AllianceBernstein Holding L.P. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. AB Holding is a publicly traded partnership whose principal income and cash flow come from its equity-method investment in AllianceBernstein L.P. (AB), an investment-management and research-services firm. Accordingly, this filing reports equity income rather than standalone operating revenue.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / period-end comparison |
|---|---|---|
| Equity income attributable to AB Holding | $52.6 million | $65.7 million; down 19.9% |
| Income taxes | $6.2 million | $7.5 million; down 17.8% |
| Net income | $46.4 million | $58.2 million; down 20.2% |
| Diluted net income per unit | $0.49 | $0.60; down 18.3% |
| Operating cash flow | $59.9 million | $80.1 million |
| Cash distributions received from AB | $67.5 million | $88.7 million |
| Total assets | $1.430 billion | $1.491 billion at Dec. 31, 2018 |
| Total liabilities | $55,000 | $644,000 at Dec. 31, 2018 |
| Cash and cash equivalents | $0 at quarter-end | $0 at year-end 2018 |
No debt balance is shown in the condensed balance sheet. The filing does not provide standalone revenue or operating-margin figures for AB Holding. AB’s adjusted operating margin was 24.1% in Q1 2019, compared with 29.1% for 2018.
Material changes and distributions
- Management attributed the $11.7 million decline in AB Holding net income principally to lower net income at AB and a slightly lower average ownership interest in AB (35.3%, versus 35.7%).
- Operating cash flow fell by $20.2 million, primarily because AB distributions received were $21.2 million lower year over year.
- Cash distributions to unitholders during the quarter were $60.8 million, versus $81.8 million a year earlier. The per-unit distribution shown for Q1 was $0.49, versus $0.73 for Q1 2018; the filing notes distributions reflect AB non-GAAP adjustments.
- On April 25, 2019, the general partner declared a $0.49-per-unit distribution for the quarter ended March 31, payable May 16 to holders of record May 6.
- Units outstanding declined to 94,994,404 from 96,658,278 at year-end, including 2.38 million units retired. AB reported purchasing approximately 1.91 million units on the open market in Q1 to help fund incentive compensation; no new repurchase plan was adopted during the quarter.
Outlook, risks, and unusual items
- Management expects AB Holding to meet its financial obligations from cash flows generated by its investment in AB; that capacity depends on AB’s operating cash flow and market conditions. AB Holding had no cash at quarter-end.
- AB’s prior goal of a 30% adjusted operating margin by 2020 is presently considered unlikely, given management’s changed financial-market outlook and the Q1 margin decline. Management said it is taking additional expense-alignment actions and remains committed to a 30% target in years after 2020, subject to market conditions and business mix.
- Key stated risks include financial-market performance, investment results and client assets, economic and industry conditions, competition, regulation and tax changes, and the ability to access capital markets. AB Holding’s cash flow depends on distributions from AB.
- AB may face litigation, regulatory inquiries, and proceedings. Management said losses are reasonably possible but cannot currently be estimated; it believes pending or threatened matters are not expected to have a material adverse effect, while acknowledging outcomes are uncertain.
- AB Holding’s tax status as a grandfathered publicly traded partnership is important: losing that status could subject it to corporate income tax and materially reduce net income and distributions. Its Q1 effective tax rate was 11.8%, versus 11.5%.
- AXA owned 48.3% of EQH at quarter-end; EQH and subsidiaries held an approximately 65.6% economic interest in AB. The filing also describes certain AXA affiliates’ non-U.S. insurance activities involving Iranian-related parties; the reported aggregate annual premiums were approximately $573,000 and estimated net profit approximately $88,000, immaterial relative to AXA’s revenues and profit.
Important facts for investors to verify
- Review AB’s accompanying Form 10-Q, incorporated as an exhibit, for the operating drivers behind lower earnings, assets under management, revenues, margins, and cash generation.
- Confirm the declared $0.49 distribution, payment date, and how AB’s non-GAAP adjustments affect distributable cash.
- Assess whether AB’s cash distributions remain sufficient to support AB Holding’s obligations and distributions, particularly given zero quarter-end cash at the holding company.
- Track progress on expense reductions and the revised timing of the 30% adjusted-margin objective.
- Monitor litigation and regulatory developments and the preservation of AB Holding’s grandfathered partnership tax status.