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BLK Blackrock

Filed: 8 Aug 19, 2:46pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934.

For the transition period from                                 to                                 .

Commission file number 001-33099

 

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

 

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

55 East 52nd Street, New York, NY 10055

(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)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $.01 par value

 

BLK

 

New York Stock Exchange

1.250% Notes due 2025

 

BLK25

 

New York Stock Exchange

 

 

 

 

 

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, every Interactive Data File required to be submitted 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 such files).  

Yes

 

X

 

No

 

 

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

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

Yes

 

 

 

No

 

X

As of July 31, 2019, there were 154,573,783 shares of the registrant’s common stock outstanding.

 

i


BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

PART II

OTHER INFORMATION

 

 

 

 

ii


PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(unaudited)

 

 

 

June 30,

 

 

December 31,

 

(in millions, except shares and per share data)

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,920

 

 

$

6,302

 

Accounts receivable

 

 

2,863

 

 

 

2,657

 

Investments

 

 

1,989

 

 

 

1,796

 

Assets of consolidated variable interest entities:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

103

 

 

 

186

 

Investments

 

 

2,431

 

 

 

2,680

 

Other assets

 

 

63

 

 

 

876

 

Separate account assets

 

 

96,807

 

 

 

90,285

 

Separate account collateral held under securities lending agreements

 

 

18,446

 

 

 

20,655

 

Property and equipment (net of accumulated depreciation of $836 and $750 at June 30, 2019

   and December 31, 2018, respectively)

 

 

659

 

 

 

643

 

Intangible assets (net of accumulated amortization of $284 and $244 at June 30, 2019 and

   December 31, 2018, respectively)

 

 

18,477

 

 

 

17,839

 

Goodwill

 

 

14,511

 

 

 

13,526

 

Other assets

 

 

3,078

 

 

 

2,128

 

Total assets

 

$

163,347

 

 

$

159,573

 

Liabilities

 

 

 

 

 

 

 

 

Accrued compensation and benefits

 

$

1,078

 

 

$

1,988

 

Accounts payable and accrued liabilities

 

 

1,277

 

 

 

1,292

 

Liabilities of consolidated variable interest entities:

 

 

 

 

 

 

 

 

Borrowings

 

 

142

 

 

 

84

 

Other liabilities

 

 

502

 

 

 

1,290

 

Borrowings

 

 

5,964

 

 

 

4,979

 

Separate account liabilities

 

 

96,807

 

 

 

90,285

 

Separate account collateral liabilities under securities lending agreements

 

 

18,446

 

 

 

20,655

 

Deferred income tax liabilities

 

 

3,825

 

 

 

3,571

 

Other liabilities

 

 

2,646

 

 

 

1,889

 

Total liabilities

 

 

130,687

 

 

 

126,033

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Temporary equity

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

710

 

 

 

1,107

 

Permanent Equity

 

 

 

 

 

 

 

 

BlackRock, Inc. stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value;

 

 

2

 

 

 

2

 

Shares authorized: 500,000,000 at June 30, 2019 and December 31, 2018;

   Shares issued: 171,252,185 at June 30, 2019 and December 31, 2018;

   Shares outstanding: 154,543,673 and 157,553,501 at June 30, 2019 and

   December 31, 2018, respectively

 

 

 

 

 

 

 

 

Preferred stock (Note 19)

 

 

 

 

 

 

Additional paid-in capital

 

 

18,947

 

 

 

19,168

 

Retained earnings

 

 

20,267

 

 

 

19,282

 

Accumulated other comprehensive loss

 

 

(664

)

 

 

(691

)

Treasury stock, common, at cost (16,708,512 and 13,698,684 shares held at June 30, 2019

    and December 31, 2018, respectively)

 

 

(6,659

)

 

 

(5,387

)

Total BlackRock, Inc. stockholders’ equity

 

 

31,893

 

 

 

32,374

 

Nonredeemable noncontrolling interests

 

 

57

 

 

 

59

 

Total permanent equity

 

 

31,950

 

 

 

32,433

 

Total liabilities, temporary equity and permanent equity

 

$

163,347

 

 

$

159,573

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

1


BlackRock, Inc.

Condensed Consolidated Statements of Income

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions, except shares and per share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment advisory, administration fees and

  securities lending revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related parties

 

$

2,061

 

 

$

2,087

 

 

$

4,050

 

 

$

4,199

 

Other third parties

 

 

842

 

 

 

857

 

 

 

1,658

 

 

 

1,692

 

Total investment advisory, administration fees and

   securities lending revenue

 

 

2,903

 

 

 

2,944

 

 

 

5,708

 

 

 

5,891

 

Investment advisory performance fees

 

 

64

 

 

 

91

 

 

 

90

 

 

 

161

 

Technology services revenue

 

 

237

 

 

 

198

 

 

 

441

 

 

 

382

 

Distribution fees

 

 

267

 

 

 

294

 

 

 

529

 

 

 

605

 

Advisory and other revenue

 

 

53

 

 

 

78

 

 

 

102

 

 

 

149

 

Total revenue

 

 

3,524

 

 

 

3,605

 

 

 

6,870

 

 

 

7,188

 

Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

1,083

 

 

 

1,082

 

 

 

2,147

 

 

 

2,203

 

Distribution and servicing costs

 

 

416

 

 

��

415

 

 

 

820

 

 

 

847

 

Direct fund expense

 

 

252

 

 

 

264

 

 

 

494

 

 

 

525

 

General and administration

 

 

470

 

 

 

393

 

 

 

858

 

 

 

776

 

Amortization of intangible assets

 

 

25

 

 

 

11

 

 

 

40

 

 

 

22

 

Total expense

 

 

2,246

 

 

 

2,165

 

 

 

4,359

 

 

 

4,373

 

Operating income

 

 

1,278

 

 

 

1,440

 

 

 

2,511

 

 

 

2,815

 

Nonoperating income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on investments

 

 

89

 

 

 

3

 

 

 

231

 

 

 

18

 

Interest and dividend income

 

 

20

 

 

 

19

 

 

 

49

 

 

 

34

 

Interest expense

 

 

(52

)

 

 

(46

)

 

 

(98

)

 

 

(92

)

Total nonoperating income (expense)

 

 

57

 

 

 

(24

)

 

 

182

 

 

 

(40

)

Income before income taxes

 

 

1,335

 

 

 

1,416

 

 

 

2,693

 

 

 

2,775

 

Income tax expense

 

 

322

 

 

 

338

 

 

 

620

 

 

 

603

 

Net income

 

 

1,013

 

 

 

1,078

 

 

 

2,073

 

 

 

2,172

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to noncontrolling

   interests

 

 

10

 

 

 

5

 

 

 

17

 

 

 

10

 

Net income attributable to BlackRock, Inc.

 

$

1,003

 

 

$

1,073

 

 

$

2,056

 

 

$

2,162

 

Earnings per share attributable to BlackRock, Inc.

   common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

6.46

 

 

$

6.67

 

 

$

13.11

 

 

$

13.42

 

Diluted

 

$

6.41

 

 

$

6.62

 

 

$

13.02

 

 

$

13.30

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

155,354,552

 

 

 

160,980,960

 

 

 

156,803,244

 

 

 

161,114,746

 

Diluted

 

 

156,360,741

 

 

 

162,161,937

 

 

 

157,853,711

 

 

 

162,532,637

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

1,013

 

 

$

1,078

 

 

$

2,073

 

 

$

2,172

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments(1)

 

 

(41

)

 

 

(274

)

 

 

27

 

 

 

(137

)

Comprehensive income (loss)

 

 

972

 

 

 

804

 

 

 

2,100

 

 

 

2,035

 

Less: Comprehensive income (loss) attributable to

     noncontrolling interests

 

 

10

 

 

 

5

 

 

 

17

 

 

 

10

 

Comprehensive income attributable to BlackRock, Inc.

 

$

962

 

 

$

799

 

 

$

2,083

 

 

$

2,025

 

 

(1)

Amounts for the three months ended June 30, 2019 and 2018 include a loss from a net investment hedge of $8 million (net of tax benefit of $2 million) and a gain of $34 million (net of tax of $11 million), respectively. Amounts for the six months ended June 30, 2019 and 2018 include gains from a net investment hedge of $3 million (net of tax of $1 million) and $18 million (net of tax of $6 million), respectively.

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

For the Six Months Ended June 30, 2019

(in millions)

Additional

Paid-in

Capital(1)

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock

Common

 

 

Total

BlackRock

Stockholders’

Equity

 

 

Nonredeemable

Noncontrolling

Interests

 

 

Total

Permanent

Equity

 

 

Redeemable

Noncontrolling

Interests /

Temporary

Equity

 

December 31, 2018

$

19,170

 

 

$

19,282

 

 

$

(691

)

 

$

(5,387

)

 

$

32,374

 

 

$

59

 

 

$

32,433

 

 

$

1,107

 

Net income

 

 

 

 

2,056

 

 

 

 

 

 

 

 

 

2,056

 

 

 

 

 

 

2,056

 

 

 

17

 

Dividends declared ($6.60 per share)

 

 

 

 

(1,071

)

 

 

 

 

 

 

 

 

(1,071

)

 

 

 

 

 

(1,071

)

 

 

 

Stock-based compensation

 

294

 

 

 

 

 

 

 

 

 

 

 

 

294

 

 

 

 

 

 

294

 

 

 

 

PNC preferred stock

   capital contribution

 

60

 

 

 

 

 

 

 

 

 

 

 

 

60

 

 

 

 

 

 

60

 

 

 

 

Retirement of preferred stock

 

(60

)

 

 

 

 

 

 

 

 

 

 

 

(60

)

 

 

 

 

 

(60

)

 

 

 

Issuance of common shares related to

   employee stock transactions

 

(515

)

 

 

 

 

 

 

 

 

523

 

 

 

8

 

 

 

 

 

 

8

 

 

 

 

Employee tax withholdings related to

   employee stock transactions

 

 

 

 

 

 

 

 

 

 

(229

)

 

 

(229

)

 

 

 

 

 

(229

)

 

 

 

Shares repurchased

 

 

 

 

 

 

 

 

 

 

(1,566

)

 

 

(1,566

)

 

 

 

 

 

(1,566

)

 

 

 

Subscriptions (redemptions/distributions)

   — noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

443

 

Net consolidations (deconsolidations) of

  sponsored investment funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

 

 

(857

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

27

 

 

 

 

 

 

27

 

 

 

 

 

 

27

 

 

 

 

June 30, 2019

$

18,949

 

 

$

20,267

 

 

$

(664

)

 

$

(6,659

)

 

$

31,893

 

 

$

57

 

 

$

31,950

 

 

$

710

 

 

(1)

Amounts include $2 million of common stock at both June 30, 2019 and December 31, 2018.

 

 

For the Three Months Ended June 30, 2019

(in millions)

Additional

Paid-in

Capital(1)

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock

Common

 

 

Total

BlackRock

Stockholders’

Equity

 

 

Nonredeemable

Noncontrolling

Interests

 

 

Total

Permanent

Equity

 

 

Redeemable

Noncontrolling

Interests /

Temporary

Equity

 

March 31, 2019

$

18,829

 

 

$

19,779

 

 

$

(623

)

 

$

(6,676

)

 

$

31,309

 

 

$

53

 

 

$

31,362

 

 

$

1,009

 

Net income

 

 

 

 

1,003

 

 

 

 

 

 

 

 

 

1,003

 

 

 

 

 

 

1,003

 

 

 

10

 

Dividends declared ($3.30 per share)

 

 

 

 

(515

)

 

 

 

 

 

 

 

 

(515

)

 

 

 

 

 

(515

)

 

 

 

Stock-based compensation

 

140

 

 

 

 

 

 

 

 

 

 

 

 

140

 

 

 

 

 

 

140

 

 

 

 

Issuance of common shares related to

   employee stock transactions

 

(20

)

 

 

 

 

 

 

 

 

24

 

 

 

4

 

 

 

 

 

 

4

 

 

 

 

Employee tax withholdings related to

   employee stock transactions

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Shares repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscriptions (redemptions/distributions)

   — noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

6

 

 

 

243

 

Net consolidations (deconsolidations) of

  sponsored investment funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

 

 

(552

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

(41

)

 

 

 

 

 

(41

)

 

 

 

 

 

(41

)

 

 

 

June 30, 2019

$

18,949

 

 

$

20,267

 

 

$

(664

)

 

$

(6,659

)

 

$

31,893

 

 

$

57

 

 

$

31,950

 

 

$

710

 

 

(1)

Amounts include $2 million of common stock at both June 30, 2019 and March 31, 2019.

 

See accompanying notes to condensed consolidated financial statements.

 

  

4


BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

For the Six Months Ended June 30, 2018

(in millions)

Additional

Paid-in

Capital(1)

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock

Common

 

 

Total

BlackRock

Stockholders’

Equity

 

 

Nonredeemable

Noncontrolling

Interests

 

 

Total

Permanent

Equity

 

 

Redeemable

Noncontrolling

Interests /

Temporary

Equity

 

December 31, 2017

$

19,258

 

 

$

16,939

 

 

$

(432

)

 

$

(3,967

)

 

$

31,798

 

 

$

50

 

 

$

31,848

 

 

$

416

 

Net income

 

 

 

 

2,162

 

 

 

 

 

 

 

 

 

2,162

 

 

 

9

 

 

 

2,171

 

 

 

1

 

Dividends declared ($5.76 per share)

 

 

 

 

(969

)

 

 

 

 

 

 

 

 

(969

)

 

 

 

 

 

(969

)

 

 

 

Stock-based compensation

 

310

 

 

 

 

 

 

 

 

 

 

 

 

310

 

 

 

 

 

 

310

 

 

 

 

PNC preferred stock

   capital contribution

 

58

 

 

 

 

 

 

 

 

 

 

 

 

58

 

 

 

 

 

 

58

 

 

 

 

Retirement of preferred stock

 

(58

)

 

 

 

 

 

 

 

 

 

 

 

(58

)

 

 

 

 

 

(58

)

 

 

 

Issuance of common shares related to

   employee stock transactions

 

(613

)

 

 

 

 

 

 

 

 

619

 

 

 

6

 

 

 

 

 

 

6

 

 

 

 

Employee tax withholdings related to

   employee stock transactions

 

 

 

 

 

 

 

 

 

 

(405

)

 

 

(405

)

 

 

 

 

 

(405

)

 

 

 

Shares repurchased

 

 

 

 

 

 

 

 

 

 

(635

)

 

 

(635

)

 

 

 

 

 

(635

)

 

 

 

Subscriptions (redemptions/distributions)

   — noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

 

 

535

 

Net consolidations (deconsolidations) of

  sponsored investment funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(266

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

(137

)

 

 

 

 

 

(137

)

 

 

 

 

 

(137

)

 

 

 

Adoption of accounting guidance

 

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

$

18,955

 

 

$

18,138

 

 

$

(575

)

 

$

(4,388

)

 

$

32,130

 

 

$

54

 

 

$

32,184

 

 

$

686

 

 

(1)

Amounts include $2 million of common stock at both June 30, 2018 and December 31, 2017.

 

 

For the Three Months Ended June 30, 2018

(in millions)

Additional

Paid-in

Capital(1)

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock

Common

 

 

Total

BlackRock

Stockholders’

Equity

 

 

Nonredeemable

Noncontrolling

Interests

 

 

Total

Permanent

Equity

 

 

Redeemable

Noncontrolling

Interests /

Temporary

Equity

 

March 31, 2018

$

18,858

 

 

$

17,529

 

 

$

(301

)

 

$

(4,108

)

 

$

31,978

 

 

$

44

 

 

$

32,022

 

 

$

561

 

Net income

 

 

 

 

1,073

 

 

 

 

 

 

 

 

 

1,073

 

 

 

10

 

 

 

1,083

 

 

 

(5

)

Dividends declared ($2.88 per share)

 

 

 

 

(464

)

 

 

 

 

 

 

 

 

(464

)

 

 

 

 

 

(464

)

 

 

 

Stock-based compensation

 

135

 

 

 

 

 

 

 

 

 

 

 

 

135

 

 

 

 

 

 

135

 

 

 

 

Issuance of common shares related to

   employee stock transactions

 

(38

)

 

 

 

 

 

 

 

 

41

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Employee tax withholdings related to

   employee stock transactions

 

 

 

 

 

 

 

 

 

 

(21

)

 

 

(21

)

 

 

 

 

 

(21

)

 

 

 

Shares repurchased

 

 

 

 

 

 

 

 

 

 

(300

)

 

 

(300

)

 

 

 

 

 

(300

)

 

 

 

Subscriptions (redemptions/distributions)

   — noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183

 

Net consolidations (deconsolidations) of

  sponsored investment funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(53

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

(274

)

 

 

 

 

 

(274

)

 

 

 

 

 

(274

)

 

 

 

June 30, 2018

$

18,955

 

 

$

18,138

 

 

$

(575

)

 

$

(4,388

)

 

$

32,130

 

 

$

54

 

 

$

32,184

 

 

$

686

 

 

(1)

Amounts include $2 million of common stock at both June 30, 2018 and March 31, 2018.

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Six Months Ended

 

(in millions)

 

June 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

2,073

 

 

$

2,172

 

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

189

 

 

 

107

 

Stock-based compensation

 

 

294

 

 

 

310

 

Deferred income tax expense (benefit)

 

 

60

 

 

 

2

 

Other gains

 

 

(26

)

 

 

 

Net (gains) losses within consolidated VIEs

 

 

(133

)

 

 

12

 

Net (purchases) proceeds within consolidated VIEs

 

 

(453

)

 

 

(531

)

(Earnings) losses from equity method investees

 

 

(56

)

 

 

(65

)

Distributions of earnings from equity method investees

 

 

21

 

 

 

17

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(131

)

 

 

78

 

Investments, trading

 

 

(157

)

 

 

36

 

Other assets

 

 

(208

)

 

 

(178

)

Accrued compensation and benefits

 

 

(930

)

 

 

(992

)

Accounts payable and accrued liabilities

 

 

(16

)

 

 

27

 

Other liabilities

 

 

170

 

 

 

292

 

Net cash provided by/(used in) operating activities

 

 

697

 

 

 

1,287

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(73

)

 

 

(200

)

Proceeds from sales and maturities of investments

 

 

71

 

 

 

161

 

Distributions of capital from equity method investees

 

 

47

 

 

 

12

 

Net consolidations (deconsolidations) of sponsored investment funds (VIEs/VREs)

 

 

(97

)

 

 

(52

)

Acquisition, net of cash acquired

 

 

(1,506

)

 

 

 

Purchases of property and equipment

 

 

(105

)

 

 

(63

)

Net cash provided by/(used in) investing activities

 

 

(1,663

)

 

 

(142

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from long-term borrowings

 

 

992

 

 

 

 

Cash dividends paid

 

 

(1,071

)

 

 

(969

)

Repurchases of common stock

 

 

(1,795

)

 

 

(1,040

)

Net proceeds from (repayments of) borrowings by consolidated VIEs

 

 

58

 

 

 

 

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

   interest holders

 

 

444

 

 

 

530

 

Other financing activities

 

 

(136

)

 

 

6

 

Net cash provided by/(used in) financing activities

 

 

(1,508

)

 

 

(1,473

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

9

 

 

 

(27

)

Net increase/(decrease) in cash, cash equivalents and restricted cash

 

 

(2,465

)

 

 

(355

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

6,505

 

 

 

7,096

 

Cash, cash equivalents and restricted cash, end of period

 

$

4,040

 

 

$

6,741

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

93

 

 

$

94

 

Income taxes (net of refunds)

 

$

604

 

 

$

589

 

Supplemental schedule of noncash investing and financing transactions:

 

 

 

 

 

 

 

 

Issuance of common stock

 

$

515

 

 

$

613

 

PNC preferred stock capital contribution

 

$

60

 

 

$

58

 

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

   sponsored investment funds

 

$

(860

)

 

$

(266

)

 

See accompanying notes to condensed consolidated financial statements.

 

6


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 technology services to institutional and retail clients worldwide.

BlackRock’s diverse platform of alpha-seeking active, index and cash management 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 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 trusts and other pooled investment vehicles. BlackRock also offers technology services, including the investment and risk management technology platform, Aladdin®, Aladdin Wealth, eFront, Cachematrix and FutureAdvisor, as well as advisory services and solutions to a broad base of institutional and wealth management clients.

At June 30, 2019, The PNC Financial Services Group, Inc. (“PNC”) held 22.0% of the Company’s voting common stock and 22.4% 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 (“NCI”) 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, 2018, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019 (“2018 Form 10-K”).

The interim financial information at June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Certain prior period presentations and disclosures were reclassified to ensure comparability with current period classifications.

Accounting Pronouncements Adopted in the Six Months Ended June 30, 2019

Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases, and several amendments (collectively, “ASU 2016-02”), which requires lessees to recognize assets and liabilities arising from most operating leases on the condensed consolidated statements of financial condition.

7


The Company adopted ASU 2016-02 on its effective date of January 1, 2019 on a modified retrospective basis and elected not to apply ASU 2016-02 to the comparative periods presented. Under this transition method, any cumulative effect adjustment is recognized in the opening balance of retained earnings in the period of adoption. The Company elected the package of practical expedients to alleviate certain operational complexities related to the adoption, which among other things, allowed the Company to carry forward the existing lease classification. The Company elected to account for lease and non-lease components as a single component for its leases. The Company also elected the short-term lease practical expedient for its leases. Consequently, leases with an initial term of 12 months or less are not recorded on the condensed consolidated statement of financial condition. Upon adoption of ASU 2016-02, the Company recorded a net increase of approximately $0.7 billion in its assets and liabilities related to the right-of-use (“ROU”) asset and lease liability for its operating leases. The adoption of ASU 2016-02 did not have a material impact on the condensed consolidated statement of income or cash flows. See Note 10, Leases, for more information.

Fair Value Measurements

Hierarchy of Fair Value Inputs.   The Company uses a fair value hierarchy that prioritizes inputs to valuation approaches 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, 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.

 

Level 2 assets may include debt securities, investments in collateralized loan obligations (“CLOs”), bank loans, short-term floating-rate notes, asset-backed securities, securities held within consolidated hedge funds, 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.

 

Level 3 assets may include direct private equity investments held within consolidated funds, investments in CLOs and bank loans of consolidated CLOs.

 

Level 3 liabilities include contingent liabilities related to acquisitions valued based upon discounted cash flow analyses using unobservable market data and borrowings of consolidated CLOs.

 

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 Approaches.   The fair values of certain Level 3 assets and liabilities were determined using various valuation approaches as appropriate, including third-party pricing vendors, broker quotes and market and income approaches.

A significant number of inputs used to value equity, debt securities, investments in CLOs 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.

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.

8


Investments Measured at Net Asset Values.    As a practical expedient, the Company uses net asset value (“NAV”) as the fair value for certain investments. The inputs to value these investments may include the Company’s capital accounts for its partnership interests in various alternative investments, including hedge funds, real assets 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 could be used as an input to value these investments.

Fair Value of Assets and Liabilities of Consolidated CLO.    The Company applies the fair value option provisions for eligible assets, including bank loans, held by consolidated CLOs. As the fair value of the financial assets of the consolidated CLO is more observable than the fair value of the borrowings of the consolidated CLO, the Company measures the fair value of the borrowings of the consolidated CLO as the fair value of the assets of the consolidated CLO less the fair value of the Company’s economic interest in the CLO.

Derivatives and Hedging Activities.    The Company does not use derivative financial instruments for trading or speculative purposes. The Company uses 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. However, certain consolidated sponsored investment funds may also utilize derivatives as a part of their investment strategy.

Changes in the fair value of the Company’s derivative financial instruments are 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 not US dollars. 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 (loss) on the condensed consolidated statements of financial condition. Amounts excluded from the effectiveness assessment are reported in the condensed consolidated statements of income using a systematic and rational method. The Company reassesses the effectiveness of its net investment hedges at least quarterly.

Leases. The Company determines if a contract is a lease or contains a lease at inception. The Company accounts for its office facility leases as operating leases, which may include escalation clauses that are based on an index or market rate. The Company accounts for lease and non-lease components as a single component for its leases. The Company elected the short-term lease exception for leases with an initial term of 12 months or less. Consequently, such leases are not recorded on the condensed consolidated statement of financial condition. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain they will be exercised or not, respectively.

Fixed lease payments are included in ROU assets and lease liabilities within other assets and other liabilities, respectively, on the condensed consolidated statement of financial condition. ROU assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date using the Company’s incremental borrowing rate as the discount rate. Fixed lease payments made over the lease term are recorded as lease expense on a straight-line basis. Variable lease payments based on usage, changes in an index or market rate are expensed as incurred.  

Upon adoption of ASU 2016-02, for existing leases, the Company elected to determine the discount rate based on the remaining lease term as of January 1, 2019 and for lease payments based on an index or rate to apply the rate at commencement date. For new leases, the discount rates are based on the entire noncancelable lease term.  

9


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. The securities lending revenue earned from lending securities held by the separate accounts is included in investment advisory, administration fees and securities lending revenue on the condensed consolidated statements of income. During the six months ended June 30, 2019 and 2018, the Company had not resold or repledged any of the collateral received under these arrangements. At June 30, 2019 and December 31, 2018, the fair value of loaned securities held by separate accounts was approximately $17.0 billion and $18.9 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $18.4 billion and $20.7 billion, respectively.

 

3. Acquisition

On May 10, 2019, the Company acquired 100% of the equity interests of eFront Holding SAS (“eFront Transaction” or “eFront”), a leading alternative investment management software and solutions provider for approximately $1.3 billion, excluding the settlement of eFront’s outstanding debt. The acquisition of eFront will expand Aladdin’s illiquid alternative capabilities and enable BlackRock to provide individual alternative or whole-portfolio technology solutions to clients.

The purchase price was funded through a combination of existing cash and issuance of commercial paper (subsequently repaid with existing cash) and long-term notes in April 2019. See Note 13, Borrowings, for information on the debt issuance in April 2019.

The purchase price for the eFront Transaction was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the transaction. The goodwill recognized in connection with the acquisition is non-deductible for tax purposes and is primarily attributable to anticipated synergies from the transaction.  

10


A summary of the recorded fair values of the assets acquired and liabilities assumed in this acquisition is as follows(1):

 

 

Estimate of

 

(in millions)

 

Fair Value

 

Accounts receivable

 

$

65

 

Finite-lived intangible assets:

 

 

 

 

Customer relationships(2)

 

 

452

 

Technology-related(3)

 

 

205

 

Trade name(4)

 

 

21

 

Goodwill

 

 

990

 

Other assets

 

 

31

 

Deferred income tax liabilities

 

 

(194

)

Other liabilities assumed

 

 

(64

)

Total consideration, net of cash acquired

 

$

1,506

 

 

 

 

Estimate of

 

(in millions)

 

Fair Value

 

Cash paid including settlement of outstanding debt of approximately $0.2 billion

 

$

1,555

 

Cash acquired

 

 

(49

)

Total consideration, net of cash acquired

 

$

1,506

 

 

(1) At this time, the Company does not expect material changes to the value of the assets acquired or liabilities assumed in conjunction with the transaction with the exception of intangible assets and deferred income tax liabilities, which were valued using preliminary assumptions.

(2) The fair value was determined based on the excess earnings method (a Level 3 input), has a weighted-average estimated useful life of approximately 11 years and is amortized using the accelerated amortization method.

(3) The fair value was determined based upon a relief from royalty method (a Level 3 input), has a weighted-average estimated useful life of approximately eight years and is amortized using the accelerated amortization method.

(4) The fair value was determined using a relief from royalty method (a Level 3 input), has an estimated useful life of approximately five years and is amortized using the accelerated amortization method.

Finite-lived intangible assets are amortized over their estimated useful lives, which range from five to 11 years.  Amortization expense related to the finite-lived intangible assets was $10 million for the three and six months ended June 30, 2019. The finite-lived intangible assets had a weighted-average remaining useful life of approximately 10 years with remaining amortization expense as follows:

 

(in millions)

 

 

 

 

Year

 

Amount

 

2019 (excluding the six months ended June 30, 2019)

 

$

32

 

2020

 

 

60

 

2021

 

 

58

 

2022

 

 

64

 

2023

 

 

70

 

Thereafter

 

 

384

 

Total

 

$

668

 

 

The financial results of eFront have been included in BlackRock’s consolidated financial statements from the closing of the eFront Transaction.  For the three and six months ended June 30, 2019, eFront contributed $22 million of revenue and did not have a material impact to net income attributable to BlackRock, Inc. Consequently, the Company has not presented pro forma combined results of operations for this acquisition.

 

 

11


4. Cash, Cash Equivalents and Restricted Cash

 

The following table provides a reconciliation of cash and cash equivalents reported within the condensed consolidated statements of financial condition to the cash, cash equivalents, and restricted cash reported within the condensed consolidated statements of cash flows.

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

3,920

 

 

$

6,302

 

Cash and cash equivalents of consolidated VIEs

 

 

103

 

 

 

186

 

Restricted cash included in other assets

 

 

17

 

 

 

17

 

Total cash, cash equivalents and restricted cash

 

$

4,040

 

 

$

6,505

 

 

5. Investments

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

 

 

 

June 30,

 

 

December 31,

(in millions)

 

2019

 

 

2018

Debt securities:

 

 

 

 

 

 

 

 

Held-to-maturity investments

 

$

213

 

 

$

188

 

Trading securities (debt securities of consolidated sponsored investment

   funds of $143 and $233 at June 30, 2019 and December 31, 2018,

   respectively)

 

 

180

 

 

 

265

 

Total debt securities

 

 

393

 

 

 

453

 

Equity securities at FVTNI(1) (equity securities of consolidated sponsored investment

   funds of $309 and $291 at June 30, 2019 and December 31, 2018, respectively)

 

 

537

 

 

 

452

 

Equity method investments(2)

 

 

846

 

 

 

781

 

Federal Reserve Bank stock(3)

 

 

93

 

 

 

92

 

Carried interest(4)

 

 

12

 

 

 

18

 

Other investments(5)

 

 

108

 

 

 

 

Total investments

 

$

1,989

 

 

$

1,796

 

 

 

 

 

 

 

 

 

 

 

(1)

Fair value recorded through net income (“FVTNI”).

(2)

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

(3)

At June 30, 2019 and December 31, 2018, there were no indicators of impairment of Federal Reserve Bank stock, which is held for regulatory purposes and is restricted from sale.

(4)

Carried interest of consolidated sponsored investment funds accounted for as voting rights entities (“VREs”) 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.

(5)

Other investments include BlackRock’s investments in nonmarketable equity securities, which are measured at cost, adjusted for observable price changes. See Note 2, Significant Accounting Policies, in the 2018 Form 10-K for more information on investments in nonmarketable equity securities.

 

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $213 million and $188 million at June 30, 2019 and December 31, 2018, respectively. Held-to-maturity investments included foreign government debt held primarily for regulatory purposes and certain investments in CLOs. The amortized cost (carrying value) of these investments approximated fair value (primarily a Level 2 input). At June 30, 2019, $44 million of these investments mature between five to ten years and $169 million mature after ten years.

12


Equity and Trading Debt Securities

A summary of the cost and carrying value of equity and trading debt securities is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

December 31, 2018

 

(in millions)

Cost

 

 

Carrying

Value

 

 

Cost

 

 

Carrying

Value

 

Trading debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

$

122

 

 

$

122

 

 

$

144

 

 

$

140

 

Government debt

 

7

 

 

 

7

 

 

 

69

 

 

 

67

 

Asset/mortgage-backed debt

 

51

 

 

 

51

 

 

 

67

 

 

 

58

 

Total trading debt securities

$

180

 

 

$

180

 

 

$

280

 

 

$

265

 

Equity securities at FVTNI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan mutual funds

$

6

 

 

$

22

 

 

$

21

 

 

$

34

 

Equity securities/multi-asset mutual funds

 

473

 

 

 

515

 

 

 

420

 

 

 

418

 

Total equity securities at FVTNI

$

479

 

 

$

537

 

 

$

441

 

 

$

452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PennyMac

In addition, the Company accounts for its interest in PennyMac Financial Services, Inc. (“PennyMac”) as an equity method investment. At June 30, 2019 and December 31, 2018, the Company’s investment in PennyMac is included in other assets on the condensed consolidated statements of financial condition. The carrying value and market value of the Company’s interest (approximately 20% or 16 million shares) were approximately $414 million and $345 million, respectively, at June 30, 2019 and approximately $397 million and $331 million, respectively, at December 31, 2018. The market value of the Company’s interest reflected the PennyMac stock price at June 30, 2019 and December 31, 2018, respectively (a Level 1 input). The Company performed an other-than-temporary impairment analysis as of June 30, 2019 and believes the shortfall of market value versus carrying value is temporary.

 

6. Consolidated Voting Rights Entities

The Company consolidates certain sponsored investment funds accounted for as VREs because it is deemed to control such funds. The following table presents the amounts related to these consolidated VREs that were recorded on the condensed consolidated statements of financial condition, including BlackRock’s net interest in these funds:

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

13

 

 

$

59

 

Investments:

 

 

 

 

 

 

 

 

Trading debt securities

 

 

143

 

 

 

233

 

Equity securities at FVTNI

 

 

309

 

 

 

291

 

Total investments

 

 

452

 

 

 

524

 

Other assets

 

 

7

 

 

 

8

 

Other liabilities

 

 

(10

)

 

 

(53

)

NCI

 

 

(44

)

 

 

(90

)

BlackRock’s net interests in consolidated VREs

 

$

418

 

 

$

448

 

 

BlackRock’s total exposure to consolidated VREs 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 VREs are reflected in nonoperating income (expense) and partially offset in net income (loss) attributable to noncontrolling interests for the portion not attributable to BlackRock.

The Company cannot readily access cash and cash equivalents held by consolidated VREs to use in its operating activities.

13


7. 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 variable interest entities (“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 primary beneficiary (“PB”).  

Consolidated VIEs.    The Company’s consolidated VIEs include certain sponsored investment products 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 products and the right to receive benefits (or the obligation to absorb losses) that could potentially be significant to these sponsored investment products. 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.

Consolidated VIE assets and liabilities are presented after intercompany eliminations in the following table:

 

 

 

June 30,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

Assets of consolidated VIEs:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103

 

 

$

186

 

Investments:

 

 

 

 

 

 

 

 

Trading debt securities

 

 

939

 

 

 

1,395

 

Equity securities at FVTNI

 

 

736

 

 

 

569

 

Bank loans

 

 

145

 

 

 

84

 

Other investments

 

 

182

 

 

 

263

 

Carried interest

 

 

429

 

 

 

369

 

Total investments

 

 

2,431

 

 

 

2,680

 

Other assets

 

 

63

 

 

 

876

 

Total assets of consolidated VIEs

 

 

2,597

 

 

 

3,742

 

Liabilities of consolidated VIEs:

 

 

 

 

 

 

 

 

Borrowings

 

 

(142

)

 

 

(84

)

Other liabilities

 

 

(502

)

 

 

(1,290

)

NCI

 

 

(723

)

 

 

(1,076

)

BlackRock's net interests in consolidated VIEs

 

$

1,230

 

 

$

1,292

 

 

Net gain (loss) related to consolidated VIEs is presented in the following table:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating net gain (loss) on consolidated VIEs

 

$

39

 

 

$

(14

)

 

$

133

 

 

$

(12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to NCI on consolidated VIEs

 

$

12

 

 

$

6

 

 

$

17

 

 

$

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14


Nonconsolidated VIEs.    At June 30, 2019 and December 31, 2018, the Company’s carrying value of assets and liabilities included on the condensed consolidated statements of financial condition pertaining to nonconsolidated 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2019

 

Investments

 

 

Advisory Fee Receivables

 

 

Other Net Assets (Liabilities)

 

 

Maximum Risk of Loss(1)

 

Sponsored investment products

 

$

492

 

 

$

65

 

 

$

(7

)

 

$

574

 

At December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sponsored investment products

 

$

348

 

 

$

43

 

 

$

(6

)

 

$

408

 

 

 

(1)

At both June 30, 2019 and December 31, 2018, BlackRock’s maximum risk of loss associated with these VIEs primarily related to BlackRock’s investments and the collection of advisory fee receivables.

The net assets of sponsored investment products that are nonconsolidated VIEs approximated $11 billion and $9 billion at June 30, 2019 and December 31, 2018, respectively.

 

15


8. Fair Value Disclosures

Fair Value Hierarchy

Assets and liabilities measured at fair value on a recurring basis

 

June 30, 2019

(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(2)

 

 

June 30,

2019

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity securities

$

 

 

$

 

 

$

 

 

$

 

 

$

213

 

 

$

213

 

Trading securities

 

 

 

 

178

 

 

 

2

 

 

 

 

 

 

 

 

 

180

 

Total debt securities

 

 

 

 

178

 

 

 

2

 

 

 

 

 

 

213

 

 

 

393

 

Equity securities at FVTNI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan mutual funds

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

Equity securities/Multi-asset mutual funds

 

515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

515

 

Total equity securities at FVTNI

 

537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

537

 

Equity method:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity and fixed income mutual funds

 

140

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

156

 

Other

 

42

 

 

 

 

 

 

 

 

 

645

 

 

 

3

 

 

 

690

 

Total equity method

 

182

 

 

 

 

 

 

 

 

 

661

 

 

 

3

 

 

 

846

 

Federal Reserve Bank Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

93

 

 

 

93

 

Carried interest

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

12

 

Other investments(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

108

 

 

 

108

 

Total investments

 

719

 

 

 

178

 

 

 

2

 

 

 

661

 

 

 

429

 

 

 

1,989

 

Investments of consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading debt securities

 

 

 

 

939

 

 

 

 

 

 

 

 

 

 

 

 

939

 

Equity securities at FVTNI

 

736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

736

 

Bank loans

 

 

 

 

20

 

 

 

125

 

 

 

 

 

 

 

 

 

145

 

Private equity(4)

 

 

 

 

 

 

 

9

 

 

 

33

 

 

 

78

 

 

 

120

 

Other

 

 

 

 

 

 

 

 

 

 

62

 

 

 

 

 

 

62

 

Carried interest

 

 

 

 

 

 

 

 

 

 

 

 

 

429

 

 

 

429

 

Total investments of consolidated VIEs

 

736

 

 

 

959

 

 

 

134

 

 

 

95

 

 

 

507

 

 

 

2,431

 

Other assets(5)

 

168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

168

 

Separate account assets

 

69,029

 

 

 

27,001

 

 

 

 

 

 

 

 

 

777

 

 

 

96,807

 

Separate account collateral held under securities

   lending agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

12,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,113

 

Debt securities

 

 

 

 

6,333

 

 

 

 

 

 

 

 

 

 

 

 

6,333

 

Total separate account collateral held under

   securities lending agreements

 

12,113

 

 

 

6,333

 

 

 

 

 

 

 

 

 

 

 

 

18,446

 

Total

$

82,765

 

 

$

34,471

 

 

$

136

 

 

$

756

 

 

$

1,713

 

 

$

119,841

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings of consolidated VIEs(6)

$

 

 

$

 

 

$

142

 

 

$

 

 

$

 

 

$

142

 

Separate account collateral liabilities under

   securities lending agreements

 

12,113

 

 

 

6,333

 

 

 

 

 

 

 

 

 

 

 

 

18,446

 

Other liabilities(7)

 

 

 

 

7

 

 

 

168

 

 

 

 

 

 

 

 

 

175

 

Total

$

12,113

 

 

$

6,340

 

 

$

310

 

 

$

 

 

$

 

 

$

18,763

 

 

(1)

Amounts are comprised of certain investments measured at fair value using NAV (or its equivalent) as a practical expedient.

(2)

Amounts are comprised of investments held at cost, adjusted for observable price changes, investments held at 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.

(3)

Amount includes $60 million of nonmarketable equity security, which due to observable price change, was revalued during the three months ended June 30, 2019 (a Level 2 input).

(4)

Level 3 amounts primarily include direct investments in private equity companies held by private equity funds.

(5)

Amount includes a minority investment in a publicly traded company.

(6)

Borrowings of consolidated VIEs are classified based on significance of unobservable inputs, used for calculating the fair value of consolidated CLO assets.

(7)

Amounts primarily include contingent liabilities related to certain acquisitions (see Note 14, Commitments and Contingencies, for more information).

 

 

16


Assets and liabilities measured at fair value on a recurring basis

 

December 31, 2018

(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(2)

 

 

December 31,

2018

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity securities

$

 

 

$

 

 

$

 

 

$

 

 

$

188

 

 

$

188

 

Trading securities

 

 

 

 

261

 

 

 

4

 

 

 

 

 

 

 

 

 

265

 

Total debt securities

 

 

 

 

261

 

 

 

4

 

 

 

 

 

 

188

 

 

 

453

 

Equity securities at FVTNI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan mutual funds

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

Equity securities/Multi-asset mutual funds

 

418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

418

 

Total equity securities at FVTNI

 

452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

452

 

Equity method:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity and fixed income mutual funds

 

122

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

136

 

Other

 

 

 

 

 

 

 

 

 

 

642

 

 

 

3

 

 

 

645

 

Total equity method

 

122

 

 

 

 

 

 

 

 

 

656

 

 

 

3

 

 

 

781

 

Federal Reserve Bank Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

92

 

 

 

92

 

Carried interest

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

18

 

Total investments

 

574

 

 

 

261

 

 

 

4

 

 

 

656

 

 

 

301

 

 

 

1,796

 

Investments of consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading debt securities

 

 

 

 

1,395

 

 

 

 

 

 

 

 

 

 

 

 

1,395

 

Equity securities at FVTNI

 

569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

569

 

Bank loans

 

 

 

 

14

 

 

 

70

 

 

 

 

 

 

 

 

 

84

 

Private equity(3)

 

 

 

 

 

 

 

82

 

 

 

48

 

 

 

75

 

 

 

205

 

Other

 

 

 

 

 

 

 

 

 

 

58

 

 

 

 

 

 

58

 

Carried interest

 

 

 

 

 

 

 

 

 

 

 

 

 

369

 

 

 

369

 

Total investments of consolidated VIEs

 

569

 

 

 

1,409

 

 

 

152

 

 

 

106

 

 

 

444

 

 

 

2,680

 

Other assets(4)

 

122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122

 

Separate account assets

 

63,610

 

 

 

25,810

 

 

 

 

 

 

 

 

 

865

 

 

 

90,285

 

Separate account collateral held under

   securities lending agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

15,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,066

 

Debt securities

 

 

 

 

5,589

 

 

 

 

 

 

 

 

 

 

 

 

5,589

 

Total separate account collateral held

   under securities lending agreements

 

15,066

 

 

 

5,589

 

 

 

 

 

 

 

 

 

 

 

 

20,655

 

Total

$

79,941

 

 

$

33,069

 

 

$

156

 

 

$

762

 

 

$

1,610

 

 

$

115,538

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings of consolidated VIEs(5)

$

 

 

$

 

 

$

84

 

 

$

 

 

$

 

 

$

84

 

Separate account collateral liabilities

   under securities lending agreements

 

15,066

 

 

 

5,589

 

 

 

 

 

 

 

 

 

 

 

 

20,655

 

Other liabilities(6)

 

 

 

 

6

 

 

 

287

 

 

 

 

 

 

 

 

 

293

 

Total

$

15,066

 

 

$

5,595

 

 

$

371

 

 

$

 

 

$

 

 

$

21,032

 

 

(1)

Amounts are comprised of certain investments measured at fair value using NAV (or its equivalent) as a practical expedient.

(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.

(3)

Level 3 amounts include direct investments in private equity companies held by private equity funds.

(4)

Amount includes a minority investment in a publicly traded company.

(5)

Borrowings of consolidated VIEs are classified based on significance of unobservable inputs, used for calculating the fair value of consolidated CLO assets.

(6)

Amounts primarily include contingent liabilities related to certain acquisitions (see Note 14, Commitments and Contingencies, for more information).

 

 

17


Level 3 Assets.    Level 3 assets may include investments in CLOs and bank loans of consolidated CLOs which were valued based on single-broker nonbinding quotes and direct private equity investments which were valued using the market or income approach as described below.

 

Level 3 investments of consolidated VIEs of $134 million and $152 million at June 30, 2019 and December 31, 2018, respectively, related to direct investments in private equity companies held by consolidated private equity funds. At June 30, 2019, Level 3 investments of consolidated VIEs also included bank loans of a consolidated CLO which was valued based on single-broker nonbinding quotes.

 

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 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 a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could have resulted in a significantly lower (higher) fair value measurement as of June 30, 2019. For investments utilizing the market-comparable valuation technique, a significant increase (decrease) in a valuation multiple in isolation could have resulted in a significantly higher (lower) fair value measurement as of June 30, 2019.

Level 3 Liabilities. Level 3 other liabilities primarily include recorded contingent liabilities related to certain acquisitions, which were valued based upon discounted cash flow analyses using unobservable market data inputs and borrowings of consolidated VIEs, which were valued based on the fair value of the assets of the consolidated CLO less the fair value of the Company’s economic interest in the CLO.  

 


 

18


Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2019

 

(in millions)

 

March 31,

2019

 

 

Realized

and

Unrealized

Gains

(Losses)

 

 

Purchases

 

 

Sales and

Maturities

 

 

Issuances and

other

Settlements(1)

 

 

Transfers

into

Level 3

 

 

Transfers

out of

Level 3

 

 

June 30,

2019

 

 

Total Net

Unrealized

Gains (Losses)

Included in

Earnings(2)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

$

 

 

$

 

 

$

2

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

2

 

 

 

 

 

Total investments

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

Assets of consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans(3)

 

 

123

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125

 

 

 

 

 

Private equity

 

 

10

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

(1

)

Total Assets of consolidated VIEs

 

 

133

 

 

 

(1

)

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134

 

 

 

(1

)

Total Level 3 assets

 

$

133

 

 

$

(1

)

 

$

4

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

136

 

 

$

(1

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings of consolidated VIEs(3)

 

$

134

 

 

$

 

 

$

 

 

$

 

 

$

8

 

 

$

 

 

$

 

 

$

142

 

 

$

 

Other liabilities(4)

 

 

275

 

 

 

(13

)

 

 

 

 

 

 

 

 

(120

)

 

 

 

 

 

 

 

 

168

 

 

 

(13

)

Total Level 3 liabilities

 

$

409

 

 

$

(13

)

 

$

 

 

$

 

 

$

(112

)

 

$

 

 

$

 

 

$

310

 

 

$

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Amounts include proceeds from borrowings of a consolidated CLO and contingent liability payments in connection with certain prior acquisitions.

(2)

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

(3)

Bank loans and borrowings of consolidated VIEs amounts are related to the consolidated CLO.

(4)

Amounts include contingent liabilities in connection with certain acquisitions.

19


Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2019

 

(in millions)

 

December 31,

2018

 

 

Realized

and

Unrealized

Gains

(Losses)

 

 

Purchases

 

 

Sales and

Maturities

 

 

Issuances and

other

Settlements(1)

 

 

Transfers

into

Level 3

 

 

Transfers

out of

Level 3(2)

 

 

June 30,

2019

 

 

Total Net

Unrealized

Gains (Losses)

Included in

Earnings(3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

$

4

 

 

$

 

 

$

2

 

 

$

 

 

$

 

 

$

 

 

$

(4

)

 

$

2

 

 

 

 

 

Total investments

 

 

4

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

2

 

 

 

 

 

Assets of consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans(4)

 

 

70

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125

 

 

 

 

 

Private equity

 

 

82

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(72

)

 

 

9

 

 

 

(1

)

Total Assets of consolidated VIEs

 

 

152

 

 

 

(1

)

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

(72

)

 

 

134

 

 

 

(1

)

Total Level 3 assets

 

$

156

 

 

$

(1

)

 

$

57

 

 

$

 

 

$

 

 

$

 

 

$

(76

)

 

$

136

 

 

$

(1

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings of consolidated VIEs(4)

 

$

84

 

 

$

 

 

$

 

 

$

 

 

$

58

 

 

$

 

 

$

 

 

$

142

 

 

$

 

Other liabilities(5)

 

 

287

 

 

 

(19

)

 

 

 

 

 

 

 

 

(138

)

 

 

 

 

 

 

 

 

168

 

 

 

(19

)

Total Level 3 liabilities

 

$

371

 

 

$

(19

)

 

$

 

 

$

 

 

$

(80

)

 

$

 

 

$

 

 

$

310

 

 

$

(19

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Amounts include proceeds from borrowings of a consolidated CLO and contingent liability payments in connection with certain prior acquisitions.

(2)

Amounts include an investment in a consolidated entity that no longer qualifies as an investment company and is no longer accounted for under a fair value measure.

(3)

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

(4)

Bank loans and borrowings of consolidated VIEs amounts are related to the consolidated CLO.

(5)

Amounts include contingent liabilities in connection with certain acquisitions.

20


Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2018

 

(in millions)

 

March 31,

2018

 

 

Realized

and

Unrealized

Gains

(Losses)

 

 

Purchases

 

 

Sales and

Maturities

 

 

Issuances

and

other

Settlements(1)

 

 

Transfers

into

Level 3

 

 

Transfers

out of

Level 3

 

 

June 30,

2018

 

 

Total Net

Unrealized

Gains (Losses)

Included in

Earnings(2)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities(3)

 

$

26

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

(26

)

 

$

 

 

 

 

 

Trading

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

Total investments

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31

)

 

 

 

 

 

 

 

Assets of consolidated VIEs - Private equity

 

 

116

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

104

 

 

 

 

 

Total Level 3 assets

 

$

147

 

 

$

 

 

$

 

 

$

(12

)

 

$

 

 

$

 

 

$

(31

)

 

$

104

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities(4)

 

$

242

 

 

$

3

 

 

$

 

 

$

 

 

$

(16

)

 

$

 

 

$

 

 

$

223

 

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Issuances and other settlements amount includes payment of a contingent liability in connection with a certain acquisition

(2)

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

(3)

Amounts include investments in CLOs.

(4)

Amounts include contingent liabilities in connection with certain acquisitions.

 

21


Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2018

 

(in millions)

 

December 31,

2017

 

 

Realized

and

Unrealized

Gains

(Losses)

 

 

Purchases

 

 

Sales and

Maturities

 

 

Issuances

and

other

Settlements(1)

 

 

Transfers

into

Level 3

 

 

Transfers

out of

Level 3

 

 

June 30,

2018

 

 

Total Net

Unrealized

Gains (Losses)

Included in

Earnings(2)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities(3)

 

$

 

 

$

 

 

$

26

 

 

$

 

 

$

 

 

$

 

 

$

(26

)

 

$

 

 

 

 

 

Trading

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

Total investments

 

 

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

(31

)

 

 

 

 

 

 

 

Assets of consolidated VIEs - Private equity

 

 

116

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

104

 

 

 

 

 

Total Level 3 assets

 

$

116

 

 

$

 

 

$

31

 

 

$

(12

)

 

$

 

 

$

 

 

$

(31

)

 

$

104

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities(4)

 

$

236

 

 

$

(3

)

 

$

 

 

$

 

 

$

(16

)

 

$

 

 

$

 

 

$

223

 

 

$

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Issuances and other settlements amount includes payment of a contingent liability in connection with a certain acquisition.

(2)

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

(3)

Amounts include investments in CLOs.

(4)

Amounts include contingent liabilities in connection with certain acquisitions.

 


 

22


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 investment funds is 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 carrying value of certain equity method investments no longer represents fair value as determined under valuation methodologies.

Disclosures of Fair Value for Financial Instruments Not Held at Fair Value.    At June 30, 2019 and December 31, 2018, the fair value of the Company’s financial instruments not held at fair value are categorized in the table below:

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

 

(in millions)

Carrying

Amount

 

 

Estimated

Fair Value

 

 

Carrying

Amount

 

 

Estimated

Fair Value

 

 

Fair Value

Hierarchy

 

Financial Assets(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

3,920

 

 

$

3,920

 

 

$

6,302

 

 

$

6,302

 

 

Level 1

(2) (3)

Cash and cash equivalents of consolidated VIEs

$

103

 

 

$

103

 

 

$

186

 

 

$

186

 

 

Level 1

(2) (3)

Other assets

$

63

 

 

$

63

 

 

$

18

 

 

$

18

 

 

Level 1

(2) (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term borrowings

$

5,964

 

 

$

6,257

 

 

$

4,979

 

 

$

5,034

 

 

Level 2

(5)

 

 

(1) 

See Note 5, Investments, for further information on investments not held at fair value.

(2) 

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

(3) 

At June 30, 2019 and December 31, 2018, approximately $371 million and $173 million, respectively, of money market funds were recorded within cash and cash equivalents on the condensed consolidated statements of financial condition. In addition, at June 30, 2019 and December 31, 2018, approximately $13 million and $7 million, respectively, of money market funds were recorded within cash and cash equivalents of consolidated VIEs. Money market funds are valued based on quoted market prices, or $1.00 per share, which generally is the NAV of the fund.

(4) 

Other assets include restricted cash and cash collateral deposited with certain derivative counterparties. The carrying values of other assets approximates fair value, due to their short-term maturities.  

(5) 

Long-term borrowings are recorded at amortized cost net of debt issuance costs. The fair value of the long-term borrowings, including the current portion of long-term borrowings, is determined using market prices at the end of June 2019 and December 2018, respectively. See Note 13, Borrowings, for the fair value of each of the Company’s long-term borrowings.

 

23


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).

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Ref

 

Fair Value

 

 

Total

Unfunded

Commitments

 

 

Redemption

Frequency

 

Redemption

Notice Period

Equity method:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge funds/funds of hedge funds

 

(a)

 

$

188

 

 

$

85

 

 

Daily/Monthly (27%)

Quarterly (20%)

N/R (53%)

 

1 – 90 days

Private equity funds

 

(b)

 

 

123

 

 

 

349

 

 

N/R

 

N/R

Real assets funds

 

(c)

 

 

334

 

 

 

142

 

 

Quarterly (64%)

N/R (36%)

 

60 days

Other

 

 

 

 

16

 

 

 

11

 

 

Daily/Monthly (73%)

N/R (27%)

 

3 – 5 days

Consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private equity funds of funds

 

(d)

 

 

33

 

 

 

11

 

 

N/R

 

N/R

Hedge fund

 

(a)

 

 

4

 

 

 

 

 

Quarterly

 

90 days

Real assets funds

 

(c)

 

 

58

 

 

 

10

 

 

N/R

 

N/R

Total

 

 

 

$

756

 

 

$

608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Ref

 

Fair Value

 

 

Total

Unfunded

Commitments

 

 

Redemption

Frequency

 

Redemption

Notice Period

Equity method:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge funds/funds of hedge funds

 

(a)

 

$

173

 

 

$

96

 

 

Daily/Monthly (30%)

Quarterly (18%)

N/R (52%)

 

1 – 90 days

Private equity funds

 

(b)

 

 

116

 

 

 

83

 

 

N/R

 

N/R

Real assets funds

 

(c)

 

 

353

 

 

 

93

 

 

Quarterly (68%)

N/R (32%)

 

60 days

Other

 

 

 

 

14

 

 

 

16

 

 

Daily (80%)

N/R (20%)

 

5 days

Consolidated VIEs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private equity funds of funds

 

(d)

 

 

48

 

 

 

18

 

 

N/R

 

N/R

Hedge fund

 

(a)

 

 

3

 

 

 

 

 

Quarterly

 

90 days

Real assets funds

 

(c)

 

 

55

 

 

 

37

 

 

N/R

 

N/R

Total

 

 

 

$

762

 

 

$

343

 

 

 

 

 

 

N/R – not redeemable

 

(1)

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

(a)

This category includes 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. The liquidation period for the investments in the funds that are not subject to redemption is unknown at both June 30, 2019 and December 31, 2018.

(b)

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. The liquidation period for the investments in these funds is unknown at both June 30, 2019 and December 31, 2018.

24


(c)

This category includes several real assets funds that invest directly and indirectly in real estate or infrastructure. The fair values of the investments have been estimated using capital accounts representing the Company’s ownership interest in the funds. The Company’s investments that are not subject to redemption or are not currently redeemable are normally returned through distributions and realizations of the underlying assets of the funds. The liquidation periods for the investments in the funds that are not subject to redemptions is unknown at both June 30, 2019 and December 31, 2018. The total remaining unfunded commitments to real assets funds were $152 million and $130 million at June 30, 2019 and December 31, 2018, respectively. The Company had contractual obligations to the real assets funds of $145 million at June 30, 2019 and $117 million at December 31, 2018.

(d)

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 or are not currently redeemable; 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. The liquidation period for the underlying assets of these funds is unknown at both June 30, 2019 and December 31, 2018. The total remaining unfunded commitments to other third-party funds were $11 million and $18 million at June 30, 2019 and December 31, 2018, respectively. The Company had contractual obligations to the consolidated funds of $22 million at both June 30, 2019 and December 31, 2018. 

 

Fair Value Option.

 

At both June 30, 2019 and December 31, 2018, the Company elected the fair value option for certain investments in CLOs of approximately $32 million, reported within investments.

 

The following table summarizes information related to assets and liabilities of a consolidated CLO, recorded within investments and borrowings of consolidated VIEs, respectively, for which the fair value option was elected:

 

June 30,

 

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

CLO Bank loans:

 

 

 

 

 

 

 

 

Aggregate principal amounts outstanding

 

$

145

 

 

$

84

 

Fair value

 

 

145

 

 

 

84

 

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

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

CLO Borrowings:

 

 

 

 

 

 

 

 

Aggregate principal amounts outstanding

 

$

142

 

 

$

84

 

Fair value

 

$

142

 

 

$

84

 

 

At June 30, 2019, the principal amounts outstanding of the borrowings issued by the CLOs mature in 2030.

During the three and six months ended June 30, 2019 and December 31, 2018, the net gains (losses) from the change in fair value of the bank loans and borrowings held by the consolidated CLO were not material and were recorded in net gain (loss) on consolidated VIEs on the condensed consolidated statements of income. The change in fair value of the assets and liabilities included interest income and expense, respectively.

 

 

9. 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 June 30, 2019 and December 31, 2018, the Company had outstanding total return swaps with aggregate notional values of approximately $522 million and $483 million, respectively.  

At both June 30, 2019 and December 31, 2018, the Company had a derivative providing credit protection of approximately $17 million to a counterparty, 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 outflows under the arrangement.

The Company executes forward foreign currency exchange contracts to mitigate the risk of certain foreign exchange movements. At June 30, 2019 and December 31, 2018, the Company had outstanding forward foreign currency exchange contracts with aggregate notional values of approximately $2.1 billion and $2.2 billion, respectively.

The fair values of the outstanding total return swaps, credit default swap and forward foreign currency exchange contracts were not material to the condensed consolidated statement of financial condition at both June 30, 2019 and December 31, 2018.

25


The following table presents gains (losses) recognized in the condensed consolidated statements of income on derivative instruments:

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Derivative Instruments

 

Statement of Income Classification

 

Gains (Losses)

 

 

Gains (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total return swaps

 

Nonoperating income (expense)

 

$

(14

)

 

$

2

 

 

$

(64

)

 

$

7

 

Forward foreign currency

   exchange contracts

 

Other general and administration expense

 

 

(49

)

 

 

(93

)

 

 

(13

)

 

 

(63

)

Total gain (loss) from derivative instruments

 

$

(63

)

 

$

(91

)

 

$

(77

)

 

$

(56

)

The Company consolidates certain sponsored investment funds, which may utilize derivative instruments as a part of the funds’ investment strategies. The change in fair value of such derivatives, which is recorded in nonoperating income (expense), was not material for the three and six months ended June 30, 2019 and 2018.

See Note 13, Borrowings, in the 2018 Form 10-K for more information on the Company’s net investment hedge.

 

10. Leases

 

The following table presents components of lease cost included in general and administration expense on the condensed consolidated statement of income:

 

(in millions)

 

Three Months Ended

June 30, 2019

 

 

Six Months Ended

June 30, 2019

 

Lease cost:

 

 

 

 

 

 

 

 

Operating lease cost(1)

 

$

34

 

 

$

68

 

Variable lease cost(2)

 

 

10

 

 

 

18

 

Total lease cost

 

$

44

 

 

$

86

 

 

(1)

Amount includes short-term leases, which are immaterial for the three and six months ended June 30, 2019.

(2)

Amount includes lease payments, which may be adjusted based on usage, changes in an index or market rate.

 

(in millions)

 

Statement of

Financial Condition

Classification

 

June 30, 2019

 

Statement of Financial Condition information:

 

 

 

 

 

 

Operating lease ROU assets

 

Other assets

 

$

646

 

Operating lease liabilities

 

Other liabilities

 

$

754

 

 

 

26


Supplemental information related to operating lease is summarized below:

 

(in millions)

 

Six Months Ended

June 30, 2019

 

Supplemental cash flow information:

 

 

 

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

70

 

 

 

 

 

 

Supplemental noncash information:

 

 

 

 

ROU assets in exchange for operating lease liabilities in connection with the

   adoption of ASU 2016-02

 

$

661

 

ROU assets in exchange for operating lease liabilities

 

$

44

 

 

 

 

 

 

 

 

 

 

Six Months Ended

June 30, 2019

Lease term and discount rate:

 

 

 

 

 

Weighted-average remaining lease term

 

 

9

 

years

Weighted-average discount rate

 

 

3

 

%

 

(in millions)

 

 

 

 

Maturity of operating lease liabilities at June 30, 2019

 

Amount(1)

 

Remainder of 2019

 

$

72

 

2020

 

 

143

 

2021

 

 

135

 

2022

 

 

123

 

2023

 

 

73

 

Thereafter

 

 

312

 

Total lease payments

 

$

858

 

Less: imputed interest

 

 

104

 

Present value of lease liabilities

 

$

754

 

 

(1)

Amount excludes $1.3 billion of legally binding minimum lease payments for leases signed but not yet commenced. See Note 14, Commitments and Contingencies, for more information.

 

 

11. Goodwill

Goodwill activity during the six months ended June 30, 2019 was as follows:

 

(in millions)

 

 

 

 

December 31, 2018

 

$

13,526

 

Acquisition (1)

 

 

990

 

Goodwill adjustments related to Quellos (2)

 

 

(5

)

June 30, 2019

 

$

14,511

 

 

 

 

(1)

The increase in goodwill during the six months ended June 30, 2019 resulted from the $990 million of goodwill associated with the eFront Transaction, which closed on May 10, 2019.  See Note 3, Acquisition, for information on the eFront Transaction.

 

(2)

The decrease in goodwill during the six months ended June 30, 2019 resulted from a decline related to 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 $121 million and $137 million at June 30, 2019 and December 31, 2018, respectively.

 

 

27


12. Intangible Assets

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

 

(in millions)

Indefinite-lived

 

 

Finite-lived

 

 

Total

 

December 31, 2018

$

17,578

 

 

$

261

 

 

$

17,839

 

Amortization expense

 

 

 

 

(40

)

 

 

(40

)

Acquisition (1)

 

 

 

 

678

 

 

 

678

 

June 30, 2019

$

17,578

 

 

$

899

 

 

$

18,477

 

 

 

(1)

In connection with the eFront Transaction, which closed on May 10, 2019, the Company acquired $452 million of finite-lived customer relationships, $205 million of finite-lived technology-related intangible assets and $21 million of a finite-lived trade name, with weighted-average estimated lives of approximately 11 years, eight years and five years, respectively. See Note 3, Acquisition, for information on the eFront Transaction.

 

13. Borrowings

 

Short-Term Borrowings

 

2019 Revolving Credit Facility.    The Company’s credit facility has an aggregate commitment amount of $4.0 billion and was amended in March 2019 to extend the maturity date to March 2024 (the “2019 credit facility”). The 2019 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 2019 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 2019 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 June 30, 2019. The 2019 credit facility provides back-up liquidity to fund ongoing working capital for general corporate purposes and various investment opportunities. At June 30, 2019, the Company had no amount outstanding under the credit facility.

Commercial Paper Program.    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 of $4.0 billion. The commercial paper program is currently supported by the 2019 credit facility. At June 30, 2019, BlackRock had no CP Notes outstanding.

 

Long-Term Borrowings

The carrying value and fair value of long-term borrowings determined using market prices and EUR/USD foreign exchange rate at June 30, 2019 included the following:

 

(in millions)

 

Maturity Amount

 

 

Unamortized

Discount

and Debt

Issuance Costs

 

 

Carrying Value

 

 

Fair Value

 

5.00% Notes due 2019

 

$

1,000

 

 

$

 

 

$

1,000

 

 

$

1,011

 

4.25% Notes due 2021

 

 

750

 

 

 

(1

)

 

 

749

 

 

 

780

 

3.375% Notes due 2022

 

 

750

 

 

 

(2

)

 

 

748

 

 

 

777

 

3.50% Notes due 2024

 

 

1,000

 

 

 

(5

)

 

 

995

 

 

 

1,062

 

1.25% Notes due 2025

 

 

797

 

 

 

(6

)

 

 

791

 

 

 

849

 

3.20% Notes due 2027

 

 

700

 

 

 

(5

)

 

 

695

 

 

 

731

 

3.25% Notes due 2029

 

 

1,000

 

 

 

(14

)

 

 

986

 

 

 

1,047

 

Total Long-term Borrowings

 

$

5,997

 

 

$

(33

)

 

$

5,964

 

 

$

6,257

 

 

2029 Notes. In April 2019, the Company issued $1.0 billion in aggregate principal amount of 3.25% senior unsecured and unsubordinated notes maturing on April 30, 2029 (the “2029 Notes”). Interest is payable semi-annually on April 30 and October 30 of each year, commencing October 30, 2019, and is approximately $33 million per year. The 2029 Notes may be redeemed prior to January 30, 2029 in whole or in part at any time, at the option of the Company, at a “make-whole” redemption price or at par thereafter. The unamortized discount and debt issuance costs are being amortized over the remaining term of the 2029 Notes.

See Note 13, Borrowings, in the 2018 Form 10-K for more information regarding the Company’s borrowings.

 

28


14. Commitments and Contingencies

Investment Commitments.   At June 30, 2019, the Company had $605 million of various capital commitments to fund sponsored investment funds, including consolidated VIEs. These funds include private equity funds, real assets funds and opportunistic 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. 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.

Lease Commitment. As of June 30, 2019, there were no material changes to the lease commitments as reported in the 2018 Form 10-K. At December 31, 2018, future minimum commitments under the operating leases were as follows:

 

(in millions)

 

 

 

 

Year

 

Amount

 

2019

 

$

145

 

2020

 

 

139

 

2021

 

 

130

 

2022

 

 

121

 

2023

 

 

106

 

Thereafter

 

 

1,516

 

Total

 

$

2,157

 

 

In May 2017, the Company entered into an agreement with 50 HYMC Owner LLC, for the lease of approximately 847,000 square feet of office space located at 50 Hudson Yards, New York, New York. The term of the lease is twenty years from the date that rental payments begin, expected to occur in May 2023, with the option to renew for a specified term. The lease requires annual base rental payments of approximately $51 million per year during the first five years of the lease term, increasing every five years to $58 million, $66 million and $74 million per year (or approximately $1.2 billion in base rent over its twenty-year term).

Contingencies

Contingent Payments Related to Business Acquisitions.  In connection with certain acquisitions, BlackRock is required to make contingent payments, subject to achieving specified performance targets, which may include revenue related to acquired contracts or new capital commitments for certain products. The fair value of the remaining aggregate contingent payments at June 30, 2019 totaled $168 million and is included in other liabilities on the condensed consolidated statements of financial condition.

Other Contingent Payments.  The Company acts as the portfolio manager in a derivative transaction and has a maximum potential exposure of $17 million between the Company and counterparty. See Note 9, Derivatives and Hedging, for further discussion.

 

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

29


On May 27, 2014, certain 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 US District Court for the District of New Jersey against BlackRock Advisors, LLC, BlackRock Investment Management, LLC and BlackRock International Limited under the caption In re BlackRock Mutual Funds Advisory Fee Litigation. In the lawsuit, which purports to be brought derivatively on behalf of the Funds, the plaintiffs allege that the defendants violated Section 36(b) of the Investment Company Act by receiving allegedly excessive investment advisory fees from the Funds. On June 13, 2018, the court granted in part and denied in part the defendants’ motion for summary judgment. On July 25, 2018, the plaintiffs served a pleading that supplemented the time period of their alleged damages to run through the date of trial. The lawsuit seeks, among other things, to recover on behalf of the Funds all allegedly excessive advisory fees received by the defendants beginning twelve months preceding the start of the lawsuit with respect to each Fund and ending on the date of judgment, along with purported lost investment returns on those amounts, plus interest. The defendants believe the claims in this lawsuit are without merit. The trial on the remaining issues was completed on August 29, 2018. On February 8, 2019, the court issued an order dismissing the claims in their entirety. The plaintiffs filed a notice of appeal on March 8, 2019, which remains pending.

On June 16, 2016, iShares Trust, BlackRock, Inc. and certain of its advisory subsidiaries, and the directors and certain officers of the iShares ETFs were named as defendants in a purported class action lawsuit filed in California state court. The lawsuit was filed by investors in certain iShares ETFs (the "ETFs"), and alleges the defendants violated the federal securities laws by failing to adequately disclose in prospectuses issued by the ETFs the risks to the ETFs’ shareholders in the event of a "flash crash." The plaintiffs seek unspecified monetary and rescission damages. The plaintiffs’ complaint was dismissed in December 2016 and on January 6, 2017, the plaintiffs filed an amended complaint. On April 27, 2017, the court partially granted the defendants’ motion for judgment on the pleadings, dismissing certain of the plaintiffs’ claims. On September 18, 2017, the court issued a decision dismissing the remainder of the lawsuit after a one-day bench trial. On December 1, 2017, the plaintiffs appealed the dismissal of their lawsuit, which is pending. The defendants believe the claims in this lawsuit are without merit.

On April 5, 2017, BlackRock, Inc., BlackRock Institutional Trust Company, N.A. (“BTC”), the BlackRock, Inc. Retirement Committee and various sub-committees, and a BlackRock employee were named as defendants in a purported class action lawsuit brought in the US District Court for the Northern District of California by a former employee on behalf of all participants and beneficiaries in the BlackRock employee 401(k) Plan (the “Plan”) from April 5, 2011 to the present. The lawsuit generally alleges that the defendants breached their duties towards Plan participants in violation of the Employee Retirement Income Security Act of 1974 by, among other things, offering investment options that were overly expensive, underperformed peer funds, focused disproportionately on active versus passive strategies, and were unduly concentrated in investment options managed by BlackRock. On October 18, 2017, the plaintiffs filed an Amended Complaint, which, among other things, added as defendants certain current and former members of the BlackRock Retirement and Investment Committees. The Amended Complaint also included a new purported class claim on behalf of investors in certain Collective Trust Funds (“CTFs”) managed by BTC. Specifically, the plaintiffs allege that BTC, as fiduciary to the CTFs, engaged in self-dealing by, most significantly, selecting itself as the securities lending agent on terms that the plaintiffs claim were excessive. The Amended Complaint also alleged that BlackRock took undue risks in its management of securities lending cash reinvestment vehicles during the financial crisis. On August 23, 2018, the court granted permission to the plaintiffs to file a Second Amended Complaint (“SAC”) which added as defendants the BlackRock, Inc. Management Development and Compensation Committee, the Plan’s independent investment consultant and the Plan’s Administrative Committee and its members. On October 22, 2018, BlackRock filed a motion to dismiss the SAC, and on June 3, 2019, the plaintiffs filed a motion seeking to certify both the Plan and the CTF classes. Both motions are pending. The defendants believe the claims in this lawsuit are without merit.

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.

30


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 June 30, 2019, the Company indemnified certain of its clients for their securities lending loan balances of approximately $205 billion. The Company held, as agent, cash and securities totaling $219 billion as collateral for indemnified securities on loan at June 30, 2019. The fair value of these indemnifications was not material at June 30, 2019.

 

31


15. Revenue

 

The table below presents detail of revenue for the three and six months ended June 30, 2019 and 2018. See Note 2, Significant Accounting Policies, in the 2018 Form 10-K for more information on the Company’s revenue recognition.

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

(in millions)

2019

 

 

2018

 

 

2019

 

 

2018

 

Investment advisory, administration fees and

   securities lending revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

$

385

 

 

$

426

 

 

$

760

 

 

$

864

 

iShares ETFs

 

870

 

 

 

911

 

 

 

1,717

 

 

 

1,837

 

Non-ETF Index

 

163

 

 

 

187

 

 

 

327

 

 

 

363

 

Equity subtotal

 

1,418

 

 

 

1,524

 

 

 

2,804

 

 

 

3,064

 

Fixed income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

474

 

 

 

458

 

 

 

931

 

 

 

914

 

iShares ETFs

 

234

 

 

 

207

 

 

 

454

 

 

 

415

 

Non-ETF Index

 

98

 

 

 

101

 

 

 

195

 

 

 

194

 

Fixed income subtotal

 

806

 

 

 

766

 

 

 

1,580

 

 

 

1,523

 

Multi-asset

 

288

 

 

 

295

 

 

 

564

 

 

 

591

 

Alternatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Illiquid alternatives

 

118

 

 

 

83

 

 

 

228

 

 

 

160

 

Liquid alternatives

 

102

 

 

 

93

 

 

 

196

 

 

 

194

 

Currency and commodities(1)

 

24

 

 

 

26

 

 

 

48

 

 

 

51

 

Alternatives subtotal

 

244

 

 

 

202

 

 

 

472

 

 

 

405

 

Long-term

 

2,756

 

 

 

2,787

 

 

 

5,420

 

 

 

5,583

 

Cash management

 

147

 

 

 

157

 

 

 

288

 

 

 

308

 

Total base fees

 

2,903

 

 

 

2,944

 

 

 

5,708

 

 

 

5,891

 

Investment advisory performance fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

4

 

 

 

43

 

 

 

4

 

 

 

61

 

Fixed income

 

 

 

 

(1

)

 

 

2

 

 

 

2

 

Multi-asset

 

6

 

 

 

9

 

 

 

6

 

 

 

14

 

Alternatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Illiquid alternatives

 

15

 

 

 

2

 

 

 

35

 

 

 

2

 

Liquid alternatives

 

39

 

 

 

38

 

 

 

43

 

 

 

82

 

Alternatives subtotal

 

54

 

 

 

40

 

 

 

78

 

 

 

84

 

Total performance fees

 

64

 

 

 

91

 

 

 

90

 

 

 

161

 

Technology services revenue

 

237

 

 

 

198

 

 

 

441

 

 

 

382

 

Distribution fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retrocessions

 

164

 

 

 

181

 

 

 

325

 

 

 

373

 

12b-1 fees (US mutual funds distribution fees)

 

88

 

 

 

103

 

 

 

177

 

 

 

211

 

Other

 

15

 

 

 

10

 

 

 

27

 

 

 

21

 

Total distribution fees

 

267

 

 

 

294

 

 

 

529

 

 

 

605

 

Advisory and other revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory

 

22

 

 

 

33

 

 

 

41

 

 

 

54

 

Other

 

31

 

 

 

45

 

 

 

61

 

 

 

95

 

Total advisory and other revenue

 

53

 

 

 

78

 

 

 

102

 

 

 

149

 

Total revenue

$

3,524

 

 

$

3,605

 

 

$

6,870

 

 

$

7,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

_____________________________________________________________

(1)      Amount includes commodity iShares ETFs.

32


The tables below present the investment advisory, administration fees and securities lending revenue by client type and investment style, respectively:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

June 30,

 

 

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

By client type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

846

 

 

$

858

 

 

$

1,672

 

 

$

1,713

 

 

iShares ETFs

 

 

1,128

 

 

 

1,143

 

 

 

2,219

 

 

 

2,301

 

 

Institutional:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

537

 

 

 

511

 

 

 

1,037

 

 

 

1,038

 

 

Index

 

 

245

 

 

 

275

 

 

 

492

 

 

 

531

 

 

Total institutional

 

 

782

 

 

 

786

 

 

 

1,529

 

 

 

1,569

 

 

Long-term

 

 

2,756

 

 

 

2,787

 

 

 

5,420

 

 

 

5,583

 

 

Cash management

 

 

147

 

 

 

157

 

 

 

288

 

 

 

308

 

 

Total

 

$

2,903

 

 

$

2,944

 

 

$

5,708

 

 

$

5,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By investment style:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

$

1,365

 

 

$

1,352

 

 

$

2,672

 

 

$

2,717

 

 

Index and iShares ETFs

 

 

1,391

 

 

 

1,435

 

 

 

2,748

 

 

 

2,866

 

 

Long-term

 

 

2,756

 

 

 

2,787

 

 

 

5,420

 

 

 

5,583

 

 

Cash management

 

 

147

 

 

 

157

 

 

 

288

 

 

 

308

 

 

Total

 

$

2,903

 

 

$

2,944

 

 

$

5,708

 

 

$

5,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33


Investment advisory and administration fees – remaining performance obligation

 

The tables below present estimated investment advisory and administration fees expected to be recognized in the future related to the unsatisfied portion of the performance obligations at June 30, 2019 and 2018:

 

June 30, 2019

 

 

Remainder of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2019

 

 

 

2020

 

 

 

2021

 

 

 

2022

 

 

Thereafter

 

 

Total

 

 

Investment advisory and

   administration fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alternatives(1)(2)

 

$

41

 

 

$

74

 

 

$

62

 

 

$

53

 

 

$

50

 

 

$

280

 

 

 

(1)

Investment advisory and administration fees include management fees related to certain alternative products, which are based on contractual committed capital outstanding at June 30, 2019. Actual management fees could be higher to the extent additional committed capital is raised. These fees are generally billed on a quarterly basis in arrears.

(2)

The Company elected the following practical expedients and therefore does not include amounts related to (1) performance obligations with an original duration of one year or less and (2) variable consideration related to future service periods.

 

June 30, 2018

 

 

Remainder of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2018

 

 

 

2019

 

 

 

2020

 

 

 

2021

 

 

Thereafter

 

 

Total

 

Investment advisory and

   administration fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alternatives(1)(2)

 

$

43

 

 

$

75

 

 

$

64

 

 

$

52

 

 

$

52

 

 

$

286

 

 

(1)

Investment advisory and administration fees include management fees related to certain alternative products, which are based on contractual committed capital outstanding at June 30, 2018. Actual management fees could be higher to the extent additional committed capital is raised. These fees are generally billed on a quarterly basis in arrears.

(2)

The Company elected the following practical expedients and therefore does not include amounts related to (1) performance obligations with an original duration of one year or less and (2) variable consideration related to future service periods.  

 

Change in Deferred Carried Interest Liability

The table below presents changes in the deferred carried interest liability (including the portion related to consolidated VIEs), which is included in other liabilities/other liabilities of consolidated VIEs on the condensed consolidated statements of financial condition, for the three and six months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Beginning balance

 

$

327

 

 

$

224

 

 

$

293

 

 

$

219

 

Net increase (decrease) in unrealized allocations

 

 

48

 

 

 

22

 

 

 

99

 

 

 

27

 

Performance fee revenue recognized

 

 

(10

)</