AllianceBernstein Holding L.P. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Holding’s principal income and cash flow come from its equity-method investment in AllianceBernstein L.P. (AB), an investment manager and related-services provider. Holding owned a weighted-average 35.7% of AB in Q3 and 35.6% for the first nine months.
Financial results
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Equity earnings from AB | $49.9m | $34.5m | $139.7m | $122.9m |
| Holding net income | $44.1m | $29.5m | $123.1m | $108.0m |
| Diluted net income per unit | $0.45 | $0.32 | $1.27 | $1.10 |
| Distribution per unit | $0.45 | $0.40 | $1.29 | $1.19 |
Q3 Holding net income rose 49.5% year over year; nine-month net income rose 14.0%. The filing attributes the increases mainly to higher AB earnings, with a higher weighted-average ownership interest also contributing in Q3. Holding’s effective tax rate was 11.5% for Q3 and 11.9% for the nine-month period, versus 14.4% and 12.1%, respectively, in 2013.
For the first nine months, operating cash flow was $137.7m, compared with $122.9m in 2013, reflecting higher distributions received from AB, partly offset by working-capital changes. Investing cash use was $12.8m, versus $26.8m; financing cash use was $124.8m, versus $96.1m, principally due to higher unitholder distributions. Holding reported no cash or cash equivalents at either period end. Total assets were $1.536bn, almost entirely its investment in AB; liabilities were $0.6m. No debt is reported in Holding’s balance sheet. The filing does not present Holding revenue or operating margins as separate metrics.
Material changes and other developments
- AB qualifying revenues, used in calculating Holding’s taxes, increased 9.1% in Q3 and 5.7% for the first nine months year over year. These are not presented as Holding revenue.
- On October 23, 2014, the general partner declared a $0.45-per-unit distribution for Q3, payable November 20 to unitholders of record November 3.
- Units outstanding increased to 97.16m from 96.03m at year-end 2013, including units issued through option exercises and other issuances, partly offset by retirements.
- W.P. Stewart, acquired in December 2013, had approximately $2.3bn in assets under management at September 30, 2014, versus a $5bn threshold required by December 12, 2016 to trigger a contingent-value-right payment. Management said the threshold was not reached in Q3.
Outlook, risks and contingencies
Management expects cash flow from AB to provide resources for Holding’s obligations, but Holding’s distributions and liquidity depend on AB’s operating cash flow and, ultimately, market performance, client assets and other factors. The filing gives no specific earnings or revenue guidance. Management states adjusted employee compensation expense is intended not to exceed 50% of adjusted net revenues, but cautions that revenue and competitive compensation changes could push it above that level.
Holding’s grandfathered publicly traded partnership tax status is important: loss of that status could subject it to corporate income tax and materially reduce net income and distributions. Other stated risks include financial-market and investment performance, economic and competitive conditions, regulation and tax changes, and access to capital markets.
AB faces a claim by former client Philips concerning management of a £500m mortgage-backed-securities portfolio. Alleged damages are $177m–$234m, plus compound interest on alleged realized losses; the matter was in early litigation and management could not estimate a reasonably possible loss range. AB also disclosed other regulatory and legal matters; management said it had accrued probable estimable losses and could not estimate additional exposure. Management did not expect pending matters to have a material adverse effect, while acknowledging uncertainty.
No material change in Holding’s market risk was reported for the quarter. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor facts to verify
- Review AB’s accompanying 10-Q, since Holding’s results and cash distributions depend principally on AB’s performance and distributions.
- Track AB earnings, distributions to Holding, and Holding’s ownership interest; distinguish Holding’s GAAP results from AB’s adjusted non-GAAP measures.
- Monitor the Philips litigation and other legal or regulatory matters, for which potential additional losses were not estimable.
- Assess the continued availability of Holding’s grandfathered partnership tax status and the resulting distribution implications.
- Track W.P. Stewart assets under management against the $5bn CVR milestone by December 12, 2016.