment funds and CLOs. The Company uses an adjusted cash flow statement, which excludes the impact of
consolidated sponsored investment funds and CLOs, as a supplemental non-GAAP measure to assess liquidity and capital requirements. The Company believes that its cash flows, excluding the impact of the consolidated sponsored investment funds and CLOs, provide investors with useful information on the cash flows of BlackRock relating to its ability to fund additional operating, investing and financing activities. BlackRock’s management does not advocate that investors consider such non-GAAP measures in isolation from, or as a substitute for, its cash flows presented in accordance with GAAP.
The following table presents a reconciliation of the consolidated statements of cash flows presented on a GAAP basis to the consolidated statements of cash flows, excluding the impact of the cash flows of consolidated sponsored investment funds and consolidated VIEs:
| (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 and cash equivalents, December 31, 2010 | $ | 3,367 | $ | 65 | $ | — | $ | 3,302 | ||||||||||||||||||||||||
| (in millions) | GAAP Basis | Impact on Cash Flows of Consolidated Sponsored Investment Funds | Impact on Cash Flows of Consolidated VIEs | Cash Flows Excluding Impact of Consolidated Sponsored Investment Funds and VIEs | ||||||||||||||||||||||||||||
Cash and cash equivalents, December 31, 2012 | $ | 4,606 | $ | 133 | $ | — | $ | 4,473 | ||||||||||||||||||||||||
Cash flows from operating activities | 2,826 | 42 | 136 | 2,648 | 3,642 | (137 | ) | 286 | 3,493 | |||||||||||||||||||||||
Cash flows from investing activities | (204 | ) | 24 | — | (228 | ) | (483 | ) | 39 | — | (522 | ) | ||||||||||||||||||||
Cash flows from financing activities | (2,485 | ) | 65 | (136 | ) | (2,414 | ) | (3,392 | ) | 79 | (286 | ) | (3,185 | ) | ||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 2 | — | — | 2 | 17 | — | — | 17 | ||||||||||||||||||||||||
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Net change in cash and cash equivalents | 139 | 131 | — | 8 | (216 | ) | (19 | ) | — | (197 | ) | |||||||||||||||||||||
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Cash and cash equivalents, December 31, 2011 | $ | 3,506 | $ | 196 | $ | — | $ | 3,310 | ||||||||||||||||||||||||
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Cash and cash equivalents, December 31, 2013 | $ | 4,390 | $ | 114 | $ | — | $ | 4,276 | ||||||||||||||||||||||||
Cash flows from operating activities | 2,240 | (256 | ) | (227 | ) | 2,723 | 3,081 | (103 | ) | (431 | ) | 3,615 | ||||||||||||||||||||
Cash flows from investing activities | (266 | ) | (211 | ) | — | (55 | ) | 239 | (174 | ) | — | 413 | ||||||||||||||||||||
Cash flows from financing activities | (944 | ) | 404 | 227 | (1,575 | ) | (1,855 | ) | 283 | 431 | (2,569) | |||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 70 | — | — | 70 | (132 | ) | — | — | (132 | ) | ||||||||||||||||||||||
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Net change in cash and cash equivalents | 1,100 | (63 | ) | — | 1,163 | 1,333 | 6 | — | 1,327 | |||||||||||||||||||||||
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Cash and cash equivalents, December 31, 2012 | $ | 4,606 | $ | 133 | $ | — | $ | 4,473 | ||||||||||||||||||||||||
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Cash and cash equivalents, December 31, 2014 | $ | 5,723 | $ | 120 | $ | — | $ | 5,603 | ||||||||||||||||||||||||
Sources of BlackRock’s operating cash primarily include investment advisory, administration fees and securities lending revenue, performance fees, revenue fromBlackRock Solutions and advisory products and services, other revenue and distribution fees.
BlackRock uses its cash to pay compensation and benefits, distribution and servicing costs, direct fund expenses, general and administrationall operating expenses, interest and principal on the Company’s borrowings, income taxes, dividends on BlackRock’s capital stock, repurchases of the Company’s stock, capital expenditures and purchases of co-investments and seed investments.
Cash flows from operating activities, excluding the impact of consolidated sponsored investment funds and VIEs, primarily include the receipt of investment advisory and administration fees, securities lending revenue and other revenue offset by the payment of operating expenses incurred in the normal course of business, including the effect of cash payments related to year-end incentive compensation.compensation accrued for in the prior year.
Cash outflowsinflows from investing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the year ended December 31, 20122014 were $55$413 million and primarily included $435reflected $739 million of purchases of investments, $267 million related to the Claymore and SRPEP Transactions and $150 million of purchases of property and equipment, partially offset by $724 million
��
of net proceeds from sales and maturities of certain investments
and $73$143 million of returndistributions of capital from equity method investees.investees, partially offset by $403 million of investment purchases.
Cash outflows from financing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the year ended December 31, 20122014 were $1.6$2.6 billion, including $1.7 billionprimarily resulting from cash outflows related to $1,344 million of share repurchases, including $1.0 billion from Barclays, $500 million in open market transactions and $0.2 billion$344 million of employee tax withholdings related to employee stock transactions, $1.1$1.3 billion of cash dividend payments for cash dividends and a $0.5$1.0 billion repaymentof repayments of long-term debt.borrowings. Cash outflows from financing activities were partially offset by cash inflows related to $1.5$1.0 billion of net proceeds from issuance of long-term borrowings $74and $106 million of excess tax benefits from vested stock-based compensation and $47 million of proceeds from stock options exercised.
Capital Resourcesawards.
The Company manages its financial condition and funding to maintain appropriate liquidity for the business. CapitalLiquidity resources at December 31, 20122014 and 20112013 were as follows:
| (Dollar amounts in millions) | December 31, 2012 | December 31, 2011 | Variance | |||||||||||||||||||||
| Amount | % Change | |||||||||||||||||||||||
| (in millions) | December 31, 2014 | December 31, 2013 | ||||||||||||||||||||||
Cash and cash equivalents | $ | 4,606 | $ | 3,506 | $ | 1,100 | 31 | % | $ | 5,723 | $ | 4,390 | ||||||||||||
Cash and cash equivalents held by consolidated sponsored investment funds(1) | (133 | ) | (196 | ) | 63 | 32 | % | (120 | ) | (114 | ) | |||||||||||||
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Subtotal | 4,473 | 3,310 | 1,163 | 35 | % | 5,603 | 4,276 | |||||||||||||||||
Credit facility – undrawn | 3,685 | 3,400 | 285 | 8 | % | |||||||||||||||||||
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Credit facility — undrawn | 3,990 | 3,990 | ||||||||||||||||||||||
Total liquidity | $ | 8,158 | $ | 6,710 | $ | 1,448 | 22 | % | $ | 9,593 | $ | 8,266 | ||||||||||||
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| (1) | The Company may not be able to access such cash to use in its operating activities. |
Total liquidity increased $1.4 billion$1,327 million during 2012,2014, primarily reflecting positive operating cash flows, proceeds from long-term debt issuances in May 2012 and the increased aggregate commitment of the 2012 credit facility from $3.5 billion to $3.785 billion,operations, partially offset by cash payments of 2013 year-end incentive awards, share repurchases includingof $1.3 billion and cash dividend payments.
A significant portion of the Company’s $1,904 million of total investments, as adjusted, is illiquid in nature and, as such, may not be readily convertible to cash.
Share Repurchases. The Company repurchased 3.2 million common shares in open market-transactions under its share repurchase program for $1.0 billion from Barclays and $500during 2014. At December 31, 2014, there were 3.4 million in open market transactions, and the long-term debt repayments of $500 million. A portion of liquidity mayshares still authorized to be utilized to pay down the current portion of long-term debt maturing in 2013.repurchased.
Share Repurchase Approvals.In January 2013,2015, the Board of Directors (the “Board”) approved an increase in the availability of shares that may be repurchased under the Company’s existing share repurchase program to allow for the repurchase of up to 10.2a total of 9.4 million additional shares of BlackRock common stock.
In February 2012, the Board approved an increase in the availability under the Company’s then existing share
repurchase program to allow for the repurchase of up to 5.0 million shares. The Company repurchased 2,726,600 shares in open market transactions for approximately $500 million during 2012. As of December 31, 2012, there were 2,725,400 shares still authorized to be repurchased, which are included in the total January 2013 Board authorization of 10.2 million shares.
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 equivalentsequivalent 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.
BTCBlackRock Institutional Trust Company, N.A. (“BTC”) is chartered as a national bank that does not accept client deposits and whose powers are limited to trust activities. BTC provides investment management services, including investment advisory and securities lending agency services, to institutional investors and other clients. BTC is subject to various regulatory capital and liquid asset requirements administered by Federal banking agencies.the Office of the Comptroller of the Currency.
At both December 31, 2012,2014 and 2013, the Company was required to maintain approximately $1,209 million, compared with $1,196 million at December 31, 2011,$1.1 billion in net capital in certain regulated subsidiaries, including BTC, entities
regulated by the Financial ServicesConduct Authority and Prudential Regulation Authority in the United Kingdom and the Company’s broker-dealers, andbroker-dealers. At such date, the Company was in compliance with all applicable regulatory minimum net capital requirements.
Undistributed Earnings of Foreign Subsidiaries. As of December 31, 2012,2014, the Company has not provided for U.S. federal and state income taxes on approximately $2,125 million$3.9 billion of undistributed earnings of its foreign subsidiaries. Such earnings are considered indefinitely reinvested outside the United States. The Company’s current plans do not demonstrate a need to repatriate these funds.
Contractual Obligations, Commitments and ContingenciesShort-Term Borrowings
The following table sets forth contractual obligations, commitments and contingencies by year of payment at December 31, 2012:
| (Dollar amounts in millions) | 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | |||||||||||||||||||||
Contractual obligations and commitments: | ||||||||||||||||||||||||||||
Short-term borrowings: | ||||||||||||||||||||||||||||
Principal | $ | 100 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 100 | ||||||||||||||
Long-term borrowings(1): | ||||||||||||||||||||||||||||
Principal | 750 | 1,000 | 750 | — | 700 | 2,500 | 5,700 | |||||||||||||||||||||
Interest(2) | 200 | 196 | 156 | 151 | 151 | 342 | 1,196 | |||||||||||||||||||||
Operating leases | 134 | 122 | 113 | 104 | 105 | 784 | 1,362 | |||||||||||||||||||||
Purchase obligations | 78 | 70 | 34 | 23 | 8 | — | 213 | |||||||||||||||||||||
Investment commitments | 235 | — | — | — | — | — | 235 | |||||||||||||||||||||
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Total contractual obligations and commitments | 1,497 | 1,388 | 1,053 | 278 | 964 | 3,626 | 8,806 | |||||||||||||||||||||
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Contingent distribution obligations | 179 | — | — | — | — | — | 179 | |||||||||||||||||||||
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Total contractual obligations, commitments and contingent obligations(3) | $ | 1,676 | $ | 1,388 | $ | 1,053 | $ | 278 | $ | 964 | $ | 3,626 | $ | 8,985 | ||||||||||||||
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Short-term Borrowings.
The following describes the Company’s short-term borrowing arrangements that the Company has access to utilize.
20122014 Revolving Credit Facility.Facility. In March 2012,2011, the 2011Company entered into a five-year $3.5 billion unsecured revolving credit facility which was amended in 2013 and 2012. In March 2014, the Company’s credit facility was further amended to extend the maturity date by one year to March 2017 and in April 2012 the2019. The amount of the aggregate commitment was increased to $3.785is $3.990 billion (the “2012“2014 credit facility”). The 20122014 credit facility permits the Company to request up to an additional $1.0 billion of borrowing capacity, subject to lender credit approval, increasing the overall size of the 20122014 credit facility to an
aggregate principal amount not to exceed $4.785$4.990 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 20122014 credit facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at December 31, 2012.
2014. The 20122014 credit facility provides back-up liquidity, funds ongoing working capital for general corporate purposes and funds various investment opportunities. At December 31, 2012,2014, the Company had $100 million
no amount outstanding under this facility with an interest rate of 1.085% and a maturity during January 2013. During January 2013, the Company rolled over the $100 million in borrowings at an interest rate of 1.085% and a maturity during February 2013. During February 2013, the Company rolled over the $100 million in borrowings at an interest rate of 1.075% and a maturity during March 2013.2014 credit facility.
Commercial Paper Program.On October 14, 2009, BlackRock established a commercial paper program (the “CP Program”) under which the Company could issue unsecured commercial paper notes (the “CP Notes”) on a private placement basis up to a maximum aggregate amount outstanding at any time of $3.0 billion. On May 13, 2011, BlackRock increased the maximum aggregate amount that maycould be borrowed under the CP Program to $3.5 billion. On May 17, 2012,billion in 2011 and to $3.785 billion in 2012. In April 2013, BlackRock increased the maximum aggregate amount for which the Company could issue unsecured CP Notes on a private-placement basis up to $3.785a maximum aggregate amount outstanding at any time of $3.990 billion. The CP Program is currently supported by the 20122014 credit facility. As ofAt December 31, 2012 and December 31, 2011,2014, BlackRock had no CP Notes outstanding.
Long-term Borrowings.At December 31, 2012, the principal amount
The carrying value of long-term borrowings including current portion, was $5.7 billion.at December 31, 2014 included the following:
2017 Notes.
| (in millions) | Maturity Amount | Carrying Value | Maturity | |||||||
1.375% Notes | $ | 750 | $ | 750 | June 2015 | |||||
6.25% Notes | 700 | 699 | September 2017 | |||||||
5.00% Notes | 1,000 | 998 | December 2019 | |||||||
4.25% Notes | 750 | 747 | May 2021 | |||||||
3.375% Notes | 750 | 747 | June 2022 | |||||||
3.50% Notes | 1,000 | 997 | March 2024 | |||||||
Total Long-term Borrowings | $ | 4,950 | $ | 4,938 | ||||||
In September 2007,March 2014, the Company issued $700 million$1.0 billion in aggregate principal amount of 6.25%3.50% senior unsecured and unsubordinated notes maturing on September 15, 2017 (the “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 of2024. During 2014, the Company at a “make-whole” redemption price.
2012, 2014 and 2019 Notes. In December 2009, the Company issued $2.5 billion in aggregate principal amount of unsecured and unsubordinated obligations. These notes were issued as three separate series of senior debt securities including $0.5 billion of 2.25% notes, which were repaid in December 2012, and $1.0 billion of 3.50% notes and $1.0 billion of 5.0%at maturity.
For more information on Company’s borrowings, see Note 12,Borrowings, in the notes maturing in December 2014 and 2019, respectively. Net proceedsto the consolidated financial statements beginning on page F-1 of this offering were used to repay borrowings under the CP program, which was used to finance a portion of the BGI Transaction, and for general corporate purposes. These notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a “make-whole” redemption price. Interest on the 2014 Notes and 2019 Notes of approximately $35 million and $50 million per year, respectively, is payable semi-annually in arrears
on June 10 and December 10 of each year. In 2012, approximately $96 million of interest was paid related to the 2012, 2014 and 2019 Notes.
2013 and 2021 Notes. In May 2011, the Company issued $1.5 billion in aggregate principal amount of unsecured unsubordinated obligations. These notes were issued as two separate series of senior debt securities including $750 million of 4.25% notes and $750 million of floating rate notes maturing in May 2021 and 2013, respectively. Net proceeds of this offering were used to fund the repurchase of BlackRock’s Series B Preferred from affiliates of Merrill Lynch. Interest on the 4.25% notes due in 2021 (“2021 Notes”) is payable semi-annually on May 24 and November 24 of each year, which commenced November 24, 2011, and is approximately $32 million per year. Interest on the floating rate notes due in 2013 (“2013 Floating Rate Notes”) is payable quarterly on February 24, May 24, August 24 and November 24 of each year. The 2021 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 2013 Floating Rate Notes may not be redeemed at the Company’s option before maturity.
In May 2011, in conjunction with the issuance of the 2013 Floating Rate Notes, the Company entered into a $750 million notional interest rate swap maturing in 2013 to hedge the future cash flows of its obligation at a fixed rate of 1.03% payable semi-annually on May 24 and November 24 of each year, which commenced November 24, 2011. The interest rate swap effectively converts the 2013 Floating Rate Notes to a fixed rate obligation.
2015 and 2022 Notes.In May 2012, the Company issued $1.5 billion in aggregate principal amount of unsecured unsubordinated obligations. These notes were issued as two separate series of senior debt securities, including $750 million of 1.375% notes maturing in June 2015 (the “2015 Notes”) and $750 million of 3.375% notes maturing in June 2022 (the “2022 Notes”). Net proceeds were used to fund the repurchase of BlackRock’s common stock and Series B Preferred from Barclays and affiliates and for general corporate purposes. Interest on the 2015 Notes and 2022 Notes of approximately $10 million and $25 million per year, respectively, is payable semi-annually on June 1 and December 1 of each year, which commenced December 1, 2012. The 2015 Notes and 2022 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 “make-whole” redemption price represents a price, subject to the specific terms of the 2015 and 2022 Notes and related indenture, that is the greater of (a) par value and (b) the present value of futureForm 10-K.
payments that will not be paid becauseThe following table sets forth contractual obligations, commitments and contingencies by year of an early redemption, which is discountedpayment at a fixed spread over a comparable Treasury security.December 31, 2014:
| (in millions) | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | |||||||||||||||||||||
Contractual obligations and commitments: | ||||||||||||||||||||||||||||
Long-term borrowings(1): | ||||||||||||||||||||||||||||
Principal | $ | 750 | $ | — | $ | 700 | $ | — | $ | 1,000 | $ | 2,500 | $ | 4,950 | ||||||||||||||
Interest | 191 | 186 | 186 | 142 | 142 | 269 | 1,116 | |||||||||||||||||||||
Operating leases | 126 | 111 | 112 | 111 | 105 | 613 | 1,178 | |||||||||||||||||||||
Purchase obligations | 168 | 68 | 11 | 1 | — | — | 248 | |||||||||||||||||||||
Investment commitments | 161 | — | — | — | — | — | 161 | |||||||||||||||||||||
Total contractual obligations and commitments | 1,396 | 365 | 1,009 | 254 | 1,247 | 3,382 | 7,653 | |||||||||||||||||||||
Contingent obligations: | ||||||||||||||||||||||||||||
Contingent distribution obligations | 189 | 189 | — | — | — | — | 378 | |||||||||||||||||||||
Contingent payments related to business acquisitions(2) | 5 | 10 | 7 | 19 | 9 | 11 | 61 | |||||||||||||||||||||
Total contractual obligations, commitments and contingent obligations(3) | $ | 1,590 | $ | 564 | $ | 1,016 | $ | 273 | $ | 1,256 | $ | 3,393 | $ | 8,092 | ||||||||||||||
| (1) | Long-term borrowings exclude the borrowings of consolidated CLOs. The Company has no obligation to settle the liabilities of these CLOs. |
| (2) | The amount of contingent payments reflected for any year represents the expected payment amounts, using foreign currency exchange rates as of December 31, 2014, under the terms of the business acquisition’s agreement. The remaining maximum potential payment amount related to Credit Suisse ETF Transaction is approximately $24 million for any year during the next six years. There is no maximum amount for payments related to the MGPA Transaction. The fair value of the contingent obligations is not significant to the consolidated statement of financial condition and is recorded within other liabilities. |
| (3) | At December 31, 2014, the Company had $334 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. |
Operating Leases. The Company leases its primary office locations under agreements that expire on varying dates through 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.
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-cancelablenoncancelable or cancelable with a penalty. At December 31, 2012,2014, the Company’s obligations primarily reflected standard service contracts for portfolio, market data, office-related services and third-party marketing and promotional services.services, and obligations for equipment. Purchase obligations are recorded on the Company’s financial statements when services are provided and, as such, obligations for services not received are not included in the consolidated statement of financial condition at December 31, 2012.2014.
Investment Commitments.At December 31, 2012,2014, the Company had $235$161 million of various capital commitments to fund sponsored investment funds, including funds of private equity funds, real estate funds, infrastructure funds, opportunistic funds and distressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third-party funds as third-party non-controllingnoncontrolling interest holders have the legal obligation to fund the respective commitments of such funds of funds. In addition to the capital commitments of $161 million, the
Company had approximately $35 million of contingent commitments for certain funds which have investment periods that have expired. Generally, the timing of the funding of these commitments is unknown and the commitments are callable on demand at any time prior to the expiration of the commitment. These unfunded commitments are not recorded on the consolidated statements of financial condition. These commitments do not include potential future commitments approved by the Company but whichthat are not yet legally binding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.
Contingent Distribution Obligations. In November 2010, BlackRock entered into a second amended and restated global distribution agreement with Merrill Lynch, which requires the Company to make payments to Merrill Lynch contingent upon sales of products and level of AUM maintained in certain BlackRock products. The initial term of the agreement remained in effect until January 2014 and was renewed for one automatic three-year extension.
Contingent Payments Related to Business Acquisitions. In connection with the Credit Suisse ETF Transaction, BlackRock is required to make contingent payments annually to Credit Suisse, subject to achieving specified thresholds during a seven-year period, subsequent to the 2013 acquisition date. In addition, BlackRock is required to make contingent payments related to the MGPA Transaction during a five-year period, subject to achieving specified thresholds, subsequent to the 2013 acquisition date. The fair value of the remaining contingent payments at December 31, 2014 is not significant to the consolidated statement of financial condition and is included in other liabilities.
The following items have not been included in the contractual obligations, commitments and contingencies table:
Carried Interest Claw-back.Clawback.As a general partner in certain investment funds, including private equity partnerships and certain hedge funds, the Company may receive carried interest cash distributions from the partnerships in
accordance with distribution provisions of the partnership agreements. The Company may, from time to time, be required to return all or a portion of such distributions to the limited partners in the event the limited partners do not achieve a return as specified in the various partnership agreements. Therefore, BlackRock records carried interest subject to such claw-backclawback provisions in investments, or cash to the extent that it is distributed, and as a deferred carried interest liability on its consolidated statements of financial condition. Carried interest is realized and recorded as performance fees on itsBlackRock’s consolidated statements of income upon the earlier of the termination of the investment fund or when the likelihood of claw-backclawback is considered mathematically improbable.
IIndemnifications.ndemnifications. In manythe ordinary course of the Company’s contracts, including the BGI, MLIM and Quellos Transactionbusiness or in connection with certain acquisition agreements, BlackRock agreesenters into contracts pursuant to which it may agree to indemnify third parties underin certain circumstances. The terms of thethese indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined or the likelihood of any liability is considered remote and, therefore, has not been included in the table above or recorded in the consolidated statement of financial condition at December 31, 2012.2014. See further discussion in Note 12, 13,Commitments and Contingencies, to the
consolidated financial statements beginning on page F-1 of this Form 10-K.
On behalf of certain clients, the Company lends securities to highly rated banks and broker-dealers. In these securities lending transactions, the borrower is required to provide and maintain collateral at or above regulatory minimums. Securities on loan are marked to market daily to determine if the borrower is required to pledge additional collateral. BlackRock has issued certain indemnifications to certain securities lending clients against potential losses resulting from a borrower’s failure to fulfill its obligations should the value of the collateral pledged by the borrower at the time of default be insufficient to cover the borrower’s obligations under the securities lending agreement. The amount of securities on loan as ofAt December 31, 2012 and subject to indemnification was $99.52014, the Company indemnified certain of its clients for their securities lending loan balances of approximately $145.7 billion. The Company held, as agent, cash and securities totaling $104.8$155.8 billion as collateral for indemnified securities on loan at December 31, 2012. As part of the Barclays Global Investors (“BGI”) acquisition, Barclays was contractually obligated to continue providing counterparty default indemnification to certain BlackRock securities lending clients through December 1, 2012. BlackRock assumed these indemnification obligations prior to or upon the expiration of Barclays’ indemnification obligation. The amount of client balances indemnified increased in the fourth quarter 2012 due to the Company’s assumption of Barclays’ indemnification obligations on December 1, 2012.2014. The fair value of these indemnifications was not
material at December 31, 2012. The Company currently expects indemnified balances to continue to increase over time.2014.
While the collateral pledged by a borrower is intended to be sufficient to offset the borrower’s obligations to return securities borrowed and any other amounts owing to the lender under the relevant securities lending agreement, in the event of a borrower default, the Company can give no assurance that the collateral pledged by the borrower will be sufficient to fulfill such obligations. If the amount of such pledged collateral is not sufficient to fulfill such obligations to a client for whom the Company has provided indemnification, BlackRock would be responsible for the amount of the shortfall. These indemnifications cover only the collateral shortfall described above, and do not in any way guarantee, assume or otherwise insure the investment performance or return of any cash collateral vehicle into which securities lending cash collateral is invested.
Contingent Distribution Obligations. In November 2010, BlackRock entered into a second amended and restated global distribution agreement with Merrill Lynch, which requires the Company to make payments to Merrill Lynch contingent upon sales of products and level of AUM 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 three-year extension if certain conditions are satisfied. The obligation for 2014, 2015 and 2016 is not included in the table above as the amounts are not currently determinable.
The following items have not been included in the contractual obligations, commitments and contingencies table:
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 contractual obligations and commitments table above. These arrangements are discussed in more detail in Notes 13, Stock-Based Compensation, and 14, 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, 20122014 totaled $1,547$1,865 million and included incentive compensation of $1,168$1,418 million, deferred compensation of $137$204 million and other compensation and benefits related obligations of $242$243 million. Substantially all of the incentive compensation liability was paid in the first quarter of 2013,2015, while the deferred compensation obligations are generally payable over periods up to five years.
Separate Account Liabilities.At December 31, 2012, the Company had $134.8 billion of separate account 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.
Short-Term Investment Funds.Barclays has provided capital support agreements to support certain cash management funds 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 were 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. On October 9, 2012, BlackRock, on behalf of two of these funds, negotiated amendments to these capital support agreements to release Barclays from coverage provided for defaults on 51 covered securities (with an estimated value of approximately $750 million) held in the funds in exchange for a payment by Barclays to the funds of $70 million. The payment was in an amount in excess of the payments that were expected under the Barclays capital support agreements. The Barclays capital support agreements continued in effect for the remaining covered securities in these two funds, and after this transaction, at October 10, 2012, Barclays’ remaining potential obligation in the aggregate under the capital support agreements was $1.6 billion. The support agreements for these two funds had a termination date of December 1, 2013 subject to an early termination option in the event that the applicable fund’s market value remained above a certain net asset value per unit for 120 consecutive days. Barclays exercised its termination option for these two funds on December 7, 2012 and January 3, 2013. After these terminations, at January 31, 2013, Barclays’ remaining maximum potential obligation in the aggregate under the capital support agreements was not material.
As previously mentioned, the fourth quarter 2012 results included a one-time $30 million charge related to a contribution to certain of these STIFs. This contribution resulted from actions taken to ensure compliance with new regulations from the Office of the Comptroller of the Currency (“OCC”) taking effect in July 2013 that further limit a STIF’s weighted-average portfolio life maturity. BlackRock chose to sell certain securities held within STIFs and to make a one-time contribution to the STIFs to maintain the value of the funds while ensuring compliance with the new OCC rules. The securities sold were held in funds managed by BGI prior to BlackRock’s
acquisition of BGI. Until adoption of the new STIF regulations, BlackRock had been pursuing a strategy to hold these securities as market values improved over time. As a result of the fourth quarter security sales, these STIFs are currently in compliance with the new OCC rules.
At December 31, 2012, BlackRock concluded that although these funds were VIEs, it was not the primary beneficiary (“PB”) of these funds.
Critical Accounting Policies
The preparation of 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 revenuesrevenue and expensesexpense 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 see Note 2,Significant Accounting Policies to, in the consolidated financial statements beginning on page F-1 of this Form 10-K.
Consolidation of Sponsored Investment Funds and Securitization ProductsProducts.. Consolidation ofThe accounting method used by the Company to record its investments depends upon the influence the Company has over the given investee, the sponsored investment funds and securitization products (collectively “investment products”) is determined pursuant to ASC 810,Consolidation. The accounting method used by the Company depends upon the influence the Company has over its investee, the investment product. To the extent that BlackRock can exert control over thehas a controlling financial and operating policies ofinterest in the investment product, which generally exists if there is a 50% or greater voting interest or if partners or members of certainthe investment products do not have substantive rights, BlackRock consolidates the investment product.
For certain investment products in which BlackRock’s votinga controlling financial interest is less than 50%,not directly linked to voting interests, an analysis is performed to determine if the investment product is a 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 PB of the investment product, which would require consolidation.
Consolidation of Variable Interest Entities. Certain investment products for which the risks and rewards of
ownership area controlling financial interest is 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 continuously evaluates such factors as facts and circumstances change to determine if the initial VIE status determination must be reconsidered. BlackRock is required to consolidate a VIE when it is deemed to be the PB, which is evaluated continuously as facts and circumstances change.
Accounting Standards Updateprimary beneficiary (“ASU”PB”) 2010-10,Amendments to Statement 167 for Certain Investment Funds(“ASU 2010-10”) defers the application of Statement of Financial Accounting Standards (“SFAS”) No. 167,Amendments to FASB Interpretation No. 46(R),for certain investment funds, including money market funds. 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 absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both. 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.
. Significant judgment is required in the determination of whether the Company is the PB of a VIE. If the Company is determined to be the PB of a VIE, BlackRock will consolidate the entity. In order to determine whether the Company is the PB of a VIE, for entities that meet the conditions of ASU 2010-10, management must make significant estimates and assumptions of projected future cash flows and assign probabilities to different cash flow scenarios. flows.
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, gainprepayments, realization of gains, 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 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, 2012,2014, the following balances related toCompany’s consolidated VIEs including CLOs and an investment fund on the consolidated statementsconsisted primarily of financial condition:CLOs.
| (Dollar amounts in millions) | CLOs | Sponsored Private Equity Fund | Total Consolidated VIEs | |||||||||
Assets of consolidated VIEs: | ||||||||||||
Cash and cash equivalents | $ | 294 | $ | 3 | $ | 297 | ||||||
Bank loans, bonds and other investments | 2,240 | 24 | 2,264 | |||||||||
Liabilities of consolidated VIEs: | ||||||||||||
Borrowings | (2,402 | ) | — | (2,402 | ) | |||||||
Other liabilities | (103 | ) | — | (103 | ) | |||||||
Appropriated retained earnings | (29 | ) | — | (29 | ) | |||||||
Non-controlling interests of consolidated VIEs | — | (27 | ) | (27 | ) | |||||||
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Total BlackRock net interests in consolidated VIEs | $ | — | $ | — | $ | — | ||||||
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CLOs.At December 31, 2012,2014, BlackRock was the manager of over 20 CLOs/CDOs and other securitization entities. In accordance with consolidation accounting guidance for VIEs, BlackRock was determined to be the PB for certain of these CLOs, which required BlackRock to consolidate these VIEs. BlackRock was deemed to be the PB because it has the power to direct the activities of the CLOCLOs that most significantly impact the entity’sentities’ economic performance and has the right to receive benefits that potentially could be significant to the VIE. At December 31, 2012,2014, the Company had $2,534$3,615 million and $2,505$3,634 million in assets and liabilities, respectively, on its consolidated statement of financial condition related to these consolidated CLOs. In addition, theThe Company recorded appropriated retained earnings for the difference between the assets and liabilities of the CLOs recorded on the consolidated statement of financial condition as the CLO noteholders not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLO’sCLOs’ assets and liabilities. The changesChanges in the fair value of the assets and liabilities of these CLOs have no impact on net income
attributable to BlackRock or its cash flows. Excluding outstanding management fee receivables, the Company has no risk of loss withrelated to its involvement with these VIEs.
At December 31, 2012, BlackRock was determined to be the PB of one sponsored private equity investment fund of funds in 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 fund, which limits the ability of the partners to transfer or sell their interests without BlackRock’s consent as the general partner of the fund. At December 31, 2012, the Company had recorded $3 million,
$24 million and $27 million in cash and cash equivalents, private equity investments and nonredeemable non-controlling interests of consolidated VIEs, respectively, on the consolidated statement of financial condition related to this VIE. The changes in the fair value of the assets and liabilities of this VIE have no impact on net income attributable to BlackRock. Excluding outstanding management fee receivables, the Company has no risk of loss with its involvement with this VIE.
Consolidation of Voting Rights Entities. To the extent that 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 or if partners or members of certain products do not have substantive rights, BlackRock consolidates the investee.
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 ASCAccounting Standards Codification (“ASC”) 810-20, Control of Partnerships and Similar Entities (“ASC 810-20”), the Company reviews such investment vehicles to determine if such a presumption can be overcome by determining whether other non-affiliatednonaffiliated 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, BlackRock will consolidate the investment vehicle.
At December 31, 2012 and 2011, as a resultSee Note 4,Consolidated Sponsored Investment Funds, in the notes to the consolidated financial statements beginning on page F-1 of consolidation of various investment productsthis Form 10-K for amounts included on the Company’s consolidated financial statements 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:entities.
| (Dollar amounts in millions) | December 31, 2012 | December 31, 2011 | ||||||
Cash and cash equivalents | $ | 133 | $ | 196 | ||||
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Trading investments | 123 | 214 | ||||||
Other investments | 401 | 373 | ||||||
Other assets | 25 | 5 | ||||||
Other liabilities | (65 | ) | (37 | ) | ||||
Non-controlling interests | (187 | ) | (276 | ) | ||||
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BlackRock’s net interests in consolidated investment funds | $ | 430 | $ | 475 | ||||
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The Company retained the specialized accounting of these investment funds pursuant to ASC 810-10. VIEs, including a consolidated sponsored investment fund and CLOs, were excluded from the balances above as these balances are reported separately on the consolidated statements of financial condition.Investments
Investments
Equity Method Investments. For equity investments where BlackRock does not control the investee, and where it is not the PB of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company follows 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.
Substantially all of BlackRock’s equity method investees that are investment companies that record their 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-operatingnonoperating income (expense) for investments in investment companies, or as other revenue for operating advisory companycertain strategic investments, which are recorded in other assets, since such investees are considered to be an extension of BlackRock’s core business.
At December 31, 2012,2014, the Company had $604$654 million and $124$208 million of equity method investments, including equity method investments held for deferred compensation, reflected within investments and other assets, respectively, and at December 31, 2011,2013, the Company had $476$736 million and $80$163 million of equity method investees reflected in investments and other assets, respectively.
Impairment of InvestmentInvestments.s. The Company’s management 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, and the impairment is considered other-than-temporary, an impairment charge is recorded in the consolidated statement of income.
When the fair value of available-for-sale securities is lower than cost, the Company evaluates the security 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 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 of such unrealized losses. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operatingnonoperating income (expense) on the consolidated statement of income.
In making this determination for debt securities, the Company considers whether: (1) it has the intent to sell the security,security; (2) it is more likely than not that it will be required to sell the security before recoveryrecovery; or (3) it expects 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 earnings with the remaining portion recorded in accumulated other comprehensive income.
Evaluation 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 consolidated statements of income.
Fair Value MeasurementsMeasurements.
HierarchyThe Company’s assessment of Fair Value Inputs. The provisionsthe significance of ASC 820-10 establish a hierarchy that prioritizes inputsparticular input to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instrumentsmeasurement according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The in its entirety requires judgment and considers factors specific to the financial instrument. See Note 2,Significant Accounting Policies, in the consolidated financial statements beginning on page F-1 of this Form 10-K for more information on fair value hierarchy givesmeasurements.
Level 3 inputs include the highest priority to quoted prices (unadjusted)most currently available information, including capital account balances for its partnership interests in active markets for identical assets or liabilities andvarious alternative investments, which may be adjusted by using the lowest priority to unobservable inputs.
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs:
Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.
Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”), which in accordance with GAAP, are calculated under fair value measures and the changes are equal to the earnings of such funds), ETFs, listed equities and certain exchange-traded derivatives.
Level 2 Inputs:
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company relies on the NAV (or its equivalent)returns of certain investments as their fair value.
Level 2 assets may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, securities held within consolidated hedge funds, certain equity method
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Level 3 Inputs:
Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation.indices. Certain investments that are valued using NAV (or its equivalent)net asset values and are subject to current redemption restrictions that will not be lifted in the near term are
included in Level 3.
Level 3 assets may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, funds of hedge funds, direct private equity investments held within consolidated funds, bonds and bank loans.
Level 3 liabilities include borrowings of consolidated CLOs valued based upon non-binding single-broker quotes.
Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. BlackRock’s $679$528 million of Level 3 investments, or 39%27% of total GAAP investments at December 31, 20122014, primarily included the above mentioned co-investments.
Significanceco-investments in private equity funds of Inputs. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Valuation Techniques. The fair values of certain Level 3 assets and liabilities were determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. Such quotes and modeled prices are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of current market environment and other analytical procedures.
As a practical expedient, the Company relies on NAV as the fair value for certain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds real estate and private equity funds, which may be adjusted by using the returnsfunds of certain market indices. The various partnershipshedge funds as well as alternative hedge funds that invest in distressed credit, opportunistic funds and mortgage securities and real estate equity products. Many of these investees are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund.fund, which could include BlackRock employees. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, including independent appraisals from third-party sources. However, in some instances current valuation information, for illiquid securities or securities in markets that are not active, may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.
A significant amount of inputs used to value equity, debt securities and bank loans is sourced from well-recognized third-party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for identical securities traded in active markets and as Level 2 for other similar securities if the vendor uses observable inputs in determining the price. Annually, BlackRock’s internal valuation committee or other designated groups review both the valuation methodology, including the general assumptions and methods used to value various asset classes, and operational process with these vendors. In addition, on a quarterly basis, meetings are held with the vendors to identify any significant changes to the vendors’ processes.
In addition, quotes obtained from brokers generally are non-binding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.
Changes in ValuationValuation.. Changes in value on $1,275$1,460 million of investments will impact the Company’s non-operatingnonoperating income (expense), $158$201 million will impact accumulated other comprehensive income, $232$175 million are held at cost or amortized cost and the remaining $85 million relates to carried interest, which will not impact non-operatingnonoperating income (expense). As ofAt December 31, 2012,2014, changes in fair value of approximately $524$713 million of such investments within consolidated sponsored investment funds will impact BlackRock’s net income (loss) attributable to non-controllingnoncontrolling interests expense on the
consolidated statements of income. BlackRock’s net exposure to changes in fair value of such consolidated sponsored investment funds was $430$696 million.
Goodwill and Intangible Assets
The value of advisory contracts acquired in business acquisitions to manage AUM in proprietary open- and closed-endopen-end investment funds as well as collective trust funds without a specified termination date are classified as indefinite-lived intangible assets. The assignment of indefinite lives to such investment fund contracts is based upon the assumption 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. In addition, trade names/trademarks are considered indefinite-lived intangibles as they are expected to generate cash flows indefinitely. Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. In accordance with the applicable provisions of ASC 350,Intangibles – Goodwill and Other (“ASC 350”), indefinite-lived intangible assets and goodwill are not amortized. Finite-lived management contracts, which relate to acquired separate accounts and funds with a specified termination date, are amortized over their remaining expected useful lives, which, at December 31, 2012,2014, ranged from 1 to 1210 years with a weighted-average remaining estimated useful life of 4.93.8 years.
GoodwillGoodwill.. The Company assesses its goodwill for impairment at least annually, considering such factors as the book value and the market capitalization of the Company. The impairment testassessment performed as of July 31, 20122014 indicated that no impairment charge was required. The Company continuously monitorscontinues to monitor its book value per share as compared with closing prices of its common stock for potential indicators of impairment. At December 31, 2012,2014, the Company’s common
stock closed at $206.71,$357.56 which exceeded its book value, per share of approximately $148.20 after excluding appropriated retained earnings.earnings, of approximately $164.06 per share.
Indefinite-lived and finite-lived intangiblesintangibles.. The Company performs assessments to determine if any intangible assets are potentially impaired and whether the indefinite-life and finite-life classifications are still appropriate. In evaluating whether it is more likely than not that the fair value of indefinite-lived intangibles is less than its carrying value, BlackRock assessesperformed certain quantitative assessments and assessed various significant qualitative factors including AUM, revenue basis points, projected AUM growth rates, operating margins, tax rates and discount rates. In addition, the Company considersconsidered other factors including: (i) macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign
exchange rates, or other developments in equity and credit markets; (ii) industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics, a change in the market for an entity’s services, or regulatory, legal or political developments; and (iii) entity-specific events, such as a change in management or key personnel, overall financial performance and litigation that could affect significant inputs.
If potential impairment circumstances are considered to exist, the Company will perform an impairment test, using an undiscounted cash flow analysis. Actual results could differ from these cash flow estimates, which could materially impact the impairment conclusion. 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 occurs.
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 $157 million, $156$161 million and $160$157 million for 2012, 20112014, 2013 and 2010,2012, respectively.
In 2012, 20112014, 2013 and 2010,2012, the Company performed impairment tests, including evaluating various qualitative factors and performing certain quantitative assessments in 2014 and 2013. The Company determined that 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 continuously monitors various factors, including AUM, for potential indicators of impairment.
Income Taxes.The Company accounts for income taxes under the asset and liability method prescribed by ASC 740,Income Taxes(“ASC 740”). Deferred income tax assets and liabilities are recognized for 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 tax assets and liabilities is recognized in income in the period that includes the enactment date.
Significant management judgment is required in estimating the ranges of possible outcomes and determining the probability of favorable or unfavorable tax outcomes and
outcomes and potential interest and penalties related to such unfavorable outcomes, that require significant management judgment.outcomes. Actual future tax consequences relating to uncertain tax positions may be materially different than the Company’s current estimates. At December 31, 2012,2014, BlackRock had $404$379 million of gross unrecognized tax benefits, of which $250$283 million, if recognized, would affect the effective tax rate.
In accordance with ASC 740, managementManagement 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, 2012,2014, the Company had deferred tax assets of $4$10 million and net deferred tax liabilities of approximately $5,293$4,989 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. ASC 740 requires the
Company to assessassesses 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. ThisThe 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.
At December 31, 2012,2014, the Company had recorded a deferred tax asset of $71$157 million for unrealized investment losses; however, no valuation allowance has been established because the Company expects to hold certain equity method investments which invest in 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 consolidated statements of income in the period of the change. Such changes may be material to the Company’s consolidated financial statements. See Note 19, 20,Income Taxes, to the consolidated financial statements beginning on page F-1 of this Form 10-K for further details.
The Company records 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 receivables of approximately $102$117 million and current income taxes payables of $121$125 million at December 31, 2012.2014.
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 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 subscriptionsinflows or redemptions. outflows.
Investment advisory and administration fees for investment funds are shown net of fees waived pursuant to contractual expense limitations of the funds or voluntary waivers.
The Company contracts with third parties and related parties for various fund distribution and shareholder servicing to be performed on behalf of certain funds the Company manages. Such arrangements generally are priced as a portion of the management fee paid by the fund. In certain cases, the fund takes on the primary responsibility for payment for services such that the Company bears no credit risk to the third party. The Company accounts for such retrocession arrangements in accordance with ASC 605-45,Revenue Recognition – Principle— Principal Agent Considerations (“ASC 605-45”), and records its management fees net of retrocessions. Retrocessions for 2014, 2013 and 2012 2011 and 2010 were $793$891 million, $928$785 million and $831$793 million, respectively. The Company has additional contracts for similar services with third parties, which due to the terms of the contracts, are recorded as distribution 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 arehighly rated banks and broker-dealers. Revenue is accounted for on an accrual basis. The securities loaned are secured by collateral, generally ranging from 102% to 112% of the value of the loaned securities. TheGenerally, 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 2012, 20112014, 2013 and 2010,2012, securities lending revenue totaled $510$477 million, $397$447 million and $325$510 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 receives investment advisory performance fees or incentive allocationallocations, from certain actively managed investment funds and certain separately managed accounts.SMAs. These performance fees are earneddependent upon exceeding specified relative and/or absolute investment return thresholds. Such fees are recorded upon completion of the measurement period, which varies by product or account, and could be monthly, quarterly, annually or longer. For the years ended December 31, 2012, 2011 and 2010, performance fee revenue totaled $463 million, $371 million and $540 million, respectively.
In addition, the Company receives carried interest from certain alternative investmentsinvestment products upon exceeding performance thresholds. BlackRock may be required to return all, or part, of such carried interest depending upon future performance of these funds. Therefore, BlackRock records carried interest subject to such claw-backclawback provisions in investments or cash to the extent that it is distributed, on its consolidated statements of financial condition. Carried interest is realized and recorded as performance fee revenue upon the earlier of the termination of the investment fund or when the likelihood of claw-backclawback is considered 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 related to carried interest prior to meeting the revenue recognition criteria. At December 31, 20122014 and 2011,2013, the Company had $97$105 million and $33$108 million, respectively, of deferred carried interest recorded in other liabilities on the consolidated statements of financial condition. The ultimate recognition of performance fee revenue, if any, for these products is unknown.
For the years ended 2014, 2013 and 2012, performance fee revenue totaled $550 million, $561 million and $463 million, respectively.
Fees earned forBlackRock Solutions, which include advisory services, are recorded as services are performed or when completed and are determined using some, or all, of the following methods: (i) percentages of various attributes of advisory AUM or value of positions on theAladdin platform, (ii) fixed fees and (iii) performance fees if contractual thresholds are met. 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 assignment. For 2012, 20112014, 2013 and 2010,2012,BlackRock Solutions and advisory revenue totaled $635 million, $577 million and $518 million, $510 million and $460 million, respectively.
Adjustments to revenue arising from initial estimates recorded 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-backclawback is mathematically improbable.
RECENT DEVELOPMENTS
Accounting Developments
For accounting pronouncements that the Company adopted during 20122014 and for recent accounting pronouncements not yet adopted, see Note 2, to Significant Accounting Policies, in the consolidated financial statements.statements beginning on page F-1 of this Form 10-K.
Recent DevelopmentsItem 7a. Quantitative and Qualitative Disclosures about Market Risk
BlackRock holds an approximately one-third equity interest in Private National Mortgage Acceptance Company, LLC (“PennyMac”), accounted for as an equity method investment. PennyMac Financial Services, Inc., which is proposed to become a holding company of PennyMac, recently filed a Form S-1 with the SEC to effectively take PennyMac public. A successful offering by PennyMac may require BlackRock to adjust its investment in PennyMac at the time of the offering. Given the uncertain nature of the registration and offering process for PennyMac, the amount and timing of any such potential gains or changes in carrying values is uncertain.
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, 2012,2014, the majority of the Company’s investment advisory and administration fees were based on average or period end AUM of the applicable investment funds or separate accounts. Movements in equity market prices, interest rates/credit spreads, foreign exchange rates or all three could cause the
value of AUM to decline, which would result in lower investment advisory and administration fees.
Corporate Investments Portfolio Risks. As a leading investment management firm, BlackRock devotes significant resources across all of its operations to identifying, measuring, monitoring, managing and analyzing market and operating risks, including the management and oversight of its own investment portfolio. The Board of Directors of the Company has adopted guidelines for the review of investments to be made by the Company, requiring, among other things, that investments be reviewed by certain senior officers of the Company, and that certain investments may be referred to the Audit Committee or the Board of Directors, depending on the circumstances, for approval.
In the normal course of its business, BlackRock is exposed to equity market price risk, interest rate/credit spread risk and foreign exchange rate risk associated with its corporate investments.
BlackRock has investments primarily in sponsored investment products that invest in a variety of asset classes, including real estate, private equity and hedge funds. Investments generally are made for co-investment purposes, to establish a performance track record, to hedge exposure to certain deferred compensation plans or for regulatory purposes. Currently, the Company has a seed capital hedging program in which it enters into total return swaps to hedge market and interest rate exposure to certain investments. At December 31, 2012,2014, the Company had outstanding total return swaps hadand interest rate swaps with an aggregate notional value of approximately $206 million.
$238 million and $84 million, respectively.
At December 31, 2012,2014, approximately $524$713 million of BlackRock’s total investments were maintained in sponsored investment funds deemed to be controlled by BlackRock in accordance with GAAP and, therefore, are consolidated even though BlackRock may not own a majority of such funds. Excluding the impact of the Federal Reserve Bank stock, carried interest, investments made to hedge exposure to certain deferred compensation plans and certain investments that are hedged via the seed capital hedging program, the Company’s economic exposure to its investment portfolio is as follows:$1,319 million. SeeBalance Sheet Overview-Investmentsin Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information on the Company’s investments.
| December 31, 2012 | December 31, 2011 | Variance | ||||||||||||||
| (Dollar amounts in millions) | Amount | % Change | ||||||||||||||
Total investments, GAAP | $ | 1,750 | $ | 1,631 | $ | 119 | 7 | % | ||||||||
Investments held by consolidated sponsored investment funds | (524 | ) | (587 | ) | 63 | 11 | % | |||||||||
Net exposure to consolidated investment funds | 430 | 475 | (45 | ) | (10 | %) | ||||||||||
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Total investments, as adjusted | 1,656 | 1,519 | 137 | 9 | % | |||||||||||
Federal Reserve Bank stock | (89 | ) | (328 | ) | 239 | 73 | % | |||||||||
Carried interest | (85 | ) | (21 | ) | (64 | ) | (305 | %) | ||||||||
Deferred compensation investments | (62 | ) | (65 | ) | 3 | 5 | % | |||||||||
Hedged investments | (209 | ) | (43 | ) | (166 | ) | (386 | %) | ||||||||
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Total “economic” investment exposure | $ | 1,211 | $ | 1,062 | $ | 149 | 14 | % | ||||||||
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The “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, 2012,2014, the Company’s net exposure to equity market price risk in its investment portfolio was approximately $609$807 million of the Company’s total economic investment exposure. Investments subject to market price risk include private equity and real estate investments, hedge funds and funds of funds as well as mutual funds. The Company estimates that a hypothetical 10% adverse change in market prices would result in a decrease of approximately $60.9$80.7 million in the carrying value of such investments.
Interest Rate/Credit Spread Risk.At December 31, 2012,2014, the Company was exposed to interest-rate risk and credit spread risk as a result of approximately $602$512 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 $8.0$4.8 million in the carrying value of such investments.
Foreign Exchange Rate Risk.As discussed above, the Company invests in sponsored investment products that invest in a variety of asset classes. The carrying value of the total economic investment exposure denominated in foreign currencies, primarily the pound sterling and euro, was $156$139 million at December 31, 2012.2014. A 10% adverse change in the applicable foreign exchange rates would result in approximately a $15.6$13.9 million decline in the carrying value of such investments.
Other Market Risks.By using derivative financial instruments, the The Company exposes itself to market risk. Market risk fromexecutes forward foreign currency exchange contracts isto mitigate the effect on the valuerisk of a financial instrument that results from a change in currencycertain foreign exchange rates. The Company manages exposure to
market risk associated with foreign currency exchange contracts by establishing and monitoring parameters that limit the types and degrees of market risk that may be undertaken.movements. At December 31, 2012,2014, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $79$201 million.
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) under the Exchange Act) as of 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.
Internal Control andOver Financial Reporting.There have beenExcept for the application of the updated Internal Control — Integrated Framework released by the Committee of Sponsoring Organizations of the Treadway Commission in May 2013, there were no changes in our internal control over financial reporting that occurred during the latestfourth quarter of the fiscal quarteryear ending December 31, 2014 that have materially affected or are reasonably likely to materially affect suchour internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of BlackRock, Inc. (the “Company”) is responsible for establishing and maintaining effective 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 affected 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 accounting principles generally accepted in 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 in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with the authorizations 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 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 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, 20122014 based on the criteria established inInternal Control –— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2012,2014, 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.
February 28, 2013
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, 2012,2014, based on criteria established inInternal Control – Integrated Framework (2013) issued 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’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’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, 2012,2014, based on the criteria established inInternal Control – Integrated Framework (2013) issued 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, 20122014 and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended of the Company and our report dated February 28, 201327, 2015 expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2013
The Company is furnishing no other information in this Form 10-K.
PART III
Part IIIItem 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 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” of 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” of 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: 20122014 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 4: Ratification of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement is incorporated herein by reference.
PART IV
Part IVItem 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.
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. 001-33099) and “Old BlackRock” refers to BlackRock Holdco 2, Inc. (formerly named BlackRock, Inc.) (Commission File No. 001-15305), 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.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Exhibit No. | Description | |||
| 10.22 | (26)† | Second Amended and Restated Global Distribution Agreement, dated as of November 15, 2010, among BlackRock and Merrill Lynch & Co., Inc. | ||
| 10.23 | (3) | Amended and Restated Implementation and Stockholder Agreement, dated as of February 27, 2009, between The PNC Financial Services Group, Inc. and BlackRock. | ||
| 10.24 | (27) | Amendment No. 1, dated as of June 11, 2009, to the Amended and Restated Implementation and Stockholder Agreement between The PNC Financial Services Group, Inc. and BlackRock. | ||
| 10.25 | (28) | 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. | ||
| 10.26 | (29) | Letter Agreement, dated February 12, 2013, between Gary S. Shedlin and BlackRock. + | ||
| 10.27 | Amended and Restated Commercial Paper Dealer Agreement between BlackRock and Barclays Capital Inc., dated as of December 23, 2014. | |||
| 10.28 | Amended and Restated Commercial Paper Dealer Agreement between BlackRock and Citigroup Global Markets Inc., dated as of December 23, 2014. | |||
| 10.29 | Amended and Restated Commercial Paper Dealer Agreement between BlackRock and Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated as of January 6, 2015. | |||
| 10.30 | Amended and Restated Commercial Paper Dealer Agreement between BlackRock and Credit Suisse Securities (USA) LLC dated as of January 6, 2015. | |||
| 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. | |||
| (1) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on October 5, 2006. |
| (2) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on May 25, 2012. |
| (3) | Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2012. |
| (4) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on February 27, 2009. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 3, 2009. |
| Incorporated by reference to BlackRock’s Registration Statement on Form S-8 (Registration No. 333-137708) filed on September 29, 2006. |
| Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2007. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on September 17, 2007. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 10, 2009. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on May 25, 2011. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on May 31, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on March 18, 2014. |
| (13) | Incorporated by reference to BlackRock’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. |
| Incorporated by reference to BlackRock’s Registration Statement on Form S-8 (Registration No. 333-197764) filed on July 31, 2014. |
| (15) | Incorporated by reference to Old BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2002. |
| Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on May 24, 2006. |
| Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2008. |
| Incorporated by reference to Old BlackRock’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. |
| Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on February 22, 2006. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 15, 2007. |
| Incorporated by reference to BlackRock’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K/A filed on August 24, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on April 4, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on April 3, 2013. |
| (25) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on March 28, 2014. |
| (26) | Incorporated by reference to BlackRock’s Current Report on Form 8-K/A filed on August 24, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 17, 2009. |
| Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2009. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on |
| + | Denotes compensatory plans or |
| † | Confidential treatment has been granted for certain portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission. |
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.
| /s/ LAURENCE D. FINK | ||
| ||
| Laurence D. Fink | ||
| Chairman, Chief Executive Officer and Director |
February 28, 201327, 2015
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,Gary S. Shedlin, Matthew J. Mallow, Daniel R. Waltcher and Harris Oliner,J. Russell McGranahan, his or her true and lawful attorneys-in-fact, with full power and substitution, for him or her 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 or her substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 | |||||
/S/ LAURENCE D. FINK Laurence D. Fink | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | February | ||||
| 27, 2015 | ||||||
/S/
Gary S. Shedlin | Senior Managing Director and Chief Financial Officer (Principal Financial Officer) | February | ||||
| 27, 2015 | ||||||
/S/ JOSEPH FELICIANI, JR. Joseph Feliciani, Jr. | Managing Director and Chief Accounting Officer (Principal Accounting Officer) | February | ||||
| 27, 2015 | ||||||
/S/ ABDLATIF Y. AL-HAMAD |
| Director | February | |||
| Abdlatif Y. Al-Hamad | ||||||
/S/ MATHIS CABIALLAVETTA |
| Director | February | |||
| Mathis Cabiallavetta | ||||||
/S/ | Director | February | ||||
/S/ WILLIAM S. DEMCHAK |
| Director | February | |||
| William S. Demchak | ||||||
/S/ JESSICA EINHORN |
| Director | February | |||
| Jessica Einhorn | ||||||
/S/ FABRIZIO FREDA |
| Director | February | |||
| Fabrizio Freda | ||||||
|
|
| ||||
/S/ MURRY S. GERBER |
| Director | February | |||
| Murry S. Gerber | ||||||
|
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/S/ ROBERT S. KAPITO |
| Director | February | |||
| Robert S. Kapito | ||||||
/S/ DAVID H. KOMANSKY |
| Director | February | |||
| David H. Komansky | ||||||
/S/ SIR DERYCK MAUGHAN |
| Director | February | |||
| Sir Deryck Maughan | ||||||
/S/ | Director | February | ||||
/S/ THOMAS H. O’BRIEN |
| Director | February | |||
| Thomas H. O’Brien | ||||||
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| |||||
| Signature | ||||||
| Title | Date | |||||
/S/ IVAN G. SEIDENBERG |
| Director | February | |||
| Ivan G. Seidenberg | ||||||
/S/ MARCO ANTONIO SLIM DOMIT |
| Director | February | |||
| Marco Antonio Slim Domit | ||||||
/S/ JOHN S. VARLEY |
| Director | February | |||
| John S. Varley | ||||||
/S/ SUSAN L. WAGNER |
| Director | February | |||
| Susan L. Wagner |
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-9 | ||||
| F-10 |
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, 20122014 and 2011,2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2012.2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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, 20122014 and 2011,2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012,2014, 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 Company’s internal control over financial reporting as of December 31, 2012,2014, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 201327, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 201327, 2015
BlackRock, Inc.
Consolidated Statements of Financial Condition
(Dollar amounts in millions, except per share data)
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| (in millions, except shares and per share data) | December 31, 2014 | December 31, 2013 | ||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 4,606 | $ | 3,506 | $ | 5,723 | $ | 4,390 | ||||||||
Accounts receivable | 2,250 | 1,960 | 2,120 | 2,247 | ||||||||||||
Due from related parties | 77 | 142 | ||||||||||||||
Investments | 1,750 | 1,631 | 1,921 | 2,151 | ||||||||||||
Assets of consolidated variable interest entities: | ||||||||||||||||
Cash and cash equivalents | 297 | 54 | 278 | 161 | ||||||||||||
Bank loans and other investments | 2,264 | 1,639 | ||||||||||||||
Bank loans, other investments and other assets | 3,352 | 2,325 | ||||||||||||||
Separate account assets | 134,768 | 118,871 | 161,287 | 155,113 | ||||||||||||
Collateral held under securities lending agreements | 23,021 | 20,918 | ||||||||||||||
Deferred sales commissions, net | 24 | 38 | ||||||||||||||
Property and equipment (net of accumulated depreciation of $572 and $483 at December 31, 2012 and 2011, respectively) | 557 | 537 | ||||||||||||||
Intangible assets (net of accumulated amortization of $899 and $751 at December 31, 2012 and 2011, respectively) | 17,402 | 17,356 | ||||||||||||||
Separate account collateral held under securities lending agreements | 33,654 | 21,788 | ||||||||||||||
Property and equipment (net of accumulated depreciation of $587 and $611 at December 31, | 467 | 525 | ||||||||||||||
Intangible assets (net of accumulated amortization of $1,040 and $1,057 at December 31, | 17,344 | 17,501 | ||||||||||||||
Goodwill | 12,910 | 12,792 | 12,961 | 12,980 | ||||||||||||
Other assets | 525 | 452 | 701 | 692 | ||||||||||||
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Total assets | $ | 200,451 | $ | 179,896 | $ | 239,808 | $ | 219,873 | ||||||||
|
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Liabilities | ||||||||||||||||
Accrued compensation and benefits | $ | 1,547 | $ | 1,383 | $ | 1,865 | $ | 1,747 | ||||||||
Accounts payable and accrued liabilities | 1,055 | 923 | 1,035 | 1,084 | ||||||||||||
Due to related parties | 14 | 22 | ||||||||||||||
Short-term borrowings | 100 | 100 | ||||||||||||||
Liabilities of consolidated variable interest entities: | ||||||||||||||||
Borrowings | 2,402 | 1,574 | 3,389 | 2,369 | ||||||||||||
Other liabilities | 103 | 9 | 245 | 74 | ||||||||||||
Long-term borrowings | 5,687 | 4,690 | ||||||||||||||
Borrowings | 4,938 | 4,939 | ||||||||||||||
Separate account liabilities | 134,768 | 118,871 | 161,287 | 155,113 | ||||||||||||
Collateral liabilities under securities lending agreements | 23,021 | 20,918 | ||||||||||||||
Separate account collateral liabilities under securities lending agreements | 33,654 | 21,788 | ||||||||||||||
Deferred income tax liabilities | 5,293 | 5,323 | 4,989 | 5,085 | ||||||||||||
Other liabilities | 844 | 721 | 886 | 1,004 | ||||||||||||
|
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Total liabilities | 174,834 | 154,534 | 212,288 | 193,203 | ||||||||||||
|
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Commitments and contingencies (Note 12) | ||||||||||||||||
Commitments and contingencies (Note 13) | ||||||||||||||||
Temporary equity | ||||||||||||||||
Redeemable non-controlling interests | 32 | 92 | ||||||||||||||
Redeemable noncontrolling interests | 35 | 54 | ||||||||||||||
Permanent Equity | ||||||||||||||||
BlackRock, Inc. stockholders’ equity | ||||||||||||||||
Common stock, $ 0.01 par value; | 2 | 1 | 2 | 2 | ||||||||||||
Shares authorized: 500,000,000 at December 31, 2012 and 2011; Shares issued: 171,252,185 and 139,880,380 at December 31, 2012 and 2011, respectively; Shares outstanding: 168,875,304 and 138,463,135 at December 31, 2012 and 2011, respectively; | ||||||||||||||||
Series B non-voting participating preferred stock, $0.01 par value; | — | — | ||||||||||||||
Shares authorized: 150,000,000 at December 31, 2012 and 2011; Shares issued and outstanding: 823,188 and 38,328,737 at December 31, 2012 and 2011, respectively; | ||||||||||||||||
Series C non-voting participating preferred stock, $0.01 par value; | — | — | ||||||||||||||
Shares authorized: 6,000,000 at December 31, 2012 and 2011; Shares issued and outstanding: 1,517,237 at December 31, 2012 and 2011, respectively | ||||||||||||||||
Shares authorized: 500,000,000 at December 31, 2014 and 2013; Shares issued: 171,252,185 at December 31, 2014 and 2013; Shares outstanding: 164,786,788 and 166,589,688 at December 31, 2014 and 2013, respectively; | ||||||||||||||||
Series B nonvoting participating preferred stock, $0.01 par value; | — | — | ||||||||||||||
Shares authorized: 150,000,000 at December 31, 2014 and 2013; Shares issued and outstanding: 823,188 at December 31, 2014 and 2013; | ||||||||||||||||
Series C nonvoting participating preferred stock, $0.01 par value; | — | — | ||||||||||||||
Shares authorized: 6,000,000 at December 31, 2014 and 2013; Shares issued and outstanding: 1,311,887 at December 31, 2014 and 2013 | ||||||||||||||||
Additional paid-in capital | 19,419 | 20,275 | 19,386 | 19,473 | ||||||||||||
Retained earnings | 6,444 | 5,046 | 10,164 | 8,208 | ||||||||||||
Appropriated retained earnings | 29 | 72 | (19 | ) | 22 | |||||||||||
Accumulated other comprehensive loss | (59 | ) | (127 | ) | (273 | ) | (35 | ) | ||||||||
Escrow shares, common, at cost (3,603 shares held at December 31, 2011) | — | (1 | ) | |||||||||||||
Treasury stock, common, at cost (2,376,881 and 1,413,642 shares held at December 31, 2012 and 2011, respectively) | (432 | ) | (218 | ) | ||||||||||||
|
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Treasury stock, common, at cost (6,465,397 and 4,662,497 shares held at December 31, 2014 and 2013, respectively) | (1,894 | ) | (1,210 | ) | ||||||||||||
Total BlackRock, Inc. stockholders’ equity | 25,403 | 25,048 | 27,366 | 26,460 | ||||||||||||
Nonredeemable non-controlling interests | 155 | 184 | ||||||||||||||
Nonredeemable non-controlling interests of consolidated variable interest entities | 27 | 38 | ||||||||||||||
|
| |||||||||||||||
Nonredeemable noncontrolling interests | 104 | 135 | ||||||||||||||
Nonredeemable noncontrolling interests of consolidated variable interest entities | 15 | 21 | ||||||||||||||
Total permanent equity | 25,585 | 25,270 | 27,485 | 26,616 | ||||||||||||
|
| |||||||||||||||
Total liabilities, temporary equity and permanent equity | $ | 200,451 | $ | 179,896 | $ | 239,808 | $ | 219,873 | ||||||||
|
| |||||||||||||||
See accompanying notes to consolidated financial statements.
BlackRock, Inc.
Consolidated Statements of Income
(Dollar amounts in millions, except per share data)
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2012 | 2011 | 2010 | ||||||||||||||||||||||
| (in millions, except shares and per share data) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Investment advisory, administration fees and securities lending revenue | ||||||||||||||||||||||||
Related parties | $ | 5,292 | $ | 5,303 | $ | 4,893 | $ | 6,738 | $ | 5,991 | $ | 5,292 | ||||||||||||
Other third parties | 2,780 | 2,593 | 2,397 | 2,851 | 2,748 | 2,780 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total investment advisory, administration fees and securities lending revenue | 8,072 | 7,896 | 7,290 | 9,589 | 8,739 | 8,072 | ||||||||||||||||||
Investment advisory performance fees | 463 | 371 | 540 | 550 | 561 | 463 | ||||||||||||||||||
BlackRock Solutions and advisory | 518 | 510 | 460 | 635 | 577 | 518 | ||||||||||||||||||
Distribution fees | 71 | 100 | 116 | 70 | 73 | 71 | ||||||||||||||||||
Other revenue | 213 | 204 | 206 | 237 | 230 | 213 | ||||||||||||||||||
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Total revenue | 9,337 | 9,081 | 8,612 | 11,081 | 10,180 | 9,337 | ||||||||||||||||||
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Expenses | ||||||||||||||||||||||||
Expense | ||||||||||||||||||||||||
Employee compensation and benefits | 3,287 | 3,199 | 3,097 | 3,829 | 3,560 | 3,287 | ||||||||||||||||||
Distribution and servicing costs | 364 | 353 | 364 | |||||||||||||||||||||
Related parties | 4 | 5 | 226 | |||||||||||||||||||||
Other third parties | 360 | 381 | 182 | |||||||||||||||||||||
Amortization of deferred sales commissions | 55 | 81 | 102 | 56 | 52 | 55 | ||||||||||||||||||
Direct fund expenses | 591 | 563 | 493 | 748 | 657 | 591 | ||||||||||||||||||
General and administration | 1,359 | 1,415 | 1,354 | 1,453 | 1,540 | 1,359 | ||||||||||||||||||
Restructuring charges | — | 32 | — | |||||||||||||||||||||
Amortization of intangible assets | 157 | 156 | 160 | 157 | 161 | 157 | ||||||||||||||||||
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Total expenses | 5,813 | 5,832 | 5,614 | |||||||||||||||||||||
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Total expense | 6,607 | 6,323 | 5,813 | |||||||||||||||||||||
Operating income | 3,524 | 3,249 | 2,998 | 4,474 | 3,857 | 3,524 | ||||||||||||||||||
Non-operating income (expense) | ||||||||||||||||||||||||
Nonoperating income (expense) | ||||||||||||||||||||||||
Net gain (loss) on investments | 163 | 46 | 179 | 165 | 305 | 163 | ||||||||||||||||||
Net gain (loss) on consolidated variable interest entities | (38 | ) | (18 | ) | (35 | ) | (41 | ) | — | (38 | ) | |||||||||||||
Interest and dividend income | 36 | 34 | 29 | 29 | 22 | 36 | ||||||||||||||||||
Interest expense | (215 | ) | (176 | ) | (150 | ) | (232 | ) | (211 | ) | (215 | ) | ||||||||||||
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Total non-operating income (expense) | (54 | ) | (114 | ) | 23 | |||||||||||||||||||
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Total nonoperating income (expense) | (79 | ) | 116 | (54 | ) | |||||||||||||||||||
Income before income taxes | 3,470 | 3,135 | 3,021 | 4,395 | 3,973 | 3,470 | ||||||||||||||||||
Income tax expense | 1,030 | 796 | 971 | 1,131 | 1,022 | 1,030 | ||||||||||||||||||
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Net income | 2,440 | 2,339 | 2,050 | 3,264 | 2,951 | 2,440 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
Net income (loss) attributable to redeemable non-controlling interests | 9 | — | 3 | |||||||||||||||||||||
Net income (loss) attributable to nonredeemable non-controlling interests | (27 | ) | 2 | (16 | ) | |||||||||||||||||||
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Net income (loss) attributable to redeemable noncontrolling interests | 2 | (1 | ) | 9 | ||||||||||||||||||||
Net income (loss) attributable to nonredeemable noncontrolling interests | (32 | ) | 20 | (27 | ) | |||||||||||||||||||
Net income attributable to BlackRock, Inc. | $ | 2,458 | $ | 2,337 | $ | 2,063 | $ | 3,294 | $ | 2,932 | $ | 2,458 | ||||||||||||
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Earnings per share attributable to BlackRock, Inc. common stockholders: | ||||||||||||||||||||||||
Basic | $ | 14.03 | $ | 12.56 | $ | 10.67 | $ | 19.58 | $ | 17.23 | $ | 14.03 | ||||||||||||
Diluted | $ | 13.79 | $ | 12.37 | $ | 10.55 | $ | 19.25 | $ | 16.87 | $ | 13.79 | ||||||||||||
Cash dividends declared and paid per share | $ | 6.00 | $ | 5.50 | $ | 4.00 | $ | 7.72 | $ | 6.72 | $ | 6.00 | ||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||
Basic | 174,961,018 | 184,265,367 | 190,554,510 | 168,225,154 | 170,185,870 | 174,961,018 | ||||||||||||||||||
Diluted | 178,017,679 | 187,116,410 | 192,692,047 | 171,112,261 | 173,828,902 | 178,017,679 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
BlackRock, Inc.
Consolidated Statements of Comprehensive Income
(Dollar amounts in millions)
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2012 | 2011 | 2010 | ||||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Net income | $ | 2,440 | $ | 2,339 | $ | 2,050 | $ | 3,264 | $ | 2,951 | $ | 2,440 | ||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Change in net unrealized gains (losses) from available-for-sale investments, net of tax: | ||||||||||||||||||||||||
Unrealized holding gains (losses), net of tax | 26 | (3 | ) | 3 | 3 | 4 | 26 | |||||||||||||||||
Less: reclassification adjustment included in net income | 6 | 1 | 1 | 8 | 13 | 6 | ||||||||||||||||||
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Net change from available-for-sale investments, net of tax (1) | 20 | (4 | ) | 2 | ||||||||||||||||||||
Benefit plans, net | (5 | ) | — | (1 | ) | |||||||||||||||||||
Net change from available-for-sale investments, net of tax | (5 | ) | (9 | ) | 20 | |||||||||||||||||||
Benefit plans, net(1) | (2 | ) | 10 | (5 | ) | |||||||||||||||||||
Foreign currency translation adjustments | 53 | (27 | ) | (1 | ) | (231 | ) | 23 | 53 | |||||||||||||||
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Other comprehensive income (loss) | 68 | (31 | ) | — | (238 | ) | 24 | 68 | ||||||||||||||||
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Comprehensive income | 2,508 | 2,308 | 2,050 | 3,026 | 2,975 | 2,508 | ||||||||||||||||||
Less: Comprehensive income (loss) attributable to non-controlling interests | (18 | ) | 2 | (13 | ) | |||||||||||||||||||
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Less: Comprehensive income (loss) attributable to noncontrolling interests | (30 | ) | 19 | (18 | ) | |||||||||||||||||||
Comprehensive income attributable to BlackRock, Inc. | $ | 2,526 | $ | 2,306 | $ | 2,063 | $ | 3,056 | $ | 2,956 | $ | 2,526 | ||||||||||||
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| (1) | The tax benefit (expense) |
See accompanying notes to consolidated financial statements.
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 preferred stock capital contribution | 5 | — | — | — | — | — | 5 | — | — | 5 | — | |||||||||||||||||||||||||||||||||
Merrill Lynch cash capital contribution | 10 | — | — | — | — | — | 10 | — | — | 10 | — | |||||||||||||||||||||||||||||||||
Exchange of common stock for preferred shares series B | 128 | — | — | — | — | (128 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions | (202 | ) | — | — | — | — | 217 | 15 | — | — | 15 | — | ||||||||||||||||||||||||||||||||
Employee tax benefit withholdings related to employee stock transactions | — | — | — | — | — | (124 | ) | (124 | ) | — | — | (124 | ) | — | ||||||||||||||||||||||||||||||
Shares repurchased | — | — | — | — | — | (140 | ) | (140 | ) | — | — | (140 | ) | — | ||||||||||||||||||||||||||||||
Convertible debt conversions, net of tax | (54 | ) | — | — | — | — | 66 | 12 | — | — | 12 | — | ||||||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 44 | — | — | — | — | — | 44 | — | — | 44 | — | |||||||||||||||||||||||||||||||||
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 | — | |||||||||||||||||||||||||||||||||
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December 31, 2010 | $ | 22,504 | $ | 3,723 | $ | 75 | $ | (96 | ) | $ | (1 | ) | $ | (111 | ) | $ | 26,094 | $ | 189 | $ | 45 | $ | 26,328 | $ | 6 | |||||||||||||||||||
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| (in millions) | Addi tional Paid-in Capital(1) | Retained Earnings | Appro priated Retained Earnings | Accum ulated Other Compre hensive Income (Loss) | Common Shares Held in Escrow | Treasury Stock Common | Total Stock holders’ Equity | Non redeemable Non controlling Interests | Non redeemable Non controlling Interests of Conso lidated VIEs | Total Permanent Equity | Redeemable Non controlling Interests / Temporary Equity(2) | |||||||||||||||||||||||||||||||||
December 31, 2011 | $ | 20,276 | $ | 5,046 | $ | 72 | $ | (127 | ) | $ | (1 | ) | $ | (218 | ) | $ | 25,048 | $ | 184 | $ | 38 | $ | 25,270 | $ | 92 | |||||||||||||||||||
Net income | — | 2,458 | — | — | — | — | 2,458 | 11 | (38 | ) | 2,431 | 9 | ||||||||||||||||||||||||||||||||
Allocation of losses of consolidated collateralized loan obligations | — | — | (43 | ) | — | — | — | (43 | ) | — | 43 | — | — | |||||||||||||||||||||||||||||||
Release of common stock from escrow | (1 | ) | — | — | — | 1 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Dividends paid | — | (1,060 | ) | — | — | — | — | (1,060 | ) | — | — | (1,060 | ) | — | ||||||||||||||||||||||||||||||
Stock-based compensation | 451 | — | — | — | — | — | 451 | — | — | 451 | — | |||||||||||||||||||||||||||||||||
Merrill Lynch cash capital contribution | 7 | — | — | — | — | — | 7 | — | — | 7 | — | |||||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions | (376 | ) | — | — | — | — | 432 | 56 | — | — | 56 | — | ||||||||||||||||||||||||||||||||
Employee tax withholdings related to employee stock transactions | — | — | — | — | — | (146 | ) | (146 | ) | — | — | (146 | ) | — | ||||||||||||||||||||||||||||||
Shares repurchased | (1,000 | ) | — | — | — | — | (500 | ) | (1,500 | ) | — | — | (1,500 | ) | — | |||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 64 | — | — | — | — | — | 64 | — | — | 64 | — | |||||||||||||||||||||||||||||||||
Subscriptions (redemptions/ distributions) — noncontrolling interest holders | — | — | — | — | — | — | — | (33 | ) | (10 | ) | (43 | ) | 343 | ||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | — | — | — | — | — | — | — | (7 | ) | (6 | ) | (13 | ) | (412 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | 68 | — | — | 68 | — | — | 68 | — | |||||||||||||||||||||||||||||||||
December 31, 2012 | $ | 19,421 | $ | 6,444 | $ | 29 | $ | (59 | ) | $ | — | $ | (432 | ) | $ | 25,403 | $ | 155 | $ | 27 | $ | 25,585 | $ | 32 | ||||||||||||||||||||
| (1) |
|
See accompanying notes to consolidated financial statements.
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 | Non redeemable Non-controlling Interests of Consolidated VIEs | Total Permanent Equity | Redeemable Non- controlling Interests / Temporary Equity | ||||||||||||||||||||||||||||||||||
December 31, 2010 | $ | 22,504 | $ | 3,723 | $ | 75 | $ | (96 | ) | $ | (1 | ) | $ | (111 | ) | $ | 26,094 | $ | 189 | $ | 45 | $ | 26,328 | $ | 6 | |||||||||||||||||||
Net income | — | 2,337 | — | — | — | — | 2,337 | 20 | (18 | ) | 2,339 | — | ||||||||||||||||||||||||||||||||
Consolidation of a collateralized loan obligation | — | — | 19 | — | — | — | 19 | — | — | 19 | — | |||||||||||||||||||||||||||||||||
Allocation of losses of consolidated collateralized loan obligations | — | — | (22 | ) | — | — | — | (22 | ) | — | 22 | — | — | |||||||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | (1,014 | ) | — | — | — | — | (1,014 | ) | — | — | (1,014 | ) | — | ||||||||||||||||||||||||||||||
Stock-based compensation | 494 | — | — | — | — | 3 | 497 | — | — | 497 | — | |||||||||||||||||||||||||||||||||
PNC preferred stock capital contribution | 200 | — | — | — | — | — | 200 | — | — | 200 | — | |||||||||||||||||||||||||||||||||
Retirement of preferred stock | (200 | ) | — | — | — | — | — | (200 | ) | — | — | (200 | ) | — | ||||||||||||||||||||||||||||||
Merrill Lynch cash capital contribution | 8 | — | — | — | — | — | 8 | — | — | 8 | — | |||||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions | (208 | ) | — | — | — | — | 228 | 20 | — | — | 20 | — | ||||||||||||||||||||||||||||||||
Employee tax benefit withholdings related to employee stock transactions | — | — | — | — | — | (239 | ) | (239 | ) | — | — | (239 | ) | — | ||||||||||||||||||||||||||||||
Shares repurchased | (2,545 | ) | — | — | — | — | (100 | ) | (2,645 | ) | — | — | (2,645 | ) | — | |||||||||||||||||||||||||||||
Convertible debt conversions | 4 | — | — | — | — | 1 | 5 | — | — | 5 | — | |||||||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 12 | — | — | — | — | — | 12 | — | — | 12 | — | |||||||||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions) – non-controlling interest holders | — | — | — | — | — | — | — | (25 | ) | (11 | ) | (36 | ) | 90 | ||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | — | — | — | — | — | — | — | — | — | — | (4 | ) | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 7 | — | — | — | — | — | 7 | — | — | 7 | — | |||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (31 | ) | — | — | (31 | ) | — | — | (31 | ) | — | ||||||||||||||||||||||||||||||
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December 31, 2011 | $ | 20,276 | $ | 5,046 | $ | 72 | $ | (127 | ) | $ | (1 | ) | $ | (218 | ) | $ | 25,048 | $ | 184 | $ | 38 | $ | 25,270 | $ | 92 | |||||||||||||||||||
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See accompanying notes to consolidated financial statements.
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 | Non redeemable Non-controlling Interests of Consolidated VIEs | Total Permanent Equity | Redeemable Non- controlling Interests / Temporary Equity(2) | ||||||||||||||||||||||||||||||||||
December 31, 2011 | $ | 20,276 | $ | 5,046 | $ | 72 | $ | (127 | ) | $ | (1 | ) | $ | (218 | ) | $ | 25,048 | $ | 184 | $ | 38 | $ | 25,270 | $ | 92 | |||||||||||||||||||
Net income | — | 2,458 | — | — | — | — | 2,458 | 11 | (38 | ) | 2,431 | 9 | ||||||||||||||||||||||||||||||||
Allocation of losses of consolidated collateralized loan obligations | — | — | (43 | ) | — | — | — | (43 | ) | — | 43 | — | — | |||||||||||||||||||||||||||||||
Release of common stock from escrow | (1 | ) | — | — | — | 1 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Dividends paid | — | (1,060 | ) | — | — | — | — | (1,060 | ) | — | — | (1,060 | ) | — | ||||||||||||||||||||||||||||||
Stock-based compensation | 451 | — | — | — | — | — | 451 | — | — | 451 | — | |||||||||||||||||||||||||||||||||
Merrill Lynch cash capital contribution | 7 | — | — | — | — | — | 7 | — | — | 7 | — | |||||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions | (376 | ) | — | — | — | — | 432 | 56 | — | — | 56 | — | ||||||||||||||||||||||||||||||||
Employee tax benefit withholdings related to employee stock transactions | — | — | — | — | — | (146 | ) | (146 | ) | — | — | (146 | ) | — | ||||||||||||||||||||||||||||||
Shares repurchased | (1,000 | ) | — | — | — | — | (500 | ) | (1,500 | ) | — | — | (1,500 | ) | — | |||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 64 | — | — | — | — | — | 64 | — | — | 64 | — | |||||||||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions) – non-controlling interest holders | — | — | — | — | — | — | — | (33 | ) | (10 | ) | (43 | ) | 343 | ||||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | — | — | — | — | — | — | — | (7 | ) | (6 | ) | (13 | ) | (412 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | 68 | — | — | 68 | — | — | 68 | — | |||||||||||||||||||||||||||||||||
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December 31, 2012 | $ | 19,421 | $ | 6,444 | $ | 29 | $ | (59 | ) | $ | — | $ | (432 | ) | $ | 25,403 | $ | 155 | $ | 27 | $ | 25,585 | $ | 32 | ||||||||||||||||||||
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Amount includes $2 million and $1 million of common stock at |
| (2) | Amounts include $89 million of redemptions and $89 million of net consolidations related to consolidated variable interest entities (“VIEs”). |
See accompanying notes to consolidated financial statements.
BlackRock, Inc.
Consolidated Statements of Cash Flows
(Dollar amountsChanges in millions)Equity
| (in millions) | Addi tional Paid-in Capital(1) | Retained Earnings | Appro priated Retained Earnings | Accu mulated Other Compre hensive Income (Loss) | Treasury Stock Common | Total BlackRock Stock holders’ Equity | Non redeemable Non controlling Interests | Non redeemable Non controlling Interests of Consolidated VIEs | Total Permanent Equity | Redeemable No ncontrolling Interests / Temporary Equity | ||||||||||||||||||||||||||||||
December 31, 2012 | $ | 19,421 | $ | 6,444 | $ | 29 | $ | (59 | ) | $ | (432 | ) | $ | 25,403 | $ | 155 | $ | 27 | $ | 25,585 | $ | 32 | ||||||||||||||||||
Net income | — | 2,932 | — | — | — | 2,932 | 20 | — | 2,952 | (1 | ) | |||||||||||||||||||||||||||||
Consolidation of a collateralized loan obligation | — | — | (4 | ) | — | — | (4 | ) | — | — | (4 | ) | — | |||||||||||||||||||||||||||
Allocation of gains (losses) of consolidated collateralized loan obligations | — | — | (3 | ) | — | — | (3 | ) | — | 3 | — | — | ||||||||||||||||||||||||||||
Dividends paid | — | (1,168 | ) | — | — | — | (1,168 | ) | — | — | (1,168 | ) | — | |||||||||||||||||||||||||||
Stock-based compensation | 447 | — | — | — | 1 | 448 | — | — | 448 | — | ||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions | (429 | ) | — | — | — | 464 | 35 | — | — | 35 | — | |||||||||||||||||||||||||||||
Employee tax withholdings related to employee stock transactions | — | — | — | — | (243 | ) | (243 | ) | — | — | (243 | ) | — | |||||||||||||||||||||||||||
Shares repurchased | — | — | — | — | (1,000 | ) | (1,000 | ) | — | — | (1,000 | ) | — | |||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 36 | — | — | — | — | 36 | — | — | 36 | — | ||||||||||||||||||||||||||||||
Subscriptions (redemptions/distributions) — noncontrolling interest holders | — | — | — | — | — | — | (59 | ) | 125 | 66 | 137 | |||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | — | — | — | — | — | — | 19 | (134 | ) | (115 | ) | (114 | ) | |||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | 24 | — | 24 | — | — | 24 | — | ||||||||||||||||||||||||||||||
December 31, 2013 | $ | 19,475 | $ | 8,208 | $ | 22 | $ | (35) | $ | (1,210) | $ | 26,460 | $ | 135 | $ | 21 | $ | 26,616 | $ | 54 | ||||||||||||||||||||
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 2,440 | $ | 2,339 | $ | 2,050 | ||||||
Adjustments to reconcile net income to cash from operating activities: | ||||||||||||
Depreciation and amortization | 295 | 299 | 310 | |||||||||
Amortization of deferred sales commissions | 55 | 81 | 102 | |||||||||
Stock-based compensation | 451 | 497 | 445 | |||||||||
Deferred income tax expense (benefit) | (61 | ) | (137 | ) | 3 | |||||||
Net (gains) losses on non-trading investments | (43 | ) | (40 | ) | (62 | ) | ||||||
Purchases of investments within consolidated sponsored investment funds | (108 | ) | (41 | ) | (26 | ) | ||||||
Proceeds from sales and maturities of investments within consolidated sponsored investment funds | 96 | 50 | 54 | |||||||||
Assets and liabilities of consolidated VIEs: | ||||||||||||
Change in cash and cash equivalents | (24 | ) | 54 | (45 | ) | |||||||
Net losses within consolidated VIEs | 38 | 18 | 35 | |||||||||
Net (purchases) proceeds within consolidated VIEs | (203 | ) | 82 | 44 | ||||||||
(Earnings) losses from equity method investees | (175 | ) | (23 | ) | (141 | ) | ||||||
Distributions of earnings from equity method investees | 42 | 30 | 14 | |||||||||
Other adjustments | (4 | ) | — | (1 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (292 | ) | 124 | (364 | ) | |||||||
Due from related parties | (4 | ) | (6 | ) | 45 | |||||||
Deferred sales commissions | (41 | ) | (53 | ) | (65 | ) | ||||||
Investments, trading | (664 | ) | (116 | ) | (118 | ) | ||||||
Other assets | 35 | (122 | ) | 236 | ||||||||
Accrued compensation and benefits | 138 | (140 | ) | 52 | ||||||||
Accounts payable and accrued liabilities | 114 | (152 | ) | 164 | ||||||||
Due to related parties | (8 | ) | (35 | ) | (356 | ) | ||||||
Other liabilities | 163 | 117 | 112 | |||||||||
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Cash flows from operating activities | 2,240 | 2,826 | 2,488 | |||||||||
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Purchases of investments | (402 | ) | (204 | ) | (656 | ) | ||||||
Proceeds from sales and maturities of investments | 695 | 213 | 181 | |||||||||
Distributions of capital from equity method investees | 73 | 34 | 53 | |||||||||
Net consolidations (deconsolidations) of sponsored investment funds | (215 | ) | — | (52 | ) | |||||||
Acquisitions, net of cash acquired, and contingent payments | (267 | ) | — | (23 | ) | |||||||
Purchases of property and equipment | (150 | ) | (247 | ) | (131 | ) | ||||||
Other | — | — | 1 | |||||||||
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Cash flows from investing activities | (266 | ) | (204 | ) | (627 | ) | ||||||
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Repayments of short-term borrowings | — | (600 | ) | (2,134 | ) | |||||||
Proceeds from short-term borrowings | — | 600 | — | |||||||||
Repayments of convertible debt | — | (67 | ) | (176 | ) | |||||||
Repayments of long-term borrowings | (500 | ) | — | — | ||||||||
Proceeds from long-term borrowings | 1,495 | 1,496 | — | |||||||||
Cash dividends paid | (1,060 | ) | (1,014 | ) | (776 | ) | ||||||
Proceeds from stock options exercised | 47 | 16 | 10 | |||||||||
Proceeds from issuance of common stock | 7 | 5 | 6 | |||||||||
Repurchases of common stock | (1,645 | ) | (2,885 | ) | (264 | ) | ||||||
Merrill Lynch cash capital contribution | 7 | 8 | 10 | |||||||||
Net proceeds from (repayments of) borrowings by consolidated VIEs | 331 | (125 | ) | — | ||||||||
Net (redemptions/distributions paid)/subscriptions received from non-controlling interest holders | 300 | 54 | 110 | |||||||||
Excess tax benefit from stock-based compensation | 74 | 27 | 44 | |||||||||
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Cash flows from financing activities | (944 | ) | (2,485 | ) | (3,170 | ) | ||||||
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Effect of exchange rate changes on cash and cash equivalents | 70 | 2 | (32 | ) | ||||||||
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Net increase (decrease) in cash and cash equivalents | 1,100 | 139 | (1,341 | ) | ||||||||
Cash and cash equivalents, beginning of year | 3,506 | 3,367 | 4,708 | |||||||||
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Cash and cash equivalents, end of year | $ | 4,606 | $ | 3,506 | $ | 3,367 | ||||||
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Supplemental disclosure of cash flow information: Cash paid for: Interest Interest on borrowings of consolidated VIEs Income taxes (net of refunds) Supplemental schedule of non-cash investing and financing transactions: Issuance of common stock PNC preferred stock capital contribution Increase (decrease) in non-controlling interests due to net consolidation (deconsolidation) Increase (decrease) in borrowings due to consolidation of VIEs Common stock released from escrow Year ended
December 31, 2012 2011 2010 $ 201 $ 167 $ 146 $ 75 $ 60 $ 53 $ 976 $ 962 $ 583 $ 378 $ 213 $ 266 $ — $ 200 $ —
of sponsored investment funds $ (425 ) $ (4 ) $ (170 ) $ 406 $ 412 $ 1,157 $ 1 $ — $ 136
| (1) | Amounts include $2 million of common stock at both December 31, 2013 and 2012. |
See accompanying notes to consolidated financial statements.
BlackRock, Inc.
Consolidated Statements of Changes in Equity
| (in millions) | Additional Paid-in Capital(1) | Retained Earnings | Appro Retained Earnings | Accumulated Other Compre Income (Loss) | Treasury Stock Common | Total BlackRock Stock Equity | Non Non Interests | Non redeemable Non controlling Interests of Consolidated VIEs | Total Permanent Equity | Redeemable Non controlling Interests / Temporary Equity(2) | ||||||||||||||||||||||||||||||
December 31, 2013 | $ | 19,475 | $ | 8,208 | $ | 22 | $ | (35 | ) | $ | (1,210 | ) | $ | 26,460 | $ | 135 | $ | 21 | $ | 26,616 | $ | 54 | ||||||||||||||||||
Net income | — | 3,294 | — | — | — | 3,294 | 9 | (41 | ) | 3,262 | 2 | |||||||||||||||||||||||||||||
Allocation of gains (losses) of consolidated collateralized loan obligations | — | — | (41 | ) | — | — | (41 | ) | — | 41 | — | — | ||||||||||||||||||||||||||||
Dividends paid | — | (1,338 | ) | — | — | — | (1,338 | ) | — | — | (1,338 | ) | — | |||||||||||||||||||||||||||
Stock-based compensation | 453 | — | — | — | — | 453 | — | — | 453 | — | ||||||||||||||||||||||||||||||
Issuance of common shares related to employee stock transactions | (646 | ) | — | — | — | 660 | 14 | — | — | 14 | — | |||||||||||||||||||||||||||||
Employee tax withholdings related to employee stock transactions | — | — | — | — | (344 | ) | (344 | ) | — | — | (344 | ) | — | |||||||||||||||||||||||||||
Shares repurchased | — | — | — | — | (1,000 | ) | (1,000 | ) | — | — | (1,000 | ) | — | |||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 106 | — | — | — | — | 106 | — | — | 106 | — | ||||||||||||||||||||||||||||||
Subscriptions (redemptions/distributions) — noncontrolling interest holders | — | — | — | — | — | — | (40 | ) | (6 | ) | (46 | ) | 248 | |||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | — | — | — | — | — | — | — | — | — | (269 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (238 | ) | — | (238 | ) | — | — | (238 | ) | — | |||||||||||||||||||||||||||
December 31, 2014 | $ | 19,388 | $ | 10,164 | $ | (19 | ) | $ | (273 | ) | $ | (1,894 | ) | $ | 27,366 | $ | 104 | $ | 15 | $ | 27,485 | $ | 35 | |||||||||||||||||
| (1) | Amounts include $2 million of common stock at both December 31, 2014 and 2013. |
| (2) | Amounts include $75 million of redemptions and $75 million of net consolidations related to consolidated VIEs. |
See accompanying notes to consolidated financial statements.
BlackRock, Inc.
Consolidated Statements of Cash Flows
| (in millions) | Year ended December 31, | |||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 3,264 | $ | 2,951 | $ | 2,440 | ||||||
Adjustments to reconcile net income to cash flows from operating activities: | ||||||||||||
Depreciation and amortization | 278 | 291 | 295 | |||||||||
Amortization of deferred sales commissions | 56 | 52 | 55 | |||||||||
Stock-based compensation | 453 | 448 | 451 | |||||||||
Deferred income tax expense (benefit) | (104 | ) | (193 | ) | (61 | ) | ||||||
Net (gains) losses on nontrading investments | (37 | ) | (73 | ) | (43 | ) | ||||||
Purchases of investments within consolidated sponsored investment funds | (160 | ) | (195 | ) | (108 | ) | ||||||
Proceeds from sales and maturities of investments within consolidated sponsored investment funds | 137 | 145 | 96 | |||||||||
Gain related to PennyMac initial public offering | — | (39 | ) | — | ||||||||
Gain related to the charitable contribution | — | (80 | ) | — | ||||||||
Charitable contribution | — | 124 | — | |||||||||
Assets and liabilities of consolidated VIEs: | ||||||||||||
Change in cash and cash equivalents | 168 | 143 | (24 | ) | ||||||||
Net (gains) losses within consolidated VIEs | 41 | — | 38 | |||||||||
Net (purchases) proceeds within consolidated VIEs | (599 | ) | 142 | (203 | ) | |||||||
(Earnings) losses from equity method investees | (158 | ) | (158 | ) | (175 | ) | ||||||
Distributions of earnings from equity method investees | 57 | 80 | 42 | |||||||||
Other adjustments | 5 | 10 | (4 | ) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 78 | 14 | (292 | ) | ||||||||
Investments, trading | (416 | ) | (218 | ) | (664 | ) | ||||||
Other assets | (1 | ) | (92 | ) | (10 | ) | ||||||
Accrued compensation and benefits | 101 | 203 | 138 | |||||||||
Accounts payable and accrued liabilities | (69 | ) | 7 | 114 | ||||||||
Other liabilities | (13 | ) | 80 | 155 | ||||||||
Cash flows from operating activities | 3,081 | 3,642 | 2,240 | |||||||||
Cash flows from investing activities | ||||||||||||
Purchases of investments | (369 | ) | (412 | ) | (402 | ) | ||||||
Proceeds from sales and maturities of investments | 654 | 286 | 695 | |||||||||
Distributions of capital from equity method investees | 143 | 83 | 73 | |||||||||
Net consolidations (deconsolidations) of sponsored investment funds | (123 | ) | (48 | ) | (215 | ) | ||||||
Acquisitions, net of cash acquired | — | (298 | ) | (267 | ) | |||||||
Purchases of property and equipment | (66 | ) | (94 | ) | (150 | ) | ||||||
Cash flows from investing activities | 239 | (483 | ) | (266 | ) | |||||||
Cash flows from financing activities | ||||||||||||
Repayments of short-term borrowings | — | (100 | ) | — | ||||||||
Repayments of long-term borrowings | (1,000 | ) | (750 | ) | (500 | ) | ||||||
Proceeds from long-term borrowings | 997 | — | 1,495 | |||||||||
Cash dividends paid | (1,338 | ) | (1,168 | ) | (1,060 | ) | ||||||
Proceeds from stock options exercised | 4 | 28 | 47 | |||||||||
Repurchases of common stock | (1,344 | ) | (1,243 | ) | (1,645 | ) | ||||||
Net proceeds from (repayments of) borrowings by consolidated VIEs | 512 | (410 | ) | 331 | ||||||||
Net (redemptions/distributions paid)/subscriptions received from noncontrolling interest holders | 202 | 203 | 300 | |||||||||
Excess tax benefit from stock-based compensation | 106 | 41 | 74 | |||||||||
Other financing activities | 6 | 7 | 14 | |||||||||
Cash flows from financing activities | (1,855 | ) | (3,392 | ) | (944 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (132 | ) | 17 | 70 | ||||||||
Net increase (decrease) in cash and cash equivalents | 1,333 | (216 | ) | 1,100 | ||||||||
Cash and cash equivalents, beginning of year | 4,390 | 4,606 | 3,506 | |||||||||
Cash and cash equivalents, end of year | $ | 5,723 | $ | 4,390 | $ | 4,606 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for: | ||||||||||||
Interest | $ | 216 | $ | 202 | $ | 201 | ||||||
Interest on borrowings of consolidated VIEs | $ | 142 | $ | 102 | $ | 75 | ||||||
Income taxes (net of refunds) | $ | 1,227 | $ | 1,064 | $ | 976 | ||||||
Supplemental schedule of noncash investing and financing transactions: | ||||||||||||
Issuance of common stock | $ | 646 | $ | 429 | $ | 378 | ||||||
Increase (decrease) in noncontrolling interests due to net consolidation (deconsolidation) of sponsored investment funds | $ | (269 | ) | $ | (229 | ) | $ | (425 | ) | |||
Increase (decrease) in borrowings due to consolidation of VIEs | $ | 585 | $ | 363 | $ | 406 | ||||||
See accompanying notes to consolidated financial statements.
BlackRock, Inc.
Notes to the Consolidated Financial Statements
1. Introduction and Basis of Presentation
Business. BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) provides diversifiedis a leading publicly traded investment management firm providing a broad range of investment and risk management services to institutional and retail clients intermediaryworldwide.
BlackRock’s diverse platform of active (alpha) and individual investors through variousindex (beta) investment vehicles. Investment management services primarily consist ofstrategies across asset classes enables the management of equity,Company to tailor investment outcomes and asset allocation solutions for clients. Product offerings include single- and multi-asset class portfolios investing in equities, fixed income, multi-asset class, alternative investmentalternatives and cash management products. BlackRock offers its investment productsmoney market instruments. Products are offered directly and through intermediaries in a variety of vehicles, including open-end and closed-end mutual funds,iShares® exchange-traded funds (“ETFs”), separate accounts, collective investment trustsfunds and separate accounts. In addition,other pooled investment vehicles. BlackRock provides marketalso offers theBlackRock Solutions® investment and risk management financial marketstechnology platform,Aladdin®, risk analytics and advisory services and enterprise investment system servicessolutions 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.institutional investors.
On May 29, 2012, BlackRock completed a secondary offering of 26,211,335 shares of common stock held by Barclays Bank PLC (“Barclays”) at a price of $160.00 per share, which included 23,211,335 shares of common stock issued upon the conversion of Series B Convertible Participating Preferred Stock (“Series B Preferred”) by a subsidiary of Barclays. Upon completion of this offering, BlackRock repurchased 6,377,552 shares directly from Barclays at a price of $156.80 per share (consisting of 6,346,036 shares of Series B Preferred and 31,516 shares of common stock). The total transactions, including the full exercise of the underwriters’ option to purchase 2,621,134 additional shares in the secondary offering, amounted to 35,210,021 shares, resulting in Barclays exiting its entire ownership position in BlackRock.
OnAt December 31, 2012,2014, The PNC Financial Services Group, Inc. (“PNC”) held 20.8%21.0% of the Company’s voting common stock and 21.9%22.0% of the Company’s capital stock, which includes outstanding common and non-votingnonvoting preferred stock.
See Note 17, Capital Stock, for more information on the equity ownership of BlackRock.
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-controllingNoncontrolling interests
on the consolidated statements of financial condition includerepresents the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Significant accountsAccounts 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 revenuesrevenue and expensesexpense during the reporting periods. Actual results could differ from those estimates.
Certain items previously reported have been reclassified to conform to the current year presentation.
2. Significant Accounting Policies
Cash and Cash Equivalents. Cash and cash equivalents primarily consists of cash, money market funds and short-term, highly liquid investments with original maturities 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 sponsored investment funds are not considered legally restricted and are included in cash and
cash equivalents on the consolidated statements of financial condition. Cash balances maintained by consolidated VIEsvariable interest entities (“VIEs”) are included in assets of consolidated variable interest entities on the consolidated statements of financial condition.
InvestmentsInvestments.
Investments in Debt and Marketable Equity SecuritiesSecurities.. BlackRock holdsclassifies debt and marketable equity investments which pursuant to Accounting Standards Codification (“ASC”) 320-10,Investments – 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 that 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-operatingnonoperating income (expense) on the consolidated statements of income in the period of the change.
2. Significant Accounting Policies (continued)
Held-to-maturity debt securities are purchased with the positive intent and ability to be held to maturity and are recorded at amortized cost on the consolidated statements of financial condition.
Available-for-sale securities are those securities that are not classified as trading or held-to-maturity. 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 (loss) 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 (loss) to non-operatingnonoperating income (expense) on the consolidated statements of income.
Equity Method. For equity investments where BlackRock does not control the investee, and where it is not the primary beneficiary (“PB”) of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company follows the equity method of accounting in accordance with ASC 323,Investments-Equity Method and Joint Ventures. Under the equity method of accounting,accounting. BlackRock’s share of the investee’s underlying net income or loss is recorded as net gain (loss) on investments within non-operatingnonoperating income (expense) and as other revenue for operating advisory companycertain strategic investments since such companies are considered to be an extension of BlackRock’s core business. BlackRock’s share of net income of the investee is recorded based upon the most current information available at the time, which may precede the date of the consolidated statement of financial condition. Distributions received from the investment reduce the Company’s carrying value of the investee.investee and the cost basis if deemed to be a return of capital.
Cost Method. For non-marketablenonmarketable equity investments where BlackRock neither controls nor has significant influence over the investee, the investments are accounted for using the cost method of accounting. Under the cost method, dividendsDividends received from the investment are recorded as dividend income within non-operatingnonoperating income (expense).
Impairmentsof Investments. The Company’s managementManagement 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 and the Company determines an impairment exists, an impairment charge is recorded inon the consolidated statement of income.
When the fair value of available-for-sale securities is lower than 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 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 of such unrealized losses. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operatingnonoperating income (expense) on the consolidated statements of income.
In making this determination for debt securities, the Company considers whether: (1) it has the intent to sell the security,security; (2) it is more likely than not that it will be required to sell the security before recoveryrecovery; or (3) it expects 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 earnings with the remaining portion recorded in accumulated other comprehensive income.
ConsolidationConsolidation.
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 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 PB of the investment product, which would require consolidation.
Consolidation of Variable Interest Entities. Pursuant to ASC 810-10,Consolidation(“ASC 810-10”) certainCertain investment products for which the risks and rewards of ownershipa controlling financial interest is achieved through arrangements that do not involve or are not directly linked to voting interests may beare deemed VIEs. BlackRock reviews factors, including whether the entity has equity that is sufficient to permit the entity to finance its activities without additional subordinated support from other parties and the rights and obligations of the equity holders and obligations of equity holders to absorb losses or receive expected residual returns or absorb expected losses, to determine if the investment product is a VIE. BlackRock continuously evaluates such factors as facts and circumstances change. BlackRock is required to consolidate a VIE when it is deemed to be the PB, which is evaluated continuously as facts and circumstances change.
Accounting Standards Update (“ASU”) 2010-10,Amendments to Statement 167 for Certain Investment Funds(“ASU 2010-10”) defers the application of Statement of Financial Accounting Standards (“SFAS”)
2. Significant Accounting Policies (continued)
No. 167,Amendments to FASB Interpretation No. 46(R),for certain investment funds, including money market funds.PB.
The Company uses two methods for determining whether it is the PB of a VIE thatVIEs in accordance with current accounting guidance depending on the nature and characteristics of the VIE. For collateralized loan obligations (“CLOs”), the Company is not subjectdeemed to ASU 2010-10 is the enterprise thatbe PB if it 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 For certain sponsored investment funds, including money markets, the Company is deemed to be 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) thatif it absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.
Consolidation of Voting Rights Entities. To the extent that 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 or if partners or members of
certain products do not have substantive rights, BlackRock consolidates the investee.
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”), theThe Company reviews such investment vehicles to determine if such a presumption can be overcome by determining whether other non-affiliatednonaffiliated partners or members of the limited partnership or limited liability company have the substantive ability to dissolve (liquidate) the investment vehicle, or to otherwise remove BlackRock as the general partner or managing member without cause based on aan unaffiliated 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, BlackRock will consolidate the investment vehicle.
Retention of Specialized Accounting Principles. Upon consolidation of certain sponsored investment funds, the Company retains the specialized accounting principles of the underlying funds pursuant to ASC 810-10.funds. All of the underlying investments held by such consolidated sponsored investment funds are carried at fair value with corresponding changes in the investments’ fair values reflected in non-operatingnonoperating income (expense) on the consolidated statements of income. 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 if the Company still maintains an investment.
Separate Account Assets and Liabilities. Separate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. The life insurance company does not underwrite any insurance contracts that involve any insurance risk transfer from the insured to the life insurance company. The separate account assets primarily include equity securities, debt securities, money market funds and derivatives. The separate account assets are not subject to general claims of the creditors of BlackRock. These separate account assets and the related equal and offsetting liabilities are recorded as separate account assets and separate account liabilities on the consolidated statements of financial condition in accordance with the ASC 944-80,Financial Services – Separate Accounts..
The net investment income attributable to separate account assets supporting individual and group pension contracts accrueaccrues directly to the contract owner and areis not reported on the consolidated statements of income. While BlackRock has no economic interest in these separate account assets and liabilities, BlackRock earns policy administration and management fees associated with these products, which are included in investment advisory, administration fees and securities lending revenue on the consolidated statements of income.
Separate Account Collateral Assets Held and Liabilities Under Securities Lending AgreementsAgreements.. The Company facilitates securities lending arrangements whereby securities held by separate account assetsaccounts maintained by BlackRock’s life insurance companyBlackRock Life Limited are lent to third parties.parties under global master securities lending agreements. In exchange, the Company receives collateral with minimumsminimum values generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. The required collateral value is calculated on a daily basis. The
global master securities lending agreements provide the Company the right to request additional collateral or, in the event of borrower default, the right to liquidate collateral. Under the Company’s securities lending arrangements, the Company can resell or re-pledgerepledge the collateral and the borrower can resell or re-pledgerepledge 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-pledgerepledge the collateral, the Company records on the consolidated statements of financial condition the cash and noncash collateral received under these BlackRock Life Limited securities lending 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. During 2014 and 2013, the Company had not resold or repledged any of the collateral received under these arrangements. At December 31, 20122014 and 2011,2013, the fair value of loaned securities held by separate account assetsaccounts was approximately $21.0$30.6 billion and $19.5$19.7 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $23.0$33.7 billion and $20.9$21.8 billion, respectively. During 2012 and 2011, the Company had not sold or re-pledged any of the collateral received under these arrangements.
2. Significant Accounting Policies (continued)
Deferred 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 carrying 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 that 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.
The Company periodically reviews the carrying value of deferred commission assets to determine whether a significant decline in the equity or bond markets or other events or circumstances indicate that an impairment 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 the 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 2012, 2011 and 2010.
Property and Equipment. Property and equipment are recorded at cost less accumulated depreciation. Depreciation is generally determined by cost less any estimated residual value 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.
BlackRock develops a variety of risk management, investment analytic and investment system services for internal use, utilizing proprietary software that is hosted and maintained by BlackRock. In accordance with ASC 350-40,Internal-Use Software (“ASC 350-40”), theThe Company capitalizes 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 approximately three years.
Goodwill and Intangible Assets. Goodwill represents the excess cost of a business acquisition overin excess of the fair value of the net assets acquired. In its assessment of goodwill for impairment, the Company considers such factors as the
book value and market capitalization of the Company. On a quarterly basis, the Company considers if triggering events have occurred that may indicate a potential goodwill impairment. If a triggering event has occurred, the Company performs assessments, which may include reviews of all significant valuation assumptions, to determine if goodwill may be impaired. The Company performs an impairment assessment of its goodwill at least annually as of July 31st.31st.
Intangible assets are comprised of indefinite-lived intangible assets and finite-lived intangible assets acquired in a business combination.acquisition. The value of contracts to manage assets in proprietary open-end funds, closed-end funds and collective trust funds and certain other commingled products without a specified termination date is generally classified as indefinite-lived intangible assets. The assignment of indefinite lives to such contracts primarily is based upon the
following: (i) the assumption that there is no foreseeable limit on the contract period to manage these products; (ii) the Company expects to, and has the ability to, continue to operate these products indefinitely; (iii) the products have multiple investors and are not reliant on a single investor or small group of investors for their continued operation; (iv) current competitive factors and economic conditions do not indicate a finite life; and (v) there is a high likelihood of continued renewal based on historical experience. In addition, trade names/trademarks are considered indefinite-lived intangible assets when they are expected to generate cash flows indefinitely.
In accordance with ASC 350,Intangibles – Goodwill and Other(“ASC 350”), indefinite-livedIndefinite-lived intangible assets and goodwill are not amortized. The value ofFinite-lived management contracts, for separately managedwhich relate to acquired separate accounts and certain funds which have finite lives,with a specified termination date, are amortized over the expected lives of the management contracts.their remaining useful lives.
The Company performs assessments to determine if any intangible assets are potentially impaired and whether the indefinite-lifeindefinite-lived and finite-lifefinite-lived classifications are still appropriate. The carrying value of finite-lived management contracts and their remaining useful lives are reviewed at least annually to determine if circumstances exist which may indicate a potential impairment. The Company performs such impairment assessments of its intangible assets including indefinite-lived management contracts and trade names/trademarks, at least annually, as of July 31st. In evaluating whether it is more likely than not that the fair value of indefinite-lived intangibles is less than its carrying value, BlackRock assesses various significant qualitative factors, including assets under management (“AUM”), revenue basis points,
2. Significant Accounting Policies (continued)
projected AUM growth rates, operating margins, tax rates and discount rates. In addition, the Company considers other factors, including (i) macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; (ii) industry and market considerations such as a deterioration in the environment in which anthe entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics, a change in the market for an entity’s services, or regulatory, legal or political developments; and (iii) entity-specific events, such as a change in management or key personnel, overall financial performance and litigation that could affect significant inputs.inputs used to determine the fair value of the indefinite-lived intangible asset.
If potential impairment circumstances are considered to exist, the Company will perform an impairment test using an undiscounted cash flow analysis. Actual results could differ from these cash flow estimates, which could materially impact the impairment conclusion. If the asset is determined to be impaired, the difference between the bookcarrying value of the asset and its current fair value would be recognized as an expense in the period in which the impairment occurs.
Non-controllingNoncontrolling Interests. According to the requirements within ASC 810-10, theThe Company reports non-controllingnoncontrolling 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-controllingnoncontrolling interest holders of the Company’s consolidated sponsored investment funds and collateralized loan obligations (“CLOs”).CLOs. Income (loss) attributable to non-controllingnoncontrolling interests is 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 Company includes redeemable non-controllingnoncontrolling interests related to certain consolidated sponsored investment funds in temporary equity on the consolidated statements of financial condition.
Appropriated Retained Earnings. Upon adoptionthe consolidation of ASU 2009-17,Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”) on January 1, 2010,CLOs, BlackRock consolidated three CLOs and recorded a cumulative effectrecords an adjustment to appropriated retained earnings on the consolidated statementstatements of financial condition equal to the difference
between the fair value of the CLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. Subsequent to adoption of ASU 2009-17, theThe net change in the fair value of the CLOs’ assets and liabilities has beenis recorded as net income (loss) attributable to nonredeemable non-controllingnoncontrolling interests and as an adjustmenta change to appropriated retained earnings. In addition, in 2011, BlackRock consolidated additional CLOs, resulting in $19 million of additional appropriated retained earnings upon the initial consolidation.
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 using 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 AUM or committed capital, or, in the case of certain real estate clients, net operating income generated by the underlying properties.capital. Investment advisory and administration fees are affected by changes in AUM, including market appreciation or depreciation, foreign exchange translation and net subscriptionsinflows or redemptions.outflows. Investment advisory and administration fees for investment funds are shown net of fees waived pursuant to contractual expense limitations of the funds or voluntary waivers.
The Company contracts with third parties and related parties for various mutual fund distribution and shareholder servicing to be performed on behalf of certain funds the Company manages. Such arrangements generally are priced as a portion of the management fee paid by the fund. In certain cases, the fund (primarily international funds) takes on the primary responsibility for payment for services such that the Company bears no credit risk to the third party. The Company accounts for such retrocession arrangements in accordance with ASCAccounting Standards Codification (“ASC”) 605-45,Revenue Recognition – Principal Agent Considerations,and has recordedrecords its management fees net of retrocessions. Retrocessions for 2014, 2013 and 2012 2011 and 2010 were $793$891 million, $928$785 million and $831$793 million, respectively, and were reflected net in investment advisory, administration fees and securities lending revenue on the consolidated statements of income.
2. Significant Accounting Policies (continued)
The Company also earns revenue by lending securities as an agent on behalf of clients, primarily to brokerage institutions. Such revenues areRevenue is accounted for on an accrual basis. 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.
Investment Advisory Performance Fees / Carried Interest. The Company receives investment advisory performance fees or an incentive allocationallocations from certain actively managed
investment funds and certain separately managed accounts.accounts (“SMAs”). These performance fees are earneddependent upon exceeding specified relative and/or absolute investment return thresholds. Such fees are recorded upon completion of the measurement period, which varies by product or account.account, and could be monthly, quarterly, annually or longer.
TheIn addition, the Company may receivereceives carried interest from certain alternative investmentsinvestment products upon exceeding performance thresholds. BlackRock may be required to return all, or part, of such carried interest depending upon future performance of these investments.funds. Therefore, BlackRock records carried interest subject to such claw-backclawback provisions in investments or cash, on the consolidated statements of financial condition to the extent that it is distributed.distributed, on its consolidated statements of financial condition. Carried interest is realized and recorded as performance fee revenue upon the earlier of the termination of the investment fund or when the likelihood of claw-backclawback is considered mathematically improbable.
The Company records a deferred carried interest liability to the extent it receives cash or capital allocations related to carried interest prior to meeting the revenue recognition criteria. At December 31, 20122014 and 2011,2013, the Company had $97$105 million and $33$108 million, respectively, of deferred carried interest recorded in other liabilities on the consolidated statements of financial condition. The ultimate recognition of performance fee revenue, if any, for these products is unknown.
BlackRock Solutions and Advisory. BlackRock provides a variety of 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 workout assignments (including long-term portfolio liquidation assignments), strategic planning and execution, and enterprise investment system outsourcing to 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) percentages of various attributes of advisory AUM or value of positions on theAladdin® platform,
(ii) fixed fees and (iii) performance fees if contractual thresholds are met. The fees earned forBlackRock Solutionsand advisory services are recorded inBlackRockSolutionsand advisory on the consolidated statements of income.
Other Revenue. The Company earns fees for transition management services comprised of 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.
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 companycertain strategic investments and marketing fees earned for services to distributeiPath® products, which are exchange-traded notes issued by Barclays.
Stock-based Compensation. The Company applies ASC 718-10,Compensation – Stock Compensation(“ASC 718-10”), which establishes standards for the accounting of 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. The compensation cost is recognized over the period during which an employee is required to provide service (usually the vesting period) in exchange for the stock-based award.
The Company measures the grant-date fair value of restricted stock units (“RSUs”) using the Company’s share price on the date of grant. For employee share options and instruments with market conditions, the Company uses pricing models. If an equity award is modified after the grant date, incremental compensation cost is recognized for 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. Awards under the Company’s stock-based compensation plans vest over various periods. Compensation cost is recorded by the Company on a straight-line basis over the requisite service period for each separate vesting portion of the award as if the award is, in-substance, multiple awards. Compensation 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 quarterly.
2. Significant Accounting Policies (continued)
The Company amortizes the grant-date fair value of stock-based compensation awards made to retirement-eligible employees over the requisite service period. Upon notification of retirement, the Company accelerates the unamortized portion of the award over the contractually required retirement notification period, if applicable.
Distribution and Servicing Costs. Distribution and servicing costs include payments to third parties, and related parties, including Bank of America/Merrill Lynch & Co., Inc. (“Merrill Lynch”), PNC and Barclays, primarily associated with distribution and servicing of client investments in certain BlackRock products. Distribution and servicing costs are expensed when incurred.
Amortization of Deferred 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 carrying value of these deferred mutual fund commissions is recorded within other assets on the consolidated statements of financial condition and 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 that 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.
Direct Fund Expenses. Direct fund expenses, which are expensed as incurred, primarily consist of third-party non-advisorynonadvisory expenses incurred by BlackRock related to certain funds for the use of certain index trademarks, reference data for certain indices, custodial services, fund administration, fund accounting, transfer agent services, shareholder reporting services, audit and tax services as well as other fund-related expenses directly attributable to the non-advisorynonadvisory operations of the fund.
Leases. The Company accounts for its operating leases, which may include escalation clauses, in accordance with ASC 840-10,Leases. The Company expenses the lease payments associated with operating leases evenly during
the lease term (including rent-free periods) commencing when the Company obtains the right to control overthe use of the leased property.
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-monetaryNonmonetary assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at historical exchange rates. Revenue 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 2014, 2013 and 2012, 2011 and 2010, the Company recorded gains (losses) from foreign currency transactions of $(8) million, $(1) million and $6 million, respectively.were immaterial.
Income Taxes. The Company accounts for income taxes under the asset and liability method prescribed by ASC
740-10,Income Taxes(“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 inon the consolidated statements of 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 will be established for the difference between the asset balance and the amount expected to be recoverable in the future. This allowance will result in additional income tax expense. Further, the Company records its income taxes receivable and payable based upon its estimated income tax position.
Excess tax benefits related to stock-based compensation are recognized as additional paid-in capital and 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, or shortfall, between the recorded tax benefit and tax return benefit. At December 31, 20122014 and 2011,2013, BlackRock had excess additional paid-in capital credits to absorb potential future deficits between recorded tax benefits and tax return benefits.
Earnings per Share (“EPS”). Basic EPS is calculated by dividing net income applicable to common shareholders by the weighted-average number of shares outstanding during the period. Diluted EPS includes the determinants of basic EPS and common stock equivalents outstanding during the period. Diluted EPS is computed using the treasury stock method.
Due to the similarities in terms between BlackRock’s nonvoting participating preferred stock and the Company’s common stock, the Company considers its nonvoting participating preferred stock to be a common stock
equivalent for purposes of EPS calculations. As such, the Company has included the outstanding nonvoting participating preferred stock in the calculation of average basic and diluted shares outstanding.
Prior to 2013, the Company calculated EPS pursuant to the two-class method, as defined in ASC 260-10,Earnings per Share (“ASC 260-10”), which specifies that all outstanding unvested share-based payment awards that contain rights to non-forfeitablenonforfeitable dividends or dividend equivalents are considered participating securities and should be included in the computation of EPS pursuant to the two-class method. The dilutive effect of outstanding unvested share-based payment awards that are considered non-participating securities are calculated under the treasury stock method.
The Company presents both basic and diluted EPS amounts. Basic EPS is calculated by dividing net distributed and undistributed earnings allocated to shareholders, excluding participating securities, by the
2. Significant Accounting Policies (continued)
weighted-average number of shares outstanding.EPS. The Company’s participating securities consistconsisted of its unvested share-based payment awards that containcontained rights to non-forfeitablenonforfeitable 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. The dilutive effect of participating securities iswas calculated under the more dilutive of either the treasury stock method or the two-class method. As of December 31, 2012, there were approximately 0.2 million of participating securities. The majority of theseCompany’s remaining participating securities vested onin January 31, 2013.
Due to the similarities in terms among each series of BlackRock’s non-voting participating preferred stock and the Company’s common stock, the Company considers each series of its non-voting participating preferred stock to be common stock equivalents for purposes of EPS calculations.
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 ASC 280-10,Segment Reporting (“ASC 280-10”).
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 of ASC 805 define the acquirer, establish the acquisition date and define transactions that qualify as business combinations.
Additionally, the requirements of ASC 805 provide guidance for measuring the fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree, provide guidance for the measurement of fair value in a step acquisition, provide guidance 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 subsequent to the adoption of the requirements of ASC 805, will affect the income tax provision in the period of reversal or change.
Fair Value Measurements.
Hierarchy of Fair Value Inputs. The provisions of ASC 820-10,Fair Value Measurements and Disclosures (“ASC 820-10”), establishCompany uses a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined).value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs:
Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.
Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”), which in accordance with GAAP, are calculated under fair value measures and the changes in fair values are equal to the earnings of such funds), ETFs, listed equities and certain exchange-traded derivatives.
Level 2 Inputs:
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price are observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company relies onuses the NAV (or its equivalent) of certain investments as their fair value.
Level 2 assets may include debt securities, bank loans, short-term floating ratefloating-rate notes, and asset-backed securities, securities held within consolidated hedge funds, certain equity method limited partnership interests in hedge funds valued based on NAV (or its equivalent) where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and
2. Significant Accounting Policies (continued)
equivalent) where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data. |
Level 3 Inputs:
Unobservable inputs for the valuation of the asset or liability, which may include non-bindingnonbinding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV (or its equivalent) and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.
Level 3 assets may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds, bank loans and bonds.
Level 3 liabilities include borrowings of consolidated CLOs valued based upon non-bindingnonbinding single-broker quotes.
Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices.
Significance of Inputs. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Valuation Techniques.The fair values of certain Level 3 assets and liabilities were determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. Such quotes and modeled prices are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of the current market environment and other analytical procedures.
As a practical expedient, the Company relies onuses NAV as the fair value for certain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and private equity funds, which may be
adjusted by using the returns of certain market indices. The various partnerships generally are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation
information from third-party sources, including independent appraisals, from third-party sources.appraisals. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.
A significant amountnumber of inputs used to value equity, debt securities and bank loans is sourced from well-recognized third-party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for identical securities traded in active markets and as Level 2 for other similar securities if the vendor uses observable inputs in determining the price. Annually, BlackRock’s internal valuation committee or other designated groups review both the valuation methodology,methodologies, including the general assumptions and methods used to value various asset classes, and operational processprocesses with these vendors. In addition, onOn a quarterly basis, meetings are held with thekey vendors to identify any significant changes to the vendors’ processes.
In addition, quotes obtained from brokers generally are non-bindingnonbinding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.
Fair Value Option. ASC 825-10,Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies an irrevocable election to use fair value as the initial and subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for whichThe Company applies the fair value option has been elected are reportedprovisions for eligible assets and liabilities, including bank loans and borrowings, held by consolidated CLOs to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplification. To the extent there is a difference between the change in earnings. The decision to elect the fair value option is determined on an instrument-by-instrument basis, must be applied to an entire instrument and is irrevocable once elected. Assetsof the assets and liabilities, measured at fair value pursuantthe difference is reflected as net income (loss) attributable to ASC 825-10 are required to be reported
2. Significant Accounting Policies (continued)
separately from those instruments measured using another accounting method.
Derivative Instruments and Hedging Activities. ASC 815-10,Derivatives and Hedging(“ASC 815-10”), establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts and for hedging activities. ASC 815-10 generally requires an entity to recognize all derivatives as either assets or liabilities on the 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 usesmay use derivative financial instruments primarily for purposes of hedging: (i)hedging exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities, (ii)and market exposures for certain seed investments and (iii) future cash flows on floating rate notes.investments. The Company may also use derivatives within its separate account assets, which are segregated funds held for purposes of funding individual and group pension contracts. In addition, certain consolidated sponsored investment funds may also invest in derivatives as a part of their investment strategy.
Changes in the fair value of the Company’s derivative financial instruments are generally recognized in current earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities or hedged investments, on the consolidated statements of income.
Accounting Pronouncements Adopted in 20122014
Cumulative Translation Adjustment. In March 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-05,
Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries orGroups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The adoption of ASU 2013-05 on January 1, 2014 was not material to the consolidated financial statements.
Investment Company Guidance. In June 2013, the FASB issued ASU 2013-08,Financial Services – Investment Companies: Amendments to Fair Value Measurements and Disclosures.On January 1, 2012, the Company adopted the applicable provisions of ASU 2011-04,Fair Value Measurement: Amendments to Achieve Common Fair ValueScope, Measurement, and Disclosure Requirements(“ASU 2013-08”). ASU 2013-08 amends the current criteria for an entity to qualify as an investment company, creates new disclosure requirements and amends the measurement criteria for certain interests in U.S. GAAP and IFRSs (“ASU 2011-04”). Among other things, ASU 2011-04 clarified existing fair value measurement guidance and required enhanced disclosures about fair value measurements.investment companies. The adoption of ASU 2011-04 did2013-08 on January 1, 2014 was not materially impactmaterial to the consolidated financial statements.
Amendments on Testing Indefinite-lived Intangible Assets for Impairment.Presentation of an Unrecognized Tax Benefit.On In July 27, 2012,2013, the Financial Accounting Standards Board (“FASB”)FASB issued ASU 2012-02,2013-11,Testing Indefinite-Lived Intangible Assets for ImpairmentPresentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists(“ (“ASU 2012-02”2013-11”), which amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under ASU 2012-02, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset.. The Company’s adoption of ASU 2012-02 during 2012 did2013-11 on January 1, 2014 was not impact itsmaterial to the consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Revenue from Contracts with Customers.
Disclosures About Offsetting Assets and Liabilities. On December 16, 2011, In May 2014, the FASB issued ASU 2011-11,2014-09,Disclosures About Offsetting Assets and Liabilities (“ASU 2011-11”), which creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associatedRevenue from Contracts with its financial instruments and derivative instruments. The provisions of ASU 2011-11 are effective for the Company for reporting periods beginning January 1, 2013 with retrospective application required. On January 31, 2013, the FASB issued ASU 2013-01,Clarifying the Scope of Disclosures about Offsetting Assets and LiabilitiesCustomers(“ASU 2013-01”) that provides clarification about which instruments and transactions are subject to ASU 2011-11. The adoption of ASU 2011-11 and ASU 2013-01 are not expected to materially impact the consolidated financial statements.
Comprehensive Income.On February 5, 2013, the FASB issued ASU 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”2014-09”). ASU 2013-02 does not change2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The Company is currently evaluating the current requirement for reporting net income or other comprehensive income but requires additional disclosures about significant amounts reclassified outimpact of accumulated other comprehensive income.adopting ASU 2013-022014-09, which is effective prospectively for the Company on January 1, 20132017.
Amendments to the Consolidation Analysis and is not expectedMeasuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. In August 2014, the FASB issued ASU 2014-13,Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity(“ASU 2014-13”). ASU 2014-13 provides an entity that consolidates a collateralized financing entity (“CFE”) that had elected the fair value option for the financial assets and financial liabilities of such CFE an alternative to havecurrent fair value measurement guidance. If elected, the Company could measure both the financial assets and the financial liabilities of the CFE by using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The election would effectively eliminate any measurement difference previously recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as an adjustment to appropriated retained earnings.
In February 2015, the FASB issued ASU 2015-02,Amendments to the Consolidation Analysis (“ASU 2015-02”), which significantly amends the consolidation analysis required under current consolidation guidance. The amendments include changes to: (i) the VIE analysis for limited partnerships; (ii) the criteria for evaluating whether fees paid to a material impactdecision maker or a service provider are a variable interest; (iii) the effect of fee arrangements on the consolidated statements.
PB determination; (iv) the effect of related parties on the PB determination; and (v) the consolidation evaluation for certain investment funds. This includes a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
ASU 2014-13 and ASU 2015-02 are effective for the Company on January 1, 2016, with retrospective or modified retrospective approach required. ASU 2014-13 permits early adoption as of the beginning of an annual period. ASU2015-02 permits early adoption in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact to the consolidated financial statements of adopting all of the provisions of ASU 2015-02 and ASU 2014-13.
3. Investments
A summary of the carrying value of total investments is as follows:
(Dollar amounts in millions) | December 31, 2012 | December 31, 2011 | ||||||||||||||
| (in millions) | December 31, 2014 | December 31, 2013 | ||||||||||||||
Available-for-sale investments | $ | 158 | $ | 52 | $ | 201 | $ | 183 | ||||||||
Held-to-maturity investments | 112 | 105 | 79 | 83 | ||||||||||||
Trading investments: | ||||||||||||||||
Consolidated sponsored investment funds | 123 | 214 | 443 | 385 | ||||||||||||
Other equity and debt securities | 94 | 7 | 29 | 43 | ||||||||||||
Deferred compensation plan mutual funds | 53 | 46 | 64 | 58 | ||||||||||||
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Total trading investments | 270 | 267 | 536 | 486 | ||||||||||||
Other investments: | ||||||||||||||||
Consolidated sponsored investment funds | 401 | 373 | 270 | 441 | ||||||||||||
Equity method investments | 595 | 457 | 633 | 697 | ||||||||||||
Deferred compensation plan hedge fund equity method investments | 9 | 19 | ||||||||||||||
Deferred compensation plan equity method investments | 21 | 39 | ||||||||||||||
Cost method investments(1) | 120 | 337 | 96 | 119 | ||||||||||||
Carried interest | 85 | 21 | 85 | 103 | ||||||||||||
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Total other investments | 1,210 | 1,207 | 1,105 | 1,399 | ||||||||||||
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Total investments | $ | 1,750 | $ | 1,631 | $ | 1,921 | $ | 2,151 | ||||||||
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| (1) | Amounts primarily include Federal Reserve Bank |
At December 31, 2012,2014, the Company consolidated $524$713 million of investments held by consolidated sponsored investment funds (non-VIEs)(excluding VIEs) of which $123$443 million and $401$270 million were classified as trading investments and other investments, respectively. At December 31, 2011,2013, the Company consolidated $587$826 million of investments held by consolidated sponsored investment funds (non-VIEs)(excluding VIEs) of which $214$385 million and $373$441 million were classified as trading investments and other investments, respectively.
Available-for-Sale Investments
A summary of the cost and carrying value of investments classified as available-for-sale investments is as follows:
| (Dollar amounts in millions) | Gross Unrealized | Carrying Value | ||||||||||||||
At December 31, 2012 | Cost | Gains | Losses | |||||||||||||
Equity securities: | ||||||||||||||||
Sponsored investment funds | $ | 142 | $ | 14 | $ | (1 | ) | $ | 155 | |||||||
Collateralized debt obligations (“CDOs”) | 1 | — | — | 1 | ||||||||||||
Debt securities: | ||||||||||||||||
Asset-backed debt | 1 | 1 | — | 2 | ||||||||||||
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Total available-for-sale investments | $ | 144 | $ | 15 | $ | (1 | ) | $ | 158 | |||||||
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At December 31, 2011 | ||||||||||||||||
Equity securities: | ||||||||||||||||
Sponsored investment funds | $ | 52 | $ | — | $ | (2 | ) | $ | 50 | |||||||
CDOs | 1 | — | — | 1 | ||||||||||||
Debt securities: | ||||||||||||||||
Asset-backed debt | 1 | — | — | 1 | ||||||||||||
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Total available-for-sale investments | $ | 54 | $ | — | $ | (2 | ) | $ | 52 | |||||||
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| (in millions) | Gross Unrealized | Carrying Value | ||||||||||||||
| December 31, 2014 | Cost | Gains | Losses | |||||||||||||
Equity securities of sponsored investment funds | $ | 205 | $ | 5 | $ | (9 | ) | $ | 201 | |||||||
| December 31, 2013 | ||||||||||||||||
Equity securities of sponsored investment funds | $ | 180 | $ | 4 | $ | (4 | ) | $ | 180 | |||||||
Other securities | 1 | 2 | — | 3 | ||||||||||||
Total available-for-sale investments | $ | 181 | $ | 6 | $ | (4 | ) | $ | 183 | |||||||
Available-for-sale investments primarily included seed investments in BlackRock sponsored investmentmutual funds.
A summary of sale activity in available-for-sale securities during 2012, 20112014, 2013 and 20102012 is shown below.
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | |||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Sales proceeds | $ | 134 | $ | 44 | $ | 42 | $ | 155 | $ | 139 | $ | 134 | ||||||||||||
Net realized gain (loss): | ||||||||||||||||||||||||
Gross realized gains | $ | 8 | $ | 3 | $ | 3 | $ | 14 | $ | 20 | $ | 8 | ||||||||||||
Gross realized losses | (1 | ) | (2 | ) | (1 | ) | (3 | ) | (1 | ) | (1 | ) | ||||||||||||
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Net realized gain (loss) | $ | 7 | $ | 1 | $ | 2 | $ | 11 | $ | 19 | $ | 7 | ||||||||||||
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Held-to-Maturity Investments
The carrying value of held-to-maturity investments was $112$79 million and $105$83 million at December 31, 20122014 and December 31, 2011,2013, respectively. Held-to-maturity investments included foreign government debt held for regulatory purposes and the amortized cost (carrying value) of these investments approximated fair value. At
3. Investments (continued)
December 31, 2012, $882014, $66 million of these investments mature in one year or less $10 million mature after one year through five years, and $14$13 million mature after 10 years.
Trading Investments
A summary of the cost and carrying value of trading investments is as follows:
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| (Dollar amounts in millions) | Cost | Carrying Value | Cost | Carrying Value | ||||||||||||
Trading investments: | ||||||||||||||||
Deferred compensation plan mutual funds | $ | 46 | $ | 53 | $ | 45 | $ | 46 | ||||||||
Equity/Multi-asset class mutual funds | 154 | 162 | 174 | 169 | ||||||||||||
Debt securities: | ||||||||||||||||
Corporate debt | 44 | 44 | 39 | 40 | ||||||||||||
U.S. government debt | 11 | 11 | — | — | ||||||||||||
Foreign debt | — | — | 12 | 12 | ||||||||||||
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Total trading investments | $ | 255 | $ | 270 | $ | 270 | $ | 267 | ||||||||
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| December 31, 2014 | December 31, 2013 | |||||||||||||||
| (in millions) | Cost | Carrying Value | Cost | Carrying Value | ||||||||||||
Trading investments: | ||||||||||||||||
Deferred compensation plan mutual funds | $ | 48 | $ | 64 | $ | 49 | $ | 58 | ||||||||
Equity securities/multi-asset mutual funds | 210 | 239 | 174 | 184 | ||||||||||||
Debt securities/fixed income mutual funds: | ||||||||||||||||
Corporate debt | 109 | 110 | 128 | 128 | ||||||||||||
Government debt | 100 | 103 | 121 | 116 | ||||||||||||
Asset/mortgage backed debt | 20 | 20 | — | — | ||||||||||||
Total trading investments | $ | 487 | $ | 536 | $ | 472 | $ | 486 | ||||||||
At December 31, 2012,2014, trading investments included $73$220 million of equity securities and $50$223 million of debt securities held by consolidated sponsored investment funds, $53$64 million of certain deferred compensation plan mutual fund investments and $94$29 million of other equity and debt securities.
At December 31, 2013, trading investments included $172 million of equity securities and $213 million of debt securities held in separateby consolidated sponsored investment accounts for the purposefunds, $58 million of establishing an investment history in various investment strategies before being marketed to investors.certain deferred compensation plan mutual fund investments and $43 million of other equity and debt securities.
Other Investments
A summary of the cost and carrying value of other investments is as follows:
| December 31, 2012 | December 31, 2011 | December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||
| (Dollar amounts in millions) | Cost | Carrying Value | Cost | Carrying Value | ||||||||||||||||||||||||||||
| (in millions) | Cost | Carrying Value | Cost | Carrying Value | ||||||||||||||||||||||||||||
Other investments: | ||||||||||||||||||||||||||||||||
Consolidated sponsored investment funds | $ | 378 | $ | 401 | $ | 345 | $ | 373 | $ | 268 | $ | 270 | $ | 420 | $ | 441 | ||||||||||||||||
Equity method | 541 | 595 | 487 | 457 | 518 | 633 | 613 | 697 | ||||||||||||||||||||||||
Deferred compensation plan hedge fund equity method investments | 15 | 9 | 17 | 19 | ||||||||||||||||||||||||||||
Deferred compensation plan equity method investments | 21 | 21 | 37 | 39 | ||||||||||||||||||||||||||||
Cost method investments: | ||||||||||||||||||||||||||||||||
Federal Reserve Bank stock | 89 | 89 | 328 | 328 | 92 | 92 | 90 | 90 | ||||||||||||||||||||||||
Other | 31 | 31 | 9 | 9 | 4 | 4 | 17 | 29 | ||||||||||||||||||||||||
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Total cost method investments | 120 | 120 | 337 | 337 | 96 | 96 | 107 | 119 | ||||||||||||||||||||||||
Carried interest | — | 85 | — | 21 | — | 85 | — | 103 | ||||||||||||||||||||||||
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Total other investments | $ | 1,054 | $ | 1,210 | $ | 1,186 | $ | 1,207 | $ | 903 | $ | 1,105 | $ | 1,177 | $ | 1,399 | ||||||||||||||||
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Consolidated sponsored investment funds include third-party private equity funds, direct investments in private companies and third-party hedge funds held by BlackRock sponsored investment funds.
Equity method investments primarily include BlackRock’s direct investmentinvestments in certain BlackRock sponsored investment funds. See Note 11,Other Assets, for information on the Company’s investment in PennyMac Financial Services, Inc. (“PennyMac”), which is included in other assets on the consolidated statements of financial condition.
Cost method investments include non-marketablenonmarketable securities, including Federal Reserve Bank (“FRB”)FRB stock, which is held for regulatory purposes and is restricted from sale. At December 31, 20122014 and 2011,2013, there were no indicators of impairment on these investments. The decrease in cost method investments from December 31, 2011 was primarily due to a lower holding requirement of FRB stock held by a wholly owned subsidiary of the Company.
Carried interest represents allocations to BlackRockBlackRock’s general partner capital accounts forfrom certain funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds.
4. Consolidated Sponsored Investment Funds
The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds in accordance with GAAP.funds. The investments owned by these consolidated sponsored investment funds are classified as trading or other investments. The following table presents the balances related to these consolidated funds that were included on the consolidated statements of financial condition as well as BlackRock’s net interest in these funds:
| (Dollar amounts in millions) | December 31, 2012 | December 31, 2011 | ||||||||||||||
| (in millions) | December 31, 2014 | December 31, 2013 | ||||||||||||||
Cash and cash equivalents | $ | 133 | $ | 196 | $ | 120 | $ | 114 | ||||||||
Investments: | ||||||||||||||||
Trading investments | 123 | 214 | 443 | 385 | ||||||||||||
Other investments | 401 | 373 | 270 | 441 | ||||||||||||
Other assets | 25 | 5 | 20 | 20 | ||||||||||||
Other liabilities | (65 | ) | (37 | ) | (18 | ) | (39 | ) | ||||||||
Non-controlling interests | (187 | ) | (276 | ) | ||||||||||||
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Noncontrolling interests | (139 | ) | (189 | ) | ||||||||||||
BlackRock’s net interests in consolidated investment funds | $ | 430 | $ | 475 | $ | 696 | $ | 732 | ||||||||
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BlackRock’s total exposure to consolidated sponsored investment funds of $430 million and $475 million at
December 31, 2012 and 2011, respectively, represents the value of the Company’sits economic ownership interest in these sponsored investment funds. Valuation changes associated with investments held at fair value by these consolidated investment funds are reflected in non-operatingnonoperating income (expense) and partially offset in net income (loss) attributable to non-controllingnoncontrolling interests for the portion not attributable to BlackRock.
In addition, at December 31, 20122014 and 2011,2013, several consolidated CLOs and one sponsored investment fund, which were deemed to be VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the consolidated statements of financial condition. See Note 6,Variable Interest Entities, for further discussion on these consolidated funds.investment products.
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 the Company’s operations.
5. Fair Value Disclosures
Fair Value Hierarchy
December 31, 2012
Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value were as follows:
| Assets measured at fair value on a recurring basis | ||||||||||||||||||||||||||||||||||||||||
| (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, 2012 | |||||||||||||||||||||||||||||||||||
December 31, 2014 (in millions) | Quoted Prices in Active Markets for (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Assets Not Held at Fair Value(1) | December 31, 2014 | |||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||||||||||
Equity securities (funds and CDOs) | $ | 155 | $ | — | $ | 1 | $ | — | $ | 156 | ||||||||||||||||||||||||||||||
Debt securities | — | 2 | — | — | 2 | |||||||||||||||||||||||||||||||||||
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Total available-for-sale | 155 | 2 | 1 | — | 158 | |||||||||||||||||||||||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||||||||||||||||||
Debt securities | — | — | — | 112 | 112 | |||||||||||||||||||||||||||||||||||
Equity securities of sponsored investment funds | $ | 198 | $ | 3 | $ | — | $ | — | $ | 201 | ||||||||||||||||||||||||||||||
Held-to-maturity debt securities | — | — | — | 79 | 79 | |||||||||||||||||||||||||||||||||||
Trading: | ||||||||||||||||||||||||||||||||||||||||
Deferred compensation plan mutual funds | 53 | — | — | — | 53 | 64 | — | — | — | 64 | ||||||||||||||||||||||||||||||
Equity/Multi-asset class mutual funds | 159 | 3 | — | — | 162 | |||||||||||||||||||||||||||||||||||
Debt securities | 5 | 50 | — | — | 55 | |||||||||||||||||||||||||||||||||||
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Equity/Multi-asset mutual funds | 239 | — | — | — | 239 | |||||||||||||||||||||||||||||||||||
Debt securities / fixed income mutual funds | 11 | 222 | — | — | 233 | |||||||||||||||||||||||||||||||||||
Total trading | 217 | 53 | — | — | 270 | 314 | 222 | — | — | 536 | ||||||||||||||||||||||||||||||
Other investments: | ||||||||||||||||||||||||||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of funds | 3 | 39 | 73 | — | 115 | |||||||||||||||||||||||||||||||||||
Private / public equity(2) | 10 | 10 | 266 | — | 286 | |||||||||||||||||||||||||||||||||||
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Total consolidated sponsored investment funds | 13 | 49 | 339 | — | 401 | |||||||||||||||||||||||||||||||||||
Consolidated sponsored investment funds private / public equity(2) | 11 | 11 | 248 | — | 270 | |||||||||||||||||||||||||||||||||||
Equity method: | ||||||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of hedge funds | — | 61 | 161 | 39 | 261 | — | 213 | 64 | 5 | 282 | ||||||||||||||||||||||||||||||
Private equity investments | — | — | 90 | — | 90 | — | — | 107 | — | 107 | ||||||||||||||||||||||||||||||
Real estate funds | — | 19 | 88 | 15 | 122 | — | 21 | 88 | 8 | 117 | ||||||||||||||||||||||||||||||
Fixed income mutual funds | 46 | — | — | — | 46 | 29 | — | — | — | 29 | ||||||||||||||||||||||||||||||
Equity/Multi-asset class, alternative mutual funds | 76 | — | — | — | 76 | |||||||||||||||||||||||||||||||||||
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Other | 98 | — | — | — | 98 | |||||||||||||||||||||||||||||||||||
Total equity method | 122 | 80 | 339 | 54 | 595 | 127 | 234 | 259 | 13 | 633 | ||||||||||||||||||||||||||||||
Deferred compensation plan hedge fund equity method investments | — | 9 | — | — | 9 | |||||||||||||||||||||||||||||||||||
Deferred compensation plan equity method investments | — | — | 21 | — | 21 | |||||||||||||||||||||||||||||||||||
Cost method investments | — | — | — | 120 | 120 | — | — | — | 96 | 96 | ||||||||||||||||||||||||||||||
Carried interest | — | — | — | 85 | 85 | — | — | — | 85 | 85 | ||||||||||||||||||||||||||||||
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Total investments | 507 | 193 | 679 | 371 | 1,750 | 650 | 470 | 528 | 273 | 1,921 | ||||||||||||||||||||||||||||||
Separate account assets: | ||||||||||||||||||||||||||||||||||||||||
Separate account assets | 113,566 | 46,866 | — | 855 | 161,287 | |||||||||||||||||||||||||||||||||||
Separate account collateral held under securities lending agreements: | ||||||||||||||||||||||||||||||||||||||||
Equity securities | 92,979 | — | 2 | — | 92,981 | 30,387 | — | — | — | 30,387 | ||||||||||||||||||||||||||||||
Debt securities | — | 36,954 | — | — | 36,954 | — | 3,267 | — | — | 3,267 | ||||||||||||||||||||||||||||||
Derivatives | — | 95 | — | — | 95 | |||||||||||||||||||||||||||||||||||
Money market funds | 2,535 | — | — | — | 2,535 | |||||||||||||||||||||||||||||||||||
Other | — | 1,343 | — | 860 | 2,203 | |||||||||||||||||||||||||||||||||||
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Total separate account assets | 95,514 | 38,392 | 2 | 860 | 134,768 | |||||||||||||||||||||||||||||||||||
Collateral held under securities lending agreements: | ||||||||||||||||||||||||||||||||||||||||
Equity securities | 21,273 | — | — | — | 21,273 | |||||||||||||||||||||||||||||||||||
Debt securities | — | 1,748 | — | — | 1,748 | |||||||||||||||||||||||||||||||||||
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Total collateral held under securities lending agreements | 21,273 | 1,748 | — | — | 23,021 | |||||||||||||||||||||||||||||||||||
Other assets(3) | — | 12 | — | — | 12 | |||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||||||||||||||||||||||
Bank loans | — | 2,004 | 106 | — | 2,110 | |||||||||||||||||||||||||||||||||||
Total separate account collateral held under securities lending agreements | 30,387 | 3,267 | — | — | 33,654 | |||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||||||||||||||||||||||
Bank loans and other assets | — | 2,958 | 302 | 32 | 3,292 | |||||||||||||||||||||||||||||||||||
Bonds | — | 78 | 46 | — | 124 | — | 29 | 18 | — | 47 | ||||||||||||||||||||||||||||||
Private / public equity(4) | 2 | 6 | 22 | — | 30 | |||||||||||||||||||||||||||||||||||
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Private / public equity(3) | — | 3 | 10 | — | 13 | |||||||||||||||||||||||||||||||||||
Total assets of consolidated VIEs | 2 | 2,088 | 174 | — | 2,264 | — | 2,990 | 330 | 32 | 3,352 | ||||||||||||||||||||||||||||||
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Total | $ | 117,296 | $ | 42,433 | $ | 855 | $ | 1,231 | $ | 161,815 | $ | 144,603 | $ | 53,593 | $ | 858 | $ | 1,160 | $ | 200,214 | ||||||||||||||||||||
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Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Borrowings of consolidated VIEs | $ | — | $ | — | $ | 3,389 | $ | — | $ | 3,389 | ||||||||||||||||||||||||||||||
Separate account collateral liabilities under securities lending agreements | 30,387 | 3,267 | — | — | 33,654 | |||||||||||||||||||||||||||||||||||
Other liabilities(4) | — | 5 | 39 | — | 44 | |||||||||||||||||||||||||||||||||||
Total | $ | 30,387 | $ | 3,272 | $ | 3,428 | $ | — | $ | 37,087 | ||||||||||||||||||||||||||||||
Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment |
| (2) |
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| (3) |
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| (4) | Amounts include a derivative (see Note 7,Derivatives and Hedging, for more information) and contingent liabilities related to the acquisitions of the Credit Suisse ETF franchise and MGPA (see Note 13,Commitments and Contingencies, for more information). |
Assets and liabilities measured at fair value on a recurring basis and other assets not held at fair value
December 31, 2013 (in millions) | Quoted Prices Markets for (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Assets Not Held at Fair Value(1) | December 31, 2013 | |||||||||||||||
Assets: | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||
Equity securities of sponsored investment funds | $ | 180 | $ | — | $ | — | $ | — | $ | 180 | ||||||||||
Other securities | — | 3 | — | — | 3 | |||||||||||||||
Total available-for-sale | 180 | 3 | — | — | 183 | |||||||||||||||
Held-to-maturity debt securities | — | — | — | 83 | 83 | |||||||||||||||
Trading: | ||||||||||||||||||||
Deferred compensation plan mutual funds | 58 | — | — | — | 58 | |||||||||||||||
Equity/Multi-asset mutual funds | 184 | — | — | — | 184 | |||||||||||||||
Debt securities / fixed income mutual funds | 31 | 213 | — | — | 244 | |||||||||||||||
Total trading | 273 | 213 | — | — | 486 | |||||||||||||||
Other investments: | ||||||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||
Hedge funds / Funds of funds | — | 135 | 24 | — | 159 | |||||||||||||||
Private / public equity(2) | 5 | 13 | 223 | 41 | 282 | |||||||||||||||
Total consolidated sponsored investment funds | 5 | 148 | 247 | 41 | 441 | |||||||||||||||
Equity method: | ||||||||||||||||||||
Hedge funds / Funds of hedge funds | — | 177 | 99 | 63 | 339 | |||||||||||||||
Private equity investments | — | — | 101 | — | 101 | |||||||||||||||
Real estate funds | — | 20 | 98 | 7 | 125 | |||||||||||||||
Fixed income mutual funds | 113 | — | — | — | 113 | |||||||||||||||
Equity/Multi-asset, alternative mutual funds | 19 | — | — | — | 19 | |||||||||||||||
Total equity method | 132 | 197 | 298 | 70 | 697 | |||||||||||||||
Deferred compensation plan equity method investments | — | 10 | 29 | — | 39 | |||||||||||||||
Cost method investments | — | — | — | 119 | 119 | |||||||||||||||
Carried interest | — | — | — | 103 | 103 | |||||||||||||||
Total investments | 590 | 571 | 574 | 416 | 2,151 | |||||||||||||||
Separate account assets | 113,382 | 40,841 | — | 890 | 155,113 | |||||||||||||||
Separate account collateral held under securities lending agreements: | ||||||||||||||||||||
Equity securities | 20,856 | — | — | — | 20,856 | |||||||||||||||
Debt securities | — | 932 | — | — | 932 | |||||||||||||||
Total separate account collateral held under securities lending agreements | 20,856 | 932 | — | — | 21,788 | |||||||||||||||
Other assets(3) | — | 39 | — | — | 39 | |||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||
Bank loans and other assets | — | 2,047 | 129 | 19 | 2,195 | |||||||||||||||
Bonds | — | 71 | 35 | — | 106 | |||||||||||||||
Private / public equity(4) | — | 10 | 14 | — | 24 | |||||||||||||||
Total assets of consolidated VIEs | — | 2,128 | 178 | 19 | 2,325 | |||||||||||||||
Total | $ | 134,828 | $ | 44,511 | $ | 752 | $ | 1,325 | $ | 181,416 | ||||||||||
Liabilities: | ||||||||||||||||||||
Borrowings of consolidated VIEs | $ | — | $ | — | $ | 2,369 | $ | — | $ | 2,369 | ||||||||||
Separate account collateral liabilities under securities lending agreements | 20,856 | 932 | — | — | 21,788 | |||||||||||||||
Other liabilities(5) | 18 | 4 | 42 | — | 64 | |||||||||||||||
Total | $ | 20,874 | $ | 936 | $ | 2,411 | $ | — | $ | 24,221 | ||||||||||
| (1) | Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which are not accounted for under a fair value measure. Certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value. |
| (2) | Level 3 amounts include $195 million and |
5. Fair Value Disclosures (continued)
Liabilities measured at fair value on a recurring basis at December 31, 2012 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, 2012 | ||||||||||||
Liabilities: | ||||||||||||||||
Borrowings of consolidated VIEs | $ | — | $ | — | $ | 2,402 | $ | 2,402 | ||||||||
Collateral liabilities under securities lending agreements | 21,273 | 1,748 | — | 23,021 | ||||||||||||
Other liabilities(1) | 15 | 5 | — | 20 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities measured at fair value | $ | 21,288 | $ | 1,753 | $ | 2,402 | $ | 25,443 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Amount |
| (4) | Level 3 amounts include $14 million of underlying third-party private equity funds held by a sponsored private equity fund of fund. |
| (5) | Amounts include a derivative (see Note 7,Derivatives and Hedging, for more information) |
December 31, 2011
Assets measured at fair value on a recurring basis and other assets not held at fair value were as follows:
| Assets measured at fair value on a recurring basis | ||||||||||||||||||||
| (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, 2011 | |||||||||||||||
Assets: | ||||||||||||||||||||
Investments | ||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||
Equity securities (funds and CDOs) | $ | 50 | $ | — | $ | 1 | $ | — | $ | 51 | ||||||||||
Debt securities | — | 1 | — | — | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total available-for-sale | 50 | 1 | 1 | — | 52 | |||||||||||||||
Held-to-maturity: | ||||||||||||||||||||
Debt securities | — | — | — | 105 | 105 | |||||||||||||||
Trading: | ||||||||||||||||||||
Deferred compensation plan mutual funds | 46 | — | — | — | 46 | |||||||||||||||
Equity securities | 163 | 6 | — | — | 169 | |||||||||||||||
Debt securities | — | 52 | — | — | 52 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total trading | 209 | 58 | — | — | 267 | |||||||||||||||
Other investments: | ||||||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||
Hedge funds / Funds of funds | — | 20 | 22 | — | 42 | |||||||||||||||
Private / public equity | 18 | — | 313 | — | 331 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total consolidated sponsored investment funds | 18 | 20 | 335 | — | 373 | |||||||||||||||
Equity method: | ||||||||||||||||||||
Hedge funds / Funds of hedge funds | — | 33 | 193 | 14 | 240 | |||||||||||||||
Private equity investments | — | — | 85 | 21 | 106 | |||||||||||||||
Real estate funds | — | — | 88 | 20 | 108 | |||||||||||||||
Equity mutual funds | 3 | — | — | — | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total equity method | 3 | 33 | 366 | 55 | 457 | |||||||||||||||
Deferred compensation plan hedge fund equity method investments | — | 19 | — | — | 19 | |||||||||||||||
Cost method investments | — | — | — | 337 | 337 | |||||||||||||||
Carried interest | — | — | — | 21 | 21 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total investments | 280 | 131 | 702 | 518 | 1,631 | |||||||||||||||
5. Fair Value Disclosures (continued)
| Assets measured at fair value on a recurring basis | ||||||||||||||||||||
| (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, 2011 | |||||||||||||||
Separate account assets: | ||||||||||||||||||||
Equity securities | 74,088 | — | 3 | — | 74,091 | |||||||||||||||
Debt securities | — | 38,596 | 7 | — | 38,603 | |||||||||||||||
Derivatives | 8 | 1,487 | — | — | 1,495 | |||||||||||||||
Money market funds | 2,845 | — | — | — | 2,845 | |||||||||||||||
Other | — | 920 | — | 917 | 1,837 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total separate account assets | 76,941 | 41,003 | 10 | 917 | 118,871 | |||||||||||||||
Collateral held under securities lending agreements: | ||||||||||||||||||||
Equity securities | 14,092 | — | — | — | 14,092 | |||||||||||||||
Debt securities | — | 6,826 | — | — | 6,826 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total collateral held under securities lending agreements | 14,092 | 6,826 | — | — | 20,918 | |||||||||||||||
Other assets(2) | — | 11 | — | — | 11 | |||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||
Bank loans | — | 1,376 | 83 | — | 1,459 | |||||||||||||||
Bonds | — | 105 | 40 | — | 145 | |||||||||||||||
Private / public equity | 4 | 4 | 27 | — | 35 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets of consolidated VIEs | 4 | 1,485 | 150 | — | 1,639 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 91,317 | $ | 49,456 | $ | 862 | $ | 1,435 | $ | 143,070 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
|
|
Liabilities measured at fair value on a recurring basis at December 31, 2011 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, 2011 | ||||||||||||
Liabilities: | ||||||||||||||||
Borrowings of consolidated VIEs | $ | — | $ | — | $ | 1,574 | $ | 1,574 | ||||||||
Collateral liabilities under securities lending agreements | 14,092 | 6,826 | — | 20,918 | ||||||||||||
Other liabilities(1) | 15 | 11 | — | 26 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities measured at fair value | $ | 14,107 | $ | 6,837 | $ | 1,574 | $ | 22,518 | ||||||||
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|
|
|
|
| |||||||||
|
5. Fair Value Disclosures (continued)
Level 3 Assets.Level 3 assets recorded within investments of $679$528 million and $574 million at December 31, 20122014 and 2013, respectively, primarily related to equity method investments and private equity funds held by consolidated sponsored investment funds. Level 3 assets within investments, except for direct investments in private equity companies held by private equity funds described below, were primarily valued based upon NAVs received from internal as well asand third-party fund managers.
Direct investments in private equity companies held by private equity funds totaled $56$80 million and $28 million at December 31, 2012.2014 and 2013, respectively. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used areis evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by
discounting the expected cash flows to a single present value amount using current market expectations about those future amounts.
Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For securitiesinvestments utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For securitiesinvestments utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.
Level 3 assets recorded within separate account assets include single-broker non-binding quotes for fixed income securities and equity securities that have unobservable inputs due to certain corporate actions.
Level 3 assets of consolidated VIEs include bank loans and bonds valued based on single-broker non-bindingnonbinding 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 returns of certain market indices.
Level 3 Liabilities.Level 3 liabilities recorded as borrowings of consolidated VIEs include CLO borrowings valued based upon single-broker non-bindingnonbinding quotes.
Level 3 other liabilities include contingent liabilities related to the acquisitions of the Credit Suisse ETF franchise and MGPA, which were valued based upon discounted cash flow analyses using unobservable market data inputs.
5. Fair Value Disclosures (continued)
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 20122014
| (Dollar amounts in millions) | December 31, 2011 | Realized and unrealized gains (losses) in earnings and OCI | Purchases | Sales and maturities | Issuances and other settlements(1) | Transfers into Level 3 | Transfers out of Level 3 | December 31, 2012 | Total net unrealized gains (losses) included in earnings(2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | December 31, 2013 | Realized and unrealized gains (losses) in earnings and OCI | Purchases | Sales and maturities | Issuances and other settlements(1) | Transfers into Level 3 | Transfers out of Level 3 | December 31, 2014 | Total net unrealized gains (losses) included in earnings(3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities (CDOs) | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of hedge funds | 22 | — | 37 | (6 | ) | — | 25 | (5 | ) | 73 | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of funds | $ | 24 | $ | — | $ | — | $ | (23 | ) | $ | (1 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Private equity | 313 | 27 | 32 | (85 | ) | (15 | ) | — | (6 | ) | 266 | 24 | 223 | 12 | 45 | (72 | ) | (1 | ) | 41 | (2) | — | 248 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||
Equity method: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of hedge funds | 193 | 38 | — | — | (70 | ) | — | — | 161 | 32 | 99 | 5 | 19 | (19 | ) | (40 | ) | — | — | 64 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Private equity investments | 85 | 6 | 11 | — | (12 | ) | — | — | 90 | 6 | 101 | 15 | 17 | — | (26 | ) | — | — | 107 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate funds | 88 | 12 | 21 | (7 | ) | (7 | ) | — | (19 | ) | 88 | 12 | 98 | 13 | 8 | (5 | ) | (26 | ) | — | — | 88 | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred compensation plan equity method investments | 29 | — | — | — | (8 | ) | — | — | 21 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 investments | 702 | 83 | 101 | (98 | ) | (104 | ) | 25 | (30 | ) | 679 | 73 | 574 | 45 | 89 | (119 | ) | (102 | ) | 41 | — | 528 | 39 | |||||||||||||||||||||||||||||||||||||||||||||||||
Separate account assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 3 | 5 | 8 | (53 | ) | — | 48 | (9 | ) | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities | 7 | — | 3 | (9 | ) | — | — | (1 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 separate account assets | 10 | 5 | 11 | (62 | ) | — | 48 | (10 | ) | 2 | n/a | (3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank loans | 83 | 4 | 68 | (44 | ) | 7 | 101 | (113 | ) | 106 | 129 | (9 | ) | 210 | (96 | ) | 46 | 302 | (280 | ) | 302 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Bonds | 40 | 4 | 2 | — | — | — | — | 46 | 35 | — | — | (17 | ) | — | — | — | 18 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Private equity | 27 | 4 | — | (9 | ) | — | — | — | 22 | 14 | 1 | — | (5 | ) | — | — | — | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets of consolidated VIEs | 150 | 12 | 70 | (53 | ) | 7 | 101 | (113 | ) | 174 | n/a | (4) | 178 | (8 | ) | 210 | (118 | ) | 46 | 302 | (280 | ) | 330 | n/a | (4) | |||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 862 | $ | 100 | $ | 182 | $ | (213 | ) | $ | (97 | ) | $ | 174 | $ | (153 | ) | $ | 855 | $ | 752 | $ | 37 | $ | 299 | $ | (237 | ) | $ | (56 | ) | $ | 343 | $ | (280 | ) | $ | 858 | $ | 39 | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings of consolidated VIEs | $ | 1,574 | $ | (93 | ) | $ | — | $ | — | $ | 735 | $ | — | $ | — | $ | 2,402 | n/a | (4) | $ | 2,369 | $ | 77 | $ | — | $ | — | $ | 1,097 | $ | — | $ | — | $ | 3,389 | n/a | (4) | |||||||||||||||||||||||||||||||||||
Other liabilities | 42 | (1 | ) | — | — | (4 | ) | — | — | 39 | n/a | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | 2,411 | $ | 76 | $ | — | $ | — | $ | 1,093 | $ | — | $ | — | $ | 3,428 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| n/a |
| (1) | Amount primarily includes distributions from equity method investees and loans and net proceeds from |
| (2) | Includes investments previously held at cost. |
| (3) | Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date. |
| The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the consolidated statements of income. |
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2013
| (in millions) | December 31, 2012 | Realized and unrealized gains (losses) in earnings and OCI | Purchases | Sales and maturities | Issuances and other settlements(1) | Transfers into Level 3 | Transfers out of Level 3 | December 31, 2013 | Total net unrealized gains (losses) included in earnings(2) | |||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||||||
Equity securities of sponsored investment funds | $ | 1 | $ | — | $ | — | $ | — | $ | (1 | ) | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of funds | 73 | 8 | 12 | (19 | ) | (34 | ) | — | (16 | ) | 24 | 4 | ||||||||||||||||||||||||
Private equity | 266 | 37 | 16 | (82 | ) | — | — | (14 | ) | 223 | 25 | |||||||||||||||||||||||||
Equity method: | ||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of hedge funds | 161 | 16 | 7 | (11 | ) | (74 | ) | — | — | 99 | 9 | |||||||||||||||||||||||||
Private equity investments | 90 | 21 | 14 | (10 | ) | (14 | ) | — | — | 101 | 21 | |||||||||||||||||||||||||
Real estate funds | 88 | 20 | 7 | — | (17 | ) | — | — | 98 | 20 | ||||||||||||||||||||||||||
Deferred compensation plan equity method investments | — | — | — | — | 29 | — | — | 29 | — | |||||||||||||||||||||||||||
Total Level 3 investments | 679 | 102 | 56 | (122 | ) | (111 | ) | — | (30 | ) | 574 | 79 | ||||||||||||||||||||||||
Separate account assets: | 2 | — | — | (2 | ) | — | — | — | — | n/a | (3) | |||||||||||||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||||||||||||||||||
Bank loans | 106 | — | 109 | (60 | ) | 16 | 117 | (159 | ) | 129 | ||||||||||||||||||||||||||
Bonds | 46 | 1 | 4 | (16 | ) | — | — | — | 35 | |||||||||||||||||||||||||||
Private equity | 22 | 2 | — | (7 | ) | — | — | (3 | ) | 14 | ||||||||||||||||||||||||||
Funds of hedge funds | — | — | 134 | — | (134 | ) | — | — | — | |||||||||||||||||||||||||||
Total Level 3 assets of consolidated VIEs | 174 | 3 | 247 | (83 | ) | (118 | ) | 117 | (162 | ) | 178 | n/a | (4) | |||||||||||||||||||||||
Total Level 3 assets | $ | 855 | $ | 105 | $ | 303 | $ | (207 | ) | $ | (229 | ) | $ | 117 | $ | (192 | ) | $ | 752 | $ | 79 | |||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||
Borrowings of consolidated VIEs | $ | 2,402 | $ | (14 | ) | $ | — | $ | — | $ | (47 | ) | $ | — | $ | — | $ | 2,369 | n/a | (4) | ||||||||||||||||
Other liabilities | — | — | — | — | 42 | — | — | 42 | — | |||||||||||||||||||||||||||
Total Level 3 liabilities | $ | 2,402 | $ | (14 | ) | $ | — | $ | — | $ | (5 | ) | $ | — | $ | — | $ | 2,411 | ||||||||||||||||||
| n/a | — not applicable |
| (1) | Amounts include distributions from equity method investees, repayments of borrowings of consolidated VIEs, loans and borrowings related to the consolidation of one additional CLO, elimination of investment related to a deconsolidation of a consolidated VIE and a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage. Amounts also include the acquisition of deferred compensation plan equity method investments and contingent liabilities related to the acquisitions of Credit Suisse’s ETF franchise and MGPA. |
| (2) | Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date. |
| (3) | The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the consolidated statements of income. |
| (4) | The net gain (loss) on consolidated VIEs is solely attributable to |
5. Fair Value Disclosures (continued)
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2011
| (Dollar amounts in millions) | December 31, 2010 | Realized and unrealized gains (losses) in earnings and OCI | Purchases | Sales and maturities | Issuances and other settlements(1) | Transfers into Level 3 | Transfers out of Level 3 | December 31, 2011 | Total net unrealized gains (losses) included in earnings(2) | |||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||||||
Equity securities (CDOs) | $ | 2 | $ | — | $ | — | $ | — | $ | (1 | ) | $ | — | $ | — | $ | 1 | $ | — | |||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of hedge funds | 19 | (1 | ) | 6 | (2 | ) | — | — | — | 22 | — | |||||||||||||||||||||||||
Private equity | 299 | 42 | 17 | (47 | ) | — | 2 | — | 313 | 35 | ||||||||||||||||||||||||||
Equity method: | ||||||||||||||||||||||||||||||||||||
Hedge funds / Funds of hedge funds | 226 | (5 | ) | 5 | (1 | ) | (32 | ) | — | — | 193 | (5 | ) | |||||||||||||||||||||||
Private equity investments | 68 | 13 | 7 | — | (3 | ) | — | — | 85 | 13 | ||||||||||||||||||||||||||
Real estate funds | 36 | 9 | 38 | — | (3 | ) | 8 | — | 88 | 9 | ||||||||||||||||||||||||||
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Total Level 3 investments | 650 | 58 | 73 | (50 | ) | (39 | ) | 10 | — | 702 | 52 | |||||||||||||||||||||||||
Separate account assets: | ||||||||||||||||||||||||||||||||||||
Equity securities | 4 | (4 | ) | 16 | (42 | ) | — | 38 | (9 | ) | 3 | |||||||||||||||||||||||||
Debt securities | 170 | (4 | ) | 96 | (168 | ) | — | — | (87 | ) | 7 | |||||||||||||||||||||||||
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Total Level 3 separate account assets | 174 | (8 | ) | 112 | (210 | ) | — | 38 | (96 | ) | 10 | n/a | (3) | |||||||||||||||||||||||
Assets of consolidated VIEs: | ||||||||||||||||||||||||||||||||||||
Bank loans | 32 | (2 | ) | 32 | (29 | ) | 16 | 85 | (51 | ) | 83 | |||||||||||||||||||||||||
Bonds | — | 1 | — | — | — | 39 | — | 40 | ||||||||||||||||||||||||||||
Private equity | 30 | 4 | — | (7 | ) | — | — | — | 27 | |||||||||||||||||||||||||||
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Total Level 3 assets of consolidated VIEs | 62 | 3 | 32 | (36 | ) | 16 | 124 | (51 | ) | 150 | n/a | (4) | ||||||||||||||||||||||||
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Total Level 3 assets | $ | 886 | $ | 53 | $ | 217 | $ | (296 | ) | $ | (23 | ) | $ | 172 | $ | (147 | ) | $ | 862 | |||||||||||||||||
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Liabilities: | ||||||||||||||||||||||||||||||||||||
Borrowings of consolidated VIEs | $ | 1,278 | $ | (9 | ) | $ | — | $ | — | $ | 287 | $ | — | $ | — | $ | 1,574 | n/a | (4) | |||||||||||||||||
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5. Fair Value Disclosures (continued)
Realized and Unrealized Gains (Losses) for Level 3 Assets and Liabilities.Realized and unrealized gains (losses) recorded for Level 3 assets and liabilities are reported in non-operatingnonoperating income (expense) on the consolidated statements of income. A portion of net income (loss) for consolidated sponsored investments and all of the net income (loss) for consolidated VIEs are allocated to non-controllingnoncontrolling interests to reflect net income (loss) not attributable to the Company.
Transfers in and/or out of Levels.Transfers in and/or out of levels are reflected when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable / 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 bookcarrying value of certain equity
method investments no longer represents fair value as determined under fair valuevaluation methodologies.
Separate Account Assets.In 2012, there were $48 million of transfers of equity securities from Level 1 into Level 3. These transfers into Level 3 were primarily due to market inputs no longer being considered observable.
In 2012, there were $9 million of transfers out of Level 3 to Level 1 related to equity securities held within separate accounts. The transfers out of Level 3 were due to availability of observable market inputs.
In 2011, there were $87 million of transfers out of Level 3 to Level 2 related to debt securities held within separate account assets. In addition, there were $9 million of transfers out of Level 3 to Level 1 related to equity securities. The transfers in and out of levels were primarily due to availability/ unavailability of market inputs, including inputs from pricing vendors and brokers.
In 2011, there were $38 million of transfers of equity securities into Level 3 from Level 1. The transfers into Level 3 were primarily due to market inputs no longer being considered observable.
Assets of Consolidated VIEs.In 2012,2014, there were $113$280 million of transfers out of Level 3 to Level 2 related to bank loans. In addition, in 2012,2014, there were $101$302 million of transfers into Level 3 from Level 2 related to bank loans. The transfers in and out of levels were primarily due to availability/ unavailability of observable market inputs, including inputs from pricing vendors and brokers.
In 2011,2013, there were $51$159 million of transfers out of Level 3 to Level 2 related to bank loans. In addition, in 2011,2013, there were $85 million and $39$117 million of transfers into Level 3 from Level 2 related to loans and bonds, respectively. Thebank loans. These transfers in and out of levels for both 2014 and 2013 were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.
Significant Issuances and Other Settlements.For 2012 In 2014, other settlements included $1,582 million of borrowings due to consolidation of CLOs and 2011,$485 million of repayments of borrowings of consolidated CLOs. In 2013, other settlements included $363 million of borrowings due to a consolidation of
one additional CLO and $410 million of repayments of borrowings of consolidated CLOs.
In 2014 and 2013, there were $89$92 million and $38$105 million, respectively, of distributions from equity method investees categorized in Level 3, respectively.3.
During 2012,In 2013, other settlements included $1,011$134 million related to a deconsolidation of proceedsa consolidated fund of hedge funds, which was previously classified as a VIE. This fund was deconsolidated during the second quarter of 2013 due to the granting of additional substantive rights to unaffiliated investors of the fund.
In 2013, there was a $28 million reclassification of a Level 3 investment from borrowings ofa consolidated CLOs.sponsored investment fund to an equity method investment due to a change in BlackRock’s ownership percentage.
During 2011,In 2013, issuances and other settlements included $412$29 million of borrowings of consolidated VIEs related to the consolidation of one additional CLO.acquired Level 3 deferred compensation plan equity method investments.
5. Fair Value Disclosures (continued)
Disclosures of Fair Value for Financial Instruments Not Held at Fair Value. At December 31, 20122014 and December 31, 2011,2013, the fair value of the Company’s financial instruments not held at fair value are categorized in the table below:below.
| December 31, 2012 | December 31, 2011 | December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Fair Value Hierarchy | |||||||||||||||||||||||||||||||||||
| (in millions) | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | Fair Value Hierarchy | |||||||||||||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,606 | $ | 4,606 | $ | 3,506 | $ | 3,506 | Level 1 | (1) | $ | 5,723 | $ | 5,723 | $ | 4,390 | $ | 4,390 | Level 1 | (1),(2) | ||||||||||||||||||||
Accounts receivable | 2,250 | 2,250 | 1,960 | 1,960 | Level 1 | (2) | 2,120 | 2,120 | 2,247 | 2,247 | Level 1 | (3) | ||||||||||||||||||||||||||||
Due from related parties | 77 | 77 | 142 | 142 | Level 1 | (2) | ||||||||||||||||||||||||||||||||||
Cash and cash equivalents of consolidated VIEs | 297 | 297 | 54 | 54 | Level 1 | (1) | 278 | 278 | 161 | 161 | Level 1 | (1) | ||||||||||||||||||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities | 1,055 | 1,055 | 923 | 923 | Level 1 | (2) | 1,035 | 1,035 | 1,084 | 1,084 | Level 1 | (3) | ||||||||||||||||||||||||||||
Due to related parties | 14 | 14 | 22 | 22 | Level 1 | (2) | ||||||||||||||||||||||||||||||||||
Short-term borrowings | 100 | 100 | 100 | 100 | Level 1 | (2) | ||||||||||||||||||||||||||||||||||
Long-term borrowings | 5,687 | 6,275 | 4,690 | 5,057 | Level 2 | (3) | 4,938 | 5,309 | 4,939 | 5,284 | Level 2 | (4) | ||||||||||||||||||||||||||||
| (1) | Cash and cash equivalents are carried at either cost or amortized cost, |
| (2) | At December 31, |
The carrying amounts of accounts receivable, |
Long-term borrowings are recorded at amortized cost. The fair value of the long-term borrowings, including the current portion of long-term borrowings, is estimated using market prices at the end of December |
Investments in Certain Entities that Calculate Net Asset Value Per Share
As a practical expedient to value certain investments that do not have a readily determinable fair value and have attributes of an investment company, the Company relies onuses NAV as the fair value for certain investments.value. The following table liststables list information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a NAV per share (or its equivalent).
December 31, 2014
5. Fair Value Disclosures (continued)
| (in millions) | Ref | Fair Value | Total Unfunded Commitments | Redemption Frequency | Redemption Notice Period | |||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||
Private equity funds of funds | (a | ) | $ | 168 | $ | 22 | n/r | n/r | ||||||||||||
Equity method:(1) | ||||||||||||||||||||
Hedge funds/funds of hedge funds | (b | ) | 277 | 39 |
| Monthly Quarterly n/r | (29%) (48%) (23%) | 1 – 90 days | ||||||||||||
Private equity funds | (c | ) | 107 | 61 | n/r | n/r | ||||||||||||||
Real estate funds | (d | ) | 109 | 1 |
| Quarterly n/r | (19%) (81%) | 60 days | ||||||||||||
Deferred compensation plan investments | (e | ) | 21 | 5 | n/r | n/r | ||||||||||||||
Consolidated VIEs: | ||||||||||||||||||||
Private equity fund | (f | ) | 10 | 1 | n/r | n/r | ||||||||||||||
Total | $ | 692 | $ | 129 | ||||||||||||||||
December 31, 20122013
| (Dollar amounts in millions) | Ref | Fair Value | Total Unfunded Commitments | Redemption Frequency | Redemption Notice Period | |||||||||||||||||||||||||
Trading: | ||||||||||||||||||||||||||||||
Equity | (a) | $ 3 | $ — | Daily (100%) | none | |||||||||||||||||||||||||
| (in millions) | Ref | Fair Value | Total Unfunded Commitments | Redemption Frequency | Redemption Notice Period | |||||||||||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||||||||||||
Private equity funds of funds | (b) | 212 | 32 | n/r | n/r | (a | ) | $ | 195 | $ | 23 | n/r | n/r | |||||||||||||||||
Other funds of hedge funds | (c) | 98 | — | Monthly/Daily (22%) Quarterly (11%) n/r (67%) | 1– 90 days | (g | ) | 155 | — |
| Monthly Quarterly n/r | (13%), (78%), (9%) | 30 –90 days | |||||||||||||||||
Equity method:(1) | ||||||||||||||||||||||||||||||
Hedge funds/funds of hedge funds | (d) | 222 | 42 | Monthly (2%) Quarterly (28%) n/r (70%) | 15 –90 days | (b | ) | 276 | 84 |
| Monthly Quarterly n/r | (55%), (11%) (34%) | 15 –90 days | |||||||||||||||||
Private equity funds | (e) | 90 | 135 | n/r | n/r | (c | ) | 101 | 62 | n/r | n/r | |||||||||||||||||||
Real estate funds | (f) | 107 | 15 | Quarterly (18%) n/r (82%) | 60 days | (d | ) | 118 | 12 |
| Quarterly n/r | (17%) (83%) | 60 days | |||||||||||||||||
Deferred compensation plan hedge fund investments | (g) | 9 | — | Monthly (33%) Quarterly (67%) | 60 –90 days | |||||||||||||||||||||||||
Consolidated VIE: | ||||||||||||||||||||||||||||||
Private equity funds | (h) | 20 | 1 | n/r | n/r | |||||||||||||||||||||||||
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Deferred compensation plan investments | (e | ) | 39 | 7 |
| Monthly Quarterly n/r | (8%), (18%) (74%) | 60 –90 days | ||||||||||||||||||||||
Consolidated VIEs: | ||||||||||||||||||||||||||||||
Private equity fund | (f | ) | 14 | 1 | n/r | n/r | ||||||||||||||||||||||||
Total | $761 | $225 | $ | 898 | $ | 189 | ||||||||||||||||||||||||
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| n/r | – not redeemable |
| (1) | Comprised of equity method investments, which include investment companies, which |
Investments in Certain Entities that Calculate Net Asset Value Per Share
December 31, 2011
| (Dollar amounts in millions) | Ref | Fair Value | Total Unfunded Commitments | Redemption Frequency | Redemption Notice Period | |||||
Trading: | ||||||||||
Equity | (a) | $ 2 | $— | Daily (100%) | none | |||||
Consolidated sponsored investment funds: | ||||||||||
Private equity funds of funds | (b) | 258 | 44 | n/r | n/r | |||||
Other funds of hedge funds | (c) | 24 | — | Monthly (25%) Quarterly (54%) n/r (21%) | 30 – 90 days | |||||
Equity method:(1) | ||||||||||
Hedge funds/funds of hedge funds | (d) | 226 | 4 | Monthly (2%) Quarterly (15%) n/r (83%) | 15 – 90 days | |||||
Private equity funds | (e) | 85 | 48 | n/r | n/r | |||||
Real estate funds | (f) | 88 | 17 | n/r | n/r | |||||
Deferred compensation plan hedge fund investments | (g) | 19 | — | Monthly (16%) Quarterly (84%) | 60 – 90 days | |||||
Consolidated VIE: | ||||||||||
Private equity funds | (h) | 27 | 2 | n/r | n/r | |||||
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Total | $729 | $115 | ||||||||
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| (a) |
5. Fair Value Disclosures (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 capital accounts representing the Company’s ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds, the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately seven |
| This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit, opportunistic and mortgage instruments and other third-party hedge funds. The fair values of the investments have been estimated using the NAV of the Company’s ownership interest in partners’ capital. It was estimated that the investments in the funds that are not subject to redemption will be liquidated over a weighted-average period of approximately |
| This category includes several private equity funds that initially invest in |
| This category includes several real estate funds that invest directly in real estate and real estate related assets. The fair values of the investments have been estimated using capital accounts representing the Company’s ownership interest in the funds. |
| This category includes investments in several real estate funds and certain hedge funds that invest in energy and health science related equity securities. The fair values of the investments in this category have been estimated using capital accounts representing the Company’s ownership interest in partners’ capital as well as performance inputs. The investments in |
| This category includes the underlying third-party private equity funds within one consolidated BlackRock sponsored private equity fund of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the Company’s ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying third-party funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately |
| (g) | At December 31, 2013, this category included consolidated funds of hedge funds that invested in multiple strategies to diversify risks. The fair values of the investments had been estimated using the NAV of the fund’s ownership interest in partners’ capital of each fund in the portfolio. Certain of the underlying funds could be redeemed as long as there were no restrictions in place. The underlying funds that were currently restricted from redemptions within one year would become redeemable in approximately 12 to 24 months. This category also included a consolidated offshore feeder fund that invested in a master fund with multiple alternative investment strategies. The fair value of this investment had been estimated using the NAV of the master offshore fund held by the feeder fund. The investment was currently subject to restrictions in place by the underlying master fund. |
5. Fair Value Disclosures (continued)
Fair Value Option.Upon the initial consolidation of certain CLOs, the Company electselected to adopt the fair value option provisions for eligible assets and liabilities, including bank loans and borrowings of the CLOs to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplification. To the extent there is a difference between the change in fair value of the assets and liabilities, the difference will be reflected as net income (loss) attributable to nonredeemable non-controllingnoncontrolling 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 summarizes information related to those assets and liabilities selected for fair value accounting as ofat December 31, 20122014 and 2011:2013:
| (Dollar amounts in millions) | December 31, 2012 | December 31, 2011 | ||||||||||||||
| (in millions) | December 31, 2014 | December 31, 2013 | ||||||||||||||
CLO Bank Loans: | ||||||||||||||||
Aggregate principal amounts outstanding | $ | 2,124 | $ | 1,522 | $ | 3,338 | $ | 2,181 | ||||||||
Fair value | $ | 2,110 | $ | 1,459 | 3,260 | 2,176 | ||||||||||
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Aggregate unpaid principal balance in excess of fair value | $ | 14 | $ | 63 | ||||||||||||
Aggregate unpaid principal balance in excess of (less than) fair value | $ | 78 | $ | 5 | ||||||||||||
Unpaid principal balance of loans more than 90 days past due | $ | 4 | $ | 4 | $ | 6 | $ | 14 | ||||||||
Aggregate fair value of loans more than 90 days past due | $ | — | $ | — | 2 | 9 | ||||||||||
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Aggregate unpaid principal balance in excess of fair value for loans more than 90 days past due | $ | 4 | $ | 4 | $ | 4 | $ | 5 | ||||||||
CLO Borrowings: | ||||||||||||||||
Aggregate principal amounts outstanding | $ | 2,535 | $ | 1,781 | $ | 3,508 | $ | 2,455 | ||||||||
Fair value | $ | 2,402 | $ | 1,574 | $ | 3,389 | $ | 2,369 | ||||||||
At December 31, 2012,2014, the principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2025.2027.
During 2012, 20112014, 2013 and 2010,2012, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $154$69 million, gain, a $57$153 million gain and a $148$154 million gain, respectively, which were offset by a $166$65 million, loss, a $68$117 million loss and a $175$166 million loss, respectively, from the change in fair value of the CLO borrowings.
The net gains (losses) were recorded in net gain (loss) on consolidated VIEs on the consolidated statements of income.
The change in fair value of the assets and liabilities included interest income and expense, respectively.
6. Variable Interest Entities
In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including CDOs/collateralized debt obligations (“CDOs”)/CLOs and sponsored investment funds, which may be considered VIEs. The Company receives advisory fees and/or other incentive-related fees for its services and may from time to time own
equity or debt securities or enter into derivatives with the vehicles, each of which are considered variable interests. The Company enters into these variable interests principally to address client needs through the launch of such investment vehicles. The VIEs are primarily financed via capital contributed by equity and debt holders. The Company’s involvement in financing the operations of the VIEs is generally limited to its equity interests.
In order to determine whether the Company is the PB of a VIE, management must make significant estimates and assumptions of projectedprobable future cash flows of the VIEs. Assumptions made in such analyses may include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, pre-payments,prepayments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes. See Note 2,Significant Accounting Policies, for more information.
6. Variable Interest Entities (continued)
Consolidated VIEs. Consolidated VIEs included CLOs in which BlackRock did not have an investment; however, BlackRock, as the collateral manager, was deemed to have both the power to control the activities of the CLOs and the right to receive benefits that could potentially be significant to the CLOs. In addition, BlackRock was the PB of one investment fund whichbecause it absorbed the majority of the variability due to its de-facto third-partyrelated-party relationships with other partners in the fund. The assets of these VIEs are not available to creditors of the Company. In addition, the investors in these VIEs have no recourse to the credit of the Company. At December 31, 20122014 and 2011,2013, the following balances related to VIEs were consolidatedrecorded on the consolidated statements of financial condition:
| (Dollar amounts in millions) | December 31, 2012 | December 31, 2011 | ||||||
Assets of consolidated VIEs: | ||||||||
Cash and cash equivalents | $ | 297 | $ | 54 | ||||
Bank loans | 2,110 | 1,459 | ||||||
Bonds | 124 | 145 | ||||||
Other investments | 30 | 35 | ||||||
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Total bank loans, bonds and other investments | 2,264 | 1,639 | ||||||
Liabilities of consolidated VIEs: | ||||||||
Borrowings | (2,402 | ) | (1,574 | ) | ||||
Other liabilities | (103 | ) | (9 | ) | ||||
Appropriated retained earnings | (29 | ) | (72 | ) | ||||
Non-controlling interests of consolidated VIEs | (27 | ) | (38 | ) | ||||
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Total BlackRock net interests in consolidated VIEs | $ | — | $ | — | ||||
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| (in millions) | December 31, 2014 | December 31, 2013 | ||||||
Assets of consolidated VIEs: | ||||||||
Cash and cash equivalents | $ | 278 | $ | 161 | ||||
Bank loans | 3,260 | 2,176 | ||||||
Bonds | 47 | 106 | ||||||
Other investments and other assets | 45 | 43 | ||||||
Total bank loans, bonds, other investments and other assets | 3,352 | 2,325 | ||||||
Liabilities of consolidated VIEs: | ||||||||
Borrowings | (3,389 | ) | (2,369 | ) | ||||
Other liabilities | (245 | ) | (74 | ) | ||||
Appropriated retained earnings | 19 | (22 | ) | |||||
Noncontrolling interests of consolidated VIEs | (15 | ) | (21 | ) | ||||
Total BlackRock net interests in consolidated VIEs | $ | — | $ | — | ||||
During 2012, theThe Company recorded a$41 million, $0 and $38 million non-operating loss offset by a $38 million netof nonoperating expense and an equal and offsetting loss attributable to nonredeemable non-controllingnoncontrolling interests on therelated to consolidated statements of income. During 2011, the Company recorded an $18 million non-operating loss offset by an $18 million net loss attributable to nonredeemable non-controlling interests on the consolidated statements of income. During 2010, the Company recorded a $35 million non-operating loss offset by a $35 million net loss attributable to nonredeemable non-controlling interests on the consolidated statements of income.
VIEs during 2014, 2013 and 2012, respectively. At December 31, 20122014 and 2011,2013, the weighted-average maturity of the bank loans and bonds was approximately 4.54.9 years and 4.24.7 years, respectively.
6. Variable Interest Entities (continued)
Non-Consolidated VIEs.At December 31, 20122014 and 2011,2013, the Company’s carrying value of assets and liabilities pertaining to its variable interests in VIEs and its maximum risk of loss related to VIEs for which it iswas the sponsor or in which it holdsheld a variable interest, but for which it was not the PB, werewas as follows:
(Dollar amounts in millions) At December 31, 2012 | Variable Interests on the Consolidated Statement of Financial Condition | |||||||||||||||||||||||||||||||
| Investments | Advisory Fee Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss(1) | |||||||||||||||||||||||||||||
| (in millions) | Variable Interests on the Consolidated Statement of Financial Condition | |||||||||||||||||||||||||||||||
| At December 31, 2014 | Investments | Advisory Fee Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss(1) | ||||||||||||||||||||||||||||
CDOs/CLOs | $ | 1 | $ | 1 | $ | (5 | ) | $ | 19 | $ | — | $ | 2 | $ | (5 | ) | $ | 19 | ||||||||||||||
Other sponsored investment funds: | ||||||||||||||||||||||||||||||||
Collective trusts | — | 248 | — | 248 | — | 191 | — | 191 | ||||||||||||||||||||||||
Other | 17 | 61 | (3 | ) | 77 | 57 | 177 | (3 | ) | 234 | ||||||||||||||||||||||
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Total | $ | 18 | $ | 310 | $ | (8 | ) | $ | 344 | $ | 57 | $ | 370 | $ | (8 | ) | $ | 444 | ||||||||||||||
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| At December 31, 2011 | ||||||||||||||||||||||||||||||||
At December 31, 2013 | ||||||||||||||||||||||||||||||||
CDOs/CLOs | $ | 1 | $ | 2 | $ | (3 | ) | $ | 20 | $ | — | $ | 1 | $ | (4 | ) | $ | 18 | ||||||||||||||
Other sponsored investment funds: | ||||||||||||||||||||||||||||||||
Collective trusts | — | 184 | — | 184 | — | 184 | — | 184 | ||||||||||||||||||||||||
Other | 18 | 54 | (5 | ) | 72 | 37 | 137 | (6 | ) | 174 | ||||||||||||||||||||||
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Total | $ | 19 | $ | 240 | $ | (8 | ) | $ | 276 | $ | 37 | $ | 322 | $ | (10 | ) | $ | 376 | ||||||||||||||
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| (1) | At |
The net assets related toof the above CDOs/CLOs and other sponsored investment funds, including collective trusts, that the Company does not consolidate were as follows:
CDOs/CLOs
| (Dollar amounts in billions) | December 31, 2012 | December 31, 2011 | ||||||||||||||
| (in billions) | December 31, 2014 | December 31, 2013 | ||||||||||||||
Assets at fair value | $ | 4 | $ | 5 | $ | 1 | $ | 1 | ||||||||
Liabilities(1) | 5 | 7 | 2 | 2 | ||||||||||||
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Net assets | $ | (1 | ) | $ | (2 | ) | $ | (1 | ) | $ | (1 | ) | ||||
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| (1) | Amounts primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders. |
Other sponsored investments funds. NetThe net assets of other sponsored investment funds that are non-consolidatednonconsolidated VIEs approximated $1.5$1.7 trillion to $1.6$1.8 trillion at December 31, 20122014 and $1.2$1.6 trillion to $1.3$1.7 trillion at December 31, 2011.2013. Net assets included $1.3 trillion and $1.0approximately $1.4 trillion of collective trusts at both December 31, 20122014 and December 31, 2011, respectively.2013. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts. The net assets of these VIEs primarily are comprised of cash and cash equivalents and investments, partially offset by liabilities primarily comprised of various accruals for the sponsored investment vehicles.
7. Derivatives and Hedging
In May 2011, the Company entered into a designated cash flow hedge consisting of a $750 million interest rate swap maturing in 2013 to hedge future cash flows on the Company’s floating rate notes due in 2013. Interest on this swap is at a fixed rate of 1.03% payable semi-annually on May 24 and November 24 of each year and commenced November 24, 2011. See Note 11, Borrowings, for more information. The fair value of the interest rate swap as of December 31, 2012 and 2011 was not material.
The Company maintains a program to enter into total return swaps to hedge against market price and interest rate exposures with respect to certain seed investments in sponsored investment products. At December 31, 2012 and 2011,2014, the Company had 21 and six outstanding total return swaps respectively,and interest rate swaps with an aggregate notional value of approximately $206$238 million and $43$84 million, respectively. The fair value ofAt December 31, 2013, the Company had outstanding total return swaps as of December 31, 2012 and 2011 was not material.
Market risk from forward foreign currency exchange contracts is the effect on the value of a financial instrument that results from a change in currency exchange rates. The Company manages certain exposure to market risk associated with foreign currency exchange contracts by establishing and monitoring parameters that limit the types and degrees of market risk that may be undertaken. At December 31, 2012, the Company had outstanding forward foreign currency exchange contracts
7. Derivatives and Hedging (continued)
interest rate swaps with an aggregate notional value of approximately $79 million. The fair value of the forward foreign currency exchange contracts as of December 31, 2012 was not material. At December 31, 2011, the Company did not have any outstanding forward foreign currency exchange contracts.$117 million and $71 million, respectively.
The Company has entered into a credit default swap,derivative, providing credit protection to thea counterparty of approximately $17 million,
representing the Company’s maximum risk of loss with respect to the provision of credit protection. The Company carries the credit default swapderivative at fair value based on the expected future cash flows under the arrangement.
On behalf of clientsThe fair values of the Company’s registered life insurance company, which maintains separate accounts representing segregated funds held foroutstanding derivatives mentioned above were not material to the purposeconsolidated statements of funding individualfinancial condition at December 31, 2014 and group pension contracts, the2013.
The Company invests in various derivative instruments, which may include futures,executes forward foreign currency exchange contracts interest rate swaps and inflation rate swaps. Net realized and unrealized gains and losses attributable to derivatives held by separate account assets accrue directly tomitigate the contract owners and are not reported in the consolidated statementsrisk of income.
The following table presents the carrying value as ofcertain foreign exchange movements. At December 31, 2012 and 20112014, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of derivative instruments not designated as hedging instruments:
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| (Dollar amounts in millions) | Assets | Liabilities | Assets | Liabilities | ||||||||||||
Credit default swap | ||||||||||||||||
Other liabilities | $ | — | $ | 5 | $ | — | $ | 3 | ||||||||
Separate account derivatives | ||||||||||||||||
Separate account assets | 95 | — | 1,495 | — | ||||||||||||
Separate account liabilities | — | 95 | — | 1,495 | ||||||||||||
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Total | $ | 95 | $ | 100 | $ | 1,495 | $ | 1,498 | ||||||||
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approximately $201 million. The fair value of the derivatives held by separate account assets is equalforward foreign currency exchange contracts at December 31, 2014 was not material to the consolidated statement of financial condition. At December 31, 2013, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $792 million and offset by a separate account liability.fair value of approximately $26 million.
Gains (losses) on total return swaps are recorded in non-operatingnonoperating income (expense) and were $(26) million, $(15) million and $(23) million for 2014, 2013 and 2012, respectively.
Gains (losses) on forward foreign currency exchange contracts are recorded in other general and administration expense and were $(26) million for 2013. Gains (losses) were not material to the consolidated statements of income for 2014 and were $(23) million, $4 million and $(2) million for 2012, 2011 and 2010, respectively.2012.
Gains (losses) on the interest rate swap entered intoswaps are recorded in 2011nonoperating income (expense) and were $(21) million for 2014. Gains (losses) were not material for 20122013 and 2011. Gains (losses) on the forward foreign currency exchange contracts were not material for 2012 and 2011, and were $5 million for 2010. Gains (losses) on the credit default swap were not material for 2012, 2011 and 2010.2012.
The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the fund’sfunds’ investment strategy.strategies. The fair value of such derivatives at December 31, 20122014 and 20112013 was not material. The change in fair value of such derivatives, which is recorded in non-operatingnonoperating income (expense), was not material for 2012, 20112014, 2013 and 2010.2012.
8. Property and Equipment
Property and equipment consists of the following:
| (Dollar amounts in millions) | Estimated useful life-in years | December 31, | ||||||||||||||||||||
| 2012 | 2011 | |||||||||||||||||||||
| (in millions) | Estimated useful life-in years | December 31, | ||||||||||||||||||||
| 2014 | 2013 | |||||||||||||||||||||
Property and equipment: | ||||||||||||||||||||||
Land | N/A | $ | 4 | $ | 4 | |||||||||||||||||
Building | 39 | 17 | 17 | 39 | $ | 17 | $ | 17 | ||||||||||||||
Building improvements | 15 | 13 | 13 | 15 | 14 | 14 | ||||||||||||||||
Leasehold improvements | 1-15 | 482 | 452 | 1-15 | 478 | 501 | ||||||||||||||||
Equipment and computer software | 3 | 465 | 443 | 3 | 387 | 451 | ||||||||||||||||
Other transportation equipment | 10 | 56 | — | 10 | 56 | 56 | ||||||||||||||||
Furniture and fixtures | 7 | 91 | 90 | 7 | 93 | 93 | ||||||||||||||||
Construction in progress | N/A | 1 | 1 | |||||||||||||||||||
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Other | N/A | 9 | 4 | |||||||||||||||||||
Total | 1,129 | 1,020 | 1,054 | 1,136 | ||||||||||||||||||
Less: accumulated depreciation and amortization | 572 | 483 | 587 | 611 | ||||||||||||||||||
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Property and equipment, net | $ | 557 | $ | 537 | $ | 467 | $ | 525 | ||||||||||||||
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| N/A | – Not Applicable |
Qualifying software costs of approximately $36$45 million, $37$35 million and $39$36 million have been capitalized within equipment and computer software forduring 2014, 2013 and 2012, 2011 and 2010, respectively, and are being amortized over an estimated useful life of three years.
Depreciation and amortization expense was $117 million, $128 million and $129 million $138 millionfor 2014, 2013 and $145 million for 2012, 2011 and 2010, respectively.
9. Goodwill
Goodwill activity during 20122014 and 20112013 was as follows:
| (Dollar amounts in millions) | ||||||||
| 2012 | 2011 | |||||||
Beginning of year balance | $ | 12,792 | $ | 12,805 | ||||
Claymore Investments, Inc.(1) | 106 | — | ||||||
Swiss Re Private Equity Partners(2) | 25 | — | ||||||
Goodwill adjustments related to Quellos(3) | (13 | ) | (13 | ) | ||||
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End of year balance | $ | 12,910 | $ | 12,792 | ||||
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| (in millions) | 2014 | 2013 | ||||||
Beginning of year balance | $ | 12,980 | $ | 12,910 | ||||
Acquisitions(1) | — | 73 | ||||||
Goodwill adjustments related to Quellos and other(2) | (19 | ) | (3 | ) | ||||
End of year balance | $ | 12,961 | $ | 12,980 | ||||
| (1) |
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The decrease in goodwill during |
BlackRock assessed its goodwill for impairment on July 31, 2014, 2013 and 2012 and considered such factors as the book value and the market capitalization of the Company. The impairment tests performed for goodwill as of July 31, 2012, 2011 and 2010assessment indicated that no impairment charges were required. The Company continuously monitorscontinues to monitor its book value per share as compared with
closing prices of its common stock for potential indicators of impairment. As ofAt December 31, 20122014, the Company’s common stock closed at $206.71,$357.56, which exceeded its book value, per share of approximately $148.20 after excluding appropriated retained earnings.earnings, of approximately $164.06 per share.
10. Intangible Assets
Intangible assets at December 31, 20122014 and 20112013 consisted of the following:
| Remaining Weighted-Average Estimated Useful Life | ||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
| At December 31, 2012 | ||||||||||||||||||||||||||||||||
| (in millions) | Remaining Weighted- Average Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||
At December 31, 2014 | ||||||||||||||||||||||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||||||||||||||||||
Management contracts | N/A | $ | 15,351 | $ | — | $ | 15,351 | N/A | $ | 15,579 | $ | — | $ | 15,579 | ||||||||||||||||||
Trade names / trademarks | N/A | 1,403 | — | 1,403 | N/A | 1,403 | — | 1,403 | ||||||||||||||||||||||||
License | N/A | 6 | — | 6 | N/A | 6 | — | 6 | ||||||||||||||||||||||||
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Total indefinite-lived intangible assets | 16,760 | — | 16,760 | 16,988 | — | 16,988 | ||||||||||||||||||||||||||
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Finite-lived intangible assets: | ||||||||||||||||||||||||||||||||
Management contracts | 4.9 | 1,535 | 896 | 639 | 3.8 | 1,390 | 1,036 | 354 | ||||||||||||||||||||||||
Other(1) | 5.6 | 6 | 3 | 3 | ||||||||||||||||||||||||||||
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Intellectual property | 3.6 | 6 | 4 | 2 | ||||||||||||||||||||||||||||
Total finite-lived intangible assets | 4.9 | 1,541 | 899 | 642 | 3.8 | 1,396 | 1,040 | 356 | ||||||||||||||||||||||||
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Total intangible assets | $ | 18,301 | $ | 899 | $ | 17,402 | $ | 18,384 | $ | 1,040 | $ | 17,344 | ||||||||||||||||||||
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| At December 31, 2011 | ||||||||||||||||||||||||||||||||
At December 31, 2013 | ||||||||||||||||||||||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||||||||||||||||||
Management contracts | N/A | $ | 15,188 | $ | — | $ | 15,188 | N/A | $ | 15,582 | $ | — | $ | 15,582 | ||||||||||||||||||
Trade names / trademarks | N/A | 1,403 | — | 1,403 | N/A | 1,403 | — | 1,403 | ||||||||||||||||||||||||
License | N/A | 6 | — | 6 | N/A | 6 | — | 6 | ||||||||||||||||||||||||
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Total indefinite-lived intangible assets | 16,597 | — | 16,597 | 16,991 | — | 16,991 | ||||||||||||||||||||||||||
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Finite-lived intangible assets: | ||||||||||||||||||||||||||||||||
Management contracts | 5.4 | 1,504 | 749 | 755 | 4.3 | 1,561 | 1,054 | 507 | ||||||||||||||||||||||||
Other(1) | 6.6 | 6 | 2 | 4 | ||||||||||||||||||||||||||||
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Intellectual property | 4.6 | 6 | 3 | 3 | ||||||||||||||||||||||||||||
Total finite-lived intangible assets | 5.4 | 1,510 | 751 | 759 | 4.3 | 1,567 | 1,057 | 510 | ||||||||||||||||||||||||
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Total intangible assets | $ | 18,107 | $ | 751 | $ | 17,356 | $ | 18,558 | $ | 1,057 | $ | 17,501 | ||||||||||||||||||||
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| N/A |
|
The impairment tests performed for intangible assets as of July 31, 2012, 20112014, 2013 and 20102012 indicated no impairment charges were required.
Estimated amortization expense for finite-lived intangible assets for each of the five succeeding years is as follows:
| (Dollar amounts in millions) | ||||
Year | Amount | |||
2013 | $ | 159 | ||
2014 | 152 | |||
2015 | 123 | |||
2016 | 87 | |||
2017 | 70 | |||
| (in millions) | ||||
| Year | Amount | |||
2015 | $ | 126 | ||
2016 | 91 | |||
2017 | 74 | |||
2018 | 24 | |||
2019 | 22 | |||
Indefinite-Lived Acquired Management Contracts
In March 2012,July 2013, in connection with the ClaymoreCredit Suisse ETF Transaction, the Company acquired $163$231 million of indefinite-lived ETP management contracts.
Finite-Lived Acquired Management Contracts
In September 2012,October 2013, in connection with the SRPEPMGPA Transaction, the Company acquired $40$29 million of finite-lived management contracts with a weighted-average estimated useful life of approximately 10eight years.
11. Other Assets
At March 31, 2013, BlackRock held an approximately one-third economic equity interest in Private National Mortgage Acceptance Company, LLC (“PNMAC”), which is accounted
for as an equity method investment and is included in other assets on the consolidated statements of financial condition. On May 8, 2013, PennyMac became the sole managing member of PNMAC in connection with an initial public offering of PennyMac (the “PennyMac IPO”). As a result of the PennyMac IPO, BlackRock recorded a noncash, nonoperating pre-tax gain of $39 million related to the carrying value of its equity method investment.
11. BorrowingsSubsequent to the PennyMac IPO, the Company contributed 6.1 million units of its PennyMac investment to a new donor advised fund (the “Charitable Contribution”). The fair value of the Charitable Contribution was $124 million and is included in general and administration expense on the consolidated statements of income for 2013. In connection with the Charitable Contribution, the Company also recorded a noncash, nonoperating pre-tax gain of $80 million related to the contributed investment and a tax benefit of approximately $48 million for 2013.
The carrying value and fair value of the Company’s interest (approximately 20% or 16 million shares and units) was approximately $167 million and $269 million, respectively, at December 31, 2014 and approximately $127 million and $273 million, respectively, at December 31, 2013. The fair value of the Company’s interest reflected the PennyMac stock price at December 31, 2014 and 2013, respectively (a Level 1 input).
12. Borrowings
Short-Term Borrowings
The carrying value of short-term borrowings at December 31, 2012 and 2011, included $100 million under the 2012 revolving credit facility and $100 million under the 2011 revolving credit facility, respectively.
20122014 Revolving Credit FacilityFacility.. In March 2011, the Company entered into a five-year $3.5 billion unsecured revolving
credit facility, (the “2011 credit facility”).which was amended in 2013 and 2012. In March 2012,2014, the 2011Company’s credit facility was further amended to extend the maturity date by one year to March 2017 and in April 2012 the2019. The amount of the aggregate commitment was increased to $3.785is $3.990 billion (the “2012“2014 credit facility”). The 20122014 credit facility permits the Company to request up to an additional $1.0 billion of borrowing capacity, subject to lender credit approval, increasing the overall size of the 20122014 credit facility to an aggregate principal amount not to exceed $4.785$4.990 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 20122014 credit 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 unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at December 31, 2012.
2014. The 20122014 credit facility provides back-up liquidity, funds ongoing working capital for general corporate purposes and funds various
investment opportunities. At December 31, 2012,2014, the Company had $100 millionno amount outstanding under this facility with an interest rate of 1.085% and a maturity during January 2013. During January 2013, the Company rolled over the $100 million in borrowings at an interest rate of 1.085% and a maturity during February 2013. During February 2013, the Company rolled over the $100 million in borrowings at an interest rate of 1.075% and a maturity during March 2013.2014 credit facility.
Commercial Paper Program.On October 14, 2009, BlackRock established a commercial paper program (the “CP Program”) under which the Company could issue unsecured commercial paper notes (the “CP Notes”) on a private placement basis up to a maximum aggregate amount outstanding at any time of $3.0 billion. On May 13, 2011, BlackRock increased the maximum aggregate amount that maycould be borrowed under the CP Program to $3.5 billion. On May 17, 2012,billion in 2011 and to $3.785 billion in 2012. In April 2013, BlackRock increased the maximum aggregate amount for which the Company could issue unsecured CP Notes on a private-placement basis up to $3.785a maximum aggregate amount outstanding at any time of $3.990 billion. The CP Program is currently supported by the 20122014 credit facility. As ofAt December 31, 2012 and December 31, 2011,2014, BlackRock had no CP Notes outstanding.
Long-Term Borrowings
The carrying value and fair value of long-term borrowings estimated using market prices at December 31, 20122014 included the following:
| (Dollar amounts in millions) | Maturity Amount | Unamortized Discount | Carrying Value | Fair Value | ||||||||||||
Floating Rate Notes due 2013 | $ | 750 | $ | — | $ | 750 | $ | 750 | ||||||||
3.50% Notes due 2014 | 1,000 | — | 1,000 | 1,058 | ||||||||||||
1.375% Notes due 2015 | 750 | — | 750 | 762 | ||||||||||||
6.25% Notes due 2017 | 700 | (3 | ) | 697 | 853 | |||||||||||
5.00% Notes due 2019 | 1,000 | (2 | ) | 998 | 1,195 | |||||||||||
4.25% Notes due 2021 | 750 | (4 | ) | 746 | 856 | |||||||||||
3.375% Notes due 2022 | 750 | (4 | ) | 746 | 801 | |||||||||||
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Total Long-term Borrowings | $ | 5,700 | $ | (13 | ) | $ | 5,687 | $ | 6,275 | |||||||
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11. Borrowings (continued)
| (in millions) | Maturity Amount | Unamortized Discount | Carrying Value | Fair Value | ||||||||||||
1.375% Notes due 2015 | $ | 750 | $ | — | $ | 750 | $ | 753 | ||||||||
6.25% Notes due 2017 | 700 | (1 | ) | 699 | 785 | |||||||||||
5.00% Notes due 2019 | 1,000 | (2 | ) | 998 | 1,134 | |||||||||||
4.25% Notes due 2021 | 750 | (3 | ) | 747 | 825 | |||||||||||
3.375% Notes due 2022 | 750 | (3 | ) | 747 | 783 | |||||||||||
3.50% Notes due 2024 | 1,000 | (3 | ) | 997 | 1,029 | |||||||||||
Total Long-term Borrowings | $ | 4,950 | $ | (12 | ) | $ | 4,938 | $ | 5,309 | |||||||
Long-term borrowings at December 31, 20112013 had a carrying value of $4,690 million$4.939 billion and a fair value of $5,057 million. During 2012, $500$5.284 billion determined using market prices at the end of December 2013.
2024 Notes. In March 2014, the Company issued $1.0 billion in aggregate principal amount of 3.50% senior unsecured and unsubordinated notes maturing on March 18, 2024 (the “2024 Notes”). The net proceeds of the 2024 Notes were used to refinance certain indebtedness which matured in the fourth quarter of 2014. Interest is payable semi-annually in arrears on March 18 and September 18 of each year, or approximately $35 million per year. The 2024 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 2024 Notes were issued at a discount of $3 million that is being amortized over the term of the notes. The Company incurred approximately $6 million of 2.25% Notes were repaid.debt issuance costs, which are being amortized over the term of the 2024 Notes. At December 31, 2014, $6 million of unamortized debt issuance costs was included in other assets on the consolidated statement of financial condition.
2015 and 2022 Notes. In May 2012, the Company issued $1.5 billion in aggregate principal amount of unsecured unsubordinated obligations. These notes were issued as two separate series of senior debt securities, including $750 million of 1.375% notes maturing in June 2015 (the “2015 Notes”) and $750 million of 3.375% notes maturing in June 2022 (the “2022 Notes”). Net proceeds were used to fund the repurchase of BlackRock’s common stock and Series B Preferred from Barclays and affiliates and for
general corporate purposes. Interest on the 2015 Notes and the 2022 Notes of approximately $10 million and $25 million per year, respectively, is payable semi-annually on June 1 and December 1 of each year, which commenced December 1, 2012. The 2015 Notes and 2022 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 “make-whole” redemption price represents a price, subject to the specific terms of the 2015 and 2022 Notes and related indenture, that is the greater of (a) par value and (b) the present value of future payments that will not be paid because of an early redemption, which is discounted at a fixed spread over a comparable Treasury security. The 2015 Notes and 2022 Notes were issued at a discount of $5 million that is being amortized over the term of the notes. The Company incurred approximately $7 million of debt issuance costs, which are being amortized over the respective terms of the 2015 Notes and 2022 Notes. As ofAt December 31, 2012, $62014, $4 million of unamortized debt issuance costs werewas included in other assets on the consolidated statement of financial condition.
2013 and 2021 Notes.In May 2011, the Company issued $1.5 billion in aggregate principal amount of unsecured unsubordinated obligations. These notes were issued as two separate series of senior debt securities, including $750 million of 4.25% notes maturing in May 2021 and $750 million of floating rate notes maturing(“2013 Floating Rate Notes”), which were repaid in May 2021 and 2013 respectively.at maturity. Net proceeds of this offering were used to fund the repurchase of BlackRock’s Series B Preferred from affiliates of Merrill Lynch.Lynch & Co., Inc. (“Merrill Lynch”). Interest
on the 4.25% notes due in 2021 (“2021 Notes”) is payable semi-annually on May 24 and November 24 of each year, which commenced November 24, 2011, and is approximately $32 million per year. Interest on the floating rate notes due in 2013 (“2013 Floating Rate Notes”) is payable quarterly on February 24, May 24, August 24 and November 24 of each year. The 2021 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 2013 Floating Rate Notes may not be redeemed at the Company’s option before maturity. The 2021 Notes were issued at a discount of $4 million that is being amortized over the term of the notes. The Company incurred approximately $7 million of debt issuance costs for the $1.5 billion note issuances, which are being amortized over the respective terms of the notes. As ofmillion. At December 31, 2012, $42014, $3 million of unamortized debt issuance costs werewas included in other assets on the consolidated statement of financial condition.condition and are being amortized over the remaining term of the 2021 Notes.
In May 2011, in conjunction with the issuance of the 2013 Floating Rate Notes, the Company entered into a $750 million notional interest rate swap maturing in 2013 to hedge the future cash flows of its obligation at a fixed rate of 1.03% payable semi-annually on May 24 and November 24. During the second quarter of each year, which commenced on November 24, 2011. The2013, the interest rate swap effectively convertsmatured and the 2013 Floating Rate Notes were fully repaid.
2019 Notes. In December 2009, the Company issued $2.5 billion in aggregate principal amount of unsecured and unsubordinated obligations. These notes were issued as three separate series of senior debt securities including $0.5 billion of 2.25% notes, which were repaid in December 2012, $1.0 billion of 3.50% notes, which were repaid in December 2014 at maturity, and $1.0 billion of 5.0% notes maturing in December 2019 (the “2019 Notes”). Net proceeds of this offering were used to repay borrowings under the CP Program, which was used to finance a fixed rate obligation.portion of the acquisition of Barclays Global Investors (“BGI”) from Barclays on December 1, 2009 (the “BGI Transaction”), and for general corporate purposes. Interest on the 2019 Notes of approximately $50 million per year is payable semi-annually in arrears on June 10 and December 10 of each year. These notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a “make-whole” redemption price. These notes were issued collectively at a discount of $5 million. At December 31, 2014, $3 million of unamortized debt issuance costs was included in other assets on the consolidated statement of financial condition and are being amortized over the remaining term of the 2019 Notes.
2017 Notes.In September 2007, the Company issued $700 million in aggregate principal amount of 6.25% senior unsecured and unsubordinated notes maturing on September 15, 2017 (the “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” 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 ofAt December 31, 2012, $22014, $1 million of unamortized debt issuance costs were included in other assets on the consolidated statement of financial condition.
2012, 2014 and 2019 Notes.In December 2009, the Company issued $2.5 billion in aggregate principal amount of unsecured and unsubordinated obligations. These notes were issued as three separate series of senior debt securities including $0.5 billion of 2.25% notes, which were repaid in December 2012, and $1.0 billion of 3.50% notes and $1.0 billion of 5.0% notes maturing in December 2014 and 2019, respectively. Net proceeds of this offering were used to repay borrowings under the CP Program, which was used to finance a portion of the acquisition of Barclays Global Investors (“BGI”) from Barclays on December 1, 2009 (the “BGI Transaction”), and for general corporate purposes. In 2012, approximately $96 million of interest was paid. Interest on the 2014 Notes and 2019 Notes of approximately $35 million and $50 million per
11. Borrowings (continued)
year, respectively, is payable semi-annually in arrears on June 10 and December 10 of each year. These notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a “make-whole” redemption price. These notes were issued collectively at a discount of $5 million, which is being amortized over the respective terms of the notes. The Company incurred approximately $13 million of debt issuance costs, which are being amortized over the respective terms of these notes. As of December 31, 2012, $6 million of unamortized debt issuance costs were included in other assets on the consolidated statement of financial condition.
12.13. Commitments and Contingencies
Operating Lease Commitments
The Company leases its primary office spacespaces under
agreements whichthat expire through 2035. Future minimum commitments under these operating leases are as follows:
| (Dollar amounts in millions) | ||||||||
| (in millions) | ||||||||
Year | Amount | Amount | ||||||
2013 | $ | 134 | ||||||
2014 | 122 | |||||||
2015 | 113 | $ | 126 | |||||
2016 | 104 | 111 | ||||||
2017 | 105 | 112 | ||||||
2018 | 111 | |||||||
2019 | 105 | |||||||
Thereafter | 784 | 613 | ||||||
| ||||||||
| $ | 1,362 | |||||||
| ||||||||
Total | $ | 1,178 | ||||||
Rent expense and certain office equipment expense under agreements amounted to $132 million, $137 million and $133 million $154 millionin 2014, 2013 and $158 million in 2012, 2011 and 2010, respectively.
Investment Commitments.At December 31, 2012,2014, the Company had $235$161 million of various capital commitments to fund sponsored investment funds, including funds of private equity funds, real estate funds, infrastructure funds, opportunistic funds and distressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third-party funds as third-party non-controllingnoncontrolling interest holders have the legal obligation to fund the respective commitments of such funds of funds. In addition to the capital commitments of $161 million, the Company had approximately $35 million of contingent commitments for certain funds which have investment periods that have expired. Generally, the timing of the funding of these commitments is unknown and the commitments are callable on demand at any time prior to the expiration of the commitment. These unfunded commitments are not recorded on the consolidated statements of financial condition. These commitments do not include potential future commitments approved by the Company but whichthat are not yet legally binding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.
Contingencies
Contingent Payments.The Company acts as the portfolio manager in a series of credit default swapderivative transactions and has a maximum potential exposure of $17 million under a credit default swapderivative between the Company and counterparty. See Note 7,Derivatives and Hedging, for further discussiondiscussion.
Contingent Payments Related to Business Acquisitions. In connection with the Credit Suisse ETF Transaction, BlackRock is required to make contingent payments annually to Credit Suisse, subject to achieving specified thresholds during a seven-year period, subsequent to the 2013 acquisition date. In addition, BlackRock is required to make contingent payments related to the MGPA Transaction during a five-year period, subject to achieving specified thresholds, subsequent to the 2013 acquisition date. The fair value of this transactionthe remaining contingent payments at December 31, 2014 is not significant to the consolidated statement of financial condition and the related commitment.is included in other liabilities.
Legal Proceedings.From time to time, BlackRock receives subpoenas or other requests for information from various U.S. federal, state governmental and domestic and
international regulatory authorities in connection with certain industry-wide or other investigations or proceedings. It is BlackRock’s policy to cooperate fully with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations and other litigation arising in connection with BlackRock’s activities. Additionally, certain of theBlackRock-sponsored investment funds that the Company manages are subject to lawsuits, any of which potentially could harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.
Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits, will have a material effect on BlackRock’s results of operations, financial position, or cash flows. However, there is no assurance as to whether any such pending or threatened matters will have a material effect on BlackRock’s results of operations, financial position or cash flows in any future reporting period. Due to uncertainties surrounding the outcome of these matters, management cannot reasonably estimate the possible loss or range of loss that may arise from these matters.matters
Indemnifications.In the ordinary course of business or in connection with certain acquisition agreements, BlackRock enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.determined or the likelihood of any liability is considered remote. Consequently, no liability has been recorded on the consolidated statements of financial condition.
In connection with securities lending transactions, BlackRock has issued certain indemnifications to certain securities lending clients against potential loss resulting from a borrower’s failure to fulfill its obligations under the securities lending agreement should the value of the collateral pledged by the borrower at the time of default be insufficient to cover the borrower’s obligation under the securities lending agreement. As part of the BGI
12. Commitments and Contingencies (continued)
acquisition, Barclays was contractually obligated to continue providing counterparty default indemnification to several BlackRock securities lending clients through December 1, 2012. BlackRock assumed these indemnification obligations prior to or upon the expiration of Barclays’ indemnification obligation. As ofAt December 31, 2012,2014, the Company indemnified certain of its clients for their securities lending loan balances of approximately $99.5$145.7 billion. The Company held as agent, cash and securities totaling $155.8 billion as collateral for indemnified securities on loan at December 31, 2014. The fair value of these indemnifications was not material to the consolidated statements of financial condition as ofat December 31, 2012. The Company expects indemnified balances to continue to increase over time.2014.
Under the transaction agreement in the BGI Transaction, the Company agreed to indemnify Barclays for losses it may incur arising from (1) breach by the Company of certain representations, (2) breach by the Company of any covenant in the agreement, (3) liabilities of the entities acquired in the transaction other than liabilities assumed by Barclays or for which it is providing indemnification, and (4) certain taxes.
Management believes that the likelihood of any liability arising under the 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.
13.14. Stock-Based Compensation
The components of stock-based compensation expense are as follows:
| (Dollar amounts in millions) | Year ended December 31, | |||||||||||||||||||||||
| 2012 | 2011 | 2010 | Year ended December 31, | |||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Stock-based compensation: | ||||||||||||||||||||||||
Restricted stock and RSUs | $ | 429 | $ | 444 | $ | 375 | $ | 421 | $ | 415 | �� | $ | 429 | |||||||||||
Market performance-based RSUs to be funded by PNC | 15 | — | — | |||||||||||||||||||||
Long-term incentive plans to be funded by PNC | 7 | 44 | 58 | 32 | 33 | 22 | ||||||||||||||||||
Stock options | — | 9 | 12 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total stock-based compensation | $ | 451 | $ | 497 | $ | 445 | $ | 453 | $ | 448 | $ | 451 | ||||||||||||
|
|
| ||||||||||||||||||||||
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-employeenonemployee directors. A maximum of 27,000,00034,500,000 shares of common stock were authorized for issuance under the Award Plan. Of this amount, 5,447,4279,134,678 shares remain available for future awards at December 31, 2012.2014. 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.
Restricted Stock and RSUs.Pursuant to the Award Plan, restricted stock grants and RSUs may be granted to certain employees. Substantially all restricted stock and RSUs vest over periods ranging from one to fivethree years and are expensed using 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. Prior to 2009, the Company awarded restricted stock and RSUs with nonforfeitable dividend equivalent rights. Restricted stock and RSUs awarded beginning in 2009 are not considered participating securities for purposes of calculating EPS as the dividend equivalents are subject to forfeiture prior to vesting of the award.
Restricted stock and RSU activity for 20122014 is summarized below:below.
Outstanding at | Restricted Stock and Units | Weighted Average Grant Date Fair Value | Restricted Stock and Units | Weighted Average Grant Date Fair Value | ||||||||||||
December 31, 2011 | 5,528,781 | $ | 196.44 | |||||||||||||
December 31, 2013 | 4,612,813 | $ | 207.94 | |||||||||||||
Granted | 1,895,118 | $ | 183.47 | 1,476,276 | $ | 319.48 | ||||||||||
Converted | (1,681,241 | ) | $ | 176.61 | (2,593,251 | ) | $ | 205.87 | ||||||||
Forfeited | (121,823 | ) | $ | 201.85 | (93,929 | ) | $ | 241.02 | ||||||||
| ||||||||||||||||
December 31, 2012 (1) | 5,620,835 | $ | 197.90 | |||||||||||||
| ||||||||||||||||
December 31, 2014(1) | 3 ,401,909 | $ | 257.01 | |||||||||||||
| (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. The total fair market value of RSUs granted to employees during 20102014, 2013 and 20112012 was $751$472 million, $390 million and $477$348 million, respectively. The total fair market value of RSUs converted to common stock during 2014, 2013 and 2012 2011was $534 million, $528 million and 2010 was $297 million, $553 million and $219 million, respectively.
At December 31, 2012,2014, the intrinsic value of outstanding RSUs was $1.2 billion.
13. Stock-Based Compensation (continued)
The awardsRSUs granted under the Award Plan primarily related to the following:
2010
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
Awards granted as part of annual incentive compensation that vest ratably over three years from the date of grant | 1,022,295 | 1,172,381 | 1,365,691 | |||||||||
Awards granted that cliff vest 100% on: | ||||||||||||
January 31, 2015 | — | — | 418,038 | |||||||||
January 31, 2016 | — | 370,812 | — | |||||||||
January 31, 2017 | 287,963 | — | — | |||||||||
| 1,310,258 | 1,543,193 | 1,783,729 | ||||||||||
846,884In addition the Company also granted RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant;
455,288 RSUs to employees that cliff vested 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 31,166,018, 117,339 and 111,389 during 2014, 2013 and 2014, the end of the service condition, as BlackRock had actual GAAP EPS in excess of $6.13 in 2010; and2012, respectively.
124,575 shares of restricted common stock to employees that vested 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.
2011
1,594,259 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant; and
609,733 RSUs to employees that cliff vest 100% on January 31, 2014.
2012
1,365,691 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant; and
418,038 RSUs to employees that cliff vest 100% on January 31, 2015.
At December 31, 2012,2014, there was $291$292 million in total unrecognized stock-based compensation expense related to unvested RSUs. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 0.9 years.
2013
In January 2013,2015, the Company granted the following awards under the Award Plan:Plan
1,172,381952,329 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant; and
370,812303,999 RSUs to employees that cliff vest 100% on January 31, 2016.2018; and
Market Performance-based RSUs.Pursuant to the Award Plan, market performance-based RSUs may be granted to certain employees. The market performance-based RSUs require that separate 15%, 25% and 35% share price appreciation targets be achieved during the six-year term of the awards. The awards are split into three tranches and each tranche may vest if the specified target increase in share price is met. Eligible delivery dates for each tranche are the fourth, fifth or sixth anniversaries of the grant date and thedate. Certain awards are generally forfeited if the employee leaves BlackRock before the vesting date. These awards are amortized over a service period of four years, which is the longer of the explicit service period or the period in which the market target is expected to be met. Market performance-based RSUs are not considered participating securities as the dividend equivalents are subject to forfeiture prior to vesting of the award. In 2013 and 2012, the Company granted 556,581 and 616,117 market performance-based RSUs, respectively, which will primarily be funded primarily by shares currently held by PNC (seeLong-Term Incentive PlansFunded by PNC below).
Market performance-based RSU activity for 20122014 is summarized below:below.
Outstanding at | Market Performance- Based RSUs | Weighted Average Grant Date Fair Value | Market Performance- Based RSUs | Weighted Average Grant Date Fair Value | ||||||||||||
December 31, 2011 | — | $ | — | |||||||||||||
December 31, 2013 | 1,132,113 | $ | 120.80 | |||||||||||||
Granted | 616,117 | $ | 115.03 | 315,961 | $ | 195.30 | ||||||||||
Forfeited | (40,585 | ) | $ | 115.03 | (22,755 | ) | $ | 121.13 | ||||||||
| ||||||||||||||||
December 31, 2012 (1) | 575,532 | $ | 115.03 | |||||||||||||
| ||||||||||||||||
December 31, 2014(1) | 1,425,319 | $ | 137.31 | |||||||||||||
| (1) | At December 31, |
At December 31, 2012, there was $51 million in2014, total unrecognized stock-based compensation expense related to unvested market performance-based awards.awards was $99 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 3.11.9 years.
The grant-date fair value of the market-performance-based awards at the grant datewas $62 million in 2014 and $71 million in both 2013 and 2012. The fair value was calculated using a Monte Carlo simulation andwith the following assumptions:
Grant Year | Risk-Free | Performance | Expected | Expected | ||||
2012 | 1.21% | 6 | 33.63% | 2.99% |
13. Stock-Based Compensation (continued)
Grant Year | Risk-Free Interest Rate | Performance Period | Expected Stock Volatility | Expected Dividend Yield | ||||||||||||
2012 | 1.21 | % | 6 | 33.63 | % | 2.99 | % | |||||||||
2013 | 1.05 | % | 6 | 25.85 | % | 2.89 | % | |||||||||
2014 | 2.05 | % | 6 | 27.40 | % | 2.42 | % | |||||||||
The Company’s expected stock volatility assumption was based upon an average of the historical stock price fluctuations of BlackRock’s common stock and an implied volatility at the grant date. 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.
In January 2013, the Company granted 556,581 market performance-based RSUs under the Award Plan, which will primarily be funded by shares currently held by PNC (seeLong-Term Incentive Plans Funded by PNC below).
Long-Term Incentive Plans Funded by PNC.Under a share surrender agreement, PNC committed to provide up to 4 million shares of BlackRock stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”). The current share surrender agreement commits PNC to provide BlackRock series C non-votingnonvoting participating preferred stock to fund the remaining committed shares. During 2007 through 2011, approximately 2.5As of December 31, 2014, 2.7 million shares werehad been surrendered by PNC.
At December 31, 2012,2014, the remaining shares committed by PNC of approximately 1.51.3 million were available to fund certain future long-term incentive awards, including approximately 1.2 million RSU’s with market conditions granted in January 2012 and January 2013.awards.
In January 2013, approximately 0.2 million shares, which were committed as of December 31, 2012, vested and were funded by PNC.
Stock Options.Stock option grants were made to certain employees pursuant to the Award Plan in 1999 through 2007. Options granted have a ten-year life, vested ratably over periods ranging from two to five years and became exercisable upon vesting. The Company has not granted any stock options subsequent to the January 2007 grant, which
vested on September 29, 2011. Stock option activity for 20122014 is summarized below:below.
Outstanding at | Shares under option | Weighted average exercise price | Shares under option | Weighted average exercise price | ||||||||||||
December 31, 2011 | 2,190,907 | $ | 105.33 | |||||||||||||
December 31, 2013 | 931,758 | $ | 167.76 | |||||||||||||
Exercised | (1,090,998 | ) | $ | 42.39 | (25,039 | ) | $ | 167.76 | ||||||||
| ||||||||||||||||
December 31, 2012 (1) | 1,099,909 | $ | 167.76 | |||||||||||||
| ||||||||||||||||
December 31, 2014(1) | 906,719 | $ | 167.76 | |||||||||||||
| (1) |
|
Stock options outstanding and exercisable at December 31, 20122014 were as follows:
| Options Outstanding and Exercisable | Options Outstanding and Exercisable | |||||||||||||||||||||||
Exercise | Options Outstanding | Weighted Average Remaining Life (years) | Weighted Average Exercise Price | Aggregate Intrinsic Value of Exercisable Shares (Dollar amounts in millions) | Options Outstanding | Weighted Average Remaining Life (years) | Weighted Average Exercise Price | Aggregate Intrinsic Value of Exercisable Shares(1)(in millions) | ||||||||||||||||
$167.76 | 1,099,909 | 4.08 | $ | 167.76 | $ | 43 | ||||||||||||||||||
$ 167.76 | 906,719 | 2.09 | $ 167.76 | $ 172 | ||||||||||||||||||||
| (1) | The aggregate intrinsic value of exercisable shares reflects a closing stock price of $357.56 at December 31, 2014. |
As of December 31, 2012,2014, the Company had no remaining unrecognized stock-based compensation expense related to unvested stock options.
Employee Stock Purchase Plan (“ESPP”).The ESPP allows 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 ASC 718-10,Compensation–Stock Compensation,theThe Company does not record compensation expense related to employees purchasing shares under the ESPP.
14.15. Employee Benefit Plans
Deferred Compensation Plans
Voluntary Deferred Compensation Plan.The Company adopted a Voluntary Deferred Compensation Plan (“VDCP”) that allows participants to elect to defer between 1% and 100% of their annual cash incentive compensation. The participants must specify a deferral period of one, three, fiveup to 10 years from the year of deferral and additionally, elect a lump sum distribution or ten years.in up to 10 annual installments. The Company fundsmay fund the obligation through the establishment of a rabbi trust on behalf of the plan’s participants.
Rabbi Trust.The rabbi trust established for the VDCP, with assets totaling $59$64 million as of bothand $65 million at December 31, 20122014 and 2011,2013, respectively, is reflected in investments on the consolidated statements of financial condition. Such investments are classified as trading and other investments. The corresponding liability balance of $60$78 million and $59$64 million as ofat December 31, 20122014 and 2011,2013, respectively, is reflected on the consolidated statements of financial condition as accrued compensation and benefits. Earnings in the rabbi trust, including unrealized appreciation or depreciation, are reflected as non-operatingnonoperating income (expense) and changes in the corresponding liability are reflected as employee compensation and benefits expense on the consolidated statements of income.
Other Deferred Compensation Plans.The Company has additional compensation plans for the purpose of
14. Employee Benefit Plans (continued)
providing deferred compensation and retention incentives to certain employees. For these plans, the final value of the deferred amount to be distributed in cash upon vesting is associated with investment returns of certain investment funds. The liabilities for these plans were $77$126 million and $34$100 million as ofat December 31, 20122014 and 2011,2013, respectively, and are reflected in the consolidated statements of financial condition as accrued compensation and benefits. In January 2013,2015, the Company granted approximately $66$125 million of additional deferred compensation that will fluctuate with investment returns and will vest ratably over three years from the date of grant.
Defined Contribution Plans
BlackRock Retirement Savings Plan.The Company has several defined contribution plans primarily in the United States and United Kingdom.
Certain of the Company’s U.S. employees participate in the BlackRock Retirement Savings Plana defined contribution plan (“BRSP”U.S. Plan”). Two predecessor plans assumed in connection with the BGI Transaction were merged with the BRSP on January 1, 2011.
Employee contributions of up to 8% of eligible compensation, as defined by the plan and subject to Internal Revenue Code (“IRC”) limitations, are matched by the Company at 50%. up to a maximum of $5,000 annually. In addition, the Company will continue to makemakes an annual retirement contribution to eligible participants equal to 3-5% of eligible compensation.
Prior to January 1, 2011, employee contributions of up to 6% of eligible compensation, as defined by the plan In 2014, 2013 and subject to IRC limitations, were matched by the Company at 50%. As part of the BRSP, the Company also made 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. 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.
In 2012, 2011 and 2010, the Company’s expense related to the BRSPU.S. Plan was $67 million, $63 million and $59 million, $43 million and $35 million, respectively. In addition, the Company’s expense related to the two predecessor plans was $25 million in 2010.
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 (“U.K. Plan”). BIM contributes between 6% and 15% of each employee’s eligible compensation. TheIn 2014, 2013 and 2012, the Company’s expense forrelated to this plan was $33 million, $29 million and $27 million, $26 million and $22 million for 2012, 2011 and 2010, respectively.
Defined Benefit Plans.The Company has several defined benefit pension plans primarily in Japan and Germany. All accrued benefits under thesethe Germany defined benefit plansplan are currently frozen and the plans areplan is closed to new participants. The participant benefits under the plansGermany plan will not change with salary increases or additional years of service.
In conjunction with 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, 20122014 and 2011,2013, the plan assets for both these plans were approximately $21 million for both periods and the unfunded$22 million, respectively. The underfunded obligations at December 31, 2014 and 2013 were less than $3 million for both periods, which were recorded in accrued compensation and benefits on the consolidated statements of financial condition.not material. Benefit payments for the next five years and in aggregate for the five years thereafter are not expected to be material.
Defined benefitThe plan assets for the defined benefit plan in Japan Plan of approximately $18 million(the “Japan Plan”) 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%22% for U.S. and international equity securities, 50-55%76% for U.S. and international fixed income securities and 0-5%2% for cash and cash equivalents.
14. Employee Benefit Plans (continued)
other. The table below provides the fair value of the defined benefitplan assets of the Japan Plan assets at December 31, 20122014 and 20112013 by asset category. The table also
category and identifies the level of inputs used to determine the fair value of assets in each category.
(Dollar amounts in At December 31, | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Total | |||||||||||||||||||||
| (in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Total | |||||||||||||||||||||
At December 31, 2014 | ||||||||||||||||||||||||
Equity securities | $ | 9 | — | $ | 9 | $ | 5 | $ | — | $ | 5 | |||||||||||||
Fixed income securities | — | 9 | 9 | — | 13 | 13 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Fair value of plan assets | $ | 9 | $ | 9 | $ | 18 | $ | 5 | $ | 13 | $ | 18 | ||||||||||||
|
|
| ||||||||||||||||||||||
At December 31, 2011 | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 1 | $ | — | $ | 1 | ||||||||||||||||||
At December 31, 2013 | ||||||||||||||||||||||||
Equity securities | 9 | — | 9 | $ | 6 | — | $ | 6 | ||||||||||||||||
Fixed income securities | — | 8 | 8 | — | 13 | 13 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Fair value of plan assets | $ | 10 | $ | 8 | $ | 18 | $ | 6 | $ | 13 | $ | 19 | ||||||||||||
|
|
| ||||||||||||||||||||||
Post-retirement Benefit Plans
The Company provides post-retirement medical benefits to a closed population of employees in the United Kingdom and the United States. The accumulated benefit obligation for each of these unfunded plans was immaterial at December 31, 2012 and 2011, respectively, and was included in accrued compensation and benefits on the consolidated statements of financial condition. For 2012, 2011 and 2010, expenses for these benefits were not material.
15.16. Related Party Transactions
Determination of Related Parties
PNC.The Company considers PNC, along with its affiliates, to be related parties based on the level of its ownership of BlackRock capital stock. At December 31, 2012,2014, PNC owned approximately 20.8%21.0% of the Company’s voting common stock and held approximately 21.9%22.0% of the total capital stock.
Registered Investment Companies and Equity Method Investments. The Company considers the registered investment companies that it manages, which include mutual funds and exchanged-tradedexchange-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, RelatedParty Disclosures(“ASC 850-10”), due to the Company’s influence over the financial and operating policies of the investee.
Barclays. The Company considered Barclays, along with its affiliates, to be related parties, in accordance with ASC 850-10, based on its level of capital stock ownership prior to the secondary offering in May 2012 by Barclays of shares of the Company’s stock. At December 31,Since May 2012, Barclays didhas not ownowned any of the Company’s capital stock and is no longer considered a related party.
Merrill Lynch / Bank of America.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, Merrill Lynch and Bank of America were no longer considered related parties. At December 31, 2012, Bank of America did not own any of the Company’s capital stock.
15. Related Party Transactions (continued)
Revenue 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, | |||||||||||||||||||||||
| 2012 | 2011 | 2010 | Year ended December 31, | |||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Investment advisory, administration fees and securities lending revenue: | ||||||||||||||||||||||||
Bank of America and affiliates | $ | — | $ | — | $ | 37 | ||||||||||||||||||
PNC and affiliates | 4 | 4 | 4 | $ | 5 | $ | 5 | $ | 4 | |||||||||||||||
Barclays and affiliates | 5 | 14 | 14 | — | — | 5 | ||||||||||||||||||
Registered investment companies/equity method investees | 5,283 | 5,282 | 4,833 | 6,733 | 5,986 | 5,283 | ||||||||||||||||||
Other | — | 3 | 5 | |||||||||||||||||||||
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Total investment advisory and administration fees | 5,292 | 5,303 | 4,893 | |||||||||||||||||||||
Total investment advisory, administration fees, and securities lending revenue | 6,738 | 5,991 | 5,292 | |||||||||||||||||||||
Investment advisory performance fees | 120 | 54 | 39 | 173 | 185 | 120 | ||||||||||||||||||
BlackRock Solutions and advisory: | ||||||||||||||||||||||||
Bank of America and affiliates | — | — | 1 | |||||||||||||||||||||
PNC and affiliates | 7 | 6 | 9 | 7 | 7 | 7 | ||||||||||||||||||
Equity method investees | 13 | 15 | 17 | 6 | 11 | 13 | ||||||||||||||||||
Other | 3 | — | — | — | 5 | 3 | ||||||||||||||||||
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TotalBlackRock Solutions and advisory | 23 | 21 | 27 | 13 | 23 | 23 | ||||||||||||||||||
Other revenue: | ||||||||||||||||||||||||
Bank of America and affiliates | — | — | 4 | |||||||||||||||||||||
PNC and affiliates | 3 | 3 | 4 | 3 | 3 | 3 | ||||||||||||||||||
Barclays and affiliates | 11 | 35 | 35 | — | — | 11 | ||||||||||||||||||
Equity method investees | 52 | 15 | 22 | 67 | 58 | 52 | ||||||||||||||||||
Other | — | — | 1 | |||||||||||||||||||||
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Total other revenue | 66 | 53 | 66 | 70 | 61 | 66 | ||||||||||||||||||
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Total revenue from related parties | $ | 5,501 | $ | 5,431 | $ | 5,025 | $ | 6,994 | $ | 6,260 | $ | 5,501 | ||||||||||||
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The Company provides investment advisory and administration services to its open- 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 Bank of America/Merrill Lynch, Barclays and PNC and its affiliates for fees based on AUM. Further, the Company provides risk management services to PNC and Bank of America/Merrill Lynch. The Company contracts with Bank of America/Merrill Lynch for various mutual fund distribution and shareholder servicing to be performed on behalf of certain non-U.S. funds managed by the Company.PNC. The Company records its investment advisory and administration fees net of retrocessions.
Such retrocession arrangements paid to Bank of America and affiliates during 2010 (prior to the secondary offering) was $88 million.
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, | |||||||||||||||||||||||
| 2012 | 2011 | 2010 | Year ended December 31, | |||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Expenses with related parties: | ||||||||||||||||||||||||
Distribution and servicing costs | ||||||||||||||||||||||||
Bank of America and affiliates | $— | $— | $ | 214 | ||||||||||||||||||||
PNC and affiliates | 3 | 3 | 11 | $ | 2 | $ | 2 | $ | 3 | |||||||||||||||
Barclays and affiliates | 1 | 2 | 1 | — | — | 1 | ||||||||||||||||||
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Total distribution and servicing costs | 4 | 5 | 226 | 2 | 2 | 4 | ||||||||||||||||||
Direct fund expenses | ||||||||||||||||||||||||
Bank of America and affiliates | — | — | 10 | |||||||||||||||||||||
Barclays and affiliates | 4 | 8 | 6 | — | — | 4 | ||||||||||||||||||
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Total direct fund expenses | 4 | 8 | 16 | — | — | 4 | ||||||||||||||||||
General and administration expenses | ||||||||||||||||||||||||
Bank of America and affiliates | — | — | 11 | |||||||||||||||||||||
Barclays and affiliates | 5 | 15 | 14 | — | — | 5 | ||||||||||||||||||
Anthracite Capital, Inc. | — | — | 14 | |||||||||||||||||||||
Other registered investment companies | 49 | 42 | 33 | 55 | 50 | 49 | ||||||||||||||||||
Other(1) | 33 | 3 | — | 5 | — | 33 | ||||||||||||||||||
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Total general and administration expenses | 87 | 60 | 72 | 60 | 50 | 87 | ||||||||||||||||||
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Total expenses with related parties | $ | 95 | $ | 73 | $ | 314 | $ | 62 | $ | 52 | $ | 95 | ||||||||||||
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Amount in 2012 included a one-time pre-tax charge of $30 million related to a contribution to certain of the Company’s bank managed short-term investment |
Certain Agreements and Arrangements with Barclays and PNC
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
15. Related Party Transactions (continued)
and their affiliates to acquire additional shares of BlackRock common stock and preferred stock and to certain other restrictions. The Barclays Stockholder Agreement was terminated on May 29, 2012.
In addition, Barclays and certain of its affiliates have been engaged by the Company to provide the use of certain indices for certain BlackRock investment funds and for a fee to provide indemnification to clients related to potential losses in connection with lending of client securities. For the five months ended May 31, 2012, and the full years ended December 31, 2011 and 2010, fees incurred for these agreements were $9 million, $18 million and $14 million and were recorded within direct fund expenses and general and administration expenses, respectively.
Certain Agreements and Arrangements with PNC and Merrill Lynch
PNC.On February 27, 2009, BlackRock entered into an amended and restated implementation and stockholder agreement with PNC, and a third amendment to the share surrender agreement with PNC. See Note 17, 19,Capital Stock, for further discussion.
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.
In June 2009, in connection with the BGI Transaction, certain additional amendments were made to the amended and restated stockholder agreement with PNC.
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.
Merrill Lynch.Barclays. In November 2010,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. The Barclays Stockholder Agreement was terminated on May 29, 2012 in connection with the secondary offering by Bank of America of shares of BlackRock’s common stock, the Company entered into an amendedits sale and restated stockholder agreement and an amended and restated global distribution agreement with Merrill Lynch.
The changes to the stockholder agreement with Merrill Lynch provide, 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.
The global distribution agreement provides a framework under which Merrill Lynch provides distribution and servicing of client investments in certain BlackRock investment advisory products. The amendment to the global distribution agreement clarifies certain economic arrangements with respect to revenue neutrality across BlackRock products distributed by Merrill Lynch.
During 2010, the total amount of related party transactions expensed by BlackRock through November 2010 related to Merrill Lynch distribution 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.exchange (see Note 19).
In addition, 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 amounted to 50% of the total amount of awards to former MLIM employees between $100 million and $200 million. The Company invoiced 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 2012, 2011 and 2010, Merrill Lynch
15. Related Party Transactions (continued)
reimbursed $7 million, $8 million and $10 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 LynchBarclays and certain of its affiliates have been engaged by the Company to provide recordkeeping, administrationthe use of certain indices for certain BlackRock investment funds and trustee servicesfor a fee to provide indemnification to clients related to potential losses in connection with lending of client securities. For the BRSP. The compensation to Merrill Lynch and its affiliatesfive months ended May 31, 2012 fees incurred for these services paid by the Company was not material.agreements were $9 million and were recorded within direct fund expenses and general and administration expenses.
Receivables and Payables with Related Parties.Due from related parties, which is included within other assets on the consolidated statements of financial condition was $77$89 million and $142$74 million at December 31, 20122014 and 2011,2013, respectively, and primarily represented 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, 2012 included $68 million due from certain funds. Due from related parties at December 31, 2011 included $56 million due from certain funds and $69 million of a tax indemnification asset due from Barclays.
Accounts receivable at December 31, 20122014 and 20112013 included $629$747 million and $540$745 million, respectively, related to receivables from BlackRock mutual funds, includingiShares, for investment advisory and administration services.
Due to related parties, which is included within other liabilities on the consolidated statements of financial condition, was $14$12 million and $13 million at December 31, 20122014 and 2013, respectively, and primarily represented payables to certain investment products managed by BlackRock. Due to related parties at December 31, 2011 included $13 million and $9 million payable to certain investment products managed by BlackRock and Barclays, respectively.
16.17. 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.Office of the
Comptroller of the Currency. 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 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, 20122014 and 2011,2013, 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 | Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 633 | 99.1 | % | $ | 51 | 8.0 | % | $ | 64 | 10.0 | % | $ | 775 | 142.0 | % | $ | 44 | 8.0 | % | $ | 56 | 10.0 | % | ||||||||||||||||||||||||
Tier 1 capital (to risk weighted assets) | $ | 633 | 99.1 | % | $ | 26 | 4.0 | % | $ | 38 | 6.0 | % | $ | 775 | 142.0 | % | $ | 22 | 4.0 | % | $ | 33 | 6.0 | % | ||||||||||||||||||||||||
Tier 1 capital (to average assets) | $ | 633 | 49.7 | % | $ | 51 | 4.0 | % | $ | 64 | 5.0 | % | $ | 775 | 72.1 | % | $ | 43 | 4.0 | % | $ | 54 | 5.0 | % | ||||||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 720 | 104.1 | % | $ | 55 | 8.0 | % | $ | 69 | 10.0 | % | $ | 660 | 112.7 | % | $ | 47 | 8.0 | % | $ | 59 | 10.0 | % | ||||||||||||||||||||||||
Tier 1 capital (to risk weighted assets) | $ | 720 | 104.1 | % | $ | 28 | 4.0 | % | $ | 42 | 6.0 | % | $ | 660 | 112.7 | % | $ | 23 | 4.0 | % | $ | 35 | 6.0 | % | ||||||||||||||||||||||||
Tier 1 capital (to average assets) | $ | 720 | 45.1 | % | $ | 64 | 4.0 | % | $ | 80 | 5.0 | % | $ | 660 | 63.4 | % | $ | 42 | 4.0 | % | $ | 52 | 5.0 | % | ||||||||||||||||||||||||
Broker-dealers.BlackRock Investments, LLC, BlackRock Capital Markets, LLC and BlackRock Execution Services 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.
16. Net Capital Requirements (continued)
Capital Requirements.At both December 31, 2012,2014 and 2013, the Company was required to maintain approximately $1,209 million$1.1 billion in net capital in certain regulated subsidiaries, including BTC, entities regulated by the Financial ServicesConduct Authority (“FSA”)and Prudential Regulation Authority in the United Kingdom, and the broker-dealers andCompany’s broker-dealers. The Company was in compliance with all applicable regulatory minimum net capital requirements.
17.18. Accumulated Other Comprehensive Income (Loss)
The following table presents changes in AOCI by component for 2014 and 2013:
| (in millions) | Unrealized Gains (Losses) on Available-for-sale Investments | Benefit Plans | Foreign Currency Translation Adjustments | Total(1) | ||||||||||||
December 31, 2012 | $ | 16 | $ | (4 | ) | $ | (71 | ) | $ | (59 | ) | |||||
Other comprehensive income (loss) before | 4 | 10 | 23 | 37 | ||||||||||||
Amount reclassified from AOCI(2),(3) | (13 | ) | — | — | (13 | ) | ||||||||||
Net other comprehensive income (loss) for 2013 | (9 | ) | 10 | 23 | 24 | |||||||||||
December 31, 2013 | $ | 7 | $ | 6 | $ | (48 | ) | $ | (35 | ) | ||||||
Other comprehensive income (loss) before | 3 | (2 | ) | (231 | ) | (230 | ) | |||||||||
Amount reclassified from AOCI(2),(3) | (8 | ) | — | — | (8 | ) | ||||||||||
Net other comprehensive income (loss) for 2014 | (5 | ) | (2 | ) | (231 | ) | (238 | ) | ||||||||
December 31, 2014 | $ | 2 | $ | 4 | $ | (279 | ) | $ | (273 | ) | ||||||
| (1) | All amounts are net of tax. |
| (2) | The tax benefit (expense) was not material for 2014 and 2013. |
| (3) | The pre-tax amount reclassified from AOCI was included in net gain (loss) on investments on the consolidated statements of income. |
19. Capital Stock
Capital Stock Authorized.BlackRock’sThe Company’s authorized common stock and nonvoting participating preferred stock, $0.01 par value, was 500,000,000 shares at December 31, 2012 and 2011. At December 31, 2012 and 2011, BlackRock had 20,000,000 series A non-voting participating preferred shares (“Series A Preferred”), $0.01 par value, authorized. At December 31, 2012 and 2011, BlackRock had 150,000,000 series B non-voting participating preferred shares (“Series B Preferred”), $0.01 par value, authorized. At December 31, 2012 and 2011, BlackRock had 6,000,000 series C non-voting participating preferred shares (“Series C Preferred”), $0.01 par value, authorized. At December 31, 2012 and 2011, BlackRock had 20,000,000 series D non-voting participating preferred shares (“Series D Preferred”), $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. As of December 31, 2011, 1,188,182 common shares had been 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. During 2012, the remaining 3,603 shares were released from the escrow account.
January 2010 Capital Exchange.In January 2010, 600,000 common shares were exchanged for Series B Preferred and all 11,203,442 Series D Preferred outstanding at December 31, 2009 were exchanged for Series B Preferred.
November 2010 Capital Exchanges.On November 15, 2010, the Company announced the closing consisted 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 Preferred. Concurrently with the secondary offerings, BlackRock issued 11,105,000 shares of common stock to PNC in exchange for an equal number of shares of Series B Preferred.
May 2011 Barclays Sale and Conversion.In May 2011, 2,356,750 shares of Series B Preferred owned by Barclays were automatically converted to shares of common stock upon their disposition.following:
June 2011 Bank of America Stock Repurchase Agreement.On June 1, 2011, BlackRock completed its repurchase of Bank of America’s remaining ownership interest of 13,562,878 Series B Preferred for $2.545 billion, or $187.65 per share.
| December 31, 2014 | December 31, 2013 | |||||||
Common Stock | 500,000,000 | 500,000,000 | ||||||
Nonvoting Participating Preferred Stock | ||||||||
Series A Preferred | 20,000,000 | 20,000,000 | ||||||
Series B Preferred | 150,000,000 | 150,000,000 | ||||||
Series C Preferred | 6,000,000 | 6,000,000 | ||||||
Series D Preferred | 20,000,000 | 20,000,000 | ||||||
September 2011 Institutional Investor Capital Exchange. In September 2011, an institutional investor exchanged 2,860,188 shares of Series B Preferred for common shares.
September 2011 PNC Capital Contribution.In September 2011, PNC surrendered to BlackRock approximately 1.3 million shares of BlackRock Series C Preferred to fund certain LTIP awards in accordance with the share surrender agreement between PNC and BlackRock.
May 2012 Barclays Sale and Capital Exchange.BlackRock completed the secondary offering of 26,211,335 shares of common stock held by Barclays at a price of $160.00 per share, which included 23,211,335 shares of common stock issued upon the conversion of Series B Preferred by a subsidiary of Barclays.
Upon completion of this offering, BlackRock repurchased 6,377,552 shares directly from Barclays outside the publicly announced share repurchase program at a price of $156.80 per share (consisting of 6,346,036 of Series B Preferred and 31,516 shares of common stock). The total transactions, including the full exercise of the underwriters’ option to
purchase 2,621,134 additional shares in the secondary offering, amounted to 35,210,021 shares, resulting in Barclays exiting its entire ownership position in BlackRock.
May 2012 PNC Capital Exchange.In May 2012, PNC exchanged 2,000,000 shares of Series B Preferred for an equal number of shares of common stock.
Other Changes.In September and October 2012, 593,786 and 2,594,070 shares of Series B Preferred, respectively, converted into an equal number of shares of common stock.
January 2013 PNC Capital Contribution. In January 2013, PNC surrendered to BlackRock 205,350 shares of BlackRock Series C Preferred to fund certain LTIP awards in accordance with the share surrender agreement between PNC and BlackRock.
Cash Dividends for Common and Preferred Shares / RSUs.During 2012, 20112014, 2013 and 2010,2012, the Company paid cash dividends of $7.72 per share (or $1,338 million), $6.72 per share (or $1,168 million) and $6.00 per share (or $1,060 million), $5.50 perrespectively.
Share Repurchases.The Company repurchased 3.2 million common shares in open market-transactions under its share (or $1,014 million) and $4.00 per share (or $776 million), respectively.repurchase program for $1.0 billion during 2014. At December 31, 2014, there were 3.4 million shares still authorized to be repurchased.
17. Capital Stock (continued)
The Company’s common and preferred shares issued and outstanding and related activity consist of the following:
| Shares Issued | Shares Outstanding | Shares Issued | Shares Outstanding | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares | Escrow Common Shares | Treasury Common Shares | Series B Preferred | Series C Preferred | Series D Preferred | Common Shares | Series B Preferred | Series C Preferred | Series D Preferred | Common Shares | Escrow Common Shares | Treasury Common Shares | Series B Preferred | Series C Preferred | Common Shares | Series B Preferred | Series C Preferred | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | — | 865,337 | — | — | — | — | 865,337 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | — | — | (896,102 | ) | (896,102 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange of common stock for Series B Preferred | — | (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 Series D Preferred for Series B Preferred | — | — | — | 11,203,442 | — | (11,203,442 | ) | — | 11,203,442 | — | (11,203,442 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange of Series B Preferred for common shares | 67,512,040 | — | — | (67,512,040 | ) | — | — | 67,512,040 | (67,512,040 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | — | — | — | (23,028 | ) | — | — | — | (23,028 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Exchange of Series B Preferred for common shares | 5,216,938 | — | (5,216,938 | ) | — | — | 5,216,938 | (5,216,938 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | — | — | (618,000 | ) | (13,562,878 | ) | — | — | (618,000 | ) | (13,562,878 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions and convertible debt conversions | 2,739,818 | — | (92,182 | ) | — | — | — | 2,647,636 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | — | — | — | — | (1,349,202 | ) | — | — | — | (1,349,202 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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December 31, 2011 | 139,880,380 | (3,603 | ) | (1,413,642 | ) | 38,328,737 | 1,517,237 | — | 138,463,135 | 38,328,737 | 1,517,237 | — | 139,880,380 | (3,603 | ) | (1,413,642 | ) | 38,328,737 | 1,517,237 | 138,463,135 | 38,328,737 | 1,517,237 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Exchange of Series B Preferred for common shares | 31,159,513 | — | — | (31,159,513 | ) | — | — | 31,159,513 | (31,159,513 | ) | — | — | 31,159,513 | — | — | (31,159,513 | ) | — | 31,159,513 | (31,159,513 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | (31,516 | ) | — | (2,726,600 | ) | (6,346,036 | ) | — | — | (2,758,116 | ) | (6,346,036 | ) | — | — | (31,516 | ) | — | (2,726,600 | ) | (6,346,036 | ) | — | (2,758,116 | ) | (6,346,036 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | 247,411 | — | 1,763,361 | — | — | — | 2,010,772 | — | — | — | 247,411 | — | 1,763,361 | — | — | 2,010,772 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Release of common shares from escrow | (3,603 | ) | 3,603 | — | — | — | — | — | — | — | — | (3,603 | ) | 3,603 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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December 31, 2012 | 171,252,185 | — | (2,376,881 | ) | 823,188 | 1,517,237 | — | 168,875,304 | 823,188 | 1,517,237 | — | 171,252,185 | — | (2,376,881 | ) | 823,188 | 1,517,237 | 168,875,304 | 823,188 | 1,517,237 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Shares repurchased | — | — | (3,689,845 | ) | — | — | (3,689,845 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | — | — | 1,404,229 | — | — | 1,404,229 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PNC LTIP capital contribution | — | — | — | — | (205,350 | ) | — | — | (205,350 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2013 | 171,252,185 | — | (4,662,497 | ) | 823,188 | 1,311,887 | 166,589,688 | 823,188 | 1,311,887 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | — | — | (3,175,088 | ) | — | — | (3,175,088 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | — | — | 1,372,188 | — | — | 1,372,188 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2014 | 171,252,185 | — | (6,465,397 | ) | 823,188 | 1,311,887 | 164,786,788 | 823,188 | 1,311,887 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
18. Restructuring Charges
During the fourth quarter of 2011, the Company reduced its workforce globally by approximately 3.4%. 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 $32 million ($22 million after-tax) during 2011. This charge was comprised of $24 million of severance and associated outplacement costs and $8 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 consolidated statements of financial condition:
| (Dollar amounts in millions) | ||||
Liability as of December 31, 2010(1) | $ | 2 | ||
Additions | 32 | |||
Cash payments | (8 | ) | ||
Accelerated amortization of equity-based awards | (8 | ) | ||
|
| |||
Liability as of December 31, 2011 | $ | 18 | ||
|
| |||
Cash payments | (17 | ) | ||
|
| |||
Liability as of December 31, 2012 | $ | 1 | ||
|
| |||
|
19.20. Income Taxes
The components of income tax expense for 2012, 20112014, 2013 and 2010,2012, are as follows:
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | |||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Current income tax expense: | ||||||||||||||||||||||||
Federal | $ | 856 | $ | 693 | $ | 708 | $ | 923 | $ | 869 | $ | 856 | ||||||||||||
State and local | 49 | 54 | 60 | 54 | 39 | 49 | ||||||||||||||||||
Foreign | 186 | 186 | 200 | 258 | 307 | 186 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total net current income tax expense | 1,091 | 933 | 968 | 1,235 | 1,215 | 1,091 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Deferred income tax expense (benefit): | ||||||||||||||||||||||||
Federal | 4 | 52 | 28 | (73 | ) | (68 | ) | 4 | ||||||||||||||||
State and local | 13 | (112 | ) | 10 | (9 | ) | 13 | 13 | ||||||||||||||||
Foreign | (78 | ) | (77 | ) | (35 | ) | (22 | ) | (138 | ) | (78 | ) | ||||||||||||
|
|
| ||||||||||||||||||||||
Total net deferred income tax expense (benefit) | (61 | ) | (137 | ) | 3 | (104 | ) | (193 | ) | (61 | ) | |||||||||||||
|
|
| ||||||||||||||||||||||
Total income tax expense | $ | 1,030 | $ | 796 | $ | 971 | $ | 1,131 | $ | 1,022 | $ | 1,030 | ||||||||||||
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|
| ||||||||||||||||||||||
Income tax expense has been based on the following components of income before taxes, less net income (loss) attributable to non-controllingnoncontrolling interests:
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | |||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Domestic | $ | 2,690 | $ | 2,397 | $ | 2,258 | $ | 2,946 | $ | 2,814 | $ | 2,690 | ||||||||||||
Foreign | 798 | 736 | 776 | 1,479 | 1,140 | 798 | ||||||||||||||||||
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|
| ||||||||||||||||||||||
Total | $ | 3,488 | $ | 3,133 | $ | 3,034 | $ | 4,425 | $ | 3,954 | $ | 3,488 | ||||||||||||
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The foreign income before taxes includes countries that have statutory tax rates that are lower than the U.S. federal statutory tax rate of 35%, such as the United Kingdom, Luxembourg, Canada and the Netherlands.
19. 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:
| (Dollar amounts in millions) | 2012 | % | 2011 | % | 2010 | % | ||||||||||||||||||||||||||||||||||||||||||
| (in millions) | 2014 | % | 2013 | % | 2012 | % | ||||||||||||||||||||||||||||||||||||||||||
Statutory income tax expense | $ | 1,221 | 35 | % | $ | 1,097 | 35 | % | $ | 1,062 | 35 | % | $ | 1,549 | 35 | % | $ | 1,383 | 35 | % | $ | 1,221 | 35 | % | ||||||||||||||||||||||||
Increase (decrease) in income taxes resulting from: | ||||||||||||||||||||||||||||||||||||||||||||||||
State and local taxes (net of federal benefit) | 49 | 2 | 59 | 2 | 53 | 2 | 51 | 1 | 39 | 1 | 49 | 2 | ||||||||||||||||||||||||||||||||||||
Impact of foreign, state, and local tax rate changes on deferred taxes | (50 | ) | (2 | ) | (188 | ) | (6 | ) | (27 | ) | (1 | ) | (4 | ) | — | (69 | ) | (2 | ) | (50 | ) | (2 | ) | |||||||||||||||||||||||||
Effect of foreign tax rates | (221 | ) | (5 | ) | (197 | ) | (6 | ) | (145 | ) | (4 | ) | (434 | ) | (10 | ) | (329 | ) | (8 | ) | (221 | ) | (5 | ) | ||||||||||||||||||||||||
Other | 31 | — | 25 | — | 28 | — | (31 | ) | — | (2 | ) | — | 31 | — | ||||||||||||||||||||||||||||||||||
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Income tax expense | $ | 1,030 | 30 | % | $ | 796 | 25 | % | $ | 971 | 32 | % | $ | 1,131 | 26 | % | $ | 1,022 | 26 | % | $ | 1,030 | 30 | % | ||||||||||||||||||||||||
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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 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:below
| December 31, | December 31, | |||||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | ||||||||||||||
| (in millions) | 2014 | 2013 | ||||||||||||||
Deferred income tax assets: | ||||||||||||||||
Compensation and benefits | $ | 355 | $ | 304 | $ | 323 | $ | 345 | ||||||||
Unrealized investment losses | 71 | 110 | 157 | 99 | ||||||||||||
Loss carryforwards | 81 | 87 | 47 | 42 | ||||||||||||
Foreign tax credit carryforwards | 40 | 28 | ||||||||||||||
Other | 222 | 229 | 253 | 290 | ||||||||||||
|
| |||||||||||||||
Gross deferred tax assets | 729 | 730 | 820 | 804 | ||||||||||||
Less: deferred tax valuation allowances | (95 | ) | (95 | ) | (29 | ) | (48 | ) | ||||||||
|
| |||||||||||||||
Deferred tax assets net of valuation allowances | 634 | 635 | 791 | 756 | ||||||||||||
|
| |||||||||||||||
Deferred income tax liabilities: | ||||||||||||||||
Goodwill and acquired indefinite-lived intangibles | 5,656 | 5,675 | 5,616 | 5,594 | ||||||||||||
Acquired finite-lived intangibles | 158 | 208 | 65 | 110 | ||||||||||||
Other | 109 | 69 | 89 | 133 | ||||||||||||
|
| |||||||||||||||
Gross deferred tax liabilities | 5,923 | 5,952 | 5,770 | 5,837 | ||||||||||||
|
| |||||||||||||||
Net deferred tax (liabilities) | $ | (5,289 | ) | $ | (5,317 | ) | $ | (4,979 | ) | $ | (5,081 | ) | ||||
|
| |||||||||||||||
Deferred income tax assets and liabilities are recorded net when related to the same tax jurisdiction. At December 31, 2012,2014, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $10 million and $4,989 million, respectively. At December 31, 2013, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $4 million and $5,293$5,085 million, respectively. At December 31, 2011, the Company recorded on the consolidated statement of financial condition deferred income tax assets, within other assets, and deferred income tax liabilities of $6 million and $5,323 million, respectively.
During 2012, tax legislation enacted in the United Kingdom and the2014, state and local income tax effect resulting from changes in the Company’s organizational structure primarily resulted in a $50$4 million net non-cashnoncash benefit related to the revaluation of certain deferred income tax liabilities.
In 2011, an During 2013, tax legislation enacted state tax law and a state tax election went into effect, which resulted in a revaluation of certain net deferred income tax liabilities primarily related to acquired intangible assets, which resulted in a $52 million and $91 million tax benefit, respectively. In addition, the United Kingdom and Japan enacted legislation reducing corporate incomedomestic state tax rates, whichlaw changes resulted in a $69 million net noncash benefit related to the revaluation of certain net deferred income tax liabilities primarily related to acquired intangible assets, which resulted in a $60 million and $13 million tax benefit, respectively.liabilities.
The Company had a deferred income tax asset related to unrealized investment losses of approximately $71$157 million and $110$99 million as ofat December 31, 20122014 and 2011,2013, 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. RealizedU.S. Federal 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 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.
At December 31, 20122014 and 2011,2013, the Company had available state net operating loss carryforwards of $842 million$1.2 billion and $388$935 million, respectively, which will begin to expire on or before 2032.in 2017. At December 31, 2012,2014 and December 31, 2013, the Company had foreign net operating loss carryforwards of $152$137 million and $109 million, respectively, of which $36$8 million expires on or before 2021will begin to expire in 2017 and the balance will carry forward indefinitely. In addition, atAt December 31, 2012 and 2011,2014, the Company had U.S.
19. Income Taxes (continued)
capital lossforeign tax credit carryforwards for income tax purposes of $69 million and $90$40 million which were acquiredwill begin to expire in the BGI Transaction and will expire on or before 2013.2023.
At December 31, 20122014 and 2011,2013, the Company had $95$29 million and $95$48 million of valuation allowances for deferred income tax assets, respectively, recorded on the consolidated statements of financial condition. Theyear-over-year increase decrease in the valuation allowance primarily related to the realization of tax loss carryforwards and certain foreign deferred income tax 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. See Note 9,Goodwill, for further discussion.
Current income taxes are recorded net inon the consolidated statements of financial condition when related to the same tax jurisdiction. As ofAt December 31, 2012,2014, the Company had current income taxes receivable and payable of $102$117 million and $121$125 million, respectively, recorded in other assets and accounts payable and accrued liabilities, respectively. As ofAt December 31, 2011,2013, the Company had current income taxes receivable and payable of $108$89 million and $102$168 million, respectively, recorded in other assets and accounts payable and accrued liabilities, respectively.
The Company does not provide deferred taxes on the excess of the financial reporting over tax basis on its investments in foreign subsidiaries that are essentially permanent in duration. The excess totaled $2,125$3,871 million and $1,516$3,074 million as ofat December 31, 20122014 and 2011,2013, respectively. The determination of the additional deferred income taxes on the excess has not been provided because it is not practicable due to the complexities associated with its hypothetical calculation.
The following tabular reconciliation presents the total amounts of gross unrecognized tax benefits:
| Year ended December 31, | ||||||||||||
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | |||||||||
Balance at January 1 | $ | 349 | $ | 307 | $ | 285 | ||||||
Additions for tax positions of prior years | 4 | 22 | 10 | |||||||||
Reductions for tax positions of prior years | (1 | ) | (1 | ) | (17 | ) | ||||||
Additions based on tax positions related to current year | 69 | 46 | 35 | |||||||||
Lapse of statute of limitations | — | — | (8 | ) | ||||||||
Settlements | (29 | ) | (25 | ) | (2 | ) | ||||||
Positions assumed in acquisitions | 12 | — | 4 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31 | $ | 404 | $ | 349 | $ | 307 | ||||||
|
|
|
|
|
| |||||||
| Year ended December 31, | ||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||
Balance at January 1 | $ | 467 | $ | 404 | $ | 349 | ||||||
Additions for tax positions of prior years | 21 | 11 | 4 | |||||||||
Reductions for tax positions of prior years | (24 | ) | (5 | ) | (1 | ) | ||||||
Additions based on tax positions related to current year | 85 | 67 | 69 | |||||||||
Lapse of statute of limitations | (2 | ) | — | — | ||||||||
Settlements | (168 | ) | (12 | ) | (29 | ) | ||||||
Positions assumed in acquisitions | — | 2 | 12 | |||||||||
Balance at December 31 | $ | 379 | $ | 467 | $ | 404 | ||||||
Included in the balance of unrecognized tax benefits at December 31, 2012, 20112014, 2013 and 2010,2012, respectively, are $250$283 million, $226$304 million and $194$250 million 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 $(25) million during 2014 and in total, as of December 31, 2014, had recognized a liability for interest and penalties of $44 million. The Company accrued interest and penalties of $(1) million during 2013 and in total, as of December 31, 2013, had recognized a liability for interest and penalties of $68 million. The Company accrued interest and penalties of $3 million during 2012 and in total, as of December 31, 2012, had recognized a liability for interest and penalties of $69 million. The Company accrued interest and penalties of $10 million during 2011 and in total, as of December 31, 2011, had recognized a liability for interest and penalties of $66 million. The Company accrued interest and penalties of $8 million during 2010 and in total, as of December 31, 2010, had recognized a liability for interest and penalties of $56 million. Pursuant to the Amended and Restated Stock Purchase Agreement, the Company has been indemnified by Barclays for $73 million and Guggenheim for $6 million of unrecognized tax benefits.
BlackRock is subject to U.S. federal income tax, state and local income tax, and foreign income tax in multiple jurisdictions. Tax years after 20072009 remain open to U.S. federal income tax examination, tax years after 2005 remain open to state and local income tax examination, and tax years after 2006 remain open to income tax examination in the United Kingdom. With few exceptions, as of December 31, 2012, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2006.
examination. The Internal Revenue Service (“IRS”) completed its examination of BlackRock’s 20062008 and 20072009 tax years in March 2011.2014. In November 2011,addition, in 2014 the IRS completed its examination of the BGI group for tax years 2007 through December 1, 2009.
In June 2014, the IRS commenced its examination of BlackRock’s 2008 and 20092010 through 2012 tax years, and while the impact on the consolidated financial statements is undetermined, it is not expected to be material.
In July 2011, the IRS commenced its federal income tax audit of the BGI group, which BlackRock acquired in December 2009. The tax years under examination are 2007 through December 1, 2009, and while the impact on the consolidated financial statements is undetermined, it is not expected to be material.
The Company is currently under audit in several state and local jurisdictions. The significant state and local income tax examinations are in California for tax years 20042009 through 2006,2010, New York State and New York City for tax years 20072009 through 2008,2011, and New Jersey for tax years 20032007 through 2009. No state and local income tax audits cover years earlier than 2007 except for California, New Jersey and New York City.2007. No state and local income tax audits are expected to result in an assessment material to theBlackRock’s consolidated financial statements.
19. Income Taxes (continued)
In December 2009, Her Majesty’s Revenue and CustomsCustoms’ (“HMRC”) commenced its United Kingdom income tax audit of BlackRock’s 2007for various U.K. BlackRock subsidiaries is in progress for tax years 2009 through 2010 tax years.2011. While the impact on the consolidated financial statements is undetermined, it is not expected to be material.
As ofAt December 31, 2012,2014, it is reasonably possible the total amounts of unrecognized tax benefits will increase or
decreasechange within the next twelve months due to completion of tax authorities’ exams or the expiration of statues of limitations. Management estimates that the existing liability for uncertain tax positions could decrease by approximately $5$2 million to $15$20 million within the 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.
20.21. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):EPS for 2014 and 2013 under the treasury stock method:
| (Dollar amounts in millions, except per share data) | 2012 | 2011 | 2010 | |||||||||
Basic EPS: | ||||||||||||
Net income attributable to BlackRock | $ | 2,458 | $ | 2,337 | $ | 2,063 | ||||||
Less: | ||||||||||||
Dividends distributed to common shares | 1,059 | 1,004 | 764 | |||||||||
Dividends distributed to participating RSUs | 1 | 10 | 12 | |||||||||
|
|
|
|
|
| |||||||
Undistributed net income attributable to BlackRock. | 1,398 | 1,323 | 1,287 | |||||||||
Percentage of undistributed net income allocated to common shares(a) | 99.9 | % | 99.1 | % | 98.6 | % | ||||||
Undistributed net income allocated to common shares | 1,396 | 1,311 | 1,269 | |||||||||
Plus: | ||||||||||||
Common share dividends | 1,059 | 1,004 | 764 | |||||||||
|
|
|
|
|
| |||||||
Net income attributable to common shares | $ | 2,455 | $ | 2,315 | $ | 2,033 | ||||||
|
|
|
|
|
| |||||||
Weighted-average shares outstanding | 174,961,018 | 184,265,367 | 190,554,510 | |||||||||
Earnings per basic share attributable to BlackRock common stockholders | $ | 14.03 | $ | 12.56 | $ | 10.67 | ||||||
Diluted EPS: | ||||||||||||
Net income attributable to common shares | $ | 2,455 | $ | 2,315 | $ | 2,033 | ||||||
Weighted-average shares outstanding | 174,961,018 | 184,265,367 | 190,554,510 | |||||||||
Dilutive effect of: | ||||||||||||
Non-participating RSUs | 2,810,312 | 2,139,100 | 1,008,682 | |||||||||
Stock options | 246,349 | 687,192 | 742,805 | |||||||||
Convertible debt | — | 24,751 | 386,050 | |||||||||
|
|
|
|
|
| |||||||
Total diluted weighted-average shares outstanding | 178,017,679 | 187,116,410 | 192,692,047 | |||||||||
|
|
|
|
|
| |||||||
Earnings per dilutive share attributable to BlackRock common stockholders | $ | 13.79 | $ | 12.37 | $ | 10.55 | ||||||
| (in millions, except shares and per share data) | 2014 | 2013 | ||||||
Net income attributable to BlackRock | $ | 3,294 | $ | 2,932 | ||||
Basic weighted-average shares outstanding | 168,225,154 | 170,185,870 | ||||||
Dilutive effect of nonparticipating RSUs and stock options | 2,887,107 | 3,643,032 | ||||||
Total diluted weighted-average shares outstanding | 171,112,261 | 173,828,902 | ||||||
Basic earnings per share | $ | 19.58 | $ | 17.23 | ||||
Diluted earnings per share | $ | 19.25 | $ | 16.87 | ||||
The following table sets forth the computation of basic and diluted EPS for 2012 under the two-class method:
| (in millions, except shares and per share data) | 2012 | |||
Net income attributable to BlackRock | $ | 2,458 | ||
Less: | ||||
Dividends distributed to common shares | 1,059 | |||
Dividends distributed to participating RSUs | 1 | |||
Undistributed net income attributable to BlackRock | 1,398 | |||
Percentage of undistributed net income allocated to common shares(1) | 99.9 | % | ||
Undistributed net income allocated to common shares | 1,396 | |||
Plus: | ||||
Common share dividends | 1,059 | |||
Net income attributable to common shares | $ | 2,455 | ||
Basic weighted-average shares outstanding | 174,961,018 | |||
Dilutive effect of nonparticipating RSUs and stock options | 3,056,661 | |||
Total diluted weighted-average shares outstanding | 178,017,679 | |||
Basic earnings per share | $ | 14.03 | ||
Diluted earnings per share | $ | 13.79 | ||
Allocation to common stockholders |
Due to the similarities in terms between BlackRock non-voting participating preferred stockThere were no anti-dilutive RSUs for 2013. Amounts of anti-dilutive RSUs for 2014 and the Company’s common stock, the Company considers participating preferred stock to be a common stock equivalent for purposes of EPS calculations. As such, the Company has included the outstanding non-voting participating preferred stock in the calculation of average basic and diluted shares outstanding.
For 2012 2011 and 2010, 449, 5,125 and 1,198,856 RSUs, respectively, were excluded from the calculation of diluted EPS because to include them would have an anti-dilutive effect.immaterial. In addition, there were no anti-dilutive stock options for 2012, 20112014, 2013 and 2010.2012.
21.22. Segment Information
The following table illustrates investment advisory, administration fees, securities lending revenue and performance fees,BlackRock Solutions and advisory revenue, distribution fees and other revenue for 2012, 20112014, 2013 and 2010.2012.
| (Dollar amounts in millions) | 2012 | 2011 | 2010 | |||||||||||||||||||||
| (in millions) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Equity | $ | 4,334 | $ | 4,447 | $ | 4,055 | $ | 5,337 | $ | 4,816 | $ | 4,334 | ||||||||||||
Fixed income | 1,900 | 1,659 | 1,531 | 2,171 | 1,996 | 1,900 | ||||||||||||||||||
Multi-asset class | 972 | 914 | 773 | |||||||||||||||||||||
Multi-asset | 1,236 | 1,063 | 972 | |||||||||||||||||||||
Alternatives | 968 | 864 | 961 | 1,103 | 1,104 | 968 | ||||||||||||||||||
Cash management | 361 | 383 | 510 | 292 | 321 | 361 | ||||||||||||||||||
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Total investment advisory, administration fees, securities lending revenue and performance fees | 8,535 | 8,267 | 7,830 | 10,139 | 9,300 | 8,535 | ||||||||||||||||||
BlackRock Solutions and advisory | 518 | 510 | 460 | 635 | 577 | 518 | ||||||||||||||||||
Distribution fees | 71 | 100 | 116 | 70 | 73 | 71 | ||||||||||||||||||
Other revenue | 213 | 204 | 206 | 237 | 230 | 213 | ||||||||||||||||||
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Total revenue | $ | 9,337 | $ | 9,081 | $ | 8,612 | $ | 11,081 | $ | 10,180 | $ | 9,337 | ||||||||||||
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The following table illustrates the Company’s total revenue for 2012, 20112014, 2013 and 20102012 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the customer resides.
| (Dollar amounts in millions) | ||||||||||||
Revenue | 2012 | 2011 | 2010 | |||||||||
Americas | $ | 6,429 | $ | 6,064 | $ | 5,824 | ||||||
Europe | 2,460 | 2,517 | 2,300 | |||||||||
Asia-Pacific | 448 | 500 | 488 | |||||||||
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Total revenue | $ | 9,337 | $ | 9,081 | $ | 8,612 | ||||||
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| (in millions) | ||||||||||||
| Revenue | 2014 | 2013 | 2012 | |||||||||
Americas | $ | 7,286 | $ | 6,829 | $ | 6,429 | ||||||
Europe | 3,246 | 2,832 | 2,460 | |||||||||
Asia-Pacific | 549 | 519 | 448 | |||||||||
Total revenue | $ | 11,081 | $ | 10,180 | $ | 9,337 | ||||||
The following table illustrates the Company’s long-lived assets includingthat consist of goodwill and property and equipment at December 31, 2012, 20112014, 2013 and 20102012 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) | ||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
Long-lived Assets | 2012 | 2011 | 2010 | 2014 | 2013 | 2012 | ||||||||||||||||||
Americas | $ | 13,238 | $ | 13,133 | $ | 13,092 | $ | 13,151 | $ | 13,204 | $ | 13,238 | ||||||||||||
Europe | 166 | 123 | 42 | 194 | 214 | 166 | ||||||||||||||||||
Asia-Pacific | 63 | 73 | 99 | 83 | 87 | 63 | ||||||||||||||||||
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Total long-lived assets | $ | 13,467 | $ | 13,329 | $ | 13,233 | $ | 13,428 | $ | 13,505 | $ | 13,467 | ||||||||||||
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Americas primarily comprisesis comprised of the United States, Canada, Brazil, Chile and Mexico, while Europe primarily comprisesis comprised of the United Kingdom. Asia-Pacific primarily comprisesis comprised of Japan, Australia, Singapore, Hong Kong, Taiwan, Korea, India, Malaysia and Hong Kong.China.
22.23. Selected Quarterly Financial Data (unaudited)
| (Dollar amounts in millions, except per share data) | ||||||||||||||||||||||||||||||||
2012 | 1st Quarter | 2nd Quarter | 3rd Quarter(1) | 4th Quarter(2) | ||||||||||||||||||||||||||||
| (in millions, except shares and per share data) | ||||||||||||||||||||||||||||||||
| 2014 | 1st Quarter | 2nd Quarter(1),(4) | 3rd Quarter(2),(5) | 4th Quarter(3) | ||||||||||||||||||||||||||||
Revenue | $ | 2,249 | $ | 2,229 | $ | 2,320 | $ | 2,539 | $ | 2,670 | $ | 2,778 | $ | 2,849 | $ | 2,784 | ||||||||||||||||
Operating income | $ | 815 | $ | 829 | $ | 875 | $ | 1,005 | $ | 1,051 | $ | 1,122 | $ | 1,157 | $ | 1,144 | ||||||||||||||||
Net income | $ | 575 | $ | 560 | $ | 655 | $ | 650 | $ | 744 | $ | 841 | $ | 873 | $ | 806 | ||||||||||||||||
Net income attributable to BlackRock | $ | 572 | $ | 554 | $ | 642 | $ | 690 | $ | 756 | $ | 808 | $ | 917 | $ | 813 | ||||||||||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: | ||||||||||||||||||||||||||||||||
Basic | $ | 3.19 | $ | 3.13 | $ | 3.72 | $ | 4.02 | $ | 4.47 | $ | 4.79 | $ | 5.46 | $ | 4.86 | ||||||||||||||||
Diluted | $ | 3.14 | $ | 3.08 | $ | 3.65 | $ | 3.93 | $ | 4.40 | $ | 4.72 | $ | 5.37 | $ | 4.77 | ||||||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 179,022,840 | 177,010,239 | 172,359,141 | 171,518,278 | 169,081,421 | 168,712,221 | 167,933,040 | 167,197,844 | ||||||||||||||||||||||||
Diluted | 181,917,864 | 179,590,702 | 175,450,532 | 175,176,037 | 171,933,803 | 171,150,153 | 170,778,766 | 170,367,445 | ||||||||||||||||||||||||
Dividend declared per share | $ | 1.50 | $ | 1.50 | $ | 1.50 | $ | 1.50 | $ | 1.93 | $ | 1.93 | $ | 1.93 | $ | 1.93 | ||||||||||||||||
Common stock price per share: | ||||||||||||||||||||||||||||||||
High | $ | 205.60 | $ | 206.57 | $ | 183.00 | $ | 209.29 | $ | 323.89 | $ | 319.85 | $ | 336.47 | $ | 364.40 | ||||||||||||||||
Low | $ | 179.13 | $ | 163.37 | $ | 164.06 | $ | 177.17 | $ | 286.39 | $ | 293.71 | $ | 301.10 | $ | 303.91 | ||||||||||||||||
Close | $ | 204.90 | $ | 169.82 | $ | 178.30 | $ | 206.71 | $ | 314.48 | $ | 319.60 | $ | 328.32 | $ | 357.56 | ||||||||||||||||
2011 | 1st Quarter | 2nd Quarter(3) | 3rd Quarter | 4th Quarter(4) | ||||||||||||
Revenue | $ | 2,282 | $ | 2,347 | $ | 2,225 | $ | 2,227 | ||||||||
Operating income | $ | 798 | $ | 866 | $ | 777 | $ | 808 | ||||||||
Net income | $ | 564 | $ | 622 | $ | 570 | $ | 583 | ||||||||
Net income attributable to BlackRock | $ | 568 | $ | 619 | $ | 595 | $ | 555 | ||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: | ||||||||||||||||
Basic | $ | 2.92 | $ | 3.26 | $ | 3.28 | $ | 3.10 | ||||||||
Diluted | $ | 2.89 | $ | 3.21 | $ | 3.23 | $ | 3.05 | ||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 191,797,365 | 187,870,001 | 179,034,837 | 178,562,187 | ||||||||||||
Diluted | 194,296,504 | 190,579,963 | 181,825,329 | 181,987,669 | ||||||||||||
Dividend declared per share | $ | 1.375 | $ | 1.375 | $ | 1.375 | $ | 1.375 | ||||||||
Common stock price per share: | ||||||||||||||||
High | $ | 209.77 | $ | 207.42 | $ | 199.10 | $ | 179.77 | ||||||||
Low | $ | 179.52 | $ | 183.51 | $ | 140.22 | $ | 137.00 | ||||||||
Close | $ | 201.01 | $ | 191.81 | $ | 148.01 | $ | 178.24 | ||||||||
| 2013 | ||||||||||||||||
Revenue | $ | 2,449 | $ | 2,482 | $ | 2,472 | $ | 2,777 | ||||||||
Operating income | $ | 909 | $ | 849 | $ | 966 | $ | 1,133 | ||||||||
Net income | $ | 666 | $ | 706 | $ | 729 | $ | 850 | ||||||||
Net income attributable to BlackRock | $ | 632 | $ | 729 | $ | 730 | $ | 841 | ||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: | ||||||||||||||||
Basic | $ | 3.69 | $ | 4.27 | $ | 4.30 | $ | 4.98 | ||||||||
Diluted | $ | 3.62 | $ | 4.19 | $ | 4.21 | $ | 4.86 | ||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 171,301,800 | 170,648,731 | 169,811,633 | 169,010,606 | ||||||||||||
Diluted | 174,561,132 | 173,873,583 | 173,371,508 | 172,999,529 | ||||||||||||
Dividend declared per share | $ | 1.68 | $ | 1.68 | $ | 1.68 | $ | 1.68 | ||||||||
Common stock price per share: | ||||||||||||||||
High | $ | 258.70 | $ | 291.69 | $ | 286.62 | $ | 316.47 | ||||||||
Low | $ | 212.77 | $ | 245.30 | $ | 255.26 | $ | 262.75 | ||||||||
Close | $ | 256.88 | $ | 256.85 | $ | 270.62 | $ | 316.47 | ||||||||
| (1) | The second quarter of 2014 included a $23 million net noncash tax expense, primarily associated with the revaluation of certain deferred income tax liabilities arising from the state and local tax effect of changes in the Company’s organizational structure. In addition, the second quarter of 2014 benefited from an improvement in the geographic mix of earnings and included a $34 million net tax benefit related to several favorable nonrecurring items. |
| (2) | The third quarter |
| In addition, the third quarter of 2014 included a $94 million tax benefit, primarily due to the resolution of certain outstanding tax matters related to the acquisition of BGI. In connection with the acquisition, BlackRock recorded a $50 million indemnification asset for unrecognized tax benefits. Due to the resolution of such tax matters, BlackRock recorded $50 million of general and administration expense to reflect the reduction of the indemnification asset and an offsetting $50 million tax benefit. |
| (3) | The fourth quarter of 2014 benefited from $39 million of nonrecurring tax items. |
| (4) | In the second quarter of 2013 in connection with the PennyMac IPO the Company recorded a noncash, nonoperating pre-tax gain of $39 million related to the carrying value of its equity method investment. In connection with the Charitable Contribution, the Company recorded an expense of $124 million and a noncash, nonoperating pre-tax gain of $80 million related to the contributed investment. For further information, see Note 11,Other Assets. |
| In addition, the second quarter of 2013 included a tax benefit of approximately $57 million recognized in connection with the Charitable Contribution and a tax benefit of approximately $29 million, primarily due to the realization of tax loss carryforwards. |
| (5) | The third quarter of 2013 included a $64 million net |
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23.24. Subsequent Events
Share Repurchase ApprovalsApproval.. In January 2013,2015, the Board of Directors (“the(the “Board”) approved an increase in the availability of shares that may be repurchased under the Company’s existing share repurchase program to allow for the repurchase of up to 10.2a total of 9.4 million additional shares of BlackRock common stock.
Dividend Approval.On January 16, 2013,14, 2015, the Board approved BlackRock’s quarterly dividend of $1.68$2.18 to be paid on March 25, 201324, 2015 to stockholders of record on March 7, 2013.6, 2015.
AcquisitionsOther.. In January 2013, BlackRock announced that it agreed to acquire the Credit Suisse ETF franchise, the European ETF platform with products domiciled in Switzerland, Ireland and Luxembourg, subject to customary closing conditions.
The Taxpayer Relief Act of 2012. The Taxpayer Relief Act of 2012, signed into law on January 2, 2013, brought about significant tax changes, including, but not limited to, the retroactive extension of several temporary tax incentives for businesses. The business tax incentives extended through 2013 include research and development credit and look-through treatment of payments between related controlled foreign corporations. The effects of the change in tax law will be recognized in the three months ended March 31, 2013, the period that the law was enacted. The Company does not expect the impact to be material to the consolidated financial statements.
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.
As used in this exhibit list, “BlackRock” refers to BlackRock, Inc. (formerly named New BlackRock, Inc. and previously, New Boise, Inc.) (Commission File No. 001-33099) and “Old BlackRock” refers to BlackRock Holdco 2, Inc. (formerly named BlackRock, Inc.) (Commission File No. 001-15305), which is the predecessor of BlackRock. The following exhibits are filed as part of this Annual Report on Form 10-K:
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 | |
| 3.1(1) | Amended and Restated Certificate of Incorporation of BlackRock. | |
| 3.2(2) | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of BlackRock, Inc. | |
| 3.3(3) | ||
| Amended and Restated Bylaws of BlackRock. | ||
| 3.4(1) | Certificate of Designations of Series A Convertible Participating Preferred Stock of BlackRock. | |
| 3.5(4) | ||
| Certificate of Designations of Series B Convertible Participating Preferred Stock of BlackRock. | ||
| 3.6(4) | ||
| Certificate of Designations of Series C Convertible Participating Preferred Stock of BlackRock. | ||
| 3.7(5) | ||
| Certificate of Designations of Series D Convertible Participating Preferred Stock of BlackRock. | ||
| 4.1(6) | ||
| Specimen of Common Stock Certificate. | ||
| 4.2(7) | ||
| Indenture, dated September 17, 2007, between BlackRock and The Bank of New York, as trustee, relating to senior debt securities. | ||
| 4.3(8) | ||
| Form of 6.25% Notes due 2017. | ||
| 4.4(9) | ||
| Form of 5.00% Notes due 2019. | ||
| 4.5(10) | ||
| Form of 4.25% Notes due 2021. | ||
| 4.6(11) | ||
| Form of 1.375% Notes due 2015. | ||
| 4.7(11) | ||
| Form of 3.375% Notes due 2022. | ||
| 4.8(12) | Form of 3.500% Notes due 2024. | |
| BlackRock, Inc. Amended and Restated 1999 Stock Award and Incentive Plan. + | ||
| 10.2(14) | Amendment No. 1 to the Amended and Restated BlackRock, Inc. 1999 Stock Award and Incentive Plan. + | |
| Amendment No. 2 to the Amended and Restated BlackRock, Inc. 1999 Stock Award and Incentive Plan. + | ||
| 10.4(15) | Amended and Restated BlackRock, Inc. 1999 Annual Incentive Performance Plan. + | |
| 10.5(16) | ||
| Amendment No. 1 to the BlackRock, Inc. Amended and Restated 1999 Annual Incentive Performance Plan.+ | ||
| 10.6(17) | ||
| 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.+ | ||
| 10.7(18) | ||
| 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.+ | ||
| 10.8(1) | 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.+ | |
| 10.9(1) | 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.+ | |
| 10.10(1) | 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.+ | |
| 10.11(6) | BlackRock, Inc. Voluntary Deferred Compensation Plan, as amended and restated as of January 1, 2005.+ | |
| Registration Rights Agreement, dated as of September 29, 2006, among BlackRock, Merrill Lynch & Co., Inc. and | ||
| 10.13(18) | ||
| 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.+ | ||
| 10.14(19) | ||
| First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement.+ | ||
| 10.15(20) | ||
| Second Amendment, dated as of June 11, 2007, to the Share Surrender Agreement.+ | ||
| 10.16(4) | ||
| Third Amendment, dated as of February 27, 2009, to the Share Surrender Agreement.+ | ||
| 10.17(21) | ||
| Fourth Amendment, dated as of August 7, 2012, to the Share Surrender Agreement.+ | ||
Exhibit No. | Description | |
| Five-Year Revolving Credit Agreement, dated as of March 10, 2011, by and among BlackRock, Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender and L/C agent, Sumitomo Mitsui Banking Corporation, as Japanese Yen lender, a group of lenders, Wells Fargo Securities, LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital, J.P. Morgan Securities LLC and Morgan Stanley Senior Funding, Inc., as joint lead arrangers and joint bookrunners, Citibank, N.A., as syndication agent and Bank of America, N.A., Barclays Bank PLC, JPMorgan Chase Bank, N.A. and Morgan Stanley Senior Funding, Inc., as documentation agents. | ||
| 10.19(23) | ||
| Amendment No. 1, dated as of March 30, 2012, by and among BlackRock, Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, L/C agent and a lender, and the banks and other financial institutions referred to therein. | ||
| 10.20(24) | Amendment No. 2, dated as of March 28, 2013, by and among BlackRock, Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, L/C agent and a lender, and the banks and other financial institutions referred to therein. | |
| Amendment No. 3, dated as of March 28, 2014, by and among BlackRock, Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, L/C agent and a lender, and the banks and other financial institutions referred to therein. | ||
| 10.22(26)† | Second Amended and Restated Global Distribution Agreement, dated as of November 15, 2010, among BlackRock and Merrill Lynch & Co., Inc. | |
| 10.23(3) | ||
| Amended and Restated Implementation and Stockholder Agreement, dated as of February 27, 2009, between The PNC Financial Services Group, Inc. and BlackRock. | ||
| 10.24(27) | ||
| Amendment No. 1, dated as of June 11, 2009, to the Amended and Restated Implementation and Stockholder Agreement between The PNC Financial Services Group, Inc. and BlackRock. | ||
| 10.25(28) | ||
| 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. | ||
| 10.26(29) | ||
| Letter Agreement, dated | ||
| 10.27 | Amended and Restated Commercial Paper Dealer Agreement between BlackRock and Barclays Capital Inc., dated as of December 23, 2014. | |
| 10.28 | Amended and Restated Commercial Paper Dealer Agreement between BlackRock and Citigroup Global Markets Inc., dated as of December 23, 2014. | |
| 10.29 | Amended and Restated Commercial Paper Dealer Agreement between BlackRock and Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated as of January 6, 2015. | |
| 10.30 | Amended and Restated Commercial Paper Dealer Agreement between BlackRock and Credit Suisse Securities (USA) LLC dated as of January 6, 2015. | |
| 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. | |
| (1) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on October 5, 2006. |
| (2) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on May 25, 2012. |
| (3) | Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2012. |
| (4) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on February 27, 2009. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 3, 2009. |
| Incorporated by reference to BlackRock’s Registration Statement on Form S-8 (Registration No. 333-137708) filed on September 29, 2006. |
| Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2007. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on September 17, 2007. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on December 10, 2009. |
Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on May 25, 2011. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on May 31, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on March 18, 2014. |
| (13) | Incorporated by reference to BlackRock’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. |
| Incorporated by reference to BlackRock’s Registration Statement on Form S-8 (Registration No. 333-197764) filed on July 31, 2014. |
| (15) | Incorporated by reference to Old BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2002. |
| Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on May 24, 2006. |
| Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2008. |
| Incorporated by reference to Old BlackRock’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. |
| Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on February 22, 2006. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 15, 2007. |
| Incorporated by reference to BlackRock’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K/A filed on August 24, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on April 4, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on April 3, 2013. |
| (25) | Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on March 28, 2014. |
| (26) | Incorporated by reference to BlackRock’s Current Report on Form 8-K/A filed on August 24, 2012. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 17, 2009. |
| Incorporated by reference to BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2009. |
| Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on |
| + | Denotes compensatory plans or |
| † | Confidential treatment has been granted for certain portions of this exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission. |