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| AB > SEC Filings for AB > Form 10-K on 12-Feb-2013 | All Recent SEC Filings |
12-Feb-2013
Annual Report
Percentage change figures are calculated using assets under management rounded to the nearest million and financial statement amounts rounded to the nearest thousand.
Executive Overview
We made significant progress in stabilizing our business in 2012, and demonstrated improvement in a number of areas of our business. In the fourth quarter, our total net flows turned positive for the first time since before the financial crisis, due to a second consecutive $5 billion-plus net inflow quarter in Retail and our first net flow positive quarter in Institutions since the first quarter of 2008. Our Fixed Income services continued to outperform their benchmarks during the fourth quarter, as did many of our core Growth and Value Equity services.
These results conclude a year during which we were successful in executing our long-term strategy to improve our investment performance, diversify our business, innovate for clients with our offerings and strengthen our financial condition. In Fixed Income, we finished 2012 with approximately 89% of our assets in strategies that outperformed their benchmarks for the three-year period. In Equities, our Global, International, Emerging Markets and U.S. Strategic Value strategies significantly outperformed their benchmarks in the fourth quarter of 2012, while Growth strategies such as U.S. Thematic, and U.S. Large and Small Cap Growth outperformed their benchmarks for the full year, and stability services such as Select U.S. Equity and Global Market Neutral beat benchmarks across multiple time periods.
Our total AUM as of December 31, 2012 were $430.0 billion, up $24.1 billion, or 5.9%, during 2012. The increase in AUM was driven by market appreciation of $38.5 billion and $16.2 billion of net inflows in the Retail channel, partially offset by net outflows of $21.6 billion and $9.0 billion in the Institutions and Private Client channels, respectively.
Institutional AUM decreased $4.1 billion, or 1.8%, to $219.8 billion during 2012. The decrease in AUM resulted from net outflows of $21.6 billion, partially offset by market appreciation of $17.6 billion. Gross sales increased $4.0 billion, or 23.2%, from $17.3 billion in 2011 to $21.3 billion in 2012. In addition, redemptions and terminations decreased $14.0 billion, or 26.4%, from $52.8 billion in 2011 to $38.8 billion in 2012. The pipeline of awarded but unfunded Institutional mandates was $8.0 billion as of year-end 2012, compared with $4.3 billion as of year-end 2011. We completed nearly 400 requests for proposals during 2012 across diverse fixed income and equity services - an 18% annual increase. Fixed Income is driving our improvement in this important business, but clients increasingly ask us about our equity, alternatives and multi-asset strategies.
Retail AUM increased $31.8 billion, or 28.2%, to $144.4 billion during 2012, resulting from net inflows of $16.2 billion and market appreciation of $15.5 billion. Gross sales increased $25.3 billion, or 81.7%, from $31.0 billion in 2011 to record annual gross sales of $56.3 billion in 2012 as a result of strong sales in Fixed Income products and significant sales increases from all geographic regions. Our strength was particularly pronounced in Asia Ex-Japan, where we won 23 awards for both performance and innovation in 2012, and where we command leading local market shares by AUM in Taiwan and Hong Kong.
Private Client AUM decreased $3.6 billion, or 5.2%, to $65.8 billion during 2012. The decrease in AUM was driven by net outflows of $9.0 billion, offset by market appreciation of $5.4 billion. Gross sales decreased $3.0 billion, or 41.5%, from $7.3 billion in 2011 to $4.3 billion in 2012. During 2012, we enhanced our fully diversified investment offering to better meet client needs by introducing Strategic Equities, a new multi-style, all-cap approach to equity investment that captures our highest conviction ideas, and providing broader client access to alternatives through a fund-of-hedge-funds registered investment company.
Bernstein Research Services revenue decreased $23.7 million, or 5.4% to $413.7 million in 2012, as a result of a significant decline in market trading volumes, partially offset by market share gains.
Our full year 2012 revenues decreased $13.2 million, or 0.5%, to $2,736.7 million in 2012. The decrease was driven by lower investment advisory base fees of $194.3 million and lower Bernstein Research Services revenue of $23.7 million, offset by investments gains in 2012 compared to losses in 2011 resulting in a positive net impact of $111.3 million, higher performance-based fees of $50.1 million and higher distribution revenues of $50.1 million. Full year 2012 operating expenses decreased $424.0 million, or 14.3% to $2,534.4 million in 2012, due to the one-time long-term incentive compensation charge of $587.1 million recorded in 2011, lower employee compensation and benefits expense of $78.3 million (excluding the compensation charge) and lower office and related expenses of $32.8 million (excluding the real estate charges), offset by higher real estate charges of $215.8 million (discussed below in this Item 7) and higher promotion and servicing expenses of $50.0 million.
Finally, we improved our firm's operating leverage, finishing the year on schedule in executing our global real estate consolidation plan and anticipated related cost savings. With this and other firm-wide rationalization efforts, we increased our adjusted operating margin by 1.8 percentage points in 2012, to 18.8%, and achieved a second-half margin of 20.4%.
Holding
Holding's principal source of income and cash flow is attributable to its
investment in AllianceBernstein Units. The Holding financial statements and
notes and management's discussion and analysis of financial condition and
results of operations ("MD&A") should be read in conjunction with those of
AllianceBernstein.
Results of Operations
Years Ended December 31, % Change
2012 2011 2010 2012-11 2011-10
(in thousands,
except per unit amounts)
Net income (loss) attributable
to AllianceBernstein
Unitholders $ 188,916 $ (174,768 ) $ 442,419 n/m n/m
Weighted average equity
ownership interest 37.5 % 37.5 % 36.7 %
Equity in net income (loss)
attributable to
AllianceBernstein Unitholders $ 70,807 $ (65,581 ) $ 162,217 n/m n/m
Net income (loss) of Holding $ 51,085 $ (93,268 ) $ 134,158 n/m n/m
Diluted net income (loss) per
Holding Unit $ 0.51 $ (0.90 ) $ 1.32 n/m n/m
Distribution per Holding
Unit (1)(2) $ 1.23 $ 1.14 $ 1.31 7.9 % (13.0 )%
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(2) The 2011 distribution excludes the impact of AllianceBernstein's $587.1 million one-time, non-cash long-term incentive compensation charge. See the AllianceBernstein section of this Item 7 for a discussion of this charge.
Holding had net income of $51.1 million in 2012 as compared to a net loss of $93.3 million in 2011. The change reflects higher net income attributable to AllianceBernstein Unitholders. Holding had a net loss of $93.3 million in 2011 as compared to net income of $134.2 million in 2010. The net loss in 2011 reflects the impact of AllianceBernstein's $587.1 million one-time, non-cash long-term incentive compensation charge.
Holding's income taxes represent a 3.5% federal tax on its partnership gross income from the active conduct of a trade or business. Holding's partnership gross income is derived from its interest in AllianceBernstein. Holding's income tax is computed by multiplying certain AllianceBernstein qualifying revenues (primarily U.S. investment advisory fees and SCB LLC commissions) by Holding's ownership interest in AllianceBernstein (adjusted for Holding Units owned by AllianceBernstein's consolidated rabbi trust), multiplied by the 3.5% tax rate. Holding's effective tax rate was 27.9% in 2012 compared to (42.2)% in 2011 and 17.3% in 2010. See Note 6 to Holding's financial statements in Item 8 for a further description.
As supplemental information, AllianceBernstein provides the performance measures "adjusted net revenue", "adjusted operating income" and "adjusted operating margin", which are the principal metrics management uses in evaluating and comparing the period-to-period operating performance of AllianceBernstein. Such measures are not based on generally accepted accounting principles ("non-GAAP measures"). The impact of these non-GAAP measures on Holding's net income and diluted net income per Holding Unit are as follows:
Years Ended December 31,
2012 2011 2010
(in thousands,
except per unit amounts)
AllianceBernstein non-GAAP adjustments, before
taxes $ 221,530 $ 585,242 $ 79,463
Income tax effect on non-GAAP adjustments (11,573 ) (23,234 ) (2,066 )
AllianceBernstein non-GAAP adjustments, after
taxes 209,957 562,008 77,397
Holding's weighted average equity ownership
interest in AllianceBernstein 37.5 % 37.5 % 36.7 %
Impact on Holding's net income of
AllianceBernstein non-GAAP adjustments $ 78,693 $ 210,891 $ 28,378
Net income (loss) - diluted, GAAP basis $ 51,085 $ (93,268 ) $ 135,798
Impact on Holding's net income of
AllianceBernstein non-GAAP adjustments 78,693 210,891 28,378
Adjusted net income - diluted $ 129,778 $ 117,623 $ 164,176
Diluted net income (loss) per Holding Unit, GAAP
basis $ 0.51 $ (0.90 ) $ 1.32
Impact of AllianceBernstein non-GAAP adjustments 0.77 2.04 0.28
Adjusted diluted net income per Holding Unit $ 1.28 $ 1.14 $ 1.60
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The impact on Holding's net income (loss) of AllianceBernstein's non-GAAP adjustments reflects Holding's share (based on its ownership percentage of AllianceBernstein over the applicable period) of AllianceBernstein's non-GAAP adjustments to its net income (see Management Operating Metrics in this Item 7). These non-GAAP measures are provided in addition to, and not as substitutes for, net revenues, operating income and operating margin, and they may not be comparable to non-GAAP measures presented by other companies. Management uses both the GAAP and non-GAAP measures in evaluating our financial performance. The non-GAAP measures alone may pose limitations because they do not include all of AllianceBernstein's revenues and expenses.
Proposed Tax Legislation
See "Risk Factors" in Item 1A.
Capital Resources and Liquidity
During the year ended December 31, 2012, net cash provided by operating activities was $99.9 million, compared to $151.4 million during the corresponding 2011 period. The decrease was primarily due to lower cash distributions received from AllianceBernstein of $57.8 million. During the year ended December 31, 2011, net cash provided by operating activities was $151.4 million, compared to $153.6 million during the corresponding 2010 period. The decrease was primarily due to lower cash distributions received from AllianceBernstein of $3.7 million.
During the years ended December 31, 2012, 2011 and 2010, net cash used in investing activities was $11.6 million, $7.2 million and $10.5 million, respectively, reflecting investments in AllianceBernstein from cash distributions paid to the AllianceBernstein consolidated rabbi trust and with proceeds from exercises of compensatory options to buy Holding Units.
During the year ended December 31, 2012, net cash used in financing activities was $88.3 million, compared to $144.2 million during the corresponding 2011 period. The decrease was primarily due to lower cash distributions paid to unitholders of $57.3 million. During the year ended December 31, 2011, net cash used in financing activities was $144.2 million, compared to $143.1 million during the corresponding 2010 period. The increase was due to lower proceeds from the exercise of compensatory options to buy Holding Units of $6.8 million, offset by lower cash distributions paid to unitholders of $5.7 million.
Management believes that the cash flow realized from its investment in AllianceBernstein will provide Holding with the resources to meet its financial obligations.
Cash Distributions
Holding is required to distribute all of its Available Cash Flow, as defined in the Holding Partnership Agreement, to its unitholders (including the General Partner). Typically in the past, Available Cash Flow has been the diluted earnings per unit for the quarter multiplied by the number of units outstanding at the end of the quarter, except when, as was the case with the compensation-related charge in the fourth quarter of 2011 and the real estate charge in the third quarter of 2012, the effects of these non-cash charges were eliminated. Starting in the third quarter of 2012, Available Cash Flow is the adjusted diluted net income per unit for the quarter multiplied by the number of units outstanding at the end of the quarter. In future periods, management anticipates that Available Cash Flow typically will be based on adjusted diluted net income per unit, unless management determines that one or more non-GAAP adjustments should not be made with respect to the Available Cash Flow calculation. See Note 2 to Holding's financial statements in Item 8 for a description of Available Cash Flow.
Commitments and Contingencies
See Note 7 to Holding's financial statements in Item 8.
AllianceBernstein
Assets Under Management
Assets under management by distribution channel were as follows:
As of December 31, % Change
2012 2011 2010 2012-11 2011-10
(in billions)
Institutions $ 219.8 $ 223.9 $ 272.9 (1.8 )% (18.0 )%
Retail 144.4 112.6 127.0 28.2 (11.4 )
Private Client 65.8 69.4 78.1 (5.2 ) (11.1 )
Total $ 430.0 $ 405.9 $ 478.0 5.9 (15.1 )
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Assets under management by investment service were as follows:
As of December 31, % Change
2012 2011 2010 2012-11 2011-10
(in billions)
Equity
Value:
U.S. $ 19.0 $ 25.2 $ 37.8 (24.6 )% (33.5 )%
Global and International 38.1 55.6 106.5 (31.5 ) (47.8 )
57.1 80.8 144.3 (29.3 ) (44.0 )
Growth:
U.S. 21.6 21.8 30.3 (1.4 ) (28.0 )
Global and International 17.8 22.4 44.0 (20.2 ) (49.1 )
39.4 44.2 74.3 (10.9 ) (40.5 )
Total Equity 96.5 125.0 218.6 (22.8 ) (42.8 )
Fixed Income:
U.S. 133.5 127.4 119.0 4.8 7.0
Global and International 122.1 90.2 87.2 35.3 3.5
255.6 217.6 206.2 17.5 5.5
Other(1):
U.S. 33.1 29.6 28.7 11.7 3.2
Global and International 44.8 33.7 24.5 33.2 37.6
77.9 63.3 53.2 23.1 19.1
Total:
U.S. 207.2 204.0 215.8 1.5 (5.5 )
Global and International 222.8 201.9 262.2 10.4 (23.0 )
Total $ 430.0 $ 405.9 $ 478.0 5.9 (15.1 )
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Changes in assets under management during 2012 and 2011 were as follows:
Distribution Channel Investment Service
Private Value Growth Fixed
Institutions Retail Client Total Equity Equity Income Other (1) Total
(in billions)
Balance as of December
31, 2011 $ 223.9 $ 112.6 $ 69.4 $ 405.9 $ 80.8 $ 44.2 $ 217.6 $ 63.3 $ 405.9
Long-term flows:
Sales/new accounts 21.3 56.3 4.3 81.9 5.2 5.0 62.4 9.3 81.9
Redemptions/terminations (38.8 ) (33.0 ) (10.9 ) (82.7 ) (32.0 ) (14.3 ) (33.8 ) (2.6 ) (82.7 )
Cash flow/unreinvested
dividends (4.1 ) (7.1 ) (2.4 ) (13.6 ) (5.7 ) (1.6 ) (6.0 ) (0.3 ) (13.6 )
Net long-term (outflows)
inflows (21.6 ) 16.2 (9.0 ) (14.4 ) (32.5 ) (10.9 ) 22.6 6.4 (14.4 )
Transfers (0.1 ) 0.1 - - - - - - -
Market appreciation 17.6 15.5 5.4 38.5 8.8 6.1 15.4 8.2 38.5
Net change (4.1 ) 31.8 (3.6 ) 24.1 (23.7 ) (4.8 ) 38.0 14.6 24.1
Balance as of December
31, 2012 $ 219.8 $ 144.4 $ 65.8 $ 430.0 $ 57.1 $ 39.4 $ 255.6 $ 77.9 $ 430.0
Distribution Channel Investment Service
Private Value Growth Fixed
Institutions Retail Client Total Equity Equity Income Other (1) Total
(in billions)
Balance as of December
31, 2010 $ 272.9 $ 127.0 $ 78.1 $ 478.0 $ 144.3 $ 74.3 $ 206.2 $ 53.2 $ 478.0
Long-term flows:
Sales/new accounts 17.3 31.0 7.3 55.6 6.5 5.2 31.4 12.5 55.6
Redemptions/terminations (52.8 ) (34.8 ) (9.5 ) (97.1 ) (43.3 ) (24.7 ) (27.8 ) (1.3 ) (97.1 )
Cash flow/unreinvested
dividends (9.3 ) (7.1 ) (4.6 ) (21.0 ) (13.1 ) (6.3 ) (0.4 ) (1.2 ) (21.0 )
Net long-term (outflows)
inflows (44.8 ) (10.9 ) (6.8 ) (62.5 ) (49.9 ) (25.8 ) 3.2 10.0 (62.5 )
Transfers 0.1 - (0.1 ) - - - - - -
Acquisitions 1.1 0.2 0.1 1.4 - 1.2 0.2 - 1.4
Market (depreciation)
appreciation (5.4 ) (3.7 ) (1.9 ) (11.0 ) (13.6 ) (5.5 ) 8.0 0.1 (11.0 )
Net change (49.0 ) (14.4 ) (8.7 ) (72.1 ) (63.5 ) (30.1 ) 11.4 10.1 (72.1 )
Balance as of December
31, 2011 $ 223.9 $ 112.6 $ 69.4 $ 405.9 $ 80.8 $ 44.2 $ 217.6 $ 63.3 $ 405.9
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Average assets under management by distribution channel and investment service were as follows:
Years Ended December 31, % Change
2012 2011 2010 2012-11 2011-10
(in billions)
Distribution Channel:
Institutions $ 218.9 $ 252.6 $ 277.1 (13.3 )% (8.8 )%
Retail 128.2 124.0 122.8 3.4 1.0
Private Client 68.9 75.3 74.7 (8.6 ) 0.9
Total $ 416.0 $ 451.9 $ 474.6 (8.0 ) (4.8 )
Investment Service:
Value Equity $ 69.5 $ 117.2 $ 153.5 (40.7 )% (23.6 )%
Growth Equity 41.1 61.0 81.3 (32.6 ) (25.0 )
Fixed Income 235.2 214.0 198.9 9.9 7.6
Other(1) 70.2 59.7 40.9 17.7 46.0
Total $ 416.0 $ 451.9 $ 474.6 (8.0 ) (4.8 )
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Our Institutions AUM decreased $4.1 billion to $219.8 billion, resulting in average AUM of $218.9 billion for 2012. The $4.1 billion decline in AUM during 2012 was primarily due to $21.6 billion of net outflows (consisting of net outflows of $31.8 billion in Value and Growth Equity services, offset by net inflows of $8.2 billion and $2.0 billion in Fixed Income services and Other services, respectively), offset by market appreciation of $17.6 billion. During 2011, Institutional AUM decreased $49.0 billion to $223.9 billion, resulting in average AUM of $252.6 billion for 2011. The $49.0 billion decrease in AUM during 2011 was primarily due to $44.8 billion of net outflows (consisting of net outflows of $54.5 billion in Value and Growth Equity services, partly offset by net inflows of $9.7 billion in Fixed Income services and Other services) and market depreciation of $5.4 billion.
Our Retail AUM increased $31.8 billion to $144.4 billion, resulting in average AUM of $128.2 billion for 2012. The $31.8 billion increase in AUM during 2012 was primarily due to $16.2 billion of net inflows (consisting of net inflows of $18.5 billion and $4.2 billion in Fixed Income services and Other services, respectively, offset by outflows of $6.5 billion in Value and Growth Equity services) and market appreciation of $15.5 billion. During 2011, Retail AUM decreased $14.4 billion to $112.6 billion, resulting in average AUM of $124.0 billion for 2011. The $14.4 billion decrease in AUM during 2011 was primarily due to $10.9 billion of net outflows (consisting of net outflows of $14.2 billion in Value and Growth Equity services, offset by net inflows of $3.3 billion in Fixed Income services and Other services) and market depreciation of $3.7 billion.
Our Private Client AUM decreased $3.6 billion to $65.8 billion, resulting in average AUM of $68.9 billion for 2012. The $3.6 billion decrease in AUM during 2012 was due to $9.0 billion of net outflows (consisting of net outflows of $5.2 billion in Value and Growth Equity services and $4.0 billion in Fixed Income services, offset by inflows of $0.2 billion in Other services), offset by market appreciation of $5.4 billion. During 2011, Private Client AUM decreased $8.7 billion to $69.4 billion, resulting in average AUM of $75.3 billion. The $8.7 billion decrease in AUM during 2011 was due to $6.8 billion of net outflows (consisting of net outflows within all services, except Other services) and market depreciation of $1.9 billion.
Absolute investment composite returns, net of fees, and relative performance compared to benchmarks for certain representative Institutional (except as otherwise indicated) Value, Growth, Blend and Fixed Income services were as follows for the years ended December 31:
2012 2011 2010
Global High Income (fixed income)
Absolute return 18.4 % 2.0 % 17.7 %
Relative return (vs. 33% Barclays High Yield, 33%
JPM EMBI Global and 33% JPM GBI-EM) 0.2 (0.3 ) 4.2
Global Fixed Income (fixed income)
Absolute return 3.9 12.1 6.8
Relative return (vs. CITI WLD GV BD-USD/JPM GLBL
BD ) 2.2 5.7 1.6
Intermediate Municipal Bonds (fixed income)
(Private Client composite)
Absolute return 3.4 7.2 2.9
Relative return (vs. Lipper Short/Int. Blended
Muni Fund Avg) (0.3 ) 0.8 0.9
U.S. Strategic Core Plus (fixed income)
Absolute return 5.9 7.1 9.5
Relative return (vs. Barclays U.S. Aggregate) 1.7 (0.7 ) 2.9
Emerging Market Debt (fixed income)
Absolute return 20.5 6.0 14.7
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