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EX-32.1 - SECTION 906 CERTIFICATON OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - BlackRock Inc.blk-ex321_7.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - BlackRock Inc.blk-ex312_6.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - BlackRock Inc.blk-ex311_8.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - BlackRock Inc.blk-ex121_9.htm

 

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 March 31, 2017

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)

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

Yes

 

X

 

No

 

 

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

Yes

 

X

 

No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 (Do not check if a smaller reporting company)

            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 April 30, 2017, there were 161,655,884 shares of the registrant’s common stock outstanding.

 

 

 


BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

61

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

 

 

 

Item 6.

Exhibits

64

 

 

 

i


PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(unaudited)

 

 

 

March 31,

 

 

December 31,

 

(in millions, except shares and per share data)

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,703

 

 

$

6,091

 

Accounts receivable

 

 

3,227

 

 

 

2,350

 

Investments

 

 

1,857

 

 

 

1,595

 

Assets of consolidated variable interest entities:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

111

 

 

 

84

 

Investments

 

 

1,097

 

 

 

1,008

 

Other assets

 

 

34

 

 

 

63

 

Separate account assets

 

 

156,352

 

 

 

149,089

 

Separate account collateral held under securities lending agreements

 

 

30,038

 

 

 

27,792

 

Property and equipment (net of accumulated depreciation of $636 and $601 at March 31,

   2017 and December 31, 2016, respectively)

 

 

546

 

 

 

559

 

Intangible assets (net of accumulated amortization of $857 and $832 at March 31, 2017

   and December 31, 2016, respectively)

 

 

17,338

 

 

 

17,363

 

Goodwill

 

 

13,113

 

 

 

13,118

 

Other assets

 

 

1,170

 

 

 

1,065

 

Total assets

 

$

230,586

 

 

$

220,177

 

Liabilities

 

 

 

 

 

 

 

 

Accrued compensation and benefits

 

$

769

 

 

$

1,880

 

Accounts payable and accrued liabilities

 

 

2,000

 

 

 

1,094

 

Liabilities of consolidated variable interest entities

 

 

207

 

 

 

216

 

Borrowings

 

 

5,619

 

 

 

4,915

 

Separate account liabilities

 

 

156,352

 

 

 

149,089

 

Separate account collateral liabilities under securities lending agreements

 

 

30,038

 

 

 

27,792

 

Deferred income tax liabilities

 

 

5,030

 

 

 

4,840

 

Other liabilities

 

 

1,056

 

 

 

1,007

 

Total liabilities

 

 

201,071

 

 

 

190,833

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Temporary equity

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

309

 

 

 

194

 

Permanent Equity

 

 

 

 

 

 

 

 

BlackRock, Inc. stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value;

 

 

2

 

 

 

2

 

Shares authorized: 500,000,000 at March 31, 2017 and December 31, 2016;

Shares issued: 171,252,185 at March 31, 2017 and December 31, 2016;

Shares outstanding: 161,798,937 and 161,534,443 at March 31, 2017 and

December 31, 2016, respectively;

 

 

 

 

 

 

 

 

Preferred stock (Note 15)

 

 

 

 

 

 

Additional paid-in capital

 

 

18,929

 

 

 

19,337

 

Retained earnings

 

 

14,073

 

 

 

13,660

 

Accumulated other comprehensive loss

 

 

(677

)

 

 

(716

)

Treasury stock, common, at cost (9,453,248 and 9,717,742 shares held at March 31, 2017 and

   December 31, 2016, respectively)

 

 

(3,171

)

 

 

(3,185

)

Total BlackRock, Inc. stockholders’ equity

 

 

29,156

 

 

 

29,098

 

Nonredeemable noncontrolling interests

 

 

50

 

 

 

52

 

Total permanent equity

 

 

29,206

 

 

 

29,150

 

Total liabilities, temporary equity and permanent equity

 

$

230,586

 

 

$

220,177

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

1


BlackRock, Inc.

Condensed Consolidated Statements of Income

(unaudited)

 

 

 

Three Months Ended

 

 

(in millions, except shares and per share data)

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

Revenue

 

 

 

 

 

 

 

 

 

Investment advisory, administration fees and securities lending revenue

 

 

 

 

 

 

 

 

 

Related parties

 

$

1,779

 

 

$

1,617

 

 

Other third parties

 

 

751

 

 

 

742

 

 

Total investment advisory, administration fees and

   securities lending revenue

 

 

2,530

 

 

 

2,359

 

 

Investment advisory performance fees

 

 

70

 

 

 

34

 

 

Technology and risk management revenue

 

 

158

 

 

 

141

 

 

Distribution fees

 

 

7

 

 

 

11

 

 

Advisory and other revenue

 

 

59

 

 

 

79

 

 

Total revenue

 

 

2,824

 

 

 

2,624

 

 

Expense

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

1,021

 

 

 

947

 

 

Distribution and servicing costs

 

 

117

 

 

 

97

 

 

Amortization of deferred sales commissions

 

 

5

 

 

 

10

 

 

Direct fund expense

 

 

208

 

 

 

188

 

 

General and administration

 

 

301

 

 

 

318

 

 

Restructuring charge

 

 

 

 

 

76

 

 

Amortization of intangible assets

 

 

25

 

 

 

25

 

 

Total expense

 

 

1,677

 

 

 

1,661

 

 

Operating income

 

 

1,147

 

 

 

963

 

 

Nonoperating income (expense)

 

 

 

 

 

 

 

 

 

Net gain (loss) on investments

 

 

51

 

 

 

(2

)

 

Interest and dividend income

 

 

7

 

 

 

5

 

 

Interest expense

 

 

(65

)

 

 

(51

)

 

Total nonoperating income (expense)

 

 

(7

)

 

 

(48

)

 

Income before income taxes

 

 

1,140

 

 

 

915

 

 

Income tax expense

 

 

269

 

 

 

268

 

 

Net income

 

 

871

 

 

 

647

 

 

Less:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to noncontrolling

   interests

 

 

9

 

 

 

(10

)

 

Net income attributable to BlackRock, Inc.

 

$

862

 

 

$

657

 

 

Earnings per share attributable to BlackRock, Inc.

   common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

5.29

 

 

$

3.97

 

 

Diluted

 

$

5.23

 

 

$

3.92

 

 

Cash dividends declared and paid per share

 

$

2.50

 

 

$

2.29

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

163,016,599

 

 

 

165,388,130

 

 

Diluted

 

 

164,856,183

 

 

 

167,398,938

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

 

 

Three Months Ended

 

 

(in millions)

 

March 31,

 

 

 

 

2017

 

 

2016

 

 

Net income

 

$

871

 

 

$

647

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments(1)

 

 

40

 

 

 

(26

)

 

Other

 

 

(1

)

 

 

 

 

Other comprehensive income (loss)

 

 

39

 

 

 

(26

)

 

Comprehensive income

 

 

910

 

 

 

621

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

9

 

 

 

(10

)

 

Comprehensive income attributable to BlackRock, Inc.

 

$

901

 

 

$

631

 

 

 

 

(1) 

Amounts for the three months ended March 31, 2017 and 2016 include losses from a net investment hedge of $7 million (net of tax of $4 million) and $23 million (net of tax of $14 million), respectively.

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

(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, 2016

 

$

19,339

 

 

$

13,660

 

 

$

(716

)

 

$

(3,185

)

 

$

29,098

 

 

$

52

 

 

$

29,150

 

 

$

194

 

Net income

 

 

 

 

 

862

 

 

 

 

 

 

 

 

 

862

 

 

 

1

 

 

 

863

 

 

 

8

 

Dividends paid

 

 

 

 

 

(447

)

 

 

 

 

 

 

 

 

(447

)

 

 

 

 

 

(447

)

 

 

 

Stock-based compensation

 

 

162

 

 

 

 

 

 

 

 

 

 

 

 

162

 

 

 

 

 

 

162

 

 

 

 

PNC preferred stock capital contribution

 

 

193

 

 

 

 

 

 

 

 

 

 

 

 

193

 

 

 

 

 

 

193

 

 

 

 

Retirement of preferred stock

 

 

(193

)

 

 

 

 

 

 

 

 

 

 

 

(193

)

 

 

 

 

 

(193

)

 

 

 

Issuance of common shares related to employee stock

   transactions

 

 

(573

)

 

 

 

 

 

 

 

 

576

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Employee tax withholdings related to employee stock

   transactions

 

 

 

 

 

 

 

 

 

 

 

(287

)

 

 

(287

)

 

 

 

 

 

(287

)

 

 

 

Shares repurchased

 

 

 

 

 

 

 

 

 

 

 

(275

)

 

 

(275

)

 

 

 

 

 

(275

)

 

 

 

Subscriptions (redemptions/ distributions) —

   noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

 

 

135

 

Net consolidations (deconsolidations) of sponsored

   investment funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

39

 

 

 

 

 

 

39

 

 

 

 

 

 

39

 

 

 

 

Adoption of new accounting pronouncement

 

 

3

 

 

 

(2

)

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

March 31, 2017

 

$

18,931

 

 

$

14,073

 

 

$

(677

)

 

$

(3,171

)

 

$

29,156

 

 

$

50

 

 

$

29,206

 

 

$

309

 

 

(1) 

Amounts include $2 million of common stock at both March 31, 2017 and December 31, 2016.

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(unaudited)

 

(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, 2015

 

$

19,407

 

 

$

12,033

 

 

$

(448

)

 

$

(2,489

)

 

$

28,503

 

 

$

77

 

 

$

28,580

 

 

$

464

 

Net income

 

 

 

 

 

657

 

 

 

 

 

 

 

 

 

657

 

 

 

 

 

 

657

 

 

 

(10

)

Dividends paid

 

 

 

 

 

(419

)

 

 

 

 

 

 

 

 

(419

)

 

 

 

 

 

(419

)

 

 

 

Stock-based compensation

 

 

172

 

 

 

 

 

 

 

 

 

 

 

 

172

 

 

 

 

 

 

172

 

 

 

 

PNC preferred stock capital contribution

 

 

172

 

 

 

 

 

 

 

 

 

 

 

 

172

 

 

 

 

 

 

172

 

 

 

 

Retirement of preferred stock

 

 

(172

)

 

 

 

 

 

 

 

 

 

 

 

(172

)

 

 

 

 

 

(172

)

 

 

 

Issuance of common shares related to employee stock

    transactions

 

 

(616

)

 

 

 

 

 

 

 

 

619

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Employee tax withholdings related to employee stock

    transactions

 

 

 

 

 

 

 

 

 

 

 

(262

)

 

 

(262

)

 

 

 

 

 

(262

)

 

 

 

Shares repurchased

 

 

 

 

 

 

 

 

 

 

 

(300

)

 

 

(300

)

 

 

 

 

 

(300

)

 

 

 

Net tax benefit (shortfall) from stock-based

    compensation

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

 

 

 

66

 

 

 

 

Subscriptions (redemptions/ distributions) —

    noncontrolling interest holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

 

 

363

 

Net consolidations (deconsolidations) of sponsored

    investment funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(300

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

(26

)

 

 

 

 

 

(26

)

 

 

 

 

 

(26

)

 

 

 

March 31, 2016

 

$

19,029

 

 

$

12,271

 

 

$

(474

)

 

$

(2,432

)

 

$

28,394

 

 

$

75

 

 

$

28,469

 

 

$

517

 

 

(1) 

Amounts include $2 million of common stock at both March 31, 2016 and December 31, 2015.

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended

 

(in millions)

 

March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

871

 

 

$

647

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

58

 

 

 

56

 

Amortization of deferred sales commissions

 

 

5

 

 

 

10

 

Stock-based compensation

 

 

162

 

 

 

172

 

Deferred income tax expense (benefit)

 

 

199

 

 

 

98

 

Net (gains) losses on nontrading investments

 

 

 

 

 

3

 

Assets and liabilities of consolidated VIEs:

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

(27

)

 

 

(46

)

Net (gains) losses within consolidated VIEs

 

 

(33

)

 

 

(2

)

Net (purchases) proceeds within consolidated VIEs

 

 

(96

)

 

 

(373

)

(Earnings) losses from equity method investees

 

 

(32

)

 

 

(3

)

Distributions of earnings from equity method investees

 

 

5

 

 

 

10

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(869

)

 

 

(270

)

Investments, trading

 

 

(188

)

 

 

(85

)

Other assets

 

 

(101

)

 

 

(58

)

Accrued compensation and benefits

 

 

(1,110

)

 

 

(1,296

)

Accounts payable and accrued liabilities

 

 

914

 

 

 

326

 

Other liabilities

 

 

51

 

 

 

246

 

Cash flows from operating activities

 

 

(191

)

 

 

(565

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(61

)

 

 

(55

)

Proceeds from sales and maturities of investments

 

 

21

 

 

 

133

 

Distributions of capital from equity method investees

 

 

10

 

 

 

6

 

Net consolidations (deconsolidations) of sponsored investment funds

 

 

 

 

 

(8

)

Purchases of property and equipment

 

 

(19

)

 

 

(30

)

Cash flows from investing activities

 

 

(49

)

 

 

46

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from long-term borrowings

 

 

697

 

 

 

 

Cash dividends paid

 

 

(447

)

 

 

(419

)

Repurchases of common stock

 

 

(562

)

 

 

(562

)

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

   interest holders

 

 

132

 

 

 

361

 

Excess tax benefit from stock-based compensation

 

 

 

 

 

70

 

Other financing activities

 

 

 

 

 

3

 

Cash flows from financing activities

 

 

(180

)

 

 

(547

)

Effect of exchange rate changes on cash and cash equivalents

 

 

32

 

 

 

(36

)

Net increase (decrease) in cash and cash equivalents

 

 

(388

)

 

 

(1,102

)

Cash and cash equivalents, beginning of period

 

 

6,091

 

 

 

6,083

 

Cash and cash equivalents, end of period

 

$

5,703

 

 

$

4,981

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

40

 

 

$

40

 

Income taxes (net of refunds)

 

$

82

 

 

$

107

 

Supplemental schedule of noncash investing and financing transactions:

 

 

 

 

 

 

 

 

Issuance of common stock

 

$

573

 

 

$

616

 

PNC preferred stock capital contribution

 

$

193

 

 

$

172

 

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

   sponsored investment funds

 

$

(28

)

 

$

(300

)

 

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 risk management services to institutional and retail clients worldwide.

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

At March 31, 2017, The PNC Financial Services Group, Inc. (“PNC”) held 21.2% of the Company’s voting common stock and 21.7% of the Company’s capital stock, which includes outstanding common and nonvoting preferred stock.

 

 

2.  Significant Accounting Policies

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

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

Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017 (“2016 Form 10-K”).

The interim financial information at March 31, 2017 and for the three months ended March 31, 2017 and 2016 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 items previously reported have been reclassified to conform to the current year presentation. Beginning with the first quarter of 2017, Aladdin revenue previously reported within “BlackRock Solutions® and advisory” is presented within “Technology and risk management revenue” on the condensed consolidated statement of income.  The remaining “BlackRock Solutions and advisory” revenue is reported as part of “Advisory and other revenue.” The prior period amount reported for BlackRock Solutions and advisory for the three months ended March 31, 2016 has been reclassified to conform to the current presentation.

Accounting Pronouncements Adopted in the Three Months Ended March 31, 2017.

Accounting for Share-Based Payments. In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the consolidated statement of cash flows. The Company adopted ASU 2016-09 as of January 1, 2017. ASU 2016-09 requires all excess tax benefits and

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deficiencies to be recognized in income tax expense on the consolidated statements of income. Accordingly, the Company recorded a discrete income tax benefit of $81 million during the three months ended March 31, 2017 for vested restricted stock units where the grant date stock price was lower than the vesting date stock price. The new guidance will increase the volatility of income tax expense as a result of fluctuations in the Company’s stock price. Upon adoption, the Company elected to account for forfeitures as they occur, which did not have a material impact on the condensed consolidated financial statements.  In addition, the Company elected to present excess tax benefits and deficiencies prospectively in operating activities on the condensed consolidated statement of cash flows.

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 CLOs, 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 and investments in CLOs.

 

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

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. Such quotes and modeled prices are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of the current market environment and other analytical procedures.

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

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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.

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 BlackRock 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.

Derivative Instruments 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 U.S. 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 on the condensed consolidated statements of financial condition. The Company reassesses the effectiveness of its net investment hedge on a quarterly basis.

Money Market Fee Waivers.    The Company is currently voluntarily waiving a portion of its management fees on certain money market funds to ensure that they maintain a targeted level of daily net investment income (the “Yield Support waivers”). During the three months ended March 31, 2017 and 2016, these waivers resulted in a reduction of management fees of approximately $6 million and $12 million, respectively.  Approximately 0% and 83% of Yield Support waivers for the three months ended March 31, 2017 and 2016, respectively, were offset by a reduction of BlackRock’s distribution and servicing costs paid to a financial intermediary.  BlackRock has provided Yield Support waivers in prior periods and may increase or decrease the level of fee waivers in future periods.

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

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

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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 three months ended March 31, 2017 and 2016, the Company had not resold or repledged any of the collateral received under these arrangements. At March 31, 2017 and December 31, 2016, the fair value of loaned securities held by separate accounts was approximately $27.5 billion and $25.7 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $30.0 billion and $27.8 billion, respectively.

Recent Accounting Pronouncements Not Yet Adopted.

Revenue from Contracts with Customers.    In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance also changes the accounting for certain contract costs and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The Company continues to evaluate the impact of ASU 2014-09 on the presentation and recognition of its revenue contracts and certain contract costs. The most significant change identified to date relates to the presentation of certain distribution costs, which are currently presented net against revenues (contra-revenue) and will likely be presented as an expense on a gross basis. The Company will adopt ASU 2014-09 upon its effective date of January 1, 2018, together with all amending ASUs, and is currently evaluating which transition method it will apply.

Recognition and Measurement of Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  ASU 2016-01 amends guidance on the classification and measurement of financial instruments, including significant revisions in accounting related to the classification and measurement of investments in equity securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected.  ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments.  ASU 2016-01 is effective for the Company on January 1, 2018.  In the period of adoption, the Company is required to reclassify the unrealized gains/losses on equity securities within accumulated other comprehensive income to retained earnings, which is not expected to be material to the condensed consolidated financial statements.  

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize assets and liabilities arising from most operating leases on the statement of financial position. The Company is currently evaluating the impact of adopting ASU 2016-02, which is effective for the Company on January 1, 2019.

Cash Flow Classification.  In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which amends and clarifies the current guidance to reduce diversity in practice of the classification of certain cash receipts and payments in the statement of cash flows. The Company is currently evaluating the impact of adopting ASU 2016-15, which is effective for the Company on January 1, 2018 with early adoption permitted. The Company must apply the guidance retrospectively to all periods presented.

 

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3.  Investments

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

 

 

 

March 31,

 

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

Available-for-sale investments

 

$

80

 

 

$

80

 

Held-to-maturity investments

 

 

51

 

 

 

51

 

Trading investments:

 

 

 

 

 

 

 

 

Consolidated sponsored investment funds

 

 

677

 

 

 

465

 

Other equity and debt securities

 

 

192

 

 

 

101

 

Deferred compensation plan mutual funds

 

 

51

 

 

 

59

 

Total trading investments

 

 

920

 

 

 

625

 

Other investments:

 

 

 

 

 

 

 

 

Equity method investments

 

 

701

 

 

 

730

 

Cost method investments(1)

 

 

91

 

 

 

91

 

Carried interest