AllianceBernstein Holding L.P. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. AB Holding is a publicly traded partnership whose principal asset and source of income is its investment in the operating partnership, AllianceBernstein L.P. (“AB”). Financial and operating measures below distinguish AB from AB Holding where relevant.
Business context and financial performance
AB provides investment management, research and related services through Institutional, Retail, Private Wealth Management and Bernstein Research Services channels. Most advisory fees are linked to assets under management (AUM).
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| AB net revenues | $3.367 billion | $3.299 billion | Up 2.1% |
| AB operating income | $825.3 million | $773.9 million | Up 6.6% |
| AB net income attributable to AB unitholders | $757.6 million | $662.4 million | Up 14.4% |
| AB diluted net income per unit | $2.78 | $2.45 | Up 13.5% |
| AB GAAP operating margin | 23.9% | 21.7% | Up 2.2 percentage points |
| AB adjusted operating margin (non-GAAP) | 29.1% | 27.7% | Up 1.4 percentage points |
| AB Holding net income | $242.4 million | $207.4 million | Up 16.9% |
| AB Holding diluted net income per unit | $2.50 | $2.19 | Up 14.2% |
AB’s base advisory fees rose 6.5% to $2.244 billion, supported by average AUM growth. Performance-based fees increased to $118.1 million from $94.8 million. Bernstein Research Services revenue fell 2.3% to $439.4 million, while investment gains dropped to $2.7 million from $92.1 million. Employee compensation and benefits rose 5.0% to $1.379 billion; total expenses increased 0.7%.
AUM, cash flow, debt and liquidity
- Year-end AUM was $516.4 billion, down 6.9% from $554.5 billion. The decline comprised $30.0 billion of market depreciation and $8.1 billion of net outflows. Institutional net outflows were $10.0 billion; Retail flows were flat; Private Wealth Management had $1.9 billion of net inflows.
- Average AUM rose 5.1% to $544.2 billion, even as fourth-quarter market declines reduced AUM by $34.0 billion to $516.4 billion.
- AB generated $1.308 billion of operating cash flow, versus $645.5 million in 2017. Management attributed much of the increase to working-capital movements, including broker-dealer payables and activity in consolidated funds; cash flow should therefore be considered alongside those movements.
- AB reported $640.2 million of cash and cash equivalents excluding consolidated investment funds. Commercial paper outstanding was $523.2 million, at a weighted average year-end rate of about 2.7%; $25.0 million was outstanding under a $200 million revolving facility. No borrowings were outstanding under the $800 million committed credit facility, and AB reported covenant compliance.
- AB Holding reported $279.3 million of operating cash flow and received $308.0 million in distributions from AB. AB Holding reported total assets of $1.491 billion and partners’ capital of $1.490 billion; its income and liquidity depend principally on AB distributions.
- Cash distributions per unit reported for 2018 were $2.68 for AB Holding and $2.96 for AB, reflecting the partnerships’ available-cash-flow calculation and AB non-GAAP adjustments. The December-quarter distributions declared in February 2019 were $0.64 per AB Holding unit and $0.71 per AB unit.
Material changes, outlook and unusual items
- Quarter-end weakness: AB’s fourth-quarter net revenues were $804.7 million versus $919.1 million in the fourth quarter of 2017; net income attributable to AB unitholders was $188.1 million versus $246.4 million. Markets sold off sharply late in 2018.
- Margin objective: Management said achieving its 30% adjusted operating margin target by 2020 was no longer likely, given lower AUM and expected fee revenue. It remained committed to a 30% target in years after 2020, subject to markets and business mix.
- Nashville relocation: AB plans to relocate about 1,050 New York-area roles and establish its headquarters in Nashville. For the transition through 2024, it estimated costs of $155–$165 million and savings of $190–$200 million; ongoing annual savings from 2025 were estimated at $70–$75 million. The largest expected EPU reduction during the transition was about $0.07 in 2019. These are forward-looking estimates and may differ materially from actual results. A 15-year Nashville lease is expected to begin in 2020, with approximately $125 million in base rent over its initial term.
- Accounting change: Adoption of ASC 606 resulted in a $35.0 million net-of-tax increase to AB partners’ capital at the start of 2018. It also permitted earlier recognition of certain performance fees; $12.9 million from a fund in liquidation was recognized in 2018 that would have been deferred under the prior standard.
- Affiliate exposure: AXA, EQH and their affiliates represented about 24% of AUM and 5% of net revenues. AXA and EQH agreements may be terminated on short notice. AXA’s 2018 letter expressed an intention to continue using AB and making suitable seed investments, subject to investment performance, past practice and fiduciary duties; AXA also announced plans to sell its remaining EQH interest over time.
- Key risks: Market declines, client withdrawals, investment performance, active-to-passive flows, fee pressure, rising interest costs, MiFID II’s effect on research spending, regulatory change, key-person retention, cyber and operational failures, and the relocation’s execution could affect results. Litigation and regulatory matters are possible, but management said it could not estimate potential losses and did not expect currently pending matters to materially affect results, financial condition or liquidity.
Most important facts for investors to verify
- Whether market recovery, investment performance and client flows stabilize AUM after the sharp fourth-quarter decline.
- Whether institutional outflows, especially in fixed income and Customized Retirement Strategies, continue or reverse.
- Progress toward the Nashville cost, savings and timing estimates, including retention and recruitment outcomes.
- Whether AB can improve adjusted margins despite the withdrawal of the 2020 target and ongoing fee and compensation pressures.
- Changes in AXA/EQH relationships, affiliate AUM and service arrangements, and the effects of MiFID II on research revenue and costs.
- Debt refinancing and liquidity needs, including the effect of higher commercial-paper rates and operating cash-flow working-capital volatility.
- The detailed financial-statement notes for distribution calculations, ASC 606 effects, commitments, and unquantified litigation or regulatory contingencies.