UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2009March 31, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number 001-33099
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 (212) 810-5300 (Registrant’s telephone number, including area code) 40 New York, NY 10022(Address of principal executive offices)(Zip Code)(Address of principal executive offices) (Zip Code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer or, a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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
As of July 31, 2009,April 30, 2010, there were 50,931,60864,324,009 shares of the registrant’s common stock outstanding.
Index to Form 10-Q
FINANCIAL INFORMATION
Page | ||||||
Condensed Consolidated Statements of Financial Condition | 1 | |||||
Condensed Consolidated Statements of Income | 3 | |||||
Condensed Consolidated Statements of Comprehensive Income | 4 | |||||
Condensed Consolidated Statements of Changes in Equity | 5 | |||||
Condensed Consolidated Statements of Cash Flows | 7 | |||||
Notes to Condensed Consolidated Financial Statements | 9 | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 47 | |||||
Quantitative and Qualitative Disclosures About Market Risk | 80 | |||||
Controls and Procedures | 82 | |||||
PART II | ||||||
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83 | ||||||
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PART I – I—FINANCIAL INFORMATION
Item 1. | Financial Statements |
Condensed Consolidated Statements of Financial Condition
(Dollar amounts in millions, except per share data)
(unaudited)
June 30, 2009 | December 31, 2008 | March 31, 2010 | December 31, 2009 | |||||||||
Assets | ||||||||||||
Cash and cash equivalents | $ | 2,305 | $ | 2,032 | $ | 2,703 | $ | 4,708 | ||||
Accounts receivable | 1,067 | 901 | 1,868 | 1,718 | ||||||||
Due from related parties | 104 | 309 | 170 | 189 | ||||||||
Investments | 957 | 1,429 | 1,096 | 1,049 | ||||||||
Separate account assets | 3,131 | 2,623 | 116,187 | 119,629 | ||||||||
Assets of consolidated variable interest entities | ||||||||||||
Cash and cash equivalents | 90 | — | ||||||||||
Bank loans and other investments | 1,288 | — | ||||||||||
Collateral held under securities lending agreements | 13,417 | 19,335 | ||||||||||
Deferred mutual fund sales commissions, net | 111 | 135 | 100 | 103 | ||||||||
Property and equipment (net of accumulated depreciation of $295 at June 30, 2009 and $259 at December 31, 2008) | 252 | 260 | ||||||||||
Intangible assets (net of accumulated amortization of $396 at June 30, 2009 and $324 at December 31, 2008) | 6,371 | 6,441 | ||||||||||
Property and equipment (net of accumulated depreciation of $366 and $333 at March 31, 2010 and December 31, 2009, respectively) | 450 | 443 | ||||||||||
Intangible assets (net of accumulated amortization of $506 and $466 at March 31, 2010 and December 31, 2009, respectively) | 17,626 | 17,666 | ||||||||||
Goodwill | 5,723 | 5,533 | 12,641 | 12,638 | ||||||||
Other assets | 388 | 261 | 424 | 588 | ||||||||
Total assets | 20,409 | 19,924 | $ | 168,060 | $ | 178,066 | ||||||
Liabilities | ||||||||||||
Accrued compensation and benefits | $ | 386 | $ | 826 | $ | 616 | $ | 1,482 | ||||
Accounts payable and accrued liabilities | 628 | 545 | 1,037 | 850 | ||||||||
Due to related parties | 119 | 103 | 391 | 490 | ||||||||
Short-term borrowings | 200 | 200 | 880 | 2,234 | ||||||||
Liabilities of consolidated variable interest entities | ||||||||||||
Borrowings | 1,214 | — | ||||||||||
Other liabilities | 4 | — | ||||||||||
Convertible debentures | 247 | 245 | 95 | 243 | ||||||||
Long-term borrowings | 695 | 697 | 3,191 | 3,191 | ||||||||
Separate account liabilities | 3,131 | 2,623 | 116,187 | 119,629 | ||||||||
Collateral liability under securities lending agreements | 13,417 | 19,335 | ||||||||||
Deferred tax liabilities | 1,767 | 1,826 | 5,577 | 5,518 | ||||||||
Other liabilities | 263 | 299 | 504 | 492 | ||||||||
Total liabilities | 7,436 | 7,364 | 143,113 | 153,464 | ||||||||
Commitments and contingencies (Note 12) | ||||||||||||
Temporary equity | ||||||||||||
Redeemable non-controlling interests | 13 | 266 | 79 | 49 | ||||||||
Convertible debentures | 2 | — | ||||||||||
Total temporary equity | 15 | 266 | ||||||||||
- 1 -
PART I – FINANCIAL INFORMATION
BlackRock, Inc.
Condensed Consolidated Statements of Financial Condition (continued)
(Dollar amounts in millions, except per share data)
(unaudited)
June 30, 2009 | December 31, 2008 | March 31, 2010 | December 31, 2009 | |||||||||||||
Permanent Equity | ||||||||||||||||
BlackRock, Inc. stockholders’ equity | ||||||||||||||||
Common stock, $0.01 par value; | 1 | 1 | ||||||||||||||
Shares authorized: 500,000,000 at June 30, 2009 and December 31, 2008; | ||||||||||||||||
Shares issued: 50,826,457 at June 30, 2009 and 118,573,367 at December 31, 2008; | ||||||||||||||||
Shares outstanding: 49,915,191 at June 30, 2009 and 117,291,110 at December 31, 2008 | ||||||||||||||||
Preferred stock (Note 11) | 1 | — | ||||||||||||||
Common stock,$0.01 par value; | 1 | 1 | ||||||||||||||
Shares authorized: 500,000,000 at March 31, 2010 and December 31, 2009; | ||||||||||||||||
Shares issued: 64,242,628 and 62,776,777 at March 31, 2010 and December 31, 2009, respectively; | ||||||||||||||||
Shares outstanding: 63,360,738 and 61,896,236 at March 31, 2010 and December 31, 2009, respectively | ||||||||||||||||
Preferred stock (Note 16) | 1 | 1 | ||||||||||||||
Additional paid-in capital | 10,891 | 10,473 | 22,174 | 22,127 | ||||||||||||
Retained earnings | 2,076 | 1,982 | 2,663 | 2,436 | ||||||||||||
Appropriated retained earnings | 114 | — | ||||||||||||||
Accumulated other comprehensive (loss) | (81 | ) | (186 | ) | (165 | ) | (96 | ) | ||||||||
Escrow shares, common, at cost (911,266 shares held at June 30, 2009 and December 31, 2008) | (143 | ) | (143 | ) | ||||||||||||
Treasury stock, common, at cost (0 and 370,991 shares held at June 30, 2009 and December 31, 2008, respectively) | — | (58 | ) | |||||||||||||
Escrow shares, common, at cost (868,940 shares held at March 31, 2010 and December 31, 2009) | (137 | ) | (137 | ) | ||||||||||||
Treasury stock, common, at cost (12,950 and 11,601 shares held at March 31, 2010 and December 31, 2009, respectively) | (3 | ) | (3 | ) | ||||||||||||
Total BlackRock, Inc. stockholders’ equity | 12,745 | 12,069 | 24,648 | 24,329 | ||||||||||||
Nonredeemable non-controlling interests | 213 | 225 | 174 | 224 | ||||||||||||
Nonredeemable non-controlling interests of consolidated variable interest entities | 46 | — | ||||||||||||||
�� | ||||||||||||||||
Total permanent equity | 12,958 | 12,294 | 24,868 | 24,553 | ||||||||||||
Total liabilities, temporary equity and permanent equity | $ | 20,409 | $ | 19,924 | $ | 168,060 | $ | 178,066 | ||||||||
See accompanying notes to condensed consolidated financial statements.
- 2 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Condensed Consolidated Statements of Income
(Dollar amounts in millions, except per share data)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Investment advisory and administration base fees | ||||||||||||||||||||||||
Investment advisory, administration fees and securities lending revenue | ||||||||||||||||||||||||
Related parties | $ | 589 | $ | 830 | $ | 1,138 | $ | 1,632 | $ | 1,149 | $ | 507 | ||||||||||||
Other third parties | 261 | 331 | 511 | 661 | 604 | 293 | ||||||||||||||||||
Investment advisory, administration fees and securities lending revenue | 1,753 | 800 | ||||||||||||||||||||||
Investment advisory performance fees | 17 | 57 | 28 | 99 | 50 | 11 | ||||||||||||||||||
Investment advisory and administration base and performance fees | 867 | 1,218 | 1,677 | 2,392 | ||||||||||||||||||||
BlackRock Solutions and advisory | 116 | 100 | 256 | 160 | 113 | 135 | ||||||||||||||||||
Distribution fees | 23 | 34 | 48 | 69 | 28 | 25 | ||||||||||||||||||
Other revenue | 23 | 35 | 35 | 66 | 51 | 16 | ||||||||||||||||||
Total revenue | 1,029 | 1,387 | 2,016 | 2,687 | 1,995 | 987 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Employee compensation and benefits | 390 | 552 | 741 | 1,021 | 773 | 351 | ||||||||||||||||||
Portfolio administration and servicing costs | ||||||||||||||||||||||||
Distribution and servicing costs | ||||||||||||||||||||||||
Related parties | 96 | 127 | 199 | 257 | 64 | 103 | ||||||||||||||||||
Other third parties | 29 | 25 | 53 | 49 | 36 | 24 | ||||||||||||||||||
Amortization of deferred mutual fund sales commissions | 26 | 33 | 53 | 63 | 26 | 27 | ||||||||||||||||||
Direct fund expenses | 113 | 13 | ||||||||||||||||||||||
General and administration | 191 | 208 | 344 | 422 | 289 | 140 | ||||||||||||||||||
Restructuring charges | — | — | 22 | — | — | 22 | ||||||||||||||||||
Amortization of intangible assets | 36 | 37 | 72 | 74 | 40 | 36 | ||||||||||||||||||
Total expenses | 768 | 982 | 1,484 | 1,886 | 1,341 | 716 | ||||||||||||||||||
Operating income | 261 | 405 | 532 | 801 | 654 | 271 | ||||||||||||||||||
Non-operating income (expense) | ||||||||||||||||||||||||
Net gain (loss) on investments | 88 | — | (84 | ) | (20 | ) | 38 | (172 | ) | |||||||||||||||
Interest and dividend income | 4 | 14 | 12 | 32 | 4 | 8 | ||||||||||||||||||
Interest expense | (15 | ) | (18 | ) | (30 | ) | (36 | ) | (40 | ) | (15 | ) | ||||||||||||
Total non-operating income (expense) | 77 | (4 | ) | (102 | ) | (24 | ) | 2 | (179 | ) | ||||||||||||||
Income before income taxes | 338 | 401 | 430 | 777 | 656 | 92 | ||||||||||||||||||
Income tax expense | 94 | 147 | 124 | 277 | 228 | 30 | ||||||||||||||||||
Net income | 244 | 254 | 306 | 500 | 428 | 62 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
Net income (loss) attributable to redeemable non-controlling interests | 1 | — | 1 | (3 | ) | |||||||||||||||||||
Net income (loss) attributable to nonredeemable non-controlling interests | 25 | (20 | ) | 3 | (12 | ) | 5 | (22 | ) | |||||||||||||||
Net income attributable to BlackRock, Inc. | $ | 218 | $ | 274 | $ | 302 | $ | 515 | $ | 423 | $ | 84 | ||||||||||||
Earnings per share attributable to BlackRock, Inc. common stockholders: | ||||||||||||||||||||||||
Basic | $ | 1.62 | $ | 2.04 | $ | 2.25 | $ | 3.85 | $ | 2.20 | $ | 0.63 | ||||||||||||
Diluted | $ | 1.59 | $ | 2.00 | $ | 2.22 | $ | 3.78 | $ | 2.17 | $ | 0.62 | ||||||||||||
Cash dividends declared and paid per share | $ | 0.78 | $ | 0.78 | $ | 1.56 | $ | 1.56 | $ | 1.00 | $ | 0.78 | ||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||
Basic | 130,928,926 | 129,569,325 | 130,574,535 | 129,242,591 | 189,676,023 | 130,216,218 | ||||||||||||||||||
Diluted | 133,364,611 | 132,032,538 | 132,668,695 | 131,812,500 | 192,152,251 | 131,797,189 |
See accompanying notes to condensed consolidated financial statements.
- 3 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Condensed Consolidated Statements of Comprehensive Income
(Dollar amounts in millions)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | Three Months Ended March 31, | ||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||
Net income | $ | 244 | $ | 254 | $ | 306 | $ | 500 | $ | 428 | $ | 62 | ||||||||||
Other comprehensive income: | ||||||||||||||||||||||
Change in net unrealized gain (loss) from available-for-sale investments, net of tax(1) | 8 | 1 | 15 | (4 | ) | |||||||||||||||||
Change in net unrealized gains (losses) from available-for-sale investments, net of tax | ||||||||||||||||||||||
Unrealized holding gains (losses), net of tax | 3 | (1 | ) | |||||||||||||||||||
Less: reclassification adjustment included in net income | 1 | (8 | ) | |||||||||||||||||||
Net change from available-for-sale investments, net of tax(1) | 2 | 7 | ||||||||||||||||||||
Minimum pension liability adjustment | — | — | 1 | (1 | ) | (1 | ) | 1 | ||||||||||||||
Foreign currency translation adjustments | 103 | (1 | ) | 89 | 25 | (70 | ) | (14 | ) | |||||||||||||
Comprehensive income attributable to BlackRock, Inc. | $ | 355 | $ | 254 | $ | 411 | $ | 520 | $ | 359 | $ | 56 | ||||||||||
(1) | The tax benefit (expense) on |
See accompanying notes to condensed consolidated financial statements.
- 4 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Condensed Consolidated StatementStatements of Changes in Equity
(Dollar amounts in millions)
(unaudited)
Additional Paid-in Capital1 | 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 | — | 423 | — | — | — | — | 423 | 4 | 1 | 428 | — | |||||||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | (196 | ) | — | — | — | — | (196 | ) | — | — | (196 | ) | — | ||||||||||||||||||||||||||||
Stock-based compensation | 108 | — | — | — | — | — | 108 | — | — | 108 | — | |||||||||||||||||||||||||||||||
PNC LTIP capital contribution | 5 | — | — | — | — | — | 5 | — | — | 5 | — | |||||||||||||||||||||||||||||||
Exchange of common stock for preferred shares series B | 128 | — | — | — | — | (128 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | (171 | ) | — | — | — | — | 64 | (107 | ) | — | — | (107 | ) | — | ||||||||||||||||||||||||||||
Convertible debt conversions | (64 | ) | — | — | — | — | 64 | — | — | — | — | — | ||||||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | 41 | — | — | — | — | — | 41 | — | — | 41 | — | |||||||||||||||||||||||||||||||
Minimum pension liability adjustment | — | — | — | (1 | ) | — | — | (1 | ) | — | — | (1 | ) | — | ||||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions)—non-controlling interest holders | — | — | — | — | — | — | — | (6 | ) | (4 | ) | (10 | ) | 19 | ||||||||||||||||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | — | — | — | — | — | — | — | — | — | — | 11 | |||||||||||||||||||||||||||||||
Other change in non-controlling interests | — | — | — | — | — | — | — | 1 | — | 1 | — | |||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | (70 | ) | — | — | (70 | ) | — | — | (70 | ) | — | ||||||||||||||||||||||||||||
Change in net unrealized gain (loss) from available-for-sale investments, net of tax | — | — | — | 2 | — | — | 2 | — | — | 2 | — | |||||||||||||||||||||||||||||||
March 31, 2010 | $ | 22,176 | $ | 2,663 | $ | 114 | $ | (165 | ) | $ | (137 | ) | $ | (3 | ) | $ | 24,648 | $ | 174 | $ | 46 | $ | 24,868 | $ | 79 | |||||||||||||||||
Common And Preferred Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (loss) | Common Shares Held In Escrow | Treasury Stock Common | Total Stockholders’ Equity | Nonredeemable Non-controlling Interests | Total Permanent Equity | Redeemable Non-controlling Interests (Temporary Equity) | ||||||||||||||||||||||||||||||
December 31, 2008, as reported | $ | 1 | $ | 10,461 | $ | 1,991 | $ | (186 | ) | $ | (143 | ) | $ | (58 | ) | $ | 12,066 | $ | — | $ | 12,066 | $ | — | ||||||||||||||||
January 1, 2009 initial recognition of APB 14-1, SFAS No. 160 and EITF Topic No. D-98 | — | 12 | (9 | ) | — | — | — | 3 | 225 | 228 | 266 | ||||||||||||||||||||||||||||
December 31, 2008, as adjusted | 1 | 10,473 | 1,982 | (186 | ) | (143 | ) | (58 | ) | 12,069 | 225 | 12,294 | 266 | ||||||||||||||||||||||||||
Reclass to temporary equity – convertible debt | — | (2 | ) | — | — | — | — | (2 | ) | — | (2 | ) | 2 | ||||||||||||||||||||||||||
Net income | — | — | 302 | — | — | — | 302 | 3 | 305 | 1 | |||||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | — | (208 | ) | — | — | — | (208 | ) | — | (208 | ) | — | ||||||||||||||||||||||||||
Stock-based compensation | — | 159 | — | — | — | — | 159 | — | 159 | — | |||||||||||||||||||||||||||||
Issuance of common shares to institutional investor | 1 | 299 | — | — | — | — | 300 | — | 300 | — | |||||||||||||||||||||||||||||
Issuance of common shares for contingent consideration | — | 43 | — | — | — | — | 43 | — | 43 | — | |||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | — | (83 | ) | — | — | — | 58 | (25 | ) | — | (25 | ) | — | ||||||||||||||||||||||||||
PNC capital contribution | — | 6 | — | — | — | — | 6 | — | 6 | — | |||||||||||||||||||||||||||||
Net tax shortfall from stock-based awards | — | (4 | ) | — | — | — | — | (4 | ) | — | (4 | ) | — | ||||||||||||||||||||||||||
Minimum pension liability adjustment | — | — | — | 1 | — | — | 1 | — | 1 | — | |||||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions) – non-controlling interest holders | — | — | — | — | — | — | — | (4 | ) | (4 | ) | (254 | ) | ||||||||||||||||||||||||||
Deconsolidation of sponsored investment funds | — | — | — | — | — | — | — | (9 | ) | (9 | ) | — | |||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 89 | — | — | 89 | — | 89 | — | |||||||||||||||||||||||||||||
Other changes in non-controlling interests | — | — | — | — | — | — | — | (2 | ) | (2 | ) | — | |||||||||||||||||||||||||||
Change in net unrealized gain (loss) from available-for sale investments, net of tax | — | — | — | 15 | — | — | 15 | — | 15 | — | |||||||||||||||||||||||||||||
June 30, 2009 | $ | 2 | $ | 10,891 | $ | 2,076 | $ | (81 | ) | $ | (143 | ) | $ | — | $ | 12,745 | $ | 213 | $ | 12,958 | $ | 15 | |||||||||||||||||
1 | Includes $1 of common stock and $1 of preferred stock at March 31, 2010 and December 31, 2009. |
See accompanying notes to condensed consolidated financial statementsstatements.
- 5 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Condensed Consolidated StatementStatements of Changes in Equity
(Dollar amounts in millions)
(unaudited)
Additional Paid-in Capital1 | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Shares held in Escrow | Treasury Stock Common | Total Stockholders’ Equity | Nonredeemable Non- controlling Interests | Total Permanent Equity | Redeemable Non-controlling Interests/ Temporary Equity | ||||||||||||||||||||||||||||
December 31, 2008 | $ | 10,474 | $ | 1,982 | $ | (186 | ) | $ | (143 | ) | $ | (58 | ) | $ | 12,069 | $ | 225 | $ | 12,294 | $ | 266 | |||||||||||||||
Reclass to temporary equity – convertible debt | (3 | ) | — | — | — | — | (3 | ) | — | (3 | ) | — | ||||||||||||||||||||||||
Net income | — | 84 | — | — | — | 84 | (22 | ) | 62 | — | ||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | (105 | ) | — | — | — | (105 | ) | — | (105 | ) | — | ||||||||||||||||||||||||
Stock-based compensation | 82 | — | — | — | — | 82 | — | 82 | — | |||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | (70 | ) | — | — | — | 33 | (37 | ) | — | (37 | ) | — | ||||||||||||||||||||||||
PNC LTIP capital contribution | 6 | — | — | — | — | 6 | — | 6 | — | |||||||||||||||||||||||||||
Net tax benefit (shortfall) from stock-based compensation | (17 | ) | — | — | — | — | (17 | ) | — | (17 | ) | — | ||||||||||||||||||||||||
Minimum pension liability adjustment | — | — | 1 | — | — | 1 | — | 1 | — | |||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions)—non-controlling interest holders | — | — | — | — | — | — | (2 | ) | (2 | ) | (132 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | (14 | ) | — | — | (14 | ) | — | (14 | ) | — | ||||||||||||||||||||||||
Change in net unrealized gain (loss) from available-for-sale investments, net of tax | — | — | 7 | — | — | 7 | — | 7 | — | |||||||||||||||||||||||||||
March 31, 2009 | $ | 10,472 | $ | 1,961 | $ | (192 | ) | $ | (143 | ) | $ | (25 | ) | $ | 12,073 | $ | 201 | $ | 12,274 | $ | 134 | |||||||||||||||
BlackRock, Inc. Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||
Common And Preferred Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Common Shares Held In Escrow | Treasury Stock Common | Total Stockholders’ Equity | Nonredeemable Non-controlling Interests | Total Permanent Equity | Redeemable Non-controlling Interests (Temporary Equity) | ||||||||||||||||||||||||||||||
December 31, 2007, as reported | $ | 1 | $ | 10,274 | $ | 1,622 | $ | 71 | $ | (188 | ) | $ | (184 | ) | $ | 11,596 | $ | — | $ | 11,596 | $ | — | |||||||||||||||||
Retrospective adoption of APB 14-1, SFAS No. 160 and EITF Topic No. D-98 | — | 12 | (6 | ) | — | — | — | 6 | 549 | 555 | 29 | ||||||||||||||||||||||||||||
December 31, 2007, as adjusted | 1 | 10,286 | 1,616 | 71 | (188 | ) | (184 | ) | 11,602 | 549 | 12,151 | 29 | |||||||||||||||||||||||||||
Net income | — | — | 515 | — | — | — | 515 | (12 | ) | 503 | (3 | ) | |||||||||||||||||||||||||||
Dividends paid, net of dividend expense for unvested RSUs | — | — | (208 | ) | — | — | — | (208 | ) | — | (208 | ) | — | ||||||||||||||||||||||||||
Release of common stock from escrow agent in connection with Quellos Transaction | — | — | — | — | 45 | — | 45 | — | 45 | — | |||||||||||||||||||||||||||||
Stock-based compensation | — | 132 | — | — | — | 1 | 133 | — | 133 | — | |||||||||||||||||||||||||||||
Net issuance of common shares related to employee stock transactions | — | (114 | ) | — | — | — | 91 | (23 | ) | — | (23 | ) | — | ||||||||||||||||||||||||||
PNC capital contribution | — | 4 | — | — | — | — | 4 | — | 4 | — | |||||||||||||||||||||||||||||
Net tax benefit from stock-based awards | — | 47 | — | — | — | — | 47 | — | 47 | — | |||||||||||||||||||||||||||||
Minimum pension liability adjustment | — | — | — | (1 | ) | — | — | (1 | ) | — | (1 | ) | — | ||||||||||||||||||||||||||
Subscriptions/(redemptions/distributions) – non-controlling interest holders | — | — | — | — | — | — | — | 5 | 5 | (15 | ) | ||||||||||||||||||||||||||||
Net deconsolidations of sponsored investment funds | — | — | — | — | — | — | — | — | — | (6 | ) | ||||||||||||||||||||||||||||
Other changes in non-controlling interests | — | — | — | — | — | — | — | (3 | ) | (3 | ) | — | |||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 25 | — | — | 25 | — | 25 | — | |||||||||||||||||||||||||||||
Change in net unrealized gain (loss) from available-for sale investments, net of tax | — | — | — | (4 | ) | — | — | (4 | ) | — | (4 | ) | — | ||||||||||||||||||||||||||
June 30, 2008 | $ | 1 | $ | 10,355 | $ | 1,923 | $ | 91 | $ | (143 | ) | $ | (92 | ) | $ | 12,135 | $ | 539 | $ | 12,674 | $ | 5 | |||||||||||||||||
1 | Includes $1 of preferred stock at March 31, 2009 and $1 of common stock at December 31, 2008. |
See accompanying notes to condensed consolidated financial statementsstatements.
- 6 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Condensed Consolidated Statements of Cash Flows
(Dollar amounts in millions)
(unaudited)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2009 | 2008 | 2010 | 2009 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 306 | $ | 500 | $ | 428 | $ | 62 | ||||||||
Adjustments to reconcile net income to cash from operating activities: | ||||||||||||||||
Depreciation and other amortization | 115 | 117 | ||||||||||||||
Depreciation and amortization | 78 | 57 | ||||||||||||||
Amortization of deferred mutual fund sales commissions | 53 | 63 | 26 | 27 | ||||||||||||
Stock-based compensation | 159 | 133 | 108 | 82 | ||||||||||||
Deferred income tax expense (benefit) | (59 | ) | (67 | ) | 55 | (44 | ) | |||||||||
Net gains (losses) on non-trading investments | 9 | 19 | ||||||||||||||
Purchases of other investments within consolidated funds | (17 | ) | (86 | ) | ||||||||||||
Proceeds from sales and maturities of other investments within consolidated funds | 245 | 83 | ||||||||||||||
Net (gains) losses on non-trading investments | (12 | ) | 48 | |||||||||||||
Purchases of investments within consolidated funds | (8 | ) | (21 | ) | ||||||||||||
Proceeds from sale and maturities of investments within consolidated funds | 14 | 152 | ||||||||||||||
Assets and liabilities of consolidated VIEs: | ||||||||||||||||
Change in cash and cash equivalents | (42 | ) | — | |||||||||||||
(Purchases)/sales of bank loans and other investments | 36 | — | ||||||||||||||
(Earnings) losses from equity method investees | 74 | (10 | ) | (35 | ) | 114 | ||||||||||
Distributions of earnings from equity method investees | 6 | 14 | 4 | 4 | ||||||||||||
Other adjustments | 2 | (1 | ) | (1 | ) | 2 | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (164 | ) | (324 | ) | (157 | ) | (51 | ) | ||||||||
Due from related parties | 170 | (30 | ) | 11 | 163 | |||||||||||
Deferred mutual fund sales commissions | (29 | ) | (57 | ) | (23 | ) | (12 | ) | ||||||||
Investments, trading | (97 | ) | 222 | (59 | ) | (74 | ) | |||||||||
Other assets | (137 | ) | 60 | 149 | (13 | ) | ||||||||||
Accrued compensation and benefits | (434 | ) | (415 | ) | (863 | ) | (599 | ) | ||||||||
Accounts payable and accrued liabilities | 69 | 256 | 203 | (10 | ) | |||||||||||
Due to related parties | 16 | (20 | ) | (99 | ) | 7 | ||||||||||
Other liabilities | (13 | ) | 24 | 23 | (20 | ) | ||||||||||
Cash flows from operating activities | 274 | 481 | (164 | ) | (126 | ) | ||||||||||
Cash flows from investing activities | ||||||||||||||||
Purchases of investments | (14 | ) | (285 | ) | (28 | ) | (9 | ) | ||||||||
Proceeds from sales and maturities of investments | 29 | 126 | ||||||||||||||
Purchases of assets held for sale | (1 | ) | (59 | ) | (1 | ) | (1 | ) | ||||||||
Proceeds from sales and maturities of investments | 198 | 52 | ||||||||||||||
Return of capital from equity method investees | 20 | 8 | ||||||||||||||
Distributions of capital from equity method investees | 20 | 4 | ||||||||||||||
Net consolidations (deconsolidations) of sponsored investment funds | 6 | — | 2 | — | ||||||||||||
Contingent/other acquisition payments | (158 | ) | — | |||||||||||||
Acquisitions, net of cash acquired | (8 | ) | — | |||||||||||||
Purchases of property and equipment | (33 | ) | (40 | ) | (44 | ) | (16 | ) | ||||||||
Proceeds from other investing activities | — | 5 | ||||||||||||||
Cash flows from investing activities | 18 | (319 | ) | (30 | ) | 104 | ||||||||||
- 7 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(Dollar amounts in millions)
(unaudited)
Six Months Ended June 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from financing activities | ||||||||
Repayment of long-term borrowings | (1 | ) | (1 | ) | ||||
Repayment of short-term borrowings | — | (100 | ) | |||||
Proceeds from short-term borrowings | — | 100 | ||||||
Cash dividends paid | (208 | ) | (208 | ) | ||||
Proceeds from stock options exercised | 11 | 18 | ||||||
Proceeds from issuance of common stock | 304 | 3 | ||||||
Repurchases of common stock | (40 | ) | (43 | ) | ||||
Net (redemptions/distributions paid)/ subscriptions received from non-controlling interest holders | (257 | ) | (10 | ) | ||||
Excess tax benefit from stock-based compensation | 16 | 47 | ||||||
Net borrowings/ (repayment of borrowings) by consolidated sponsored investment funds | 70 | (202 | ) | |||||
Cash flows from financing activities | (105 | ) | (396 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 86 | 6 | ||||||
Net increase (decrease) in cash and cash equivalents | 273 | (228 | ) | |||||
Cash and cash equivalents, beginning of period | 2,032 | 1,656 | ||||||
Cash and cash equivalents, end of period | $ | 2,305 | $ | 1,428 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 26 | $ | 33 | ||||
Cash paid for income taxes | $ | 340 | $ | 295 | ||||
Supplemental non-cash investing and financing activities: | ||||||||
Issuance of common stock | $ | 77 | $ | 109 | ||||
Contingent common stock payment related to Quellos transaction | $ | 43 | $ | — |
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from financing activities | ||||||||
Repayments of short-term borrowings | (1,354 | ) | — | |||||
Repayments of convertible debt | (148 | ) | — | |||||
Cash dividends paid | (196 | ) | (105 | ) | ||||
Proceeds from of stock options exercised | 6 | 1 | ||||||
Proceeds from issuance of common stock | 1 | 1 | ||||||
Repurchases of common stock | (114 | ) | (39 | ) | ||||
Net (redemptions/distributions paid)/subscriptions received from non-controlling interests holders | 9 | (134 | ) | |||||
Excess tax benefit from stock-based compensation | 41 | 3 | ||||||
Net borrowings/(repayments of borrowings) by consolidated sponsored investment funds | — | 72 | ||||||
Cash flows from financing activities | (1,755 | ) | (201 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (56 | ) | (16 | ) | ||||
Net decrease in cash and cash equivalents | (2,005 | ) | (239 | ) | ||||
Cash and cash equivalents, beginning of period | 4,708 | 2,032 | ||||||
Cash and cash equivalents, end of period | $ | 2,703 | $ | 1,793 | ||||
Supplemental disclosure of cash flow information is as follows: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 26 | $ | 26 | ||||
Interest on borrowings of consolidated VIEs | $ | 12 | $ | — | ||||
Income taxes | $ | 67 | $ | 133 | ||||
Supplemental schedule of non-cash financing transactions is as follows: | ||||||||
Issuance of common stock | $ | 230 | $ | 62 | ||||
Increase in borrowings due to consolidation of VIEs | $ | 1,157 | $ | — |
See accompanying notes to condensed consolidated financial statements.
- 8 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in millions, except per share data)(unaudited)
(unaudited)1. Business Overview
BlackRock, Inc. and(together, with its subsidiaries, (“BlackRock”unless the context otherwise indicates, “BlackRock” or the “Company”) provideprovides diversified investment management and securities lending services to institutional clients and to individual investors through various investment vehicles. Investment management services primarily consist of the management of fixed income, cash management and equity client accounts, the management of a number of open-end and closed-end mutual fund families, exchange traded funds and other non-U.S. equivalent retail products serving the institutional and retail markets, and the management of other investment funds, including collective trusts and alternative funds, developed to serve various customer needs. In addition, BlackRock provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.
In September 2006, Merrill Lynch & Co., Inc. (“Merrill Lynch”) contributed the entities and net assets that constituted its investment management business (the “MLIM Business”) to BlackRock via a capital contribution, referred to as the “MLIM Transaction”, and in October 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”), referred to as the “Quellos Transaction”.
On JanuaryDecember 1, 2009, BankBlackRock completed its acquisition of America Corporation (“Bank of America”) acquired Merrill Lynch, which continues as a subsidiary of Bank of America. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and The PNC Financial Services Group, Inc. (“PNC”) pursuant to which on February 27, 2009 each exchanged a portion of the BlackRock common stock it held for an equal number of shares of non-voting preferred stock. See Note 11, Capital Stock, for more details on these transactions.
In June 2009, BlackRock announced that it entered into a definitive purchase agreement (the “Barclays Purchase Agreement”) to acquire Barclays Global Investors (“BGI”) from Barclays Bank PLC (“Barclays”) (the “BGI Transaction”). In exchange for BGI, BlackRock paid approximately $6.65 billion in cash and issued capital stock valued at $8.53 billion comprised of 3,031,516 shares of BlackRock common stock and 34,535,255 shares of BlackRock Series B and D Participating Preferred Stock. See Note 16, Pending Transaction.3, Mergers and Acquisitions, for more details on this transaction.
On March 31, 2010, equity ownership of BlackRock was as follows:
Voting Common Stock | Capital Stock(1) | |||||
Bank of America/Merrill Lynch & Co., Inc. | 3.7 | % | 33.8 | % | ||
The PNC Financial Services Group, Inc. (“PNC”) | 34.4 | % | 24.2 | % | ||
Barclays | 4.7 | % | 19.6 | % | ||
Other | 57.2 | % | 22.4 | % | ||
100.0 | % | 100.0 | % | |||
(1) | Includes outstanding common and preferred stock only. |
- 9 -
PART I—FINANCIAL INFORMATION (continued)
Item 1. |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
2. Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Non-controlling interests on the condensed consolidated statements of financial condition include the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Significant accounts and transactions between consolidated entities have been eliminated.
- 9 -
PART I – FINANCIAL INFORMATION (continued)
Basis of Presentation (continued)
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008,2009, which was filed with the Securities and Exchange Commission (“SEC”) on March 2, 2009.10, 2010.
The interim financial information at June 30, 2009March 31, 2010 and for the three and six months ended June 30,March 31, 2010 and 2009 and 2008 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Certain prior year amounts have been revised or reclassified to conform to
Business Combinations
In accordance with the 2009 presentation including those required by the retrospective adoptionrequirements of Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”) (Accounting Standards Codification (“ASC”) 470-20,805,Debt with ConversionBusiness Combinations (“ASC 805”), certain line items on the condensed consolidated statement of financial condition, including goodwill, intangibles, and Other Options), FSP Emerging Issues Task Force (“EITF”) 03-6-1,Determining Whether Instruments Granteddeferred tax liabilities, have been retrospectively adjusted as of December 31, 2009 to reflect new information obtained about facts that existed as of December 1, 2009, the BGI acquisition date. See Note 3, Mergers and Acquisitions, for the changes in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) (ASC 260-10,Earnings per Share) and Statement of Financial Accounting Standards (“SFAS”) No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (ASC 810-10,Consolidation).the BGI purchase price allocation.
Fair Value Measurements
BlackRock adopted SFAS No. 157,Fair Value Measurements(“SFAS No. 157”) (ASCASC 820-10,Fair Value Measurements and Disclosures (“ASC 820-10”) as of January 1, 2008, which, requires among other things, enhanced disclosures about assets and liabilities that are measured and reported at fair value. SFAS No. 157 establishesThe provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide enhanced disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.
- 10 -
PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
2. Significant Accounting Policies (continued)
Basis of Presentation(continued)
Fair Value Measurements (continued)
Financial instruments 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 include listed mutual funds, equities and certain debt securities.
- 10 -
PART I – FINANCIAL INFORMATION (continued)
Basis of Presentation (continued)
Fair Value Measurements (continued)
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; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. Assets whichthat generally are included in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, held by consolidated sponsored cash management funds, securities held within consolidated hedge funds, certain limited partnership interests in hedge funds in which the valuations for substantially all of the investments within the fund are based upon Level 1 or Level 2 inputs, as well as restricted public securities valued at a discount.discount, as well as over the counter derivatives, including interest and inflation rate swaps and foreign exchange currency contracts that have inputs to the valuations that can be generally corroborated by observable market data.
Level 3 Inputs – Unobservable inputs for the valuation of the asset or liability.liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Assets included in this category generally include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds and certain held for sale real estate disposal assets. Liabilities included in this category include borrowings of consolidated collateralized loan obligations.
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.funds, which may be adjusted by using the returns of certain market indices. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, including independent appraisals, from third party sources, however, in some instances current valuation information, for illiquid securities or securities in markets that are not active, may not be available from any third party source or fund management may conclude that the valuations that are available from third party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used to value these investments.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Collateral Assets Held and Liabilities Under Securities Lending Agreements
The Company facilitates securities lending arrangements whereby securities held by separate account assets are lent to third parties. In exchange, the Company receives collateral, principally cash and securities, ranging from 102% to 108% of the value of the securities lent in order to reduce credit risk. Under the Company’s securities lending arrangements, the Company can resell or re-pledge the collateral and the borrower can re-sell or re-pledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles and obligates the Company to repurchase or redeem the transferred securities before their maturity. These transactions are not reported as sales under ASC 860,Transfers and Servicing, because of the obligation of the Company to repurchase the securities.
- 11 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
2. Significant Accounting Policies (continued)
Basis of Presentation(continued)
Collateral Assets Held and Liabilities Under Securities Lending Agreements (continued)
As a result, the Company records the collateral received under these arrangements (both cash and non-cash), as its own asset in addition to a corresponding liability for the obligation to return the collateral. As with the securities lending collateral discussed above, the fair value of the asset and related obligation to return the collateral are recorded by the Company. At March 31, 2010, the fair value of loaned securities held by separate account assets was approximately $12 billion and the collateral held under these securities lending agreements was approximately $13.4 billion. The fair value of the collateral liability approximates the fair value of the collateral assets and is recorded in collateral liability under securities lending agreements on the Company’s condensed consolidated statements of financial condition.
Classification and Measurement of Redeemable Securities
EITF Topic No. D-98,Classification and MeasurementThe provisions of Redeemable Securities (ASCASC 480-10,Distinguishing Liabilities from Equity,), requires require temporary equity classification for instruments that are currently redeemable or convertible for cash or other assets at the option of the holder. At June 30, 2009March 31, 2010 and December 31, 20082009, the Company determined that $13$79 million and $266,$49 million, respectively, of non-controlling interests related to certain consolidated sponsored investment funds were redeemable for cash or other assets at the option of the holder, resulting in temporary equity classification on the condensed consolidated statements of financial condition. The amount of temporary equity related to convertible instruments is measured as the excess of the amount of cash required to be exchanged in a hypothetical settlement, as of the balance sheet date, over the current carrying amount of the liability component. During the six months ended June 30, 2009, the 2.625% convertible debentures became convertible at the option of the holders into cash and shares of the Company’s common stock. The amount of cash required to be paid out in a hypothetical settlement exceeded the current carrying amount of the liability component by $2, which was classified as temporary equity–convertible debentures on the condensed consolidated statement of financial condition.
Assets and Liabilities to be Disposed of by Sale
In the course of the business of establishing real estate and private equity sponsoredother alternative investment funds, the Company may purchase land, properties and third party private equity fundsother assets while incurring liabilities directly associated with the assets, together a disposal group, with the intention to sell the disposal group to sponsored investment funds upon their launch. In accordance with the provisions of SFAS No. 144,Accounting for the Impairment or Disposal of Long-lived Assets (ASCASC 360-10,Property, Plant, and Equipment,) the Company treats these assets and liabilities as a “disposal group”, measured at the lower of the carrying amount or fair value. Losses are recognized for any initial or subsequent write-down to fair value and gains are recognized for any subsequent increase in fair value, but not in excess of the cumulative loss previously recognized.
At June 30, 2009,March 31, 2010, the Company held disposal group assets of $50$24 million and related liabilities of $49$22 million in other assets and other liabilities, respectively, on its condensed consolidated statement of financial condition. Disposal group liabilities include approximately $47$20 million of borrowings directly associated with the disposal group assets. During the three and six months ended June 30,March 31, 2009, the Company recorded a net loss of $0 and $1, respectively($1) million within non-operating income (expense) on its condensed consolidated statement of income related to the disposal group.
- 12 -
PART I – FINANCIAL INFORMATION (continued)
Accounting Policies Adopted in the Six Months Ended June 30, 2009
Non-Controlling Interests
In December 2007, the FASB issued SFAS No. 160. SFAS No. 160 establishes accountinggroup and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity, separate from the parent’s equity, in the consolidated financial statements. In addition, consolidated net income should be adjusted to include the net income attributed to the non-controlling interests. The Company adopted SFAS No. 160 on January 1, 2009. SFAS No. 160 required retrospective adoption of the presentation and disclosure requirements for existing non-controlling interests. All other requirements of SFAS No. 160 are applied prospectively. The adoption of SFAS No. 160 did not impact BlackRock’s stockholders’ equity on the condensed consolidated statements of financial condition.record any adjustments in 2010.
Convertible Debt Instruments
In May 2008,accordance with the FASB issued FSP APB 14-1. FSP APB 14-1 specifies that forprovisions within ASC 470-20,Debt (“ASC 470-20”), issuers of convertible debt instruments that may be settled in cash upon conversion, issuers of such instruments should separately account for the liability and equity components in the statement of financial condition. The excess of the initial proceeds of the convertible debt instrument over the amount allocated to the liability component creates a debt discount, which should be amortized as interest expense over the expected life of the liability. FSP APB 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and is to be applied retrospectively. At DecemberMarch 31, 2008,2010, the Company had $249$95 million principal amount of convertible debentures outstanding, which were issued in February 2005, bear interest at a rate of 2.625%, and are due in 2035. The Company retrospectively adopted FSP APB 14-1the requirements of ASC 470-20 on January 1, 2009 resulting in a total cumulative impact of a $9 million reduction to retained earnings at December 31, 2008. The effective borrowing rate for nonconvertible debt at the time of issuance of the 2.625% convertible debentures was estimated to be 4.3%, which resulted in $18 million of the $250 million aggregate principal amount of the debentures issued, or $12 million after tax, being attributable to equity. At DecemberAs of March 31, 2008 and June 30, 2009, $4 and $2, respectively, of2010, the initial $18 million debt discount remained unamortized, and is expected to be amortized to the first put date of the convertible debentures in February 2010. The Company recognized approximately $1 of additional interest expense in each of the three months ended June 30, 2009 and 2008 and $2 of additional interest expense in each of the six months ended June 30, 2009 and 2008.
See below for retrospective EPS impact of adopting FSP APB 14-1 for the three and six months ended June 30, 2008.has been fully amortized.
- 1312 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
2. Significant Accounting Policies (continued)
Accounting Policies Adopted in the SixThree Months Ended June 30, 2009 (continued)
Earnings Per Share
In June 2008, the FASB issued FSP EITF 03-6-1 which specifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend equivalents are considered participating securities and should be included in the computation of EPS pursuant to the two-class method as defined in SFAS No. 128,Earnings per Share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. All prior period EPS data presented must be adjusted retrospectively. Prior to 2009, the Company awarded restricted stock and restricted stock units with nonforfeitable dividend equivalent rights. Restricted stock and restricted stock units awarded in 2009 are not considered participating securities as dividend equivalents are subject to forfeiture prior to vesting of the award. The Company adopted FSP EITF 03-6-1 on January 1, 2009. See below for the retrospective EPS impact of adopting FSP EITF 03-6-1 for the three and six months ended June 30, 2008.
EPS Impact of Adoption of FSP APB 14-1, FSP EITF 03-6-1 and SFAS No. 160
The following table illustrates the effect on net income attributable to BlackRock, Inc. and earnings per share upon retrospective application of FSP APB 14-1, FSP EITF 03-6-1 and SFAS No. 160 during the three and six months ended June 30, 2008.
Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 | ||||||
Net income, as previously reported | $ | 274 | $ | 516 | |||
Impact of FSP APB 14-1 | — | (1 | ) | ||||
Net income attributable to BlackRock, Inc., as currently reported | $ | 274 | $ | 515 | |||
Earnings per share attributable to BlackRock, Inc. common stockholders: | |||||||
Basic earnings per common share, as previously reported | $ | 2.12 | $ | 3.99 | |||
Basic earnings per common share, as currently reported | $ | 2.04 | $ | 3.85 | |||
Diluted earnings per common share, as previously reported | $ | 2.05 | $ | 3.87 | |||
Diluted earnings per common share, as currently reported | $ | 2.00 | $ | 3.78 |
- 14 -
PART I – FINANCIAL INFORMATION (continued)
Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)
Fair Value Measurements
In February 2008, the FASB issued FSP FAS 157-2,Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”) (ASC 820-10,Fair Value Measurements and Disclosures). FSP FAS 157-2 delayed the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and liabilities recognized or disclosed at fair value in the financial statements on a non-recurring basis. Non-recurring non-financial assets and liabilities include goodwill, indefinite-lived and finite-lived intangible assets and long-lived assets each measured at fair value for purposes of impairment testing, asset retirement and guarantee obligations initially measured at fair value, and those assets and liabilities initially measured at fair value in a business combination or asset purchase. The adoption of the provisions of FSP FAS 157-2 on January 1, 2009 for non-recurring non-financial assets and liabilities did not have a material impact on Company’s condensed consolidated financial statements.
Fair Value Measurements Disclosures and Impairments of Securities:
In April 2009, the FASB issued the following three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:
FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”) (ASC 320-10,Investments – Debt and Equity Securities) amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. Under FSP FAS 115-2 and FAS 124-2, an other-than-temporary impairment is triggered if (1) an entity has the intent to sell the security, (2) it is more likely than not that an entity will be required to sell the security before recovery, or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity does not intend to sell a security and it is not more likely than not that the entity will be required to sell the security, but the security has suffered a credit loss, the impairment charge will be separated into the credit loss component, which is recorded in earnings, and the remainder is recorded in other comprehensive income. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.
FSP FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”) (ASC 820-10,Fair Value Measurements and Disclosures), provides additional guidance on determining when the volume and level of activity for an asset or liability has significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly.
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PART I – FINANCIAL INFORMATION (continued)
Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)
Fair Value Measurements Disclosures and Impairments of Securities (continued):
FSP FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”) (ASC 825-10,Financial Instruments), amends SFAS No. 107,Disclosures about Fair Value of Financial Instruments, to expand the required qualitative and quantitative disclosures about fair value of financial instruments to interim reporting periods for publicly traded entities. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28,Interim Financial Reporting (ASC 270-10,Interim Reporting), to require those disclosures in summarized financial information at interim reporting periods.
The adoption of all three FSPs as of April 1, 2009, did not materially impact the Company’s condensed consolidated financial statements.
Business Combinations
In December 2007, the FASB issued SFAS No. 141 (revised),Business Combinations (ASC 805,Business Combinations), and in April 2009, the FASB issued FSP 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise From Contingencies, together (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141,Business Combinations (“SFAS No. 141”), while retaining the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) further defines the acquirer, establishes the acquisition date and broadens the scope of transactions that qualify as business combinations.
Additionally, SFAS No. 141(R) changes the fair value measurement provisions for assets acquired, liabilities assumed and any non-controlling interest in the acquiree, provides guidance for the measurement of fair value in a step acquisition, changes the requirements for recognizing assets acquired and liabilities assumed subject to contingencies, provides guidance on recognition and measurement of contingent consideration and requires that acquisition-related costs of the acquirer generally be expensed as incurred. Liabilities for unrecognized tax benefits related to tax positions assumed in business combinations that settled prior to the adoption of SFAS No. 141(R) affected goodwill. If such liabilities reverse subsequent to the adoption of SFAS No. 141(R), such reversals will affect the income tax provision in the period of reversal. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted SFAS No. 141(R) on January 1, 2009. The adoption of SFAS No. 141(R) impacted the Company’s condensed consolidated financial statements in the six months ended June 30, 2009 as certain acquisition related costs in connection with the Barclays Global Investors Transaction have been expensed as incurred. See Note 16, Pending Transaction.
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PART I – FINANCIAL INFORMATION (continued)
Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)
Useful Life of Intangible Assets
In April 2008, the FASB issued FSP FAS 142-3,Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”) (ASC 350-30,Intangibles –Goodwill and Other). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS No. 142”) (ASC 350-30,Intangibles – Goodwill and Other). FSP FAS 142-3 requires that an entity shall consider its own experience in renewing similar arrangements. FSP FAS 142-3 is intended to improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption on January 1, 2009 of FSP FAS 142-3 did not materially impact the Company’s condensed consolidated financial statements.
Disclosures about Derivative Instruments
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 13331, 2010 (“SFAS No. 161”) (ASC 815-10,Derivatives and Hedging). SFAS No. 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 specifically requires enhanced disclosures addressing: a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption on January 1, 2009 of the additional disclosure requirements of SFAS No. 161 did not materially impact the Company’s condensed consolidated financial statements.
Meaning of Indexed to a Company’s Own Stock
In June 2008, the FASB issued EITF No. 07-5,Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”) (ASC 815-40,Derivatives and Hedging: Contracts in Entity’s Own Entity). EITF 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. To meet the definition of “indexed to its own stock,” an instrument's contingent exercise provisions must not be based on an observable market other than the market for the issuer’s stock, and its settlement amount must be based only on those variables that are inputs to the fair value of a “fixed-for-fixed” forward or option on an entity’s equity shares. EITF 07-5 was adopted on January 1, 2009 and did not change the classification or measurement of the Company’s financial instruments.
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PART I – FINANCIAL INFORMATION (continued)
Accounting Policies Adopted in the Six Months Ended June 30, 2009 (continued)
Subsequent Events
In May 2009, the FASB issued SFAS No. 165,Subsequent Events (“SFAS No. 165”) (ASC 855-10,Subsequent Events), which provides guidance to establish general standards of accounting for and disclosures of events that occur after balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is effective for interim or fiscal periods ending after June 15, 2009. The Company adopted SFAS No. 165 on June 30, 2009. The adoption of SFAS No. 165 did not materially impact the Company’s condensed consolidated financial statements. See Note 17, Subsequent Events, for further discussion.
Recent Accounting Developments
New Consolidation Guidance for Variable Interest Entities:Entities
In June 2009, the FASBFinancial Accounting Standards Board (“FASB”) issued SFAS No. 167,Accounting Standards Update (“ASU”) 2009-17,AmendmentsImprovements to FASB Interpretation No. 46(R)Financial Reporting by Enterprises Involved with Variable Interest Entities (“SFAS No. 167”ASU 2009-17”), which amendsamended the consolidation guidance for variable interest entities under FIN 46(R).entities. The amendments include: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the primary beneficiary of a variable interest entity (“VIE”), which requires that the primary beneficiary have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, and (3) the requirement to continually reassess whothe primary beneficiary of a VIE.
In February 2010 the FASB issued ASU 2010-10,Amendments to Statement 167 for Certain Investment Funds(“ASU 2010-10”).This ASU defers the application of Statement of Financial Accounting Standards (“SFAS”) No. 167,Amendments to FASB Interpretation No. 46(R), for a reporting enterprise’s interest in an entity if all of the following conditions are met:
(1) the entity either has all of the attributes of an investment company, as specified in ASC 946-10,Financial Services-Investment Companies (“ASC 946-10”) or it is industry practice to apply measurement principles for financial reporting that are consistent with those in ASC 946-10; (2) the entity is not a securitization entity, an asset-backed financing entity, or an entity formerly considered a qualifying special-purpose entity and (3) the reporting enterprise does not have an explicit or implicit obligation to fund losses of the entity that could potentially be significant to the entity.
In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with the requirement of Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
The amendments in this ASU clarify that for entities that do not qualify for the deferral, related parties should consolidatebe considered when evaluating each of the criteria for determining whether a variable-interest entity.decision maker or service provider fee represents a variable interest.
An entity that qualifies for the deferral will continue to be assessed for consolidation under the overall guidance on variable interest entities in ASC 810,Consolidation (“ASC 810”) (before its amendment by SFAS No. 167 is effective167) or other applicable consolidation guidance, including guidance for the beginningconsolidation of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.
partnerships in ASC 810. The Companyamendment does not expectdefer the disclosure requirements in ASU 2009-17.
On January 1, 2010, upon adoption of SFAS No. 167the provisions of ASU 2009-17, the Company recorded a cumulative effect adjustment to impact net income attributableappropriated retained earnings of $114 million.
Fair Value Option
ASC 825-10,Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies to BlackRock, Inc. or its stockholders’ equity, however, itirrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to choose to measure eligible financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is currently evaluatingdetermined on an instrument by instrument basis, must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately in the impactstatement of financial condition from those instruments measured using another accounting method. On January 1, 2010, upon adoption of ASU 2009-17, the Company elected the fair value option for eligible financial assets and liabilities upon consolidation of three collateralized loan obligations (“CLOs”), to its condensed consolidated financial statements, as a resultmitigate accounting mismatches between the carrying value of consolidating the assets and liabilities and net income (loss) of certain VIEs in addition to a corresponding non-controlling interest liability and allocation of net income (loss) to non-controlling interests.achieve operational simplifications.
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PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
2. Significant Accounting Policies (continued)
Accounting Policies Adopted in the Three Months Ended March 31, 2010 (continued)
Appropriated Retained Earnings
Upon adoption of ASU 2009-17, BlackRock consolidated three CLOs and recorded a cumulative effect adjustment to appropriated retained earnings on the condensed consolidated statement 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, the net change in the fair value of the CLOs’ assets and liabilities will be recorded as net income (loss) attributable to non-controlling interests and as an adjustment to appropriated retained earnings.
Improving Disclosures about Fair Value Measurements
In January 2009, the FASB issued ASU 2010-06,Fair Value Measurements and Disclosures(“ASU 2010-06”). ASU 2010-06 amends ASC 820-10 to require new disclosures with regards to significant transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and other settlements within the Level 3 fair value rollforward. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption on January 1, 2010 of the additional disclosure requirements of ASU 2010-06 did not materially impact BlackRock’s condensed consolidated financial statements.
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PART I—FINANCIAL INFORMATION (continued)
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
3. Mergers and Acquisitions
Barclays Global Investors
On December 1, 2009, BlackRock acquired from Barclays all of the outstanding equity interests of subsidiaries of Barclays conducting the investment management business of BGI in exchange for an aggregate of 37,566,771 shares of BlackRock common stock and participating preferred stock and $6.65 billion in cash. The fair value of the 37,566,771 shares at closing, on December 1, 2009, was $8.53 billion, at a price of $227.08 per share, the closing price of BlackRock’s common stock on November 30, 2009.
A summary of the initial and revised fair values of the assets acquired and liabilities and non-controlling interests assumed on December 1, 2009 in this acquisition is as follows:
(Dollar amounts in millions) | Initial Estimate of Fair Value | Purchase Price Adjustments | Revised Estimate of Fair Value | |||||||||
Accounts receivable | $ | 593 | $ | (12 | ) | $ | 581 | |||||
Investments | 125 | — | 125 | |||||||||
Separate account assets | 116,301 | — | 116,301 | |||||||||
Collateral held under securities lending agreements | 23,498 | — | 23,498 | |||||||||
Property and equipment | 205 | (2 | ) | 203 | ||||||||
Finite-lived intangible management contracts (intangible assets) | 163 | (7 | ) | 156 | ||||||||
Indefinite-lived intangible management contracts (intangible assets) | 9,785 | 25 | 9,810 | |||||||||
Trade names / trademarks (indefinite-lived intangible assets) | 1,403 | — | 1,403 | |||||||||
Goodwill | 6,842 | 68 | 6,910 | |||||||||
Other assets | 366 | — | 366 | |||||||||
Separate account liabilities | (116,301 | ) | — | (116,301 | ) | |||||||
Collateral liability under securities lending agreements | (23,498 | ) | — | (23,498 | ) | |||||||
Deferred tax liabilities | (3,799 | ) | 8 | (3,791 | ) | |||||||
Accrued compensation and benefits | (885 | ) | — | (885 | ) | |||||||
Other liabilities assumed | (660 | ) | (80 | ) | (740 | ) | ||||||
Non-controlling interests assumed | (12 | ) | — | (12 | ) | |||||||
Total consideration, net of cash acquired | $ | 14,126 | $ | — | $ | 14,126 | ||||||
Summary of consideration, net of cash acquired: | ||||||||||||
Cash paid | $ | 6,650 | $ | — | $ | 6,650 | ||||||
Cash acquired | (1,055 | ) | — | (1,055 | ) | |||||||
Capital stock at fair value | 8,531 | — | 8,531 | |||||||||
Total cash and stock consideration | $ | 14,126 | $ | — | $ | 14,126 | ||||||
At this time, the Company does not expect additional material changes to the value of the assets acquired or liabilities assumed in conjunction with the transaction.
Helix Financial Group LLC
In January 2010, the Company completed the acquisition of substantially all of the net assets of Helix Financial Group LLC, which provides advisory, valuation and analytics solutions to commercial real estate lenders and investors (the “Helix Transaction”). The assets acquired and liabilities assumed, as well as the total consideration paid for the acquisition, were not material to the Company’s condensed consolidated financial statements.
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
4. Investments
A summary of the carrying value of total investments is as follows:
June 30, 2009 | December 31, 2008 | Carrying Value | ||||||||||
(Dollar amounts in millions) | March 31, 2010 | December 31, 2009 | ||||||||||
Available-for-sale investments | $ | 70 | $ | 101 | $ | 65 | $ | 73 | ||||
Held-to-maturity | 40 | 29 | ||||||||||
Trading investments | 134 | 122 | 237 | 167 | ||||||||
Other investments: | ||||||||||||
Consolidated sponsored investment funds (non cash management funds) | 342 | 349 | ||||||||||
Consolidated sponsored cash management funds | — | 326 | ||||||||||
Consolidated sponsored investment funds | 318 | 360 | ||||||||||
Equity method investments | 387 | 501 | 393 | 376 | ||||||||
Deferred compensation plan hedge fund equity method investments | 24 | 30 | 28 | 29 | ||||||||
Cost method investments | 15 | 15 | ||||||||||
Total other investments | 753 | 1,206 | 754 | 780 | ||||||||
Total investments | $ | 957 | $ | 1,429 | $ | 1,096 | $ | 1,049 | ||||
At June 30, 2009,March 31, 2010, the Company had $418$493 million of total investments held by consolidated sponsored investment funds (non-VIEs) of which $76$175 million and $342$318 million were classified as trading investments and other investments, respectively.
At December 31, 2008,2009, the Company had $728$463 million of total investments held by consolidated sponsored investment funds of which $53$103 million and $675$360 million were classified as trading investments and other investments, respectively. Other investments at December 31, 2009 included $40 million related to a consolidated VIE, which has been reclassified as of January 1, 2010 to bank loans and other investments of consolidated VIEs on the condensed consolidated statement of financial condition.
- 1916 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
4. Investments (continued)
Available-for-sale investmentsInvestments
A summary of the cost and carrying value of investments classified as available-for-sale, is as follows:
June 30, 2009 | Cost | Gross Unrealized | Carrying Value | |||||||||||||||||||||||
Gains | Losses | |||||||||||||||||||||||||
(Dollar amounts in millions) | ||||||||||||||||||||||||||
Cost | Gross Unrealized | Carrying Value | ||||||||||||||||||||||||
March 31, 2010 | Gains | Losses | ||||||||||||||||||||||||
Available-for-sale investments: | ||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||
Sponsored investment funds | $ | 8 | $ | — | $ | (2 | ) | $ | 6 | $ | 44 | $ | 3 | $ | (2 | ) | $ | 45 | ||||||||
Collateralized debt obligations (“CDOs”) | 3 | — | — | 3 | ||||||||||||||||||||||
Collateralized debt obligations | 2 | 1 | — | 3 | ||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||
Mortgage debt | 40 | — | — | 40 | 5 | 1 | — | 6 | ||||||||||||||||||
Asset-backed debt | 14 | 1 | — | 15 | 9 | 2 | — | 11 | ||||||||||||||||||
Corporate debt | 3 | — | — | 3 | ||||||||||||||||||||||
Foreign government debt | 2 | 1 | — | 3 | ||||||||||||||||||||||
Total available-for-sale investments | $ | 70 | $ | 2 | $ | (2 | ) | $ | 70 | $ | 60 | $ | 7 | $ | (2 | ) | $ | 65 | ||||||||
December 31, 2008 | Cost | Gross Unrealized | Carrying Value | |||||||||||||||||||||||
Gains | Losses | |||||||||||||||||||||||||
Cost | Gross Unrealized | Carrying Value | ||||||||||||||||||||||||
December 31, 2009 | Gains | Losses | ||||||||||||||||||||||||
Available-for-sale investments: | ||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||
Sponsored investment funds | $ | 109 | $ | — | $ | (16 | ) | $ | 93 | $ | 53 | $ | 2 | $ | (1 | ) | $ | 54 | ||||||||
Collateralized debt obligations | 6 | — | (2 | ) | 4 | 2 | — | — | 2 | |||||||||||||||||
Other debt securities | 4 | — | — | 4 | ||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||
Mortgage debt | 6 | 1 | — | 7 | ||||||||||||||||||||||
Asset-backed debt | 10 | — | — | 10 | ||||||||||||||||||||||
Total available-for-sale investments | $ | 119 | $ | — | $ | (18 | ) | $ | 101 | $ | 71 | $ | 3 | $ | (1 | ) | $ | 73 | ||||||||
Available-for-sale investments includesinclude seed investments in BlackRock sponsored investment funds and debt securities received upon closure of an enhanced cash fund, in lieu of the Company’s remaining investment in the fund and securities purchased from another enhanced cash fund.
During the sixthree months ended June 30,March 31, 2010 and 2009, and 2008, the Company recordeddid not record any other-than-temporary impairments of $4, including $2 related to credit loss impairments on available-for-sale debt securities, and $5, respectively which was recorded in non-operating income (expense) on the condensed consolidated statements of income. The $2 credit loss impairment was determined by comparing the estimated discounted cash flows versus the amortized cost for each individual security.securities.
The Company has reviewed the gross unrealized losses of $2 million as of June 30, 2009March 31, 2010 related to available-for-sale equity securities, of which approximately $1 million had been in a loss position for greater than twelve months, and determined that these unrealized losses were not other-than-temporary primarily because the Company has the ability and intent to hold the securities for a period of time sufficient to allow for recovery of such unrealized losses. As a result, the Company did not record additional impairments on such equity securities.
- 2017 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Available-for-sale investments BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
The Company has reviewed4. Investments (continued)
Held-to-Maturity Investments
A summary of the gross unrealized lossescarrying value of less than $1held-to-maturity investments is as follows:
Carrying Value | ||||||
(Dollar amounts in millions) | March 31, 2010 | December 31, 2009 | ||||
Held-to-maturity investments: | ||||||
Foreign government debt | $ | 39 | $ | 28 | ||
U.S. government debt | 1 | 1 | ||||
Total held-to-maturity investments: | $ | 40 | $ | 29 | ||
Held-to-maturity investments include debt instruments held for regulatory purposes and the carrying value of June 30, 2009 related to available-for-sale debt securities, of which less than $1 has been in a loss position of greater than twelve months, and determined that these unrealized losses were not other-than-temporary primarily because the Company did not have the intent to sell the securities and it was not more likely than not that the Company would be required to sell the security prior to recovery of its amortized costs basis. As a result, the Company did not record additional impairments on such debt securities.investments approximates fair value.
Trading and Other Investments
A summary of the cost and carrying value of trading and other investments is as follows:
June 30, 2009 | December 31, 2008 | March 31, 2010 | December 31, 2009 | |||||||||||||||||||||
(Dollar amounts in millions) | Cost | Carrying Value | Cost | Carrying Value | ||||||||||||||||||||
Cost | Carrying Value | Cost | Carrying Value | |||||||||||||||||||||
Trading investments: | ||||||||||||||||||||||||
Deferred compensation plan mutual fund investments | $ | 39 | $ | 37 | $ | 32 | $ | 29 | $ | 49 | $ | 43 | $ | 49 | $ | 42 | ||||||||
Equity securities | 108 | 76 | 109 | 75 | 157 | 145 | 112 | 97 | ||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
Municipal debt | 11 | 10 | 9 | 7 | 11 | 11 | 10 | 11 | ||||||||||||||||
Mortgage debt | 4 | 4 | — | — | ||||||||||||||||||||
Foreign government debt | 9 | 9 | 8 | 7 | — | — | 15 | 15 | ||||||||||||||||
Corporate debt | 1 | 1 | 1 | 1 | 19 | 19 | 1 | 1 | ||||||||||||||||
U.S. government debt | 1 | 1 | 3 | 3 | 6 | 6 | 1 | 1 | ||||||||||||||||
Asset-backed debt | 9 | 9 | — | — | ||||||||||||||||||||
Total trading investments | $ | 169 | $ | 134 | $ | 162 | $ | 122 | $ | 255 | $ | 237 | $ | 188 | $ | 167 | ||||||||
Other investments: | ||||||||||||||||||||||||
Consolidated sponsored investment funds (non cash management) | $ | 383 | $ | 342 | $ | 376 | $ | 349 | ||||||||||||||||
Consolidated sponsored cash management funds | — | — | 333 | 326 | ||||||||||||||||||||
Consolidated sponsored investment funds | $ | 330 | $ | 318 | $ | 380 | $ | 360 | ||||||||||||||||
Equity method | 705 | 387 | 752 | 501 | 492 | 393 | 499 | 376 | ||||||||||||||||
Deferred compensation plan hedge fund equity method investments | 40 | 24 | 39 | 30 | 25 | 28 | 28 | 29 | ||||||||||||||||
Cost method investments | 15 | 15 | 15 | 15 | ||||||||||||||||||||
Total other investments | $ | 1,128 | $ | 753 | $ | 1,500 | $ | 1,206 | $ | 862 | $ | 754 | $ | 922 | $ | 780 | ||||||||
Trading investments include certain deferred compensation plan mutual fund investments, equity and debt securities within certain consolidated sponsored investment funds and equity and debt securities held in separate accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.
- 2118 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
4. Investments (continued)
Cost Method Investments
Cost method investments include non-marketable securities, including $10 million of restricted Federal Reserve Bank stock, that is held for regulatory purposes.
As of March 31, 2010, there were no indicators of impairments on these investments.
Maturity Datesdates
The carrying value of debt securities, classified as available-for-sale, held-to-maturity and trading or other investments, by maturity at June 30, 2009March 31, 2010 and December 31, 20082009 is as follows:
Maturity date | June 30, 2009 | December 31, 2008 | ||||||||||
(Dollar amounts in millions) Maturity date | March 31, 2010 | December 31, 2009 | ||||||||||
<1 year | $ | 39 | $ | 329 | $ | 43 | $ | 28 | ||||
>1-5 years | 7 | 2 | 7 | 5 | ||||||||
>5-10 years | 7 | 3 | 17 | 9 | ||||||||
> 10 years | 29 | 14 | 39 | 32 | ||||||||
Total | $ | 82 | $ | 348 | $ | 106 | $ | 74 | ||||
At June 30,March 31, 2010 and December 31, 2009, the debt securities in the table above primarily consisted of mortgage, asset-backed, municipal, corporate, U.S. and foreign government debt securities a portion of which are held by consolidated sponsored investment funds, which are consolidated in the Company’s condensed consolidated statements of financial condition. In addition, at December 31, 2008, the debt securities in the table above included floating rate notes and asset backed securities held by consolidated sponsored cash management funds.
- 19 -
PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
Impact ofBlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
5. Consolidated Sponsored Investment Funds
The Company consolidates certain sponsored investment funds primarily because it is deemed to control such investmentsfunds in accordance with GAAP. The investments that are owned by these consolidated sponsored investment funds are classified as other or trading investments. At June 30, 2009March 31, 2010 and December 31, 2008,2009, the following balances related to these funds were consolidated in the condensed consolidated statements of financial condition:
(Dollar amounts in millions) | March 31, 2010 | December 31, 2009 | ||||||||||||||
June 30, 2009 | December 31, 2008 | |||||||||||||||
Cash and cash equivalents | $ | 49 | $ | 61 | $ | 123 | $ | 75 | ||||||||
Investments | 418 | 728 | 493 | 463 | ||||||||||||
Other net assets (liabilities) | (7 | ) | 12 | (24 | ) | (7 | ) | |||||||||
Non-controlling interests | (226 | ) | (491 | ) | (253 | ) | (273 | ) | ||||||||
Total net interests in consolidated investment funds | $ | 234 | $ | 310 | $ | 339 | $ | 258 | ||||||||
- 22 -
PART I – FINANCIAL INFORMATION (continued)
Impact of Consolidated Sponsored Investment Funds (continued)
At December 31, 2009, the above balances included, a consolidated sponsored investment fund that was also deemed a VIE. This VIE as well as three consolidated CLOs, which are also VIEs, were excluded from the March 31, 2010 balances above. See Note 7, Variable Interest Entities, for further discussion.
BlackRock’s total exposure to consolidated sponsored investment funds of $234$339 million and $310$258 million at June 30, 2009March 31, 2010 and December 31, 2008,2009, respectively, represents the fair value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income (expense) and net income (loss) attributable to non-controlling interests. During the three months ended June 30, 2009, BlackRock took necessary steps to grant additional rights to the unaffiliated investors in one consolidated sponsored investment fund, which resulted in deconsolidation of this fund and the elimination of $85, $76, and $9 of investments, borrowings, and nonredeemable non-controlling interests, respectively. Approximately $0 and $6 of borrowings by consolidated sponsored investment funds at June 30, 2009 and December 31, 2008, respectively, were included in other liabilities on the condensed consolidated statements of financial condition.
The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in its operations.
- 2320 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
6. Fair Value Disclosures
Fair Value Hierarchy
Assets and liabilities measured at fair value on a recurring basis at June 30, 2009March 31, 2010 were as follows:
(Dollar amounts in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Assets Not Held at Fair Value (1) | March 31, 2010 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||
Available-for-sale | ||||||||||||||||||||||||||||||
Equity | $ | 45 | $ | 3 | $ | — | $ | — | $ | 48 | ||||||||||||||||||||
Fixed income | 1 | 16 | — | — | 17 | |||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Assets Not Held at Fair Value(1) | June 30, 2009 | ||||||||||||||||||||||||||
Total available-for-sale | 46 | 19 | — | — | 65 | |||||||||||||||||||||||||
Held-to-maturity | ||||||||||||||||||||||||||||||
Fixed income | — | — | — | 40 | 40 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||
Total held-to-maturity | — | — | — | 40 | 40 | |||||||||||||||||||||||||
Trading | ||||||||||||||||||||||||||||||
Equity | 133 | 12 | — | — | 145 | |||||||||||||||||||||||||
Fixed income | — | 49 | — | — | 49 | |||||||||||||||||||||||||
Deferred compensation plan mutual fund investments | 43 | — | — | — | 43 | |||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||
Total trading | 176 | 61 | — | — | 237 | |||||||||||||||||||||||||
Other investments: | ||||||||||||||||||||||||||||||
Consolidated sponsored investment funds: | ||||||||||||||||||||||||||||||
Hedge funds / Funds of funds | — | — | 25 | — | 25 | |||||||||||||||||||||||||
Private equity | 13 | — | 280 | — | 293 | |||||||||||||||||||||||||
Available-for-sale | $ | 8 | $ | 59 | $ | 3 | $ | — | $ | 70 | ||||||||||||||||||||
Total Consolidated sponsored investment funds | 13 | — | 305 | — | 318 | |||||||||||||||||||||||||
Equity method | ||||||||||||||||||||||||||||||
Fixed income mutual fund | — | 10 | — | — | 10 | |||||||||||||||||||||||||
Hedge funds / Funds of funds | — | — | 237 | 23 | 260 | |||||||||||||||||||||||||
Private equity funds | — | — | 58 | 18 | 76 | |||||||||||||||||||||||||
Real estate funds | — | — | 39 | 8 | 47 | |||||||||||||||||||||||||
Trading | 124 | 10 | — | — | 134 | |||||||||||||||||||||||||
Other investments: | ||||||||||||||||||||||||||||||
Consolidated sponsored investment funds (non cash management funds) | 10 | 1 | 331 | — | 342 | |||||||||||||||||||||||||
Equity method | 10 | — | 348 | 29 | 387 | |||||||||||||||||||||||||
Total equity method | — | 10 | 334 | 49 | 393 | |||||||||||||||||||||||||
Deferred compensation plan hedge fund equity method investments | — | 10 | 14 | — | 24 | — | 11 | 17 | — | 28 | ||||||||||||||||||||
Cost method investments | — | — | — | 15 | 15 | |||||||||||||||||||||||||
Total investments | 152 | 80 | 696 | 29 | 957 | 235 | 101 | 656 | 104 | 1,096 | ||||||||||||||||||||
Separate account assets | 3,020 | 88 | 3 | 20 | 3,131 | |||||||||||||||||||||||||
Equity | 73,920 | 58 | 63 | — | 74,041 | |||||||||||||||||||||||||
Fixed income | — | 37,027 | 1,090 | — | 38,117 | |||||||||||||||||||||||||
Derivatives | 4 | 1,453 | — | — | 1,457 | |||||||||||||||||||||||||
Money market funds | 1,764 | — | — | — | 1,764 | |||||||||||||||||||||||||
Other | — | — | — | 808 | 808 | |||||||||||||||||||||||||
Total separate account assets | 75,688 | 38,538 | 1,153 | 808 | 116,187 | |||||||||||||||||||||||||
Collateral held under securities lending agreements | ||||||||||||||||||||||||||||||
Equity | 8,463 | — | — | — | 8,463 | |||||||||||||||||||||||||
Fixed income | — | 4,954 | — | — | 4,954 | |||||||||||||||||||||||||
Total collateral held under securities lending agreements | 8,463 | 4,954 | — | — | 13,417 | |||||||||||||||||||||||||
Other assets(2) | — | 11 | 50 | — | 61 | — | 11 | 24 | — | 35 | ||||||||||||||||||||
Assets of consolidated VIEs | ||||||||||||||||||||||||||||||
Bank loans | — | 1,154 | — | — | 1,154 | |||||||||||||||||||||||||
Bonds | — | 93 | — | — | 93 | |||||||||||||||||||||||||
Private equity | 3 | — | 35 | — | 38 | |||||||||||||||||||||||||
Other | — | 3 | — | — | 3 | |||||||||||||||||||||||||
Total investments of consolidated VIEs | 3 | 1,250 | 35 | — | 1,288 | |||||||||||||||||||||||||
Total | $ | 84,389 | $ | 44,854 | $ | 1,868 | $ | 912 | $ | 132,023 | ||||||||||||||||||||
Total assets measured at fair value | $ | 3,172 | $ | 179 | $ | 749 | $ | 49 | $ | 4,149 | ||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||
Borrowings of consolidated VIEs | $ | — | $ | — | $ | 1,214 | $ | — | $ | 1,214 | ||||||||||||||||||||
Collateral liability under securities lending agreements | 8,463 | 4,954 | — | — | 13,417 | |||||||||||||||||||||||||
Other liabilities | — | 7 | — | — | 7 | |||||||||||||||||||||||||
Total liabilities measured at fair value | $ | 8,463 | $ | 4,961 | $ | 1,214 | $ | — | $ | 14,638 | ||||||||||||||||||||
(1) | Comprised of equity method investments, which include investment companies and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method |
(2) | Includes disposal group assets and company-owned and split-dollar life insurance policies. |
- 2421 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
6. Fair Value Disclosures (continued)
Fair Value Hierarchy (continued)
Assets and liabilities measured at fair value on a recurring basis at December 31, 20082009 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) | Other Assets Not Held at Fair Value (1) | December 31, 2009 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||
Available-for-sale | $ | 53 | $ | 20 | $ | — | $ | — | $ | 73 | ||||||||||||||||||||
Held-to-maturity | — | — | — | 29 | 29 | |||||||||||||||||||||||||
Trading | 118 | 49 | — | — | 167 | |||||||||||||||||||||||||
Other investments: | ||||||||||||||||||||||||||||||
Consolidated sponsored investment funds | 22 | — | 338 | — | 360 | |||||||||||||||||||||||||
Equity method | — | 1 | 334 | 41 | 376 | |||||||||||||||||||||||||
Deferred compensation plan hedge fund equity method investments | — | 14 | 15 | — | 29 | |||||||||||||||||||||||||
Cost method investments | — | — | — | 15 | 15 | |||||||||||||||||||||||||
Total investments | 193 | 84 | 687 | 85 | 1,049 | |||||||||||||||||||||||||
Separate account assets | 99,983 | 17,599 | 1,292 | 755 | 119,629 | |||||||||||||||||||||||||
Collateral held under securities lending agreements | 11,580 | 7,755 | — | — | 19,335 | |||||||||||||||||||||||||
Other assets(2) | — | 11 | 46 | — | 57 | |||||||||||||||||||||||||
Total | $ | 111,756 | $ | 25,449 | $ | 2,025 | $ | 840 | $ | 140,070 | ||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Assets Not Held at Fair Value(1) | December 31, 2008 | ||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||
Collateral liability under securities lending agreements | $ | 11,580 | $ | 7,755 | $ | — | $ | — | $ | 19,335 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||
Available-for-sale | $ | 63 | $ | 34 | $ | 4 | $ | — | $ | 101 | ||||||||||||||||||||
Trading | 113 | 9 | — | — | 122 | |||||||||||||||||||||||||
Other investments: | ||||||||||||||||||||||||||||||
Consolidated sponsored investment funds (non cash management funds) | — | 21 | 328 | — | 349 | |||||||||||||||||||||||||
Consolidated sponsored cash management funds | — | 326 | — | — | 326 | |||||||||||||||||||||||||
Equity method | — | — | 461 | 40 | 501 | |||||||||||||||||||||||||
Deferred compensation plan hedge fund investments | — | 10 | 20 | — | 30 | |||||||||||||||||||||||||
Total investments | 176 | 400 | 813 | 40 | 1,429 | |||||||||||||||||||||||||
Separate account assets | 2,461 | 85 | 4 | 73 | 2,623 | |||||||||||||||||||||||||
Other assets(2) | — | 9 | 64 | — | 73 | |||||||||||||||||||||||||
Total assets measured at fair value | $ | 2,637 | $ | 494 | $ | 881 | $ | 113 | $ | 4,125 | ||||||||||||||||||||
(1) | Comprised of equity method investments, which include investment companies and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method |
(2) | Includes disposal group assets and company-owned and split-dollar life insurance policies. |
- 2522 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
6. Fair Value MeasurementsDisclosures (continued)
Separate Account Assets
BlackRock Pensions Limited aand BlackRock Asset Management Pensions Limited, both wholly-owned subsidiarysubsidiaries of the Company, is aare registered life insurance companycompanies that maintainsmaintain separate account assets, representing segregated funds held for purposes of funding individual and group pension contracts, and equal and offsetting separate account non-financial liabilities. At June 30, 2009 and December 31, 2008, the Level 3 separate account assets were approximately $3 and $4, respectively. The changes in Level 3 assets in the three months ended March 31, 2009, primarily relaterelated to purchases, sales and gains/(losses). The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owner and are not reported as non-operating income (expense) on the condensed consolidated statements of income.
Money Market Funds within Cash and Cash Equivalents
At March 31, 2010 and December 31, 2009, approximately $0.3 billion and $1.4 billion, respectively, of money market funds were recorded within cash and cash equivalents on the Company’s condensed consolidated statements of financial condition. Money market funds are valued through the use of quoted market prices (a Level 1 input), or $1, which is generally the net asset value of the fund.
Level 3 Assets
Level 3 assets recorded within investments, which include equity method investments and consolidated investments of real estate funds, private equity funds and funds of private equity funds, are valued based upon valuations received from internal as well as third party fund managers. Fair valuations at the underlying funds are based on a combination of methods, which may include third-party independent appraisals and discounted cash flow techniques. Direct investments in private equity companies held by funds of private equity funds are valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third party financing, changes in valuations of comparable peer companies, the business environment of the companies and market indices, among other factors. Level 3 assets recorded within separate account assets may include single broker non-binding quotes for fixed income securities.
Level 3 assets recorded as investments of consolidated VIEs, include a private equity fund valued based upon valuations received from internal as well as well as third party funds managers.
Level 3 Liabilities
Level 3 liabilities recorded as borrowings of consolidated VIEs, include CLO borrowings valued based upon non-binding broker quotes.
- 23 -
PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
6. Fair Value Disclosures (continued)
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2009March 31, 2010
Investments | Other Assets | Other Liabilities | ||||||||||
March 31, 2009 | $ | 666 | $ | 51 | $ | 76 | ||||||
Realized and unrealized gains / (losses), net | 78 | (1 | ) | — | ||||||||
Purchases, sales, other settlements and issuances, net | (48 | ) | — | (76 | ) | |||||||
Net transfers in and/or out of Level 3 | — | — | — | |||||||||
June 30, 2009 | $ | 696 | $ | 50 | $ | — | ||||||
Total net gains (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date | $ | 76 | $ | (1 | ) | $ | — |
(Dollar amounts in millions) | December 31, 2009 | Realized and unrealized gains / (losses), net | Purchases, sales, other settlements and issuances, net | Net transfers in and/or out of Level 3 | March 31, 2010 | Total net gains (losses) included in earnings(1) | ||||||||||||||||
Assets: | ||||||||||||||||||||||
Investments: | ||||||||||||||||||||||
Consolidated sponsored investment funds | ||||||||||||||||||||||
Hedge funds / Funds of funds | $ | 26 | $ | — | $ | (1 | ) | $ | — | $ | 25 | $ | (1 | ) | ||||||||
Private equity | 312 | 4 | (36 | ) | — | 280 | 5 | |||||||||||||||
Equity method | ||||||||||||||||||||||
Hedge funds / Funds of funds | 247 | 13 | (23 | ) | — | 237 | 14 | |||||||||||||||
Private equity funds | 51 | — | 7 | — | 58 | 1 | ||||||||||||||||
Real estate funds | 36 | (1 | ) | 4 | — | 39 | (1 | ) | ||||||||||||||
Deferred compensation plan hedge funds | 15 | 2 | — | — | 17 | 2 | ||||||||||||||||
Total investments | 687 | 18 | (49 | ) | — | 656 | 20 | |||||||||||||||
Separate account assets | ||||||||||||||||||||||
Equity | 5 | — | (3 | ) | 61 | 63 | ||||||||||||||||
Fixed income | 1,287 | 34 | 185 | (416 | ) | 1,090 | ||||||||||||||||
Total separate account assets | 1,292 | 34 | 182 | (355 | ) | 1,153 | n/a | (2) | ||||||||||||||
Other assets | 46 | (12 | ) | (10 | ) | — | 24 | (12 | ) | |||||||||||||
Private equity assets of consolidated VIEs | — | 2 | 33 | — | 35 | n/a | (3) | |||||||||||||||
Total assets measured at fair value | $ | 2,025 | $ | 42 | $ | 156 | $ | (355 | ) | $ | 1,868 | |||||||||||
Liabilities: | ||||||||||||||||||||||
Borrowings of consolidated VIEs | $ | — | $ | (57 | ) | $ | 1,157 | — | $ | 1,214 | n/a | (3) |
n/a – Not applicable
(1) | Earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date. |
(2) | The net investment income and net gains and losses attributable to separate account assets accrue directly to the contract owner and are not reported as non-operating income (expense) on the Company’s condensed consolidated statements of income. |
(3) | The net investment income (expense) attributable to assets and borrowings of consolidated VIEs are solely allocated to non-controlling interests on the Company’s condensed consolidated statements of income. |
- 2624 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc. Notes to Condensed Consolidated Financial Statements—(continued) (unaudited) 6. Fair Value Disclosures (continued) |
Fair Value Measurements (continued)
Changes in Level 3 Investments and Other Assets Measured at Fair Value on a Recurring Basis for the SixThree Months Ended June 30,March 31, 2009
Investments | Other Assets | |||||||
December 31, 2008 | $ | 813 | $ | 64 | ||||
Realized and unrealized gains / (losses), net | (40 | ) | (15 | ) | ||||
Purchases, sales, other settlements and issuances, net | (58 | ) | 1 | |||||
Net transfers in and/or out of Level 3 | (19 | ) | — | |||||
June 30, 2009 | $ | 696 | $ | 50 | ||||
Total net (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date | $ | (40 | ) | $ | (15 | ) |
(Dollar amounts in millions) | December 31, 2008 | Realized and unrealized gains / (losses), net | Purchases, sales, other settlements and issuances, net | Net transfers in and/or out of Level 3 | March 31, 2009 | Total net gains (losses) included in earnings(1) | ||||||||||||||||
Investments | $ | 813 | $ | (118 | ) | $ | (10 | ) | $ | (19 | ) | $ | 666 | $ | (116 | ) | ||||||
Other assets | 64 | (14 | ) | 1 | — | 51 | (14 | ) | ||||||||||||||
Total assets measured at fair value | $ | 877 | $ | (132 | ) | $ | (9 | ) | $ | (19 | ) | $ | 717 | $ | (130 | ) | ||||||
(1) | Earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date. |
Changes inRealized and unrealized gains and losses for Level 3 Investments Measured at Fair Value on a Recurring Basis for the Three and Six Months Ended June 30, 2008investments
Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 | |||||||
Beginning of period | $ | 1,289 | $ | 1,240 | ||||
Realized and unrealized gains / (losses), net | (8 | ) | (1 | ) | ||||
Purchases, sales, other settlements and issuances, net | 137 | 179 | ||||||
Net transfers in and/or out of Level 3 | (32 | ) | (32 | ) | ||||
June 30, 2008 | $ | 1,386 | $ | 1,386 | ||||
Total net (losses) for the period included in earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date | $ | (13 | ) | $ | (19 | ) |
Realized and unrealized gains and losses recorded for Level 3 investments are reported in non-operating income (expense) on the Company’s condensed consolidated statements of income. A portion of net income (loss) for consolidated investments is allocated to non-controlling interests to reflect net income (loss) not attributable to the Company.
The Company transfers assetsSignificant Transfers in and/or out of Level 3Levels
Transfers in and/or out of Levels are reflected as of the beginning of the period when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable or when the book value of certain equity method investments no longer representrepresents fair value as determined under fair value methodologies.
Upon a change in valuation sources, approximately $61 million of separate account assets transferred from Level 1 to Level 3 and $416 million from Level 3 to Level 2.
Significant Other Settlements
As of January 1, 2010, upon the adoption of ASU 2009-17 there was a $35 million reclass out of Level 3 private equity investments to Level 3 private equity assets of consolidated VIEs.
- 2725 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
6. Fair Value Disclosures (continued)
Investments in Certain Entities that Calculate Net Asset Value Per Share
As a practical expedient to value certain investments, the Company relies on net asset values as the fair value for certain investments. The following table lists information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a net asset value per share (or its equivalent):
(Dollars amounts in millions) | Fair Value | Total Unfunded Commitment | Redemption | Redemption | ||||||
Trading: | ||||||||||
Equity(a) | $ | 12 | $ | — | Daily (100)% | n/a | ||||
Consolidated sponsored investment funds: | ||||||||||
Private equity fund of funds(b) | 280 | 78 | n/a | n/a | ||||||
Other fund of funds(c) | 9 | — | Monthly (39)%, Quarterly (51)% Semi-annually and Annually (10)% | 30 – 120 days | ||||||
Equity method(1): | ||||||||||
Hedge funds/funds of hedge funds(d) | 237 | 91 | Monthly (8)%, Quarterly (18)%, n/a (74)% | 15 – 90 days | ||||||
Private equity funds(e) | 58 | 73 | n/a | n/a | ||||||
Real estate funds(f) | 39 | 61 | n/a | n/a | ||||||
Deferred compensation plan hedge fund investments(g) | 28 | — | Monthly (10)%, Quarterly (90)% | 30 – 60 days | ||||||
Private equity assets of consolidated VIEs(h) | 35 | 3 | n/a | n/a | ||||||
Total | $ | 698 | $ | 306 | ||||||
n/a— not applicable
(1) | Comprised of equity method investments, which include investment companies, which in accordance with GAAP account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees approximates fair value. |
This category includes several consolidated offshore feeder funds that invest in multiple equity strategies to diversify risks. The fair values of the investments in this category have been estimated using the net asset value of master offshore funds held by the feeder funds. Investments in this category can generally be redeemed, as long as there are no restrictions in place by the underlying master funds. |
- 26 -
PART I—FINANCIAL INFORMATION (continued)
Item 1. |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
6. Fair Value Disclosures (continued)
Investments in Certain Entities that Calculate Net Asset Value Per Share (continued)
(b) | This category includes the underlying third party private equity funds within consolidated BlackRock sponsored private equity funds of funds. The fair values of the investments in the third party funds have been estimated using the net asset value of the Company’s ownership interest in partners’ capital in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption, however for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment via distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds would be liquidated over a weighted average period of approximately 9 years. |
Total remaining unfunded commitments to other third party funds is $78 million. The Company is contractually obligated to fund only $52 million to the consolidated funds, while the remaining unfunded balance in the table above would be funded by capital contributions from non-controlling interest holders.
(c) | This category includes several consolidated funds of funds that invest in multiple strategies to diversify risks. The fair values of the investments in this category have been estimated using the net asset value of the fund’s ownership interest in partners’ capital of each fund in the portfolio. Investments in this category can generally be redeemed, as long as there are no restrictions in place by the underlying funds. |
(d) | This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit and mortgage instruments and other third party hedge funds. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital. It is estimated that the investments in the funds that are not subject to redemptions would be liquidated over a weighted average period of less than 8 years. |
(e) | This category includes several private equity funds that initially invest in non-marketable securities of private companies, which ultimately may become public in the future. The fair values of these investments have been estimated using the net asset value of the Company’s ownership interest in partners’ capital as well as other performance inputs. The Company’s investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the private equity funds. It is estimated that the investment in these funds would be liquidated over a weighted average period of approximately 8 years. |
(f) | This category includes several real estate funds that invest primarily to acquire, expand, renovate, finance, hold for investment, and ultimately sell income-producing apartment properties or to capitalize on the distress in the residential real estate market. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital. The Company’s investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the real estate funds. It is estimated that the investments in these funds would be liquidated over a weighted average period of approximately 14 years. |
(g) | This category includes investments in certain hedge funds that invest in energy and health science related equity securities. The fair values of the investments in this category have been estimated using the net asset value of the Company’s ownership interest in partners’ capital as well as performance inputs. |
(h) | This category includes the underlying third party private equity funds within one consolidated BlackRock sponsored private equity fund of funds. The fair values of the investments in the third party funds have been estimated using the net asset value of the Company’s ownership interest in partners’ capital in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption, however for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment via distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds would be liquidated over a weighted average period of approximately 5 years. Total remaining unfunded commitments to other third party funds is $3 million, which will be funded by capital contributions from non-controlling interest holders. |
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
6. Fair Value Disclosures (continued)
Fair Value Option
Upon consolidation of three CLOs, the Company elected to adopt the fair value accounting provisions for eligible assets, including bank loans and borrowings of the CLOs. To the extent there is a difference between the change in fair value of the assets and liabilities, the difference will be reflected as net income attributable to nonredeemable non-controlling interests on the condensed consolidated statements of income and offset by a change in appropriated retained earnings on the condensed consolidated statements of financial condition.
The following table presents, as of March 31, 2010, the fair value of those assets and liabilities selected for fair value accounting:
(Dollars amounts in millions) | |||
CLO Bank Loans: | March 31, 2010 | ||
Fair value | $ | 1,154 | |
Aggregate principal amounts outstanding | $ | 1,303 | |
Aggregate unpaid principal balance in excess of fair value | $ | 149 | |
Unpaid principal balance of loans more than 90 days past due | $ | 9 | |
Aggregate fair value of loans more than 90 days past due | $ | 1 | |
Aggregate unpaid principal balance in excess of fair value for loans more than 90 days past due | $ | 8 | |
CLO Borrowings: | |||
Fair value | $ | 1,214 | |
Aggregate principal amounts outstanding | $ | 1,433 |
The principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2019.
During the three months ended March 31, 2010, the change in fair value of the bank loans, along with the bonds held at fair value, resulted in a $67 million gain which was offset by a $67 million loss in the fair value of the CLO borrowings, which were recorded in non-operating income (expense). The change in fair value of the assets and liabilities includes interest income and expense, respectively.
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
7. Variable Interest Entities
In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debtdebt/loan obligations (“CDO” or “CLO”) and sponsored investment funds, which may be considered VIEs. The Company receives managementadvisory fees 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 limited to its equity interests, unfunded capital commitments for certain sponsored investment funds and two capital support agreements for two enhanced cash funds at December 31, 2008 both of which have been terminated in 2009, due to closure of the funds.interests.
The primary beneficiary of a VIE that is an investment fund that meets the conditions of ASU 2010-10 is the enterprise that has a variable interest (or combination of variable interests, including those of related parties) that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns or both. The primary beneficiary of a CDO/CLO that is a VIE that does not meet the conditions of ASU 2010-10 is the enterprise that has the power to direct activities of the entity and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the CDO/CLO.
In order to determine whether the Company is the primary beneficiary of a VIE, management must make significant estimates and assumptions of probable future cash flows and assign probabilities to different cash flow scenarios.of the VIEs. Assumptions made in such analyses may include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, pre-payments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.
VIEs in which BlackRock is the Primary Beneficiary
As of March 31, 2010
As of March 31, 2010, BlackRock was the primary beneficiary of four VIEs, which included three CLOs, in which it 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. In addition, BlackRock was the primary beneficiary of one private sponsored investment fund, in which it had a resultnon-substantive investment, which absorbed the majority of consolidatingthe variability due to its de-facto third party relationships with other partners in the fund. At March 31, 2010 the following balances related to these four VIEs were consolidated in the Company’s condensed consolidated statements of financial condition:
(Dollar amounts in millions) | March 31, 2010 | |||
Assets of consolidated VIEs | ||||
Cash and cash equivalents | $ | 90 | ||
Bank loans, bonds and other investments | 1,288 | |||
Liabilities of consolidated VIEs | ||||
Borrowings | (1,214 | ) | ||
Other liabilities | (4 | ) | ||
Appropriated retained earnings | (114 | ) | ||
Non-controlling interests of consolidated VIEs | (46 | ) | ||
Total net interests in consolidated VIEs | $ | — | ||
For the three months ended March 31, 2010, the Company recorded non-operating income of $1 million offset by a $1 million net gain attributable to nonredeemable non-controlling interests on the Company’s condensed consolidated statements of income. For the three months ended March 31, 2009, the Company recorded a non-operating expense of $12 million offset by a $12 million net loss attributable to non-controlling interests on its condensed consolidated statements of income.
At March 31, 2010, bank loans, bonds and other investments were $1,154 million, $93 million, and $41 million, respectively. The weighted average maturity of the bank loans and bonds was approximately 4.1 years.
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
7. Variable Interest Entities (continued)
VIEs in which BlackRock is the Primary Beneficiary (continued)
As of December 31, 2009
As of December 31, 2009, BlackRock was the primary beneficiary of one VIE, a private sponsored investment fund, in which it had a non-substantive investment, due to its de-facto third party relationships with other partners in the fund. Due to the consolidation of this VIE, at June 30,December 31, 2009, the Company recorded $52$54 million of net assets, primarily comprised of investments and cash and cash equivalents. These net assets were offset by $52$54 million of nonredeemable non-controlling interests, which reflect the equity ownership of third parties, on the Company’s condensed consolidated statements of financial condition. For the period ended June 30, 2009, the Company recorded a non-operating expense of $6 offset by a $6 net loss attributable to nonredeemable non-controlling interests on its condensed consolidated statements of income. The Company has no risk of loss with its involvement with this VIE.
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PART I – FINANCIAL INFORMATION (continued)
As of December 31, 2008
Maximum Risk of Loss | ||||||||||||
VIE Net Assets That the Company Consolidates | Equity Interests | Capital Support Agreements | Total | |||||||||
Sponsored enhanced cash management funds | $ | 328 | $ | 88 | $ | 45 | $ | 133 | ||||
Other sponsored investment funds | 55 | — | — | — | ||||||||
Total | $ | 383 | $ | 88 | $ | 45 | $ | 133 | ||||
As a result of consolidating three private investment funds at December 31, 2008, the Company recorded $383 of net assets, primarily investments and cash and cash equivalents. These net assets were offset by $319 of non-controlling interests which reflect the equity ownership of third parties, on its condensed consolidated statements of financial condition.
The maximum risk of loss related to the capital support agreements in the table above reflect the Company’s total obligation under the capital support agreements with the two enhanced cash funds. The fair value of the Company’s obligation related to the two capital support agreements recorded at December 31, 2008 was $18.
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PART I – FINANCIAL INFORMATION (continued)
VIEs in which BlackRockthe Company holds significant variable interests or is the sponsor that holds a variable interest but is not the Primary Beneficiary of the VIE
At June 30, 2009March 31, 2010 and December 31, 2008,2009, the Company’s carrying value of assets and liabilities and its maximum risk of loss related to VIEs in which it holds a significant variable interest or is the sponsor that holds a variable interest, but for which it was not the primary beneficiary, waswere as follows:
As of June 30, 2009March 31, 2010
Variable Interests on the Condensed Statement of Financial Condition | (Dollar amounts in millions) | |||||||||||||||||||||||||||||||
VIE Assets That the Company Does Not Consolidate | VIE Liabilities That the Company Does Not Consolidate | Investments | Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss | Variable Interests on the Condensed Consolidated Statement of Financial Condition | ||||||||||||||||||||||||||
Investments | Advisory Fee Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss | |||||||||||||||||||||||||||||
CDOs | $ | 6,348 | $ | 14,276 | $ | 3 | $ | 3 | $ | (1 | ) | $ | 22 | |||||||||||||||||||
Sponsored cash management fund | 1,333 | — | — | — | — | — | ||||||||||||||||||||||||||
CDOs/CLOs | $ | 3 | $ | 2 | $ | (3 | ) | $ | 22 | |||||||||||||||||||||||
Other sponsored investment funds | 10,163 | 2,010 | 11 | 11 | 7 | 22 | 14 | 318 | (— | ) | 332 | |||||||||||||||||||||
Total | $ | 17,844 | $ | 16,286 | $ | 14 | $ | 14 | $ | 6 | $ | 44 | $ | 17 | $ | 320 | $ | (3 | ) | $ | 354 | |||||||||||
The size of the net assets of the VIEs that the Company does not consolidate related to CDOs/CLOs, collective trust funds and other sponsored investment funds were as follows:
CDOs/CLOs – approximately ($6) billion, comprised of approximately $9 billion of assets at fair value and $15 billion of liabilities, primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders.
Other sponsored investments funds – approximately $1.5 trillion to $1.6 trillion
This amount includes approximately $1.1 trillion of collective trusts. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts.
The net assets of the VIEs are primarily comprised of cash and cash equivalents and investments and theoffset by liabilities are primarily comprised of debt obligations (CDO debt holders) and various accruals.accruals for the sponsored investment vehicles.
At June 30, 2009,March 31, 2010, BlackRock’s maximum risk of loss associated with these VIEs primarily relates to: (i) BlackRock’s equity investments, (ii) managementadvisory fee receivables and (iii) credit protection sold by BlackRock to a third party in a synthetic CDO transaction.
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PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
7. Variable Interest Entities (continued)
VIEs in which BlackRock holds significant variable interests or is the sponsor that holds a variable interest but is not the Primary Beneficiary of the VIE (continued)
As of December 31, 20082009
Variable Interests on the Condensed Statement of Financial Condition | (Dollar amounts in millions) | |||||||||||||||||||||||||||||||
VIE Assets That the Company Does Not Consolidate | VIE Liabilities That the Company Does Not Consolidate | Investments | Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss | Variable Interests on the Condensed Consolidated Statement of Financial Condition | ||||||||||||||||||||||||||
Investments | Advisory Fee Receivables | Other Net Assets (Liabilities) | Maximum Risk of Loss | |||||||||||||||||||||||||||||
CDOs | $ | 6,660 | $ | 14,487 | $ | 4 | $ | 5 | $ | (1 | ) | $ | 25 | |||||||||||||||||||
Sponsored cash management fund | 733 | — | — | — | — | — | ||||||||||||||||||||||||||
CDOs/CLOs | $ | 2 | $ | 2 | $ | (2 | ) | $ | 21 | |||||||||||||||||||||||
Other sponsored investment funds | 5,813 | 440 | 9 | 9 | (6 | ) | 18 | 14 | 254 | (7 | ) | 268 | ||||||||||||||||||||
Total | $ | 13,206 | $ | 14,927 | $ | 13 | $ | 14 | $ | (7 | ) | $ | 43 | $ | 16 | $ | 256 | $ | (9 | ) | $ | 289 | ||||||||||
The size of the net assets of the VIEs that the Company does not consolidate related to CDOs/CLOs, collective trust funds and other sponsored investment funds were as follows:
CDOs/CLOs – approximately ($8) billion, comprised of approximately $10 billion of assets at fair value and $18 billion of liabilities, primarily comprised of unpaid principal debt obligations to CDO/CLO debt holders.
Other sponsored investments funds – approximately $1.5 trillion to $1.6 trillion
This amount includes approximately $1.1 trillion of collective trusts. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts.
The net assets of the VIEs are primarily comprised of cash and cash equivalents and investments and theoffset by liabilities are primarily comprised of debt obligations (CDO debt holders) and various accruals.accruals for the sponsored investment vehicles.
At December 31, 2008,2009, BlackRock’s maximum risk of loss associated with these VIEs primarily relates to: (i) BlackRock’s equity investments, (ii) managementadvisory fee receivables and (iii) credit protection sold by BlackRock to a third party in a synthetic CDO transaction.
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PART I—FINANCIAL INFORMATION (continued)
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
8. Derivatives and Hedging
For the sixthree months ended June 30,March 31, 2010 and the year ended December 31, 2009, and 2008, the Company did not hold any derivatives designated in a formal hedge relationship under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(ASC 815,815-10,Derivatives and Hedging (“ASC 815-10”), as amended..
By using derivative financial instruments, the Company exposes itself to market and counterparty risk. Market risk from forward foreign currency exchange contracts is the effect on the value of a financial instrument that results from a change in currency exchange rates. The Company manages 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 March 31, 2010, the Company had two outstanding forward foreign exchange contracts with two counterparties with an aggregate notional value of $100 million.
During the six months ended June 30, 2009 and 2008,2007, the Company wascommenced a counterpartyprogram to enter into a series of total return swaps to economically hedge against changes in fair value ofmarket price exposures with respect to certain seed investments in sponsored investment products. At June 30, 2009,March 31, 2010, the Company had seven outstanding total return swaps hadwith two counterparties with an aggregate notional value of approximately $36$24 million.
The Company acts as the portfolio manager in a series of credit default swap transactions, referred to collectively as the Pillars synthetic CDO transaction (“Pillars”). The Company has entered into a credit default swap with Citibank, N.A. (“Citibank”), providing Citibank credit protection of approximately $17 million, representing the Company’s maximum risk of loss with respect to the provision of credit protection. Pursuant to ASC 815-10, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement.
On behalf of clients that maintain separate accounts representing segregated funds held for the purpose of funding individual and netgroup pension contracts, the Company invests in various derivative instruments, including forward foreign currency contracts, interest rate and inflation rate swaps.
The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the fund’s investment strategy. The change in fair value of such derivatives, which is recorded in non-operating income (expense) is not material to the Company’s condensed consolidated financial statements.
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
8. Derivatives and Hedging (continued)
The following table presents the fair value as of March 31, 2010 of derivative instruments not designated as hedging instruments:
Assets | Liabilities | |||||||||
(Dollar amounts in millions) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||
Foreign exchange contracts | Other assets | $ | — | Other liabilities | $ | 3.6 | ||||
Total return swaps | Other assets | — | Other liabilities | 0.4 | ||||||
Credit default swap (Pillars) | Other assets | — | Other liabilities | 2.5 | ||||||
Separate account derivatives(1) | Separate account assets | 1,457.0 | Separate account liabilities | 1,457.0 | ||||||
Total | $ | 1,457.0 | $ | 1,463.5 | ||||||
(1) | Derivatives associated with separate account assets include interest rate, inflation rate swaps, futures and foreign currency contracts. |
The following table presents the fair value as of December 31, 2009 of derivative instruments not designated as hedging instruments:
Assets | Liabilities | |||||||||
(Dollar amounts in millions) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||
Foreign exchange contracts | Other assets | $ | 0.2 | Other liabilities | $ | — | ||||
Total return swaps | Other assets | — | Other liabilities | 0.4 | ||||||
Credit default swap (Pillars) | Other assets | — | Other liabilities | 2.5 | ||||||
Separate account derivatives(1) | Separate account assets | 1,501.0 | Separate account liabilities | 1,501.0 | ||||||
Total | $ | 1,501.2 | $ | 1,503.9 | ||||||
(1) | Derivatives associated with separate account assets include interest rate, inflation rate swaps, futures and foreign currency contracts. |
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
8. Derivatives and Hedging (continued)
The following table presents gains (losses) recognized in income for the three months ended March 31, 2010 on derivative instruments:
(Dollar amounts in millions) | Income Statement Location | Amount of Gain (Loss) Recognized in Income on Derivative Instruments | ||||
Foreign exchange contracts | General and administration expense | $ | (3.8 | ) | ||
Total return swaps | Non-operating income (expense) | (0.5 | ) | |||
Credit default swap (Pillars) | Non-operating income (expense) | (0.1 | ) | |||
Total | $ | (4.4 | ) | |||
Net realized and change in unrealized gains/gains and losses of approximately ($2)attributable to derivatives held by separate account assets and $12 forliabilities accrue directly to the six months ended June 30, 2009contract owner and 2008, respectively, which were included inare not reported as non-operating income (expense) in the Company’s condensed consolidated statements of income. At June 30, 2009, an unrealized gain of less than $1 was included in other assets on the condensed consolidated statement of financial condition.
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PART I – FINANCIAL INFORMATION (continued)9. Goodwill
In December 2007, BlackRock entered into capital support agreements, up to $100, with two enhanced cash funds. These capital support agreements were backed by letters of credit issued under BlackRock’s revolving credit facility. In December 2008, the capital support agreements were modified to be up to $45 and were no longer backed by the letters of credit. In January and May 2009, the capital support agreements were terminated, due to the closure of the related funds. During the six months ended June 30, 2009, the Company provided approximately $4 of capital contributions to the funds under the capital support agreements. At December 31, 2008, the derivative liability for the fair value of the capital support agreements for two funds totaled approximately $18. The fair value of these liabilities increased and decreased as BlackRock’s obligation under the guarantee fluctuated based on the fair value of the derivative. Upon closure of the funds, the liability decreased $11, while the change in the liability was included in general and administration expenses.
Goodwill at June 30, 2009March 31, 2010 and changes during the sixthree months ended June 30, 2009March 31, 2010 were as follows:
December 31, 2008 | $ | 5,533 | |
Net additions related to: | |||
Quellos | 189 | ||
Other | 1 | ||
June 30, 2009 | $ | 5,723 | |
(Dollar amounts in millions) | |||
December 31, 2009, as reported | $ | 12,570 | |
BGI purchase price allocation adjustment | 68 | ||
December 31, 2009, as adjusted | 12,638 | ||
Other net additions | 3 | ||
March 31, 2010 | $ | 12,641 | |
In accordance with ASC 805, goodwill has been retrospectively adjusted to reflect new information obtained about facts that existed as of December 1, 2009, the BGI acquisition date. During the sixthree months ended June 30, 2009, the CompanyMarch 31, 2010, goodwill increased goodwill by $190.$71 million. The increase relates primarily to a $156 cash payment and a common stock issuance of $43purchase price allocation adjustments related to the first contingent payment in connection withBGI Transaction, the Quellos Transaction,purchase of substantially all of the net assets of Helix Financial Group, LLC, offset by a $10 decline related to tax benefits realized from tax-deductible goodwill in excess of book goodwill.
At June 30, 2009,March 31, 2010, the balance of the Quellos tax-deductible goodwill in excess of book goodwill was approximately $391.$364 million. Goodwill related to the Quellos Transaction will continue to be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill.
- 3234 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
10. Intangible Assets
The carrying amounts of identifiable intangible assets are summarized as follows:
Indefinite-lived intangible assets | Finite-lived intangible assets | Total | |||||||||
December 31, 2008 | $ | 5,378 | $ | 1,063 | $ | 6,441 | |||||
Addition | — | 2 | 2 | ||||||||
Amortization expense | — | (72 | ) | (72 | ) | ||||||
June 30, 2009 | $ | 5,378 | $ | 993 | $ | 6,371 | |||||
(Dollar amounts in millions) | Indefinite-lived intangible assets | Finite-lived intangible assets | Total | ||||||||
December 31, 2009, as reported | $ | 16,566 | $ | 1,082 | $ | 17,648 | |||||
BGI purchase price allocation adjustments | 25 | (7 | ) | 18 | |||||||
December 31, 2009, as adjusted | 16,591 | 1,075 | 17,666 | ||||||||
Amortization expense | — | (40 | ) | (40 | ) | ||||||
March 31, 2010 | $ | 16,591 | $ | 1,035 | $ | 17,626 | |||||
In Aprilaccordance with ASC 805, intangible assets have been retrospectively adjusted to reflect new information obtained about facts that existed as of December 1, 2009, the Company acquired $2 of finite-life management contracts with a five-year estimated useful life associated withBGI acquisition date. During the acquisition of the R3 Capital Partners funds.three months ended March 31, 2010, intangible assets decreased $22 million related to amortization, partially offset by BGI purchase price allocation adjustments.
11. Borrowings
Short-Term Borrowings
2007 Facility
In August 2007, the Company entered into a five-year $2,500$2.5 billion unsecured revolving credit facility (“(the “2007 facility”), which permits the 2007 facility”).Company to request an additional $500 million of borrowing capacity, subject to lender credit approval, up to a maximum of $3.0 billion. The 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at June 30, 2009.March 31, 2010.
The 2007 facility provides back-up liquidity, funds ongoing working capital for general corporate purposes and funds various investment opportunities. At June 30, 2009,March 31, 2010, the Company had $200$100 million outstanding under the 2007 facility with an interest rate of 0.49%0.43% and a maturity date during July 2009. During July 2009, the Company rolled over the $200 in borrowings with an interest rate of 0.47% and a maturity date in August 2009.May 2010.
Lehman Commercial Paper Inc. has a $140 million participation under the 2007 facility;Facility; however BlackRock does not expect that Lehman Commercial Paper Inc. will honor its commitment to fund additional amounts.
Bank of America Corporation (“Bank of America”), a related party, has a $140 million participation under the 2007 facility.
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
11. Borrowings (continued)
Short-Term Borrowings (continued)
Commercial Paper Program
On October 14, 2009, BlackRock established a commercial paper program (the “CP Program”) under which the Company may issue unsecured commercial paper notes (the “CP Notes”) on a private placement basis up to a maximum aggregate amount outstanding at any time of $3 billion. The proceeds of the commercial paper issuances were used for the financing of a portion of the BGI Transaction. Subsidiaries of Bank of America and Barclays, as well as other third parties, act as dealers under the CP Program. The CP Program is supported by the 2007 facility.
The Company began issuance of CP Notes under the CP Program on November 4, 2009. As of March 31, 2010, BlackRock had approximately $780 million of outstanding CP Notes with a weighted average interest rate of 0.20% and a weighted average maturity of 22 days. As of May 6, 2010, BlackRock had $616 million of outstanding CP Notes with a weighted average interest rate of 0.23% and a weighted average maturity of 23 days.
Japan Commitment-line
In June 2009, BlackRock Japan Co., Ltd., a wholly owned subsidiary of the Company, renewed itsa five billion Japanese yen commitment-line agreement with a banking institution (the “Japan Commitment-line”) for a. The term of the Japan Commitment-line was one year.year and interest accrued at the applicable Japanese short-term prime rate. The Japan Commitment-line is intended to provide liquidity and flexibility for operating requirements in Japan. At June 30, 2009,March 31, 2010, the Company had no borrowings outstanding underon the Japan Commitment-line.
Convertible Debentures
The carrying value of the 2.625% convertible debentures due in 2035 included the following:
(Dollar amounts in millions) | March 31, 2010 | December 31, 2009 | ||||
Maturity amount | $ | 95 | $ | 243 | ||
Unamortized discount | — | — | ||||
Carrying value | $ | 95 | $ | 243 | ||
The Company recognized $1 million and $3 million for the three months ended March 31, 2010 and 2009, respectively of interest expense, comprised of $1 million and $2 million related to the coupon and less than $1 million and $1 million related to amortization of the discount for the three months ended March 31, 2010 and 2009, respectively. At March 31, 2010, the estimated fair value of the convertible debentures was $204 million, which was estimated using a market price at March 31, 2010.
On February 15, 2009, the convertible debentures became convertible at the option of the holder into cash and shares of the Company’s common stock at any time prior to maturity. During the three months ended March 31, 2010, holders of $148 million of debentures converted their holdings into cash and shares. In addition, through May 6, 2010, holders of an additional $24 million of debentures elected to convert their holdings into cash and shares.
- 3336 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
11. Borrowings (continued)
Convertible DebenturesLong-Term Borrowings
2017 Notes
In September 2007, the Company issued $700 million in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “2017 Notes”). Interest is payable semi-annually 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 in debt issuance costs, which are included in other assets on the condensed consolidated statements of financial condition and are being amortized over the term of the 2017 Notes.
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, $1.0 billion of 3.50% notes and $1.0 billion of 5.0% notes maturing in December 2012, 2014 and 2019, respectively. Net proceeds of this offering were used to repay borrowings under the CP Program and for general corporate purposes. Interest on these notes is payable semi-annually on June 10 and December 10 of each year beginning June 10, 2010, or approximately $96 million per 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 that is being amortized over the term of the notes. The Company incurred approximately $13 million in debt issuance costs, which are included in other assets on the condensed consolidated statements of financial condition and are being amortized over the terms of the these notes.
Carrying Value and Fair Value of Long-Term Borrowings
The carrying value of the convertible debentures included the following:
June 30, 2009 | December 31, 2008 | |||||||
2.625% Convertible debentures due in 2035 | ||||||||
Maturity amount | $ | 249 | $ | 249 | ||||
Unamortized discount | (2 | ) | (4 | ) | ||||
Total | $ | 247 | $ | 245 | ||||
The Company recognized $6 in each of the six months ended June 30, 2009 and 2008 of interest expense, comprised in both periods of $4 related to the coupon and $2 related to amortization of the discount. At June 30, 2009, the estimated fair value of the convertible debentures was $442, which was estimated using a market price at June 30, 2009.
Long-Term Borrowings
The carrying value of long-term borrowings included the following:
June 30, 2009 | December 31, 2008 | |||||||
6.25% Senior notes due in 2017 | ||||||||
Maturity amount | $ | 700 | $ | 700 | ||||
Unamortized discount | (5 | ) | (5 | ) | ||||
Total long-term senior notes | 695 | 695 | ||||||
Other long-term borrowings | — | 2 | ||||||
Total long-term borrowings | $ | 695 | $ | 697 | ||||
At June 30, 2009, the estimated fair value of the senior notes was $699, which was estimated using an applicable bond index at June 30, 2009.March 31, 2010 included the following:
(Dollar amounts in millions) | 2.25% Notes due 2012 | 3.50% Notes due 2014 | 6.25% Notes due 2017 | 5.00% Notes due 2019 | Total Long-term Borrowings | |||||||||||||||
Maturity amount | $ | 500 | $ | 1,000 | $ | 700 | $ | 1,000 | $ | 3,200 | ||||||||||
Unamortized discount | (1 | ) | (1 | ) | (4 | ) | (3 | ) | (9 | ) | ||||||||||
Carrying value | $ | 499 | $ | 999 | $ | 696 | $ | 997 | $ | 3,191 | ||||||||||
Fair value | $ | 504 | $ | 1,010 | $ | 768 | $ | 1,001 | $ | 3,283 |
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PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
At June 30, 2009, the Company was committedBlackRock, Inc.
Notes to provide financing of up to $60, until March 2010, to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that is managed by a subsidiary of BlackRock. The financing is collateralized by Anthracite pledging its ownership interest in an investment fund which is also managed by a subsidiary of BlackRock. At June 30, 2009, $33.5 of financing was outstanding which matured in July 2009. Upon maturity Anthracite rolled over the borrowings with a new maturity date of October 2009. As of June 2009, the value of the collateral was estimated to be $28.5, which resulted in the Company reducing the outstanding balance included in due from related parties on the Company’s condensed consolidated statement of financial condition by $5 and recorded a charge to general and administration expense. Based on the value of the collateral and the borrowings outstanding of such date, the Company has no obligation to loan new amounts to Anthracite under this facility. The Company has granted waivers for certain breaches of financial covenants of Anthracite’s credit facility.Condensed Consolidated Financial Statements—(continued)
In July 2008, the Company entered into an amended and restated stockholder agreement and an amended and restated global distribution agreement with Merrill Lynch.
These changes to the stockholder agreement with Merrill Lynch, among other items, (i) provide Merrill Lynch with additional flexibility to form or acquire asset managers substantially all of the business of which is devoted to non-traditional investment management strategies such as short selling, leverage, arbitrage, specialty finance and quantitatively-driven structured trades; (ii) expand the definition of change in control of Merrill Lynch to include the disposition of two-thirds or more of its Global Private Client business; (iii) extend the general termination date to the later of July 16, 2013 or the date Merrill Lynch's beneficial ownership of BlackRock voting securities falls below 20%; and (iv) clarify certain other provisions in the agreement.
The changes in the global distribution agreement in relation to the prior agreement, among other things, (i) provide for an extension of the term to five years from the date of a change in control of Merrill Lynch (to January 1, 2014 following Bank of America’s acquisition of Merrill Lynch) and one automatic 3-year extension if certain conditions are satisfied; (ii) strengthen the obligations of Merrill Lynch to achieve revenue neutrality across the range of BlackRock products distributed by Merrill Lynch if the pricing or structure of particular products is required to be changed; (iii) obligate Merrill Lynch to seek to obtain distribution arrangements for BlackRock products from buyers of any portion of its distribution business on the same terms as the global distribution agreement for a period of at least 3 years; and (iv) restrict the manner in which products managed by alternative asset managers in which Merrill Lynch has an interest may be distributed by Merrill Lynch.
In connection with the closings under the exchange agreements, (see Note 11, Capital Stock), on February 27, 2009 BlackRock entered into a second amended and restated stockholder agreement with Merrill Lynch and an amended and restated implementation and stockholder agreement with PNC, and a third amendment to the share surrender agreement with PNC.(unaudited)
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PART I – FINANCIAL INFORMATION11. Borrowings (continued)
Carrying Value and Fair Value of Long-Term Borrowings (continued)
The changes contained incarrying value and fair value of long-term borrowings estimated using an applicable bond index at December 31, 2009 included the amended and restated stockholder agreement with Merrill Lynch, in relation to the prior agreement, among other things, (i) revised the definitions of “Fair Market Value,” “Ownership Cap” and “Significant Stockholder”; and (ii) amended or supplemented certain other definitions and provisions therein to incorporate series B preferred stock and series C preferred stock, respectively. The changes contained in the amended and restated stockholder agreement with PNC, in relation to the prior agreement, among other things, (i) revised the definitions of “Fair Market Value,” “Ownership Cap,” “Ownership Percentage,” “Ownership Threshold” and “Significant Stockholder”; and (ii) amended or supplemented certain other provisions therein to incorporate series B preferred stock and series C preferred stock, respectively.
The amendment to the share surrender agreement provided for the substitution of series C preferred stock for the shares of common stock subject to the share surrender agreement.following:
During the three months ended March 31, 2009, the Company continued to reduce its workforce globally. This action was the result of business reengineering efforts designed to streamline operations, enhance competitiveness and better position the Company in the asset management marketplace. The Company recorded a pre-tax restructuring charge of $22 ($14 after-tax) for the three months ended March 31, 2009. This charge was comprised of $15 of severance and associated outplacement costs, $4 of property costs associated with the lease payments for the remaining term in excess of the estimated sublease proceeds and $3 of expenses related to the accelerated amortization of previously granted stock-based compensation awards.
The following table presents a rollforward of the Company’s restructuring liability, which is included within other liabilities on the Company’s condensed consolidated statements of financial condition.
Liability as of December 31, 2008 | $ | 21 | ||
Additions | 22 | |||
Cash payments | (30 | ) | ||
Non-cash charges | (3 | ) | ||
Liability as of June 30, 2009 | $ | 10 | ||
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(Dollar amounts in millions) | 2.25% Notes due 2012 | 3.50% Notes due 2014 | 6.25% Notes due 2017 | 5.00% Notes due 2019 | Total Long- term Borrowings | |||||||||||||||
Maturity amount | $ | 500 | $ | 1,000 | $ | 700 | $ | 1,000 | $ | 3,200 | ||||||||||
Unamortized discount | (1 | ) | (1 | ) | (4 | ) | (3 | ) | (9 | ) | ||||||||||
Carrying value | $ | 499 | $ | 999 | $ | 696 | $ | 997 | $ | 3,191 | ||||||||||
Fair value | $ | 497 | $ | 987 | $ | 751 | $ | 987 | $ | 3,222 |
PART I – FINANCIAL INFORMATION (continued)
On January 1, 2009, Bank of America acquired Merrill Lynch. In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and PNC pursuant to which each agreed to exchange a portion of the BlackRock common stock it held for an equal number of shares of non-voting participating preferred stock. On February 27, 2009, Merrill Lynch exchanged (i) 49,865,000 shares of BlackRock’s common stock for a like number of shares of BlackRock’s series B non-voting participating preferred stock, and (ii) 12,604,918 shares of BlackRock’s series A preferred stock for a like number of shares of series B preferred stock, and PNC exchanged (i) 17,872,000 shares of BlackRock’s common stock for a like number of shares of series B preferred stock and (ii) 2,889,467 shares of BlackRock’s common stock for a like number of shares of BlackRock’s series C non-voting participating preferred stock. On June 30, 2009, Bank of America/Merrill Lynch owned approximately 4.6% of BlackRock’s voting common stock and 46.3% of BlackRock’s capital stock on a fully diluted basis, and PNC owned approximately 43.9% of BlackRock’s voting common stock and 30.8% of BlackRock’s capital stock on a fully diluted basis.
Below is a summary description of the series B and C preferred stock issued in the exchanges.
The series B non-voting participating preferred stock:
is non-voting except as otherwise provided by applicable law;
participates in dividends on a basis generally equal to the common stock;
benefits from a liquidation preference of $0.01 per share; and
is mandatorily convertible to BlackRock common stock upon transfer to an unrelated party.
The series C non-voting participating preferred stock:
is non-voting except as otherwise provided by applicable law;
participates in dividends on a basis generally equal to the common stock;
benefits from a liquidation preference of $40.00 per share; and
is only convertible to BlackRock common stock upon the termination of the obligations of PNC under its share surrender agreement with BlackRock.
In June 2009, the Company issued 2,133,713 shares of BlackRock's common stock at $140.60 per share. The proceeds of the issuance will be used to fund the purchase of Barclays Global Investors (see Note 16, Pending Transaction).
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PART I – FINANCIAL INFORMATION (continued)
At June 30, 2009 and December 31, 2008, BlackRock had 20,000,000 series A non-voting participating preferred shares, $0.01 par value, authorized. At June 30, 2009, BlackRock had 150,000,000 and 6,000,000 series B and series C, respectively non-voting participating preferred shares, $0.01 par value, authorized.
The Company’s common and preferred shares issued and outstanding and activity for the six months ended June 30, 2009 was as follows:
Shares Issued | Shares Outstanding | |||||||||||||||||||||||||
Common Shares | Escrow Common Shares | Treasury Common Shares | Preferred Shares Series A | Preferred Shares Series B | Preferred Shares Series C | Common Shares | Preferred Shares Series A | Preferred Shares Series B | Preferred Shares Series C | |||||||||||||||||
December 31, 2008 | 118,573,367 | (911,266 | ) | (370,991 | ) | 12,604,918 | — | — | 117,291,110 | 12,604,918 | — | — | ||||||||||||||
Issuance of common shares to institutional investor | 2,133,713 | — | — | — | — | — | 2,133,713 | — | — | — | ||||||||||||||||
Issuance of common shares for contingent consideration | 330,341 | — | — | — | — | — | 330,341 | — | — | — | ||||||||||||||||
Net issuance of common shares related to employee stock transactions | 415,503 | — | 422,390 | — | — | — | 837,893 | — | — | — | ||||||||||||||||
Exchange of preferred shares series A for preferred shares series B | — | — | — | (12,604,918 | ) | 12,604,918 | — | — | (12,604,918 | ) | 12,604,918 | — | ||||||||||||||
Exchange of common shares for preferred shares series B | (67,737,000 | ) | — | — | — | 67,737,000 | — | (67,737,000 | ) | — | 67,737,000 | — | ||||||||||||||
Exchange of common shares for preferred shares series C | (2,889,467 | ) | — | — | — | — | 2,889,467 | (2,889,467 | ) | — | — | 2,889,467 | ||||||||||||||
PNC capital contribution | — | — | (51,399 | ) | — | — | — | (51,399 | ) | — | — | — | ||||||||||||||
June 30, 2009 | 50,826,457 | (911,266 | ) | — | — | 80,341,918 | 2,889,467 | 49,915,191 | — | 80,341,918 | 2,889,467 | |||||||||||||||
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PART I – FINANCIAL INFORMATION (continued)
12. Commitments and Contingencies |
Commitments
Investment / Loan Commitments
At June 30, 2009,March 31, 2010 the Company had approximately $277$301 million of investment commitments relating primarily to funds of private equity funds, real estate funds and hedge funds. Amounts to be funded generally are callable at any point prior to the expiration of the commitment. This amount excludes additional commitments made by consolidated funds of funds to underlying third party funds as third party non-controlling interest holders have the legal obligation to fund the respective commitments of such funds of funds.
Legal Proceedings
From time to time, BlackRock receives subpoenas or other requests for information from various U.S. federal, state governmental and regulatory authorities in connection with certain industry-wide or other investigations or proceedings. It is BlackRock’s policy to cooperate fully with such inquiries. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations and other litigation arising in connection with BlackRock’s activities. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which potentially could harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.
Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of regulatory matters or lawsuits will have a material adverse effect on BlackRock’s earnings, financial position, or cash flows although, at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations in any future reporting period.
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
12. Commitments and Contingencies (continued)
Indemnifications
In the ordinary course of business, BlackRock enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.
Under the Transaction Agreementtransaction agreement in the MLIM Transaction, the Company has agreed to indemnify Merrill Lynch & Co., Inc. (“Merrill Lynch”) for losses it may incur arising from (1) any alleged or actual breach, failure to comply, violation or other deficiency with respect to any regulatory or fiduciary requirements relating to the operation of BlackRock’s business, (2) any fees or expenses incurred or owed by BlackRock to any brokers, financial advisors or comparable other persons retained or employed by BlackRock in connection with the MLIM Transaction, and (3) certain specified tax covenants.
Under the transaction agreement in the BGI Transaction, the Company has agreed to indemnify Barclays for losses it may incur arising from (1) breach by the Company of certain representations, (2) breach by the Company of any covenant in the agreement, (3) liabilities of the entities acquired in the transaction other than liabilities assumed by Barclays or for which it is providing indemnification, and (4) certain taxes.
Management believes that the likelihood of any liability arising under thesethe MLIM Transaction and 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 Company’s condensed consolidated statements of financial condition.
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PART I – FINANCIAL INFORMATION (continued)
Contingent Payments Related to Quellos TransactionBusiness Acquisitions
On October 1, 2007, the Company acquired the fund of funds business of Quellos. As part of this transaction, Quellos is entitled to receive two contingent payments upon achieving certain investment advisory revenue measures through December 31, 2010, totaling up to an additional $969 million in a combination of cash and stock. The first contingent payment of up to $374, was payablepaid in second quarter 2009 and the second contingent payment, of up to $595 million is payable in cash in 2011.
During second quarter 2009, the Company determined the first contingent payment to be $219 million, of which $11 million was previously paid in cash during 2008. Of the remaining $208 million, $156 million was paid in cash and $52 million was paid in common stock, or approximately 330,000 shares converted atbased on a price of $157.33.$157.33 per share. Quellos may also be entitled to a “catch-up” payment related to the first contingent payment if certain performance measures are met in 2011 as the value of the first contingent payment was less than $374.$374 million.
In connection with the SSR Transaction, which closed in January 2005, the Company will make an additional contingent payment in 2010 of approximately $9 million.
London Lease
In January 2010, the Company entered into an agreement with Mourant & Co Trustees Limited and Mourant Property Trustees Limited as Trustees of the Drapers Gardens Unit Trust, for the lease of approximately 292,418 square feet of office and ancillary (including retail) space located at Drapers Gardens, 12 Throgmorton Avenue, London, EC2, United Kingdom.
The term of the lease began on February 17, 2010 (the “Effective Date”) and will continue for twenty five years, with the option to renew for an additional five year term. The lease provides for total annual base rental payments of approximately £13 million (exclusive of value added tax and other lease charges, or approximately $21.7 million based on an exchange rate of $1.60 per £1), payable quarterly in advance. The annual rent is subject to increase on each fifth anniversary of the Effective Date to the then open market rent. The lease includes an initial rent free period for thirty six (36) months and twenty two (22) days following the Effective Date.
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PART I—FINANCIAL INFORMATION (continued)
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
13. Stock-Based Compensation
The components of the Company’s stock-based compensation expense are comprised of the following:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Stock-based compensation: | ||||||||||||
Restricted stock and restricted stock units (“RSUs”) | $ | 59 | $ | 48 | $ | 123 | $ | 99 | ||||
Stock options | 3 | — | 6 | 4 | ||||||||
Long-term incentive plans funded by PNC | 15 | 15 | 30 | 30 | ||||||||
Total stock-based compensation | $ | 77 | $ | 63 | $ | 159 | $ | 133 | ||||
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Three Months Ended March 31, | ||||||
(Dollar amounts in millions) | 2010 | 2009 | ||||
Stock-based compensation: | ||||||
Restricted stock and restricted stock units (“RSUs”) | $ | 90 | $ | 64 | ||
Long-term incentive plans funded by PNC | 15 | 15 | ||||
Stock options | 3 | 3 | ||||
Total stock-based compensation | $ | 108 | $ | 82 | ||
PART I – FINANCIAL INFORMATION (continued)
Stock Options
Options outstanding at June 30, 2009 and changes during the six months ended June 30, 2009 were as follows:
Outstanding at | Shares Under Option | Weighted Average Exercise Price | ||||
December 31, 2008 | 3,140,517 | $ | 88.82 | |||
Exercised | (310,846 | ) | $ | 36.64 | ||
June 30, 2009 | 2,829,671 | $ | 94.55 | |||
The aggregate intrinsic value of options exercised during the six months ended June 30, 2009 was $33.
At June 30, 2009, the Company had $27 in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 2.3 years.
Restricted Stock and RSUs
Restricted stock and RSU activity at June 30, 2009March 31, 2010 and changes during the sixthree months ended June 30, 2009March 31, 2010 were as follows:
Outstanding at | Unvested Restricted Stock and Units | Weighted Average Grant Date Fair Value | ||||
December 31, 2008 | 4,603,953 | $ | 174.24 | |||
Granted | 1,855,077 | $ | 117.73 | |||
Converted | (818,013 | ) | $ | 179.46 | ||
Forfeited | (192,807 | ) | $ | 156.37 | ||
June 30, 2009 | 5,448,210 | $ | 154.85 | |||
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PART I – FINANCIAL INFORMATION (continued)
Outstanding at | Unvested Restricted Stock and Units | Weighted Average Grant Date Fair Value | ||||
December 31, 2009 | 5,360,463 | $ | 154.75 | |||
Granted | 2,796,005 | $ | 239.47 | |||
Converted | (1,279,522 | ) | $ | 154.72 | ||
Forfeited | (161,023 | ) | $ | 161.92 | ||
March 31, 2010 | 6,715,923 | $ | 189.86 | |||
The Company values restricted stock and RSUs at their grant-date fair value as measured by BlackRock’s common stock price.
In January 2009,2010, the Company granted 23,417 RSUs as long-term incentive compensation, which will be partially funded by shares currently held by PNC (see Long-Termthe following awards under the BlackRock, Inc. 1999 Stock Award and Incentive Plans Funded by PNC below). The awards cliff vest five years from the date of grant.Plan:
In January 2009, the Company granted 1,789,685
846,884 RSUs to employees as part of annual incentive compensation under the BlackRock, Inc. 1999 Stock Award and Incentive Plan (the “Award Plan”) that vest ratably over three years from the date of grant.
At June 30, 2009, there was $442 in total unrecognized compensation cost related
256,311 RSUs to unvested restricted stock and RSUs. The unrecognized compensation cost is expected to be recognized over the remaining weighted average period of 2.1 years.
Long-Term Incentive Plans Funded by PNC
Under a share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock common stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”).
During 2007, the Company granted additional long-term incentive awards, out of the Award Plan of approximately 1,600,000 RSUsemployees that will be settled using BlackRock shares held by PNC in accordance with the share surrender agreement. The RSU awardscliff vest on September 29, 2011 providedJanuary 31, 2012. Awards to certain individuals require that BlackRock has actual GAAP earnings per share of at least $5.20 in 2009, $5.52$6.13 in 2010 or $5.85$6.50 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards. The valueRSUs may not be sold before the one-year anniversary of the RSUs was calculated using BlackRock’s closing stock price on the date of grant. The grant date fair value of the RSUs is being amortized as an expense on the straight-line method over the vesting period, net of expected forfeitures. The maximum value of awards that may be funded by PNC, prior to the earlier of September 29, 2011 or the date the performance criteria are met is approximately $271, all of which has been granted as of June 30, 2009.date.
- 4240 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
13. Stock-Based Compensation (continued)
Restricted Stock and RSUs (continued)
1,497,222 RSUs to employees that vest 50% on both January 31, 2013 and 2014. Awards to certain individuals require that BlackRock has actual GAAP earnings per share of at least $6.13 in 2010 or $6.50 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards.
124,575 shares of restricted common stock to employees that vest in tranches on January 31, 2010, 2011 and 2012. The restricted common stock may not be sold before the one-year anniversary of each vesting date.
At March 31, 2010, there was $826 million in total unrecognized compensation cost related to unvested restricted stock and RSUs. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 2.0 years.
Long-Term Incentive Plans Funded by PNC
Under a share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”). In February 2009, the share surrender agreement was amended for PNC to provide BlackRock series C non-voting participating preferred stock to fund the remaining committed shares.
The BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan (the “2002 LTIP Awards”) permitted the grant of up to $240 million in deferred compensation awards, of which the Company previously granted approximately $233 million. Approximately $208 million of the 2002 LTIP Awards were paid in January 2007. The 2002 LTIP Awards were payable approximately 16.7% in cash and the remainder in BlackRock stock contributed by PNC and distributed to plan participants. During the three months ended March 31, 2010, approximately $6 million of previously issued 2002 LTIP Awards resulted in the settlement of cash and BlackRock shares held by PNC at a conversion price approximating the market price on the settlement date. On the payment date, the Company recorded a capital contribution from PNC for the amount of shares funded by PNC.
Stock Options
Options outstanding at March 31, 2010 and changes during the three months ended March 31, 2010 were as follows:
Outstanding at | Shares Under Option | Weighted Average Exercise Price | ||||
December 31, 2009 | 2,641,836 | $ | 98.59 | |||
Exercised | (202,310 | ) | $ | 38.49 | ||
March 31, 2010 | 2,439,526 | $ | 103.57 | |||
The aggregate intrinsic value of options exercised during the three months ended March 31, 2010 was $35 million.
At March 31, 2010, the Company had $18 million in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 1.5 years.
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PART I—FINANCIAL INFORMATION (continued)
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
14. Related Party Transactions
Loan Commitments with Anthracite
Prior to March 31, 2010, the Company was committed to provide financing of up to $60 million to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that was managed by a subsidiary of BlackRock. The financing is collateralized by a pledge by Anthracite of its ownership interest in a real estate debt investment fund, which is also managed by a subsidiary of BlackRock. At March 31, 2010, $33.5 million of financing was outstanding and remains outstanding as of May 2010, which is past its final maturity date of March 5, 2010. At March 31, 2010, the value of the collateral was estimated to be $10 million, which resulted in a $2.5 million reduction in due from related parties on the Company’s condensed consolidated statement of financial condition and an equal amount recorded in general and administrative expense in the three months ended March 31, 2010. The Company has no obligation to loan additional amounts to Anthracite under this facility. Anthracite filed a voluntary petition for relief under chapter 7 of title 11 of the U.S. Code in the U.S. Bankruptcy Court for the Southern District of New York on March 15, 2010. The management agreement between the Company and Anthracite has expired. Recovery of any amount of the financing provided by the Company in excess of the value of the collateral is not anticipated. The Company continues to evaluate the collectability of the outstanding borrowings by reviewing the carrying value of the net assets of the collateral, which fluctuates each period.
15. Net Capital Requirements
The Company is required to maintain net capital in certain regulated subsidiaries within a number of jurisdictions, which is met in part by retaining cash and cash equivalent investments in those 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, transfer of cash between international jurisdictions, including repatriation to the United States, may have adverse tax consequences that could discourage such transfers.
Banking Regulatory Requirements
BlackRock Institutional Trust Company, N.A. (“BTC”), a wholly-owned subsidiary of the Company, is chartered as a national bank whose powers are limited to trust activities. BTC is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s condensed consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that invoke quantitative measures of the Company’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.
Broker-dealers
BlackRock Investments, LLC, BlackRock Capital Markets, LLC, BlackRock Execution Services and BlackRock Fund Distribution Company are registered broker-dealers and wholly-owned subsidiaries of BlackRock that are subject to the Uniform Net Capital requirements under the Securities Exchange Act of 1934, which requires maintenance of certain minimum net capital levels.
Capital Requirements as of March 31, 2010
At March 31, 2010, the Company was required to maintain approximately $818 million in net capital in certain regulated subsidiaries, including BTC, and is in compliance with all applicable regulatory minimum net capital requirements.
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PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
16. Capital Stock
Non-voting Participating Preferred Stock
March 31, 2010 | December 31, 2009 | |||
Series A | ||||
Shares authorized, $0.01 par value | 20,000,000 | 20,000,000 | ||
Shares issued | — | — | ||
Shares outstanding | — | — | ||
Series B | ||||
Shares authorized, $0.01 par value | 150,000,000 | 150,000,000 | ||
Shares issued | 124,620,593 | 112,817,151 | ||
Shares outstanding | 124,620,593 | 112,817,151 | ||
Series C | ||||
Shares authorized, $0.01 par value | 6,000,000 | 6,000,000 | ||
Shares issued | 2,866,439 | 2,889,467 | ||
Shares outstanding | 2,866,439 | 2,889,467 | ||
Series D | ||||
Shares authorized, $0.01 par value | 20,000,000 | 20,000,000 | ||
Shares issued | — | 11,203,442 | ||
Shares outstanding | — | 11,203,442 |
Capital Exchanges
In January 2010, 600,000 common shares were exchanged for Series B preferred stock and all 11,203,442 Series D preferred stock outstanding at December 31, 2009 were exchanged for Series B preferred stock.
PNC Contribution
During the three months ended March 31, 2010, PNC contributed 23,028 of Series C preferred stock in connection with its share surrender agreement to fund certain LTIP awards.
- 43 -
PART I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
17. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the three months ended June 30, 2009March 31, 2010 and 2008:2009:
Three Months Ended June 30, | ||||||||||||
2009 | 2008 | |||||||||||
Basic | Diluted | Basic | Diluted | |||||||||
Net income attributable to BlackRock, Inc. allocated to: | ||||||||||||
Common shares | $ | 212 | $ | 212 | $ | 264 | $ | 264 | ||||
Participating RSUs | 6 | 6 | 10 | 10 | ||||||||
Total net income attributable to BlackRock, Inc. | $ | 218 | $ | 218 | $ | 274 | $ | 274 | ||||
Weighted-average common shares outstanding | 130,928,916 | 130,928,916 | 129,569,325 | 129,569,325 | ||||||||
Dilutive effect of stock options and non-participating restricted stock units | 1,392,767 | 1,231,272 | ||||||||||
Dilutive effect of convertible debt | 1,042,928 | 655,806 | ||||||||||
Dilutive effect of acquisition-related contingent stock payments | — | 576,135 | ||||||||||
Total weighted-average shares outstanding | 133,364,611 | 132,032,538 | ||||||||||
Earnings per share attributable to BlackRock, Inc., common stockholders: | $ | 1.62 | $ | 1.59 | $ | 2.04 | $ | 2.00 |
- 43 -
PART I – FINANCIAL INFORMATION (continued)
The following table sets forth the computation of basic and diluted earnings per share for the six months ended June 30, 2009 and 2008:
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||
2009 | 2008 | 2010 | 2009 | |||||||||||||||||||||
Basic | Diluted | Basic | Diluted | Basic | Diluted | Basic | Diluted | |||||||||||||||||
Net income attributable to BlackRock, Inc. allocated to: | ||||||||||||||||||||||||
Common shares | $ | 294 | $ | 294 | $ | 498 | $ | 498 | $ | 417 | $ | 417 | $ | 82 | $ | 82 | ||||||||
Participating RSUs | 8 | 8 | 17 | 17 | 6 | 6 | 2 | 2 | ||||||||||||||||
Total net income attributable to BlackRock, Inc. | $ | 302 | $ | 302 | $ | 515 | $ | 515 | $ | 423 | $ | 423 | $ | 84 | $ | 84 | ||||||||
Weighted-average common shares outstanding | 130,574,535 | 130,574,535 | 129,242,591 | 129,242,591 | 189,676,023 | 189,676,023 | 130,216,218 | 130,216,218 | ||||||||||||||||
Dilutive potential shares from stock options and non-participating restricted stock units | 1,154,851 | 1,325,001 | ||||||||||||||||||||||
Dilutive potential shares from convertible debt | 939,309 | 668,773 | ||||||||||||||||||||||
Dilutive potential shares from acquisition-related contingent stock payments | — | 576,135 | ||||||||||||||||||||||
Dilutive effect of stock options and non-participating restricted stock units | 1,723,512 | 845,382 | ||||||||||||||||||||||
Dilutive effect of convertible debt | 752,716 | 379,270 | ||||||||||||||||||||||
Dilutive effect of acquisition-related contingent stock payments | — | 356,319 | ||||||||||||||||||||||
Total weighted-average shares outstanding | 132,668,695 | 131,812,500 | 192,152,251 | 131,797,189 | ||||||||||||||||||||
Earnings per share attributable to BlackRock, Inc., common stockholders: | $ | 2.25 | $ | 2.22 | $ | 3.85 | $ | 3.78 | $ | 2.20 | $ | 2.17 | $ | 0.63 | $ | 0.62 |
Due to the similarities in terms between BlackRock series A, B, C and CD non-voting participating preferred stock and the Company’s common stock, the Company considers the series A, B, C and CD non-voting participating preferred stock to be a common stock equivalentsequivalent for purposes of earnings per share calculations. As such, the Company has included the outstanding series A, B, C and CD non-voting participating preferred stock in the calculation of average basic and diluted shares outstanding for the three and six months ended June 30, 2009March 31, 2010 and 2008.2009.
For the three and six months ended June 30, 2009, 1,244,100 stock options and 1,249,792March 31, 2010, 743,869 RSUs and stock options, respectively, were excluded from the calculation of diluted earnings per share because to include them would have an anti-dilutive effect.
Shares issued in acquisitionQuellos Transaction
On October 1, 2007, the Company acquired the fund of funds business of Quellos.Quellos Group (“Quellos”). The Company issued 1,191,785 shares of newly-issued BlackRock common stock that were placed into an escrow account. In April 2008 280,519and 2009, a total of 322,845 common shares were released to Quellos in accordance with the Quellos asset purchase agreement, which resulted in an adjustment to the recognized purchase price and had a dilutive effect in 2008.price. The remaining 911,266868,940 common shares may have a dilutive effect in future periods based on the timing of the release of shares from the escrow account in accordance with the Quellos asset purchase agreement. The release of the remaining escrow shares could begin to occur in 2009 and be completed in 2010.
- 44 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
18. Segment Information
The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company believes it operates in one business segment in accordance with SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information (ASCASC 280-10,Segment ReportingReporting.).
The following table illustrates investment advisory, and administration basefees, securities lending revenue and performance fees,BlackRock Solutions® and advisory, distribution fees and other revenue for the three and six months ended June 30, 2009March 31, 2010 and 2008, respectively.2009.
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | March 31, | ||||||||||||||
(Dollar amounts in millions) | 2010 | 2009 | ||||||||||||||||
Equity | $ | 955 | $ | 242 | ||||||||||||||
Fixed income | $ | 212 | $ | 234 | $ | 414 | $ | 457 | 363 | 200 | ||||||||
Multi-asset | 167 | 99 | ||||||||||||||||
Alternative investment products | 186 | 95 | ||||||||||||||||
Cash management | 166 | 184 | 341 | 359 | 132 | 175 | ||||||||||||
Equity and balanced | 384 | 631 | 727 | 1,271 | ||||||||||||||
Alternative investment products | 105 | 169 | 195 | 305 | ||||||||||||||
Total investment advisory and administration base and performance fees | 867 | 1,218 | 1,677 | 2,392 | ||||||||||||||
Total investment advisory, administration fees, securities lending revenue and performance fees | 1,803 | 811 | ||||||||||||||||
BlackRock Solutions and advisory | 116 | 100 | 256 | 160 | 113 | 135 | ||||||||||||
Distribution fees | 23 | 34 | 48 | 69 | 28 | 25 | ||||||||||||
Other revenue | 23 | 35 | 35 | 66 | 51 | 16 | ||||||||||||
Total revenue | $ | 1,029 | $ | 1,387 | $ | 2,016 | $ | 2,687 | $ | 1,995 | $ | 987 | ||||||
The following tables illustratetable illustrates the Company’s total revenue for the three and six months ended June 30,March 31, 2010 and 2009 and 2008 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the customer is sourced.
Three Months Ended June 30, | ||||||||||||
Revenues | 2009 | % of total | 2008 | % of total | ||||||||
North America | $ | 764 | 74 | % | $ | 915 | 66 | % | ||||
Europe | 223 | 22 | % | 389 | 28 | % | ||||||
Asia-Pacific | 42 | 4 | % | 83 | 6 | % | ||||||
Total revenues | $ | 1,029 | 100 | % | $ | 1,387 | 100 | % | ||||
(Dollar amounts in millions) | Three Months Ended March 31, | |||||||||||||||||||||||
Six Months Ended June 30, | % of | % of | ||||||||||||||||||||||
Revenues | 2009 | % of total | 2008 | % of total | 2010 | total | 2009 | total | ||||||||||||||||
North America | $ | 1,531 | 75 | % | $ | 1,744 | 65 | % | ||||||||||||||||
Americas | $ | 1,364 | 68 | % | $ | 767 | 78 | % | ||||||||||||||||
Europe | 414 | 21 | % | 806 | 30 | % | 511 | 26 | % | 191 | 19 | % | ||||||||||||
Asia-Pacific | 71 | 4 | % | 137 | 5 | % | 120 | 6 | % | 29 | 3 | % | ||||||||||||
Total revenues | $ | 2,016 | 100 | % | $ | 2,687 | 100 | % | $ | 1,995 | 100 | % | $ | 987 | 100 | % | ||||||||
- 45 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
BlackRock, Inc.
Notes to Condensed Consolidated Financial Statements—(continued)
(unaudited)
18. Segment Information (continued)
The following table shows the Company’s long-lived assets, including goodwill and property and equipment at June 30, 2009March 31, 2010 and December 31, 20082009 and does not necessarily reflect where the asset is physically located.
Long-Lived Assets | June 30, 2009 | December 31, 2008 | ||||||||||||||||||||||
North America | $ | 5,899 | 99 | % | $ | 5,714 | 99 | % | ||||||||||||||||
(Dollar amounts in millions) Long-Lived Assets | March 31, 2010 | December 31, 2009 | ||||||||||||||||||||||
Americas | $ | 12,969 | 99 | % | $ | 12,961 | 99 | % | ||||||||||||||||
Europe | 28 | 0 | % | 27 | 0 | % | 52 | — | % | 46 | — | % | ||||||||||||
Asia-Pacific | 48 | 1 | % | 52 | 1 | % | 70 | 1 | % | 74 | 1 | % | ||||||||||||
Total long-lived assets | $ | 5,975 | 100 | % | $ | 5,793 | 100 | % | $ | 13,091 | 100 | % | $ | 13,081 | 100 | % | ||||||||
North AmericaAmericas primarily is comprised of the United States, Canada, Brazil and Mexico, while Europe primarily is comprised of the United Kingdom and Asia-Pacific primarily is comprised of Japan, Australia and Hong Kong.
BlackRock will acquire from Barclays all of the outstanding equity interests of subsidiaries of Barclays conducting the business of BGI in exchange for an aggregate of approximately 37.8 million shares of BlackRock common stock and participating preferred stock, subject to certain adjustments, and $6,600 in cash, subject to certain adjustments (the “BGI Transaction”). The value of the 37.8 million shares will be determined at the time of closing, which is expected in December 2009, or early 2010, pending regulatory approvals and satisfaction of other customary closing conditions.
The shares of common stock issued to Barclays pursuantAdditional Subsequent Event Review
In addition to the BGI Transaction will represent approximately 4.9% ofsubsequent events included in the outstanding shares of common stock of BlackRock immediately following the closing of the transaction, and the total equity consideration will represent approximately an aggregate 19.9% economic interest in BlackRock immediately following the closing of the transaction.
The cash portion of the purchase price will be funded through a combination of existing cash, committed debt facilities and proceeds from the issuance of 19.9 million capital shares to a group of institutional investors, including PNC. Both the debt facilities and the issuance of capital shares are 100% committed subjectnotes to the closing of the BGI Transaction.
The Company has reviewed subsequent events occurring through August 7, 2009, the date that these financial statements, were issuedthe Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosure.disclosures.
- 46 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-looking Statements
This report, and other statements that BlackRock may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to BlackRock’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.
BlackRock cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
In addition to risk factors previously disclosed in BlackRock’s Securities and Exchange Commission (“SEC”) reports and those identified elsewhere in this report the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes and volatility in political, economic or industry conditions, the interest rate environment, foreign exchange rates or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock’s investment products; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions or divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock, Barclays Bank PLC, Bank of America Corporation, Merrill Lynch & Co., Inc. or The PNC Financial Services Group, Inc.; (11) terrorist activities and international hostilities, which may adversely affect the general economy, domestic and local financial and capital markets, specific industries or BlackRock; (12) the ability to attract and retain highly talented professionals; (13) fluctuations in the carrying value of BlackRock’s economic investments; (14) fluctuations in foreign currency exchange rates, which may adversely affect the value of investment advisory and administration fees earned by BlackRock or the carrying value of certain assets and liabilities denominated in foreign currencies; (15) the impact of changes to tax legislation and, generally, the tax position of the Company; (16)(15) BlackRock’s success in maintaining the distribution of its products; (17)(16) the impact of BlackRock electing to provide support to its products from time to time; (18)(17) the impact of problems at other financial institutions or the failure or negative performance of products at other financial institutions; and (19)(18) the ability of BlackRock to complete the transaction with Barclays Bank PLC and integrate the operations of Barclays Global Investors.
- 47 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview
BlackRock, Inc. (“BlackRock” or the “Company”) is one of the largest publicly traded investment management firms infirm. As of March 31, 2010, the world with $1.373Company managed $3.364 trillion of assets under management (“AUM”) at June 30, 2009. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety ofworldwide. The Company’s products include equities, fixed income, multi-asset class, alternatives and cash management, equity and balanced and alternative investmentoffer clients diversified access to global markets through separate accounts, collective trust funds, mutual funds, exchange traded funds, hedge funds and closed-end funds. 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 of illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.
On JanuaryDecember 1, 2009, Bank of America Corporation (“Bank of America”)BlackRock acquired Merrill Lynch & Co., Inc. (“Merrill Lynch”). In connection with this transaction, BlackRock entered into exchange agreements with each of Merrill Lynch and The PNC Financial Services Group, Inc. (“PNC”) pursuant to which each agreed to exchange a portion of the BlackRock voting common stock they held for non-voting preferred stock. On June 30, 2009, Bank of America/Merrill Lynch owned approximately 4.6% of BlackRock’s voting common stock and 46.3% of BlackRock’s capital stock on a fully diluted basis, and PNC owned approximately 43.9% of BlackRock’s voting common stock and 30.8% of BlackRock’s capital stock on a fully diluted basis.
On June 16, 2009, BlackRock announced thatfrom Barclays Bank PLC (“Barclays”) accepted its offer to acquire all of the outstanding equity interests of subsidiaries of Barclays conducting the business of Barclays Global Investors (“BGI”) in exchange for capital shares valued at closing of $8.53 billion and entered into a definitive purchase agreement to acquire BGI from Barclays (the “BGI Transaction”). The price consideration consists of $6.6$6.65 billion in cash, subject to certain adjustments, and approximately 37.8 million shares of common and participating preferred stock, subject to certain adjustments. The cash portion of the transaction will be financed by $800 million from BlackRock’s cash position, a new $2 billion credit facility, which is expected to eventually be replaced with term debt, $1 billion of additional short-term debt, and $2.8 billion of capital from a group of institutional investors. The shares of common stock issued to Barclays pursuant to the BGI Transaction will represent approximately 4.9% of the outstanding shares of common stockcash.
At March 31, 2010, equity ownership of BlackRock immediately following the closing of the BGI Transaction, and the total equity consideration will represent approximately an aggregate 19.9% economic interest in BlackRock immediately following the closing of the transaction.was as follows:
In connection with the execution by BlackRock of the Barclays Purchase Agreement, on June 11, 2009, BlackRock entered into Amendment No. 1 (the “Merrill Lynch Amendment”) to the Second Amended and Restated Stockholder Agreement, by and among Merrill Lynch & Co., Inc., Merrill Lynch Group, Inc. and BlackRock (the “Merrill Lynch Stockholder Agreement”) and Amendment No. 1 (the “PNC Amendment”) to the Amended and Restated Implementation and Stockholder Agreement between PNC and BlackRock (the “PNC Stockholder Agreement”). The Merrill Lynch Amendment and the PNC Amendment will become effective only upon the closing of the BGI Transaction.
Voting Common Stock | Capital Stock(1) | |||||
Bank of America Corporation/Merrill Lynch & Co. Inc. | 3.7 | % | 33.8 | % | ||
The PNC Financial Services Group, Inc. (“PNC”) | 34.4 | % | 24.2 | % | ||
Barclays | 4.7 | % | 19.6 | % | ||
Other | 57.2 | % | 22.4 | % | ||
100.0 | % | 100.0 | % | |||
(1) | Includes outstanding common and preferred stock only. |
- 48 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
BlackRock, Inc.
Financial Highlights
(Dollar amounts in millions, except per share data)
(unaudited)
The following table summarizes BlackRock’s operating performance for each of the three months ended June 30, 2009, March 31, 2010, December 31, 2009 and June 30, 2008 and the six months ended June 30, 2009 and 2008. Certain prior year amounts have been revised or reclassified to conform to 2009 presentation including those required by the retrospective adoption of FASB Staff Position (“FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”) (Accounting Standards Codification (“ASC”) 470-20,Debt with Conversion and Other Options), FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) (ASC 260-10,Earnings per Share) and Statement of Financial Accounting Standards (“SFAS”) No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (ASC 810-10, Consolidation). For more information please refer to the Company’s Annual Report on Form 10-K for the year ended DecemberMarch 31, 2008, which was filed with the Securities and Exchange Commission on March 2, 2009.
Three Months Ended | Variance vs. Three Months Ended | Three Months Ended | Variance vs. Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||
June 30, | March 31, 2009 | June 30, 2008 | March 31, 2009 | March 31, | December 31, | March 31, 2009 | December 31, 2009 | |||||||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | Amount | % Change | Amount | % Change | 2010 | 2009 | 2009 | Amount | % Change | Amount | % Change | ||||||||||||||||||||||||||||||||||||||||
GAAP basis: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total revenue | $ | 1,029 | $ | 1,387 | $ | 987 | $ | (358 | ) | (26 | )% | $ | 42 | 4 | % | $ | 1,995 | $ | 987 | $ | 1,544 | $ | 1,008 | 102 | % | $ | 451 | 29 | % | |||||||||||||||||||||||
Total expenses | $ | 768 | $ | 982 | $ | 716 | $ | (214 | ) | (22 | )% | $ | 52 | 7 | % | $ | 1,341 | $ | 716 | $ | 1,155 | $ | 625 | 87 | % | $ | 186 | 16 | % | |||||||||||||||||||||||
Operating income | $ | 261 | $ | 405 | $ | 271 | $ | (144 | ) | (36 | )% | $ | (10 | ) | (4 | )% | $ | 654 | $ | 271 | $ | 389 | $ | 383 | 141 | % | $ | 265 | 68 | % | ||||||||||||||||||||||
Operating margin | 25.4 | % | 29.2 | % | 27.5 | % | (4 | )% | (13 | )% | (2 | )% | (8 | )% | 32.8 | % | 27.5 | % | 25.2 | % | 5.3 | % | 19 | % | 7.6 | % | 30 | % | ||||||||||||||||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests | $ | 51 | $ | 16 | $ | (157 | ) | $ | 35 | 219 | % | $ | 208 | 132 | % | |||||||||||||||||||||||||||||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests1 | $ | (3 | ) | $ | (157 | ) | $ | 17 | $ | 154 | 98 | % | $ | (20 | ) | NM | ||||||||||||||||||||||||||||||||||||
Net income attributable to BlackRock, Inc. | $ | 218 | $ | 274 | $ | 84 | $ | (56 | ) | (20 | )% | $ | 134 | 160 | % | $ | 423 | $ | 84 | $ | 256 | $ | 339 | 404 | % | $ | 167 | 65 | % | |||||||||||||||||||||||
Diluted earnings per common share(e) | $ | 1.59 | $ | 2.00 | $ | 0.62 | $ | (0.41 | ) | (21 | )% | $ | 0.97 | 156 | % | $ | 2.17 | $ | 0.62 | $ | 1.62 | $ | 1.55 | 250 | % | $ | 0.55 | 34 | % | |||||||||||||||||||||||
As adjusted: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating income(a) | $ | 302 | $ | 447 | $ | 307 | $ | (145 | ) | (32 | )% | $ | (5 | ) | (2 | )% | $ | 727 | $ | 307 | $ | 561 | $ | 420 | 137 | % | $ | 166 | 30 | % | ||||||||||||||||||||||
Operating margin(a) | 34.4 | % | 37.8 | % | 37.2 | % | (3 | )% | (9 | )% | (3 | )% | (8 | )% | 38.9 | % | 37.2 | % | 39.7 | % | 1.7 | % | 5 | % | (0.8 | )% | (2 | )% | ||||||||||||||||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests(b) | $ | 42 | $ | (9 | ) | $ | (153 | ) | $ | 51 | NM | $ | 195 | 127 | % | |||||||||||||||||||||||||||||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests1,(b) | $ | (6 | ) | $ | (153 | ) | $ | 13 | $ | 147 | 96 | % | $ | (19 | ) | NM | ||||||||||||||||||||||||||||||||||||
Net income attributable to BlackRock, Inc.(c),(d) | $ | 239 | $ | 285 | $ | 110 | $ | (46 | ) | (16 | )% | $ | 129 | 117 | % | $ | 469 | $ | 110 | $ | 379 | $ | 359 | 326 | % | $ | 90 | 24 | % | |||||||||||||||||||||||
Diluted earnings per common share(c),d),(e) | $ | 1.75 | $ | 2.08 | $ | 0.81 | $ | (0.33 | ) | (16 | )% | $ | 0.94 | 116 | % | |||||||||||||||||||||||||||||||||||||
Diluted earnings per common share(c),d),(e) | $ | 2.40 | $ | 0.81 | $ | 2.39 | $ | 1.59 | 196 | % | $ | 0.01 | — | % | ||||||||||||||||||||||||||||||||||||||
Other: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted weighted-average common shares outstanding(e) | 133,364,611 | 132,032,538 | 131,797,189 | 1,332,073 | 1 | % | 1,567,422 | 1 | % | 192,152,251 | 131,797,189 | 155,040,242 | 60,355,062 | 46 | % | 37,112,009 | 24 | % | ||||||||||||||||||||||||||||||||||
Assets under management | $ | 1,373,160 | $ | 1,427,543 | $ | 1,283,355 | $ | (54,383 | ) | (4 | )% | $ | 89,805 | 7 | % | $ | 3,363,898 | $ | 1,283,355 | $ | 3,346,256 | $ | 2,080,543 | 162 | % | $ | 17,642 | 1 | % | |||||||||||||||||||||||
|
NM – Not Meaningful
1 | Includes net income (loss) attributable to non-controlling interests (redeemable and nonredeemable) related to investment activities. |
- 49 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
BlackRock, Inc.
Financial Highlights (continued)
(Dollar amounts in millions, except per share data)
(unaudited)
Six Months Ended June 30, | Variance vs. Six Months Ended June 30, 2008 | ||||||||||||||
2009 | 2008 | Amount | % Change | ||||||||||||
GAAP basis: | |||||||||||||||
Total revenue | $ | 2,016 | $ | 2,687 | $ | (671 | ) | (25 | )% | ||||||
Total expenses | $ | 1,484 | $ | 1,886 | $ | (402 | ) | (21 | )% | ||||||
Operating income | $ | 532 | $ | 801 | $ | (269 | ) | (34 | )% | ||||||
Operating margin | 26.4 | % | 29.8 | % | (3 | )% | (11 | )% | |||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests | $ | (106 | ) | $ | (9 | ) | $ | (97 | ) | NM | |||||
Net income attributable to BlackRock, Inc. | $ | 302 | $ | 515 | $ | (213 | ) | (41 | )% | ||||||
Diluted earnings per common share(e) | $ | 2.22 | $ | 3.78 | $ | (1.56 | ) | (41 | )% | ||||||
As adjusted: | |||||||||||||||
Operating income(a) | $ | 609 | $ | 860 | $ | (251 | ) | (29 | )% | ||||||
Operating margin(a) | 35.8 | % | 37.7 | % | (2 | )% | (5 | )% | |||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests(b) | $ | (111 | ) | $ | (33 | ) | $ | (78 | ) | (236 | )% | ||||
Net income attributable to BlackRock, Inc.(c),(d) | $ | 349 | $ | 537 | $ | (188 | ) | (35 | )% | ||||||
Diluted earnings per common share(c),d),(e) | $ | 2.56 | $ | 3.94 | $ | (1.38 | ) | (35 | )% | ||||||
Other: | |||||||||||||||
Diluted weighted-average common shares outstanding(e) | 132,668,695 | 131,812,500 | 856,195 | 1 | % | ||||||||||
Assets under management | $ | 1,373,160 | $ | 1,427,543 | $ | (54,383 | ) | (4 | )% | ||||||
|
NM – Not Meaningful
- 50 -
PART I – FINANCIAL INFORMATION (continued)
Overview (continued)
BlackRock, Inc.
Financial Highlights
(continued)
BlackRock reports its financial results on a GAAP basis;in accordance with accounting principles generally accepted in the United States (“GAAP”); however, management believes that evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
Certain prior period non-GAAP data has been reclassified to conform to the current presentation. Computations for all periods are derived from the Company’s condensed consolidated statements of income as follows:
(a) Operating income, as adjusted, and operating margin, as adjusted:
Operating income, as adjusted, equals operating income, GAAP basis, excluding certain items deemed non-recurring by management or transactions that ultimately will not impact BlackRock’s book value, as indicated in the table below. Operating income used for operating margin measurement equals operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Operating margin, as adjusted, equals operating income used for operating margin measurement, divided by revenue used for operating margin measurement, as indicated in the table below.
Three Months Ended | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
June 30, | March 31, | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Three Months Ended | |||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2009 | 2008 | March 31, | December 31, | ||||||||||||||||||||||||||
2010 | 2009 | 2009 | ||||||||||||||||||||||||||||||
Operating income, GAAP basis | $ | 261 | $ | 405 | $ | 271 | $ | 532 | $ | 801 | $ | 654 | $ | 271 | $ | 389 | ||||||||||||||||
Non-GAAP adjustments: | ||||||||||||||||||||||||||||||||
Restructuring charges | — | — | 22 | 22 | — | |||||||||||||||||||||||||||
BGI transaction/integration costs | ||||||||||||||||||||||||||||||||
Employee compensation and benefits | 18 | — | 60 | |||||||||||||||||||||||||||||
General and administration | 34 | — | 92 | |||||||||||||||||||||||||||||
Total BGI transaction/integration costs | 52 | — | 152 | |||||||||||||||||||||||||||||
PNC LTIP funding obligation | 15 | 15 | 15 | 30 | 30 | 15 | 15 | 14 | ||||||||||||||||||||||||
Merrill Lynch compensation contribution | 2 | 2 | 3 | 5 | 5 | 3 | 3 | 2 | ||||||||||||||||||||||||
Barclays Global Investors (“BGI”) transaction/integration costs | 15 | — | — | 15 | — | |||||||||||||||||||||||||||
Compensation expense related to (depreciation) appreciation on deferred compensation plans | 9 | 25 | (4 | ) | 5 | 24 | ||||||||||||||||||||||||||
Restructuring charges | — | 22 | — | |||||||||||||||||||||||||||||
Compensation expense related to appreciation (depreciation) on deferred compensation plans | 3 | (4 | ) | 4 | ||||||||||||||||||||||||||||
Operating income, as adjusted | 302 | 447 | 307 | 609 | 860 | 727 | 307 | 561 | ||||||||||||||||||||||||
Closed-end fund launch costs | — | 5 | 2 | 2 | 9 | — | 2 | — | ||||||||||||||||||||||||
Closed-end fund launch commissions | — | — | 1 | 1 | — | — | 1 | — | ||||||||||||||||||||||||
Operating income used for operating margin measurement | $ | 302 | $ | 452 | $ | 310 | $ | 612 | $ | 869 | $ | 727 | $ | 310 | $ | 561 | ||||||||||||||||
Revenue, GAAP basis | $ | 1,029 | $ | 1,387 | $ | 987 | $ | 2,016 | $ | 2,687 | $ | 1,995 | $ | 987 | $ | 1,544 | ||||||||||||||||
Non-GAAP adjustments: | ||||||||||||||||||||||||||||||||
Portfolio administration and servicing costs | (125 | ) | (152 | ) | (127 | ) | (252 | ) | (306 | ) | ||||||||||||||||||||||
Distribution and servicing costs | (100 | ) | (127 | ) | (106 | ) | ||||||||||||||||||||||||||
Amortization of deferred mutual fund sales commissions | (26 | ) | (33 | ) | (27 | ) | (53 | ) | (63 | ) | (26 | ) | (27 | ) | (24 | ) | ||||||||||||||||
Reimbursable property management compensation | — | (6 | ) | — | — | (12 | ) | |||||||||||||||||||||||||
Revenue used for operating margin measurement | $ | 878 | $ | 1,196 | $ | 833 | $ | 1,711 | $ | 2,306 | $ | 1,869 | $ | 833 | $ | 1,414 | ||||||||||||||||
Operating margin, GAAP basis | 25.4 | % | 29.2 | % | 27.5 | % | 26.4 | % | 29.8 | % | 32.8 | % | 27.5 | % | 25.2 | % | ||||||||||||||||
Operating margin, as adjusted | 34.4 | % | 37.8 | % | 37.2 | % | 35.8 | % | 37.7 | % | 38.9 | % | 37.2 | % | 39.7 | % | ||||||||||||||||
- 5150 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
BlackRock, Inc.
Financial Highlights
(continued)
(a) (continued)
Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of BlackRock’s performance over time. As such, management believes that operating income, as adjusted, and operating margin, as adjusted, provide useful disclosure to investors.
Operating income, as adjusted:
Restructuring charges recorded in 2009 consist of compensation costs, occupancy costs and professional fees. BGI transaction/integration costs recorded in 2010 and 2009 consist principally of certain advisory payments, compensation expense, legal fees, marketing and consulting expenses incurred in conjunction with the BGI transaction. The expenses associated with restructuring and BGI transaction and integration costs have been deemed non-recurring by management and thus have been excluded from operating income, as adjusted, to help ensureenhance the comparability of this information to prior periods. BGI transaction/integration costs recorded in 2009 consist principally of certain advisory and legal fees incurred in conjunction with the announced transaction. As such, management believes that operating margins exclusive of these costs are useful measures in evaluating BlackRock’s operating performance for the respective periods.
The portion of compensation expense associated with certain long-term incentive plans (“LTIP”) that will be funded through the distribution to participants of shares of BlackRock stock held by PNC and the anticipateda Merrill Lynch & Co., Inc. (“Merrill Lynch”) cash compensation contribution, a portion of which has been received, have been excluded because these charges ultimately do not impact BlackRock’s book value.
Compensation expense associated with appreciation (depreciation) on assets related to certain BlackRock deferred compensation plans has been excluded as returns on investments set aside for these plans, which substantially offset this expense, are reported in non-operating income.
Operating margin, as adjusted:
Operating income used for measuring operating margin, as adjusted, is equal to operating income, as adjusted, excluding the impact of closed-end fund launch costs and commissions. Management believes that excluding such costs and commissions is useful because these costs can fluctuate considerably and revenues associated with the expenditure of these costs will not fully impact the Company’s results until future periods.
Operating margin, as adjusted, allows the Company to compare performance from year-to-yearperiod-to-period by adjusting for items that may not recur, recur infrequently or may fluctuate based on market movement,movements, such as restructuring charges, transaction/integration costs, closed-end fund launch costs, commissions and fluctuations in compensation expense based on mark-to-market movements in investments held to fund certain compensation plans. The Company also uses operating margin, as adjusted, to monitor corporate performance and efficiency and as a benchmark to compare its performance to other companies. Management uses both the GAAP and non-GAAP financial measures.measures in evaluating the financial performance for BlackRock. The non-GAAP measure by itself may pose limitations because it does not include all of the Company’s revenues and expenses.
Revenue used for operating margin, as adjusted, excludes portfolio administrationdistribution and servicing costs paid to related parties and to other third parties. Management believes that excluding such costs is useful to BlackRock because it creates consistency in the Company receives offsetting revenuetreatment for these services.certain contracts for similar services, which due to the terms of the contracts, are accounted for under GAAP on a net basis within investment advisory, administration fees and securities lending revenue. Amortization of deferred mutual fund sales commissions is excluded from revenue used for operating margin measurement, as adjusted, because such costs, over time, offset distribution fee revenue earned by the Company. Reimbursable property management compensation represented compensation and benefits paid to personnel of Metric Property Management, Inc. (“Metric”), a subsidiary of BlackRock Realty Advisors, Inc. (“Realty”). These employees were retained on Metric’s payroll when certain properties were acquired by Realty’s clients. The related compensation and benefits were fully reimbursed by Realty’s clients and have been excluded from revenue used for operating margin, as adjusted, because they bear no economic cost to BlackRock. For each of these items, BlackRock excludes from revenue used for operating margin, as adjusted, the costs related to each of these items as a proxy for such offsetting revenues.
- 5251 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
BlackRock, Inc.
Financial Highlights
(continued)
(b) Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted:
Non-operating income (expense), less net income (loss) attributable to non-controlling interests (“NCI”), as adjusted, equals non-operating income (expense), GAAP basis, less net income (loss) attributable to non-controlling interests,NCI, GAAP basis, adjusted for compensation expense associated with depreciation (appreciation) on assets related to certain BlackRock deferred compensation plans. The compensation expense offset is recorded in operating income. This compensation expense has been included in non-operating income (expense), less net income (loss) attributable to non-controlling interests,NCI, as adjusted, to offset returns on investments set aside for these plans, which are reported in non-operating income (expense), GAAP basis.
Three Months Ended | Six Months Ended June 30, | |||||||||||||||||||
June 30, | March 31, | |||||||||||||||||||
2009 | 2008 | 2009 | 2009 | 2008 | ||||||||||||||||
Non-operating income (expense), GAAP basis | $ | 77 | $ | (4 | ) | $ | (179 | ) | $ | (102 | ) | $ | (24 | ) | ||||||
Net income (loss) attributable to non-controlling interests, GAAP basis | 26 | (20 | ) | (22 | ) | 4 | (15 | ) | ||||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests | 51 | 16 | (157 | ) | (106 | ) | (9 | ) | ||||||||||||
Compensation expense related to (appreciation) depreciation on deferred compensation plans | (9 | ) | (25 | ) | 4 | (5 | ) | (24 | ) | |||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests, as adjusted | $ | 42 | $ | (9 | ) | $ | (153 | ) | $ | (111 | ) | $ | (33 | ) | ||||||
(Dollar amounts in millions) | Three Months Ended | |||||||||||
March 31, | December 31, | |||||||||||
2010 | 2009 | 2009 | ||||||||||
Non-operating income (expense), GAAP basis | $ | 2 | $ | (179 | ) | $ | 18 | |||||
Less: Net income (loss) attributable to NCI, GAAP basis | 5 | (22 | ) | 1 | ||||||||
Non-operating income (expense)(1) | (3 | ) | (157 | ) | 17 | |||||||
Compensation expense related to (appreciation) depreciation on deferred compensation plans | (3 | ) | 4 | (4 | ) | |||||||
Non-operating income (expense), less net income (loss) attributable to NCI, as adjusted(1) | $ | (6 | ) | $ | (153 | ) | $ | 13 | ||||
(1) | Includes net income (loss) attributable to NCI (redeemable and non-redeemable) related to investment activities. |
Management believes that non-operating income (expense), less net income (loss) attributable to non-controlling interests,NCI, as adjusted, provides for comparability of this information to prior periods and is an effective measure for reviewing BlackRock’s non-operating contribution to its results. As compensation expense associated with depreciation (appreciation) on theassets related to certain deferred compensation plans, which is included in operating income, offsets the gain/(loss) on the investments set aside for these plans, management believes that non-operating income (expense), less net income (loss) attributable to non-controlling interests,NCI, as adjusted, provides a useful measures tomeasure, for both management and investors, of BlackRock’s non-operating results.results that impact book value.
- 5352 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
BlackRock, Inc.
Financial Highlights
(continued)
(c) Net income attributable to BlackRock, Inc., as adjusted:
Management believes that net income attributable to BlackRock, Inc., as adjusted, and diluted common earnings per common share, as adjusted, are useful measures of BlackRock’s profitability and financial performance. Net income attributable to BlackRock, Inc., as adjusted, equals net income attributable to BlackRock, Inc., GAAP basis, adjusted for significant non-recurring items as well as charges that ultimately will not impact BlackRock’s book value.
Three Months Ended | Six Months Ended June 30, | ||||||||||||||||||||||||
June 30, | March 31, | ||||||||||||||||||||||||
2009 | 2008 | 2009 | 2009 | 2008 | |||||||||||||||||||||
(Dollar amounts in millions) | Three Months Ended | ||||||||||||||||||||||||
March 31, | December 31, | ||||||||||||||||||||||||
2010 | 2009 | 2009 | |||||||||||||||||||||||
Net income attributable to BlackRock, Inc., GAAP basis | $ | 218 | $ | 274 | $ | 84 | $ | 302 | $ | 515 | $ | 423 | $ | 84 | $ | 256 | |||||||||
Non-GAAP adjustments, net of tax:(d) | |||||||||||||||||||||||||
Restructuring charges | — | — | 14 | 14 | — | ||||||||||||||||||||
BGI transaction/integration costs | 34 | — | 108 | ||||||||||||||||||||||
PNC LTIP funding obligation | 10 | 10 | 10 | 20 | 19 | 10 | 10 | 12 | |||||||||||||||||
Merrill Lynch compensation contribution | 1 | 1 | 2 | 3 | 3 | 2 | 2 | 3 | |||||||||||||||||
BGI transaction/integration costs | 10 | — | — | 10 | — | ||||||||||||||||||||
Restructuring charges | — | 14 | — | ||||||||||||||||||||||
Net income attributable to BlackRock, Inc., as adjusted | $ | 239 | $ | 285 | $ | 110 | $ | 349 | $ | 537 | $ | 469 | $ | 110 | $ | 379 | |||||||||
Allocation of net income attributable to BlackRock, Inc., as adjusted:(f) | |||||||||||||||||||||||||
Common shares(e) | $ | 233 | $ | 275 | $ | 107 | $ | 339 | $ | 520 | $ | 462 | $ | 107 | $ | 371 | |||||||||
Participating RSUs | 6 | 10 | 3 | 10 | 17 | 7 | 3 | 8 | |||||||||||||||||
Net income attributable to BlackRock, Inc., as adjusted | $ | 239 | $ | 285 | $ | 110 | $ | 349 | $ | 537 | $ | 469 | $ | 110 | $ | 379 | |||||||||
Diluted weighted average common shares outstanding(e) | 133,364,611 | 132,032,538 | 131,797,189 | 132,668,695 | 131,812,500 | 192,152,251 | 131,797,189 | 155,040,242 | |||||||||||||||||
Diluted earnings per common share, GAAP basis(e) | $ | 1.59 | $ | 2.00 | $ | 0.62 | $ | 2.22 | $ | 3.78 | $ | 2.17 | $ | 0.62 | $ | 1.62 | |||||||||
Diluted earnings per common share, as adjusted(e) | $ | 1.75 | $ | 2.08 | $ | 0.81 | $ | 2.56 | $ | 3.94 | $ | 2.40 | $ | 0.81 | $ | 2.39 | |||||||||
The restructuring charges and BGI transaction/transaction and integration costs reflected in GAAP net income attributable to BlackRock, Inc. have been deemed non-recurring by management and have been excluded from net income attributable to BlackRock, Inc., as adjusted, to help ensureenhance the comparability of this information to prior reporting periods.
The portion of the compensation expense associated with LTIP awards that will be funded through the distribution to participants of shares of BlackRock stock held by PNC and the anticipated Merrill Lynch cash compensation contribution, havea portion of which has been received, has been excluded from net income attributable to BlackRock, Inc., as adjusted, because these charges ultimately do not impact BlackRock’s book value.
- 53 -
PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
BlackRock, Inc.
Financial Highlights
(continued)
(d) The tax rates used represent BlackRock’s corporate effective tax rates in the respective periods, which exclude certain adjustments that were recorded. For each of the quarters ended June 30,March 31, 2010, March 31, 2009 June 30, 2008 and MarchDecember 31, 2009 non-GAAP adjustments were tax effected at 35%. For each, 35% and 26.8%, respectively, which reflect the blended rate applicable to the adjustments. BlackRock’s tax rate in fourth quarter 2009 includes the impact of changes in the six months ended June 30, 2009 and 2008, non-GAAP adjustments were tax effected at 35%.fourth quarter to the respective full year blended rate applicable to the adjustments.
(e) Series A, B, C and CD non-voting participating preferred stock are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations. Certain unvested restricted stock units (“RSUs”) are not included in this number as they are deemed participating securities in accordance with FSP EITF 03-6-1 (ASCAccounting Standards Codification (“ASC”) 260-10,Earnings per Share(“ASC 260-10”).
(f) Allocation of net income attributable to BlackRock, Inc., as adjusted, to common shares and participating RSUs is calculated pursuant to the two-class method as defined in SFAS No. 128,Earnings per Share (ASC 260-10,Earnings per Share).260-10.
- 54 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, the Netherlands, Japan, Hong Kong, Australia and Australia.Germany. The Company provides a wide array of taxable and tax-exempt fixed income, equity and balancedmulti-asset class investment funds, including exchange traded funds and mutual funds, and separate accounts, as well as a wide assortment of index-based equity and alternative investment products for a diverse global clientele. BlackRock provides global advisory services for mutualinvestment funds and other non-U.S. equivalent retail products. The Company’s non-U.S. mutualinvestment funds are based in a number of domiciles and cover a range of asset classes, including cash management, fixed income and equities. The BlackRock Global Funds, the Company’s primary retail fund group offered outside the United States, are authorized for distribution in more than 35 jurisdictions worldwide. In the United States, the primary retail offerings include various open-end and closed-end funds, including exchange traded funds. Additional fund offerings include structured products, real estate funds, hedge funds, hedge funds of funds, private equity funds and funds of funds, managed futures funds and exchange funds. These products are sold to both U.S. and non-U.S. high net worth, retail and institutional investors in a wide variety of active and passive strategies covering both equity and fixed income assets.
BlackRock’s client base consists of financial institutions and other corporate clients, pension plans, charities, official institutions, such as central banks, sovereign wealth funds, supranationals and other government entities; high net worth individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presence both inside and outside the United States that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to retail and institutional investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships. BlackRock also distributes its products and services through Merrill Lynch under thea global distribution agreement, which following Bank of America’sAmerica Corporation’s acquisition of Merrill Lynch, runs through January 2014. After such term, the agreement will renew for one automatic three-year extension if certain conditions are met.
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-determined percentages of the market value of AUM, percentages of committed capital during investment periods of certain alternative products, or, in the case of certain real estate equity separate accounts,clients, net operating income generated by the underlying properties, and are affected by changes in AUM, including market appreciation or depreciation, foreign exchange gains or losses and net subscriptions or redemptions. Net subscriptions or redemptions represent the sum of new client assets, additional fundings from existing clients (including dividend reinvestment), withdrawals of assets from, and termination of, client accounts, and purchases and redemptions of mutualinvestment fund shares.shares and distributions to investors representing return of capital and return on investments to investors. Market appreciation or depreciation includes current income earned on, and changes in the fair value of, securities held in client accounts.
BlackRock also earns revenue by lending securities on behalf of clients, primarily to brokerage institutions. Such revenues are accounted for on an accrual basis. The securities loaned are secured by collateral in the form of cash and securities, ranging from approximately 102% to 108% of the value of the loaned securities. The net income earned on the collateral is shared between BlackRock and the funds or other third-party accounts managed by the Company from which the securities are borrowed.
Investment advisory agreements for certain separate accounts and BlackRock’s alternative investment products provide for performance fees, based upon relative and/or absolute investment performance, in addition to base fees based on AUM. Investment advisory performance fees generally are earned after a given period of time orand when investment performance exceeds a contractual threshold. As such, the timing of recognition of performance fees may increase the volatility of BlackRock’s revenue and earnings. Historically, the magnitude of performance fees in the fourth quarter exceeds the first three calendar quarters in a year due to the higher number of products with performance measurement periods that end on December 31.
- 55 -
PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Overview (continued)
BlackRock provides a variety of risk management, investment analytic and investment system and advisory services to financial institutions, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts and government agencies. These services are provided under the brand nameBlackRock 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. Fees earned forBlackRock Solutions and advisory services are determined using some, or all, of the following methods: (i) fixed fees, (ii) percentages of various attributes of advisory assets under management and (iii) performance fees if contractual thresholds are met.
- 55 -
PART I – FINANCIAL INFORMATION (continued)
Overview (continued)
The Company also earns fees for transition management services comprised of referral fees or agency commissions from acting as an introducing broker-dealer in buying and selling securities on behalf of its customers. Commissions and clearing expenses related to transition management services are recorded on a trade-date basis as securities transactions occur.
Operating expenses reflect employee compensation and benefits, portfolio administrationdistribution and servicing costs, amortization of deferred mutual fund sales commissions, direct fund expenses, general and administration expenses and amortization of finite-lived intangible assets.
Employee compensation and benefits expense reflects salaries, commissions, severance, deferred and incentive compensation, stock-based compensationemployer payroll taxes and related benefit costs. Portfolio administration
Distribution and servicing costs include payments made to Merrill Lynch-affiliated entities under a global distribution agreement and to PNC-affiliated entities, as well as other third parties, primarily associated with the administrationobtaining and servicing ofretaining client investments in certain BlackRock products.
Direct fund expenses consist primarily of third party non-advisory expenses incurred by BlackRock related to certain funds for the use of index trademarks, reference data for indices, custodial services, fund administration, fund accounting, transfer agent services, shareholder reporting services, legal expenses, audit and tax services as well as other fund related expenses directly attributable to the non-advisory operations of the fund. These expenses may vary over time with fluctuations in AUM, number of shareholder accounts, or other attributes directly related to volume of business.
BlackRock holds investments primarily in sponsored investment products that invest in a variety of asset classes, including real estate, private equity, distressed credit/mortgage debt securities, hedge funds and hedge funds.real estate. Investments generally are made for co-investment purposes, to establish a performance track record, or to hedge exposure to certain deferred compensation plans.plans, or for regulatory purposes. Non-operating income (expense) and other comprehensive income for available-for-sale investments includes the impact of changes in the valuations or pick up of equity method earnings of these investments, as well as interest and dividend income and interest expense.
In addition, non-operating income (expense) includes the impact of changes in the valuations of these investments.consolidated sponsored investment funds and collateralized loan obligations. The portion of non-operating income (expense) not attributable to BlackRock is allocated to non-controlling interests.
- 56 -
PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Assets Under Management
AUM for reporting purposes is generally based upon how investment advisory and administration fees are calculated for each portfolio. Net asset values, total assets, committed assets or other measures may be used to determine portfolio AUM.
BlackRock, Inc.
Assets Under Management Summary1
(Dollar amounts in millions)By Asset Class
Variance vs. | |||||||||||||||
June 30, | March 31, | June 30, 2008 | March 31, 2009 | June 30, 2008 | |||||||||||
2009 | |||||||||||||||
Fixed income | $ | 509,656 | $ | 474,299 | $ | 527,186 | 7 | % | (3 | )% | |||||
Cash management | 316,702 | 322,485 | 344,944 | (2 | )% | (8 | )% | ||||||||
Equity and balanced | 329,622 | 265,733 | 435,676 | 24 | % | (24 | )% | ||||||||
Alternative investment products | 51,562 | 51,693 | 76,103 | — | (32 | )% | |||||||||
Sub Total | 1,207,542 | 1,114,210 | 1,383,909 | 8 | % | (13 | )% | ||||||||
Advisory AUM1 | 165,618 | 169,145 | 43,634 | (2 | )% | 280 | % | ||||||||
Total | $ | 1,373,160 | $ | 1,283,355 | $ | 1,427,543 | 7 | % | (4 | )% | |||||
|
Variance vs. | |||||||||||||||
(Dollar amounts in millions) | March 31, 2010 | December 31, 2009 | March 31, 2009 | December 31, 2009 | March 31, 2009 | ||||||||||
Equity | |||||||||||||||
Index | $ | 1,229,253 | $ | 1,183,005 | $ | 50,065 | 4 | % | NM | ||||||
Active | 353,269 | 353,050 | 141,447 | — | % | 150 | % | ||||||||
Fixed income | |||||||||||||||
Index | 470,589 | 459,744 | 3,075 | 2 | % | NM | |||||||||
Active | 588,594 | 595,883 | 469,581 | (1 | )% | 25 | % | ||||||||
Multi-asset class | 154,750 | 142,029 | 73,972 | 9 | % | 109 | % | ||||||||
Alternative | 101,886 | 102,101 | 53,592 | — | % | 90 | % | ||||||||
Long-term | 2,898,341 | 2,835,812 | 791,732 | 2 | % | 266 | % | ||||||||
Cash management | 306,536 | 349,277 | 322,478 | (12 | )% | (5 | )% | ||||||||
Sub-total | 3,204,877 | 3,185,089 | 1,114,210 | 1 | % | 188 | % | ||||||||
Advisory2 | 159,021 | 161,167 | 169,145 | (1 | )% | (6 | )% | ||||||||
Total | $ | 3,363,898 | $ | 3,346,256 | $ | 1,283,355 | 1 | % | 162 | % | |||||
NM—Not Meaningful
1 | Data reflects the reclassification of prior period AUM into the current period presentation. |
2 | Advisory AUM represents long-term portfolio liquidation assignments. |
NM – Not Meaningful
- 5657 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Assets Under Management (continued)
The following table presents the component changes in BlackRock’s AUM for the three months ended June 30, 2009.
BlackRock, Inc.
Component Changes inMix of Assets Under Management
For the Three Months Ended June 30, 2009By Asset Class1
(Dollar amounts in millions)
March 31, 2009 | Net subscriptions (redemptions)1 | Acquisition2 | Market Appreciation | Foreign exchange3 | June 30, 2009 | ||||||||||||||
Fixed income | $ | 474,299 | $ | 15,471 | $ | — | $ | 15,159 | $ | 4,727 | $ | 509,656 | |||||||
Cash management | 322,485 | (7,504 | ) | — | 237 | 1,484 | 316,702 | ||||||||||||
Equity and balanced | 265,733 | 15,609 | — | 39,270 | 9,010 | 329,622 | |||||||||||||
Alternative investment products | 51,693 | (2,651 | ) | 1,344 | 520 | 656 | 51,562 | ||||||||||||
Sub Total | 1,114,210 | 20,925 | 1,344 | 55,186 | 15,877 | 1,207,542 | |||||||||||||
Advisory AUM4 | 169,145 | (5,766 | ) | — | 291 | 1,948 | 165,618 | ||||||||||||
Total | $ | 1,283,355 | $ | 15,159 | $ | 1,344 | $ | 55,477 | $ | 17,825 | $ | 1,373,160 | |||||||
|
March 31, 2010 | December 31, 2009 | March 31, 2009 | |||||||
Equity | |||||||||
Index | 37 | % | 35 | % | 4 | % | |||
Active | 10 | % | 11 | % | 11 | % | |||
Fixed income | |||||||||
Index | 14 | % | 14 | % | — | % | |||
Active | 17 | % | 18 | % | 37 | % | |||
Multi-asset class | 5 | % | 4 | % | 6 | % | |||
Alternative | 3 | % | 3 | % | 4 | % | |||
Long-term | 86 | % | 85 | % | 62 | % | |||
Cash management | 9 | % | 10 | % | 25 | % | |||
Sub-total | 95 | % | 95 | % | 87 | % | |||
Advisory2 | 5 | % | 5 | % | 13 | % | |||
Total | 100 | % | 100 | % | 100 | % | |||
1 |
|
2 |
|
|
Advisory AUM represents long-term portfolio liquidation assignments. |
AUM increased approximately $90 billion, or 7%, to $1.373 trillion at June 30, 2009, compared to $1.283 trillion at March 31, 2009. The growth in AUM was attributable to $55 billion in net market appreciation, $18 billion in foreign exchange translation, $15 billion in net subscriptions and $1 billion as a result of the acquisition of the R3 Capital Partners funds. Net market appreciation of $55 billion included $39 billion of appreciation in equity and balanced assets due to an increase in global equity markets and $15 billion in fixed income products due to current income and changes in interest rate spreads. The $18 billion increase in AUM from foreign exchange was across all asset classes due to the weakening of the U.S. dollar primarily against the British pound, which resulted in an increase in AUM from converting non-dollar denominated AUM into U.S. dollars.
Net subscriptions of $10 billion from institutional clients and $5 billion from retail and high net worth clients for the three months ended June 30, 2009 were the result of net subscriptions of $16 billion in equity and balanced products including $8 billion in passive index strategies and $3 billion in global allocation and balanced products; $15 billion in fixed income products spread across all major product categories, partially offset by $8 billion in cash management net outflows primarily in government and tax exempt funds, $6 billion of distributions in long-term advisory liquidation assignments and $3 billion of net outflows in alternative investment products primarily in funds of funds and hedge funds.
- 5758 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Assets Under Management (continued)
The following table presents the component changes in BlackRock’s AUM1 for the sixthree months ended June 30, 2009.
BlackRock, Inc.
Component Changes in Assets Under Management
For the Six Months Ended June 30, 2009
(Dollar amounts in millions)March 31, 2010.
December 31, 2008 | Net subscriptions (redemptions)1 | Acquisition2 | Market appreciation (depreciation) | Foreign exchange3 | June 30, 2009 | |||||||||||||||
Fixed income | $ | 483,173 | $ | 9,081 | $ | — | $ | 14,864 | $ | 2,538 | $ | 509,656 | ||||||||
Cash management | 338,439 | (23,146 | ) | — | 85 | 1,324 | 316,702 | |||||||||||||
Equity and balanced | 280,821 | 21,364 | — | 22,150 | 5,287 | 329,622 | ||||||||||||||
Alternative investment products | 59,723 | (5,247 | ) | 1,344 | (4,678 | ) | 420 | 51,562 | ||||||||||||
Sub Total | 1,162,156 | 2,052 | 1,344 | 32,421 | 9,569 | 1,207,542 | ||||||||||||||
Advisory AUM4 | 144,995 | 18,754 | — | 180 | 1,689 | 165,618 | ||||||||||||||
Total | $ | 1,307,151 | $ | 20,806 | $ | 1,344 | $ | 32,601 | $ | 11,258 | $ | 1,373,160 | ||||||||
|
(Dollar amounts in millions) | December 31, | Net subscriptions | Market appreciation | Foreign | March 31, | |||||||||||||
2009 | (redemptions)2 | (depreciation) | exchange3 | 2010 | ||||||||||||||
Equity | ||||||||||||||||||
Index | $ | 1,183,005 | $ | 4,560 | $ | 51,662 | $ | (9,974 | ) | $ | 1,229,253 | |||||||
Active | 353,050 | (7,929 | ) | 11,833 | (3,685 | ) | 353,269 | |||||||||||
Fixed income | ||||||||||||||||||
Index | 459,744 | 13,608 | 7,412 | (10,175 | ) | 470,589 | ||||||||||||
Active | 595,883 | (14,350 | ) | 11,305 | (4,244 | ) | 588,594 | |||||||||||
Multi-asset class | 142,029 | 10,559 | 4,346 | (2,184 | ) | 154,750 | ||||||||||||
Alternative | 102,101 | 2,465 | (1,686 | ) | (994 | ) | 101,886 | |||||||||||
Long-term | 2,835,812 | 8,913 | 84,872 | (31,256 | ) | 2,898,341 | ||||||||||||
Cash management | 349,277 | (39,599 | ) | 77 | (3,219 | ) | 306,536 | |||||||||||
Sub-total | 3,185,089 | (30,686 | ) | 84,949 | (34,475 | ) | 3,204,877 | |||||||||||
Advisory4 | 161,167 | (2,864 | ) | (177 | ) | 895 | 159,021 | |||||||||||
Total | $ | 3,346,256 | $ | (33,550 | ) | $ | 84,772 | $ | (33,580 | ) | $ | 3,363,898 | ||||||
1 | Data reflects the reclassification of prior period AUM into the current period presentation. |
2 | Includes distributions representing return of capital and return on investment to investors. |
|
3 | Foreign exchange reflects the impact of converting |
4 | Advisory AUM represents long-term portfolio liquidation assignments. |
AUM increased approximately $66$18 billion, or 5%1%, to $1.373$3.364 trillion at June 30, 2009,March 31, 2010, compared with $1.307to $3.346 trillion at December 31, 2008.2009. The increasegrowth in AUM was primarily attributable to $33$85 billion in net market appreciation $21and $9 billion in net subscriptions and $1 billion as a result of the acquisition of the R3 Capital Partners funds, and $11 billion in AUM from foreign exchange translation. Net market appreciation of $33 billion included $22 billion of appreciation in equity and balanced and $15 billion in fixed income products due to significant improvements in the second quarter in both the equity and fixed income markets,long-term mandates, partially offset by $5$34 billion of market depreciation in alternative investment products primarily in real estate products. The $11 billion increase in AUM fromnet foreign exchange was across all asset classes due to the weakening of the U.S. dollar primarily against the British pound, which resulted in an increase in AUM from converting non-dollar denominated AUM into U.S. dollars.
Net subscriptions of $14 billion from institutional clients and $7 billion from retail and high net worth clients for the six months ended June 30, 2009 were attributable to net new business of $19 billion in long-term advisory liquidation assignments, $21 billion in equity and balanced products including $12 billion in passive index strategies and $9 billion in fixed income products partially offset by $23movements, $40 billion of net outflows in cash management products primarilyand $3 billion of distributions in government and tax exempt funds, and $5advisory assignments. Net market appreciation of $85 billion included $63 billion of net appreciation in equity products due to an increase in global equity markets, $19 billion in alternativefixed income products due to current income and changes in interest rate spreads and $4 billion in multi-asset class products. The $34 billion net decrease in AUM from foreign exchange movements was due to the strengthening of the U.S. dollar primarily against the Pound Sterling, which resulted in a decrease in AUM from converting non-U.S. dollar denominated AUM into U.S. dollars.
- 5859 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Assets Under Management (continued)
Net Subscriptions/(Redemptions)
Net redemptions of $34 billion for the three months ended March 31, 2010 included distributions of $40 billion from institutional clients, partially offset by net subscriptions of $2 billion from retail and high net worth clients and $4 billion from iShares® clients.
Net subscriptions in long-term mandates of $9 billion were primarily the result of $11 billion net subscriptions in multi-asset class products related to $8 billion in asset allocation products and $3 billion in target date/risk and other products, $14 billion in index fixed income products concentrated in U.S. target duration and U.S. sector-specialty strategies, $5 billion in index equity products and $2 billion in alternative products, which were offset by $14 billion net redemptions in active fixed income products primarily related to U.S. targeted duration and global fixed income products and $8 billion in net redemptions in active equity products concentrated in U.S. equity and regional/country quantitative funds. Net outflows included $40 billion in cash management products as a result of asset reallocation by both institutional and retail/high net worth investors due to exceptionally low level yields. Cash management net outflows included $34 billion and $6 billion from U.S. institutional and retail/high net worth clients, respectively. Advisory AUM outflows included $3 billion of net distributions from long-term liquidation portfolios.
The following table presents the component changes in BlackRock’s AUM1 for the twelve months ended June 30, 2009.
BlackRock, Inc.March 31, 2010.
Component Changes in Assets Under Management
For the Twelve Months Ended June 30, 2009
(Dollar amounts in millions)
March 31, | Net subscriptions | Market appreciation | Foreign | March 31, | |||||||||||||||||
(Dollar amounts in millions) | 2009 | (redemptions)2 | Acquisitions3 | (depreciation) | exchange4 | 2010 | |||||||||||||||
Equity | |||||||||||||||||||||
Index | $ | 50,065 | $ | 32,632 | $ | 1,055,456 | $ | 105,007 | $ | (13,907 | ) | $ | 1,229,253 | ||||||||
Active | 141,447 | 1,548 | 132,205 | 76,986 | 1,083 | 353,269 | |||||||||||||||
Fixed income | |||||||||||||||||||||
Index | 3,075 | 20,318 | 467,768 | (3,744 | ) | (16,828 | ) | 470,589 | |||||||||||||
Active | 469,581 | 17,202 | 49,491 | 51,131 | 1,189 | 588,594 | |||||||||||||||
Multi-asset class | 73,972 | 21,436 | 36,408 | 23,011 | (77 | ) | 154,750 | ||||||||||||||
Alternative | 53,592 | 542 | 49,395 | (1,209 | ) | (434 | ) | 101,886 | |||||||||||||
Long-term | 791,732 | 93,678 | 1,790,723 | 251,182 | (28,974 | ) | 2,898,341 | ||||||||||||||
Cash management | 322,478 | (73,070 | ) | 59,530 | 65 | (2,467 | ) | 306,536 | |||||||||||||
Sub-total | 1,114,210 | 20,608 | 1,850,253 | 251,247 | (31,441 | ) | 3,204,877 | ||||||||||||||
Advisory5 | 169,145 | (15,742 | ) | — | 103 | 5,515 | 159,021 | ||||||||||||||
Total | $ | 1,283,355 | $ | 4,866 | $ | 1,850,253 | $ | 251,350 | $ | (25,926 | ) | $ | 3,363,898 | ||||||||
June 30, 2008 | Net subscriptions (redemptions)1 | Acquisition2 | Market appreciation (depreciation) | Foreign exchange3 | June 30, 2009 | ||||||||||||||||
Fixed income | $ | 527,186 | $ | (11,310 | ) | $ | — | $ | 97 | $ | (6,317 | ) | $ | 509,656 | |||||||
Cash management | 344,944 | (28,019 | ) | — | 661 | (884 | ) | 316,702 | |||||||||||||
Equity and balanced | 435,676 | 16,588 | — | (103,944 | ) | (18,698 | ) | 329,622 | |||||||||||||
Alternative investment products | 76,103 | (7,174 | ) | 1,344 | (17,492 | ) | (1,219 | ) | 51,562 | ||||||||||||
Sub Total | 1,383,909 | (29,915 | ) | 1,344 | (120,678 | ) | (27,118 | ) | 1,207,542 | ||||||||||||
Advisory AUM4 | 43,634 | 119,876 | — | 419 | 1,689 | 165,618 | |||||||||||||||
Total | $ | 1,427,543 | $ | 89,961 | $ | 1,344 | $ | (120,259 | ) | $ | (25,429 | ) | $ | 1,373,160 | |||||||
|
1 | Data reflects the reclassification of prior period AUM into the current period presentation. |
2 | Includes distributions representing return of capital and return on investment to investors. |
|
Foreign exchange reflects the impact of converting |
Advisory AUM represents long-term portfolio liquidation assignments. |
- 60 -
PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Assets Under Management (continued)
AUM decreasedincreased approximately $54 billion,$2.081 trillion, or 4%162%, to $1.373$3.364 trillion at June 30, 2009,March 31, 2010, compared with $1.428to $1.283 trillion at June 30, 2008.March 31, 2009. The declinegrowth in AUM was primarily attributable to $120$1.849 trillion acquired in the BGI Transaction, $1 billion acquired from R3 Capital Management, LLC, $251 billion in net market depreciation and $25appreciation, $94 billion of net subscriptions in foreign exchange translation,long-term mandates, partially offset by $90 billion in net subscriptions and $1 billion as a result of an acquisition of the R3 Capital Partners funds. Net market depreciation of $121 billion was primarily due to the depreciation in equity and balanced assets of $104 billion, as equity markets declined during the twelve months ended June 30, 2009 and $17 billion in alternative products. The $25 billion reduction in AUM from foreign exchange was across all asset classes other than advisory due to the strengthening of the U.S. dollar, which resulted in foreign exchange translation from converting non-dollar denominated AUM into U.S. dollars.
Net subscriptions of $90 billion for the twelve months ended June 30, 2009 were attributable to net new business of $120 billion in long-term advisory liquidation assignments, $17 billion in equity and balanced products primarily related to U.S. index products, partially offset by $28$73 billion of net outflows in cash management products, primarily related$26 billion in foreign exchange movements and $16 billion in advisory assignments. Net market appreciation of $251 billion included $182 billion of net appreciation in equity products due to prime funds, securities lending portfolios, and tax exempt products, $11an increase in global equity markets, $47 billion in fixed income products due to current income and $7changes in interest rate spreads and $23 billion in multi-asset class products. The $26 billion net decrease in AUM from foreign exchange movements was across long-term products, partially offset by a foreign exchange increase in advisory long-term portfolio liquidation assignments.
Net Subscriptions/(Redemptions)
Net subscriptions of $5 billion for the twelve months ended March 31, 2010 included $16 billion from investors in iShares and $14 billion from retail and high net worth clients, partially offset by $25 billion of net redemptions from institutional clients.
Net subscriptions were attributable to net new business of $33 billion in index equity products spread across U.S. equity and regional/country strategies, $2 billion in active equity products, $20 billion in index fixed income products including U.S. sector, targeted duration and local currency strategies, $21 billion in multi-asset class products primarily related to asset allocation strategies, $17 billion in active fixed income products including $20 billion of inflows in local currency, $11 billion in U.S. sector products, $6 billion in U.S. core strategies and $4 billion in U.S. municipals partially offset by net redemptions of $16 billion in active targeted duration and $8 billion in global strategies. Cash management products had $73 billion of net outflows primarily in prime, government and tax exempt cash funds, as clients reallocated capital to long-term assets or bank deposit programs, which follows industry trends as investors search for higher yields in alternative products.products as interest rates remained at historic lows. Advisory AUM outflows included $16 billion of net distributions from long-term liquidation portfolios.
- 5961 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended June 30, 2009,March 31, 2010, as compared with the three months ended June 30, 2008.March 31, 2009.
The three months ended March 31, 2010 reflects the results of the BGI Transaction, which closed on December 1, 2009. Given the magnitude of the acquired business, certain line items variances are driven primarily by the inclusion of BGI results.
Revenue
Three Months Ended June 30, | Variance | ||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||
Investment advisory and administration fees: | |||||||||||||
Fixed income | $ | 207 | $ | 234 | $ | (27 | ) | (12 | )% | ||||
Cash management | 166 | 184 | (18 | ) | (10 | )% | |||||||
Equity and balanced | 382 | 601 | (219 | ) | (36 | )% | |||||||
Alternative investment products | 95 | 142 | (47 | ) | (33 | )% | |||||||
Investment advisory and administration base fees | 850 | 1,161 | (311 | ) | (27 | )% | |||||||
Fixed income | 5 | — | 5 | NM | |||||||||
Equity and balanced | 2 | 30 | (28 | ) | (93 | )% | |||||||
Alternative investment products | 10 | 27 | (17 | ) | (63 | )% | |||||||
Investment advisory performance fees | 17 | 57 | (40 | ) | (70 | )% | |||||||
Total investment advisory and administration base and performance fees | 867 | 1,218 | (351 | ) | (29 | )% | |||||||
BlackRock Solutions and advisory | 116 | 100 | 16 | 16 | % | ||||||||
Distribution fees | 23 | 34 | (11 | ) | (32 | )% | |||||||
Other revenue | 23 | 35 | (12 | ) | (34 | )% | |||||||
Total revenue | $ | 1,029 | $ | 1,387 | $ | (358 | ) | (26 | )% | ||||
| |||||||||||||
NM – Not Meaningful |
|
Three Months Ended | |||||||||||||
March 31, | Variance | ||||||||||||
(Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | |||||||||
Investment advisory, administration fees and securities lending revenue: | |||||||||||||
Equity | |||||||||||||
Index | $ | 489 | $ | 5 | $ | 484 | NM | ||||||
Active | 461 | 232 | 229 | 99 | % | ||||||||
Fixed income | |||||||||||||
Index | 96 | 1 | 95 | NM | |||||||||
Active | 254 | 196 | 58 | 30 | % | ||||||||
Multi-asset class | 166 | 98 | 68 | 69 | % | ||||||||
Alternative | 155 | 93 | 62 | 67 | % | ||||||||
Cash management | 132 | 175 | (43 | ) | (25 | )% | |||||||
Total | 1,753 | 800 | 953 | 119 | % | ||||||||
Investment advisory performance fees | |||||||||||||
Equity | 5 | 5 | — | — | % | ||||||||
Fixed income | 13 | 3 | 10 | 333 | % | ||||||||
Multi-asset class | 1 | 1 | — | — | % | ||||||||
Alternative | 31 | 2 | 29 | NM | |||||||||
Total | 50 | 11 | 39 | 355 | % | ||||||||
BlackRock Solutionsand advisory | 113 | 135 | (22 | ) | (16 | )% | |||||||
Distribution fees | 28 | 25 | 3 | 12 | % | ||||||||
Other revenue | 51 | 16 | 35 | 219 | % | ||||||||
Total revenue | $ | 1,995 | $ | 987 | $ | 1,008 | 102 | % | |||||
NM—Not Meaningful
Total revenue for the three months ended June 30, 2009 decreased $358March 31, 2010 increased $1,008 million, or 26%102%, to $1,029$1,995 million, compared with $1,387$987 million for the three months ended June 30, 2008.March 31, 2009. Total revenue for the three months ended March 31, 2010 reflects the full quarter effect of the BGI acquisition. The $358$1,008 million decreaseincrease was the result of a $351$953 million decreaseincrease in total investment advisory, administration fees and administration base andsecurities lending revenue, a $39 million increase in performance fees, a $12$35 million decreaseincrease in other revenue and an $11a $3 million decreaseincrease in distribution fees, partially offset by a $16$22 million increasedecrease inBlackRock Solutions and advisory revenue.
Investment Advisory and Administration Fees
The decrease in investment advisory and administration fees of $351 million, or 29%, was the result of a decrease in investment advisory and administration base fees of $311 million, or 27%, to $850 million for the three months ended June 30, 2009, compared with $1,161 million for the three months ended June 30, 2008 and a decrease of $40 million in performance fees.
The decrease in investment advisory and administration base fees of $311 million for the three months ended June 30, 2009, compared with the three months ended June 30, 2008 consisted of decreases in base fees of $219 million in equity and balanced products, $47 million in alternative products, $27 million in fixed income products and $18 million in cash management products as a result of decreased average AUM in 2009 compared to 2008 for all asset classes.
- 6062 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months endedJune 30, 2009, March 31, 2010, as compared with the three months endedJune 30, 2008. (continued) March 31, 2009.
Revenue (continued)
Investment Advisory, and Administration Fees (continued)and Securities Lending Revenue
InvestmentThe increase in investment advisory, performanceadministration fees decreased $40 million, or 70%, to $17and securities lending revenues of $953 million for the three months ended June 30,March 31, 2010, compared with the three months ended March 31, 2009 consisted of increases of $484 million in index equity products, $229 million in active equity products, $95 million in index fixed income products, $58 million in active fixed income products, $68 million in multi-asset class products and $62 million in alternative investment products, partially offset by a $43 million decrease in cash management products. The $953 million net increase primarily related to products acquired in the BGI acquisition as comparedwell as growth in long-term AUM due to $57market growth and net new business, partially offset by net redemptions in cash management products.
Performance Fees
Investment advisory performance fees increased $39 million, or 355%, to $50 million for the three months ended June 30, 2008,March 31, 2010, as compared to $11 million for the three months ended March 31, 2009, primarily due to a reductionan increase in performance fees in international equity separate accounts and equityhedge funds and fixed income hedge funds.products.
BlackRock Solutions and Advisory
BlackRock Solutions and advisory revenue for the three months ended June 30, 2009 increased $16March 31, 2010 decreased $22 million, or 16%, compared with the three months ended June 30, 2008.March 31, 2009. The increasedecrease inBlackRock Solutions and advisory revenue was primarily due to additionalfewer advisory assignments, withincluding portfolio liquidation assignments, which have AUM based fees, based on advisory AUM as well aspartially offset by additional Aladdin® mandates. Revenue earned on advisory assignments was comprised of advisory and portfolio structuring assignment fees and ongoing fees based on AUM of the respective portfolio assignments.
Distribution FeesOther Revenue
Distribution fees decreased $11 million to $23
Three Months Ended | ||||||||||||
March 31, | Variance | |||||||||||
(Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | ||||||||
Other revenue: | ||||||||||||
Transition management service fees | $ | 18 | $ | 6 | $ | 12 | 200 | % | ||||
Commissions revenue | 9 | 5 | 4 | 80 | % | |||||||
Equity method investment earnings(1) | 6 | 1 | 5 | 500 | % | |||||||
iPath® marketing fees(2) | 6 | — | 6 | NM | ||||||||
Other miscellaneous revenue | 12 | 4 | 8 | 200 | % | |||||||
Total other revenue | $ | 51 | $ | 16 | $ | 35 | 219 | % | ||||
NM – Not Meaningful
(1) | Related to operating and advisory company investments. |
(2) | Related to exchange traded notes issued by Barclays. |
Other revenue of $51 million for the three months ended June 30, 2009, as compared to $34March 31, 2010 increased $35 million, for the three months ended June 30, 2008. The decrease in distribution fees was primarily the result of lower sales, redemptions and AUM in certain share classes of open-end funds.
Other Revenue
Other revenue of $23 million for the three months ended June 30, 2009 decreased $12 millionor 219%, compared with the three months ended June 30, 2008. Other revenue for the three months ended June 30, 2009 included $7 million of net interest related to securities lending, $5 million of unit trust sales commissions and $11 million of other revenue.
March 31, 2009. The decreaseincrease in other revenue of $12 million, or 34%, for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008, was primarily the result of a $9$12 million declineincrease in real estate propertyfees earned for transition management services, a $6 million increase in marketing fees primarily related tofor the outsourcingBarclays iPath products (exchange traded notes issued by Barclays), a $5 million increase in the fourth quarterBlackRock’s share of 2008 of Metric contracts with BlackRock real estate clients, a $3 million decrease in net interest earned related to securities lendingunderlying earnings from certain operating and advisory company investments and a $2$4 million declineincrease in unit trust sales commissions.commissions as a result of the BGI acquisition.
- 6163 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months endedJune 30, 2009, March 31, 2010, as compared with the three months endedJune 30, 2008. March 31, 2009. (continued)
Expenses
Three Months ended | |||||||||||||||||||||||||||
Three Months Ended June 30, | Variance | March 31, | Variance | ||||||||||||||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | 2010 | 2009 | Amount | % | |||||||||||||||||||
Expenses: | |||||||||||||||||||||||||||
Employee compensation and benefits | $ | 390 | $ | 552 | $ | (162 | ) | (29 | )% | $ | 773 | $ | 351 | $ | 422 | 120 | % | ||||||||||
Portfolio administration and servicing costs | 125 | 152 | (27 | ) | (18 | )% | |||||||||||||||||||||
Distribution and servicing costs | 100 | 127 | (27 | ) | (21 | )% | |||||||||||||||||||||
Amortization of deferred mutual fund sales commissions | 26 | 33 | (7 | ) | (21 | )% | 26 | 27 | (1 | ) | (4 | )% | |||||||||||||||
Direct fund expenses | 113 | 13 | 100 | NM | |||||||||||||||||||||||
General and administration | 191 | 208 | (17 | ) | (8 | )% | 289 | 140 | 149 | 106 | % | ||||||||||||||||
Restructuring charges | — | 22 | (22 | ) | (100 | )% | |||||||||||||||||||||
Amortization of intangible assets | 36 | 37 | (1 | ) | (3 | )% | 40 | 36 | 4 | 11 | % | ||||||||||||||||
Total expenses | $ | 768 | $ | 982 | $ | (214 | ) | (22 | )% | ||||||||||||||||||
Total expenses, GAAP | $ | 1,341 | $ | 716 | $ | 625 | 87 | % | |||||||||||||||||||
Total expenses, GAAP | $ | 1,341 | $ | 716 | $ | 625 | 87 | % | |||||||||||||||||||
Less: Non-GAAP adjustments: | |||||||||||||||||||||||||||
BGI integration costs | |||||||||||||||||||||||||||
Employee compensation and benefits | 18 | — | 18 | NM | |||||||||||||||||||||||
General and administration | 34 | — | 34 | NM | |||||||||||||||||||||||
Total BGI transaction/integration costs | 52 | — | 52 | NM | |||||||||||||||||||||||
PNC LTIP funding obligation | 15 | 15 | — | — | % | ||||||||||||||||||||||
Merrill Lynch compensation contribution | 3 | 3 | — | — | % | ||||||||||||||||||||||
Restructuring charges | — | 22 | (22 | ) | (100 | )% | |||||||||||||||||||||
Compensation expense related to appreciation (depreciation) on deferred compensation plans | 3 | (4 | ) | 7 | NM | ||||||||||||||||||||||
Total non-GAAP adjustments | 73 | 36 | 37 | 103 | % | ||||||||||||||||||||||
Total expenses, as adjusted | $ | 1,268 | $ | 680 | $ | 588 | 86 | % | |||||||||||||||||||
Employee compensation and benefits, as adjusted(1) | $ | 734 | $ | 337 | $ | 397 | 118 | % |
NM—Not Meaningful
(1) | Adjusted for BGI integration costs, PNC LTIP funding obligation, Merrill Lynch compensation cash contribution and compensation expense related to appreciation (depreciation) on certain deferred compensation plans. |
Total GAAP expenses decreased $214increased $625 million, or 22%87%, to $768$1,341 million for the three months ended June 30, 2009,March 31, 2010, compared with $982to $716 million for the three months ended June 30, 2008.March 31, 2009. Excluding certain items deemed non-recurring by management or transactions that ultimately will not affect the Company’s book value, total expenses, as adjusted, increased $588 million, or 86%. The decreaseincrease in total expenses, as adjusted, is primarily attributable to decreasesincreases in employee compensation and benefits, portfolio administration and servicing costs anddirect fund expenses, general and administration expenses.expenses, partially offset by a reduction of distribution and servicing costs.
- 64 -
PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended March 31, 2010, as compared with the three months ended March 31, 2009 (continued)
Expenses (continued)
Employee Compensation and Benefits
Employee compensation and benefits expense decreased $162increased $422 million, or 29%120%, to $390 million, at June 30, 2009, compared to $552$773 million, for the three months ended June 30, 2008. March 31, 2010, compared to $351 million for the three months ended March 31, 2009.
The decreaseincrease in employee compensation and benefits expense, after excluding $18 million of BGI integration costs, was primarily attributable to a $87$166 million declineincrease in salaries, benefits and commissions, a $198 million increase in incentive compensation associated with the decreaseincrease in operating income, a $31 million increase in stock-based compensation expense related to additional grants to a larger population at the end of January 2010 and performance fees, a $61$9 million decreaseincrease in deferred compensation, which is primarily offset by an increase in non-operating income related to appreciation on assets associated with certain deferred compensation plans. The $166 million increase in salaries, benefits and commissions reflects an increase in the number of employees primarily due to lower headcount as a result ofresulting from the BlackRock’s cost control efforts and a $14 million decrease in deferred compensation expense, which is primarily linked to a decrease in appreciation on assets related to certain deferred compensation plans. EmployeesBGI Transaction. Full time employees at June 30, 2009March 31, 2010 totaled 4,984approximately 8,400 as compared to 6,069 (including 410 Metric employees) and 5,659 (excluding Metric employees)5,200 at June 30, 2008.March 31, 2009.
Portfolio AdministrationDistribution and Servicing Costs
Portfolio administrationDistribution and servicing costs decreased $27 million to $125 million during the three months ended June 30, 2009, compared to $152$100 million for the three months ended June 30, 2008.March 31, 2010, compared to $127 million for the three months ended March 31, 2009. These costs include payments to Bank of America/America Corporation (“Bank of America”)/Merrill Lynch under a global distribution agreement and payments to PNC as well as other third parties, primarily associated with the administrationdistribution and servicing of client investments in certain BlackRock products. The $27 million decrease primarily related to lower levels of average cash management AUM serviced by third parties across all asset classes.Merrill Lynch and an increase in waivers within certain cash management funds, resulting in lower distribution payments.
- 62 -
PART I – FINANCIAL INFORMATION (continued)
Operating results for the three months ended June 30, 2009, as compared with the three months ended June 30, 2008. (continued)
Expenses (continued)
Portfolio Administration and Servicing Costs (continued)
Portfolio administrationDistribution and servicing costs for the three months ended June 30, 2009March 31, 2010 included $91$59 million of costs attributable to Bank of America/Merrill Lynch and affiliates and $5 million of costs attributable to PNC and affiliates as compared to $118$98 million and $9$5 million, respectively, in the three months ended June 30, 2008. Portfolio administrationMarch 31, 2009. Distribution and servicing costs related to other non-relatedthird parties increased $4$12 million to $29$36 million for the three months ended June 30, 2009,March 31, 2010, as compared to $25$24 million for the three months ended June 30, 2008March 31, 2009 due to an expansion of distribution platforms.
Amortization of Deferred MutualDirect Fund Sales Commissions
Amortization of deferred mutual fund sales commissions decreased to $26 million for the three months ended June 30, 2009, as compared to $33 million for the three months ended June 30, 2008. The decrease in amortization of deferred mutual fund sales commissions was primarily the result of lower sales and redemptions in certain share classes of open-end funds.
General and Administration Expenses
Three Months Ended June 30, | Variance | ||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||
General and administration expenses: | |||||||||||||
Marketing and promotional | $ | 18 | $ | 45 | $ | (27 | ) | (60 | )% | ||||
Professional services | 29 | 18 | 11 | 61 | % | ||||||||
Portfolio services | 37 | 48 | (11 | ) | (23 | )% | |||||||
Technology | 26 | 30 | (4 | ) | (13 | )% | |||||||
Closed-end fund launch costs | — | 5 | (5 | ) | (100 | )% | |||||||
Occupancy | 35 | 34 | 1 | 3 | % | ||||||||
Other general and administration | 46 | 28 | 18 | 64 | % | ||||||||
Total general and administration expenses | $ | 191 | $ | 208 | $ | (17 | ) | (8 | )% | ||||
- 63 -
PART I – FINANCIAL INFORMATION (continued)
Operating results for the three months ended June 30, 2009, as compared with the three months ended June 30, 2008. (continued)
Expenses (continued)
General and Administration Expenses (continued)
General and administration expenses decreased $17 million, or 8%, for the three months ended June 30, 2009 compared with the three months ended June 30, 2008. Marketing and promotional expenses decreased $27 million, or 60%, primarily due to a decline in travel and promotional expenses. Portfolio service costs decreased $11 million, or 23%, to $37 million. Closed-end funds launch costs decreased $5 million as compared to the three months ended June 30, 2008 as a result of one alternative assetDirect fund launched on the London Stock Exchange in the three months ended June 30, 2008 which generated $300 million in AUM. Technology expenses decreased $4 million, or 13%, to $26 million compared to $30 million for the three months ended June 30, 2008 primarily due to a decrease in technology consulting. Professional services increased $11 million, or 61%, to $29 million compared to $18 million for the three months ended June 30, 2008 primarily related to legal and advisory costs in connection with the BGI Transaction. Other general and administration expenses increased $18 million, or 64%, to $46 million from $28$100 million primarily related to a $16 million increase in expense duethe addition of BGI funds subject to balance sheet related foreign currency effects, expenses for potentially uncollectible receivables, offset by a reduction of various expenses primarily the result of cost control efforts.
Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests
Non-operating income (expense), less net income (loss) attributable to non-controlling interests for the three months ended June 30, 2009 and 2008 was as follows:
Three Months Ended June 30, | Variance | ||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||
Total non-operating income (expense) | $ | 77 | $ | (4 | ) | $ | 81 | NM | |||||
Net income (loss) attributable to non-controlling interests | 26 | (20 | ) | 46 | 230 | % | |||||||
Total non-operating income (expense), less net income (loss) attributable to non-controlling interests | $ | 51 | $ | 16 | $ | 35 | 219 | % | |||||
|
NM – Not Meaningful
- 64 -
PART I – FINANCIAL INFORMATION (continued)
Operating results for the three months endedJune 30, 2009, as compared with the three months endedJune 30, 2008. (continued)
Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests (continued)
The components of non-operating income (expense), less net income (loss) attributable to non-controlling interests, for the three months ended June 30, 2009 and 2008 were as follows:
Three Months Ended June 30, | Variance | ||||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||||
Net gain (loss) on investments1 | |||||||||||||||
Private equity | $ | 11 | $ | 2 | $ | 9 | 450 | % | |||||||
Real estate | (12 | ) | (8 | ) | (4 | ) | (50 | )% | |||||||
Distressed hedge funds | 44 | 7 | 37 | NM | |||||||||||
Hedge funds/funds of hedge funds | 8 | 5 | 3 | 60 | % | ||||||||||
Other investments2 | 2 | (10 | ) | 12 | 120 | % | |||||||||
Sub-total | 53 | (4 | ) | 57 | NM | ||||||||||
Investments related to deferred compensation plans | 9 | 25 | (16 | ) | (64 | )% | |||||||||
Total net gain (loss) on investments1 | 62 | 21 | 41 | 195 | % | ||||||||||
Net income (loss) attributable to other non-controlling interests3 | — | (1 | ) | 1 | 100 | % | |||||||||
Interest and dividend income | 4 | 14 | (10 | ) | (71 | )% | |||||||||
Interest expense | (15 | ) | (18 | ) | 3 | 17 | % | ||||||||
Total non-operating income (expense)1 | 51 | 16 | 35 | 219 | % | ||||||||||
Compensation expense related to (appreciation) on deferred compensation plans | (9 | ) | (25 | ) | 16 | 64 | % | ||||||||
Non-operating income (expense), as adjusted1 | $ | 42 | $ | (9 | ) | $ | 51 | NM | |||||||
|
NM – Not Meaningful
|
|
|
Non-operating income, net of non-controlling interests, increased $35 million to $51 million for the three months ended June 30, 2009, as compared to $16 million for the three months ended June 30, 2008. The $51 million non-operating income, net of non-controlling interests, related to the Company’s co-investments and seed investments included, net gains in distressed hedge funds of $44 million, private equity products of $11 million, hedge funds/funds of hedge funds of $8 million, fixed income and equity investments of $2 million, and investments related to deferred compensation plans of $9 million, offset by a decrease in valuations from real estate equity/debt products of $12 million. In addition, net interest expense was $11 million, an increase of $7 million primarily due to a decline in interest rates.these arrangements, under which BlackRock pays certain fund expenses.
- 65 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended June 30, 2009,March 31, 2010, as compared with the three months ended June 30, 2008.March 31, 2009 (continued)
Expenses (continued)
General and Administration Expenses
Three months ended | |||||||||||||
March 31, | Variance | ||||||||||||
(Dollar amounts in millions) | 2010 | 2009 | Amount | % Change | |||||||||
General and administration expenses: | |||||||||||||
Marketing and promotional | $ | 70 | $ | 14 | $ | 56 | 400 | % | |||||
Occupancy | 68 | 35 | 33 | 94 | % | ||||||||
Portfolio services | 41 | 23 | 18 | 78 | % | ||||||||
Technology | 39 | 25 | 14 | 56 | % | ||||||||
Professional services | 32 | 12 | 20 | 167 | % | ||||||||
Closed-end fund launch costs | — | 2 | (2 | ) | (100 | )% | |||||||
Other general and administration | 39 | 29 | 10 | 34 | % | ||||||||
Total general and administration expenses | $ | 289 | $ | 140 | $ | 149 | 106 | % | |||||
Total general and administration expenses, as adjusted(1) | $ | 255 | $ | 140 | $ | 115 | 82 | % |
(1) | Adjusted for $34 million of BGI integration costs in the three months ended March 31, 2010. |
General and administration expenses increased $149 million, or 106%, for the three months ended March 31, 2010 compared with the three months ended March 31, 2009.
The three months ended March 31, 2010 included $16 million, $9 million, $4 million, $2 million and $3 million of marketing, professional services, occupancy, technology, and other general and administration expenses, respectively, related to the integration of BGI. Excluding these expenses, general and administration expenses increased $115 million, or 82%, for the three months ended March 31, 2010 compared to the three months ended March 31, 2009.
Marketing and promotional expenses increased $56 million, or 400%, primarily due to increase in travel, promotional and rebranding and advertising expenses. Occupancy increased $33 million primarily related to the BGI Transaction. Portfolio service costs increased $18 million, or 78%, to $41 million, due to an increase in market data and research expenses. Professional services increased $20 million, or 167%, to $32 million compared to $12 million for the three months ended March 31, 2009 primarily related to consulting and legal costs incurred in connection with the BGI Transaction. Other general and administration expenses increased $10 million, or 34%, to $39 million compared to $29 million for the three months ended March 31, 2009, primarily related to increases in communication and other non-income taxes, partially offset by a $10 million increase in foreign currency remeasurement benefits and an $11 million decrease as a result of an expense recorded in first quarter 2009 for a potentially uncollectible fee.
- 66 -
PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended March 31, 2010, as compared with the three months ended March 31, 2009 (continued)
Expenses (continued)
Restructuring Charges
For the three months ended March 31, 2009, BlackRock recorded pre-tax restructuring charges of $22 million, primarily related to severance, outplacement costs, occupancy costs and accelerated amortization of certain previously granted stock awards associated with a reduction in work force and reengineering efforts.
Amortization of Intangible Assets
Amortization of intangible assets increased $4 million to $40 million for the three months ended March 31, 2010, as compared to $36 million for the three months ended March 31, 2009. The increase in amortization of intangible assets reflects amortization of finite-lived management contracts acquired in the BGI Transaction.
- 67 -
PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Non-operating results for the three months ended March 31, 2010, as compared with the three months ended March 31, 2009
Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests
Non-operating income (expense), less net income (loss) attributable to non-controlling interests for the three months ended March 31, 2010 and 2009 was as follows:
Three months ended | |||||||||||||||
March 31, | Variance | ||||||||||||||
(Dollar amounts in millions) | 2010 | 2009 | Amount | % | |||||||||||
Non-operating income (expense), GAAP basis | $ | 2 | $ | (179 | ) | $ | 181 | NM | |||||||
Less: Net income (loss) attributable to NCI, GAAP basis | 5 | (22 | ) | (27 | ) | NM | |||||||||
Non-operating (expense)1 | (3 | ) | (157 | ) | 154 | 98 | % | ||||||||
Compensation expense related to (appreciation) depreciation on deferred compensation plans | (3 | ) | 4 | (7 | ) | NM | |||||||||
Non-operating (expense), as adjusted1 | $ | (6 | ) | $ | (153 | ) | $ | 147 | 96 | % | |||||
NM—Not Meaningful
1 | Includes net income (loss) attributable to non-controlling interests (redeemable and nonredeemable) related to investment activities. |
The components of non-operating income (expense), less net income (loss) attributable to non-controlling interests, for the three months ended March 31, 2010 and 2009 were as follows:
Three months ended | |||||||||||||||
March 31, | Variance | ||||||||||||||
(Dollar amounts in millions) | 2010 | 2009 | Amount | % | |||||||||||
Net gain (loss) on investments1 | |||||||||||||||
Private equity | $ | 8 | $ | (20 | ) | $ | 28 | NM | |||||||
Real estate | (1 | ) | (93 | ) | 92 | 99 | % | ||||||||
Distressed credit/mortgage funds | 20 | (12 | ) | 32 | NM | ||||||||||
Hedge funds/funds of hedge funds | 6 | (6 | ) | 12 | NM | ||||||||||
Other investments2 | (3 | ) | (15 | ) | 12 | 80 | % | ||||||||
Sub-total | 30 | (146 | ) | 176 | NM | ||||||||||
Investments related to deferred compensation plans | 3 | (4 | ) | 7 | NM | ||||||||||
Total net gain (loss) on investments1 | 33 | (150 | ) | 183 | NM | ||||||||||
Interest and dividend income | 4 | 8 | (4 | ) | (50 | )% | |||||||||
Interest expense | (40 | ) | (15 | ) | (25 | ) | 167 | % | |||||||
Net interest expense | (36 | ) | (7 | ) | (29 | ) | 414 | % | |||||||
Total non-operating income (expense)1 | (3 | ) | (157 | ) | 154 | 98 | % | ||||||||
Compensation expense related to depreciation (appreciation) on deferred compensation plans | (3 | ) | 4 | (7 | ) | NM | |||||||||
Non-operating income (expense), as adjusted1 | $ | (6 | ) | $ | (153 | ) | $ | 147 | 96 | % | |||||
NM—Not Meaningful
1 | Includes net income (loss) attributable to non-controlling interests (redeemable and nonredeemable) related to investment activities. |
2 | Includes net gains / (losses) related to equity and fixed income investments and BlackRock’s seed capital hedging program. |
- 68 -
PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Non-operating results for the three months ended March 31, 2010, as compared with the three months ended March 31, 2009 (continued)
Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests (continued)
Non-operating expense, less net income (loss) attributable to non-controlling interests, decreased $154 million to $3 million for the three months ended March 31, 2010, as compared to $157 million for the three months ended March 31, 2009. The $3 million non-operating expense, net of non-controlling interests, was comprised of $33 million of net gains on investments which was more than offset by $36 million of net interest expense.
The $33 million net gain on investments, less non-controlling interests, related to the Company’s co-investment and seed investments, included net gains in private equity products of $8 million, distressed credit/mortgage funds of $20 million, hedge funds/funds of hedge funds of $6 million, and deferred compensation plans of $3 million, partially offset by a $3 million and a $1 million decrease in valuations from other investments and real estate equity/debt products, respectively.
Net interest expense was $36 million, an increase of $29 million primarily due to an increase in interest expense related to the December 2009 issuances of $2.5 billion of long-term notes.
Net Economic Investment Portfolio
The Company reviews its net economic exposure to its investment portfolio by reducing its GAAP investments by the net assets attributable to non-controlling interests of consolidated sponsored investment funds. Changes in the investment portfolio are due to purchases, sales, maturities, distributions as well as the impact of valuations. The following table represents the percentage ranges,carrying value, by asset type, of the net “economic” investment portfolio, excluding investments related to deferred compensation plans, at June 30, 2009March 31, 2010 and 2008:2009:
|
| |||
| ||||
| ||||
| ||||
| ||||
|
(Dollar amounts in millions) | March 31, | March 31, | Variance | ||||||||||
2010 | 2009 | Amount | % Change | ||||||||||
Private equity | $ | 239 | $ | 212 | $ | 27 | 13 | % | |||||
Real estate | 47 | 64 | (17 | ) | (27 | )% | |||||||
Distressed credit/mortgage funds | 200 | 160 | 40 | 25 | % | ||||||||
Hedge funds/funds of hedge funds | 125 | 112 | 13 | 12 | % | ||||||||
Other investments | 236 | 137 | 99 | 72 | % | ||||||||
Total net “economic” investment exposure | 847 | 685 | 162 | 24 | % | ||||||||
Deferred compensation investments | 71 | 54 | 17 | 31 | % | ||||||||
Hedged investments | 24 | 44 | (20 | ) | (45 | )% | |||||||
Total net “economic” investments | $ | 942 | $ | 783 | $ | 159 | 20 | % | |||||
Income Tax Expense
Income tax expense was $94$228 million and $147$30 million for the three months ended June 30,March 31, 2010 and 2009, and 2008, respectively. The effective income tax rate for the three months ended June 30, 2009March 31, 2010 was 30.1%35.0%, as compared to 34.9%26.3% for the three months ended June 30, 2008.March 31, 2009. Excluding approximately $15a $10 million oftax benefit related to a decrease in unrecognized tax benefits primarily from favorablerelated to the final resolution of an outstanding tax rulings received duringmatter in the quarter,three months ended March 31, 2009, the effective income tax rate for this period was 35.0%approximately 35%.
Operating Income and Operating Margin
GAAP
Operating income totaled $261 million for the three months ended June 30, 2009, which was a decrease of $144 million compared to the three months ended June 30, 2008. The Company’s operating margin was 25.4% for the three months ended June 30, 2009, compared to 29.2% for the three months ended June 30, 2008. Operating income and operating margin for the three months ended June 30, 2009 included the impact of a $311 million decrease in investment advisory and administration base fees, associated with a market driven reduction in AUM over the past twelve months and a $40 million decrease in performance fee revenue. The decrease in revenue is partially offset by a $214 million decrease in operating expenses primarily due to declines in employee compensation and benefits, portfolio administration and servicing costs, general and administration expenses and amortization of deferred mutual fund sales commissions.
- 6669 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months ended June 30, 2009,March 31, 2010, as compared with the three months ended June 30, 2008.March 31, 2009 (continued)
Operating Income and Operating Margin (continued)
As AdjustedGAAP
Operating income as adjusted, totaled $302$654 million for the three months ended June 30, 2009,March 31, 2010, which was a decreasean increase of $145$383 million compared to the three months ended June 30, 2008.March 31, 2009. Operating margin, as adjusted, was 34.4% and 37.8%income for the three months ended June 30,March 31, 2010 included the full quarter effect of revenue and expenses related to the acquisition of BGI and $52 million of BGI integration costs. The integration expenses are not part of the on-going business and are principally comprised of compensation expense, legal fees, marketing and consulting expenses.
The increase in operating income for the three months ended March 31, 2010 included the effect of a $953 million increase in investment advisory, administration fees and securities lending revenue associated with the acquired BGI AUM and growth in long-term AUM related to net market appreciation and net subscriptions, a $39 million increase in performance fees revenue and a $38 million increase in distribution fees and other revenue, partially offset by a $22 million reduction inBlackRock Solutions and advisory revenue. The increase in total revenue is partially offset by a $625 million net increase in operating expenses due to increases in employee compensation and benefits, direct fund expenses, general and administration expenses and amortization of intangible assets, partially offset by decreases in distribution and servicing costs and restructuring expenses.
The Company’s operating margin was 32.8% for the three months ended March 31, 2010, compared to 27.5% for the three months ended March 31, 2009. The increase in operating margin for three months ended March 31, 2010 as compared to the three months ended March 31, 2009 included the effect of the BGI Transaction, an $11 million decrease in expenses as a result of an expense recorded in first quarter 2009 for a potentially uncollectible fee and 2008, respectively.an increase in foreign currency remeasurement benefits from $2 million in the three months ended March 31, 2009 to $12 million in the three months ended March 31, 2010, partially offset by $52 million of BGI integration costs, an increase in stock-based compensation expense related to RSU grants in January 2010 as well as the commencement of additional strategic investments to grow the franchise.
As Adjusted
Operating income, as adjusted, totaled $727 million for the three months ended March 31, 2010, which was an increase of $420 million compared to the three months ended March 31, 2009. The decline ofincrease in operating income, as adjusted, for the three months ended June 30, 2009March 31, 2010 as compared to the three months ended June 30, 2008March 31, 2009 is primarily related to the impacteffect of the $358$1,008 million decreaseincrease in total revenue, partially offset by a $213$588 million decreaseincrease in operating expenses primarily due to increases in employee compensation and benefits, and general and administration. The 34.4% operatingadministration expenses, direct fund expenses and amortization of intangible assets, partially offset by a decrease in distribution and servicing costs.
Operating margin, as adjusted, was 38.9% and 37.2% for the three months ended June 30,March 31, 2010 and 2009, includes approximatelyrespectively. The increase in operating margin reflects the initial synergies from the acquisition of BGI, an $11 million decrease in expenses as a two percentage point reduction attributable to balance sheet relatedresult of an expense recorded in first quarter 2009 for a potentially uncollectible fee and an increase in foreign currency effects.remeasurement benefits from $2 million in the three months ended March 31, 2009 to $12 million in the three months ended March 31, 2010, partially offset by an increase in stock-based compensation related to RSU grants in January 2010 and the commencement of additional strategic investments to grow the franchise.
Operating income, as adjusted, and operating margin, as adjusted, are described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
- 6770 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months endedJune 30, 2009, March 31, 2010, as compared with the three months endedJune 30, 2008. March 31, 2009 (continued)
Net Income Attributable to BlackRock, Inc.
The components of net income attributable to BlackRock, Inc. and net income attributable to BlackRock, Inc., as adjusted, for the three months ended June 30,March 31, 2010 and 2009 and 2008 are as follows:
Three Months Ended June 30, | Three Months Ended June 30, | Three months ended March 31, | Three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | GAAP | GAAP | % Change | As adjusted | As adjusted | % Change | GAAP | GAAP | % Change | As adjusted | As adjusted | % Change | ||||||||||||||||||||||||||||||||
Operating income | $ | 261 | $ | 405 | (36 | )% | $ | 302 | $ | 447 | (32 | )% | $ | 654 | $ | 271 | 141 | % | $ | 727 | $ | 307 | 137 | % | ||||||||||||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests | 51 | 16 | 219 | % | 42 | (9 | ) | NM | ||||||||||||||||||||||||||||||||||||
Non-operating (expense)1 | (3 | ) | (157 | ) | 98 | % | (6 | ) | (153 | ) | 96 | % | ||||||||||||||||||||||||||||||||
Income tax expense | (94 | ) | (147 | ) | (36 | )% | (105 | ) | (153 | ) | (31 | )% | (228 | ) | (30 | ) | NM | (252 | ) | (44 | ) | 473 | % | |||||||||||||||||||||
Net income attributable to BlackRock, Inc. | $ | 218 | $ | 274 | (20 | )% | $ | 239 | $ | 285 | (16 | )% | $ | 423 | $ | 84 | 404 | % | $ | 469 | $ | 110 | 326 | % | ||||||||||||||||||||
Net income allocated to: | ||||||||||||||||||||||||||||||||||||||||||||
Allocation of net income attributable to BlackRock, Inc.: | ||||||||||||||||||||||||||||||||||||||||||||
Common shares | $ | 212 | $ | 264 | (20 | )% | $ | 233 | $ | 275 | (15 | )% | $ | 417 | $ | 82 | 409 | % | $ | 462 | $ | 107 | 332 | % | ||||||||||||||||||||
Participating RSUs | 6 | 10 | (40 | )% | 6 | 10 | (40 | )% | 6 | 2 | 200 | % | 7 | 3 | 133 | % | ||||||||||||||||||||||||||||
Net income attributable to BlackRock, Inc. | $ | 218 | $ | 274 | (20 | )% | $ | 239 | $ | 285 | (16 | )% | $ | 423 | $ | 84 | 404 | % | $ | 469 | $ | 110 | 326 | % | ||||||||||||||||||||
Total weighted-average common shares outstanding | 133,364,611 | 132,032,538 | 1 | % | 133,364,611 | 132,032,538 | 1 | % | ||||||||||||||||||||||||||||||||||||
Diluted earnings attributable to BlackRock, Inc. shareholders per common share | $ | 1.59 | $ | 2.00 | (21 | )% | $ | 1.75 | $ | 2.08 | (16 | )% | ||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||
NM – Not Meaningful | ||||||||||||||||||||||||||||||||||||||||||||
Diluted weighted-average common shares outstanding2 | 192,152,251 | 131,797,189 | 46 | % | 192,152,251 | 131,797,189 | 46 | % | ||||||||||||||||||||||||||||||||||||
Diluted earnings per common share | $ | 2.17 | $ | 0.62 | 250 | % | $ | 2.40 | $ | 0.81 | 196 | % |
1 | Includes net income (loss) attributable to non-controlling interests (redeemable and nonredeemable) related to investment activities. |
2 | Series A, B, C, and D non-voting participating preferred stock are considered to be common stock equivalents for purposes of determining basic and diluted earnings per share calculations. Certain unvested restricted stock units are not included in this number as they are deemed participating securities in accordance with ASC 260-10. |
GAAP
Net income attributable to BlackRock, Inc. for the three months ended March 31, 2010 includes operating income of $654 million, or $2.18 per diluted common share and non-operating expenses, less net income attributable to non-controlling interests, of $3 million, or $0.01 per diluted common share. Net income attributable to BlackRock, Inc. totaled $423 million, or $2.17 per diluted common share, for the three months ended March 31, 2010, which was an increase of $339 million, or $1.55 per diluted common share, compared to the three months ended March 31, 2009.
- 6871 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Operating results for the three months endedJune 30, 2009, March 31, 2010, as compared with the three months endedJune 30, 2008. March 31, 2009 (continued)
Net Income Attributable to BlackRock, Inc. (continued)
Net income attributable to BlackRock, Inc. for the three months ended June 30, 2009 included operating income of $261 million, or $1.24 per diluted common share, non-operating income, less net income (loss) attributable to non-controlling interests, of $51 million, or $0.24 per diluted common share and an $0.11 per diluted common share benefit primarily related to a favorable tax ruling received during the quarter. Net income attributable to BlackRock, Inc. totaled $218 million, or $1.59 per diluted common share, for the three months ended June 30, 2009, which was a decrease of $56 million, or $0.41 per diluted common share, compared to the three months ended June 30, 2008.
Net income attributable to BlackRock, Inc. for the three months ended June 30, 2009March 31, 2010 included the after-tax impacteffect of the BGI integration costs of $34 million, the after-tax effect of the portion of LTIP awards which will be funded through a capital contribution of BlackRock stock held by PNC of $10 million, BGI transaction/integration costs of $10 million and an expected contribution by Merrill Lynch of $1 million to fund certain compensation of former Merrill Lynch Investment Managers (“MLIM”) employees.
Net income attributable to BlackRock, Inc. of $274 million for the three months ended June 30, 2008 included the after-tax impact of the portion of certain LTIP awards, which will be funded through a capital contribution of BlackRock stock held by PNC of $10 million, and an expected contribution by Merrill Lynch of $1 million to fund certain compensation of former MLIM employees.
Exclusive of these items in both periods, diluted earnings per common share, as adjusted, for the three months ended June 30, 2009 decreased $0.33, or 16%, to $1.75 compared to the three months ended June 30, 2008. Diluted earnings per common share, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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PART I – FINANCIAL INFORMATION (continued)
Operating results for the six months endedJune 30, 2009, as compared with the six months endedJune 30, 2008. (continued)
Revenue
Six Months Ended June 30, | Variance | ||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||
Investment advisory and administration fees: | |||||||||||||
Fixed income | $ | 406 | $ | 455 | $ | (49 | ) | (11 | )% | ||||
Cash management | 341 | 359 | (18 | ) | (5 | )% | |||||||
Equity and balanced | 719 | 1,203 | (484 | ) | (40 | )% | |||||||
Alternative investment products | 183 | 276 | (93 | ) | (34 | )% | |||||||
Investment advisory and administration base fees | 1,649 | 2,293 | (644 | ) | (28 | )% | |||||||
Fixed income | 8 | 2 | 6 | 300 | % | ||||||||
Equity and balanced | 8 | 68 | (60 | ) | (88 | )% | |||||||
Alternative investment products | 12 | 29 | (17 | ) | (59 | )% | |||||||
Investment advisory performance fees | 28 | 99 | (71 | ) | (72 | )% | |||||||
Total investment advisory and administration base and performance fees | 1,677 | 2,392 | (715 | ) | (30 | )% | |||||||
BlackRock Solutions and advisory | 256 | 160 | 96 | 60 | % | ||||||||
Distribution fees | 48 | 69 | (21 | ) | (30 | )% | |||||||
Other revenue | 35 | 66 | (31 | ) | (47 | )% | |||||||
Total revenue | $ | 2,016 | $ | 2,687 | $ | (671 | ) | (25 | )% | ||||
Total revenue for the six months ended June 30, 2009 decreased $671 million, or 25%, to $2,016 million, compared with $2,687 million for the six months ended June 30, 2008. The $671 million decrease was the result of a $715 million decrease in total investment advisory and administration base and performance fees, a $31 million decrease in other revenue and a $21 million decrease in distribution fees, partially offset by a $96 million increase inBlackRock Solutions and advisory revenue.
Investment Advisory and Administration Fees
The decrease in investment advisory and administration fees of $715 million, or 30%, was the result of a decrease in investment advisory and administration base fees of $644 million, or 28%, to $1,649 million for the six months ended June 30, 2009, compared with $2,293 million for the six months ended June 30, 2008 and a decrease of $71 million in performance fees.
The decrease in investment advisory and administration base fees of $644 million for the six months ended June 30, 2009, compared with the six months ended June 30, 2008 consisted of decreases in base fees of $484 million in equity and balanced products, $93 million in alternative products, $49 million in fixed income products and $18 million in cash management products as a result of decreased AUM in 2009 compared to 2008 for all asset classes.
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PART I – FINANCIAL INFORMATION (continued)
Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)
Revenue (continued)
Investment Advisory and Administration Fees (continued)
Investment advisory performance fees decreased $71 million, or 72%, to $28 million for the six months ended June 30, 2009, as compared to $99 million for the six months ended June 30, 2008, primarily due to a reduction in performance fees in international equity separate accounts and equity hedge funds.
BlackRock Solutions and Advisory
BlackRock Solutions and advisory revenue for the six months ended June 30, 2009 increased $96 million, or 60%, compared with the six months ended June 30, 2008. The increase in BlackRock Solutions and advisory revenue was primarily the result of additional advisory assignments during the period, as well as additional Aladdin mandates. Revenue earned on advisory assignments was comprised of advisory and portfolio structuring assignment fees and ongoing fees based on AUM of the respective portfolio assignments.
Distribution Fees
Distribution fees decreased $21 million to $48 million for the six months ended June 30, 2009, as compared to $69 million for the six months ended June 30, 2008. The decrease in distribution fees was primarily the result of lower sales, redemptions and AUM in certain share classes of open-end funds.
Other Revenue
Other revenue of $35 million for the six months ended June 30, 2009 decreased $31 million compared with the six months ended June 30, 2008. Other revenue for the six months ended June 30, 2009 included $9 million of unit trust sales commissions, $9 million of net interest related to securities lending and $17 million of other revenue.
The decrease in other revenue of $31 million, or 47%, for the six months ended June 30, 2009, as compared to the six months ended June 30, 2008, was primarily the result of a $17 million decline in property management fees primarily related to the outsourcing in the fourth quarter of 2008 of Metric contracts with BlackRock real estate clients, a $9 million decrease in net interest earned related to securities lending and a $5 million decline in unit trust sales commissions.
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PART I – FINANCIAL INFORMATION (continued)
Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)
Expenses
Six Months Ended June 30, | Variance | ||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||
Expenses: | |||||||||||||
Employee compensation and benefits | $ | 741 | $ | 1,021 | $ | (280 | ) | (27 | )% | ||||
Portfolio administration and servicing costs | 252 | 306 | (54 | ) | (18 | )% | |||||||
Amortization of deferred mutual fund sales commissions | 53 | 63 | (10 | ) | (16 | )% | |||||||
General and administration | 344 | 422 | (78 | ) | (18 | )% | |||||||
Restructuring charges | 22 | — | 22 | NM | |||||||||
Amortization of intangible assets | 72 | 74 | (2 | ) | (3 | )% | |||||||
Total expenses | $ | 1,484 | $ | 1,886 | $ | (402 | ) | (21 | )% | ||||
NM – Not Meaningful
Total expenses decreased $402 million, or 21%, to $1,484 million for the six months ended June 30, 2009, compared to $1,886 million for the six months ended June 30, 2008. Excluding the restructuring charges of $22 million, expenses decreased $424 million, or 22%, primarily attributable to decreases in employee compensation and benefits, general and administration expenses and portfolio administration and servicing costs.
Employee Compensation and Benefits
Employee compensation and benefits expense decreased $280 million, or 27%, to $741 million, at June 30, 2009, compared to $1,021 million for the six months ended June 30, 2008. The decrease in employee compensation and benefits expense was attributable to a $158 million reduction in incentive compensation primarily associated with the decrease in operating income and performance fees, a $105 million decrease in salaries, benefits and commissions due to lower headcount as a result of the Company’s cost control efforts and outsourcing of Metric services and a $17 million decrease in deferred compensation which is linked to a decrease in appreciation on assets related to certain deferred compensation plans. Employees at June 30, 2009 totaled 4,984 as compared to 6,069 (including 410 Metric employees) and 5,659 (excluding Metric employees) at June 30, 2008.
Portfolio Administration and Servicing Costs
Portfolio administration and servicing costs decreased $54 million to $252 million during the six months ended June 30, 2009, compared to $306 million for the six months ended June 30, 2008. These costs include payments to Bank of America/Merrill Lynch under a global distribution agreement, and payments to PNC as well as other third parties, primarily associated with the administration and servicing of client investments in certain BlackRock products. The $54 million decrease primarily related to lower levels of average AUM serviced by related parties across all asset classes.
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PART I – FINANCIAL INFORMATION (continued)
Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)
Expenses (continued)
Portfolio Administration and Servicing Costs (continued)
Portfolio administration and servicing costs for the six months ended June 30, 2009 included $189 million of costs attributable to Bank of America/Merrill Lynch and affiliates and $10 million of costs attributable to PNC and affiliates as compared to $240 million and $17 million, respectively, in the six months ended June 30, 2008. Portfolio administration and servicing costs related to other non-related parties increased $4 million to $53 million for the six months ended June 30, 2009, as compared to $49 million for the six months ended June 30, 2008 due to an expansion of distribution platforms.
Amortization of Deferred Mutual Fund Sales Commissions
Amortization of deferred mutual fund sales commissions decreased $10 million to $53 million for the six months ended June 30, 2009, as compared to $63 million for the six months ended June 30, 2008. The decrease in amortization of deferred mutual fund sales commissions was primarily the result of lower sales and redemptions in certain share classes of U.S. open-end funds.
General and Administration Expenses
Six Months Ended June 30, | Variance | ||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||
General and administration expenses: | |||||||||||||
Marketing and promotional | $ | 32 | $ | 87 | $ | (55 | ) | (63 | )% | ||||
Professional services | 42 | 41 | 1 | 2 | % | ||||||||
Portfolio services | 70 | 87 | (17 | ) | (20 | )% | |||||||
Technology | 51 | 61 | (10 | ) | (16 | )% | |||||||
Closed-end fund launch costs | 2 | 9 | (7 | ) | (78 | )% | |||||||
Occupancy | 70 | 68 | 2 | 3 | % | ||||||||
Other general and administration | 77 | 69 | 8 | 12 | % | ||||||||
Total general and administration expenses | $ | 344 | $ | 422 | $ | (78 | ) | (18 | )% | ||||
General and administration expenses decreased $78 million, or 18%, for the six months ended June 30, 2009 compared with the six months ended June 30, 2008. Marketing and promotional expenses decreased $55 million, or 63%, primarily due to a decline in travel and promotional expenses. Portfolio service costs decreased $17 million, or 20%, to $70 million, partially due to a decline in AUM. Technology expenses decreased $10 million, or 16%, to $51 million compared to $61 million for the six months ended June 30, 2008 primarily due to a decrease in software licensing/maintenance costs and technology consulting. Other general and administration expenses increased $8 million, or 12%, to $77 million from $69 million, primarily related to expenses for potentially uncollectible receivables and an increase in expense due to balance sheet related foreign currency effects, partially offset by a reduction of various expenses primarily the result of cost control efforts.
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PART I – FINANCIAL INFORMATION (continued)
Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)
Expenses (continued)
Restructuring Charges
For the six months ended June 30, 2009 BlackRock recorded pre-tax restructuring charges of $22 million, primarily related to severance, outplacement costs, occupancy costs and accelerated amortization of certain previously granted stock awards associated with a reduction in work force and reengineering efforts. See Note 10, Restructuring Charges, to the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filing.
Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests
Non-operating income (expense), less net income (loss) attributable to non-controlling interests for the six months ended June 30, 2009 and 2008 was as follows:
Six Months Ended June 30, | Variance | ||||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||||
Total non-operating income (expense) | $ | (102 | ) | $ | (24 | ) | $ | (78 | ) | (325 | )% | ||||
Net income (loss) attributable to non-controlling interests | 4 | (15 | ) | 19 | 127 | % | |||||||||
Total non-operating income (expense), less net income (loss) attributable to non-controlling interests | $ | (106 | ) | $ | (9 | ) | $ | (97 | ) | NM | |||||
NM – Not Meaningful
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PART I – FINANCIAL INFORMATION (continued)
Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)
Non-Operating Income (Expense), Less Net Income (Loss) Attributable to Non-Controlling Interests (continued)
The components of non-operating income (expense), less net income (loss) attributable to non-controlling interests, for the six months ended June 30, 2009 and 2008 were as follows:
Six Months Ended June 30, | Variance | ||||||||||||||
(Dollar amounts in millions) | 2009 | 2008 | Amount | % Change | |||||||||||
Net gain (loss) on investments1 | |||||||||||||||
Private equity | $ | (9 | ) | $ | 10 | $ | (19 | ) | (190 | )% | |||||
Real estate | (105 | ) | (22 | ) | (83 | ) | (377 | )% | |||||||
Distressed hedge funds | 32 | 4 | 28 | NM | |||||||||||
Hedge funds/funds of hedge funds | 2 | (8 | ) | 10 | 125 | % | |||||||||
Other investments2 | (13 | ) | (12 | ) | (1 | ) | (8 | )% | |||||||
Sub-total | (93 | ) | (28 | ) | (65 | ) | (232 | )% | |||||||
Investments related to deferred compensation plans | 5 | 24 | (19 | ) | (79 | )% | |||||||||
Total net gain (loss) on investments1 | (88 | ) | (4 | ) | (84 | ) | NM | ||||||||
Net income (loss) attributable to other non-controlling interests3 | — | (1 | ) | 1 | 100 | % | |||||||||
Interest and dividend income | 12 | 32 | (20 | ) | (63 | )% | |||||||||
Interest expense | (30 | ) | (36 | ) | 6 | 17 | % | ||||||||
Total non-operating income (expense)1 | (106 | ) | (9 | ) | (97 | ) | NM | ||||||||
Compensation expense related to (appreciation) on deferred compensation plans | (5 | ) | (24 | ) | 19 | 79 | % | ||||||||
Non-operating expense, as adjusted1 | $ | (111 | ) | $ | (33 | ) | $ | (78 | ) | (236 | )% | ||||
NM – Not Meaningful
|
|
|
Non-operating expense, less net income (loss) attributable to non-controlling interests, decreased $97 million to $106 million for the six months ended June 30, 2009, as compared to $9 million for the six months ended June 30, 2008. The $106 million non-operating expense, less non-controlling interests, related to the Company’s co-investment and seed investments, included net losses in real estate products of $105 million, private equity products of $9 million and other investments of $13 million, partially offset by valuation gains in distressed hedge funds of $32 million, investments related to deferred compensation plans of $5 million and hedge funds/funds of hedge funds of $2 million. In addition, net interest expense was $18 million, a decline of $14 million primarily due to a decline in interest rates.
- 75 -
PART I – FINANCIAL INFORMATION (continued)
Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)
Income Tax Expense
Income tax expense was $124 million and $277 million for the six months ended June 30, 2009 and 2008, respectively. The effective income tax rate for the six months ended June 30, 2009 was 29.1%, as compared to 35.0% for the six months ended June 30, 2008. Excluding $25 million of tax benefits primarily related to a favorable tax ruling and the final resolution of outstanding tax matters in the six months ended June 30, 2009, the effective income tax rate was 35.0%.
Operating Income and Operating Margin
GAAP
Operating income totaled $532 million for the six months ended June 30, 2009, which was a decrease of $269 million compared to the six months ended June 30, 2008. The Company’s operating margin was 26.4% for the six months ended June 30, 2009, compared to 29.8% for the six months ended June 30, 2008. Operating income and operating margin for the six months ended June 30, 2009 included the impact of a $644 million decrease in investment advisory and administration base fees, associated with a market driven reduction in AUM, a $71 million decrease in performance fees revenue, and a $52 million reduction in other revenue and distribution fees, partially offset by a $96 million increase inBlackRock Solutions and advisory revenue. The decrease in revenue is partially offset by a $402 million decrease in operating expenses primarily due to declines in employee compensation and benefits, general and administration expenses and portfolio administration and servicing costs offset by $22 million of restructuring charges.
As Adjusted
Operating income, as adjusted, totaled $609 million for the six months ended June 30, 2009, which was a decrease of $251 million compared to the six months ended June 30, 2008. Operating margin, as adjusted, was 35.8% and 37.7% for the six months ended June 30, 2009 and 2008, respectively. The decline of operating income, as adjusted, for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 is primarily related to the impact of the $671 million decrease in revenue offset by a $420 million decrease in operating expenses primarily due to decreases in employee compensation and benefits, general and administration expenses and portfolio administration and servicing costs.
Operating income, as adjusted, and operating margin, as adjusted, are described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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PART I – FINANCIAL INFORMATION (continued)
Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)
Net Income Attributable to BlackRock, Inc.
The components of net income attributable to BlackRock, Inc. and net income attributable to BlackRock, Inc., as adjusted, for the six months ended June 30, 2009 and 2008 are as follows:
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
(Dollar amounts in millions, except per share data) | GAAP | GAAP | % Change | As adjusted | As adjusted | % Change | ||||||||||||||||
Operating income | $ | 532 | $ | 801 | (34 | )% | $ | 609 | $ | 860 | (29 | )% | ||||||||||
Non-operating income (expense), less net income (loss) attributable to non-controlling interests | (106 | ) | (9 | ) | NM | (111 | ) | (33 | ) | (236 | )% | |||||||||||
Income tax expense | (124 | ) | (277 | ) | (55 | )% | (149 | ) | (290 | ) | (49 | )% | ||||||||||
Net income attributable to BlackRock, Inc. | $ | 302 | $ | 515 | (41 | )% | $ | 349 | $ | 537 | (35 | )% | ||||||||||
Net income allocated to: | ||||||||||||||||||||||
Common shares | $ | 294 | $ | 498 | (41 | )% | $ | 339 | $ | 520 | (35 | )% | ||||||||||
Participating RSUs | 8 | 17 | (53 | )% | 10 | 17 | (41 | )% | ||||||||||||||
Net income attributable to BlackRock, Inc. | $ | 302 | $ | 515 | (41 | )% | $ | 349 | $ | 537 | (35 | )% | ||||||||||
Total weighted-average common shares outstanding | 132,668,695 | 131,812,500 | 1 | % | 132,668,695 | 131,812,500 | 1 | % | ||||||||||||||
Diluted earnings attributable to BlackRock, Inc. shareholders per common share | $ | 2.22 | $ | 3.78 | (41 | )% | $ | 2.56 | $ | 3.94 | (35 | )% | ||||||||||
NM – Not Meaningful |
|
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PART I – FINANCIAL INFORMATION (continued)
Operating results for thesix months endedJune 30, 2009, as compared with thesix months endedJune 30, 2008. (continued)
Net Income Attributable to BlackRock, Inc. (continued)
Net income attributable to BlackRock, Inc. for the six months ended June 30, 2009 includes operating income of $532 million, or $2.54 per diluted common share, non-operating losses, less net income (loss) attributable to non-controlling interests, of $106 million, or $0.50 per diluted common share and an $0.18 per diluted common share benefit related to a favorable tax ruling and the final resolution of outstanding tax matters. Net income attributable to BlackRock, Inc. totaled $302 million, or $2.22 per diluted common share, for the six months ended June 30, 2009, which was a decrease of $213 million, or $1.56 per diluted common share, compared to the six months ended June 30, 2008.
Net income attributable to BlackRock, Inc. for the six months ended June 30, 2009 included the after-tax impact portion of LTIP awards which will be funded through a capital contribution of BlackRock stock held by PNC of $20 million, restructuring charges of $14 million, BGI transaction/integration costs of $10 million and an expected contribution by Merrill Lynch of $3 million to fund certain compensation of former MLIM employees.
Net income attributable to BlackRock, Inc. of $515$84 million for the sixthree months ended June 30, 2008March 31, 2009 included the after-tax impacteffect of the portion of certain LTIP awards, which will be funded through a capital contribution of BlackRock stock held by PNC of $19$10 million, restructuring charges of $14 million and an expected contribution by Merrill Lynch of $3$2 million to fund certain compensation of former MLIM employees.employees, a portion of which was received by BlackRock in third quarter 2009.
As Adjusted
Exclusive of thesethe items in both periods,discussed above, diluted earnings per common share, as adjusted, of $2.40 for the sixthree months ended June 30, 2009 decreased $1.38,March 31, 2010 increased $1.59, or 35%196%, to $2.56 compared to the sixthree months ended June 30, 2008.March 31, 2009.
Net income attributable to BlackRock, Inc., as adjusted, for the three months ended March 31, 2010 includes operating income of $727 million, or $2.42 per diluted common share, non-operating expenses, less net income attributable to non-controlling interests, of $6 million, or $0.02 per diluted common share. Diluted earnings per common share, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
Operating Activities
Sources of BlackRock’s operating cash include investment advisory and administration fees, revenues fromBlackRock Solutionsand advisory products and services, mutual fund distribution fees and realized earnings and distributions on the Company’s investments. BlackRock primarily uses its cash to pay compensation and benefits, portfolio administration and servicing costs, general and administration expenses, interest on the Company’s borrowings, purchase co-investments and seed investments, capital expenditures, income taxes and dividends on BlackRock’s capital stock.
BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds and VIEs
In accordance with GAAP, certain BlackRock sponsored investment funds and collateralized loan obligations (“CLOs”) are consolidated into the condensed consolidated financial statements of BlackRock, notwithstanding the fact that BlackRock may only have a minority economicequity interest, if any, in these funds.funds or CLOs. As a result, BlackRock’s condensed consolidated statements of cash flows include the cash flows of consolidated sponsored investment funds.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 our ability to fund additional operating, investing and financing activities. BlackRock’s management does not advocate that investors consider such non-GAAP measures in isolation from, or as a substitute for its cash flow presented in accordance with GAAP.
- 7872 -
PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued)
BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds and VIEs (continued)
The following table presents a reconciliation of the Company’s condensed consolidated statements of cash flows presented on a GAAP basis to the Company’s condensed consolidated statements of cash flows, excluding the impact of the cash flows of consolidated sponsored investment funds:funds and VIEs:
(Dollar amounts in millions) | Six Months Ended June 30, 2009 | Three Months Ended March 31, 2010 | |||||||||||||||||||||||||
GAAP Basis | Impact on Cash Flows of Consolidated Sponsored Investment Funds | Cash Flows Excluding Impact of Consolidated Sponsored Investment Funds | |||||||||||||||||||||||||
(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 | |||||||||||||||||||||||
$ | 274 | $ | 162 | $ | 112 | $ | (164 | ) | $ | 37 | $ | (5 | ) | $ | (196 | ) | |||||||||||
Cash flows from investing activities | 18 | 13 | 5 | (30 | ) | (2 | ) | — | (28 | ) | |||||||||||||||||
Cash flows from financing activities | (105 | ) | (187 | ) | 82 | (1,755 | ) | 13 | (4 | ) | (1,764 | ) | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 86 | — | 86 | (56 | ) | — | — | (56 | ) | ||||||||||||||||||
Net change in cash and cash equivalents | 273 | (12 | ) | 285 | (2,005 | ) | 48 | (9 | ) | (2,044 | ) | ||||||||||||||||
Cash and cash equivalents, beginning of period | 2,032 | 61 | 1,971 | 4,708 | 75 | 9 | 4,624 | ||||||||||||||||||||
Cash and cash equivalents, end of period | $ | 2,305 | $ | 49 | $ | 2,256 | $ | 2,703 | $ | 123 | $ | — | $ | 2,580 | |||||||||||||
Cash and cash equivalents, excluding cash held by consolidated sponsored investment funds and VIEs at June 30, 2009 increased $285March 31, 2010 decreased $2,044 million from December 31, 2008,2009, primarily resulting from $112$196 million of cash inflowsoutflows from operating activities, $82$1,764 million of cash inflowsoutflows from financing activities, $5$28 million of cash inflowsoutflows from investing activities and an $86a $56 million increasedecrease due to the effect of foreign exchange rate changes.
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PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued)
BlackRock Cash Flows Excluding the Impact of Consolidated Sponsored Investment Funds and VIEs (continued)
Operating Activities
Sources of BlackRock’s operating cash primarily include investment advisory, administration fees and securities lending revenue, revenues fromBlackRock Solutions and advisory products and services and mutual fund distribution fees. BlackRock uses its cash to pay compensation and benefits, distribution and servicing costs, direct fund expenses, general and administration expenses, interest and principal on the Company’s borrowings, income taxes and dividends on BlackRock’s capital stock and to purchase co-investments and seed investments, and pay for capital expenditures.
Net cash inflowsoutflows from operating activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the sixthree months ended June 30, 2009,March 31, 2010, primarily includedinclude the receipt of investment advisory and administration fees, securities lending revenue and other revenue offset by the payment of operating expenses incurred in the normal course of business. Cash inflows from operating activities, excludingoutflows for the impact of consolidated sponsored investment funds, in the sixthree months ended June 30, 2009March 31, 2010 included cash payments related to year end incentive compensation, that was paidincluding the payments for BGI employee compensation accruals assumed in the first quarter. BGI Transaction.
Investing Activities
Cash inflowsoutflows from investing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the sixthree months ended June 30, 2009March 31, 2010 were $28 million and primarily included $198$28 million of purchases of investments and $44 million of purchases of property and equipment, partially offset by $29 million of net proceeds from sales and maturities of investments partially offset by a $156 million contingent consideration payment to Quellos and $33$20 million of purchasesreturn of property and equipment. capital from equity method investees.
Financing Activities
Cash inflowsoutflows from financing activities, excluding the impact of consolidated sponsored investment funds and VIEs, for the sixthree months ended June 30, 2009March 31, 2010 primarily included the receiptrepayments of $300short-term borrowings and convertible debt of $1,354 million from equity raised in connection with the BGI Transaction, partially offset by $208and $148 million, respectively, $196 million of payments for cash dividends.dividends and $114 million related to repurchases of common stock to satisfy tax withholding obligations of employees related to vesting of certain restricted stock awards.
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PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued)
Capital Resources
The Company manages its financial condition and funding to maintain appropriate liquidity for the business. Capital resources at June 30, 2009March 31, 2010 and December 31, 20082009 were as follows:
March 31, | December 31, | Variance | |||||||||||||||||||||
(Dollar amounts in millions) | June 30, 2009 | December 31, 2008 | 2010 | 2009 | Amount | % | |||||||||||||||||
Cash and cash equivalents | $ | 2,305 | $ | 2,032 | $ | 2,703 | $ | 4,708 | $ | (2,005 | ) | (43 | )% | ||||||||||
Cash and cash equivalents held by consolidated sponsored investment funds1 | (49 | ) | (61 | ) | (123 | ) | (75 | ) | (48 | ) | (64 | )% | |||||||||||
Regulatory capital2 | (193 | ) | (172 | ) | |||||||||||||||||||
2007 credit facility - undrawn3 | 2,171 | 2,171 | |||||||||||||||||||||
Committed access | $ | 4,234 | $ | 3,970 | |||||||||||||||||||
Subtotal | 2,580 | 4,633 | (2,053 | ) | (44 | )% | |||||||||||||||||
2007 credit facility—undrawn2 | 2,266 | 2,171 | 95 | 4 | % | ||||||||||||||||||
Commercial paper3 | (780 | ) | (2,034 | ) | 1,254 | 62 | % | ||||||||||||||||
Total liquidity | $ | 4,066 | $ | 4,770 | $ | (704 | ) | (15 | )% | ||||||||||||||
Required regulatory capital4 | $ | 818 | $ | 857 | $ | (39 | ) | (5 | )% |
1 | The Company may not be able to access such cash to use in its operating activities. |
2 |
|
3 | The outstanding commercial paper notes that are supported by the 2007 credit facility reduce the availability of the facility. |
4 | A portion of the required regulatory capital is partially met with cash and cash equivalents. |
The $704 million decline in total liquidity during the three months ended March 31, 2010 is predominantly related to the payments of cash bonuses related to 2009 year end awards. |
In addition, a significant portion of the Company’s $773$942 million of net economic investments are illiquid in nature and, as such, may not be readily convertible to cash.
Investment/Loan Commitments
At June 30, 2009,March 31, 2010, the Company had $277$301 million of various capital commitments to fund sponsored investment funds. This amount excludes additional commitments made by consolidated funds primarily for co-investment purposes.of funds to underlying third party funds as third party non-controlling interest holders have the legal obligation to fund the respective commitments of such funds of funds. Generally, the timing of the funding of capitalthese commitments is uncertainunknown. Therefore, amounts are shown to be paid upon the expiration date of the commitment. Actual payments could be made at any time prior to such expiration date and, if not called by that date, such commitments could expire before funding.would expire. These commitments have not been recorded on the Company’s condensed consolidated statements of financial condition at March 31, 2010. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.
During the six months ended June 30, 2009, approximately $174 million of loans outstanding were repaid from a warehouse entity established for certain private equity funds of funds.
At June 30, 2009,Prior to March 31, 2010, the Company was committed to provide financing of up to $60 million until March 2010, to Anthracite Capital, Inc. (“Anthracite”), a specialty commercial real estate finance company that iswas managed by a subsidiary of BlackRock. The financing is collateralized by a pledge by Anthracite pledgingof its ownership interest in ana real estate debt investment fund, which is also managed by a subsidiary of BlackRock. At June 30, 2009,March 31, 2010, $33.5 million of financing was outstanding and remains outstanding as of May 2010, which matured in July 2009. Upon maturity Anthracite rolled over the borrowings with a newis past its final maturity date of October 2009. As of June 2009,March 5, 2010. At March 31, 2010, the value of the collateral was estimated to be $28.5$10 million, which resulted in the Company reducing the outstanding balance includeda $2.5 million reduction in due from related parties on the Company’s condensed consolidated statement of financial condition by $5 million and recording aan equal amount recorded in general and administration expense. Based onadministrative expense in the value of the collateral and the borrowings outstanding of such date, thethree months ended March 31, 2010. The Company has no obligation to loan newadditional amounts to Anthracite under this facility. Anthracite filed a voluntary petition for relief under chapter 7 of title 11 of the U.S. Code in the U.S. Bankruptcy Court for the Southern District of New York on March 15, 2010. The management agreement between the Company and Anthracite has expired. Recovery of any amount of the financing provided by the Company in excess of the value of the collateral is not anticipated. The Company has granted waivers for certain breachescontinues to evaluate the collectability of financial covenantsthe outstanding borrowings by reviewing the carrying value of Anthracite’s credit facility.the net assets of the collateral, which fluctuates each period.
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PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued)
Short-TermShort-term Borrowings
2007 Facility
In August 2007, the Company entered into a five-year, $2.5 billion unsecured revolving credit facility (the “2007 facility”). The 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to EBITDA,earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 0.51 to 1 at June 30, 2009.
March 31, 2010. At June 30, 2009,March 31, 2010, the Company had $200$100 million outstanding under the 2007 facility with an interest rate of 0.49%0.43% and a maturity date during July 2009. During July 2009, the Company rolled over the $200 million in borrowings with an interest rate of 0.47% and a maturity date in August 2009.
May 2010. Lehman Commercial Paper, Inc. has a $140 million participation under the 2007 facility; however, BlackRock does not expect that Lehman Commercial Paper, Inc. will honor its commitment to fund additional amounts. Bank of America, a related party, has a $140 million participation under the 2007 facility.
Commercial Paper Program
On October 14, 2009, BlackRock established a commercial paper program (the “CP Program”) under which the Company may issue unsecured commercial paper notes (the “CP Notes”) on a private placement basis up to a maximum aggregate amount outstanding at any time of $3 billion. The proceeds of the commercial paper issuances were used to finance a portion of the BGI Transaction. Subsidiaries of Bank of America and Barclays, both related parties, as well as other third parties, act as dealers under the CP Program. At March 31, 2010 the CP Program was supported by the 2007 facility.
The Company began to issue CP Notes under the CP Program on November 4, 2009. As of March 31, 2010, BlackRock had approximately $780 million of outstanding CP Notes with a weighted average interest rate of 0.20% and a weighted average maturity of 22 days. As of May 6, 2010, BlackRock had $616 million of outstanding CP Notes supported by the 2007 facility with a weighted average interest rate of 0.23% and a weighted average maturity of 23 days. The Company expects that the outstanding balance of CP Notes may fluctuate throughout the year.
Japan Commitment-line
In June 2009, BlackRock Japan Co., Ltd., a wholly owned subsidiary of the Company, renewed its five billion Japanese yen commitment-line agreement with a banking institution (the “Japan Commitment-line”) for a term of one year. The Japan Commitment-line is intended to provide liquidity and flexibility for operating requirements in Japan. At June 30, 2009,March 31, 2010, the Company had no borrowings outstanding under the Japan Commitment-line.
Convertible Debentures and Long-Term Borrowings
At June 30, 2009,In February 2005, the Company issued $250 million aggregate principal amount of convertible debentures due in 2035 and long-term borrowingsbearing interest at a rate of 2.625% per annum. Beginning in February 2009, the convertible debentures became convertible at the option of the holders at any time and on, and after, February 20, 2010 the convertible debentures became callable by the Company at any time following not more than 60 but not less than 30 days notice. During the three months ended March 31, 2010, holders of $148 million of debentures converted their holdings into cash and shares. At March 31, 2010, $95 million in convertible debentures were $942 million. Debtoutstanding.
As of March 31, 2010, debt service and repayment requirements, assuming the Company’s 2.625% convertible debentures due 2035 (the “convertible debentures”) are converted for cash equal to the principal at the option of the holdersfully repaid in third quarter 2009,2010, are $275$96 million for the remainder of 2009, $452010.
In addition, through May 6, 2010, holders of an additional $24 million in 2010of debentures elected to convert their holdings into cash and $44 million in each of 2011, 2012shares.
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PART I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and 2013.Capital Resources (continued)
Contingent Payments Related to Quellos Transaction
On October 1, 2007,In connection with the Company acquired the fund of funds business of Quellos. As part of this transactionQuellos Transaction, Quellos is entitled to receive two contingent payments, uponsubject to achieving certain investment advisory revenuebase and performance fee measures through December 31, 2010, totaling up to an additional $969 million in a combination of cash and stock. The first contingent payment, of up to $374 million, was payable in second quarter 2009 and the second payment, of up to $595 million is payable in cash in 2011.
During second quarter 2009, the Company determined the amount of the first contingent payment to be $219 million, of which $11 million was previously paid in cash during 2008. Of the remaining $208 million, during second quarter 2009, $156 million was paid in cash and $52 million was paid in common stock, or approximately 330,000 shares converted atbased on a price of $157.33.$157.33 per share.
The second contingent payment, of up to $595 million, is payable in cash in 2011. Quellos may also be entitled to a “catch-up” payment in 2011 if certain performanceinvestment advisory base fee measures are met in 2011through 2010 as the value of the first contingent payment was less than $374 million.
BGI Transaction
In June 2009, BlackRock announced that Barclays PLC accepted its offer to acquire BGI from Barclays. The price consideration consists of $6.6 billion in cash, subject to certain adjustments, and a capital stock sale of approximately 37.8 million common and participating preferred shares to Barclays, subject to certain adjustments, which would give Barclays approximately a 19.9% economic stake in BlackRock. The cash A portion of the dealsecond contingent payment, not to exceed $90 million, may be paid to Quellos based on factors including the continued employment of certain employees with BlackRock. Therefore, this portion, not to exceed $90 million, would be recorded as employee compensation.
Other Cash Uses
As certain acquired BGI receivables are collected, the Company will pay Barclays approximately $330 million, which was recorded as of December 31, 2009 in due to related parties on the condensed consolidated statement of financial condition, to settle certain non-interest bearing notes assumed in the BGI Transaction. As of March 2010, the Company had repaid approximately $100 million. In addition, in April 2010 the Company repaid approximately $155 million and it is anticipated that substantially all of the remainder of the notes will be financed by $800repaid during the remainder of 2010.
In addition, BlackRock Institutional Trust Company, N.A. (“BTC”), a wholly-owned subsidiary of the Company, may be required to purchase approximately $300 million from cash currently held by BlackRock, a new $2 billion credit facility, which is expected to ultimately be replaced with term debt, $1 billion of additional short term debt, and $2.8 billionFederal Reserve Bank stock during the second quarter of capital proceeds from the sale of 19.9 million common shares and participating preferred shares2010 pursuant to a group of institutional investors, of which $300 million from the sale of 2.1 million common shares was received prior to June 30, 2009. The transaction is expected to close in December 2009, or early 2010, pendingits regulatory approvals and the satisfaction of other customary closing conditions.requirements.
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PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Liquidity and Capital Resources (continued)
Barclays Support of Two EnhancedCertain Securities Lending Related Cash Funds
In December 2007, BlackRock entered intoBarclays has provided capital support agreements withto support certain securities lending related cash management products acquired by BlackRock in the two funds, backed by letters of credit drawn under BlackRock’s existing credit facility.BGI Transaction. Pursuant to the terms of the capital support agreements, BlackRockBarclays agreed to make subsequent capital contributions tocover losses on covered securities within the funds to cover realized losses,products in the aggregate of up to $100 million, related$2.2 billion from December 1, 2009 through December 1, 2013. BlackRock and Barclays have procedures in place to specifieddetermine loss events on covered securities held bywithin the funds. In December 2008, BlackRock’sproducts and to ensure support payments from Barclays. At March 2010, Barclays’ remaining maximum potential obligation in the aggregate under the capital support agreements was reduced to $45 million, and in 2009, both capital support agreements were terminated, due to the closure of the related funds. BlackRock provided approximately $3 million of capital contributions to these funds for the six months ended June 30, 2009 under the capital support agreements.
$2.2 billion. At June 30, 2009, BlackRock’s remaining exposure from its support of the two enhanced cash funds, which were both liquidated and closed prior to June 30, 2009, is $45 million, which represents securities it received in lieu of it’s remaining investment in one fund and securities it directly purchased from the funds prior to closure of the funds of which $15 million matured in July 2009 and an additional $15 million is expected to mature at par in fourth quarter 2009.
In applying the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R),Consolidation of Variable Interest Entities (“FIN 46(R)”),March 31, 2010, BlackRock concluded that although these funds were variable interest entities, it was not the primary beneficiary of the two enhanced cash funds at December 31, 2008, which resulted in consolidation of the funds on its condensed consolidated statements of financial condition.these funds.
Net Capital Requirements
The Company is required to maintain net capital in certain regulated subsidiaries within a number of jurisdictions, which is met in part by retaining cash and cash equivalents in those jurisdictions. As a result, such subsidiaries of the Company may be restricted in itstheir ability to transfer cash between different jurisdictions.jurisdictions and to their parents. Additionally, transfers of cash between international jurisdictions, including repatriation to the United States, may have adverse tax consequences that could discourage such transfers.
BTC is chartered as a national bank that does not accept client deposits and whose powers are limited to trust activities. BTC provides investment management services, including investment advisory and securities lending agency services to institutional investors and other clients. BTC is subject to various regulatory capital and liquid asset requirements administered by Federal banking agencies.
At June 30, 2009,March 31, 2010, the Company was required to maintain approximately $193$818 million in net capital at thesein certain regulated subsidiaries, including BTC, and is in compliance with all applicable regulatory minimum net capital requirements.requirements.
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PART I – I—FINANCIAL INFORMATION (continued)
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Critical Accounting Policies
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. In addition to Fair Value Measurements, discussed below, see Note 2, and the Company’s Significant Accounting Policies, to the Company’s condensed consolidated financial statements contained in Management’s Discussion and AnalysisPart I, Item 1 of Financial Condition and Results of Operations in BlackRock’s 2008 Annual Report on Form 10-K filed with the SEC on March 2, 2009 for details on Significant Accounting Policies.this filing.
Fair Value Measurements
BlackRock reports its investments on a GAAP basis, which includes investment balances, which are owned by sponsored investment funds that are deemed to be controlled by BlackRock in accordance with GAAP and therefore are consolidated even though BlackRock may not own a majority of such funds. As a result, management reviews its investments on an “economic” basis, which eliminates the portion of investments that do not impact BlackRock’s book value. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
The following table represents investments measured at fair value on a recurring basis at June 30, 2009:March 31, 2010:
(Dollar amounts in millions) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Investments Not Held at Fair Value(3) | Investments at June 30, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Other Investments Not Held at Fair Value(3) | Investments at March 31, 2010 | |||||||||||||||||||||||||||
Total investments, GAAP | $ | 152 | $ | 80 | $ | 696 | $ | 29 | $ | 957 | $ | 235 | $ | 101 | $ | 656 | $ | 104 | $ | 1,096 | |||||||||||||||||
Net assets for which the Company does not bear “economic” exposure(1) | (19 | ) | (1 | ) | (164 | ) | — | (184 | ) | (46 | ) | 21 | (129 | ) | — | (154 | ) | ||||||||||||||||||||
Net “economic” investments(2) | $ | 133 | $ | 79 | $ | 532 | $ | 29 | $ | 773 | $ | 189 | $ | 122 | $ | 527 | $ | 104 | $ | 942 | |||||||||||||||||
(1) | Consists of net assets attributable to non-controlling investors of consolidated non VIE sponsored investment funds. |
(2) | Includes BlackRock’s portion of cash and cash equivalents, other assets, accounts payable and accrued liabilities, and other liabilities that are consolidated from sponsored investment funds. |
(3) | Comprised of equity method investments, which include investment companies, and other assets which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures, therefore the Company’s investment in such equity method |
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PART I – I—FINANCIAL INFORMATION (continued)
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
AUM Market Price Risk
BlackRock’s investment management revenues are comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns realized on AUM. At March 31, 2010, the majority of our investment advisory and administration fees were based on average or period end AUM of the applicable investment funds or separate accounts. Movements in equity market prices, interest rates/credit spreads, foreign exchange rates, or all three could cause the value of AUM to decline, which would result in lower investment advisory and administration fees.
Corporate Investments Portfolio Risks
As a leading investment management firm, BlackRock devotes significant resources across all of its operations to identifying, measuring, monitoring, managing and analyzing market and operating risks, including the management and oversight of its own investment portfolio. The Board of Directors of the Company has adopted guidelines for the review of investments to be made by the Company, requiring, among other things, that all investments be reviewed by the Company’s Capital Committee, which consists of senior officers of the Company, and that certain investments may be referred to the Audit Committee or the Board of Directors, depending on the circumstances, for approval.
AUM Market Price Risk
BlackRock’s investment management revenues are primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns realized on AUM. At June 30, 2009, the majority of our investment advisory and administration fees were based on average or period end AUM of the applicable mutual funds or separate accounts. Movements in equity market prices, interest rates/credit spreads, foreign exchange rates, or all three could cause the value of AUM to decline, which would result in lower investment advisory and administration fees.
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PART I – FINANCIAL INFORMATION (continued)
Corporate Investments Portfolio Risks
In the normal course of its business, BlackRock is exposed to equity market price risk, interest rate/credit spread risk and foreign exchange rate risk associated with its corporate investments.
BlackRock has investments primarily in sponsored investment products that invest in a variety of asset classes including real estate, private equity and hedge funds. Investments generally are made for co-investment purposes, to establish a performance track record, or to hedge exposure to certain deferred compensation plans.plans or for regulatory purposes. Currently, the Company has a seed capital hedging program in which it enters into total return swaps to hedge exposure to certain equity investments. At June 30, 2009,March 31, 2010, the outstanding total return swaps had an aggregate notional value of approximately $36$24 million.
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PART I—FINANCIAL INFORMATION (continued)
Item 3. | Quantitative and Qualitative Disclosures About Market Risk (continued) |
Corporate Investments Portfolio Risks (continued)
At June 30, 2009,March 31, 2010, approximately $418$493 million of BlackRock’s total investments were maintained in sponsored investment funds that are deemed to be controlled by BlackRock in accordance with GAAP and therefore are consolidated even though BlackRock may not own a majority of such funds. Excluding the impact of investments made to hedge exposure to certain deferred compensation plans and certain equity investments that are hedged via the seed capital hedging program, the Company’s net economic exposure to its investment portfolio is as follows:
(Dollar amounts in millions) | June 30, 2009 | December 31, 2008 | March 31, 2010 | December 31, 2009 | Variance | ||||||||||||||||||
Total investments | $ | 957 | $ | 1,429 | |||||||||||||||||||
Consolidated sponsored investments funds | (418 | ) | (728 | ) | |||||||||||||||||||
(Dollar amounts in millions) | March 31, 2010 | December 31, 2009 | Amount | % | |||||||||||||||||||
$ | 47 | 4 | % | ||||||||||||||||||||
Investments held by consolidated sponsored investment funds | (493 | ) | (463 | ) | (30 | ) | (6 | )% | |||||||||||||||
Net exposure to consolidated investment funds | 234 | 310 | 339 | 258 | 81 | 31 | % | ||||||||||||||||
Total net “economic” investments | 773 | 1,011 | 942 | 844 | 98 | 12 | % | ||||||||||||||||
Deferred compensation investments | (61 | ) | (59 | ) | (71 | ) | (71 | ) | — | — | % | ||||||||||||
Hedged investments | (36 | ) | (49 | ) | (24 | ) | (36 | ) | 12 | 33 | % | ||||||||||||
Total net “economic” investment exposure | $ | 676 | $ | 903 | $ | 847 | $ | 737 | $ | 110 | 15 | % | |||||||||||
The net “economic” investment exposure of the portfolio is presented in either the market price or the interest rate/credit spread risk disclosures below:
Market Price Risk
At June 30, 2009,March 31, 2010, the Company’s net exposure to market price risk in its investment portfolio was approximately $363$466 million of the Company’s net economic investment exposure. Investments that are subject to market price risk include public equity and real estate investments, as well as certain hedge funds. The Company estimates that a 10% adverse change in market prices would result in a decrease of approximately $36$46.6 million in the carrying value of such investments.
Interest Rate/Credit Spread Risk
At June 30, 2009,March 31, 2010, the Company was exposed to interest-rate risk and credit spread risksrisk as a result of approximately $313$381 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 $3$7 million in the carrying value of such investments.
Foreign Exchange Rate Risk
As discussed above, the Company invests in sponsored investment products that invest in a variety of asset classes. The carrying value of the net economic investment exposure denominated in foreign currencies, primarily the Britisheuro, pound sterling, South Korean won and Australian dollars, and the Euro, was $37$78 million. A 10% adverse change in foreign exchange rates would result in approximately a $3.7an $8 million decline in the carrying value of such investments.
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PART I – I—FINANCIAL INFORMATION (continued)
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Under the direction of BlackRock'sBlackRock’s Chief Executive Officer and Chief Financial Officer, BlackRock evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d—15(e) under the Exchange Act) at June 30, 2009.March 31, 2010. Based on this evaluation, BlackRock’s Chief Executive Officer and Chief Financial Officer have concluded that BlackRock’s disclosure controls and procedures were effective at June 30, 2009.March 31, 2010.
Internal Control andover Financial Reporting
ThereOther than the integration of certain information technology systems and processes of the acquired BGI business to those of BlackRock, there have been no changes in internal control over financial reporting during the quarter ended June 30, 2009March 31, 2010 that have materially affected or are reasonably likely to materially affect, such internal control over financial reporting. BlackRock is continuing to evaluate its internal controls as well as the internal controls of the acquired BGI business as BlackRock integrates the BGI business into the existing BlackRock business.
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PART II – II—OTHER INFORMATION
Item 1. | Legal Proceedings |
See Note 12, Commitments and Contingencies, to the Company’s condensed consolidated financial statements contained in Part I, Item 1 of this filing.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In June 2009, the Company issued 2,133,713 shares of common stock to an institutional investor at a price of $140.60 per share. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the purchaser has represented to us that it is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, and that the common stock was being acquired for investment. We did not engage in a general solicitation or advertising with regard to the issuance of the common stock and have not offered securities to the public in connection with this issuance.
During the three months ended June 30, 2009,March 31, 2010, the Company made the following purchases of its common stock, which are registered pursuant to Section 12(b) of the Exchange Act.
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans Of Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs1 | |||||||
April 1, 2009 through April 30, 2009 | 3,426 | 2 | $ | 127.25 | — | 751,400 | ||||
May 1, 2009 through May 31, 2009 | 716 | 2 | $ | 145.21 | — | 751,400 | ||||
June 1, 2009 through June 30, 2009 | 3,464 | 2 | $ | 166.14 | — | 751,400 | ||||
Total | 7,606 | $ | 146.65 | — | ||||||
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans Of Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs1 | |||||||
January 1, 2010 through | ||||||||||
January 31, 2010 | 4,032 | 2 | $ | 236.74 | — | 751,400 | ||||
February 1, 2010 through | ||||||||||
February 28, 2010 | 514,073 | 2,3 | $ | 213.45 | — | 751,400 | ||||
March 1, 2010 through March 31, 2010 | 14,640 | 2 | $ | 217.05 | — | 751,400 | ||||
Total | 532,745 | $ | 213.73 | — | 751,400 | |||||
1 | On August 2, 2006, the Company announced a 2.1 million share repurchase program with no stated expiration date. |
2 | Reflects purchases made by the Company primarily to satisfy income tax withholding obligations of employees and members of our Board of Directors related to the vesting of certain restricted stock or restricted stock unit awards. All such purchases were made outside of the publicly announced share repurchase program. |
3 | Includes 18,886 shares repurchased by the Company from employees in February 2010 pursuant to a put feature available in connection with the payment of certain 2002 LTIP awards. |
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PART II – II—OTHER INFORMATION (continued)
The annual meeting of stockholders of BlackRock was held on May 21, 2009, for the purpose of considering and acting upon the following:
(1)Election of Directors. Six Class I directors were elected and the votes cast for or against/withheld were as follows:
Aggregate Votes | ||||
For | Withheld | |||
Nominees for Class I | ||||
William S. Demchak | 44,227,370 | 1,425,723 | ||
Kenneth B. Dunn | 45,452,168 | 200,925 | ||
Laurence D. Fink | 44,338,328 | 1,314,765 | ||
Robert S. Kapito | 44,331,982 | 1,321,111 | ||
Brian T. Moynihan | 44,319,038 | 1,334,056 | ||
Thomas H. O’Brien | 45,438,410 | 214,684 |
As of August 6, 2009 the other continuing directors of BlackRock are Abdlatif Yousef Al-Hamad, Mathis Cabiallavetta, Dennis D. Dammerman, Murry S. Gerber, James Grosfield, David H. Komansky, Sir Deryck Maughan, Linda Gosden Robinson, James E. Rohr and Daniel C. Sontag.
(2)Ratification of Auditor. The appointment of Deloitte & Touche LLP as BlackRock’s independent registered public accounting firm for the year 2009 was ratified.
Aggregate Votes | ||||||
For | Against | Abstain | ||||
Ratification of Appointment | 45,501,503 | 141,754 | 9,834 |
There were no broker non-votes for any of the items.
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PART II – OTHER INFORMATION (continued)
Item 6. | Exhibits |
Exhibit No. | Description | |
| ||
| ||
| ||
| ||
12.1 | Computation of Ratio of Earnings to Fixed | |
31.1 | Section 302 Certification of Chief Executive | |
31.2 | Section 302 Certification of Chief Financial | |
32.1 | Section 906 Certification of Chief Executive Officer and Chief Financial | |
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 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BLACKROCK, INC. (Registrant) | ||||||
By: | ||||||
Ann Marie Petach | ||||||
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Managing Director & Chief Financial Officer |
Date: May 10, 2010
- 8985 -
EXHIBIT INDEX
Exhibit No. | Description | |
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12.1 | Computation of Ratio of Earnings to Fixed | |
31.1 | Section 302 Certification of Chief Executive | |
31.2 | Section 302 Certification of Chief Financial | |
32.1 | Section 906 Certification of Chief Executive Officer and Chief Financial | |
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 |