AllianceBernstein Holding L.P. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 12, 2015. AB Holding is a publicly traded partnership whose principal asset and source of income is its interest in operating partnership AllianceBernstein L.P. (AB). AB provides investment management, research, brokerage and related services.
Financial and operating results
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| AB net revenues | $3.005 billion | $2.915 billion | +3.1% |
| AB operating income | $608.6 million | $564.3 million | +7.9% |
| AB net income attributable to AB Unitholders | $570.4 million | $517.7 million | +10.2% |
| Diluted net income per AB Unit | $2.09 | $1.88 | +11.1% |
| GAAP operating margin | 20.2% | 19.0% | +1.2 percentage points |
| Adjusted operating margin (non-GAAP) | 24.2% | 24.1% | +0.1 percentage points |
| Operating cash flow | $630.1 million | $505.6 million | +24.6% |
AB Holding reported net income of $180.8 million, or $1.86 per diluted unit, versus $165.5 million, or $1.71 per diluted unit, in 2013. Its 2014 distributions were $1.86 per AB Holding Unit; AB distributed $2.08 per AB Unit. Distributions are based on Available Cash Flow under the partnership agreements, not solely on GAAP earnings.
At year-end, AUM was $474.0 billion, up $23.6 billion or 5.2% from 2013. Growth reflected $17.2 billion of market appreciation, $5.1 billion of net long-term inflows and $2.9 billion from acquisitions, partly offset by $1.6 billion of AUM adjustments. Institutions had $5.5 billion of net inflows; Retail had $0.5 billion of outflows; Private Wealth Management had $0.1 billion of inflows.
Base advisory fees rose 6.1% to $1.905 billion, supported by a 5.6% increase in average AUM. Performance-based fees were approximately flat at $53.2 million versus $53.6 million. Bernstein Research Services revenue increased 8.4% to $482.5 million. Distribution revenue declined 4.4% to $445.0 million, while investment results shifted to a $9.1 million loss from a $33.3 million gain in 2013.
Total expenses increased 2.0% to $2.397 billion. Employee compensation and benefits rose 4.4% to $1.266 billion; real estate charges fell sharply to approximately $0.1 million from $28.4 million in 2013. AB reported $555.5 million of cash and cash equivalents and $489.0 million of commercial paper debt at year-end. Its $1.0 billion committed revolving credit facility was undrawn, and the firm reported compliance with its covenants. Operating cash flow improved, while investing activities used $86.2 million and financing activities used $478.2 million.
Changes versus 2013
- Net income and operating margin improved, with higher base advisory fees and Bernstein Research Services revenue among the main contributors.
- AUM growth included a return to positive net inflows overall, compared with $12.3 billion of net outflows in 2013; Retail nevertheless remained slightly net outflow-positive only after acquisitions and market effects, with reported net outflows of $0.5 billion.
- Investment gains swung to losses, and distribution revenue declined; these partly offset fee and research-revenue growth.
- Cash from operations rose to $630.1 million from $505.6 million. Commercial paper outstanding increased to $489.0 million from $268.4 million.
- AB acquired an approximately 82% interest in Danish manager CPH in June 2014 for $64.4 million cash plus contingent consideration of $9.4 million. The acquisition added $58.1 million of goodwill.
Outlook, risks and unusual items
The filing provides no numerical earnings or revenue guidance. Management said it expects AB Holding’s cash flow from AB to meet its obligations and believes AB’s operating cash flow and access to debt markets provide adequate liquidity; these expectations depend on markets, AUM and continued access to financing. In January 2015, the firm introduced AB branding for its Institutions and Retail businesses and AB Bernstein branding for Private Wealth Management and Bernstein Research Services.
- Business exposure: Revenue depends on market values and composition of AUM, investment performance, client flows and fee rates. Management highlighted market volatility and interest-rate uncertainty, competition and ongoing pressure on brokerage commissions. Client agreements and distribution arrangements are generally terminable on relatively short notice.
- Client and product concentration: AXA and affiliates represented approximately 23% of AUM and 5% of net revenues. One Luxembourg Global High Yield fund generated approximately 13% of 2014 net revenues. UBS accounted for approximately 11% of open-end AB Fund sales; distribution relationships are not guaranteed.
- Regulatory and structural risks: The filing cites potential effects of Dodd-Frank, MiFID II, proposed changes to Rule 12b-1 fees and Taiwan fund-ownership limits effective in 2016. Tax changes or loss of partnership tax status could materially reduce income and distributions. Limited partnership governance gives Unitholders restricted influence; AXA controls the General Partner.
- Litigation: A former UK pension client, Philips, seeks alleged damages of $177–$234 million plus compound interest in a mortgage-backed-securities matter. AB disputes the claims and says it cannot estimate a reasonably possible loss range. Management says adequate accruals were recorded for estimable probable losses, while additional losses remain possible but not estimable.
- Acquisition contingency: W.P. Stewart contingent value rights pay up to $4 per share if acquired-service AUM exceeds $5 billion by December 12, 2016. AUM was approximately $2.6 billion at December 31, 2014, and management said the milestone was not met in Q4 2014.
- Other items: AB’s defined benefit pension plan was underfunded by $23.4 million, compared with $9.7 million in 2013. AB reported $3.0 billion of goodwill; its September 2014 impairment test found no impairment. PricewaterhouseCoopers issued unqualified audit opinions and reported effective internal control over financial reporting.
Key facts for investors to verify
- Whether AUM growth and institutional inflows continue, and whether Retail outflows persist or improve.
- How advisory fee growth, investment performance, product mix and compensation costs affect margins and distributions.
- Whether commercial paper balances, liquidity and borrowing access remain manageable under market stress.
- Developments in the Philips litigation, the WPS AUM milestone and the CPH acquisition’s performance.
- Potential impacts of regulatory changes, tax-status rules, AXA-related concentration and the pension-plan deficit.