AllianceBernstein Holding L.P. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing reports both AB Holding L.P. (the publicly traded partnership) and AllianceBernstein L.P. (AB), its operating partnership. Operating results below refer to AB unless stated otherwise. Figures are in U.S. dollars.
Business context
AB provides global investment management, research and related services through Institutional, Retail and Private Wealth Management channels, plus Bernstein Research Services. Most advisory fees are based on assets under management (AUM). AXA and its affiliates are the firm’s largest client group and represented approximately 24% of AUM; services to affiliates generated about 5% of net revenues.
Key financial and operating metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| AB net revenues | $3,020.7 million | $3,005.4 million | +0.5% |
| Operating income | $631.1 million | $608.6 million | +3.7% |
| Net income attributable to AB Unitholders | $586.6 million | $570.4 million | +2.8% |
| Diluted net income per AB Unit | $2.13 | $2.09 | +1.9% |
| Operating margin | 20.7% | 20.2% | +0.5 percentage points |
| Adjusted operating margin, non-GAAP | 24.5% | 24.2% | +0.3 percentage points |
| Operating cash flow | $667.2 million | $630.1 million | Increased |
| Year-end AUM | $467.4 billion | $474.0 billion | -1.4% |
| Commercial paper outstanding | $583.9 million | $489.0 million | Increased |
AB generated $3.2 billion of net long-term inflows, but $9.8 billion of market depreciation drove the AUM decline. Institutional net inflows of $6.9 billion were offset by Retail outflows of $3.5 billion and Private Wealth outflows of $0.2 billion. Average AUM rose 2.8% to $480.7 billion.
Base advisory fees increased 2.4% to $1,950.1 million, while performance-based fees fell 55.4% to $23.7 million. Bernstein Research Services revenue rose 2.3% to $493.5 million; distribution revenue fell 4.0% to $427.2 million. Expenses decreased 0.3% to $2,389.6 million. AB distributed $2.11 per AB Unit for 2015.
At AB Holding level, net income was $188.2 million, diluted net income per unit was $1.89, and annual distributions per unit were $1.86. AB Holding’s operating cash flow was $192.8 million, primarily reflecting cash distributions received from AB.
AB had $541.5 million in cash and cash equivalents at year-end. This included $392.1 million held by foreign subsidiaries, which management intended to keep permanently invested outside the U.S.; repatriation would trigger U.S. income taxes. The $1.0 billion committed revolving credit facility was undrawn, and AB reported compliance with its covenants. The commercial paper program is short-term funding; the filing does not provide a clear maturity schedule for the outstanding balance.
Material changes and fourth-quarter performance
- Full-year revenue and earnings grew modestly despite weaker markets, while year-end AUM declined. Management attributed the pressure to second-half market depreciation, investor withdrawals from riskier assets and flows from active to passive strategies.
- Fourth-quarter 2015 AB net revenues were $726.7 million, versus $787.4 million in fourth-quarter 2014; net income attributable to AB Unitholders was $161.1 million versus $177.4 million. Diluted earnings per AB Unit were $0.59 versus $0.65.
- Retail AUM fell 4.4% during 2015, primarily because of net outflows and market depreciation. Institutional AUM was nearly flat, with inflows offsetting market losses; Private Wealth AUM rose 1.8%.
- AB repurchased 2.0 million AB Holding Units on the open market under a Rule 10b5-1 plan during the fourth quarter, in addition to employee-unit purchases for tax withholding. Total fourth-quarter purchases were 4.7 million units.
Outlook, management commentary, risks and unusual items
- The filing gives no quantified revenue, earnings or AUM guidance. Management said it was reducing costs and aligning staffing and other expenses with the revenue base, while seeking to retain key investment professionals. It noted an objective that adjusted compensation generally not exceed 50% of adjusted net revenues; the 2015 ratio was 48.9%.
- Management expected approximately $29 million of real-estate charges in first-quarter 2016 as it vacated and marketed two New York floors for sublease. It estimated about $3.5 million in annualized savings if the space is successfully sublet.
- On February 3, 2016, Cisco announced an agreement to acquire Jasper Technologies, in which AB held a 7.6% interest carried at $10.2 million. AB expected approximately $85 million in cash, subject to adjustments and closing conditions, with closing anticipated in third-quarter 2016. Any gain would be recognized at closing; management expected to exclude it from adjusted results.
- The W.P. Stewart acquisition’s $5 billion AUM milestone for an additional $4 per share under contingent value rights had not been reached as of December 31, 2015; acquired-service AUM was approximately $4.0 billion, and the milestone deadline was December 12, 2016.
- Material business risks include market and AUM declines, investment performance, active-management outflows, fee pressure, client redemptions, dependence on AXA-related business, compensation costs, foreign exchange, seed-investment and counterparty exposures, cyber and operational disruption, and evolving regulation. Proposed U.S. Department of Labor fiduciary rules and European MiFID II research-payment rules could affect distribution and research revenues or costs.
- Philips, a former pension client, claimed damages of $177 million to $234 million plus compound interest in litigation concerning a U.S. mortgage-backed-securities portfolio. AB disputed the allegations and intended to defend the case. Management reported adequate accruals for probable estimable losses but said additional possible losses could not currently be estimated.
- AB reported $3.0 billion of goodwill; its September 2015 annual impairment test found no impairment. The filing cautioned that sustained market or AUM declines could increase impairment risk. Auditors gave unqualified opinions and reported effective internal control over financial reporting.
Important facts for investors to verify
- Track AUM flows and market effects by channel, especially Retail outflows, Institutional inflows and active-to-passive shifts.
- Review performance-based fees, fee rates and product mix, including the Global High Yield Portfolio, which generated about 12% of 2015 net revenues.
- Monitor commercial paper funding, foreign cash and repatriation taxes, credit-facility access, and the partnership’s distribution capacity.
- Confirm the closing, final proceeds and accounting treatment of the Jasper transaction, and whether the W.P. Stewart AUM milestone is achieved by its deadline.
- Assess the eventual real-estate charges and sublease savings, and developments in the Philips litigation, regulatory proposals and partnership-tax rules.