UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGEACT OF 1934.

For the quarterly period ended March 31,June 30, 2015

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGEACT OF 1934.

For the transition period from                               to                               .

Commission file number 001-33099

 

 

LOGOLOGO

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

    

32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

        (I.R.S. Employer Identification No.)

55 East 52nd Street, New York, NY 10055

(Address of Principal Executive Offices)

(Zip Code)

(212) 810-5300

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

            X             No                                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes

            X             No                                

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or, a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer           X      

  Accelerated filer                       Non-accelerated filer              

Smaller reporting company                  

  (Do not check if a smaller

reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes                                

  No         X        

As of April 30,July 31, 2015, there were 164,616,254163,636,449 shares of the registrant’s common stock outstanding.


BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

      Page 
Item 1.  Financial Statements (unaudited)  
  Condensed Consolidated Statements of Financial Condition   1  
  Condensed Consolidated Statements of Income   2  
  Condensed Consolidated Statements of Comprehensive Income   3  
  Condensed Consolidated Statements of Changes in Equity   4  
  Condensed Consolidated Statements of Cash Flows   6  
  Notes to Condensed Consolidated Financial Statements   7  
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   3438  
Item 3.  Quantitative and Qualitative Disclosures About Market Risk   5967  
Item 4.  Controls and Procedures   6169  

PART II

OTHER INFORMATION

 

Item 1.  Legal Proceedings   6270  
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds   6371  
Item 6.  Exhibits   6472  

 

i


PART I – FINANCIAL INFORMATION

 

Item 1.    FinancialFinancial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(unaudited)

 

(in millions, except shares and per share data)  March 31,
2015
 December 31,
2014
   June 30,
2015
 December 31,
2014
 

Assets

      

Cash and cash equivalents

   $    4,293    $    5,723     $    4,907    $    5,723  

Accounts receivable

   2,836    2,120     2,347    2,120  

Investments

   2,204    1,921     1,436    1,921  

Assets of consolidated variable interest entities:

      

Cash and cash equivalents

   279    278     64    278  

Bank loans, other investments and other assets

   3,895    3,352  

Investments

   901    3,320  

Other assets

   40    32  

Separate account assets

   162,046    161,287     162,911    161,287  

Separate account collateral held under securities lending agreements

   35,367    33,654     32,437    33,654  

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

   537    467  

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

   17,429    17,344  

Property and equipment (net of accumulated depreciation of $635 and $587 at June 30, 2015 and December 31, 2014, respectively)

   545    467  

Intangible assets (net of accumulated amortization of $1,110 and $1,040 at June 30, 2015 and December 31, 2014, respectively)

   17,394    17,344  

Goodwill

   12,975    12,961     12,970    12,961  

Other assets

   853    701     1,056    685  
  

 

  

 

   

 

  

 

 

Total assets

                   $242,714                    $239,808                     $237,008                    $239,792  
  

 

  

 

   

 

  

 

 

Liabilities

      

Accrued compensation and benefits

   $       684    $    1,865     $    1,137    $    1,865  

Accounts payable and accrued liabilities

   1,714    1,035     1,284    1,035  

Liabilities of consolidated variable interest entities:

      

Borrowings

   3,964    3,389     -    3,389  

Other liabilities

   182    245     192    245  

Borrowings

   4,938    4,938     4,947    4,922  

Separate account liabilities

   162,046    161,287     162,911    161,287  

Separate account collateral liabilities under securities lending agreements

   35,367    33,654     32,437    33,654  

Deferred income tax liabilities

   5,077    4,989     4,999    4,989  

Other liabilities

   1,086    886     971    886  
  

 

  

 

   

 

  

 

 

Total liabilities

   215,058    212,288     208,878    212,272  
  

 

  

 

   

 

  

 

 

Commitments and contingencies (Note 11)

      

Temporary equity

      

Redeemable noncontrolling interests

   180    35  

Redeemable noncontrolling interests (includes $162 million of redeemable noncontrolling interests of consolidated variable interest entities at June 30, 2015)

   258    35  

Permanent Equity

      

BlackRock, Inc. stockholders’ equity

      

Common stock, $0.01 par value;

   2    2     2    2  

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

   

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

   

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

   

Shares authorized: 500,000,000 at June 30, 2015 and December 31, 2014;

   

Shares issued: 171,252,185 at June 30, 2015 and December 31, 2014;

   

Shares outstanding: 164,244,192 and 164,786,788 at June 30, 2015 and December 31, 2014, respectively

   

Preferred stock (Note 15)

   -    -     -    -  

Additional paid-in capital

   19,126    19,386     19,252    19,386  

Retained earnings

   10,597    10,164     11,052    10,164  

Appropriated retained earnings

   16    (19   -    (19

Accumulated other comprehensive loss

   (439  (273   (339  (273

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

   (1,927  (1,894

Treasury stock, common, at cost (7,007,993 and 6,465,397 shares held at June 30, 2015 and December 31, 2014, respectively)

   (2,191  (1,894
  

 

  

 

   

 

  

 

 

Total BlackRock, Inc. stockholders’ equity

   27,375    27,366     27,776    27,366  

Nonredeemable noncontrolling interests

   89    104  

Nonredeemable noncontrolling interests of consolidated variable interest entities

   12    15  

Nonredeemable noncontrolling interests (includes $95 million and $15 million of nonredeemable noncontrolling interests of consolidated variable interest entities at June 30, 2015 and December 31, 2014, respectively)

   96    119  
  

 

  

 

   

 

  

 

 

Total permanent equity

   27,476    27,485     27,872    27,485  
  

 

  

 

   

 

  

 

 

Total liabilities, temporary equity and permanent equity

   $242,714    $239,808     $237,008    $239,792  
  

 

  

 

   

 

  

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Income

(unaudited)

 

(in millions, except shares and per share data) Three Months Ended
March 31,
  Three Months Ended
June 30,
 Six Months Ended
June 30,
 
 2015 2014  2015 2014 2015 2014 

Revenue

      

Investment advisory, administration fees and securities lending revenue

      

Related parties

  $1,681    $1,611    $1,766    $1,689    $3,447    $3,300  

Other third parties

  709    680    768    745    1,477    1,425  
 

 

  

 

  

 

  

 

  

 

  

 

 

Total investment advisory, administration fees and securities lending revenue

  2,390    2,291    2,534    2,434    4,924    4,725  

Investment advisory performance fees

  108    158    136    115    244    273  

BlackRock Solutions and advisory

  147    154    161    146    308    300  

Distribution fees

  17    19    13    18    30    37  

Other revenue

  61    48    61    65    122    113  
 

 

  

 

  

 

  

 

  

 

  

 

 

Total revenue

  2,723    2,670    2,905    2,778    5,628    5,448  

Expense

      

Employee compensation and benefits

  981    982    1,012    948    1,993    1,930  

Distribution and servicing costs

  99    89    105    89    204    178  

Amortization of deferred sales commissions

  13    15    12    14    25    29  

Direct fund expense

  189    179    191    187    380    366  

General and administration

  339    313    312    377    651    690  

Amortization of intangible assets

  35    41    35    41    70    82  
 

 

  

 

  

 

  

 

  

 

  

 

 

Total expense

  1,656    1,619    1,667    1,656    3,323    3,275  
 

 

  

 

  

 

  

 

  

 

  

 

 

Operating income

  1,067    1,051    1,238    1,122    2,305    2,173  

Nonoperating income (expense)

      

Net gain (loss) on investments

  63    76    (6  45    53    121  

Net gain (loss) on consolidated variable interest entities

  35    (16  12    28    16    12  

Interest and dividend income

  4    10    5    3    9    13  

Interest expense

  (51  (53  (52  (60  (103  (113
 

 

  

 

  

 

  

 

  

 

  

 

 

Total nonoperating income (expense)

  51    17    (41  16    (25  33  
 

 

  

 

  

 

  

 

  

 

  

 

 

Income before income taxes

  1,118    1,068    1,197    1,138    2,280    2,206  

Income tax expense

  258    324    371    297    629    621  
 

 

  

 

  

 

  

 

  

 

  

 

 

Net income

  860    744    826    841    1,651    1,585  

Less:

      

Net income (loss) attributable to redeemable noncontrolling interests

  4    1    3    1    7    2  

Net income (loss) attributable to nonredeemable noncontrolling interests

  34    (13  4    32    3    19  
 

 

  

 

  

 

  

 

  

 

  

 

 

Net income attributable to BlackRock, Inc.

  $822    $756    $819    $808    $1,641    $1,564  
 

 

  

 

  

 

  

 

  

 

  

 

 

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

      

Basic

  $4.92    $4.47    $4.92    $4.79    $9.84    $9.26  

Diluted

  $4.84    $4.40    $4.84    $4.72    $9.69    $9.12  

Cash dividends declared and paid per share

  $2.18    $1.93    $2.18    $1.93    $4.36    $3.86  

Weighted-average common shares outstanding:

      

Basic

  167,089,037    169,081,421    166,616,558    168,712,221    166,851,492    168,895,801  

Diluted

  169,723,167    171,933,803    169,114,759    171,150,153    169,418,964    171,540,018  

 

 

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

(in millions)      Three Months Ended    
March 31,
       Three Months Ended    
June 30,
     Six Months Ended    
June 30,
 
    2015     2014       2015      2014     2015     2014   

Net income

  $860   $744    $826   $841   $1,651   $1,585  

Other comprehensive income:

        

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

        

Unrealized holding gains (losses), net of tax

   -    -     (1  4    (1  4  

Less: reclassification adjustment included in net income(1)

   -    8     -    (2  -    6  
  

 

  

 

   

 

  

 

  

 

  

 

 

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

   -    (8   (1  6    (1  (2

Benefit plans, net

   (1  -     -    -    (1  -  

Foreign currency translation adjustments(2)

   (165  8     101    30    (64  38  
  

 

  

 

   

 

  

 

  

 

  

 

 

Other comprehensive income (loss)

   (166  -     100    36    (66  36  
  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income

   694    744     926    877    1,585    1,621  

Less: Comprehensive income (loss) attributable to noncontrolling interests

   38    (12   7    33    10    21  
  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income attributable to BlackRock, Inc.

  $656   $756    $919   $844   $1,575   $1,600  
  

 

  

 

   

 

  

 

  

 

  

 

 

 

 

(1)

The tax benefit (expense) was not material for the three and six months ended March 31,June 30, 2015 and 2014.

(2)

Amounts in the three and six months ended June 30, 2015 include gains from a net investment hedge of $7 million, net of tax of $4 million.

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

(in millions) Additional
Paid-in
Capital(1)
 Retained
Earnings
 Appropriated
Retained
Earnings
 Accumulated
Other
Comprehensive
Income (Loss)
 Treasury
Stock
Common
 Total
BlackRock
Stockholders’
Equity
 Nonredeemable
Noncontrolling
Interests
 Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
 Total
Permanent
Equity
 Redeemable
Noncontrolling
Interests /
Temporary

Equity
  Additional
Paid-in
Capital(1)
 Retained
Earnings
 Appropriated
Retained
Earnings
 Accumulated
Other
Comprehensive
Income (Loss)
 Treasury
Stock
Common
 Total
BlackRock
Stockholders’
Equity
 Nonredeemable
Noncontrolling
Interests(2)
 Total
Permanent
Equity
 Redeemable
Noncontrolling
Interests /
Temporary
Equity(2)
 

December 31, 2014

  $19,388       $10,164       $(19)      $(273)      $(1,894)      $27,366       $104       $15       $27,485       $35      $19,388      $10,164      ($19)     ($273)     ($1,894)     $27,366      $119      $27,485       $35    

Net income

  -      822      -      -      -      822      (1)     35      856      4     -       1,641      -       -       -       1,641      3      1,644       7    

Allocation of gains (losses) of consolidated collateralized loan obligations

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

Net consolidation (deconsolidation) of VIEs due to adoption of new accounting pronouncement

  -       -       19      -       -       19      (8)      11       194    

Dividends paid

  -      (389)     -      -      -      (389)     -      -      (389)     -     -       (753)     -       -       -       (753)     -       (753)      -     

Stock-based compensation

  143      -      -      -      -      143      -      -      143      -     269      -       -       -       -       269      -       269       -     

Issuance of common shares related to employee stock transactions

  (458)     -      -      -      465      7      -      -      7       -     (470)     -       -       -       480      10      -       10       -     

Employee tax withholdings related to employee stock transactions

  -      -      -      -      (223)     (223)     -      -      (223)     -     -       -       -       -       (227)     (227)     -       (227)       -     

Shares repurchased

  -      -      -      -      (275)     (275)     -      -      (275)     -     -       -       -       -       (550)     (550)     -       (550)       -     

Net tax benefit (shortfall) from stock-based compensation

  55      -      -      -      -      55      -      -      55      -     67      -       -       -       -       67      -       67       -     

Subscriptions (redemptions/ distributions) — noncontrolling interest holders

  -      -      -      -      -      -      (14)     (3)     (17)     123     -       -       -       -       -       -       (12)     (12)      241    

Net consolidations (deconsolidations) of sponsored investment funds

  -      -      -      -      -      -      -      -      -      18      -       -       -       -       -       -       (6)     (6)      (219)   

Other comprehensive income (loss)

  -      -      -      (166)     -      (166)     -      -      (166)     -     -       -       -       (66)     -       (66)     -       (66)      -     
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

March 31, 2015

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

June 30, 2015

  $19,254      $11,052      $-       ($339)     ($2,191)     $27,776      $96       $27,872       $258    
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

(1)

Amounts include $2 million of common stock at both June 30, 2015 and December 31, 2014.

(2)

Amounts include noncontrolling interests of consolidated variable interest entities (“VIEs”).

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

(in millions) Additional
Paid-in
Capital(1)
  Retained
Earnings
  Appropriated
Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
  Treasury
Stock
Common
  Total
BlackRock
Stockholders’
Equity
  Nonredeemable
Noncontrolling
Interests
  Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
  Total
Permanent
Equity
  Redeemable
Noncontrolling
Interests /
Temporary
Equity
 

December 31, 2013

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

Net income

  -      1,564      -      -      -      1,564      7      12   1,583      2    

Allocation of gains (losses) of consolidated collateralized loan obligations

  -      -      11      -      -      11      -      (11)  -      -    

Dividends paid

  -      (692)     -      -      -      (692)     -      -      (692)     -    

Stock-based compensation

  236      -      -      -      -      236      -      -      236      -    

Issuance of common shares related to employee stock transactions

  (621)     -      -      -      626      5      -      -      5      -    

Employee tax withholdings related to employee stock transactions

  -      -      -      -      (332)     (332)     -      -      (332)     -    

Shares repurchased

  -      -      -      -      (500)     (500)     -      -      (500)     -    

Net tax benefit (shortfall) from stock-based compensation

  93      -      -      -      -      93      -      -      93      -    

Subscriptions (redemptions/distributions)-noncontrolling interest holders

  -      -      -      -      -      -      (22)     (4)     (26)     184    

Net consolidations (deconsolidations) of sponsored investment funds

  -      -      -      -      -      -      -      -      -      (193)   

Other comprehensive income (loss)

  -      -      -      36      -      36      -      -      36      -    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

June 30, 2014

    $19,183        $9,080          $33          $1        ($1,416)        $26,881        $120          $18          $27,019          $47    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(1) 

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

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

(in millions) Additional
Paid-in
Capital(1)
  Retained
Earnings
  Appropriated
Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
  Treasury
Stock
Common
  Total
BlackRock
Stockholders’
Equity
  Nonredeemable
Noncontrolling
Interests
  Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
  Total
Permanent
Equity
  Redeemable
Noncontrolling
Interests /
Temporary
Equity
 

December 31, 2013

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

Net income

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

Allocation of gains (losses) of consolidated collateralized loan obligations

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

Dividends paid

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

Stock-based compensation

  126      -      -      -      1      127      -      -      127      -    

Issuance of common shares related to employee stock transactions

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

Employee tax withholdings related to employee stock transactions

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

Shares repurchased

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

Net tax benefit (shortfall) from stock-based compensation

  91      -      -      -      -      91      -      -      91      -    

Subscriptions (redemptions/distributions)-noncontrolling interest holders

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

Net consolidations (deconsolidations) of sponsored investment funds

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

March 31, 2014

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Amounts include $2 million of common stock at both March 31,June 30, 2014 and December 31, 2013.

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

(in millions)      Three Months Ended     
March 31,
       Six Months Ended    
June 30,
  2015 2014   2015 2014

Cash flows from operating activities

      

Net income

   $860    $744     $1,651      $1,585    

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

      

Depreciation and amortization

   63    73     128    145  

Amortization of deferred sales commissions

   13    15     25    29  

Stock-based compensation

   143    127     269    236  

Deferred income tax expense (benefit)

   87    165     -    102  

Other gains

   (40  -     (40  -  

Net (gains) losses on nontrading investments

   19    (47   6    (54

Purchases of investments within consolidated sponsored investment funds

   (5  (7   (1  (139

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

   18    69     1    84  

Assets and liabilities of consolidated VIEs:

      

Change in cash and cash equivalents

   209    (46   (14  (209

Net (gains) losses within consolidated VIEs

   (35  16     (16  (12

Net (purchases) proceeds within consolidated VIEs

   (177  169     (122  (131

(Earnings) losses from equity method investees

   (33  (39   (51  (92

Distributions of earnings from equity method investees

   9    7     25    22  

Changes in operating assets and liabilities:

      

Accounts receivable

   (750  (624   (253  (1,964

Investments, trading

   (336  (95   (425  (102

Other assets

   (91  (82   (291  (234

Accrued compensation and benefits

   (1,188  (1,079   (732  (668

Accounts payable and accrued liabilities

   654    521     233    2,011  

Other liabilities

   90    (93   103    (77
  

 

  

 

   

 

 

 

Cash flows from operating activities

   (490  (206   496    532  
  

 

  

 

   

 

 

 

Cash flows from investing activities

      

Purchases of investments

   (101  (123   (162  (239

Proceeds from sales and maturities of investments

   152    266     314    337  

Distributions of capital from equity method investees

   9    8     46    33  

Net consolidations (deconsolidations) of sponsored investment funds

   27    (3   (81  (3

Acquisition

   (88  -     (88  -  

Purchases of property and equipment

   (98  (15   (134  (34
  

 

  

 

   

 

 

 

Cash flows from investing activities

   (99  133     (105  94  
  

 

  

 

   

 

 

 

Cash flows from financing activities

      

Proceeds from long-term borrowings

   -    997     787    997  

Repayments of long-term borrowings

   (750  -  

Cash dividends paid

   (389  (366   (753  (692

Repurchases of common stock

   (498  (575   (777  (832

Net proceeds from (repayments of) borrowings by consolidated VIEs

   (29  (120   -    344  

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

   106    25     229    158  

Excess tax benefit from stock-based compensation

   55    102     67    93  

Other financing activities

   7    1     6    (1
  

 

  

 

   

 

 

 

Cash flows from financing activities

   (748  64     (1,191  67  
  

 

  

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

   (93  13     (16  44  
  

 

  

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   (1,430  4     (816  737  

Cash and cash equivalents, beginning of period

   5,723    4,390     5,723    4,390  
  

 

  

 

   

 

 

 

Cash and cash equivalents, end of period

   $4,293    $4,394       $4,907      $5,127  
  

 

  

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Cash paid for:

      

Interest

   $40    $23     $99    $100  

Interest on borrowings of consolidated VIEs

   $30    $27     $-    $48  

Income taxes (net of refunds)

   $133    $178     $708    $696  

Supplemental schedule of noncash investing and financing transactions:

      

Issuance of common stock

   $458    $603     $470    $621  

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

   $18    ($16   ($39  ($193

Increase (decrease) in borrowings due to consolidation of VIEs

   $603    -  

Increase (decrease) in borrowings due to deconsolidation of VIEs

   ($3,389  $-  

 

 

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1.  Business Overview

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

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

At March 31,June 30, 2015, The PNC Financial Services Group, Inc. (“PNC”) held 20.9%21.0% of the Company’s voting common stock and 22.0% of the Company’s capital stock, which includes outstanding common and nonvoting preferred stock.

2.  Significant Accounting Policies

Basis of Presentation.    These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Noncontrolling interests on the condensed consolidated statements of financial condition represents the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Accounts and transactions between consolidated entities have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Actual results could differ from those estimates.

Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission (“SEC”) on February 27, 2015 (“2014 Form 10-K”).

The interim financial information at March 31,June 30, 2015 and for the three and six months ended March 31,June 30, 2015 and 2014 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Accounting Pronouncements Adopted in the Six Months Ended June 30, 2015

Amendments to the Consolidation Analysis.    In February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-02,Consolidation: Amendments to the Consolidation Analysis, (“ASU 2015-02”) that requires companies to reevaluate all legal entities under new consolidation guidance. The revised consolidation rules provide new guidance for evaluating: i) limited partnerships and similar entities for consolidation ii) how

decision maker or service provider fees affect the consolidation analysis, iii) how interests held by related parties affect the consolidation analysis, and iv) the consolidation analysis required for certain investment funds. The new consolidation guidance also provides a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.

The Company early adopted ASU 2015-02 using the modified retrospective method with an effective adoption date of January 1, 2015. The modified retrospective method did not require the restatement of prior year periods. In connection with the adoption of ASU 2015-02, the Company reevaluated all of its investment products for consolidation. As of January 1, 2015, the Company deconsolidated all of its previously consolidated CLOs as its fee arrangements were no longer deemed variable interests and it held no other interests in these entities.

The adoption of the ASU also resulted in the consolidation of certain investment products that were not previously consolidated. Upon adoption, these products became consolidated VIEs as the Company is considered the party with both (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE.

The impact to the Company’s condensed consolidated statement of financial condition upon adoption of ASU 2015-02 was primarily the deconsolidation of approximately $3.6 billion of assets, $3.6 billion of liabilities related to the Company’s CLOs with an adjustment to appropriated retained earnings/loss of $19 million. In addition, certain investment products previously accounted for as voting rights entities (“VREs”) became VIEs under the new accounting guidance.

Debt Issuance Costs.    In April 2015, the FASB issued ASU 2015-03,Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The Company early adopted ASU 2015-03 during the quarter ended June 30, 2015 on a retrospective basis, which required the restatement of prior periods. The adoption of ASU 2015-03 was not material to the condensed consolidated financial statements.

Disclosures for Investments in Certain Entities that Calculate NAV Per Share.    In May 2015, the FASB issued ASU 2015-07,Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. The Company early adopted ASU 2015-07 during the quarter ended June 30, 2015 on a retrospective basis, which required the restatement of prior periods. As a result of the adoption of ASU 2015-07, $630 million and $692 million as of June 30, 2015 and December 31, 2014, respectively, of NAV investments were no longer included in Level 2 and 3 within the fair value hierarchy.

Fair Value MeasurementsMeasurements..

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

(unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 Inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.

 

Level 1 assets may include listed mutual funds, (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”), which in accordance with GAAP, are calculated under fair value measures and the changes in fair values are equal to the earnings of such funds), ETFs, listed equities and certain exchange-traded derivatives.

Level 2 Inputs:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price are observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company uses the NAV (or its equivalent) of certain investments as their fair value.

 

Level 2 assets may include debt securities, bank loans, short-term floating-rate notes, asset-backed securities, securities held within consolidated hedge funds, certain equity method limited partnership interests in hedge funds valued based on NAV (or its equivalent) where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data.

Level 3 Inputs:

Unobservable inputs for the valuation of the asset or liability, which may include nonbinding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV (or its equivalent) and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.

 

Level 3 assets may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, funds of hedge funds, direct private equity investments held within consolidated funds, bank loans and bonds.

 

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

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and private equity funds, which may be adjusted by using the returnsliabilities at December 31, 2014 also included borrowings of certain market indices.consolidated collateralized loan obligations (“CLOs”) valued based upon nonbinding single-broker quotes.

Significance of Inputs.    The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

Valuation Techniques.    The fair values of certain Level 3 assets and liabilities were determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. Such quotes and modeled prices are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of the current market environment and other analytical procedures.

As a practical expedient, the Company uses NAV as the fair value for certain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships generally are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information from third-party sources, including independent appraisals. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

A significant number of inputs used to value equity, debt securities and bank loans is sourced from third-party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for identical securities traded in active markets and as Level 2 for other similar securities if the vendor uses observable inputs in determining the price. Annually, BlackRock’s internal valuation committee or other designated groups review both the valuation methodologies, including the general assumptions and methods used to value various asset classes, and operational processes with these vendors. On a quarterly basis, meetings are held with key vendors to identify any significant changes to the vendors’ processes.

In addition, quotes obtained from brokers generally are nonbinding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.

Fair Value Option.Investments Measured at Net Asset Values.    TheAs a practical expedient, the Company appliesuses net asset value (“NAV”) as the fair value option provisions for eligible assetscertain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, opportunistic funds, real estate and liabilities, including bank loans and borrowings, heldprivate equity funds, which may be adjusted by consolidated CLOs to mitigate accounting mismatches betweenusing the carryingreturns of certain market indices. The various partnerships generally are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the assets and liabilities andunderlying fund. Fair value policies at the underlying fund generally require the fund to achieve operational simplification. Toutilize pricing/valuation information from third-

party sources, including independent appraisals. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the extent there is a difference between the change in fairvaluations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value of the assets and liabilities, the difference is reflected as net income (loss) attributable to nonredeemable noncontrolling interests on the condensed consolidated statements of income and offset by a change in appropriated retained earnings on the condensed consolidated statements of financial condition.these investments.

Derivative Instruments and Hedging Activities.    The Company does not use derivative financial instruments for trading or speculative purposes. The Company may use derivative financial instruments primarily for purposes of hedging exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities, and market exposures for certain seed investments. The Company may also use derivatives within its separate account assets, which are segregated funds held for purposes of funding individual and group pension contracts. In addition, certain consolidated sponsored investment funds may also invest in derivatives as a part of their investment strategy.

Changes in the fair value of the Company’s derivative financial instruments are generally recognized in earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities or hedged investments, on the condensed consolidated statements of income.

The Company may also use financial instruments designated as net investment hedges for accounting purposes to hedge net investments in international subsidiaries whose functional currency is different from the reporting currency of the parent company. The gain or loss from revaluing accounting hedges of net investments in foreign operations at the spot rate is deferred and reported within accumulated other comprehensive income on the condensed consolidated statements of financial condition. The Company reassesses the effectiveness of its net investment hedge on a quarterly basis.

Consolidation.    The Company performs an analysis for investment products to determine if the product is a VIE or a VRE. Assessing whether an entity is a VIE or a VRE involves judgment and analysis. Factors considered in this assessment include the entity’s legal organization, the entity’s capital structure and equity ownership, and any related party or de facto agent implications of the Company’s involvement with the entity. Investments that are determined to be VIEs are consolidated if the Company is the primary beneficiary (“PB”) of the entity. VREs are typically consolidated if the Company holds the majority voting interest. Upon the occurrence of certain events (such as contributions and redemptions, either by the Company, or third parties, or amendments to the governing documents of the Company’s investment products) management reviews and reconsiders its previous conclusion regarding the status of an entity as a VIE or a VRE. Additionally, management continually reconsiders whether the Company is deemed to be a VIE’s PB that consolidates such entity.

Consolidation of Variable Interest Entities.    Certain investment products for which a controlling financial interest is achieved through arrangements that do not involve or are not directly linked to voting interests are deemed VIEs. BlackRock reviews factors, including whether or not i) the entity has equity that is sufficient to permit the entity to finance its activities without additional subordinated support from other parties and ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns, and the right to direct the activities of the entity that most significantly impact the entity’s economic performance, to determine if the investment product is a VIE. BlackRock re-evaluates such factors as facts and circumstances change.

Prior to the adoption of ASU 2015-02, the Company used two methods for determining whether it was the PB of a VIE depending on the nature and characteristics of the entity. For CLOs, the Company was deemed to be the PB if it had the power to direct activities of the entity that most significantly impacted the entity’s economic performance and had the obligation to absorb losses or the right to receive benefits that potentially could be significant to the VIE. For certain sponsored investment funds, the Company was deemed to be the PB if it absorbed the majority of the entity’s expected losses, received a majority of the entity’s expected residual returns, or both.

Following the adoption of ASU 2015-02, all VIEs are evaluated for consolidation under a single method. The PB of a VIE is defined as the variable interest holder that has a controlling financial interest in the VIE. A controlling financial interest is defined as (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that potentially could be significant to the VIE. The consolidation analysis can generally be performed qualitatively, however, if it is not readily apparent that the Company is not the PB, a quantitative analysis may also be performed.

Consolidation of Voting Rights Entities.    BlackRock is required to consolidate an investee to the extent that BlackRock can exert control over the financial and operating policies of the investee, which generally exists if there is a greater than 50% voting equity interest.

Retention of Specialized Investment Company Accounting Principles.    Upon consolidation of sponsored investment funds, the Company retains the specialized investment company accounting principles of the underlying funds. All of the underlying investments held by such consolidated sponsored investment funds are carried at fair value with corresponding changes in the investments’ fair values reflected in nonoperating income (expense) on the condensed consolidated statements of income. When the Company no longer controls these funds due to reduced ownership percentage or other reasons, the funds are deconsolidated and accounted for under another accounting method if the Company still maintains an investment.

Money Market Fee Waivers.    The Company is currently voluntarily waiving a portion of its management fees on certain money market funds to ensure that they maintain a minimum level of daily net investment income (the “Yield Support waivers”). During the three and six months ended June 30, 2015, these waivers resulted in a reduction of management fees of approximately $37 million and $80 million, respectively. Approximately 45% of Yield Support waivers were offset by a reduction of BlackRock’s distribution and servicing costs paid to a financial intermediary. BlackRock has provided Yield Support waivers in prior periods and may increase or decrease the level of fee waivers in future periods.

Separate Account Assets and Liabilities.    Separate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. The life insurance company does not underwrite any insurance contracts that involve any insurance risk transfer from the insured to the life insurance company. The separate account assets primarily include equity securities, debt securities, money market funds and derivatives. The separate account assets are not subject to general claims of the creditors of BlackRock. These separate account assets and the related equal and offsetting liabilities are recorded as separate account assets and separate account liabilities on the condensed consolidated statements of financial condition.

The net investment income attributable to separate account assets supporting individual and group pension contracts accrues directly to the contract owner and is not reported on the condensed consolidated statements of income. While BlackRock has no economic interest in these separate account assets and liabilities, BlackRock earns policy administration and management fees associated with these products, which are included in investment advisory, administration fees and securities lending revenue on the condensed consolidated statements of income.

Separate Account Collateral Assets Held and Liabilities Under Securities Lending Agreements.    The Company facilitates securities lending arrangements whereby securities held by separate accounts maintained by BlackRock Life Limited are lent to third parties under global master securities lending agreements. In exchange, the Company receives legal title to the collateral with minimum values generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. The required collateral value is calculated on a daily basis. The global master securities lending agreements provide the Company the right to request additional collateral or, in the event of borrower default, the right to liquidate collateral. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore, these transactions are not reported as sales.

The Company records on the condensed consolidated statements of financial condition the cash and noncash collateral received under these BlackRock Life Limited securities lending arrangements as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. During the three months ended March 31,June 30, 2015 and 2014, the Company had not resold or repledged any of the collateral received under these arrangements. At March 31,June 30, 2015 and December 31, 2014, the fair value of loaned securities held by separate accounts was approximately $32.5$29.6 billion and $30.6 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $35.4$32.4 billion and $33.7 billion, respectively.

Appropriated Retained Earnings.    Upon the consolidation of CLOs, BlackRock records an adjustment to appropriated retained earnings on the condensed consolidated statements of financial condition equal to the difference between the fair value of the CLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. The net change in the fair value of the CLOs’ assets and liabilities is recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as a change to appropriated retained earnings.

Recent Accounting Pronouncements Not Yet Adopted

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

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

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

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

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

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

3.  Investments

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

 

(in millions) March 31,
2015
  December 31,
2014
 June 30,
2015
  December 31,
2014

Available-for-sale investments

  $203      $201     $35      $201   

Held-to-maturity investments

  13      79     100      79   

Trading investments:

          

Consolidated sponsored investment funds

  787      443     576      443   

Other equity and debt securities

  16      29     17      29   

Deferred compensation plan mutual funds

  66      64     67      64   
 

 

 

  

 

 

 

 

 

  

 

 

Total trading investments

  869      536     660      536   

Other investments:

          

Consolidated sponsored investment funds

  255      270     -      270   

Equity method investments

  656      633     501      633   

Deferred compensation plan equity method investments

  21      21     17      21   

Cost method investments(1)

  96      96     96      96   

Carried interest

  91      85     27      85   
 

 

 

  

 

 

 

 

 

  

 

 

Total other investments

  1,119      1,105     641      1,105   
 

 

 

  

 

 

 

 

 

  

 

 

Total investments

              $2,204                  $1,921                 $1,436                  $1,921   
 

 

 

  

 

 

 

 

 

  

 

 

 

(1) 

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

At March 31,June 30, 2015, the Company consolidated $1,042$576 million of investments held by consolidated sponsored investment funds (excluding variable interest entities (“VIEs”)) ofaccounted for as VREs, which $787 million and $255 million were classified as trading investments and other investments, respectively.investments. At December 31, 2014, the Company consolidated $713 million of investments held by consolidated sponsored investment funds (excluding VIEs)accounted for as VREs of which $443 million and $270 million were classified as trading investments and other investments, respectively.

Available-for-Sale Investments

A summary of the cost and carrying value of investments classified as available-for-sale investments is as follows:

 

(in millions)                  
   Gross Unrealized Carrying
Value
    Gross Unrealized Carrying
Value
 
March 31, 2015 Cost Gains Losses 
June 30, 2015 Cost Gains Losses Carrying
Value
 

Equity securities of sponsored investment funds

  td00     $7     ($4)     td03    $35     td     (td)    
December 31, 2014                  

Equity securities of sponsored investment funds

          $205             $5             ($9)             $201            $205             $5             ($9)             $201  

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

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $13$100 million and $79 million at March 31,June 30, 2015 and December 31, 2014, respectively. Held-to-maturity investments included foreign government debt held for regulatory purposes and thepurposes. The amortized cost (carrying value) of these investments approximated fair value. At March 31,June 30, 2015, $86 million of these investments mature within one year and $14 million mature after five years through ten years.

Trading Investments

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

 

(in millions)      March 31, 2015           December 31, 2014           June 30, 2015           December 31, 2014     
  Cost   Carrying
Value
   Cost   Carrying
Value
   Cost   Carrying
Value
   Cost   Carrying
Value
 
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading investments:

        

Deferred compensation plan mutual funds

   $48     $66     $48     $64     $48     $67     $48     $64  

Equity securities/multi-asset mutual funds

   202     230     210     239     156     156     210     239  

Debt securities/fixed income mutual funds:

                

Corporate debt

   250     252     109     110     227     226     109     110  

Government debt

   257     264     100     103     167     169     100     103  

Asset/mortgage backed debt

   57     57     20     20     42     42     20     20  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading investments

       $814             $869         $487             $536         $640             $660         $487             $536  
  

 

 

   

 

 

   

 

 

   

 

 

 

At March 31,June 30, 2015, trading investments included $572$436 million of debt securities and $215$140 million of equity securities held by consolidated sponsored investment funds $66accounted for as VREs, $67 million of certain deferred compensation plan mutual fund investments and $16$17 million of other equity and debt securities.

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

Other Investments

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

 

(in millions)  March 31, 2015   December 31, 2014   June 30, 2015   December 31, 2014 
  Cost   Carrying
Value
   Cost   Carrying
Value
   Cost   Carrying
Value
   Cost   Carrying
Value
 
  

 

 

   

 

 

   

 

 

   

 

 

 

Other investments:

                

Consolidated sponsored investment funds

   $268     $255     $268     $270  

Equity method

   519     656     518     633  

Consolidated sponsored investment funds accounted for as VREs

   $-     $-     $268     $270  

Equity method investments

   399     501     518     633  

Deferred compensation plan equity method investments

   20     21     21     21     16     17     21     21  

Cost method investments:

                

Federal Reserve Bank stock

   92     92     92     92     93     93     92     92  

Other

   4     4     4     4     3     3     4     4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost method investments

   96     96     96     96     96     96     96     96  

Carried interest(1)

   -     91     -     85     -     27     -     85  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other investments

           $903             $1,119             $903             $1,105             $511             $641             $903             $1,105  
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)

Carried interest related to VREs.

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

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

In addition, the Company accounts for its interest in PennyMac Financial Services, Inc. (“PennyMac”) as an equity method investment. At March 31,June 30, 2015 and December 31, 2014 the Company’s investment in PennyMac was excluded from the balances in the table above and included in other assets on the condensed consolidated statements of financial condition. The carrying value and fair value of the Company’s interest (approximately 20% or 16 million shares and units) was approximately $179$191 million and $264$282 million, respectively, at March 31,June 30, 2015 and approximately $167 million and $269 million, respectively, at December 31, 2014. The fair value of the Company’s interest reflected the PennyMac stock price at March 31,June 30, 2015 and December 31, 2014, respectively (a Level 1 input).

Cost method investments include nonmarketable securities, primarily including FRB stock, which is held for regulatory purposes and is restricted from sale. At March 31,June 30, 2015 and December 31, 2014, there were no indicators of impairment on these investments.

Carried interest represents allocations to BlackRock’s general partner capital accounts from certain funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds.

4. Consolidated Sponsored Investment FundsVoting Rights Entities

The Company consolidates certain sponsored investment funds primarilyaccounted for as VREs because it is deemed to control such funds. The investments owned by these consolidated sponsored investment fundsVREs are classified as trading or other investments. The following table presents the balances related to these consolidated fundsVREs that were includedrecorded on the condensed consolidated statements of financial condition, as well asincluding BlackRock’s net interest in these funds:

 

(in millions)  March 31,
2015
 December 31,
2014
   June 30,
2015
 December 31,
2014
 

Cash and cash equivalents

   $  180    $120     $120    $120  

Investments:

      

Trading investments

   787    443     576    443  

Other investments

   255    270     -    270  

Other assets

   46    20     35    20  

Other liabilities

   (122  (18   (79  (18

Noncontrolling interests

   (269  (139   (97  (139
  

 

  

 

   

 

  

 

 

BlackRock’s net interests in consolidated sponsored investment funds

                 $877                  $696  

BlackRock’s net interests in consolidated VREs

                 $555                  $696  
  

 

  

 

   

 

  

 

 

BlackRock’s total exposure to consolidated sponsored investment fundsVREs represents the value of its economic ownership interest in these sponsored investment funds. Valuation changes associated with investments held at fair value by these consolidated investment fundsVREs are reflected in nonoperating income (expense) and partially offset in net income (loss) attributable to noncontrolling interests for the portion not attributable to BlackRock.

In addition, at March 31,June 30, 2015 and December 31, 2014, severalcertain consolidated CLOs and one sponsored investment fund,funds, which were deemed to beaccounted for as VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6,5,Variable Interest Entities, for further discussion on these consolidated investment products. See Note 2,Significant Accounting Policies-Recent Accounting Pronouncements Not Yet AdoptedPolicies, for the Company’s consolidation policy and for further information on the adoption of ASU 2015-02.

The Company can notcannot readily access cash and cash equivalents held by consolidated sponsored investment fundsVREs to use in its operating activities. In addition, the Company can notcannot readily sell investments held by consolidated sponsored investment funds in orderVREs to obtain cash for use in the Company’s operations.

5.   Variable Interest Entities

In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, which may be considered VIEs. The Company 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’s involvement in financing the operations of the VIEs is generally limited to its investments in the entity. The Company consolidates entities when it is determined to be the PB under current VIE accounting guidance. See Note 2,Significant Accounting Policies, for further information on the Company’s accounting policy on consolidation.

As a result of the adoption of ASU 2015-02, the Company deconsolidated all previously consolidated CLOs effective January 1, 2015 as its fees are no longer deemed variable interests. The Company also consolidated certain investment products that were not previously consolidated as a result of the adoption of ASU 2015-02. See Note 2,Significant Accounting Policies – Accounting Pronouncements Adopted in the Six Months ended June 30, 2015, for further information on ASU2015-02.

Consolidated VIEs.    The Company’s consolidated VIEs as of June 30, 2015 include certain sponsored investment funds in which BlackRock has an investment and as the investment manager, is deemed to have both the power to direct the most significant activities of the funds and the right to receive benefits (or the obligation to absorb losses) that could potentially be significant to these sponsored investment funds. The assets of these VIEs are not available to creditors of the Company. In addition, the investors in these VIEs have no recourse to the credit of the Company.

The Company’s consolidated VIEs under previous accounting guidance as of December 31, 2014 primarily included CLOs in which BlackRock did not have an investment; however, as the collateral manager, BlackRock was deemed to have both the power to direct the most significant activities of the CLOs and the right to receive benefits that could potentially be significant to the CLOs.

Consolidated VIE assets and liabilities are presented after intercompany eliminations at June 30, 2015 and December 31, 2014 in the following table:

(in millions)  June 30, 2015  December 31, 2014 

Assets of consolidated VIEs:

   

Cash and cash equivalents

   $64    $278  

Investments

   901    3,320  

Other assets

   40    32  
  

 

 

  

 

 

 

Total investments and other assets

   941    3,352  

Liabilities of consolidated VIEs:

   

Borrowings

   -    (3,389

Other liabilities

   (192  (245

Appropriated retained earnings

   -    19  

Noncontrolling interests of consolidated VIEs

   (257  (15
  

 

 

  

 

 

 

Total BlackRock net interests in consolidated VIEs

   $556    $-  
  

 

 

  

 

 

 

The Company recorded $12 million and $16 million of nonoperating income, respectively, during the three and six months ended June 30, 2015 related to consolidated VIEs. Net income attributable to noncontrolling interests related to consolidated VIEs during both the three and six months ended June 30, 2015 was $7 million.

The Company recorded $28 million and $12 million of nonoperating income and an equal and offsetting income/loss attributable to nonredeemable noncontrolling interests related to consolidated VIEs during the three and six months ended June 30, 2014, respectively.

5.Non-Consolidated VIEs.    At June 30, 2015 and December 31, 2014, the Company’s carrying value of assets and liabilities pertaining to its variable interests in VIEs and its maximum risk of loss related to VIEs for which it held a variable interest, but for which it was not the PB, was as follows:

(in millions)  Variable Interests on the Condensed

Consolidated
Statement of Financial Condition
   Maximum
Risk of Loss(1)
 
At June 30, 2015  Investments   Advisory
Fee
Receivables
   Other Net
Assets
(Liabilities)
   

Sponsored investment products

   $51     $5     ($6)     $73  

At December 31, 2014

  

CDOs/CLOs

   $-     $2     ($5)     $19  

Other sponsored investment funds:

        

Collective trusts

   -     191     -     191  

Other

   57     177     (3)     234  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $57     $370     ($8)     $444  
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)At both June 30, 2015 and December 31, 2014, BlackRock’s maximum risk of loss associated with these VIEs primarily related to collecting  advisory fee receivables and BlackRock’s investments.

The net assets of sponsored investment products that are nonconsolidated VIEs approximated $3 billion at June 30, 2015. Net assets of other sponsored investment funds approximated $1.7 trillion to $1.8 trillion at

December 31, 2014 and included approximately $1.4 trillion of collective trusts at December 31, 2014. Upon the adoption of ASU 2015-02, BlackRock no longer has a variable interest in collective trusts, as BlackRock does not have any economic interest and earns at-market fees from these products.

6.  Fair Value Disclosures

Fair Value Hierarchy

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

 

March 31, 2015

(in millions)

 

Quoted

Prices in

Active

Markets for
Identical
Assets

(Level 1)

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

March 31,

2015

 

June 30, 2015

(in millions)

 

Quoted
Prices in

Active

Markets for
Identical
Assets

(Level 1)

 

Significant

Other
Observable
Inputs
(Level 2)

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

June 30,

2015

 
 

 

 

  

 

 

 

Assets:

           

Investments

           

Available-for-sale:

           

Equity securities of sponsored investment funds

 $200   $3   $-   $-   $203       $33   $2   $-   $-   $-   $35      

Held-to-maturity debt securities

  -    -    -    13    13        -    -    -    -    100    100      

Trading:

           

Deferred compensation plan mutual funds

  66    -    -    -    66        67    -    -    -    -    67      

Equity/Multi-asset mutual funds

  230    -    -    -    230        156    -    -    -    -    156      

Debt securities / fixed income mutual funds

  1    572    -    -    573        1    436    -    -    -    437      
 

 

 

  

 

 

 

Total trading

  297    572    -    -    869        224    436    -    -    -    660      

Other investments:

           

Consolidated sponsored investment funds private / public equity(2)

  12    7    236    -    255      

Equity method:

           

Hedge funds / Funds of hedge funds

  -    164    73    1    238      

Private equity investments

  -    -    168    -    168      

Real estate funds

  -    21    90    7    118      

Fixed income mutual funds

  10    -    -    -    10      

Equity and fixed income mutual funds

  135    -    -    -    -    135      

Other

  122    -    -    -    122        -    -    -    358    8    366      
 

 

 

  

 

 

 

Total equity method

  132    185    331    8    656        135    -    -    358    8    501      

Deferred compensation plan equity method investments

  -    -    21    -    21        -    -    -    17    -    17      

Cost method investments

  -    -    -    96    96        -    -    -    -    96    96      

Carried interest

  -    -    -    91    91        -    -    -    -    27    27      
 

 

 

  

 

 

 

Total investments

  641    767    588    208    2,204        392    438    -    375    231    1,436      
 

 

 

  

 

 

 

Separate account assets

  115,164    45,628    -    1,254    162,046        116,340    45,767    -    -    804    162,911      

Separate account collateral held under securities lending agreements:

           

Equity securities

  32,523    -    -    -    32,523        28,664    -    -    -    -    28,664      

Debt securities

  -    2,844    -    -    2,844        -    3,773    -    -    -    3,773      
 

 

 

  

 

 

 

Total separate account collateral held under securities lending agreements

  32,523    2,844    -    -    35,367        28,664    3,773    -    -    -    32,437      

Assets of consolidated VIEs:

           

Bank loans and other assets

  -    3,622    171    41    3,834      

Bonds

  -    29    18    -    47      

Private / public equity(3)

  -    4    10    -    14        10    7    166    164    -    347      

Equity securities

  178    -    -    -    -    178      

Debt securities

  -    173    -    -    -    173      

Other

  -    -    -    91    -    91      

Carried interest

  -    -    -    -    112    112      
 

 

 

  

 

 

 

Total assets of consolidated VIEs

  -    3,655    199    41    3,895        188    180    166    255    112    901      
 

 

 

  

 

 

 

Total

 $148,328   $52,894   $787   $1,503   $203,512       $145,584   $50,158   $166   $630   $1,147   $197,685      
 

 

 

  

 

 

 

Liabilities:

           

Borrowings of consolidated VIEs

 $-   $-   $3,964   $-   $3,964      

Separate account collateral liabilities under securities lending agreements

  32,523    2,844    -    -    35,367       $28,664   $3,773   $-   $-   $-   $32,437      

Other liabilities(4)

  -    6    51    -    57        -    6    56    -    -    62      
 

 

 

  

 

 

 

Total

 $32,523   $2,850   $4,015   $-   $39,388       $28,664   $3,779   $56   $-   $-   $32,499      
 

 

 

  

 

 

 

 

 (1)

Amounts are comprised of certain investments measured at fair value using NAV (or its equivalent) as a practical expedient. These investments in accordance with current accounting guidance have not been classified in the fair value hierarchy (see Note 2,Significant Accounting Policies, for more information on the adoption of ASU 2015-07).

(2) 

Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

 (2)(3) 

Level 3 amounts include $157$166 million and $79 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

(3)

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

 (4) 

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

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

 

December 31, 2014

(in millions)

 

Quoted
Prices in

Active

Markets for
Identical
Assets

(Level 1)

 

Significant

Other
Observable
Inputs
(Level 2)

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

December 31,

2014

  

Quoted
Prices in

Active

Markets for
Identical
Assets

(Level 1)

 

Significant

Other
Observable
Inputs
(Level 2)

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

December 31,

2014

 
 

 

 

  

 

 

 

Assets:

           

Investments

           

Available-for-sale:

           

Equity securities of sponsored investment funds

 $198   $3   $-   $-   $201   $198   $3   $-   $-   $-   $201  

Held-to-maturity debt securities

  -    -    -    79    79    -    -    -    -    79    79  

Trading:

           

Deferred compensation plan mutual funds

  64    -    -    -    64    64    -    -    -    -    64  

Equity/Multi-asset mutual funds

  239    -    -    -    239    239    -    -    -    -    239  

Debt securities / fixed income mutual funds

  11    222    -    -    233    11    222    -    -    -    233  
 

 

 

  

 

 

 

Total trading

  314    222    -    -    536    314    222    -    -    -    536  

Other investments:

           

Consolidated sponsored investment funds private / public equity(2)(3)

  11    11    248    -    270    11    11    80    168    -    270  

Equity method:

           

Hedge funds / Funds of hedge funds

  -    213    64    5    282  

Private equity investments

  -    -    107    -    107  

Real estate funds

  -    21    88    8    117  

Fixed income mutual funds

  29    -    -    -    29    29    -    -    -    -    29  

Other

  98    -    -    -    98    98    -    -    493    13    604  
 

 

 

  

 

 

 

Total equity method

  127    234    259    13    633    127    -    -    493    13    633  

Deferred compensation plan equity method investments

  -    -    21    -    21    -    -    -    21    -    21  

Cost method investments

  -    -    -    96    96    -    -    -    -    96    96  

Carried interest

  -    -    -    85    85    -    -    -    -    85    85  
 

 

 

  

 

 

 

Total investments

  650    470    528    273    1,921    650    236    80    682    273    1,921  
 

 

 

  

 

 

 

Separate account assets

  113,566    46,866    -    855    161,287    113,566    46,866    -    -    855    161,287  

Separate account collateral held under securities lending agreements:

           

Equity securities

  30,387    -    -    -    30,387    30,387    -    -    -    -    30,387  

Debt securities

  -    3,267    -    -    3,267    -    3,267    -    -    -    3,267  
 

 

 

  

 

 

 

Total separate account collateral held under securities lending agreements

  30,387    3,267    -    -    33,654    30,387    3,267    -    -    -    33,654  

Assets of consolidated VIEs:

           

Bank loans and other assets

  -    2,958    302    32    3,292    -    2,958    302    -    32    3,292  

Bonds

  -    29    18    -    47    -    29    18    -    -    47  

Private / public equity(3)

  -    3    10    -    13  

Private / public equity

  -    3    -    10    -    13  
 

 

 

  

 

 

 

Total assets of consolidated VIEs

  -    2,990    330    32    3,352    -    2,990    320    10    32    3,352  
 

 

 

  

 

 

 

Total

 $144,603   $53,593   $858   $1,160   $200,214   $144,603   $53,359   $400   $692   $1,160   $200,214  
 

 

 

  

 

 

 

Liabilities:

           

Borrowings of consolidated VIEs

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

Separate account collateral liabilities under securities lending agreements

  30,387    3,267    -    -    33,654    30,387    3,267    -    -    -    33,654  

Other liabilities(4)

  -    5    39    -    44    -    5    39    -    -    44  
 

 

 

  

 

 

 

Total

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

 

 

  

 

 

 

 

 (1)

Amounts are comprised of certain investments measured at fair value using NAV (or its equivalent) as a practical expedient. These investments in accordance with current accounting guidance have not been classified in the fair value hierarchy (see Note 2,Significant Accounting Policies, for more information on the adoption of ASU 2015-07).

(2) 

Amounts are comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include sponsored investment funds and other assets, which are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

 (2)(3) 

Level 3 amounts include $168 million and $80 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

(3)

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

 (4) 

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

Level 3 Assets.Level 3 investments of $588 million and $528 million at March 31, 2015 and December 31, 2014, respectively, primarily related to equity method investments and private equity funds held by consolidated sponsored investment funds.    Level 3 assets within investments, except forof consolidated VIEs of $166 million at June 30, 2015 related to direct investments in private equity companies held by private equity funds described below, were primarily valued based upon NAVs received from internal and third-party fund managers.

Directfunds. Level 3 investments of $80 million at December 31, 2014, related to direct investments in private equity companies held by private equity funds totaled $79 million and $80 million at March 31, 2015 and December 31, 2014, respectively.funds. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies,

market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used is evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and

amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the expected cash flows to a single present value amount using current expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For investments utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For investments utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

Level 3 assets of consolidated VIEs include bank loans and bonds valued based on single-broker nonbinding quotes and direct private equity investments and private equity funds valued based upon internal as well as third-party fund managers, which may be adjusted by using the returns of certain market indices.approach or the income approach as described above.

Level 3 Liabilities.    Level 3 borrowings of consolidated VIEs at December 31, 2014 include CLO borrowings valued based upon single-broker nonbinding quotes.

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31,June 30, 2015(1)

 

(in millions) December 31,
2014
  Realized
and
unrealized
gains
(losses) in
earnings
and OCI
  Purchases  Sales and
maturities
  Issuances  and
other
settlements(1)
  Transfers
into
Level 3
  Transfers
out of
Level 3
  March 31,
2015
  Total net
unrealized
gains (losses)
included in
earnings(2)
 

Assets:

         

Investments:

         

Consolidated sponsored investment funds:

         

Private equity

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

Equity method:

         

Hedge funds / Funds of hedge funds

  64    7    8    (4  (2  -    -    73    9  

Private equity investments

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

Real estate funds

  88    1    1    -    -    -    -    90    2  

Deferred compensation plan equity method investments

  21    1    -    -    (1  -    -    21    1  
 

 

 

  

 

 

 

Total Level 3 investments

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

 

 

  

 

 

 

Assets of consolidated VIEs:

         

Bank loans

  302    1    17    (12  26    72    (235  171   

Bonds

  18    -    -    -    -    -    -    18   

Private equity

  10    -    -    -    -    -    -    10   
 

 

 

  

Total Level 3 assets of consolidated VIEs

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

 

 

  

Total Level 3 assets

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

 

 

  

Liabilities:

         

Borrowings of consolidated VIEs

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

Other liabilities

  39    2    -    -    14    -    -    51    -  
 

 

 

  

Total Level 3 liabilities

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

 

 

  
(in millions) March 31,
2015(2)
  Realized
and
unrealized
gains
(losses) in
earnings
and OCI
  Purchases  Sales and
maturities
  Issuances and
other
settlements
  Transfers
into
Level 3
  Transfers
out of
Level 3
  June 30,
2015
  Total net
unrealized
gains (losses)
included  in
earnings(3)
 
 

 

 

 

Assets:

         

Assets of consolidated VIEs:

         

Private equity

  $149    $8    $9    $-    $-    $-    $-    $166    $8  

Liabilities:

         

Other liabilities

  $51    ($5  $-    $-    $-    $-    $-    $56    -  

(1)

Upon adoption of ASU 2015-07, investments measured at NAV are no longer required to be categorized within the fair value hierarchy. See Note 2,Significant Accounting Policies, for further information.

(2)

Amounts reflect the adoption of ASU 2015-02. See Note 2,Significant Accounting Policies, for further information.

(3)

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2015(1)

(in millions) December 31,
2014
  Realized
and
unrealized
gains
(losses) in
earnings
and OCI
  Purchases  Sales and
maturities
  Issuances  and
other
settlements(2)(3)
  Transfers
into
Level 3
  Transfers
out of
Level 3
  June 30,
2015
  Total net
unrealized
gains (losses)
included in
earnings(4)
 

Assets:

         

Investments:

         

Consolidated sponsored investment funds- Private equity

  $80    $-    $-    $-    ($80  $-    $-    $-   $-  

Assets of consolidated VIEs:

         

Private equity

  -    7    79    -    80    -    -    166    7  

Bank loans

  302    -    -    -    (302  -    -    -    -  

Bonds

  18    -    -    -    (18  -    -    -    -  
 

 

 

 

Total Level 3 assets of consolidated VIEs

  320    7    79    -    (240  -    -    166    7  
 

 

 

 

Total Level 3 assets

  $400    $7    $79    $-    ($320  $-    $-    $166   $7  
 

 

 

 

Liabilities:

         

Borrowings of consolidated VIEs

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

Other liabilities

  39    (3  -    -    14    -    -    56    -  
 

 

 

  

Total Level 3 liabilities

  $3,428    ($3  $-    $-    ($3,375  $-    $-    $56    -  
 

 

 

  

(1)

Upon adoption of ASU 2015-07, investments measured at NAV are no longer required to be categorized within the fair value hierarchy. See Note 2,Significant Accounting Policies, for further information.

(2)

Amounts include the consolidation (deconsolidation) of VIEs due to the adoption of ASU 2015-02 effective January 1, 2015.

(3)

Amounts include a contingent liability related to an acquisition.

(4)

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

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2014(1)

(in millions)  March 31,
2014
   Realized
and
unrealized
gains
(losses) in
earnings
and OCI
  Purchases   Sales and
maturities
  Issuances  and
other
settlements(2)
   Transfers
into
Level 3
   Transfers
out of
Level 3
  June 30,
2014
   Total net
unrealized
gains (losses)
included in
earnings(3)
 

Assets:

               

Investments

               

Consolidated sponsored investment funds:

               

Hedge funds

   $3     ($2  $-     $-    $-     $-     $-    $1     $-  

Private equity

   64     2    13     -    -     -     -    79     -  

Assets of consolidated VIEs:

               

Bank loans

   147     -    76     (30  -     36     (76  153    

Bonds

   28     -    -     (3  -     -     -    25    
  

 

 

   

Total Level 3 assets of consolidated VIEs

   175     -    76     (33  -     36     (76  178     N/A(4) 
  

 

 

   

Total Level 3 assets

           $242     $-   $89    ($33  $-    $36    ($76  $258    
  

 

 

   

Liabilities:

               

Borrowings of consolidated VIEs

   $2,244     $9    $-     $-    $464     $-     $-    $2,699     N/A(4) 

Other liabilities

   42     (1  -     -    -     -     -    43     -  
  

 

 

   

Total Level 3 liabilities

   $2,286     $8    $-     $-    $464     $-     $-    $2,742    
  

 

 

   

 

 N/A– not applicable
 (1) 

Upon adoption of ASU 2015-07, investments measured at NAV are no longer required to be categorized within the fair value hierarchy. See Note 2,Significant Accounting Policies, for further information.

(2)

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

 (2)(3) 

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

 (3)(4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the ThreeSix Months Ended March 31,June 30, 2014(1)

 

(in millions) December 31,
2013
 Realized
and
unrealized
gains
(losses) in
earnings
and OCI
 Purchases Sales and
maturities
 Issuances  and
other
settlements(1)
 Transfers
into
Level 3(2)
 Transfers
out of
Level 3
 March 31,
2014
 Total net
unrealized
gains (losses)
included in
earnings(3)
  December 31,
2013
   Realized
and
unrealized
gains
(losses) in
earnings
and OCI
 Purchases   Sales and
maturities
 Issuances  and
other
settlements(2)
   Transfers
into
Level 3(3)
   Transfers
out of
Level 3
 June 30,
2014
   Total net
unrealized
gains (losses)
included in
earnings(4)
 

Assets:

                       

Investments

                       

Consolidated sponsored investment funds:

                       

Hedge funds / Funds of funds

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

Hedge funds

  $2     ($1  $-     $-    $-     $-     $-    $1     $-  

Private equity

  223    1    5    (14  -    41    -    256    1    28     1    13     -    -     37     -    79     $-  

Equity method:

         

Hedge funds / Funds of hedge funds

  99    2    4    (11  (3  -    -    91    2  

Private equity investments

  101    3    3    -    (6  -    -    101    4  

Real estate funds

  98    2    2    -    (2  -    -    100    1  

Deferred compensation plan equity method investments

  29    2    -    -    -    -    -    31    2  
 

 

 

  

 

 

Total Level 3 investments

  574    11    14    (37  (12  41    -    591    10  
 

 

 

  

 

 

Assets of consolidated VIEs:

                       

Bank loans

  129    -    16    (13  -    73    (58  147     129     -    92     (43  -     109     (134  153    

Bonds

  35    -    -    (7  -    -    -    28     35     -    -     (10  -     -     -    25    

Private equity

  14    -    -    (1  -    -    -    13   
 

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

  178    -    16    (21  -    73    (58  188    N/A(4)   164     -    92     (53  -     109     (134  178     N/A(5) 
 

 

 

   

 

 

   

Total Level 3 assets

          $752    $11    $30    ($58  ($12  $114    ($58  $779             $194     $-    $105     ($ 53  $-     $146     ($134  $258    
 

 

 

   

 

 

   

Liabilities:

                       

Borrowings of consolidated VIEs

  $2,369    $5    $-    $-    ($120  $-    $-    $2,244    N/A(4)   $2,369     $14    $-     $-    $ 344     $-     $-    $ 2,699     N/A(5) 

Other liabilities

  42    -    -    -    -    -    -    42    -    42     (1  -     -    -     -     -    43     -  
 

 

 

   

 

 

   

Total Level 3 liabilities

  $2,411    $5    $-    $-    ($120  $-    $-    $2,286     $ 2,411     $13    $-     $-    $ 344     $-     $-    $ 2,742    
 

 

 

   

 

 

   

 

 N/A– not applicable
 (1) 

Upon adoption of ASU 2015-07, investments measured at NAV are no longer required to be categorized within the fair value hierarchy. See Note 2,Significant Accounting Policies, for further information.

(2)

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

 (2)(3) 

Includes investments previously held at cost.

 (3)(4) 

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

 (4)(5) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

Realized and Unrealized Gains (Losses) for Level 3 Assets and Liabilities.    Realized and unrealized gains (losses) recorded for Level 3 assets and liabilities are reported in nonoperating income (expense) on the condensed consolidated statements of income. A portion of net income (loss) for consolidated sponsored investments and all of the net income (loss) for consolidated VIEsinvestment funds are allocated to noncontrolling interests to reflect net income (loss) not attributable to the Company.

Transfers in and/or out of Levels.    Transfers in and/or out of levels are reflected when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable/unobservable, or when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a NAV (or a capital account), or when the carrying value of certain equity method investments no longer represents fair value as determined under valuation methodologies.

Assets of Consolidated VIEs.    During the three and six months ended March 31, 2015 andJune 30, 2014, there were $235$76 million and $58$134 million, respectively, of transfers out of Level 3 to Level 2 related to bank loans. In addition, during the three and six months ended March 31, 2015 andJune 30, 2014, there were $72$36 million and $73$109 million, respectively, of transfers into Level 3 from Level 2 related to bank loans. These transfers in and out of levels were primarily due to availability/unavailability of observable market inputs, including inputs from pricing vendors and brokers.

Significant Issuances and Other Settlements.    During the threesix months ended March 31,June 30, 2015, other settlements primarily included $603 millionthe impact of borrowings due to the consolidationdeconsolidating previously consolidated CLOs effective January 1, 2015 as a result of one additional CLO and $29 million of repayments of borrowings of consolidated CLOs. adopting ASU 2015-02. See Note 2,Significant Accounting Policies, for further information on ASU 2015-02.

During the three and six months ended March 31,June 30, 2014, other settlements included $120$612 million of repayments ofproceeds from borrowings of a consolidated CLOs.CLO.

Disclosures of Fair Value for Financial Instruments Not Held at Fair Value.    At March 31,June 30, 2015 and December 31, 2014, the fair value of the Company’s financial instruments not held at fair value are categorized in the table below:

 

  March 31, 2015   December 31, 2014       June 30, 2015   December 31, 2014     
(in millions)  Carrying 
Amount
   Estimated 
Fair Value
   Carrying 
Amount
   Estimated 
Fair Value
   Fair Value 
Hierarchy
   Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
   Fair Value
Hierarchy
 

Financial Assets:

                    

Cash and cash equivalents

  $4,293    $4,293    $5,723    $5,723     Level 1(1)/(2)   $4,907    $4,907    $5,723    $5,723     Level 1(1)(2) 

Accounts receivable

   2,836     2,836     2,120     2,120     Level 1(3)    2,347     2,347     2,120     2,120     Level 1(3) 

Cash and cash equivalents of consolidated VIEs

   279     279     278     278     Level 1(1)    64     64     278     278     Level 1(1) 

Financial Liabilities:

                    

Accounts payable and accrued liabilities

   1,714     1,714     1,035     1,035     Level 1(3)    1,284     1,284     1,035     1,035     Level 1(3) 

Long-term borrowings

   4,938     5,365     4,938     5,309     Level 2(4)    4,947     5,219     4,922     5,309     Level 2(4) 

 

 (1) 

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

 

 (2) 

At March 31,June 30, 2015 and December 31, 2014, approximately $184$129 million and $100 million, respectively, of money market funds were recorded within cash and cash equivalents on the condensed consolidated statements of financial condition. Money market funds are valued based on quoted market prices, or $1.00 per share, which generally is the NAV of the fund.

 

 (3) 

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

 

 (4) 

Long-term borrowings are recorded at amortized cost.cost net of debt issuance costs. The fair value of the long-term borrowings, including the current portion of long-term borrowings, is estimated using market prices at the end of MarchJune 2015 and December 2014, respectively. See Note 10,Borrowings, for the fair value of each of the Company’s long-term borrowings.

Investments in Certain Entities that Calculate Net Asset Value Per Share.

As a practical expedient to value certain investments that do not have a readily determinable fair value and have attributes of an investment company, the Company uses NAV as the fair value. The following tables list information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a NAV per share (or equivalent).

March 31,June 30, 2015

 

(in millions) Ref Fair Value Total
Unfunded
Commitments
 

Redemption
Frequency

 Redemption
Notice Period
 Ref Fair Value Total
Unfunded
Commitments
 

Redemption

Frequency

 Redemption
Notice Period

Consolidated sponsored investment funds:

     

Equity method:(1)

     

Hedge funds/funds of hedge funds

  (b  $180   $93   

Daily/Monthly (28%)

 

Quarterly (36%)

 

N/R (36%)

 1 – 90 days

Private equity funds

  (c  93    66   N/R N/R

Real estate funds

  (d  85    20   

Quarterly (26%)

 

N/R (74%)

 60 days

Deferred compensation plan investments

  (e  17    6   N/R N/R

Consolidated VIEs:

     

Private equity funds of funds

  (a  164    17   N/R N/R

Hedge fund

  (b  91    -   Quarterly 90 days
  

 

  

 

   

Total

   $630   $202    
  

 

  

 

   

December 31, 2014

     
(in millions) Ref Fair Value Total
Unfunded
Commitments
 

Redemption

Frequency

 Redemption
Notice Period

Consolidated VREs:

     

Private equity funds of funds

  (a  $157   $  21   N/R N/R  (a  $168    $22   N/R N/R

Equity method:(1)

          

Hedge funds/funds of hedge funds

  (b  237    39   

Daily/Monthly (37%)

 

Quarterly (32%)

 

N/R (31%)

 1 – 90 days  (b  277    39   

Daily/Monthly (29%)

 

Quarterly (48%)

 

N/R (23%)

 1 – 90 days

Private equity funds

  (c  168    68   

N/R

 N/R  (c  107    61   N/R N/R

Real estate funds

  (d  111    -   

Quarterly (19%)

 

N/R (81%)

 60 days  (d  109    1   

Quarterly (19%)

 

N/R (81%)

 60 days

Deferred compensation plan investments

  (e  21    5   N/R N/R  (e  21    5   N/R N/R

Consolidated VIEs:

          

Private equity fund

  (f  10    1   N/R N/R  (f  10    1   N/R N/R
  

 

  

 

     

 

  

 

   

Total

   $704   $134       $692   $129    
  

 

  

 

     

 

  

 

   

December 31, 2014

     
(in millions) Ref Fair Value Total
Unfunded
Commitments
 

Redemption
Frequency

 Redemption
Notice Period

Consolidated sponsored investment funds:

     

Private equity funds of funds

  (a  $168    $22   N/R N/R

Equity method:(1)

     

Hedge funds/funds of hedge funds

  (b  277    39   

Daily/Monthly (29%)

 

Quarterly (48%)

 

N/R (23%)

 1 –90 days

Private equity funds

  (c  107    61   N/R N/R

Real estate funds

  (d  109    1   

Quarterly (19%)

 

N/R (81%)

 60 days

Deferred compensation plan investments

  (e  21    5   N/R N/R

Consolidated VIEs:

     

Private equity fund

  (f  10    1   N/R N/R
  

 

  

 

   

Total

   $692   $129    
  

 

  

 

   

 

 N/R–Rnot redeemable

 

 (1) 

Comprised of equity method investments, which include investment companies, which account for their financial assets and most financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees approximates fair value.

 (a) 

This category includes the underlying third-party private equity funds within consolidated BlackRock sponsored private equity funds of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the

Company’s ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds, the Company may sell or transfer its interest, which may need approval by the general partner of the underlying funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately six years and seven years at March 31,June 30, 2015 and December 31, 2014, respectively.2014. The total remaining unfunded commitments to other third-party funds were $21$18 million at March 31,June 30, 2015 and $22 million at December 31, 2014. The Company had contractual obligations to the consolidated funds of $31 million at both March 31,June 30, 2015 and December 31, 2014.

 (b) 

This category includes hedge funds and funds of hedge funds that invest primarily in equities, fixed income securities, distressed credit, opportunistic and mortgage instruments and other third-party hedge funds. The fair values of the investments have been estimated using the NAV of the Company’s ownership interest in partners’ capital. It was estimated that the investments in the funds that are not subject to redemption will be liquidated over a weighted-average period of approximately two years at both March 31,June 30, 2015 and December 31, 2014.

 (c) 

This category includes several private equity funds that initially invest in nonmarketable securities of private companies, which ultimately may become public in the future. The fair values of these investments have been estimated using capital accounts representing the Company’s ownership interest in the funds as well as other performance inputs. The Company’s investment in each fund is not subject to redemption and is normally returned through distributions as a result of the liquidation of the underlying assets of the private equity funds. It was estimated that the investments in these funds will be liquidated over a weighted-average period of approximately four years at both March 31,June 30, 2015 and December 31, 2014.

 (d) 

This category includes several real estate funds that invest directly in real estate and real estate related assets. The fair values of the investments have been estimated using capital accounts representing the Company’s ownership interest in the funds. A majority of the Company’s investments are not subject to redemption or are not currently redeemable and are normally returned through distributions as a result of the liquidation of the underlying assets of the real estate funds. It is estimated that the investments in these funds not subject to redemptions will be liquidated over a weighted-average period of approximately five years and seven years at both March 31,June 30, 2015 and December 31, 2014.2014, respectively.

 (e) 

This category includes investments in several real estate funds .funds. The fair values of the investments in this category have been estimated using capital accounts representing the Company’s ownership interest in partners’ capital as well as performance inputs. The investments are not subject to redemption; however, distributions as a result of the liquidation of the underlying assets will be used to settle certain deferred compensation liabilities over time.

 (f) 

This category includes the underlying third-party private equity funds within one consolidated BlackRock sponsored private equity fund of funds. The fair values of the investments in the third-party funds have been estimated using capital accounts representing the Company’s ownership interest in each fund in the portfolio as well as other performance inputs. These investments are not subject to redemption; however, for certain funds the Company may sell or transfer its interest, which may need approval by the general partner of the underlying third-party funds. Due to the nature of the investments in this category, the Company reduces its investment by distributions that are received through the realization of the underlying assets of the funds. It is estimated that the underlying assets of these funds will be liquidated over a weighted-average period of approximately one year at both March 31, 2015 and December 31, 2014. Total remaining unfunded commitments to other third-party funds were not material at both March 31, 2015 and December 31, 2014, which commitments are required to be funded by capital contributions from noncontrolling interest holders.

Fair Value Option.

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

 

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

CLO Bank Loans:

    

Aggregate principal amounts outstanding

   $3,827     $3,338  

Fair value

   3,793     3,260  
  

 

 

   

 

 

 

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

   $34     $78  

Unpaid principal balance of loans more than 90 days past due

   $4     $6  

Aggregate fair value of loans more than 90 days past due

   -     2  
  

 

 

   

 

 

 

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

   $4     $4  
  

 

 

   

 

 

 

CLO Borrowings:

    

Aggregate principal amounts outstanding

   $4,088     $3,508  

Fair value

   $3,964     $3,389  
(in millions)    December 31,    
2014

CLO Bank Loans:

Aggregate principal amounts outstanding

$3,338

Fair value

3,260

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

$78

Unpaid principal balance of loans more than 90 days past due

$6

Aggregate fair value of loans more than 90 days past due

2

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

$4

CLO Borrowings:

Aggregate principal amounts outstanding

$3,508

Fair value

$3,389

At MarchDecember 31, 2015,2014, the principal amounts outstanding of the borrowings issued by the CLOs mature between 2016 and 2027.

During the three months ended March 31, 2015 andJune 30, 2014, the change in fair value of the bank loans and bonds held by the CLOs resulted in an $84 million and a $27$52 million gain, respectively, which werewas partially offset by a $39$13 million and a $22 million loss respectively, from the change in fair value of the CLO borrowings.

During the six months ended June 30, 2014, the change in fair value of the bank loans and bonds held by the CLOs resulted in a $79 million gain, which was partially offset by a $50 million loss from the change in fair value of the CLO borrowings.

The net gains (losses) were recorded in net gain (loss) on consolidated VIEs on the condensed consolidated statements of income.

income for the three and six months ended June 30, 2014. The change in fair value of the assets and liabilities included interest income and expense, respectively.

6.  Variable Interest Entities

In the normal course of business,Effective January 1, 2015, the Company isno longer consolidates these CLOs due to the manageradoption of various types of sponsored investment vehicles, including collateralized debt obligations (“CDOs”)/CLOs and sponsored investment funds, which may be considered VIEs. The Company receives advisory fees and/or other incentive-related fees for its services and may from time to time own equity or debt securities or enter into derivatives with the vehicles, each of which are considered variable interests. The Company enters into these variable interests principally to address client needs through the launch of such investment vehicles. The VIEs are primarily financed via capital contributed by equity and debt holders. The Company’s involvement in financing the operations of the VIEs is generally limited to its equity interests.

In order to determine whether the Company is the PB of a VIE, management must make significant estimates and assumptions of probable future cash flows of the VIEs. Assumptions made in such analyses may include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, prepayments, realization of gains, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.ASU 2015-02. See Note 2,Significant Accounting Policies in the 2014 Form 10-K, for more information.

Consolidated VIEs.    Consolidated VIEs included CLOs in which BlackRock did not have an investment; however, BlackRock, as the collateral manager, was deemed to have both the power to control the activities of the CLOs and the right to receive benefits that could potentially be significant to the CLOs. In addition, BlackRock was the PB of one investment fund because it absorbed the majority of the variability due to its de facto related-party relationships with other partners in the fund. The assets of these VIEs are not available to creditors of the Company. In addition, the investors in these VIEs have no recourse to the credit of the Company. At March 31, 2015 and December 31, 2014, the following balances related to VIEs were recorded on the condensed consolidated statements of financial condition:

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

Assets of consolidated VIEs:

   

Cash and cash equivalents

   $279    $278  

Bank loans

   3,793    3,260  

Bonds

   47    47  

Other investments and other assets

   55    45  
  

 

 

  

 

 

 

Total bank loans, bonds, other investments and other assets

   3,895    3,352  

Liabilities of consolidated VIEs:

   

Borrowings

   (3,964  (3,389

Other liabilities

   (182  (245

Appropriated retained earnings

   (16  19  

Noncontrolling interests of consolidated VIEs

   (12  (15
  

 

 

  

 

 

 

Total BlackRock net interests in consolidated VIEs

   $-    $-  
  

 

 

  

 

 

 

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

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

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

Non-Consolidated VIEs.    At March 31, 2015 and December 31, 2014, the Company’s carrying value of assets and liabilities pertaining to its variable interests in VIEs and its maximum risk of loss related to VIEs for which it was the sponsor or in which it held a variable interest, but for which it was not the PB, was as follows:

(in millions)  Variable Interests on the Condensed
Consolidated
Statement of Financial Condition
     
At March 31, 2015  Investments   Advisory
Fee
Receivables
   Other Net
Assets
(Liabilities)
   Maximum
Risk of Loss(1)
 

CDOs/CLOs

   $-     $1     ($6)     $18  

Other sponsored investment funds:

        

Collective trusts

   -     212     -        212  

Other

   52     163     (3)     215  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $52     $376     ($9)     $445  
  

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2014

  

CDOs/CLOs

   $-     $2     ($5)     $19  

Other sponsored investment funds:

        

Collective trusts

   -     191     -     191  

Other

   57     177     (3)     234  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $57     $370     ($8)     $444  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

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

CDOs/CLOs

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

Assets at fair value

   $1     $1  

Liabilities(1)

   2     2  
  

 

 

   

 

 

 

Net assets

   ($1   ($1
  

 

 

   

 

 

 

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

The net assets of other sponsored investment funds that are nonconsolidated VIEs approximated $1.7 trillion to $1.8 trillion at both March 31, 2015 and December 31, 2014. Net assets included approximately $1.5 trillion of collective trusts at March 31, 2015 and approximately $1.4 trillion of collective trusts at December 31, 2014. Each collective trust has been aggregated separately and may include collective trusts that invest in other collective trusts. The net assets of these VIEs primarily are comprised of cash and cash equivalents and investments, partially offset by liabilities primarily comprised of various accruals for the sponsored investment vehicles.

7.  Derivatives and Hedging

The Company maintains a program to enter into swaps to hedge against market price and interest rate exposures with respect to certain seed investments in sponsored investment products. At March 31,June 30, 2015, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional valuevalues of approximately $260$251 million and $99$86 million, respectively. At December 31, 2014, the Company had outstanding total return swaps and interest rate swaps with aggregate notional values of approximately $238 million and $84 million, respectively.

The Company has entered into a derivative providing credit protection to a counterparty of approximately $17 million, representing the Company’s maximum risk of loss with respect to the provision of credit protection. The Company carries the derivative at fair value based on the expected discounted future cash flows under the arrangement.

The Company executes forward foreign currency exchange contracts to mitigate the risk of certain foreign exchange movements. At March 31,June 30, 2015 and December 31, 2014, the Company had outstanding forward foreign currency exchange contracts with aggregate notional values of approximately $215$193 million and $201 million, respectively.

Gains (losses) on total return swaps and interest rate swaps are recorded in nonoperating income (expense) and were not material to the condensed consolidated statements of income for the three and six months ended March 31,June 30, 2015 and 2014.

Gains (losses) on forward foreign currency exchange contracts are recorded in other general and administration expense and were not material to the condensed consolidated statements of income for the three and six months ended March 31,June 30, 2015 and 2014.

The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the funds’ investment strategies. Gains (losses) on such derivatives are recorded in nonoperating income (expense) and were not material for the three and six months ended March 31,June 30, 2015 and 2014.

The fair values of the outstanding derivatives were not material to the condensed consolidated statements of financial condition at both March 31,June 30, 2015 and December 31, 2014.

See Note 10,Borrowings, for information on the Company’s net investment hedge.

8.  Goodwill

Goodwill activity during the threesix months ended March 31,June 30, 2015 was as follows:

 

(in millions)    

December 31, 2014

               $12,961  

BKCA acquisition

   19  

Goodwill adjustment related to Quellos(1)

   (510
  

 

 

 

March 31,June 30, 2015

   $12,97512,970  
  

 

 

 

 

(1) 

The $10 million decrease in goodwill during the threesix months ended March 31,June 30, 2015 resulted from tax benefits realized from tax-deductible goodwill in excess of book goodwill from the acquisition of the fund-of-funds business of Quellos Group, LLC in October 2007 (the “Quellos Transaction”). Goodwill related to the Quellos Transaction will continue to be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill from the Quellos Transaction. The balance of the Quellos tax-deductible goodwill in excess of book goodwill was approximately $255$247 million and $263 million at March 31,June 30, 2015 and December 31, 2014, respectively.

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

9.  Intangible Assets

The carrying amounts of identifiable intangible assets are summarized as follows:

 

(in millions)  Indefinite-lived
 intangible assets 
   Finite-lived
 intangible assets 
  Total
 intangible assets 
 

December 31, 2014

               $16,988                 $356                $17,344  

Amortization expense

   -     (35  (35

BKCA acquisition

   120     -    120  
  

 

 

   

 

 

  

 

 

 

March 31, 2015

   $17,108     $321    $17,429  
  

 

 

   

 

 

  

 

 

 

(in millions)  Indefinite-lived
 intangible assets 
   Finite-lived
 intangible assets 
   Total
 intangible assets 
 

December 31, 2014

               $16,988                 $356                 $17,344  

Amortization expense

   -     (70   (70

BKCA acquisition

   120     -     120  
  

 

 

   

 

 

   

 

 

 

June 30, 2015

   $17,108     $286     $17,394  
  

 

 

   

 

 

   

 

 

 

Indefinite-lived Acquired Management Contracts

Indefinite-lived intangible assets increased by $120 million in the threesix months ended March 31,June 30, 2015, as a result of the BKCA acquisition.

10.  Borrowings

Short-Term Borrowings

2015 Revolving Credit Facility.    In April 2015, the Company’s credit facility was amended to extend the maturity date to March 2020 and to increase the amount of the aggregate commitment to $4.0 billion (the “2015 credit facility”). The 2015 credit facility permits the Company to request up to an additional $1.0 billion of borrowing capacity, subject to lender credit approval, increasing the overall size of the 2015 credit facility to an aggregate principal amount not to exceed $5.0 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 2015 credit facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at March 31,June 30, 2015. The 2015 credit facility provides back-up liquidity to fund ongoing working capital for general corporate purposes and various investment opportunities. At March 31,June 30, 2015, the Company had no amount outstanding under the 2015 credit facility.

Commercial Paper Program.    The maximum aggregate amount for which the Company can issue unsecured commercial paper notes (the “CP Notes”) on a private-placement basis up to a maximum aggregate amount outstanding at any time is $3.990$4.0 billion. The commercial paper program is currently supported by the 2015 credit facility. At March 31,June 30, 2015, BlackRock had no CP Notes outstanding.

Long-Term Borrowings

The carrying value and fair value of long-term borrowings estimated using market prices at March 31,June 30, 2015 included the following:

 

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

 Unamortized 
  Discount  

and Debt
  Issuance Costs  

   Carrying Value     Fair Value   
 

 

 

  

 

 

 

1.375% Notes due 2015

  $750    $ -    $750    $751  

6.25% Notes due 2017

  700    (1)    699    785    $700    ($2)    $698    $775  

5.00% Notes due 2019

  1,000    (2)    998    1,136    1,000    (4)    996    1,118  

4.25% Notes due 2021

  750    (3)    747    840    750    (5)    745    821  

3.375% Notes due 2022

  750    (3)    747    793    750    (6)    744    773  

3.50% Notes due 2024

  1,000    (3)    997    1,060    1,000    (8)    992    1,007  

1.25% Notes due 2025

  780    (8)    772    725  
 

 

 

  

 

 

 

Total Long-term Borrowings

  $4,950    ($12)    $4,938    $5,365    $4,980    ($33)    $4,947    $5,219  
 

 

 

  

 

 

 

Long-term borrowings at December 31, 2014 had a carrying value of $4.938$4.922 billion and a fair value of $5.309 billion determined using market prices at the end of December 2014.

In June 2015, the Company fully repaid $750 million of 1.375% notes at maturity.

See Note 19,Subsequent Events2025 Notes., for information    In May 2015, the Company issued700 million (or approximately $780 million based on the exchange rate at June 30, 2015) of 1.25% senior unsecured notes maturing on May 20156, 2025 (the “2025 Notes”). The notes are listed on the New York Stock Exchange. The net proceeds of the 2025 Notes were used for general corporate purposes, including refinancing of outstanding indebtedness. Interest of approximately $10 million per year based on current exchange rates is payable annually on May 6 of each year. The 2025 Notes may be redeemed in whole or in part prior to maturity at any time at the option of the Company at a “make-whole” redemption price. The 2025 Notes were issued at a discount of approximately $3 million that will be amortized over the term of the 2025 Notes.

Upon conversion to U.S. dollars the Company designated the700 million debt offering as a net investment hedge to offset its currency exposure relating to its net investment in euro functional currency operations. A gain of $7 million, net of tax, was recognized in other comprehensive income for the three and six months ended June 30, 2015. No hedge ineffectiveness was recognized during the three and six months ended June 30, 2015.

See Note 12,Borrowings, in the 2014 Form 10-K for more information regarding the Company’s borrowings.

11.  Commitments and Contingencies

Investment Commitments.    At March 31,June 30, 2015, the Company had $353$417 million of various capital commitments to fund sponsored investment funds, including consolidated VIEs. These funds ofinclude private equity funds, real estate funds, infrastructure funds, opportunistic funds and distressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third-party funds as third-party noncontrolling interest holders have the legal obligation to fund the respective commitments of such funds of funds. In addition to the capital

commitments of $353$417 million, the Company had approximately $30$32 million of contingent commitments for certain funds which have investment periods that have expired. Generally, the timing of the funding of these commitments is unknown and the commitments are callable on demand at any time prior to the expiration of the commitment. These unfunded commitments are not recorded on the condensed consolidated statements of financial condition. These commitments do not include potential future commitments approved by the Company that are not yet legally binding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.

Contingencies

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

Contingent Payments Related to Business Acquisitions.    In connection with the acquisition of Credit Suisse’s ETF franchise, BlackRock is required to make contingent payments annually to Credit Suisse, subject to achieving specified thresholds during a seven-year period, subsequent to the 2013 acquisition date. BlackRock is required to make contingent payments related to the acquisition of MGPA during a five-year period, subject to achieving specified thresholds, subsequent to the 2013 acquisition date. In addition, BlackRock is required to make contingent payments in connection with the BKCA acquisition over a three-year period, subject to the acquired business achieving specified performance targets. The fair value of the remaining aggregate contingent payments at March 31,June 30, 2015 is not significant to the condensed consolidated statement of financial condition and is included in other liabilities.

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

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

Indemnifications.    In the ordinary course of business or in connection with certain acquisition agreements, BlackRock enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined or the likelihood of any liability is considered remote. Consequently, no liability has been recorded on the condensed consolidated statements of financial condition.

In connection with securities lending transactions, BlackRock has issued certain indemnifications to certain securities lending clients against potential loss resulting from a borrower’s failure to fulfill its obligations under the securities lending agreement should the value of the collateral pledged by the borrower at the time of default be insufficient to cover the borrower’s obligation under the securities lending agreement. At March 31,June 30, 2015, the Company indemnified certain of its clients for their securities lending loan balances of approximately $153.9$147.3 billion. The Company held as agent, cash and securities totaling $164.4$156.5 billion as collateral for indemnified securities on loan at March 31,June 30, 2015. The fair value of these indemnifications was not material at March 31,June 30, 2015.

12.  Stock-Based Compensation

Restricted stock and restricted stock units (“RSUs”) activity for the threesix months ended March 31,June 30, 2015 is summarized below:

 

Outstanding at

  Restricted
Stock and
RSUs
 Weighted-
Average
Grant Date
Fair Value
   Restricted
Stock and
RSUs
 Weighted-
Average
Grant Date
Fair Value
 

December 31, 2014

                   3,401,909            $257.01                     3,401,909            $257.01  

Granted

   1,260,795    $343.91     1,290,014    $344.36  

Converted

   (1,531,673  $228.31     (1,566,979  $228.78  

Forfeited

   (4,768  $304.46     (26,091  $300.08  
  

 

    

 

  

March 31, 2015(1)

   3,126,263    $306.04  

June 30, 2015(1)

   3,098,853    $307.28  
  

 

    

 

  

 

(1) 

At March 31,June 30, 2015, approximately 2.9 million awards are expected to vest and 0.10.2 million awards have vested but have not been converted.

The Company values restricted stock and RSUs at their grant-date fair value as measured by BlackRock’s common stock price. In January 2015, the Company granted 952,329 RSUs to employees as part of annual incentive compensation that vest ratably over three years from the date of grant and 303,999 RSUs to employees that cliff vest 100% on January 31, 2018.

At March 31,June 30, 2015, the intrinsic value of outstanding RSUs was $1.1 billion reflecting a closing stock price of $365.84.$345.98.

At March 31,June 30, 2015, total unrecognized stock-based compensation expense related to unvested RSUs was $601$499 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 1.61.3 years.

Market Performance-based RSUs.

Market performance-based RSUs outstanding at both March 31,June 30, 2015 and December 31, 2014 were 1,425,319 with a weighted average exercise price of $137.31. At March 31,June 30, 2015, approximately 1.4 million awards are expected to vest and an immaterial amount of awards have vested but have not been converted. No market performance based RSUs were granted during the threesix months ended March 31,June 30, 2015.

At March 31,June 30, 2015, the intrinsic value of outstanding market performance-based RSUs was $521$493 million reflecting a closing stock price of $365.84.$345.98.

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

At March 31,June 30, 2015, total unrecognized stock-based compensation expense related to unvested market performance-based awards was $87$75 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 1.71.4 years.

Performance-Based RSUs.

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

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

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

Performance-based RSU activity for the threesix months ended March 31,June 30, 2015 is summarized below:

 

Outstanding at

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

December 31, 2014

   -     $-     -     $-  

Granted

               262,847     $343.86                 262,847     $343.86  
  

 

     

 

   

March 31, 2015(1)

   262,847    $343.86  

June 30, 2015(1)

   262,847    $343.86  
  

 

     

 

   

 

(1) 

At March 31,June 30, 2015, approximately 0.3 million awards are expected to vest and noan immaterial amount of awards have vested andbut have not been converted.

At March 31,June 30, 2015, total unrecognized stock-based compensation expense related to unvested performance-based awards was $84$77 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted-average period of 2.82.6 years.

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

At March 31,June 30, 2015, the intrinsic value of outstanding performance-based RSUs was $96.2$90.9 million reflecting a closing stock price of $365.84.$345.98.

Long-Term Incentive Plans Funded by PNC.    Under a share surrender agreement, PNC committed to provide up to 4 million shares of BlackRock stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”). The current share surrender agreement commits PNC to provide BlackRock series C nonvoting participating preferred stock to fund the remaining committed shares. As of March 31,June 30, 2015, 2.7 million shares had been surrendered by PNC.

At March 31,June 30, 2015, the remaining shares committed by PNC of 1.3 million were available to fund certain future long-term incentive awards.

Stock Options.    Stock option activity for the threesix months ended March 31,June 30, 2015 is summarized below:

 

Outstanding at

  Shares
under
option
   Weighted
average
exercise
price
   Shares
under
option
   Weighted
average
exercise
price
 

December 31, 2014(1)

   906,719    $167.76     906,719    $167.76  

Exercised(1)

   (32,116  $167.76     (42,116  $167.76  
  

 

     

 

   

March 31, 2015(1)

   874,603    $167.76  

June 30, 2015(1)

   864,603    $167.76  
  

 

     

 

   

 

(1) 

The aggregate intrinsic value of options exercised during the threesix months ended March 31,June 30, 2015 was $6.2$8.2 million. At March 31,June 30, 2015, all options  were vested.

The remaining average life of stock options outstanding at March 31,June 30, 2015 is approximately two years.

13.  Net Capital Requirements

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

Capital Requirements.    At March 31,June 30, 2015, the Company was required to maintain approximately $1.1 billion in net capital in certain regulated subsidiaries, including BlackRock Institutional Trust Company, N.A. (a chartered national bank whose powers are limited to trust activities and which is subject to regulatory capital requirements administered by the Office of the Comptroller of the Currency), entities regulated by the Financial Conduct Authority and Prudential Regulation Authority in the United Kingdom, and the Company’s broker-dealers. The Company was in compliance with all applicable regulatory net capital requirements.

14.  Accumulated Other Comprehensive Income (Loss)

The following table presents changes in AOCI by component for the three and six months ended March 31,June 30, 2015 and 2014:

 

(in millions) Unrealized gains
(losses) on
available-for-sale
investments(1)
 Benefit plans Foreign
currency
translation
adjustments
 Total  Unrealized gains
(losses) on
available-for-sale
investments(1)
 Benefit plans Foreign
currency
translation
adjustments(2)
 Total 

For the Three Months Ended June 30, 2015

       

March 31, 2015

 $2    $3    ($444  ($439

Other comprehensive income (loss) before reclassifications

  (1   -     101     100  

Amount reclassified from AOCI

  -     -     -     -  
 

 

   

 

   

 

   

 

 

Net other comprehensive income (loss) for the three months ended June 30, 2015

  (1   -     101     100  
 

 

   

 

   

 

   

 

 

June 30, 2015

 $1    $3    ($343  ($339
 

 

   

 

   

 

   

 

 

For the Six Months Ended June 30, 2015

       

December 31, 2014

 $2    $4    ($279  ($273 $2    $4    ($279  ($273

Other comprehensive income (loss) before reclassifications

  -     (1   (165   (166  (1   (1   (64   (66

Amount reclassified from AOCI

  -     -     -     -    -     -     -     -  
 

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

 

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

  -     (1   (165   (166

Net other comprehensive income (loss) for the six months ended June 30, 2015

  (1   (1   (64   (66
 

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

 

March 31, 2015

 $2    $3    ($444  ($439

June 30, 2015

 $1    $3    ($343  ($339
 

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

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

December 31, 2013

 $7    $6    ($48  ($35

Other comprehensive income (loss) before reclassifications

  -     -     8     8  

Amount reclassified from AOCI(2),(3)

  (8   -     -     (8
 

 

   

 

   

 

   

 

 

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

  (8   -     8     -  
 

 

   

 

   

 

   

 

 

March 31, 2014

 ($1  $6    ($40  ($35
 

 

   

 

   

 

   

 

 

(1)

All amounts are net of tax.

(2)

Amounts in the three and six months ended June 30, 2015 include a gain from the Company’s net investment hedge of $7 million, net of tax of $4 million.

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

For the Three Months Ended June 30, 2014

       

March 31, 2014

 ($1  $6    ($40  ($35

Other comprehensive income (loss) before reclassifications

  4     -     30     34  

Amount reclassified from AOCI(2),(3)

  2     -     -     2  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss) for the three months ended June 30, 2014

  6     -     30     36  
 

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2014

 $5    $6    ($10  $1  
 

 

 

   

 

 

   

 

 

   

 

 

 

For the Six Months Ended June 30, 2014

       

December 31, 2013

 $7    $6    ($48  ($35

Other comprehensive income (loss) before reclassifications

  4     -     38     42  

Amount reclassified from AOCI(2),(3)

  (6   -     -     (6
 

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss) for the six months ended June 30, 2014

  (2   -     38     36  
 

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2014

 $5    $6    ($10  $1  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

All amounts are net of tax.

(2) 

The tax benefit (expense) was not material for the three and six months ended March 31,June 30, 2014.

(3) 

The pre-tax amount reclassified from AOCI was included in net gain (loss) on investments on the condensed consolidated statements of income.

15.  Capital Stock

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

 

  March 31,
2015
   December 31,
2014
   June 30,
2015
   December 31,
2014
 

Series A

        

Shares authorized, $0.01 par value

   20,000,000     20,000,000     20,000,000     20,000,000  

Shares issued and outstanding

   -     -     -     -  

Series B

        

Shares authorized, $0.01 par value

   150,000,000     150,000,000     150,000,000     150,000,000  

Shares issued and outstanding(1)

   823,188     823,188     823,188     823,188  

Series C

        

Shares authorized, $0.01 par value

   6,000,000     6,000,000     6,000,000     6,000,000  

Shares issued and outstanding(1)

   1,311,887     1,311,887     1,311,887     1,311,887  

Series D

        

Shares authorized, $0.01 par value

   20,000,000     20,000,000     20,000,000     20,000,000  

Shares issued and outstanding

   -     -     -     -  

 

(1) 

Shares held by PNC.

Share Repurchases.    The Company repurchased 0.81.5 million common shares in open market-transactions under the share repurchase program for approximately $275$550 million during the threesix months ended March 31,June 30, 2015.

In January 2015, the Board of Directors approved an increase in the availability of shares that may be repurchased under the Company’s existing share repurchase program to allow for the repurchase of up to a total of 9.4 million additional shares of BlackRock common stock. At March 31,June 30, 2015, there were 8.67.9 million shares still authorized to be repurchased.

16.  Income Taxes

The first quarterthree and six months ended June 30, 2015 included a $13 million and $16 million, respectively, net noncash expense, primarily associated with the revaluation of certain deferred income tax liabilities as a result of domestic state and local tax changes. The six months ended June 30, 2015 also included nonrecurring tax benefits of $69 million, primarily due to the realization of losses from changes in the Company’s organizational tax structure and the resolution of certain outstanding tax matters.

The three and six months ended June 30, 2014 included a $23 million net noncash expense, primarily associated with the revaluation of certain deferred tax liabilities arising from the state and local tax effect of changes in the Company’s organizational structure. In addition, the second quarter of 2014 benefited from an improvement in the geographic mix of earnings and included a $34 million net tax benefit related to several favorable nonrecurring items.

17.  Earnings Per Share

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

The following table sets forth the computation of basic and diluted EPS for the three and six months ended March 31,June 30, 2015 and 2014 under the treasury stock method:

 

  Three Months Ended
March 31,
   Three Months Ended
June  30,
   Six Months Ended
June  30,
 
(in millions, except per share data)  2015   2014 
(in millions, except shares and per share
data)
  2015   2014   2015   2014 

Net income attributable to BlackRock

   $822     $756     $819     $808     $1,641     $1,564  

Basic weighted-average shares outstanding

   167,089,037     169,081,421     166,616,558     168,712,221     166,851,492     168,895,801  

Dilutive effect of nonparticipating RSUs and stock options

   2,634,130     2,852,382     2,498,201     2,437,932     2,567,472     2,644,217  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total diluted weighted-average shares outstanding

   169,723,167     171,933,803     169,114,759     171,150,153     169,418,964     171,540,018  
  

 

   

 

   

 

   

 

   

 

   

 

 

Basic earnings per share

   $4.92     $4.47     $4.92     $4.79     $9.84     $9.26  

Diluted earnings per share

   $4.84     $4.40     $4.84     $4.72     $9.69     $9.12  

18.  Segment Information

The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company operates in one business segment.

The following table illustrates investment advisory, administration fees, securities lending revenue and performance fees,BlackRock Solutions and advisory revenue, distribution fees and other revenue for the three and six months ended March 31,June 30, 2015 and 2014.

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(in millions)  2015     2014   2015     2014     2015     2014 

Equity

  $1,306      $1,277    $1,426      $1,369      $2,732      $2,646  

Fixed income

   575       503     600       544       1,175       1,047  

Multi-asset

   312       289     324       310       636       599  

Alternatives

   232       306     244       253       476       559  

Cash management

   73       74     76       73       149       147  
  

 

     

 

   

 

     

 

     

 

     

 

 

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

   2,498       2,449     2,670       2,549       5,168       4,998  

BlackRock Solutions and advisory

   147       154     161       146       308       300  

Distribution fees

   17       19     13       18       30       37  

Other revenue

   61       48     61       65       122       113  
  

 

     

 

   

 

     

 

     

 

     

 

 

Total revenue

      $2,723          $2,670        $2,905          $2,778          $5,628          $5,448  
  

 

     

 

   

 

     

 

     

 

     

 

 

The following table illustrates total revenue for the three and six months ended March 31,June 30, 2015 and 2014 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the customer resides.

 

(in millions)  Three Months Ended
March 31,
   Three Months Ended
June 30,
     Six Months Ended
June  30,
 

Revenue

    2015         2014       2015          2014         2015         2014   

Americas

  $1,851      $1,782    $1,913      $1,764      $3,766      $3,546  

Europe

           743               757             847               882               1,588               1,639  

Asia-Pacific

   129       131     145       132       274       263  
  

 

     

 

   

 

     

 

     

 

     

 

 

Total revenue

  $2,723      $2,670    $2,905      $2,778      $5,628      $5,448  
  

 

     

 

   

 

     

 

     

 

     

 

 

The following table illustrates long-lived assets that consist of goodwill and property and equipment at March 31,June 30, 2015 and December 31, 2014 by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.

 

(in millions)  March 31,
2015
   December 31,
2014
   June 30,
2015
   December 31,
2014
 

Long-lived Assets

    

Americas

  $13,238    $13,151    $13,232    $13,151  

Europe

   187     194     194     194  

Asia-Pacific

   87     83     89     83  
  

 

   

 

   

 

   

 

 

Total long-lived assets

  $13,512    $13,428    $13,515    $13,428  
  

 

   

 

   

 

   

 

 

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

19.  Acquisition

Infraestructura Institucional.In June 2015, the Company announced that it agreed to acquire Infraestructura Institucional, Mexico’s leading independently managed, infrastructure investment firm, expanding the Company’s infrastructure capabilities in Mexico. The transaction is expected to close in the fourth quarter of 2015, subject to customary regulatory approvals and closing conditions. The transaction is not expected to be material to the condensed consolidated financial statements.

20.  Subsequent Events

Debt Offering.    In May 2015, the Company issued700 million (or approximately $760 million based on an exchange rate of $1.09 per1) of 1.25% senior unsecured notes maturing on May 6, 2025 (the “2025 Notes”). The notes are expected to be listed on the New York Stock Exchange. The net proceeds of the 2025 Notes will be used for general corporate purposes, including refinancing of outstanding indebtedness. Interest of approximately $10 million per year based on current exchange rates is payable annually on May 6 of each year. The 2025 Notes may be redeemed in whole or in part prior to maturity at any time at the option of the Company at a “make-whole” redemption price. The 2025 Notes were issued at a discount of approximately $3 million that will be amortized over the term of the 2025 Notes.

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

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

Item2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

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

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

OVERVIEW

BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) is a leading publicly traded investment management firm with $4.774$4.721 trillion of AUM at March 31,June 30, 2015. With approximately 12,30012,400 employees in more than 30 countries, BlackRock provides a broad range of investment and risk management services to institutional and retail clients worldwide.

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

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

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

At March 31,June 30, 2015, PNC held 20.9%21.0% of the Company’s voting common stock and 22.0% of the Company’s capital stock, which includes outstanding common and nonvoting preferred stock.

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

EXECUTIVE SUMMARY

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
(in millions, except shares and per share data)  2015   2014   2015   2014   2015   2014 

GAAP basis:

            

Total revenue

  $2,723       $2,670       $2,905       $2,778       $5,628       $5,448     

Total expense

   1,656        1,619        1,667        1,656        3,323        3,275     
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating income

  $1,067       $1,051       $1,238       $1,122       $2,305       $2,173     

Operating margin

   39.2%     39.4%     42.6%     40.4%     41.0%     39.9%  

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

   13        29        (48)       (17)       (35)       12     

Income tax expense

   (258)       (324)       (371)       (297)       (629)       (621)    
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income attributable to BlackRock

  $822       $756       $819       $808       $1,641       $1,564     
  

 

   

 

   

 

   

 

   

 

   

 

 

Diluted earnings per common share

  $4.84       $4.40       $4.84       $4.72       $9.69       $9.12     

Effective tax rate

   23.9%     30.0%     31.2%     26.8%     27.7%     28.4%  

As adjusted(2):

            

Total revenue

  $2,723       $2,670       $2,905       $2,778       $5,628       $5,448     

Total expense

   1,646        1,608        1,657        1,645        3,303        3,253     
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating income

  $1,077       $1,062       $1,248       $1,133       $2,325       $2,195     

Operating margin

   41.2%     41.4%     44.9%     42.4%     43.2%     41.9%  

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

   11        26        (50)       (20)       (39)       6     

Income tax expense

   (258)       (326)       (360)       (276)       (618)       (602)    
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income attributable to BlackRock

  $830       $762       $838       $837       $1,668       $1,599     
  

 

   

 

   

 

   

 

   

 

   

 

 

Diluted earnings per common share

  $4.89       $4.43       $4.96       $4.89       $9.85       $9.32     

Effective tax rate

   23.7%     30.0%     30.1%     24.8%     27.0%     27.4%  

Other:

            

Assets under management (end of period)

  $4,774,192       $4,400,925       $4,721,294       $4,593,612       $4,721,294       $4,593,612     

Diluted weighted-average common shares outstanding(3)

   169,723,167        171,933,803        169,114,759        171,150,153        169,418,964        171,540,018     

Common and preferred shares outstanding (end of period)

   167,084,582        169,138,109        166,379,267        168,363,315        166,379,267        168,363,315     

Book value per share(4)

  $163.74       $156.51       $166.94       $159.46       $166.94       $159.46     

Cash dividends declared and paid per share

  $2.18       $1.93       $2.18       $1.93       $4.36       $3.86     

 

(1) 

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

(2) 

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

(3) 

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

(4) 

Total BlackRock stockholders’ equity, excluding appropriated retained earnings of $16$33 million and $6 million for the three months ended March 31, 2015 andat June 30, 2014, respectively, divided by total common and preferred shares outstanding at March 31June 30 of the respective period-end.

THREE MONTHS ENDED MARCH 31,JUNE 30, 2015 COMPARED WITH THREE MONTHS ENDED MARCH 31,JUNE 30, 2014

GAAP.    Operating income of $1,067$1,238 million increased $16$116 million and operating margin of 39.2% declined 2042.6% increased 220 bps from the firstsecond quarter of 2014. Operating income reflected the impact of $252 billionorganic growth and market appreciation, despite the impact of net new inflows over the last twelve monthsforeign exchange movements. Operating income also reflected strength in performance fees and continued strong growth inAladdinfees,partially offset by a higher level of transaction-related revenue in last year’s first quarter and significant negative foreign exchange movements.fees. Nonoperating income (expense), less net income (loss) attributable to NCI, decreased $16$31 million due to lower positive marks on investments in the firstsecond quarter of 2015.

Income tax expense increased $74 million from the second quarter of 2014. The second quarter of 2015 included a $13 million net noncash expense, primarily associated with the revaluation of certain deferred income tax liabilities as a result of domestic state and local tax changes. The second quarter of 2014 included a $23 million net noncash expense, primarily associated with the revaluation of certain deferred tax liabilities, an improvement in the geographic mix of earnings and a $34 million net tax benefit related to several favorable nonrecurring items.

Earnings per diluted common share rose $0.44,$0.12, or 10%3%, from the second quarter of 2014, reflecting the benefit of share repurchases and higher net income in the second quarter of 2015.

As Adjusted.    Operating income of $1,248 million and operating margin of 44.9% increased $115 million and 250 bps, respectively, from the second quarter of 2014. Earnings per diluted common share rose $0.07, or 1%, from the second quarter of 2014. Income tax expense on an as adjusted basis for the second quarter of 2015 and 2014 excluded the net noncash expense of $13 million and $23 million, respectively, described above.

SIX MONTHS ENDED JUNE 30, 2015 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2014

GAAP.    Operating income of $2,305 million increased $132 million and operating margin of 41.0% increased 110 bps from the six months ended June 30, 2014. Operating income reflected growth in base fees, partially offset by lower performance fees and higher expense. Expense reflected higher revenue-related expense, including compensation and distribution and servicing costs, partially offset by lower general and administration expense and the impact of foreign exchange movements in the six months ended June 30, 2015. Nonoperating income (expense), less net income (loss) attributable to NCI, decreased $47 million from the six months ended June 30, 2014 due to lower net positive marks on investments during the six months ended June 30, 2015.

Income tax expense for the six months ended June 30, 2015 included a $16 million net noncash expense associated with the revaluation of certain deferred income tax liabilities described above and benefited from $69 million of nonrecurring items. Income tax expense for the six months ended June 30, 2014 reflected the previously described $23 million net noncash expense, an improvement in the geographic mix of earnings and the $34 million net tax benefit described above.

Earnings per diluted common share rose $0.57, or 6%, compared with the first quarter of 2014prior year period due to higher net income and the benefit of share repurchases.

As Adjusted.    Operating income of $1,077 million increased $15$2,325 million and operating margin of 41.2% declined 2043.2% increased $130 million and 130 bps, respectively, from the first quartersix months ended June 30, 2014. Income tax expense on an as adjusted basis for the six months ended June 30, 2015 and 2014 excluded the previously described net noncash expense of 2014.$16 million and $23 million, respectively. Earnings per diluted common share rose $0.46,$0.53, or 10%6%, from the first quarter ofsix months ended June 30, 2014.

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

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

NON-GAAP FINANCIAL MEASURES

BlackRock reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”); however, management believes evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. Management also uses non-GAAP financial measures as a benchmark to compare its performance with other companies and to enhance the comparability of this information for the reporting periods presented. Non-GAAP measures may pose limitations because they do not include all of BlackRock’s revenue and expense. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

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

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

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

Management believes operating income, as adjusted, and operating margin, as adjusted, are effective indicators of BlackRock’s financial performance over time and, therefore, provide useful disclosure to investors.

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
(in millions)    2015       2014       2015       2014       2015       2014   

Operating income, GAAP basis

   $1,067       $1,051      $1,238       $1,122      $2,305       $2,173   

Non-GAAP expense adjustments:

            

PNC LTIP funding obligation

   8      8      8      8      16      16   

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

   2      3      2      3      4      6   
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating income, as adjusted

   1,077      1,062      1,248      1,133      2,325      2,195   

Closed-end fund launch costs / commissions

   -      -   

Product placement costs and commissions

   5      -      5      -   
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating income used for operating margin measurement

           $1,077              $1,062      $1,253      $1,133      $2,330      $2,195   
  

 

   

 

   

 

   

 

   

 

   

 

 

Revenue, GAAP basis

   $2,723      $2,670      $2,905      $2,778      $5,628      $5,448   

Non-GAAP adjustments:

            

Distribution and servicing costs

   (99)      (89)      (105)      (89)      (204)      (178)   

Amortization of deferred sales commissions

   (13)      (15)      (12)      (14)      (25)      (29)   
  

 

   

 

   

 

   

 

   

 

   

 

 

Revenue used for operating margin measurement

   $2,611      $2,566      $2,788      $2,675      $5,399      $5,241   
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating margin, GAAP basis

   39.2%      39.4%      42.6%      40.4%      41.0%      39.9%   
  

 

   

 

   

 

   

 

   

 

   

 

 

Operating margin, as adjusted

   41.2%      41.4%      44.9%      42.4%      43.2%      41.9%   
  

 

   

 

   

 

   

 

   

 

   

 

 

 

Operating income, as adjusted, includes non-GAAP expense adjustments. The portion of compensation expense associated with certain long-term incentive plans (“LTIP”) funded, or to be funded, through share distributions to participants of BlackRock stock held by PNC has been excluded because it ultimately does not impact BlackRock’s book value. Compensation expense associated with appreciation (depreciation) on investments related to certain BlackRock deferred compensation plans has been excluded as returns on investments set aside for these plans, which substantially offset this expense, are reported in nonoperating income (expense).

 

Operating income used for measuring operating margin, as adjusted, is equal to operating income, as adjusted, excluding the impact of closed-end fund launch costs and related commissions. Managementproduct placement costs, and

 

related commissions. Management believes the exclusion of such costs and related commissions is useful because these costs can fluctuate considerably and revenue associated with the expenditure of these costs will not fully impact the Company’s results until future periods.

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

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

Nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, equals nonoperating income (expense), GAAP basis, less net income (loss) attributable to NCI, adjusted for compensation expense associated with (appreciation) depreciation on investments related to certain BlackRock deferred compensation plans. The compensation expense offset is recorded in operating income. This compensation expense has been included in nonoperating income (expense), less net income (loss) attributable to NCI, as adjusted, to offset returns on investments set aside for these plans, which are reported in nonoperating income (expense), GAAP basis.

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
 Six Months Ended
June 30,
 
(in millions)      2015         2014           2015         2014         2015         2014     

Nonoperating income (expense), GAAP basis

  $51   $17    ($41 $16   ($25 $33  

Less: Net income (loss) attributable to NCI

   38    (12   7    33    10    21  
  

 

  

 

   

 

  

 

  

 

  

 

 

Nonoperating income (expense), net of NCI

   13    29     (48  (17  (35  12  

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

   (2  (3   (2  (3  (4  (6
  

 

  

 

   

 

  

 

  

 

  

 

 

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

  $11   $26    ($50 ($20 ($39 $6  
  

 

  

 

   

 

  

 

  

 

  

 

 

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

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
(in millions, except per share data)      2015           2014           2015           2014           2015           2014     

Net income attributable to BlackRock, GAAP basis

  $822      $756     $819     $808     $1,641     $1,564   

Non-GAAP adjustments, net of tax:

            

PNC LTIP funding obligation

   5      6      6      6      11      12   

Income tax matters

   3      -      13      23      16      23   
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income attributable to BlackRock, as adjusted

  $830     $762     $838     $837     $1,668     $1,599   
  

 

   

 

   

 

   

 

   

 

   

 

 

Diluted weighted-average common shares outstanding(4)

   169.7      171.9      169.1      171.2      169.4      171.5   

Diluted earnings per common share, GAAP basis(4)

  $4.84     $4.40     $4.84     $4.72     $9.69     $9.12   

Diluted earnings per common share, as adjusted(4)

  $4.89     $4.43     $4.96     $4.89     $9.85     $9.32   

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

For each period presented, the non-GAAP adjustment related to the PNC LTIP funding obligation was tax effected at the respective blended rates applicable to the adjustments. The three and six months ended June 30, 2015 included $13 million and $16 million, respectively, of net noncash tax expense primarily related to the revaluation of certain deferred tax liabilities. The three and six months ended June 30, 2014 both included a $23 million net noncash tax expense primarily related to the revaluation of certain deferred tax liabilities. The resulting increase in income taxes has been excluded from net income attributable to BlackRock, Inc., as adjusted, as these items will not have a cash flow impact and to ensure comparability among periods presented.

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

Assets Under Management

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

AUM and Net Inflows (Outflows) by Client Type

 

  AUM   Net Inflows (Outflows)   AUM   Net Inflows (Outflows) 
(in millions)  March 31,
2015
   December 31,
2014
   March 31,
2014
   Three
Months
Ended
March 31,
2015
 Twelve
Months
Ended
March 31,
2015
   June 30,
2015
   March 31,
2015
   December 31,
2014
   June 30,
2014
   Three
Months
Ended
June 30,
2015
 Six
Months
Ended
June 30,
2015
 Twelve
Months
Ended
June 30,
2015
 

Retail

  $550,980    $534,329    $508,717    $14,172   $55,114    $561,062    $550,980    $534,329    $534,502    $10,765   $24,936   $52,750  

iShares

   1,074,130     1,024,228     930,380     35,478    128,321     1,075,589     1,074,130     1,024,228     993,832     10,850    46,327    108,726  

Institutional:

                     

Active

   984,282     959,160     939,654     17,984    20,174     975,483     984,282     959,160     970,433     2,516    20,501    21,679  

Index

   1,854,205     1,816,124     1,726,855     2,806    21,358     1,824,755     1,854,205     1,816,124     1,795,938     (31,434  (28,628  (3,514
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total institutional

   2,838,487     2,775,284     2,666,509     20,790    41,532     2,800,238     2,838,487     2,775,284     2,766,371     (28,918  (8,127  18,165  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total long-term

   4,463,597     4,333,841     4,105,606     70,440    224,967     4,436,889     4,463,597     4,333,841     4,294,705     (7,303  63,136    179,641  
  

 

   

 

   

 

   

 

  

 

 

Cash management

   292,495     296,353     263,533     561    38,690     271,506     292,495     296,353     268,388     (23,890  (23,329  11,288  

Advisory(1)

   18,100     21,701     31,786     (2,297  (11,697   12,899     18,100     21,701     30,519     (5,452  (7,749  (15,131
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $4,774,192    $4,651,895    $4,400,925    $68,704   $251,960    $4,721,294    $4,774,192    $4,651,895    $4,593,612    ($36,645 $32,058   $175,798  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

AUM and Net Inflows (Outflows) by Product Type

 

  AUM   Net Inflows (Outflows)   AUM   Net Inflows (Outflows) 
(in millions)  March 31,
2015
   December 31,
2014
   March 31,
2014
   Three
Months
Ended
March 31,
2015
 Twelve
Months
Ended
March 31,
2015
   June 30,
2015
   March 31,
2015
   December 31,
2014
   June 30,
2014
   Three
Months
Ended
June 30,
2015
 Six
Months
Ended
June 30,
2015
 Twelve
Months
Ended
June 30,
2015
 

Equity

  $2,527,130    $2,451,111    $2,347,934    $20,941   $69,520    $2,505,317    $2,527,130    $2,451,111    $2,462,585    ($27,261 ($6,320 $32,551  

Fixed income

   1,428,480     1,393,653     1,289,014     36,289    117,072     1,422,434     1,428,480     1,393,653     1,340,725     12,847    49,135    108,665  

Multi-asset

   395,312     377,837     353,231     12,792    36,706     395,009     395,312     377,837     374,473     5,049    17,841    34,959  

Alternatives

         

Alternatives:

            

Core

   89,086     88,006     87,865     (201  926     89,954     89,086     88,006     88,758     1,229    1,028    1,882  

Currency and commodities(2)

   23,589     23,234     27,562     619    743     24,175     23,589     23,234     28,164     833    1,452    1,584  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Subtotal

   112,675     111,240     115,427     418    1,669     114,129     112,675     111,240     116,922     2,062    2,480    3,466  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total long-term

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

 

   

 

   

 

   

 

  

 

 

Long-term

   4,436,889     4,463,597     4,333,841     4,294,705     (7,303  63,136    179,641  

Cash management

   292,495     296,353     263,533     561    38,690     271,506     292,495     296,353     268,388     (23,890  (23,329  11,288  

Advisory(1)

   18,100     21,701     31,786     (2,297  (11,697   12,899     18,100     21,701     30,519     (5,452  (7,749  (15,131
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $4,774,192    $4,651,895    $4,400,925    $68,704   $251,960    $4,721,294    $4,774,192    $4,651,895    $4,593,612    ($36,645 $32,058   $175,798  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

AUM and Net Inflows (Outflows) by Investment Style

 

  AUM   Net Inflows (Outflows)   AUM   Net Inflows (Outflows) 
(in millions)  March 31,
2015
   December 31,
2014
   March 31,
2014
   Three
Months
Ended
March 31,
2015
 Twelve
Months
Ended
March 31,
2015
   June 30,
2015
   March 31,
2015
   December 31,
2014
   June 30,
2014
   Three
Months
Ended
June 30,
2015
 Six
Months
Ended
June 30,
2015
 Twelve
Months
Ended
June 30,
2015
 

Active

  $1,496,210    $1,453,613    $1,417,546    $31,547   $66,131    $1,496,571    $1,496,210    $1,453,613    $1,468,823    $12,711   $44,256   $68,471  

Index andiShares

   2,967,387     2,880,228     2,688,060     38,893    158,836     2,940,318     2,967,387     2,880,228     2,825,882     (20,014  18,880    111,170  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total long-term

   4,463,597     4,333,841     4,105,606     70,440    224,967     4,436,889     4,463,597     4,333,841     4,294,705     (7,303  63,136    179,641  
  

 

   

 

   

 

   

 

  

 

 

Cash management

   292,495     296,353     263,533     561    38,690     271,506     292,495     296,353     268,388     (23,890  (23,329  11,288  

Advisory(1)

   18,100     21,701     31,786     (2,297  (11,697   12,899     18,100     21,701     30,519     (5,452  (7,749  (15,131
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total

  $4,774,192    $4,651,895    $4,400,925    $68,704   $251,960    $4,721,294    $4,774,192    $4,651,895    $4,593,612    ($36,645 $32,058   $175,798  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

 

(1) 

Advisory AUM represents long-term portfolio liquidation assignments.

(2) 

Amounts include commodityiShares.

Component Changes in AUM for the Three Months Ended March 31,June 30, 2015

The following table presents the component changes in AUM by client type and product for the quarterthree months ended June 30, 2015.

(in millions)  March 31,
2015
   Net
inflows
(outflows)
  Market
change
  FX
impact(1)
   June 30,
2015
   Average
AUM(2)
 

Retail:

          

Equity

  $201,706    $300   ($400 $1,767    $203,373    $205,427  

Fixed income

   201,405     9,802    (2,688  537     209,056     206,177  

Multi-asset

   128,402     714    (312  384     129,188     129,864  

Alternatives

   19,467     (51  (47  76     19,445     19,381  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Retail subtotal

   550,980     10,765    (3,447  2,764     561,062     560,849  

iShares:

          

Equity

   824,336     8,808    (8,833  3,746     828,057     833,952  

Fixed income

   233,183     1,544    (6,089  2,097     230,735     234,884  

Multi-asset

   1,772     101    (31  2     1,844     1,833  

Alternatives

   14,839     397    (329  46     14,953     15,006  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

iShares subtotal

   1,074,130     10,850    (15,282  5,891     1,075,589     1,085,675  

Institutional:

          

Active:

          

Equity

   128,036     (1,761  (518  2,275     128,032     129,512  

Fixed income

   526,117     (760  (12,123  4,017     517,251     524,246  

Multi-asset

   257,084     4,418    (9,150  4,612     256,964     259,498  

Alternatives

   73,045     619    (953  525     73,236     73,190  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Active subtotal

   984,282     2,516    (22,744  11,429     975,483     986,446  

Index:

          

Equity

   1,373,052     (34,608  (3,072  10,483     1,345,855     1,379,088  

Fixed income

   467,775     2,261    (18,642  13,998     465,392     468,699  

Multi-asset

   8,054     (184  (926  69     7,013     7,617  

Alternatives

   5,324     1,097    (106  180     6,495     5,807  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Index subtotal

   1,854,205     (31,434  (22,746  24,730     1,824,755     1,861,211  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Institutional subtotal

   2,838,487     (28,918  (45,490  36,159     2,800,238     2,847,657  
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Long-term

   4,463,597     (7,303  (64,219  44,814     4,436,889    $4,494,181  

Cash management

   292,495     (23,890  26    2,875     271,506    

Advisory(3)

   18,100     (5,452  (136  387     12,899    
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

Total

  $4,774,192    ($36,645 ($64,329 $48,076    $4,721,294    
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

   

(1)

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

(2)

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

(3)

Advisory AUM represents long-term portfolio liquidation assignments.

The following table presents component changes in AUM by product for the three months ended June 30, 2015.

(in millions) March 31,
2015
  Net
inflows
(outflows)
  Market
change
  FX
impact(1)
  June 30,
2015
  Average
AUM(2)
 

Equity:

      

Active

 $298,118   ($2,079 ($450  $3,295   $298,884   $302,364  

iShares

  824,336    8,808    (8,833  3,746    828,057    833,952  

Non-ETF index

  1,404,676    (33,990  (3,540  11,230    1,378,376    1,411,663  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
Equity subtotal  2,527,130    (27,261  (12,823  18,271    2,505,317    2,547,979  

Fixed income:

      

Active

  720,094    9,089    (14,621  4,291    718,853    722,831  

iShares

  233,183    1,544    (6,089  2,097    230,735    234,884  

Non-ETF index

  475,203    2,214    (18,832  14,261    472,846    476,291  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fixed income subtotal

  1,428,480    12,847    (39,542  20,649    1,422,434    1,434,006  

Multi-asset

  395,312    5,049    (10,419  5,067    395,009    398,812  

Alternatives:

      

Core

  89,086    1,229    (1,014  653    89,954    89,582  

Currency and commodities(3)

  23,589    833    (421  174    24,175    23,802  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
Alternatives subtotal  112,675    2,062    (1,435  827    114,129    113,384  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Long-term

  4,463,597    (7,303  (64,219  44,814    4,436,889   $4,494,181  

Cash management

  292,495    (23,890  26    2,875    271,506   

Advisory(4)

  18,100    (5,452  (136  387    12,899   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total

 $4,774,192   ($36,645 ($64,329  $48,076   $4,721,294   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

(1)

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

(2)

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

(3)

Amounts include commodityiShares.

(4)

Advisory AUM represents long-term portfolio liquidation assignments.

AUM decreased $52.9 billion, or 1%, to $4.721 trillion at June 30, 2015 from $4.774 trillion at March 31, 2015, driven largely by net market depreciation and net outflows, partially offset by the impact of foreign exchange movements.

Net market depreciation of $64.3 billion included $39.5 billion from fixed income products, $12.8 billion from equity products and $10.4 billion from multi-asset products across the majority of strategies, reflecting elevated market volatility.

AUM increased $48.1 billion as a result of foreign exchange movements, primarily resulting from the weakening of the U.S. dollar, largely against the pound sterling and the euro.

Net Inflows (Outflows).    Long-term net outflows of $7.3 billion included $23.6 billion of net new business from active andiShares products that was more than offset by $30.9 billion of low-fee non-ETF index outflows. Net flows in long-term products are described below.

·

iShares net inflows of $10.9 billion included equity net inflows of $8.8 billion driven by demand for international developed market exposures. Fixed income net inflows of $1.5 billion reflected flows into investment grade corporate, U.S. aggregate and emerging markets bond funds.

·

Active fixed income net inflows of $9.1 billion were led by retail active fixed income net inflows of $9.8 billion. Net inflows were diversified across exposures, with $2.7 billion of inflows into unconstrained strategies, $1.6 billion into the High Yield suite and $1.2 billion into Total Return.

·

Multi-asset net inflows of $5.0 billion were led by $4.4 billion of institutional active net inflows, reflecting solutions-based insurance fundings in the quarter and ongoing demand for theLifePath® target-date suite.

·

Institutional index long-term net outflows of $31.4 billion were driven by equity net outflows of $34.6 billion linked to asset allocation, re-balancing and cash needs.

Cash management net outflows of $23.9 billion, driven by seasonal outflows, were primarily comprised of net outflows from Americas institutional clients in prime and government strategies and from EMEA institutional clients concentrated in offshore funds.

Advisory net outflows of $5.5 billion were driven by planned portfolio liquidations.

The following table presents component changes in AUM by client type and product for the six months ended June 30, 2015.

 

(in millions)  December 31,
2014
   Net
inflows
(outflows)
 Acquisition(1)   Market
change
 FX impact(2) March 31,
2015
   Average
AUM(3)
   December 31,
2014
   Net
inflows
(outflows)
 Acquisition(1)   Market
change
 FX
impact(2)
 June 30,
2015
   Average
AUM(3)
 

Retail:

                      

Equity

  $200,445    $332   $-    $5,102   ($4,173 $201,706    $201,052    $200,445    $631   $-    $4,703    ($2,406 $203,373    $203,459  

Fixed income

   189,820     12,787    -     962    (2,164  201,405     195,821     189,820     22,589    -     (1,726  (1,627  209,056     200,941  

Multi-asset

   125,341     1,402    -     2,426    (767  128,402     127,031     125,341     2,116    -     2,113    (382  129,188     128,454  

Alternatives

   18,723     (349  1,293     296    (496  19,467     18,671     18,723     (400  1,293     249    (420  19,445     18,963  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Retail subtotal

   534,329     14,172    1,293     8,786    (7,600  550,980     542,575     534,329     24,936    1,293     5,339    (4,835  561,062     551,817  

iShares:

                      

Equity

   790,067     16,725    -     28,200    (10,656  824,336     804,294     790,067     25,533    -     19,366    (6,909  828,057     818,378  

Fixed income

   217,671     18,595    -     2,591    (5,674  233,183     228,005     217,671     20,138    -     (3,498  (3,576  230,735     231,196  

Multi-asset

   1,773     (18  -     30    (13  1,772     1,827     1,773     83    -     (1  (11  1,844     1,838  

Alternatives

   14,717     176    -     49    (103  14,839     14,954     14,717     573    -     (280  (57  14,953     15,000  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

iShares subtotal

   1,024,228     35,478    -     30,870    (16,446  1,074,130     1,049,080     1,024,228     46,327    -     15,587    (10,553  1,075,589     1,066,412  

Institutional:

                      

Active:

                      

Equity

   125,143     168    -     6,206    (3,481  128,036     126,662     125,143     (1,593  -     5,688    (1,206  128,032     128,094  

Fixed income

   518,590     5,723    -     9,546    (7,742  526,117     525,711     518,590     4,964    -     (2,577  (3,726  517,251     524,816  

Multi-asset

   242,913     11,717    -     12,549    (10,095  257,084     250,197     242,913     16,135    -     3,400    (5,484  256,964     254,528  

Alternatives

   72,514     376    -     1,094    (939  73,045     72,734     72,514     995    -     140    (413  73,236     72,950  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Active subtotal

   959,160     17,984    -     29,395    (22,257  984,282     975,304     959,160     20,501    -     6,651    (10,829  975,483     980,388  

Index:

                      

Equity

   1,335,456     3,716    -     53,361    (19,481  1,373,052     1,354,904     1,335,456     (30,891  -     50,287    (8,997  1,345,855     1,366,131  

Fixed income

   467,572     (816  -     16,183    (15,164  467,775     469,931     467,572     1,444    -     (2,458  (1,166  465,392     469,534  

Multi-asset

   7,810     (309  -     818    (265  8,054     7,928     7,810     (493  -     (108  (196  7,013     7,732  

Alternatives

   5,286     215    -     (27  (150  5,324     5,359     5,286     1,312    -     (133  30    6,495     5,620  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Index subtotal

   1,816,124     2,806    -     70,335    (35,060  1,854,205     1,838,122     1,816,124     (28,628  -     47,588    (10,329  1,824,755     1,849,017  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Institutional subtotal

   2,775,284     20,790    -     99,730    (57,317  2,838,487     2,813,426     2,775,284     (8,127  -     54,239    (21,158  2,800,238     2,829,405  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Long-term

   4,333,841     70,440    1,293     139,386    (81,363  4,463,597    $4,405,081     4,333,841     63,136    1,293     75,165    (36,546  4,436,889    $4,447,634  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Cash management

   296,353     561    -     (42  (4,377  292,495       296,353     (23,329  -     (15  (1,503  271,506    

Advisory(4)

   21,701     (2,297  -     526    (1,830  18,100       21,701     (7,749  -     391    (1,444  12,899    
  

 

   

 

  

 

   

 

  

 

  

 

     

 

   

 

  

 

   

 

  

 

  

 

   

Total

  $4,651,895    $68,704   $1,293    $139,870   ($87,570 $4,774,192      $4,651,895    $32,058   $1,293    $75,541    ($39,493 $4,721,294    
  

 

   

 

  

 

   

 

  

 

  

 

     

 

   

 

  

 

   

 

  

 

  

 

   

 

(1) 

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

(2) 

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

(3) 

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

(4) 

Advisory AUM represents long-term portfolio liquidation assignments.

The following table presents component changes in AUM by product for the threesix months ended March 31,June 30, 2015.

 

(in millions) December 31,
2014
 Net
inflows
(outflows)
 Acquisition(1) Market
change
 FX
impact(2)
 March 31,
2015
 
Average
AUM(3)
  December 31,
2014
 Net
inflows
(outflows)
 Acquisition(1) Market
change
 FX
impact(2)
 June 30,
2015
 Average
AUM(3)
 

Equity:

              

Active

 $292,802   $546   $-   $11,445    ($6,675 $298,118   $295,297   $292,802   ($1,533 $-   $10,995    ($  3,380 $298,884   $298,932  

iShares

  790,067    16,725    -    28,200    (10,656  824,336    804,294    790,067    25,533    -    19,366    (6,909  828,057    818,378  

Non-ETF index

  1,368,242    3,670    -    53,224    (20,460  1,404,676    1,387,321    1,368,242    (30,320  -    49,683    (9,229  1,378,376    1,398,752  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Equity subtotal

  2,451,111    20,941    -    92,869    (37,791  2,527,130    2,486,912    2,451,111    (6,320  -    80,044    (19,518  2,505,317    2,516,062  

Fixed income:

              

Active

  701,324    17,855    -    10,447    (9,532  720,094    714,317    701,324    26,944    -    (4,174  (5,241  718,853    718,356  

iShares

  217,671    18,595    -    2,591    (5,674  233,183    228,005    217,671    20,138    -    (3,498  (3,576  230,735    231,196  

Non-ETF index

  474,658    (161  -    16,244    (15,538  475,203    477,146    474,658    2,053    -    (2,587  (1,278  472,846    476,935  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Fixed income subtotal

  1,393,653    36,289    -    29,282    (30,744  1,428,480    1,419,468    1,393,653    49,135    -    (10,259  (10,095  1,422,434    1,426,487  

Multi-asset

  377,837    12,792    -    15,823    (11,140  395,312    386,983    377,837    17,841    -    5,404    (6,073  395,009    392,552  

Alternatives:

              

Core

  88,006    (201  1,293    1,425    (1,437  89,086    88,062    88,006    1,028    1,293    411    (784  89,954    88,784  

Currency and commodities(4)

  23,234    619    -    (13  (251  23,589    23,656    23,234    1,452    -    (435  (76  24,175    23,749  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Alternatives subtotal

  111,240    418    1,293    1,412    (1,688  112,675    111,718    111,240    2,480    1,293    (24  (860  114,129    112,533  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Long-term

  4,333,841    70,440    1,293    139,386    (81,363  4,463,597   $4,405,081    4,333,841    63,136    1,293    75,165    (36,546  4,436,889   $4,447,634  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Cash management

  296,353    561    -    (42  (4,377  292,495     296,353    (23,329  -    (15  (1,503  271,506   

Advisory(5)

  21,701    (2,297  -    526    (1,830  18,100     21,701    (7,749  -    391    (1,444  12,899   
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

Total

 $4,651,895   $68,704   $1,293   $139,870    ($87,570 $4,774,192    $4,651,895   $32,058   $1,293   $75,541    ($39,493 $4,721,294   
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

(1) 

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

(2) 

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

(3) 

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

(4) 

Amounts include commodityiShares.

(5) 

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased $122.3$69.4 billion, or 3%1%, to $4.774$4.721 trillion at March 31,June 30, 2015 from $4.652 trillion at December 31, 2014, driven largely by net market appreciation and positive net inflows, partially offset by negative foreign exchange movements.

Net market appreciation of $139.9$75.5 billion included $92.9$80.0 billion from equity products due to higher U.S. and global equity markets, and $29.3partially offset by $10.3 billion of net market depreciation from fixed income products.

AUM decreased $87.6$39.5 billion from foreign exchange movements, primarily resulting from the strengthening of the U.S. dollar, largely against the euro and pound sterling.euro.

Net Inflows (Outflows).    NetLong-term net inflows of $68.7$63.1 billion reflected $70.4were driven by $90.6 billion of long-term net inflows across all client types, including $35.5 billion, $20.8 billionfrom active and $14.2 billion fromiShares institutional and retail clients, respectively.products, partially offset by $27.4 billion of low-fee non-ETF index outflows. Net inflowsflows in long-term products of $70.4 billion reflected the following:are described below.

 

 ·  

iShares net inflows of $35.5$46.3 billion which were led by fixed incomeequity net inflows of $18.6$25.5 billion diversified across exposures and geographies. Equity net inflows of $16.7 billion were driven by the Core Series as well asand demand for European equities;regional and country specific strategies. Fixed income net inflows of $20.1 billion were diversified across exposures and geographies.

 ·  

Active fixed income net inflows of $17.9$26.9 billion which were led by retail active fixed income net inflows of $12.1$22.0 billion. Active fixed income net inflows were diversified across exposures and included strong flowsnet inflows into the unconstrained Strategic Income Opportunities fund, high yield products and the Total Return fund. Institutional active fixed income net inflows of $5.7 billion were driven by unconstrained and total return mandates; and

 ·  

Multi-asset net inflows of $12.8$17.8 billion were driven by $11.7$16.1 billion of institutional active net inflows, reflecting strong solutions-based insurance wins and ongoing demand for theLifePath® target-date product suite.

Cash Management Net Inflows.
·

Institutional index long-term net outflows of $28.6 billion were driven by equity net outflows of $30.9 billion linked to asset allocation, re-balancing and cash needs.

Cash management net inflowsoutflows of $0.6$23.3 billion were primarily comprised of net inflows from EMEA institutional clients concentrated in offshore funds, partially offset by net outflows from Americas institutional clients from prime and government strategies.strategies and net outflows from EMEA institutional clients concentrated in offshore funds.

Advisory Net Outflows.Advisory net outflows of $2.3$7.7 billion were driven by portfolio liquidations.

Component Changes in AUM for the Twelve Months Ended March 31,June 30, 2015

The following table presents the component changes in AUM by client type and product for the twelve months ended March 31,June 30, 2015.

 

(in millions)  March 31,
2014
   Net
inflows
(outflows)
 Acquisition(1)   Market
change
 FX
impact(2)
 March 31,
2015
   
Average
AUM(3)
   June 30,
2014
   Net
inflows
(outflows)
 Acquisition(1)   Market
change
 FX
impact(2)
 June 30,
2015
   Average
AUM(3)
 

Retail:

                      

Equity

  $208,238    ($269 $-    $4,219    ($10,482 $201,706    $206,939    $216,469    ($1,493 $-    ($2,188  ($9,415 $203,373    $206,230  

Fixed income

   160,448     43,724    -     1,806    (4,573  201,405     180,458     172,672     43,394    -     (2,909  (4,101  209,056     190,498  

Multi-asset

   121,548     11,131    -     (2,418  (1,859  128,402     125,831     126,392     10,813    -     (6,433  (1,584  129,188     127,589  

Alternatives

   18,483     528    1,293     316    (1,153  19,467     18,897     18,969     36    1,293     210    (1,063  19,445     19,010  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Retail subtotal

   508,717     55,114    1,293     3,923    (18,067  550,980     532,125     534,502     52,750    1,293     (11,320  (16,163  561,062     543,327  

iShares:

                      

Equity

   723,973     75,417    -     48,942    (23,996  824,336     775,337     774,053     63,589    -     11,662    (21,247  828,057     798,383  

Fixed income

   188,022     51,979    -     4,635    (11,453  233,183     210,296     200,519     44,049    -     (4,133  (9,700  230,735     219,806  

Multi-asset

   1,437     311    -     45    (21  1,772     1,649     1,624     278    -     (33  (25  1,844     1,731  

Alternatives

   16,948     614    -     (2,450  (273  14,839     16,090     17,636     810    -     (3,259  (234  14,953     15,659  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

iShares subtotal

   930,380     128,321    -     51,172    (35,743  1,074,130     1,003,372     993,832     108,726    -     4,237    (31,206  1,075,589     1,035,579  

Institutional:

                      

Active:

                      

Equity

   132,374     (10,447  -     14,632    (8,523  128,036     129,656     133,780     (7,694  -     9,369    (7,423  128,032     129,195  

Fixed income

   509,692     5,802    -     32,841    (22,218  526,117     520,137     523,665     4,191    -     9,904    (20,509  517,251     522,187  

Multi-asset

   223,865     24,701    -     30,326    (21,808  257,084     241,399     239,207     23,863    -     11,891    (17,997  256,964     248,591  

Alternatives

   73,723     118    -     1,911    (2,707  73,045     72,917     73,781     1,319    -     548    (2,412  73,236     72,828  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Active subtotal

   939,654     20,174    -     79,710    (55,256  984,282     964,109     970,433     21,679    -     31,712    (48,341  975,483     972,801  

Index:

                      

Equity

   1,283,349     4,819    -     141,113    (56,229  1,373,052     1,331,971     1,338,283     (21,851  -     81,155    (51,732  1,345,855     1,351,919  

Fixed income

   430,852     15,567    -     59,601    (38,245  467,775     453,205     443,869     17,031    -     34,857    (30,365  465,392     460,652  

Multi-asset

   6,381     563    -     2,124    (1,014  8,054     7,284     7,250     5    -     766    (1,008  7,013     7,498  

Alternatives

   6,273     409    -     (997  (361  5,324     5,948     6,536     1,301    -     (1,078  (264  6,495     5,857  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Index subtotal

   1,726,855     21,358    -     201,841    (95,849  1,854,205     1,798,408     1,795,938     (3,514  -     115,700    (83,369  1,824,755     1,825,926  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Institutional subtotal

   2,666,509     41,532    -     281,551    (151,105  2,838,487     2,762,517     2,766,371     18,165    -     147,412    (131,710  2,800,238     2,798,727  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Long-term

   4,105,606     224,967    1,293     336,646    (204,915  4,463,597    $4,298,014     4,294,705     179,641    1,293     140,329    (179,079  4,436,889    $4,377,633  
  

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Cash management

   263,533     38,690    -     546    (10,274  292,495       268,388     11,288    -     193    (8,363  271,506    

Advisory(4)

   31,786     (11,697  -     1,400    (3,389  18,100       30,519     (15,131  -     1,094    (3,583  12,899    
  

 

   

 

  

 

   

 

  

 

  

 

     

 

   

 

  

 

   

 

  

 

  

 

   

Total

  $4,400,925    $251,960   $1,293    $338,592    ($218,578 $4,774,192      $4,593,612    $175,798   $1,293    $141,616    ($191,025 $4,721,294    
  

 

   

 

  

 

   

 

  

 

  

 

     

 

   

 

  

 

   

 

  

 

  

 

   

 

(1) 

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

(2) 

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

(3) 

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

(4) 

Advisory AUM represents long-term portfolio liquidation assignments.

The following table presents component changes in AUM by product for the twelve months ended March 31,June 30, 2015.

 

(in millions) March 31,
2014
 Net
inflows
(outflows)
 Acquisition(1) Market
change
 FX
impact(2)
 March 31,
2015
 
Average
AUM(3)
  June 30,
2014
 Net
inflows
(outflows)
 Acquisition(1) Market
change
 FX
impact(2)
 June 30,
2015
 Average
AUM(3)
 

Equity:

              

Active

 $314,850   ($17,420 $-   $17,196    ($  16,508 $298,118   $306,332   $320,830   ($14,157 $-   $6,911    ($  14,700 $298,884   $303,735  

iShares

  723,973    75,417    -    48,942    (23,996  824,336    775,337    774,053    63,589    -    11,662    (21,247  828,057    798,383  

Non-ETF index

  1,309,111    11,523    -    142,768    (58,726  1,404,676    1,362,234    1,367,702    (16,881  -    81,425    (53,870  1,378,376    1,383,609  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Equity subtotal

  2,347,934    69,520    -    208,906    (99,230  2,527,130    2,443,903    2,462,585    32,551    -    99,998    (89,817  2,505,317    2,485,727  

Fixed income:

              

Active

  665,151    47,006    -    33,861    (25,924  720,094    694,165    689,724    46,529    -    6,490    (23,890  718,853    705,640  

iShares

  188,022    51,979    -    4,635    (11,453  233,183    210,296    200,519    44,049    -    (4,133  (9,700  230,735    219,806  

Non-ETF index

  435,841    18,087    -    60,387    (39,112  475,203    459,635    450,482    18,087    -    35,362    (31,085  472,846    467,697  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Fixed income subtotal

  1,289,014    117,072    -    98,883    (76,489  1,428,480    1,364,096    1,340,725    108,665    -    37,719    (64,675  1,422,434    1,393,143  

Multi-asset

  353,231    36,706    -    30,077    (24,702  395,312    376,163    374,473    34,959    -    6,191    (20,614  395,009    385,409  

Alternatives:

              

Core

  87,865    926    1,293    2,426    (3,424  89,086    88,189    88,758    1,882    1,293    948    (2,927  89,954    88,513  

Currency and commodities(4)

  27,562    743    -    (3,646  (1,070  23,589    25,663    28,164    1,584    -    (4,527  (1,046  24,175    24,841  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Alternatives subtotal

  115,427    1,669    1,293    (1,220  (4,494  112,675    113,852    116,922    3,466    1,293    (3,579  (3,973  114,129    113,354  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Long-term

  4,105,606    224,967    1,293    336,646    (204,915  4,463,597   $4,298,014    4,294,705    179,641    1,293    140,329    (179,079  4,436,889   $4,377,633  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Cash management

  263,533    38,690    -    546    (10,274  292,495     268,388    11,288    -    193    (8,363  271,506   

Advisory(5)

  31,786    (11,697  -    1,400    (3,389  18,100     30,519    (15,131  -    1,094    (3,583  12,899   
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

Total

 $4,400,925   $251,960   $1,293   $338,592    ($218,578 $4,774,192    $4,593,612   $175,798   $1,293   $141,616    ($191,025 $4,721,294   
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

(1) 

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

(2) 

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

(3) 

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

(4) 

Amounts include commodityiShares.

(5) 

Advisory AUM represents long-term portfolio liquidation assignments.

AUM increased $373.3$127.7 billion, or 8%3%, to $4.774$4.721 trillion at March 31,June 30, 2015 from $4.401$4.594 trillion at March 31,June 30, 2014, driven largely by positive net inflows and net market appreciation, and positive net inflows, partially offset by negative foreign exchange movements.

Net market appreciation of $338.6$141.6 billion reflected $208.9$100.0 billion of growth from equity products, primarily due to higher U.S. and global equity markets, and net appreciation in fixed income and multi-asset products of $98.9$37.7 billion, and $30.1 billion, respectively, across the majority of strategies.

AUM decreased $218.6$191.0 billion from foreign exchange movements primarily resulting from the strengthening of the U.S. dollar, largely against the euro, pound sterling and Japanese yen.

Net Inflows (Outflows).    NetLong-term net inflows of $252.0$179.6 billion reflected $225.0 billion of long-term net inflowswere across all client types, including $128.3$108.7 billion, $55.1$52.8 billion and $41.5$18.2 billion fromiShares, retail and institutional clients, respectively. Net inflowsflows in long-term products of $225.0 billion reflected the following:

Net Inflowsare described below.

 

 · 

iShares net inflows of $128.3$108.7 billion includingincluded equityiShares and fixed incomeiShares net inflows of $75.4$63.6 billion and $52.0$44.0 billion, respectively.EquityiSharesnet inflows were led by the Core Series and developed-markets equity offerings. Strong demand forFixed incomeiSharesnet inflows were diversified across exposures, led by strong net inflows into U.S. sector specific, local currency and U.S. Sector-specific mandates drove fixed incomeiShares net inflows;core strategies.

 · 

Active fixed income net inflows of $47.0$46.5 billion were led by retail active fixed income net inflows of $41.2$42.3 billion, which reflected strong interest in unconstrained fixed income, high yield and core bond offerings;offerings.

 · 

Multi-asset net inflows of $36.7$35.0 billion were led by $24.7$23.9 billion of institutional active net inflows, which reflected strong demand for theLifePath target-date series, the dynamic diversified growth strategy and solutions-based insurance mandates. Retail net inflows of $11.1$10.8 billion were concentrated in the Multi-Asset Income funds;fund family.

 · 

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

 ·

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

Net Outflows

· 

Active equity net outflows of $17.4$14.2 billion were driven by fundamental equity outflows of $16.4$14.9 billion.

Non-ETF index equity net outflows of $16.9 billion were driven by institutional index net outflows linked to asset allocation, re-balancing and cash needs.

Cash Management Net Inflows.Cash management net inflows of $38.7$11.3 billion were primarily comprised of net inflows from Americas institutional clients into government and prime strategies, andpartially offset by net inflowsoutflows from EMEA institutional clients infrom offshore funds.

Advisory Net Outflows.Advisory net outflows of $11.7$15.1 billion were driven by portfolio liquidations.

DISCUSSION OF FINANCIAL RESULTS

The Company’s results of operations for the three and six months ended March 31,June 30, 2015 and 2014 are discussed below. For a further description of the Company’s revenue and expense, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”).

Revenue

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
(in millions)       2015             2014        2015   2014   2015   2014 

Investment advisory, administration fees and securities lending revenue:

            

Equity:

            

Active

  $422    $463    $447    $478    $869    $941  

iShares

   684     634     728     677     1,412     1,311  

Non-ETF index

   163     158     190     183     353     341  
  

 

   

 

   

 

   

 

   

 

   

 

 

Equity subtotal

   1,269     1,255     1,365     1,338     2,634     2,593  

Fixed income:

            

Active

   373     324     387     346     760     670  

iShares

   130     113     138     122     268     235  

Non-ETF index

   68     58     72     71     140     129  
  

 

   

 

   

 

   

 

   

 

   

 

 

Fixed income subtotal

   571     495     597     539     1,168     1,034  

Multi-asset

   304     286     316     300     620     586  

Alternatives:

            

Core

   154     159     161     161     315     320  

Currency and commodities

   19     22     19     23     38     45  
  

 

   

 

   

 

   

 

   

 

   

 

 

Alternatives subtotal

   173     181     180     184     353     365  
  

 

   

 

   

 

   

 

   

 

   

 

 

Long-term

   2,317     2,217     2,458     2,361     4,775     4,578  

Cash management

   73     74     76     73     149     147  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total base fees

   2,390     2,291     2,534     2,434     4,924     4,725  

Investment advisory performance fees:

            

Equity

   37     22     61     31     98     53  

Fixed income

   4     8     3     5     7     13  

Multi-asset

   8     3     8     10     16     13  

Alternatives

   59     125     64     69     123     194  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   108     158  

Total performance fees

   136     115     244     273  

BlackRock Solutionsand advisory

   147     154     161     146     308     300  

Distribution fees

   17     19     13     18     30     37  

Other revenue

   61     48     61     65     122     113  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total revenue

  $2,723    $2,670    $2,905    $2,778    $5,628    $5,448  
  

 

   

 

   

 

   

 

   

 

   

 

 

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

 

  Mix of Base Fees    Mix of Average AUM
by Asset Class(1)
   Three Months Ended June 30, Six Months Ended June 30, 
  Three months ended March 31,    Three months
ended March 31,
       Mix of Base Fees         Mix of Average AUM
      by Asset Class(1)      
     Mix of Base Fees         Mix of Average AUM
      by Asset Class(2)      
 
  2015 2014    2015 2014   2015 2014     2015 2014 2015 2014     2015 2014 

Equity:

                      

Active

   17  20    7  7   19  19     6  7  18  20     6  7

iShares

   29  28    17  17   29  28     17  17  29  28     17  17

Non-ETF index

   7  7    29  30   7  8     30  30  7  7     30  30
  

 

  

 

    

 

  

 

   

 

  

 

     

 

  

 

  

 

  

 

     

 

  

 

 

Equity subtotal

   53  55    53  54   55  55     53  54  54  55     53  54

Fixed income:

                      

Active

   16  14    15  15   15  14     16  15  15  14     15  15

iShares

   5  5    5  4   5  5     5  4  5  5     5  4

Non-ETF index

   3  3    10  10   3  3     10  10  3  3     10  10
  

 

  

 

    

 

  

 

   

 

  

 

     

 

  

 

  

 

  

 

     

 

  

 

 

Fixed income subtotal

   24  22    30  29   23  22     31  29  23  22     30  29

Multi-asset

   13  12    8  8   12  12     8  8  13  12     8  8

Alternatives:

                      

Core

   6  7    2  2   6  7     2  2  6  7     2  2

Currency and commodities

   1  1    1  1   1  1     0  1  1  1     1  1
  

 

  

 

    

 

  

 

   

 

  

 

     

 

  

 

  

 

  

 

     

 

  

 

 

Alternatives subtotal

   7  8    3  3   7  8     2  3  7  8     3  3
  

 

  

 

    

 

  

 

   

 

  

 

     

 

  

 

  

 

  

 

     

 

  

 

 

Long-term

   97  97    94  94   97  97     94  94  97  97     94  94
  

 

  

 

    

 

  

 

 

Cash management

   3  3    6  6   3  3     6  6  3  3     6  6
  

 

  

 

    

 

  

 

   

 

  

 

     

 

  

 

  

 

  

 

     

 

  

 

 

Total excluding Advisory AUM

   100  100    100  100   100  100     100  100  100  100     100  100
  

 

  

 

    

 

  

 

   

 

  

 

     

 

  

 

  

 

  

 

     

 

  

 

 

 

(1) 

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

(2)

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

Three Months Ended March 31,June 30, 2015 Compared with Three Months Ended March 31,June 30, 2014

Revenue increased $53$127 million, or 2%5%, from the firstsecond quarter of 2014, reflecting strongdriven by base fees, strength in performance fees andBlackRock Solutions and advisory revenue.

Investment advisory, administration fees and securities lending revenue of $2,534 million increased $100 million from $2,434 million in the second quarter of 2014 driven by organic growth and market appreciation, which outpaced the impact of divergent beta and foreign exchange movements,movements. Securities lending fees of $147 million increased $7 million from the second quarter of 2014.

Investment advisory performance fees of $136 million increased $21 million from the second quarter of 2014, primarily reflecting higher fees from equity products.

BlackRock Solutions and advisory revenue of $161 million increased $15 million from $146 million in the second quarter of 2014 due to higher revenue fromAladdin®.BlackRock Solutions and advisory revenue included $129 million inAladdin revenue compared with $113 million in the second quarter of 2014.

Six Months Ended June 30, 2015 Compared with Six Months Ended June 30, 2014

Revenue increased $180 million, or 3%, from the six months ended June 30, 2014, driven by base fees, partially offset by a decline in performance fees.

Investment advisory, administration fees and securities lending revenue of $2,390$4,924 million for the current quarter increased $99$199 million from $2,291$4,725 million in the first quarter ofsix months ended June 30, 2014 driven by strong organic growth and market appreciation, which outpaced the impact of divergent beta and foreign exchange movements.due to higher long-term average AUM. Securities lending fees of $114$261 million in the current quartersix months ended June 30, 2015 increased $9$16 million from the first quarter of 2014, primarily reflecting an increase in average balances of securities on loan.prior year period.

Investment advisory performance fees of $108were $244 million compared with $273 million in the six months ended June 30, 2014. The current quarter decreased $50 millionperiod reflected higher fees from the first quarter of 2014, primarily due toequity products which were more than offset by the impact of a large fee associated with the liquidation of a closed-end mortgage fund in last year’s first quarter.2014.

BlackRock Solutions and advisory revenue of $147totaled $308 million compared with $300 million in the six months ended June 30, 2014. The current quarter decreased $7 million from $154 million in the first quarter of 2014 due to reduced Financial Markets Advisory Services (“FMA”)period reflected higher revenue from disposition-related advisory assignments,Aladdin, partially offset by higherlower revenue from theAladdin platform.advisory assignments.BlackRock Solutions and advisory revenue included $126$255 million inAladdin revenue in the current quartersix months ended June 30, 2015 compared with $112$225 million in the first quarter of 2014.prior year period.

Expense

 

  Three Months Ended
March 31,
   Three Months Ended,
June 30,
   Six Months Ended
June 30,
 
(in millions)  2015   2014       2015           2014       2015   2014 

Expense, GAAP:

            

Employee compensation and benefits

  $981    $982    $1,012    $948    $1,993    $1,930  

Distribution and servicing costs

   99     89     105     89     204     178  

Amortization of deferred sales commissions

   13     15     12     14     25     29  

Direct fund expense

   189     179     191     187     380     366  

General and administration:

            

Marketing and promotional

   95     89     80     109     175     197  

Occupancy and office related

   67     62     69     72     136     133  

Portfolio services

   54     50     53     54     107     104  

Technology

   41     41     39     43     80     84  

Professional services

   29     25     22     31     51     55  

Communications

   9     10     9     10     18     20  

Other general and administration

   44     36     40     58     84     97  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total general and administration expense

   339     313     312     377     651     690  

Amortization of intangible assets

   35     41     35     41     70     82  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total expense, GAAP

  $1,656    $1,619    $1,667    $1,656    $3,323    $3,275  
  

 

   

 

   

 

   

 

   

 

   

 

 

Less non-GAAP expense adjustments:

            

Employee compensation and benefits:

            

PNC LTIP funding obligation

   8     8     8     8     16     16  

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

   2     3     2     3     4     6  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total non-GAAP expense adjustments

   10     11     10     11     20     22  

Expense, as adjusted:

            

Employee compensation and benefits

   971     971    $1,002    $937    $1,973    $1,908  

Distribution and servicing costs

   99     89     105     89     204     178  

Amortization of deferred sales commissions

   13     15     12     14     25     29  

Direct fund expense

   189     179     191     187     380     366  

General and administration

   339     313     312     377     651     690  

Amortization of intangible assets

   35     41     35     41     70     82  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total expense, as adjusted

  $1,646    $1,608    $1,657    $1,645    $3,303    $3,253  
  

 

   

 

   

 

   

 

   

 

   

 

 

Three Months Ended March 31,June 30, 2015 Compared with Three Months Ended March 31,June 30, 2014

GAAP.    Expense increased $37$11 million, or 2%1%, from the firstsecond quarter of 2014, primarily reflecting higher revenue-related expense, including employee compensation and benefits expense, partially offset by lower general and administration expense.

Employee compensation and benefits expense decreased $1increased $64 million from the firstsecond quarter of 2014, reflecting higher headcount and higher incentive compensation driven by higher operating income, partially offset by the impact of foreign exchange movements, partially offset by higher headcount.movements. Employees at March 31,June 30, 2015 totaled approximately 12,30012,400 compared with approximately 11,50011,600 at March 31,June 30, 2014.

Distribution and servicing costs totaled $99$105 million in the current quarter compared with $89 million in the firstsecond quarter of 2014. These costs included payments to Bank of America/Merrill Lynch under a global distribution agreement and payments to PNC, as well as other third parties, primarily associated with the distribution and servicing of client investments in certain BlackRock products. Distribution and servicing costs for the firstsecond quarter of 2015 and 2014 included $47$49 million and $46$45 million, respectively, attributable to Bank of America/Merrill Lynch.

General and administration expense increased $26decreased $65 million from the firstsecond quarter of 2014, primarily reflecting higherlower marketing and promotional expense higher portfolio and professional services expense,in the current quarter and the impact of a benefit from the reversal of a real estate-related retirement obligation which was no longer required to be fundedelevated legal and regulatory expense in last year’s firstsecond quarter.

As Adjusted.    Expense, as adjusted, increased $38$12 million, or 2%1%, to $1,646$1,657 million from $1,645 million in the current quarter from $1,608 million in the firstsecond quarter of 2014. The increase in total expense, as adjusted, is primarily attributable to higher revenue-related expense, including employee compensation and benefits expense, partially offset by lower general and administration expense.

Six Months Ended June 30, 2015 Compared with Six Months Ended June 30, 2014

GAAP.    Expense increased $48 million, or 1%, from the six months ended June 30, 2014, primarily reflecting higher revenue-related expense, including compensation and benefits expense and distributions and servicing costs, partially offset by lower general and administration expense.

Employee compensation and benefits expense increased $63 million, or 3%, to $1,993 million from $1,930 million in the six months ended June 30, 2014, reflecting higher headcount and higher incentive compensation driven by higher operating income.

Distribution and servicing costs increased $26 million, or 15%, to $204 million in the six months ended June 30, 2015 from $178 million in the prior year period, driven by higher average AUM. These costs included payments to Bank of America/Merrill Lynch under a global distribution agreement and payments to PNC, as well as other third parties, primarily associated with the distribution and servicing of client investments in certain BlackRock products. Distribution and servicing costs for the second quarter of 2015 and 2014 included $96 million and $91 million, respectively, attributable to Bank of America/Merrill Lynch.

General and administration expense decreased $39 million from the six months ended June 30, 2014, primarily reflecting lower marketing and promotional expense, lower legal and regulatory expense and the impact of foreign exchange movements.

As Adjusted.    Expense, as adjusted, increased $50 million, or 2%, to $3,303 million in the six months ended June 30, 2015 from $3,253 million in the prior year period. The increase in total expense, as adjusted, is primarily attributable to higher revenue-related expense, including compensation and benefits expense and distribution and servicing costs, partially offset by lower general and administration expense.

NONOPERATING RESULTS

Nonoperating income (expense), less net income (loss) attributable to NCI for the quartersthree and six months ended March 31,June 30, 2015 and 2014 was as follows:

 

  Three Month Ended
March 31,
   Three Months Ended
June 30,
 Six Months Ended
June 30,
 
(in millions)    2015     2014       2015     2014     2015     2014   

Nonoperating income (expense), GAAP basis(1)

   $51    $17     ($41  $16    ($25  $33  

Less: Net income (loss) attributable to NCI

   38    (12   7    33    10    21  
  

 

  

 

   

 

  

 

  

 

  

 

 

Nonoperating income (expense)(2)

   13    29     (48  (17  (35  12  

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

   (2  (3   (2  (3  (4  (6
  

 

  

 

   

 

  

 

  

 

  

 

 

Nonoperating income (expense), as adjusted(2)

         $11          $26           ($50        ($20        ($39        $6  
  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1) 

Amounts included gains of $35$12 million and losses of $16$28 million attributable to consolidated variable interest entities (“VIEs”) for the three months ended March 31,June 30, 2015 and 2014, respectively. Amounts included gains of $16 million and $12 million attributable to consolidated VIEs for the six months ended June 30, 2015 and 2014, respectively.

(2) 

Net of net income (loss) attributable to NCI.

The components of nonoperating income (expense), less net income (loss) attributable to NCI, for the quartersthree and six months ended March 31,June 30, 2015 and 2014 were as follows:

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
 Six Months Ended
June 30,
 
(in millions)      2015         2014           2015         2014         2015         2014     

Net gain (loss) on investments(1)

        

Private equity

   $1    $44     $9    $12    $10    $56  

Real estate

   2    2               2              8              4            10  

Other alternatives(2)

   4    21     -    14    4    35  

Other investments(3)

   6    2     (14  3    (8  5  
  

 

  

 

   

 

  

 

  

 

  

 

 

Subtotal

           13            69     (3  37    10    106  

Other gains(4)

   45    -     -    -    45    -  

Investments related to deferred compensation plans

   2    3     2    3    4    6  
  

 

  

 

   

 

  

 

  

 

  

 

 

Total net gain (loss) on investments(1)

   60    72     (1  40    59    112  

Interest and dividend income

   4    10     5    3    9    13  

Interest expense

   (51  (53   (52  (60  (103  (113
  

 

  

 

   

 

  

 

  

 

  

 

 

Net interest expense

   (47  (43   (47  (57  (94  (100
  

 

  

 

   

 

  

 

  

 

  

 

 

Total nonoperating income (expense)(1)

   13    29     (48  (17  (35  12  

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

   (2  (3   (2  (3  (4  (6
  

 

  

 

   

 

  

 

  

 

  

 

 

Nonoperating income (expense), as adjusted(1)

   $11    $26     ($50  ($20  ($39  $6  
  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1) 

Net of net income (loss) attributable to NCI. Amounts for the three and six months ended June 30, 2015 also include net gain (loss) on consolidated VIEs.

(2) 

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

(3) 

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

(4) 

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

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

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

Three Months Ended June 30, 2015 Compared with Three Months Ended June 30, 2014

Net gainsloss on investments of $60$1 million in the current quarter decreased $12$41 million from the firstsecond quarter of 2014 due to lower marks in the second quarter of 2015.

Six Months Ended June 30, 2015 Compared with Six Months Ended June 30, 2014

Net gains on investments of $59 million in the six months ended June 30, 2015 decreased $53 million from the prior year period due to lower net positive marks in the first quartersix months ended June 30, 2015. The six months ended June 30, 2015 included a $40 million gain related to the BKCA acquisition and the six months ended June 30, 2014 included the positive impact of 2015.the monetization of a non-strategic, opportunistic private equity investment.

Income Tax Expense

 

  GAAP As Adjusted 
(in millions)  GAAP
Three Months Ended
March 31,
 As adjusted
Three Months Ended
March 31,
   Three Months Ended
June 30,
 Six Months Ended
June 30,
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 
      2015         2014         2015         2014           2015         2014         2015         2014         2015         2014         2015         2014     

Income before income taxes(1)

  $1,080   $1,080   $1,088   $1,088    $1,190   $1,105   $2,270   $2,185   $1,198   $1,113   $2,286   $2,201  

Income tax expense

  $258   $324   $258   $326    $371   $297   $629   $621   $360   $276   $618   $602  

Effective tax rate

   23.9  30.0  23.7  30.0   31.2  26.8  27.7  28.4  30.1  24.8  27.0  27.4

 

(1) 

Net of net income (loss) attributable to NCI.

IncomeThe three and six months ended June 30, 2015 included $13 million and $16 million, respectively, of net noncash tax expense primarily related to the revaluation of certain deferred tax liabilities, which has been excluded from as adjusted results. In addition, income tax expense in the first quarter ofsix months ended June 30, 2015 benefited from $69 million of nonrecurring items.

The three and six months ended June 30, 2014 GAAP tax rate included a $23 million net noncash expense, primarily associated with the revaluation of certain deferred tax liabilities arising from the state and local tax effect of changes in the Company’s organizational structure, which has been excluded from as adjusted results. In addition, the three and six months ended June 30, 2014 GAAP tax rate benefited from an improvement in the geographic mix of earnings and included a $34 million net tax benefit related to several favorable nonrecurring items.

BALANCE SHEET OVERVIEW

As Adjusted Balance Sheet

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

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

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

Separate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. The Company records equal and offsetting separate account liabilities. The separate account assets are not available to creditors of the Company and the holders of the pension contracts have no recourse to the Company’s assets. The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the Company’s condensed consolidated statements of income. While BlackRock has no economic interest in these assets or liabilities, BlackRock earns an investment advisory fee for the service of managing these assets on behalf of the clients.

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

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

Consolidated VIEs

At March 31, 2015, BlackRock’s consolidated VIEs included multiple CLOs and one private investment fund. The assets of these VIEs are not available to creditors of the Company and the Company has no obligation to settle the liabilities of the VIEs. While BlackRock has no material economic interest in these assets or liabilities, BlackRock earns an investment advisory fee, as well as a potential performance fee, for the service of managing these assets on behalf of clients. See Note 2,Significant Accounting Policies- Recent Accounting Pronouncements Not Yet Adopted, for further information on ASU 2015-02.

Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds. accounted for as voting rights entities (“VREs”) and VIEs, (collectively, “Consolidated Funds”). See Note 2,Significant Accounting Policies, in the condensed consolidated financial statements contained in Part I, Item I of this filing for further information of the Company’s consolidation policy.

The Company can notcannot readily access cash and cash equivalents or other assets held by consolidated sponsored investment fundsConsolidated Funds to use in its operating activities. In addition, the Company can notcannot readily sell investments held by consolidated sponsored investment fundsConsolidated Funds in order to obtain cash for use in the Company’s operations.

 

 March 31, 2015 
   Segregated client assets
generating advisory fees in
which BlackRock has no
economic interest or
liability
    June 30, 2015 
(in millions) GAAP
Basis
 Separate
Account
Assets/
Collateral
 Consolidated
VIEs
 Consolidated
Sponsored
Investment
Funds
 As
Adjusted
  GAAP
Basis
 Separate
Account
Assets/
Collateral(1)
 Consolidated
VIEs(2)
 Consolidated
VREs(2)
 As
Adjusted
 

Assets

          

Cash and cash equivalents

 $4,293   $-   $-   $180   $4,113   $4,907   $-   $-   $120   $4,787  

Accounts receivable

  2,836    -    -    -    2,836    2,347    -    -    -    2,347  

Investments

  2,204    -    -    165    2,039    1,436    -    -    21    1,415  

Assets of consolidated VIEs

  4,174    -    4,174    -    -    1,005    -    322    -    683  

Separate account assets and collateral held under securities lending agreements

  197,413    197,413    -    -    -    195,348    195,348    -    -    -  

Other assets(1)

  1,390    -    -    46    1,344  

Other assets(3)

  1,601    -    -    35    1,566  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal

  212,310      197,413        4,174           391      10,332    206,644      195,348             322           176      10,798  

Goodwill and intangible assets, net

  30,404    -    -    -    30,404    30,364    -    -    -    30,364  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total assets

 $242,714   $197,413   $4,174   $391   $40,736   $237,008   $195,348   $322   $176   $41,162  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Liabilities

          

Accrued compensation and benefits

 $684   $-   $-   $-   $684   $1,137   $-   $-   $-   $1,137  

Accounts payable and accrued liabilities

  1,714    -    -    -    1,714    1,284    -    -    -    1,284  

Liabilities of consolidated VIEs

  4,146    -    4,146    -    -    192    -    65    -    127  

Borrowings

  4,938    -    -    -    4,938    4,947    -    -    -    4,947  

Separate account liabilities and collateral liabilities under securities lending agreements

  197,413    197,413    -    -    -    195,348    195,348    -    -    -  

Deferred income tax liabilities

  5,077    -    -    -    5,077    4,999    -    -    -    4,999  

Other liabilities

  1,086    -    -    122    964    971    -    -    79    892  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities

  215,058    197,413    4,146    122    13,377    208,878    195,348    65    79    13,386  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Equity

          

Total stockholders’ equity(2)

  27,375    -    16    -    27,359  

Total stockholders’ equity

  27,776    -    -    -    27,776  

Noncontrolling interests

  281    -    12    269    -    354    -    257    97    -  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total equity

  27,656    -    28    269    27,359    28,130    -    257    97    27,776  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities and equity

 $242,714   $197,413   $4,174   $391   $40,736   $237,008   $195,348   $322   $176   $41,162  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)

Amounts represent segregated client assets generating advisory fees in which BlackRock has no economic interest or liability.

(2)

Amounts represent the portion of assets and liabilities of Consolidated Funds attributable to noncontrolling interests.

(3) 

Amounts include property and equipment and other assets.

(2)

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

The following discussion summarizes the significant changes in assets and liabilities on a GAAP basis. Please see the condensed consolidated statements of financial condition as of March 31,June 30, 2015 and December 31, 2014 contained in Part I, Item 1 of this filing. The discussion does not include changes related to assets and liabilities that are equal and offsetting and have no impact on BlackRock’s stockholders’ equity.

Assets.    Cash and cash equivalents included $120 million of cash held by consolidated VREs at March 31,both June 30, 2015 and December 31, 2014, included $180 million and $120 million, respectively, of cash held by consolidated sponsored investment funds (seeLiquidity and Capital Resources for details on the change in cash and cash equivalents during the threesix months ended March 31,June 30, 2015).

Accounts receivable at March 31,June 30, 2015 increased $716$227 million from December 31, 2014 due to an increase in unit trust receivables (substantially offset by an increase in unit trust payables recorded within accounts payable and accrued liabilities). Investments increased $283were $1,436 million from December 31, 2014at June 30, 2015 (for more information seeInvestments herein). Goodwill and intangible assets increased $99$59 million from December 31, 2014, primarily due to the BKCA acquisition, partially offset by $35$70 million of amortization of intangible assets. Other assets (including property, plant and equipment) increased $222$449 million from December 31, 2014, primarily related to an increase in property and equipment and an increase in current taxes receivable and other assets.

Liabilities.    Accrued compensation and benefits at March 31,June 30, 2015 decreased $1,181$728 million from December 31, 2014, primarily due to 2014 incentive compensation cash payments in the first quarter of 2015, partially offset by the effect of

2015 incentive compensation accruals. Accounts payable and accrued liabilities at March 31,June 30, 2015 increased $679$249 million from December 31, 2014 due to higher unit trust payables (substantially offset by an increase in unit trust receivables recorded within accounts receivable) and increased accruals, including direct fund expense.

Net deferred income tax liabilities at March 31,June 30, 2015 increased $88$10 million, primarily due to the effects of temporary differences associated with stock compensation and the BKCA acquisition. Other liabilities increased $200$85 million from December 31, 2014, primarily resulting from an increase in consolidated funds and other operating liabilities.

Investments and Investments of Consolidated VIEs

Investments totaled $2,204The Company’s investments and investments of consolidated VIEs (collectively, “Total Investments”) were $1,436 million and $901 million, respectively, at March 31, 2015 and $1,921 million at December 31, 2014.June 30, 2015. Total Investments include consolidated investments held by sponsored investment funds deemed to be controlled by BlackRock.accounted for as VREs and VIEs. Management reviews BlackRock’s investmentsTotal Investments on an “economic” basis, which eliminates the portion of investmentsTotal Investments that does not impact BlackRock’s book value or net income attributable to BlackRock. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

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

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

 

(in millions)  March 31,
2015
   December 31,
2014
   June 30,
2015
   December 31,
2014
 

Total investments, GAAP

          $2,204            $1,921  

Investments held by consolidated sponsored investment funds(1)

   (1,042   (713

Net exposure to consolidated investment funds

   877     696  

Investments, GAAP

          $1,436            $1,921  

Investments held by consolidated VIEs, GAAP

   901     3,320  
  

 

   

 

   

 

   

 

 

Total investments, as adjusted

   2,039     1,904  

Total Investments

   2,337     5,241  

Investments held by consolidated VREs/VIEs(1)

   (1,365   (4,033

Net exposure to consolidated VREs/VIEs

   1,126     696  
  

 

   

 

 

Total Investments, as adjusted

   2,098     1,904  

Federal Reserve Bank stock

   (92   (92   (93   (92

Carried interest

   (91   (85   (139   (85

Deferred compensation investments

   (87   (85  ��(84   (85

Hedged investments

   (358   (323   (337   (323
  

 

   

 

   

 

   

 

 

Total “economic” investment exposure

          $        1,411            $        1,319            $        1,445            $        1,319  
  

 

   

 

   

 

   

 

 

 

(1) 

At March 31, 2015 and December 31, 2014, approximately $1,042 million and $713 million, respectively, of BlackRock’s total GAAPAmounts represent investments were held in sponsored investment funds that were deemed to be controlled by BlackRockare consolidated in accordance with GAAP as either a VIE or VRE. See Note 2,Significant Accounting Policies, for further information on the Company’s consolidation policy and therefore, are consolidated even though BlackRock may not economically own a majoritythe adoption of such funds.ASU 2015-02.

The following table represents the carrying value of the Company’s economic investment exposure, by asset type, at March 31,June 30, 2015 and December 31, 2014:

 

(in millions)  March 31,
2015
   December 31,
2014
   June 30,
2015
   December 31,
2014
 

Private equity

          $358           $314            $372            $314  

Real estate

   118    117     92     117  

Other alternatives(1)

   247    289     189     289  

Other investments(2)

   688    599     792     599  
  

 

   

 

   

 

   

 

 

Total “economic” investment exposure

          $        1,411           $        1,319           $        1,445            $        1,319  
  

 

   

 

   

 

   

 

 

 

(1) 

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

(2) 

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

As adjusted investment activity for the threesix months ended March 31,June 30, 2015 was as follows:

 

(in millions)        

Investments, as adjusted, December 31, 2014

  $1,904 

Total Investments, as adjusted, December 31, 2014

  $1,904  

Purchases/capital contributions

   330    692  

Sales/maturities

   (181)   (495

Distributions(1)

   (32)   (90

Market valuations/earnings from equity method investments

   12    33  

Carried interest capital allocations

   6    54  
  

 

   

 

 

Investments, as adjusted, March 31, 2015

  $2,039 

Total Investments, as adjusted, June 30, 2015

  $2,098  
  

 

   

 

 

 

(1) 

Amounts include distributions representing return of capital and return on investments

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

 

(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
   GAAP
Basis
   Impact on
Cash Flows
of Consolidated
VREs
   Impact on
Cash Flows
of
Consolidated
VIEs
   Cash Flows
Excluding
Impact of
Consolidated

VREs and
VIEs
 

Cash and cash equivalents, December 31, 2014

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

Cash flows from operating activities

   (490)       (61)       32        (461)       496        (84)       (134)       714     

Cash flows from investing activities

   (99)       12                -         (111)       (105)       (82)       71        (94)    

Cash flows from financing activities

   (748)       109        (32)       (825)       (1,191)       166         63         (1,420)    

Effect of exchange rate changes on cash and cash equivalents

   (93)       -         -         (93)       (16)       -                -        (16)    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net change in cash and cash equivalents

   (1,430)       60        -         (1,490)       (816)       -        -        (816)    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash and cash equivalents, March 31, 2015

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

Cash and cash equivalents, June 30, 2015

  $4,907       $120       $-        $4,787     
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Sources of BlackRock’s operating cash primarily include investment advisory, administration fees and securities lending revenue, performance fees, revenue fromBlackRock Solutions and advisory products and services, other revenue and distribution fees. BlackRock uses its cash to pay all operating expense, interest and principal on borrowings, income taxes, dividends on BlackRock’s capital stock, repurchases of the Company’s stock, capital expenditures and purchases of co-investments and seed investments.

Cash flows from operating activities, excluding the impact of consolidated sponsored investment funds and VIEs,Consolidated Funds, primarily include the receipt of investment advisory and administration fees, securities lending revenue and other revenue offset by the payment of operating expenses incurred in the normal course of business, including year-end incentive compensation accrued for in the prior year.

Cash outflows from investing activities, excluding the impact of consolidated sponsored investment funds and VIEs,Consolidated Funds, for the threesix months ended March 31,June 30, 2015 were $111$94 million and primarily reflected $103$162 million of investment purchases, $98$134 million of purchases of property and equipment and $88 million related to the BKCA acquisition, partially offset by $169$315 million of net proceeds from sales and maturities of certain investments.

Cash outflows from financing activities, excluding the impact of consolidated sponsored investment funds and VIEs,Consolidated Funds, for the threesix months ended March 31,June 30, 2015 were $825$1,420 million, primarily resulting from $498$777 million of share repurchases, including $275$550 million in open market transactions and $223$227 million of employee tax withholdings related to employee stock transactions and $389$753 million of cash dividend payments, partially offset by $55$67 million of excess tax benefits from vested stock-based compensation awards.

The Company manages its financial condition and funding to maintain appropriate liquidity for the business. Liquidity resources at March 31,June 30, 2015 and December 31, 2014 were as follows:

 

(in millions)  March 31,
2015
   December 31,
2014
   June 30,
2015
   December 31,
2014
 

Cash and cash equivalents

  $4,293    $5,723     $4,907    $5,723  

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

   (180)     (120)  

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

   (120)     (120)  
  

 

   

 

   

 

   

 

 

Subtotal

   4,113     5,603      4,787     5,603  

Credit facility – undrawn

   4,000     3,990      4,000     3,990  
  

 

   

 

   

 

   

 

 

Total liquidity

  $      8,113    $      9,593     $      8,787    $      9,593  
  

 

   

 

   

 

   

 

 

 

(1) 

The Company can notcannot readily access such cash to use in its operating activities.

Total liquidity decreased $1,480$806 million during the threesix months ended March 31,June 30, 2015, primarily reflecting cash payments of 2014 year-end incentive awards, share repurchases of $498$777 million and cash dividend payments.

A significant portion of the Company’s $2,039$2,098 million of total investments,Total Investments, as adjusted, is illiquid in nature and, as such, can notcannot be readily convertible to cash.

Share Repurchases.    The Company repurchased 0.81.5 million common shares in open market-transactions under the share repurchase program for approximately $275$550 million during the threesix months ended March 31,June 30, 2015.

In January 2015, the Board of Directors approved an increase in the availability of shares that may be repurchased under the Company’s existing share repurchase program to allow for the repurchase of up to a total of 9.4 million additional shares of BlackRock common stock. At March 31,June 30, 2015, there were 8.67.9 million shares still authorized to be repurchased.

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

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

The Company was required to maintain approximately $1.1 billion at both March 31,June 30, 2015 and December 31, 2014 in net capital in certain regulated subsidiaries, including BTC, entities regulated by the Financial Conduct Authority and Prudential Regulation Authority in the United Kingdom and the Company’s broker-dealers. At such date, the Company was in compliance with all applicable regulatory net capital requirements.

Short-Term Borrowings

2015 Revolving Credit Facility.    In April 2015, the Company’s credit facility was amended to extend the maturity date to March 2020 and to increase the amount of the aggregate commitment to $4.0 billion (the “2015 credit facility”). The 2015 credit facility permits the Company to request up to an additional $1.0 billion of borrowing capacity, subject to lender credit approval, increasing the overall size of the 2015 credit facility to an aggregate principal amount not to exceed $5.0 billion. Interest on borrowings outstanding accrues at a rate based on the applicable London Interbank Offered Rate plus a spread. The 2015 credit facility requires the Company not to

exceed a maximum leverage ratio (ratio of net debt to earnings before interest, taxes, depreciation and amortization, where net debt equals total debt less unrestricted cash) of 3 to 1, which was satisfied with a ratio of less than 1 to 1 at March 31,June 30, 2015. The 2015 credit facility provides back-up liquidity to fund ongoing working capital for general corporate purposes and various investment opportunities. At March 31,June 30, 2015, the Company had no amount outstanding under the 2015 credit facility.

Commercial Paper Program.    The maximum aggregate amount for which the Company can issue unsecured commercial paper notes (the “CP Notes”) on a private-placement basis up to a maximum aggregate amount outstanding at any time is $3.990$4.0 billion. The commercial paper program is currently supported by the 2015 credit facility. At March 31,June 30, 2015 and December 31, 2014, BlackRock had no CP Notes outstanding.

Long-Term Borrowings

At March 31,June 30, 2015, the principal amount of long-term borrowings outstanding was $4.950$4.980 billion. See Note 12,Borrowings, in the 2014 Form 10-K for more information on borrowings outstanding as of December 31, 2014. During the quarter ended March 31,

In June 2015, the Company paid approximately $39fully repaid $750 million of interest on long-term borrowings. Future principal repayments and interest requirements1.375% notes at March 31, 2015 were as follows:maturity.

(in millions)            

Year

      Principal           Interest       Total
    Payments    
 

Remainder of 2015

   $750     $     152     $902  

2016

       186     186  

2017

   700     186     886  

2018

       142     142  

2019

   1,000     142     1,142  

2020

       92     92  

Thereafter

          2,500                   177     2,677  
  

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

 

In May 2015, the Company issued700 million (or approximately $760$780 million based on anthe exchange rate of $1.09 per1)at June 30, 2015) of 1.25% senior unsecured notes maturing on May 6, 2025 (the “2025 Notes”). The notes are expected to be listed on the New York Stock Exchange. The net proceeds of the 2025 Notes will bewere used for general corporate purposes, including refinancing of outstanding indebtedness. Interest of approximately $10 million per year based on current exchange rates is payable annually on May 6 of each year. The 2025 Notes may be redeemed in whole or in part prior to maturity at any time at the option of the Company at a “make-whole” redemption price. The 2025 Notes were issued at a discount of approximately $3 million.million that will be amortized over the term of the 2025 Notes. See Note 10,Borrowings,in the condensed consolidated financial statements in Part I, Item I of this filing for further information on the Company’s designation of the debt offering as a net investment hedge to offset its currency exposure relating to its net investment in euro functional currency operations.

During the six months ended June 30, 2015, the Company paid approximately $98 million of interest on long-term borrowings. Future principal repayments and interest requirements at June 30, 2015 were as follows:

(in millions)            

Year

      Principal           Interest       Total
    Payments    
 

Remainder of 2015

   $-      $      93      $ 93  

2016

       196     196  

2017

   700     196     896  

2018

       152     152  

2019

   1,000     152     1,152  

2020

       102     102  

Thereafter(1)

          3,280                   225     3,505   
  

 

 

   

 

 

   

 

 

 

Total

   $4,980     $1,116             $6,096   
  

 

 

   

 

 

   

 

 

 

(1)

The amount of principal and interest payments for the 2025 Notes represents the expected payment amounts using foreign exchange rates as of June 30, 2015.

Investment Commitments.    At March 31,June 30, 2015, the Company had $353$417 million of various capital commitments to fund sponsored investment funds, including consolidated VIEs. These funds ofinclude private equity funds, real estate funds, infrastructure funds, opportunistic funds and distressed credit funds. This amount excludes additional commitments made by consolidated funds of funds to underlying third-party funds as third-party noncontrolling interest holders have the legal obligation to fund the respective commitments of such funds of funds. In addition to the capital commitments of $353$417 million, the Company had approximately $30$32 million of contingent commitments for certain funds which have investment periods that have expired. Generally, the timing of the funding of these commitments is unknown and the commitments are callable on demand at any time prior to the expiration of the commitment. These unfunded commitments are not recorded on the condensed consolidated statements of financial condition. These commitments do not include potential future commitments approved by the Company that are not yet legally binding. The Company intends to make additional capital commitments from time to time to fund additional investment products for, and with, its clients.

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

to make contingent payments related to the acquisition of MGPA during a five-year period, subject to achieving specified thresholds, subsequent to the 2013 acquisition date. In addition, BlackRock is required to make contingent payments in connection with the BKCA acquisition over a three-year period, subject to the acquired business achieving specified performance targets. The fair value of the remaining aggregate contingent payments at March 31,June 30, 2015 is not significant to the condensed consolidated statement of financial condition and is included in other liabilities.

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

Indemnifications.    On behalf of certain clients, the Company lends securities to highly rated banks and broker-dealers. In these securities lending transactions, the borrower is required to provide and maintain collateral at or above regulatory minimums. Securities on loan are marked to market daily to determine if the borrower is

required to pledge additional collateral. BlackRock has issued certain indemnifications to certain securities lending clients against potential lossesloss resulting from a borrower’s failure to fulfill its obligations under the securities lending agreement should the value of the collateral pledged by the borrower at the time of default be insufficient to cover the borrower’s obligationsobligation under the securities lending agreement. At March 31,June 30, 2015, the Company indemnified certain of its clients for their securities lending loan balances of approximately $153.9$147.3 billion. The Company held, as agent, cash and securities totaling $164.4$156.5 billion as collateral for indemnified securities on loan at March 31,June 30, 2015. The fair value of these indemnified securitiesindemnifications was not material at March 31,June 30, 2015.

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

Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. Actual results could differ significantly from those estimates. Management considers the following critical accounting policies important to understanding the condensed consolidated financial statements. For a summary of these and additional accounting policies see Note 2,Significant Accounting Policies, in the condensed consolidated financial statements contained in Part I, Item 1 of this filing andCritical Accounting Policiesin Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2014 Form 10-K and Note 2,Significant Accounting Policies, in the 2014 Form 10-K for further information.

Consolidation of Variable Interest Entities.Consolidation.    In the normal course of business, the Company is the manager of various types of sponsored investment vehicles, including collateralized debt obligations (“CDOs”)vehicles. The Company performs an analysis for investment products to determine if the product is a VIE or CLOsa VRE. Assessing whether an entity is a VIE or a VRE involves judgment and sponsored investment funds, which may beanalysis. Factors considered VIEs. At March 31, 2015,in this assessment include the entity’s legal organization, the entity’s capital structure and equity ownership, and any related party or de facto agent implications of the Company’s involvement with the entity. Investments that are determined to be VREs are consolidated if the Company can exert control over the financial and operating policies of the investee, which generally exists if there is greater than 50% voting interest. See Note 4,Consolidated Voting Right Entities, for further information. Investments that are determined to be VIEs consisted primarilyare consolidated if the Company is the primary beneficiary (“PB”) of CLOs.the entity.

CLOs.    At March 31,June 30, 2015, BlackRock was the manager of over 20 CLOs/CDOs and other securitization entities. BlackRock was determined to be the primary beneficiary (“PB”)PB for certain of these CLOsinvestment products that were determined to be VIEs, which required BlackRock to consolidate them. BlackRock was deemed to be the PB because it has the power to direct the activities of the CLOs that most significantly impact the entities’ economic performance and has the obligation to absorb losses or the right to receive benefits that potentially could be significant to the VIE. At March 31, 2015, the Company had $4,162 million and $4,146 million in assets and liabilities, respectively, on its condensed consolidated statement of financial condition related to these consolidated CLOs. The Company recorded appropriated retained earningsSee Note 5,Variable Interest Entities, for the difference between the assets and liabilities of the CLOs recorded on the condensed consolidated statement of financial condition as the CLO noteholders ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. Changes in the fair value of the assets and liabilities of these CLOs have no impact on net income attributable to BlackRock or its cash flows. Excluding outstanding management fee receivables, the Company has no risk of loss related to its involvement with these VIEs. further information.

See Note 2,Significant Accounting Policies-RecentPolicies — Accounting Pronouncements Not Yet Adopted during the Six Months Ended June 30, 2015, for further information on ASU 2015-02.

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

Level 3 inputs include the most currently available information, including capital account balances for its partnership interests in various alternative investments, which may be adjusted by using the returns of certain market indices. Certain investments that are valued using net asset values and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3. BlackRock’s $588 million of Level 3 investments, or 27% of total GAAP investments at March 31, 2015, primarily included co-investments in private equity funds of funds and private equity funds, funds of hedge funds as well as alternative hedge funds that invest in distressed credit, opportunistic funds and mortgage securities and real estate equity products. Many of these investees are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund, which could include BlackRock employees. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, including independent appraisals from third-party sources. However, in some instances current valuation information, for illiquid securities or securities in markets that are not active, may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations to value these investments.

Investment Advisory Performance Fees / Carried Interest.    The Company receives investment advisory performance fees or incentive allocations from certain actively managed investment funds and certain separately managed accounts (“SMAs”). These performance fees are dependent upon exceeding specified relative or absolute investment return thresholds. Such fees are recorded upon completion of the measurement period, which varies by product or account, and could be monthly, quarterly, annually or longer.

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

The Company records a deferred carried interest liability to the extent it receives cash or capital allocations related to carried interest prior to meeting the revenue recognition criteria. At March 31,June 30, 2015 and December 31, 2014, the Company had $115$172 million and $105 million, respectively, of deferred carried interest recorded in other liabilities/other liabilities of consolidated VIEs on the condensed consolidated statements of financial condition. A portion of the deferred carried interest liability will be paid to certain employees. The ultimate timing of the recognition of performance fee revenue, if any, for these products is unknown.

The following table presents changes in the deferred carried interest liability (including the portion related to consolidated VIEs) for the three and six months ended March 31,June 30, 2015 and 2014:

 

  Three Months Ended
March 31,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
(in millions)  2015   2014   2015   2014   2015   2014 

Beginning balance

  $105    $108    $115    $72    $105    $108  

Net additional allocations

   12     18  

Net additional allocations/other

   61     15     73     33  

Performance fee revenue recognized

   (2   (54   (4   (7   (6   (61
  

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance

  $115    $72    $172    $80    $172    $80  
  

 

   

 

   

 

   

 

   

 

   

 

 

Recent Developments

Acquisition. Infraestructura Institucional.In June 2015, the Company announced that it agreed to acquire Infraestructura Institucional, Mexico’s leading independently managed, infrastructure investment firm, expanding the Company’s infrastructure capabilities in Mexico. The transaction is expected to close in the fourth quarter of 2015, subject to customary regulatory approvals and closing conditions. The transaction is not expected to be material to the condensed consolidated financial statements.

Accounting Developments

For accounting pronouncements the Company adopted during the six months ended June 30, 2015 and for recent accounting pronouncements not yet adopted, see Note 2,Significant Accounting Policies, in the condensed consolidated financial statements contained in Part I, Item 1 of this filing.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

AUM Market Price Risk.    BlackRock’s investment advisory and administration fees are primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns realized on AUM. At March 31,June 30, 2015, the majority of the Company’s investment advisory and administration fees were based on average or period end AUM of the applicable investment funds or separate accounts. Movements in equity market prices, interest rates/credit spreads, foreign exchange rates or all three could cause the value of AUM to decline, which would result in lower investment advisory and administration fees.

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

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

BlackRock has investments primarily in sponsored investment products that invest in a variety of asset classes, including real estate, private equity and hedge funds. Investments generally are made for co-investment purposes, to establish a performance track record, to hedge exposure to certain deferred compensation plans or for regulatory purposes. Currently, the Company has a seed capital hedging program in which it enters into swaps to hedge market and interest rate exposure to certain investments. At March 31,June 30, 2015, the Company had outstanding total return swaps and interest rate swaps with an aggregate notional value of approximately $260$251 million and $99$86 million, respectively.

At March 31,June 30, 2015, approximately $1,042$1,365 million of BlackRock’s total investmentsTotal Investments were maintained in consolidated sponsored investment funds deemed to be controlled by BlackRock in accordance with GAAPaccounted for as VREs and therefore, are consolidated even though BlackRock may not own a majority of such funds.VIEs. Excluding the impact of the Federal Reserve Bank stock, carried interest, investments made to hedge exposure to certain deferred compensation plans and certain investments that are hedged via the seed capital hedging program, the Company’s economic exposure to its investment portfolio is $1,411$1,445 million. SeeBalance Sheet Overview-Investmentsin Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information on the Company’s investments.Total Investments.

Equity Market Price Risk.    At March 31,June 30, 2015, the Company’s net exposure to equity market price risk in its investment portfolio was approximately $707$589 million of the Company’s total economic investment exposure. Investments subject to market price risk include private equity and real estate investments, hedge funds and funds of funds as well as mutual funds. The Company estimates that a hypothetical 10% adverse change in market prices would result in a decrease of approximately $70.7$58.9 million in the carrying value of such investments.

Interest Rate/Credit Spread Risk.    At March 31,June 30, 2015, the Company was exposed to interest-rate risk and credit spread risk as a result of approximately $704$856 million of investmentsTotal Investments in debt securities and sponsored investment products that invest primarily in debt securities. Management considered a hypothetical 100 basis point fluctuation in interest rates or credit spreads and estimates that the impact of such a fluctuation on these investments, in the aggregate, would result in a decrease, or increase, of approximately $13.7$18.1 million in the carrying value of such investments.

Foreign Exchange Rate Risk.    As discussed above, the Company invests in sponsored investment products that invest in a variety of asset classes. The carrying value of the total economic investment exposure denominated in foreign currencies, primarily the pound sterling and euro, was $179$334 million at March 31,June 30, 2015. A 10% adverse change in the applicable foreign exchange rates would result in approximately a $17.9$33.4 million decline in the carrying value of such investments.

Other Market Risks.    The Company executes forward foreign currency exchange contracts to mitigate the risk of certain foreign exchange risk movements. At March 31,June 30, 2015, the Company had outstanding forward foreign currency exchange contracts with an aggregate notional value of approximately $215$193 million.

Item 4. Controls and Procedures

Disclosure Controls and Procedures.    Under the direction of BlackRock’s Chief Executive Officer and Chief Financial Officer, BlackRock evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, BlackRock’s Chief Executive Officer and Chief Financial Officer have concluded that BlackRock’s disclosure controls and procedures were effective.

Internal Control over Financial Reporting.    There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31,June 30, 2015 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.    Legal Proceedings

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

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

Consob alleges that Mr. Bolton, on behalf of certain BlackRock clients, sold, or influenced the sale of, approximately 10.7 million shares of Saipem using material, non-public information thereby avoiding client losses of over114.5 million. The EET’s sale of Saipem shares occurred between January 25 and January 29, 2013, and Saipem announced negative news following the market close on January 29, 2013. While BlackRock is not charged in the proceeding, it may be liable for the actions of its employee.

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

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

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

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

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

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

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

During the three months ended March 31,June 30, 2015, the Company made the following purchases of its common stock, which is registered pursuant to Section 12(b) of the Exchange Act.

 

    Total Number
  of Shares
Purchased
  Average Price
  Paid per Share
  Total Number of
Shares
Purchased as
Part of Publicly
  Announced Plans 
  or Programs
  Maximum
Number of
  Shares that May 
  Yet Be
Purchased
Under the Plans
or Programs(1)
 
January 1, 2015 through January 31, 2015  887,906(2)   $343.44     253,142             9,107,325   
February 1, 2015 through February 28, 2015  459,309(2)   $368.68     457,003     8,650,322   
March 1, 2015 through March 31, 2015  63,064(2)   $373.08     47,597     8,602,725    
 

 

 

   

 

 

  

Total

      1,410,279            $352.99             757,742    
 

 

 

   

 

 

  
    Total Number
  of Shares
Purchased
  Average Price
  Paid per Share
  Total Number of
Shares

Purchased as
Part of Publicly
  Announced Plans

  or Programs
  Maximum
Number of
  Shares that May

  Yet Be
Purchased Under
the Plans or
Programs(1)
 
April 1, 2015 through April 30, 2015  355,775(2)   $370.18     351,089             8,251,636   
May 1, 2015 through May 31, 2015  396,169(2)   $367.75     394,268     7,857,368   
June 1, 2015 through June 30, 2015  7,038(2)   $351.97     -     7,857,368   
 

 

 

   

 

 

  

Total

      758,982            $368.75             745,357    
 

 

 

   

 

 

  

 

(1) 

In January 2015, the Board of Directors approved an increase in the availability under the Company’s existing share repurchase program to allow for the repurchase of up to 9.4 million shares of BlackRock common stock with no stated expiration date.

(2) 

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

Item 6.      Exhibits

 

Exhibit No.  

 

Description

  4.1(1) 

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

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

York, as trustee, relating to senior debt securities.

10.1(2) Amendment No. 4, dated as of April 2, 2015, to BlackRock, Inc.’s Five-Year Revolving Credit Agreement, dated as of March 10, 2011, as amended by Amendment No. 1 thereto, dated as of March 30, 2012, Amendment No. 2 thereto, dated as of March 28, 2013, and Amendment No. 3 thereto, dated as of March 28, 2014, by and among BlackRock, Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, L/C agent and a lender, and the banks and other financial institutions referred to therein.
10.2Form of Restricted Stock Unit Agreement under the BlackRock, Inc. Amended and Restated 1999 Stock Award and Incentive Plan+
10.3Form of Performance-Based Restricted Stock Unit Agreement (BPIP) under the BlackRock, Inc. Amended and Restated 1999 Stock Award and Incentive Plan+
12.1 Computation of Ratio of Earnings to Fixed Charges
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) 

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

(2) 

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

+

Denotes compensatory plans or arrangements

SIGNATURES

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

 

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

Date: May 8,August 7, 2015

   Gary S. Shedlin  
  

 Senior Managing Director &

 Chief Financial Officer

  

EXHIBIT INDEX

 

Exhibit No.    

  

Description

  4.1(1)  

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

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

York, as trustee, relating to senior debt securities.

10.1(2)  Amendment No. 4, dated as of April 2, 2015, to BlackRock, Inc.’s Five-Year Revolving Credit Agreement, dated as of March 10, 2011, as amended by Amendment No. 1 thereto, dated as of March 30, 2012, Amendment No. 2 thereto, dated as of March 28, 2013, and Amendment No. 3 thereto, dated as of March 28, 2014, by and among BlackRock, Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, L/C agent and a lender, and the banks and other financial institutions referred to therein.
10.2Form of Restricted Stock Unit Agreement under the BlackRock, Inc. Amended and Restated 1999 Stock Award and Incentive Plan+
10.3Form of Performance-Based Restricted Stock Unit Agreement (BPIP) under the BlackRock, Inc. Amended and Restated 1999 Stock Award and Incentive Plan+
12.1  Computation of Ratio of Earnings to Fixed Charges
31.1  Section 302 Certification of Chief Executive Officer
31.2  Section 302 Certification of Chief Financial Officer
32.1  Section 906 Certification of Chief Executive Officer and Chief Financial Officer
101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) 

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

(2) 

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

+

Denotes compensatory plans or arrangements

 

6674