AllianceBernstein Holding L.P. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. AB Holding is a publicly traded partnership whose income and cash flow principally come from its equity-method investment in AllianceBernstein L.P. (AB), an investment manager and research provider. Accordingly, the figures below are primarily AB Holding’s share of AB’s results, not AB’s consolidated operating results.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Equity in AB net income | $65.4 million | $47.9 million | $131.1 million | $97.6 million |
| AB Holding net income | $58.5 million | $41.7 million | $116.6 million | $85.7 million |
| Diluted net income per unit | $0.59 | $0.43 | $1.19 | $0.89 |
| Distribution per unit | $0.62 declared after quarter-end | $0.49 | $1.35 | $0.95 |
Q2 net income rose 40.0% year over year; six-month net income rose 36.2%. Management attributed the increases to higher AB net income attributable to AB unitholders and a higher average AB ownership interest. Equity in AB’s net income increased 36.4% in Q2 and 34.3% for the six-month period. AB Holding’s effective tax rate was 10.6% in Q2 versus 12.9%, and 11.0% for six months versus 12.3%.
For the six months, operating cash flow was $152.9 million, compared with $108.8 million, principally reflecting $167.9 million of cash distributions received from AB, up from $120.8 million. Financing cash outflow was $144.6 million, including $154.1 million of distributions to unitholders, versus $99.5 million and $109.4 million, respectively, in 2017. Investing cash outflow was $8.3 million, compared with $9.2 million. Cash and cash equivalents were zero at both the beginning and end of the reported periods.
At June 30, 2018, total assets were $1.535 billion, almost entirely the investment in AB; total liabilities were $629,000. The filing reports no debt balance. Partners’ capital was $1.534 billion. The filing does not present AB Holding revenue or operating margins; AB’s detailed operating results are referenced in a separate exhibit.
Changes and notable items
- AB Holding’s weighted average ownership interest in AB increased to 36.0% for Q2 and 35.8% for the first half, from 35.5% in both comparable 2017 periods.
- AB adopted ASC 606 on January 1, 2018. The standard had no impact on AB Holding’s income statement; AB Holding recorded a $12.5 million cumulative-effect increase to partners’ capital through its investment in AB.
- AB repurchased approximately 1.2 million AB Holding units for $32.9 million in Q2 to help fund incentive compensation. Outstanding units totaled 98,028,820 at June 30.
- After quarter-end, the general partner declared a $0.62-per-unit distribution for Q2, payable August 23, 2018. The partnership agreement generally requires distribution of available cash flow, which management says typically tracks adjusted diluted net income per unit.
- EQH completed an IPO in Q2. AXA owned approximately 71.9% of EQH at June 30; EQH held approximately 3.8% of AB Holding units.
Outlook, risks and contingencies
Management said it expects AB Holding to have resources to meet its obligations through cash flow from AB, but that dependence makes liquidity sensitive to AB’s operating cash flow and capital-market conditions. The filing gives no new standalone earnings guidance for AB Holding. It identifies market performance, investment results, client assets and flows, competition, regulation, tax changes, relocation costs and execution, and achievement of AB’s 2020 margin target as important uncertainties. Management also cautions that adjusted employee compensation could exceed its stated goal of 50% of adjusted net revenues.
Management reported increased market volatility in Q2, citing trade-war concerns, slower global growth, inflation and more aggressive U.S. monetary policy; these factors could pressure AB assets under management and revenues. AB may face regulatory inquiries, proceedings and litigation. Losses are reasonably possible, but management said it could not estimate them; it did not believe pending matters would individually or collectively have a material adverse effect, while noting outcomes remain uncertain. Losing AB Holding’s grandfathered publicly traded partnership tax status could materially reduce net income and distributions. Disclosure controls were judged effective, with no material change in internal control reported.
Important facts for investors to verify
- Review AB’s accompanying 10-Q exhibit for consolidated revenue, operating margins, assets under management, flows and the drivers of its performance.
- Assess how market volatility and investment performance may affect AB’s assets, revenues, distributions to AB Holding and unit distributions.
- Confirm the basis and sustainability of distributions, including the role of non-GAAP adjustments in available cash flow.
- Monitor the tax and legal contingencies, including preservation of AB Holding’s grandfathered partnership status and the currently unquantified possible litigation losses.
- Check subsequent unit repurchases, ownership changes and the execution assumptions behind AB’s relocation and 2020 margin plans.