AllianceBernstein Holding L.P. — Q1 2015 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2015. AllianceBernstein Holding L.P. (“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 firm. This summary covers AB Holding; the filing refers readers to AB’s separate 10-Q, filed as an exhibit, for the underlying operating detail.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Equity income attributable to AB Holding | $51.6 million | $41.4 million; up 24.8% |
| Income taxes | $6.0 million | $5.2 million; up 15.7% |
| Net income | $45.6 million | $36.2 million; up 26.1% |
| Diluted net income per unit | $0.45 | $0.38; up 18.4% |
| Operating cash flow | $63.2 million | $63.5 million |
| Cash distributions received from AB | $63.2 million | $63.5 million |
| Cash distributions paid to unitholders | $57.2 million | $57.7 million |
AB Holding reported no cash balance at period-end. Net cash used in investing activities was $3.9 million and net cash used in financing activities was $59.3 million. The filing presents no debt balance for AB Holding. Management says cash flow from its investment in AB is expected to provide resources for financial obligations, but Holding’s liquidity depends on AB’s distributions and operating cash flow.
At March 31, 2015, the investment in AB was $1.605 billion, compared with $1.628 billion at December 31, 2014. Total assets were $1.605 billion and total liabilities were $6.4 million, including a rise in other liabilities from $0.4 million at year-end. The effective tax rate was 11.7%, down from 12.6%. Comprehensive income was $41.4 million, including a $4.4 million after-tax foreign currency translation loss.
Changes, distributions and outlook
Net income growth reflected higher AB earnings and a higher average equity ownership interest in AB (36.5%, versus 35.4%). AB Holding’s distribution per unit was $0.45, compared with $0.39 for the prior-year quarter. On April 30, 2015, the general partner declared a $0.45-per-unit distribution for Q1, payable May 21 to holders of record May 11.
No specific earnings or revenue guidance is provided. Management says Available Cash Flow typically is based on adjusted diluted net income per unit and expects to continue using that basis unless it determines certain adjustments should be treated differently. Management also cites a goal that adjusted employee compensation expense should not exceed 50% of adjusted net revenues; results could exceed that level as revenues or compensation conditions change.
Risks, contingencies and unusual items
- AB faces a claim by former client Philips alleging negligent management of a U.S. mortgage-backed securities portfolio. Claimed damages are £500 million portfolio-related, with alleged damages stated as $177 million to $234 million plus compound interest on $125 million of realized losses. AB disputes the allegations and intends to defend the matter; management cannot estimate a reasonably possible loss range.
- AB is involved in other litigation, regulatory inquiries and proceedings. Management says probable and estimable losses have been accrued, but additional losses are reasonably possible and not currently estimable. Management does not currently expect pending or threatened matters to have a material adverse effect, while noting outcomes are uncertain.
- AB Holding’s tax treatment 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.
- AB Holding purchased no units directly in the quarter; AB repurchased 654,412 AB Holding units, principally to fund incentive compensation. No material change in market risk was reported, and management concluded disclosure controls were effective.
- W.P. Stewart assets under management were approximately $3.0 billion at March 31, 2015, below the $5 billion milestone required by December 12, 2016 for contingent value right payments. Management said the milestone was not achieved in Q1.
Most important facts for investors to verify
- Review AB’s attached 10-Q for operating revenue, margins, AUM trends, client flows, and the drivers of AB’s earnings growth; AB Holding’s filing does not provide a clear standalone operating revenue or margin figure.
- Confirm the sustainability of AB’s cash distributions, on which AB Holding’s liquidity and unitholder distributions depend.
- Track developments in the Philips litigation and any changes to loss estimates or accruals.
- Monitor AB Holding’s grandfathered partnership tax status and related tax rules.
- Check W.P. Stewart AUM against the CVR milestone and deadline, and review the terms governing any payment.