Business context and reporting period
AllianceBernstein Holding L.P. (Holding) filed this Form 10-K for the fiscal year ended December 31, 2013. Holding’s principal asset and source of income is its investment in AllianceBernstein L.P., the operating partnership. AllianceBernstein provides investment management, research, brokerage and related services. Figures below distinguish the operating partnership from Holding where relevant.
At year-end, AllianceBernstein managed $450.4 billion in assets, up 4.7% from $430.0 billion. The business spans institutional, retail and private-client investment management, plus Bernstein Research Services.
Financial and operating performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| AllianceBernstein net revenues | $2.915 billion | $2.737 billion |
| Operating income | $564.3 million | $202.4 million |
| Net income attributable to AllianceBernstein unitholders | $517.7 million | $188.9 million |
| Diluted earnings per AllianceBernstein unit | $1.88 | $0.67 |
| Reported operating margin | 19.0% | 7.4% |
| Adjusted operating margin (non-GAAP) | 24.0% | 18.8% |
| Operating cash flow | $505.6 million | $684.0 million |
| Year-end debt | $268.4 million | $323.2 million |
Revenue growth was 6.5%; expenses fell 7.2% to $2.351 billion. The reported improvement in profit and margin was substantially affected by lower real-estate charges: $28.4 million in 2013 versus $223.0 million in 2012. Management’s adjusted measures exclude specified items and are not GAAP measures.
Revenue components included investment advisory and services fees of $1.849 billion, Bernstein Research Services revenue of $445.1 million and distribution revenue of $465.4 million. Base advisory fees increased $97.7 million, while performance-based fees declined $13.0 million to $53.6 million. Employee compensation and benefits were $1.212 billion, up 3.7%; reported general and administrative expense, including real-estate charges, fell substantially.
AllianceBernstein reported $509.9 million of cash and cash equivalents at year-end. Management noted that cash included broker-dealer operating deposits and $371.1 million held by foreign entities that the firm intended to keep permanently invested abroad. A $1.0 billion committed revolving credit facility, maturing January 2017, was undrawn; the firm was in covenant compliance. Commercial paper outstanding was $268.4 million. Holding reported $155.5 million of operating cash flow, up from $99.9 million in 2012.
For the fourth quarter, AllianceBernstein reported net revenues of $765.6 million and net income attributable to its unitholders of $182.5 million, or $0.68 per diluted unit. Holding reported quarterly net income of $57.5 million, or $0.62 per diluted unit.
Material changes versus the prior comparable period
- AUM rose by $20.4 billion during 2013, principally from $30.6 billion of market appreciation, partly offset by $12.3 billion of net long-term outflows and $2.1 billion from acquisitions.
- Institutional AUM increased 2.8% to $226.0 billion. Net outflows were $1.0 billion; the loss of $6.8 billion in fixed-income assets followed AXA’s sale of MONY. Management said these were low-fee assets and would not materially affect revenue.
- Retail AUM grew 6.0% to $153.0 billion, but net outflows were $7.5 billion as redemptions rose. Private Client AUM increased 8.5% to $71.4 billion, with net outflows improving to $3.8 billion.
- Average AUM increased 6.4%, but asset mix and fee realization remained important: active equity AUM had fallen materially in prior years, while passive and fixed-income assets generally carry lower fee rates than actively managed equity assets.
- Operating cash flow declined despite higher earnings, largely reflecting working-capital movements, including lower payables and reduced segregated cash and securities.
Outlook, commentary, risks and unusual items
- Management described improving equity investment performance and reported that 85% of fixed-income assets were in strategies outperforming over the three- and five-year periods at year-end; nearly two-thirds of equity assets outperformed benchmarks over one year. Fixed-income performance in 2013 was mixed amid rising yields and market volatility.
- No specific quantified revenue, earnings or AUM guidance was provided. Management said it was pursuing growth through broader offerings, investment in talent and cost controls, and highlighted a $0.9 billion net increase in the institutional mandate pipeline during the fourth quarter. Pipeline mandates are not binding commitments.
- Management reported more than $125 million in adjusted non-compensation expense reductions over two years. The filing also described ongoing real-estate consolidation; approximately $70 million of annual operating expenses had been reduced since 2009, while substantial lease obligations remain.
- On December 12, 2013, AllianceBernstein acquired W.P. Stewart for $12 per share plus contingent value rights providing a possible additional $4 per share if specified acquired AUM exceed $5 billion by December 12, 2016. Year-end WPS AUM was approximately $2.2 billion; the milestone had not been met in Q4. The filing also disclosed a January 2014 agreement to acquire Danish manager CPH Capital, subject to regulatory approval.
- A former U.K. pension client, Philips, formally filed litigation in January 2014 alleging negligence involving a $500 million mortgage-backed-securities portfolio. Claimed damages were $177 million to $234 million plus compound interest on alleged realized losses. The company disputed the allegations and said it could not estimate a reasonably possible loss range.
- Key business risks include market declines and interest-rate changes, investment underperformance, client withdrawals, fee pressure, reliance on AXA and other distribution relationships, retention of investment professionals, regulatory changes, litigation, and operational, valuation and technology risks. Moody’s downgraded AllianceBernstein’s long-term credit rating in May 2013; S&P affirmed its rating and changed its outlook to stable in June.
- Cash distributions are variable and based on defined Available Cash Flow, generally using adjusted earnings per unit. The filing reports FY 2013 distributions declared of $1.97 per AllianceBernstein unit and $1.79 per Holding unit; amounts paid during the year differ because distributions are paid in arrears. The general partner declared fourth-quarter distributions of $0.66 and $0.60 per unit, respectively, payable in March 2014.
Most important facts for investors to verify
- Whether net outflows—particularly retail redemptions and institutional equity outflows—improve, and whether the institutional pipeline converts into funded mandates.
- How much of AUM growth and revenue improvement comes from market appreciation, acquisition effects and fee-rate or asset-mix changes rather than net client inflows.
- The sustainability of the 24.0% adjusted operating margin and the reconciliation of management’s non-GAAP measures to reported results, including the effect of real-estate and other adjustments.
- Cash availability after considering broker-dealer requirements, foreign cash intended for permanent reinvestment, commercial paper and substantial lease commitments.
- Progress toward the WPS AUM milestone and the outcome, estimated exposure and any accrual changes related to the Philips litigation and other contingencies.
- Distribution sustainability under the partnership’s Available Cash Flow provisions, and the distinction between distributions declared and distributions paid in each reporting period.