Business context and reporting period
AllianceBernstein Holding L.P. filed this Form 10-K for the fiscal year ended December 31, 2011. Holding primarily owns an interest in AllianceBernstein L.P., the operating investment-management and research business; its results largely reflect its share of AllianceBernstein’s performance. The filing also reports fourth-quarter results.
The firm provides institutional, retail, private-client investment management, and institutional research and brokerage services. Its principal revenue source is fees based on assets under management (AUM).
Key financial and operating metrics
| Metric | 2011 | 2010 |
|---|---|---|
| AllianceBernstein net revenues | $2.750 billion | $2.949 billion |
| AllianceBernstein operating income (loss) | $(208.5) million | $458.9 million |
| AllianceBernstein net income (loss) attributable to unitholders | $(174.8) million | $442.4 million |
| Diluted income (loss) per AllianceBernstein unit | $(0.62) | $1.58 |
| Adjusted operating income (non-GAAP) | $413.6 million | $553.6 million |
| Adjusted operating margin (non-GAAP) | 17.0% | 21.6% |
| Operating cash flow | $583.9 million | $832.3 million |
| Cash and cash equivalents at year-end | $638.7 million | $650.2 million |
| Debt at year-end | $444.9 million | $225.0 million |
| Period-end AUM | $405.9 billion | $478.0 billion |
AllianceBernstein had $1.0 billion of committed revolving credit capacity at year-end, with no borrowings outstanding under the facility. In January 2012, it was amended to $900 million, with an increased $350 million accordion feature and maturity extended to January 2017. Commercial paper outstanding at year-end was $444.9 million, at a weighted average rate of about 0.2%. The filing reports compliance with credit-facility covenants.
For Holding, 2011 net loss was $93.3 million, or $(0.90) per unit, compared with net income of $134.2 million, or $1.32 diluted per unit, in 2010. Holding reported $145.7 million of operating cash flow. Holding’s year-end assets were $1.63 billion and partners’ capital was $1.63 billion.
Fourth-quarter 2011 AllianceBernstein net revenues were $625.0 million, compared with $777.6 million in fourth-quarter 2010. The quarter’s net loss attributable to AllianceBernstein unitholders was $516.4 million, or $(1.84) per unit, including the one-time deferred-compensation charge.
Material changes versus the prior comparable period
- Total AUM fell 15.1% during 2011. Net outflows of $62.5 billion and market depreciation of $11.0 billion were partly offset by $1.4 billion of acquisitions. Institutional AUM declined 18.0%, retail AUM 11.4%, and private-client AUM 11.1%.
- Equity strategies were the main source of outflows: value and growth equity together recorded $75.7 billion of net outflows. Fixed income and other services had net inflows of $3.2 billion and $10.0 billion, respectively.
- Net revenues declined 6.7%. Investment advisory and services fees fell 6.6%, primarily reflecting lower average AUM and weaker institutional fees. Retail and private-client revenues were broadly stable to higher, while institutional revenues declined 19.4%.
- Reported expenses rose 18.8%, largely because of the deferred-compensation charge. Excluding specified items, adjusted operating income declined 25.3% and adjusted operating margin fell from 21.6% to 17.0%.
- Investment losses were $82.1 million, versus losses of $1.4 million in 2010; the filing attributes much of the swing to deferred-compensation-related and seed/brokerage investment marks and losses in the consolidated venture capital fund.
- Bernstein Research Services revenue increased 1.6% for the year, but trading activity fell sharply in the fourth quarter. Performance-based fees declined to $16.5 million from $20.5 million.
Outlook, management commentary, risks and unusual items
Management described 2011 as a difficult year marked by market volatility, risk aversion and continued underperformance in major equity services. It said equity underperformance could continue to pressure flows in 2012, especially in the institutional channel, and noted that the pipeline of won but unfunded institutional mandates fell to $4.3 billion from $6.4 billion. The filing gives no quantified revenue or earnings guidance.
Management highlighted continued fixed-income strength, product development, expansion of research and sell-side activities in Asia and Europe, and cost management. It expected the first Secure Retirement Strategies client to fund in the second quarter of 2012. A State Street outsourcing agreement covers investment operations for more than $300 billion in client assets; about 100 employees transferred, while research and investment management were not outsourced. Management said it would continue adjusting costs, including headcount, to the revenue base.
- Unusual compensation item: A fourth-quarter, non-cash charge of $587.1 million followed changes to deferred incentive awards that removed service requirements for many active employees’ outstanding awards. The change accelerated recognition of unrecognized expense; the company also recognized the full expense of its 2011 deferred awards. Distributions excluded the charge.
- Investment performance and credit: Management cited persistent equity underperformance and outflows. S&P and Moody’s affirmed long-term debt ratings in 2011 but changed their outlooks to negative; the filing warns a downgrade could increase borrowing costs or limit market access.
- Goodwill: Goodwill was approximately $3.0 billion. No impairment was recorded after year-end testing, but management cautioned that prolonged weak markets, redemptions, or a lower unit price could make impairment more likely.
- Concentration and flows: AXA and its subsidiaries represented about 23% of company-wide AUM and 4% of net revenues in 2011. Investment-management arrangements are generally terminable on short notice, and clients can redeem fund investments.
- Liquidity and obligations: Customer-related segregated cash and securities are not equivalent to unrestricted corporate liquidity. Net operating leases were $1.98 billion; total listed contractual obligations were $3.00 billion. Funding commitments were $69.2 million.
- Contingencies and other risks: The firm disclosed regulatory inquiries, administrative proceedings and litigation; management considered potential losses reasonably possible but believed them immaterial. Other highlighted risks include market and AUM volatility, competition, fee pressure, key-person retention, technology and operational disruptions, counterparty exposure, foreign exchange, regulation and partnership tax status.
Most important facts for investors to verify
- Whether investment performance and net flows improved after 2011, particularly in institutional and large-cap equity strategies.
- How the $587.1 million compensation charge, the new award-expensing pattern and related non-GAAP adjustments affect comparability and recurring profitability.
- Whether the $444.9 million commercial-paper balance, revised credit facility and negative rating outlooks changed the firm’s financing costs or liquidity.
- Whether the unfunded mandate pipeline, SRS launch and other product initiatives translated into funded AUM and revenue.
- Whether the substantial lease commitments, AXA relationship and client concentration, and pending legal or regulatory matters present changes not captured in this filing.