AllianceBernstein Holding L.P. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. AB Holding’s principal income and cash flow come from its investment in AllianceBernstein L.P. (AB); it reports its interest in AB using the equity method. At quarter-end, AB Holding owned 34.9% of AB. The figures below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Equity income attributable to AB Holding | $49.1 | $55.9 | Down 12.3% |
| Income taxes | $5.9 | $5.7 | Up 3.7% |
| Net income | $43.2 | $50.3 | Down 14.1% |
| Diluted net income per unit | $0.46 | $0.52 | Down 11.5% |
| Distribution per unit | $0.51 | $0.45 | Up 13.3% |
For the nine months ended September 30, net income was $128.8 million versus $143.9 million, down 10.5%; diluted earnings per unit were $1.35 versus $1.47, down 8.2%. Equity income was $146.7 million versus $160.8 million, down 8.8%. Adjusted diluted earnings per unit, a non-GAAP measure, were $0.51 for Q3 versus $0.45 and $1.47 for the nine months versus $1.23. The filing says these adjustments primarily address incentive-compensation mark-to-market effects, real-estate consolidation charges, and other items.
At September 30, total assets were $1,441.7 million, almost entirely the investment in AB, versus $1,540.5 million at December 31, 2016. Total liabilities were $0.2 million; no debt balance is reported in the condensed statement of financial condition. Partners’ capital was $1,441.4 million. Cash and cash equivalents were zero at both the beginning and end of the nine-month period. Revenue and operating margins for AB Holding are not separately presented in this filing.
Cash flow, distributions, and liquidity
For the first nine months of 2017, operating cash flow was $154.8 million, compared with $127.0 million in 2016, mainly reflecting $29.0 million more cash distributions received from AB. Investing cash outflow was $17.7 million, versus $2.4 million, largely for investments in AB funded with proceeds from option exercises. Financing cash outflow was $137.1 million, versus $124.6 million, principally because distributions to unitholders increased by $27.7 million, partly offset by higher option-exercise proceeds.
AB Holding distributed $155.1 million to unitholders during the nine-month period. Management said it believes cash flow from its investment in AB will provide resources to meet financial obligations; that capacity depends on AB’s operating cash flow and capital-market conditions. On October 25, 2017, the general partner declared a $0.51-per-unit distribution for the third quarter, payable November 16 to holders of record November 6.
Material changes, outlook, and risks
- Management attributed lower net income to reduced net income attributable to AB unitholders and a lower weighted-average ownership interest in AB. AB’s net income attributable to its unitholders fell 10.8% in Q3 and 7.3% for the nine-month period.
- The effective tax rate rose to 12.0% in Q3 from 10.1%, and to 12.2% for the nine months from 10.5%. AB Holding notes that loss of its grandfathered publicly traded partnership tax status could materially reduce net income and distributions.
- No numerical earnings or revenue guidance is provided. Management expects Available Cash Flow generally to continue to be based on adjusted diluted net income per unit, subject to possible changes.
- Key stated risks include financial-market performance, investment results and client assets, economic and competitive conditions, regulation and tax changes, and access to capital markets. AB Holding’s cash flow depends on distributions from AB.
- AB may incur losses in connection with regulatory inquiries, proceedings, and litigation; management said losses are reasonably possible but not currently estimable. Management did not expect pending matters to have a material adverse effect, while cautioning that outcomes are uncertain.
- The filing reports no material changes in risk factors or market risk from the prior annual report. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during Q3.
- AB disclosed 283,160 open-market purchases of AB Holding units during Q3 at an average $24.01 under a Rule 10b5-1 plan; the plan expired July 26 and no new plan was adopted in Q3. Separately, the filing describes small insurance activities involving Iranian diplomatic or state-linked parties at AXA subsidiaries; AB Holding and AB reported no transactions or activities requiring disclosure under the cited Iran/Syria law.
Facts investors should verify
- Review AB’s accompanying Form 10-Q (Exhibit 99.1) for the underlying operating results, revenues, margins, assets under management, and drivers of performance.
- Confirm how AB’s distributions and future operating performance support AB Holding’s liquidity and the $0.51 quarterly distribution.
- Assess the sustainability of the decline in equity income and the increase in the effective tax rate, including the risk to grandfathered partnership tax status.
- Review the details and potential financial exposure of pending litigation and regulatory matters, which the filing says cannot currently be estimated.
- Consider the assumptions and exclusions in adjusted earnings per unit, a non-GAAP measure, alongside GAAP results.