AllianceBernstein Holding L.P. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 14, 2017. AB Holding is a publicly traded limited partnership whose principal income and cash flow come from its investment in operating partnership AllianceBernstein L.P. (AB). AB provides investment management, research, brokerage and related services. Figures below distinguish AB from AB Holding where relevant.
Business context and performance
AB ended 2016 with $480.2 billion in assets under management (AUM), up 2.7% from $467.4 billion. Market appreciation added $23.1 billion, partly offset by $9.8 billion of net long-term outflows and a $3.0 billion AUM reclassification. Institutional and Retail had net outflows of $5.4 billion and $4.8 billion, respectively; Private Wealth Management had $0.4 billion of net inflows. AXA and affiliates represented about 24% of AUM and approximately 5% of net revenues.
Key financial metrics
| AB, unless noted | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenues | $3.029 billion | $3.021 billion | +0.3% |
| Operating income | $723.2 million | $631.1 million | +14.6% |
| Net income attributable to AB Unitholders | $673.4 million | $579.9 million | +16.1% |
| Diluted net income per AB Unit | $2.47 | $2.10 | +17.6% |
| GAAP operating margin | 23.2% | 20.7% | +2.5 percentage points |
| Adjusted operating margin (non-GAAP) | 25.3% | 24.5% | +0.8 percentage points |
| Operating cash flow | $1.548 billion | $667.2 million | More than doubled |
| Debt at year end | $513.0 million | $581.7 million | Down $68.7 million |
Investment advisory and services fees were $1.933 billion, down 2.0%; Bernstein Research Services revenue was $479.9 million, down 2.8%; and distribution revenue was $384.4 million, down 10.0%. Investment gains were $93.4 million, compared with $3.6 million in 2015, and included a $75.3 million gain on the Jasper investment sale. Expenses declined 3.5% to $2.306 billion. Compensation expense fell 3.0%, while real estate charges rose to $17.7 million from $1.0 million.
Operating cash flow was affected by broker-dealer balances and the consolidation of investment funds; the filing attributes $270.3 million of the year-over-year increase to VIE consolidation and $403.9 million to broker-dealer payable, receivable and segregated Treasury activity. AB reported $657.0 million of cash and cash equivalents excluding consolidated VIE cash; total reported cash including VIEs was $994.5 million. The filing cautions that much of the company’s cash supports broker-dealer activities or is held by foreign subsidiaries.
AB had $513.0 million of commercial paper outstanding at year end. It also had a $1.0 billion committed revolving facility maturing in 2019 and a new $200 million 364-day revolver; neither had a balance outstanding at year end. AB stated it was in compliance with credit facility covenants. Contractual obligations totaled $1.425 billion, including $641.5 million of operating leases net of sublease receipts.
For AB Holding, net income was $216.6 million and diluted net income per unit was $2.23, versus $185.8 million and $1.86 in 2015. AB Holding’s net cash from operations was $169.5 million, down from $192.8 million. Its principal liquidity source is distributions from AB.
Fourth-quarter results and material changes
In Q4 2016, AB reported net revenues of $786.3 million, compared with $726.7 million in Q4 2015; net income attributable to AB Unitholders was $224.5 million versus $159.4 million, and diluted earnings per AB Unit were $0.83 versus $0.58. AB Holding reported Q4 net income of $72.7 million and diluted earnings per unit of $0.77, compared with $51.1 million and $0.52 in Q4 2015.
Annual revenue was nearly flat: higher investment gains, performance fees, other revenue and net interest income were largely offset by lower base advisory fees, distribution revenue and research revenue. Management cited a shift in product mix toward generally lower-fee fixed-income products as a factor in lower advisory fees. Retail AUM rose, but Retail net outflows increased; Private Wealth Management AUM and fees grew.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no specific earnings or revenue guidance. Management expected AB Holding to have resources to meet obligations through cash flows from AB, and said AB’s operating cash flow and debt access should support general liquidity needs. AB expected its effective tax rate to increase as it began repatriating future non-U.S. earnings from January 1, 2017.
- Business and market risks: Results depend on market values and mix of AUM, client flows and investment performance. Management highlighted active-to-passive migration, fee pressure, lower brokerage volumes and rates, interest-rate and foreign-exchange movements, Brexit and regulatory uncertainty. AXA is the largest client; its arrangements and many other client and distribution agreements can be terminated on relatively short notice.
- Tax revision: AB identified an error in its tax provision relating to intercompany balances and deemed dividends under Section 956. It revised prior-period financial statements and recorded a $34.2 million income-tax liability, including interest and potential penalties, at year end. Management described the error as not material to the prior statements individually, but said a catch-up adjustment in Q3 2016 would have been material. The revision also affected AB Holding’s reported prior-period results.
- One-time and accounting items: The $75.3 million Jasper gain materially benefited reported results; management excluded it from adjusted operating measures. AB adopted new consolidation guidance in 2016, bringing certain investment funds onto its balance sheet, including $393.0 million of redeemable non-controlling interests at year end. The $19.3 million W.P. Stewart contingent value right liability was reversed after its AUM milestone was not achieved; no additional $4-per-share payment is due. AB acquired Ramius Alternative Solutions for $20.5 million cash plus $11.9 million contingent consideration.
- Legal and other contingencies: The Philips litigation, which alleged damages of $177 million to $234 million plus interest, settled in November 2016 on confidential terms; AB’s contribution was paid by insurers. Management said probable and estimable litigation losses were adequately accrued, but additional losses could not be estimated. AB also disclosed $12.6 million of unrecognized tax benefits and an ongoing New York City tax examination of 2010 and 2011 returns.
- Capital and governance: Standard & Poor’s lowered AB’s long-term rating from A+ to A in 2016; Moody’s affirmed its ratings and both agencies indicated stable outlooks. AXA held an approximate 63.7% economic interest in AB. The partnership structure limits unitholder voting and influence; AB Units are not publicly traded and have significant transfer restrictions.
Important facts for investors to verify
- Reconcile reported earnings growth with the Jasper gain, lower operating expenses and the Section 956 tax revision; compare GAAP results with management’s non-GAAP adjustments.
- Track net flows, investment performance and fee mix by channel, especially continued Institutional and Retail outflows and the shift toward lower-fee strategies.
- Assess cash-flow quality: distinguish recurring operating cash generation from VIE consolidation and changes in broker-dealer balances, and note cash held abroad and potential repatriation taxes.
- Review commercial-paper refinancing needs, available revolvers, credit ratings, lease commitments and the effect of higher rates on borrowing costs and fixed-income AUM.
- Monitor the tax liability and future effective tax rate, remaining litigation or regulatory matters, and the implications of AXA’s control and the limited partnership structure.