Business context and reporting period
AllianceBernstein Holding L.P. (AB Holding) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Its principal income and cash flow come from its equity-method investment in AllianceBernstein L.P. (AB), an investment-management and research-services business. This summary focuses on AB Holding; its filing incorporates AB’s separate quarterly report as Exhibit 99.1.
At June 30, AB Holding owned a 35.6% limited partnership interest in AB. EQH and its subsidiaries held a 63.7% interest in AB. AB Holding had 96.6 million units outstanding.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| AB net income attributable to AB unitholders | $166.3 million | $181.7 million | $315.4 million | $365.9 million |
| AB Holding equity in AB income | $59.0 million | $65.4 million | $111.7 million | $131.1 million |
| AB Holding net income | $52.3 million | $58.5 million | $98.7 million | $116.6 million |
| Diluted net income per unit | $0.54 | $0.59 | $1.03 | $1.19 |
| Distribution per unit | $0.56 | $0.62 | $1.05 | $1.35 |
| AB non-GAAP adjusted diluted net income per AB Holding unit | $0.56 | $0.62 | $1.05 | $1.35 |
AB Holding’s income taxes were $6.7 million in Q2 and $12.9 million for the first half; its effective tax rates were 11.4% and 11.6%, respectively. AB Holding does not report revenue or operating margins as standalone metrics in this filing; its detailed operating results are in AB’s incorporated report.
For the six months, operating cash flow was $108.7 million, versus $152.9 million a year earlier, mainly reflecting $46.2 million less in cash distributions received from AB. Investing cash outflow was $9.0 million and financing cash outflow was $99.7 million. Cash and cash equivalents were zero at both the beginning and end of the period.
At June 30, total assets were $1.470 billion, almost entirely the investment in AB, compared with $1.491 billion at December 31, 2018. Total liabilities were $637,000. The filing reports no debt balance for AB Holding; it does not provide a standalone debt metric for AB in the supplied text.
Material changes versus the prior comparable period
- Q2 AB Holding net income fell 10.6%, and first-half net income fell 15.4%; management attributed the declines to lower AB income attributable to its unitholders and a slightly lower average ownership interest.
- AB net income attributable to its unitholders declined 8.5% in Q2 and 13.8% in the first half. AB Holding’s equity in that income declined 9.7% and 14.8%, respectively.
- First-half operating cash flow decreased by $44.2 million, primarily because of lower distributions from AB.
- Cash distributions per unit declined 9.7% for Q2 and 22.2% for the first half. Distributions reflect AB non-GAAP adjustments and are not the same as AB Holding GAAP earnings per unit.
Outlook, risks and contingencies
On July 25, 2019, the general partner declared a $0.56-per-unit distribution for the second quarter, payable August 22 to holders of record August 5. AB Holding’s distributions depend on cash distributions from AB, whose operating cash flow is exposed to capital-market conditions and other factors.
AB’s adjusted operating margin was 24.7% in the first half of 2019, down from 29.1% for 2018. Management said achieving its 30% adjusted-margin target by 2020 was unlikely under current revenue and expense projections. It said it was taking additional steps to align expenses with lower expected revenue, while remaining committed to a 30% target in later years. Management also cautioned that adjusted compensation expense could exceed 50% of adjusted net revenue if revenue or competitive compensation conditions move unfavorably.
Management believes AB Holding has resources to meet its obligations through cash flow from AB, but that cash flow depends on AB’s operating performance and financial markets. AB may face litigation, regulatory inquiries or proceedings; losses are considered reasonably possible, but management could not estimate them. Management currently believes pending or threatened matters will not materially adversely affect results, financial condition or liquidity, while noting outcomes remain uncertain.
AB Holding’s partnership tax status is a material consideration: loss of its grandfathered publicly traded partnership status could subject it to corporate income tax and materially reduce net income and distributions. AXA continued reducing its EQH stake; it held 40.1% at June 30 and 38.9% after an offering over-allotment on July 8. AXA said it intends to sell its remaining interest over time but has no obligation to do so. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Review AB’s incorporated Form 10-Q (Exhibit 99.1) for revenue, assets under management, flows, expenses, margins and related operating trends not detailed in AB Holding’s standalone statements.
- Assess whether AB’s cash generation can sustain distributions, especially given lower first-half cash distributions and AB’s market sensitivity.
- Track progress on expense actions and the adjusted operating-margin outlook; the 2020 target is considered unlikely, and adjusted measures are non-GAAP.
- Monitor litigation and regulatory developments; the filing provides no estimable loss range.
- Consider potential effects of AXA’s EQH divestment plans and the tax consequences if AB Holding were to lose its partnership tax status.