Business context and reporting period
AllianceBernstein Holding L.P. (AB Holding) reported for the quarter and nine months ended September 30, 2015. Its principal source of income and cash flow is its investment in AllianceBernstein L.P. (AB), an asset manager serving institutional, retail, and private-wealth clients and providing research services. AB Holding accounts for its AB investment using the equity method.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Equity income attributable to AB Holding | $49.0 million in 2015; $49.9 million in 2014 | $155.0 million in 2015; $139.7 million in 2014 |
| AB Holding net income | $42.7 million; $44.1 million in 2014 | $136.5 million; $123.1 million in 2014 |
| Diluted net income per unit | $0.43; $0.45 in 2014 | $1.36; $1.27 in 2014 |
| Distribution per unit | $0.43; $0.45 in 2014 | $1.36; $1.29 in 2014 |
At September 30, 2015, total assets were $1.526 billion, principally the $1.526 billion investment in AB; total liabilities were $277,000, and partners’ capital was $1.526 billion. The filing reports no debt. AB Holding had no cash and cash equivalents at period-end. Standalone revenue and operating margins are not presented; AB qualifying revenues, primarily U.S. advisory fees and brokerage commissions, were $572.4 million for the quarter and $1.682 billion for nine months.
For the first nine months, operating cash flow was $149.8 million, investing cash outflow was $9.0 million, and financing cash outflow was $140.8 million. AB distributions received were $168.5 million; distributions paid to AB Holding unitholders were $150.5 million. Management said cash flow from AB was expected to provide resources to meet AB Holding’s obligations.
Changes versus prior comparable periods
- Third-quarter net income fell 3.3% and diluted earnings per unit fell 4.4%. Lower income attributable to AB unitholders was partly offset by AB Holding’s higher average ownership interest in AB.
- Nine-month net income rose 10.8% and diluted earnings per unit rose 7.1%, reflecting higher AB income and a higher average ownership interest.
- AB qualifying revenues increased 4.4% for the quarter and 6.4% for nine months. AB income attributable to its unitholders decreased 3.4% in the quarter but increased 8.3% year to date.
- AB Holding’s investment in AB declined from $1.628 billion at December 31, 2014, primarily reflecting distributions, unit retirements and other capital movements. Units outstanding fell to 97.8 million from 100.8 million.
- Operating cash flow increased $12.1 million year over year for nine months, primarily due to higher AB distributions received. Financing cash outflow increased $16.0 million, mainly from higher unitholder distributions and lower option-exercise proceeds.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. The general partner declared a $0.43-per-unit distribution for the third quarter, payable November 19, 2015 to unitholders of record November 2, 2015.
- AB Holding’s federal tax treatment as a grandfathered publicly traded partnership is important to results and distributions. Loss of that status could subject it to corporate income tax and materially reduce net income and distributions.
- AB faces a claim by former client Philips alleging negligence in managing a £500 million mortgage-backed securities portfolio. Philips alleges damages of $177 million to $234 million, plus compound interest on $125 million of alleged realized losses. AB disputes the allegations and intends to defend the claim. Management said an adequate accrual was recorded for probable estimable losses, but it could not estimate possible additional losses.
- Management identified financial-market performance, investment results, economic conditions, competition, regulation and taxes as factors that could affect results. AB Holding’s liquidity also depends on AB’s operating cash flow and distributions.
- AB repurchased approximately 3.015 million AB Holding units in the quarter, primarily to fund incentive compensation. The filing also reports W.P. Stewart acquired-business AUM of approximately $3.8 billion; the $5 billion milestone for a contingent value right had not been reached as of September 30, 2015.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No material risk-factor changes were reported.
Important facts for investors to verify
- Review AB’s separate Form 10-Q, which contains the underlying consolidated operating results and additional performance detail not included in this AB Holding summary.
- Track AB’s operating cash flow and distributions, on which AB Holding’s liquidity and distributions depend.
- Monitor the Philips litigation, including potential exposure beyond recorded accruals.
- Assess the tax-status risk and any developments that could affect AB Holding’s grandfathered partnership treatment.
- Follow progress toward the W.P. Stewart $5 billion AUM milestone and the related contingent payment deadline of December 12, 2016.