AllianceBernstein Holding L.P. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Holding’s principal source of income and cash flow is its investment in AllianceBernstein L.P.; the filing primarily reports Holding’s share of AllianceBernstein’s results, not a standalone operating business. Amounts below are in U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Equity income attributable to Holding | $27.8 million | $42.7 million | $60.5 million | $93.8 million |
| Income taxes | $6.5 million | $7.2 million | $12.5 million | $14.6 million |
| Net income | $21.3 million | $35.5 million | $48.0 million | $79.2 million |
| Diluted net income per unit | $0.21 | $0.34 | $0.47 | $0.76 |
| Distribution per unit | $0.21 | $0.34 | $0.47 | $0.76 |
- Net income declined 39.9% in Q2 and 39.3% for the first half; equity income attributable to Holding fell 35.0% and 35.5%, respectively. Management attributed the net income decline primarily to lower income from AllianceBernstein.
- For the first six months, operating cash flow was $40.0 million, down from $88.3 million. Cash distributions received from AllianceBernstein were $50.5 million, versus $102.0 million a year earlier. Investing cash use was $3.5 million; distributions to unitholders used $36.5 million. Ending cash was zero.
- At June 30, total assets were $1.658 billion, principally the investment in AllianceBernstein. Total liabilities were $3.7 million, and partners’ capital was $1.654 billion. No debt is listed on Holding’s condensed balance sheet.
- Holding’s effective tax rate increased to 23.2% in Q2 and 20.6% for the first half, from 16.9% and 15.6%. Holding is generally not subject to federal or state corporate income taxes but is subject to specified federal and New York City taxes.
- The filing does not provide Holding operating margins; its statements do not present a conventional standalone revenue line.
Material changes and notable items
- On August 2, 2012, the general partner declared a $22.1 million distribution, or $0.21 per unit, for Q2 available cash flow. It was payable August 30 to holders of record August 13.
- Holding revised the presentation of certain prior-period rabbi-trust-related amounts, moving them from amounts due from AllianceBernstein to investment in AllianceBernstein and from operating to investing cash flows. Management concluded the revision did not materially misstate prior periods.
- AllianceBernstein’s 2011 employee incentive-compensation changes resulted in a $587.1 million one-time non-cash charge in Q4 2011 and accelerated recognition of 2011 awards. This affected the affiliate’s prior-year results; it is not a Q2 2012 Holding charge.
- AllianceBernstein purchased 2.1 million Holding units during Q2 for approximately $28.2 million, primarily to fund incentive awards. Holding had 105.2 million units outstanding at June 30.
Outlook, risks and contingencies
- No specific earnings or distribution guidance is provided. Holding’s ability to meet obligations and make distributions depends on cash distributions from AllianceBernstein, whose results are exposed to capital-market performance, client assets and flows, investment performance, competition, regulation and economic conditions.
- AllianceBernstein faces a claim from a former European pension fund client alleging negligence in managing a £500 million U.S. mortgage-backed securities portfolio. Alleged damages are $177 million to $234 million, plus compound interest on $125 million of realized losses. The company disputes the claims; a loss is reasonably possible, but it cannot predict the outcome or estimate a loss range.
- Holding’s tax status depends on maintaining its “grandfathered” publicly traded partnership status. Losing that status could subject it to corporate income tax and materially reduce net income and distributions.
- Management cited risks to assets under management, revenues and profitability from weak markets, net redemptions and possible goodwill impairment. It also noted uncertainty around institutional mandates not yet funded and anticipated real-estate footprint reductions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during Q2. The interim financial statements received a limited review, not an audit.
Important facts for investors to verify
- Review AllianceBernstein’s accompanying 10-Q for the underlying business’s revenue, operating results, assets under management, flows and liquidity; Holding’s results depend substantially on that affiliate.
- Track future AllianceBernstein cash distributions and whether Holding’s per-unit distributions remain supported by available cash flow.
- Monitor developments in the pension-fund litigation, for which the filing gives no estimable loss range.
- Assess the sustainability of Holding’s tax status and the stated market, redemption and goodwill-impairment risks.