Business context and reporting period
AllianceBernstein Holding L.P. (AB Holding) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. Its principal income and cash flow come from its equity-method investment in AllianceBernstein L.P. (AB), an investment-management and research business. Accordingly, AB Holding’s reported results primarily reflect its share of AB’s earnings, rather than standalone operating revenue.
Financial results and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Equity in AB net income attributable to AB Unitholders | $55.9 million | $48.4 million | $160.8 million | $153.2 million |
| AB Holding net income | $50.3 million | $42.1 million | $143.9 million | $134.7 million |
| Diluted net income per unit | $0.52 | $0.42 | $1.47 | $1.34 |
| Distribution per unit | $0.45 | $0.43 | $1.25 | $1.36 |
Q3 net income increased 19.4% year over year; nine-month net income increased 6.9%. Higher AB earnings drove the increase, partly offset by AB Holding’s lower average equity ownership in AB. Income taxes fell 10.1% for Q3 and 9.1% for the nine-month period; the effective tax rate was 10.1% and 10.5%, respectively, versus 13.0% and 12.1% in the comparable 2015 periods.
Management’s non-GAAP adjusted diluted net income per unit was $0.45 in Q3 2016 versus $0.43 in Q3 2015, and $1.23 for the first nine months versus $1.34 in 2015. AB’s non-GAAP adjustments reduced AB Holding’s diluted net income by $7.0 million in Q3 and $23.4 million for the nine months of 2016; these measures are not GAAP and may not be comparable across companies.
Cash flow, balance sheet, and distributions
For the first nine months, operating cash flow was $127.0 million, down from $149.8 million in 2015, primarily because cash distributions received from AB declined $24.5 million to $144.0 million. Investing cash use was $2.4 million, compared with $9.0 million; financing cash use was $124.6 million, compared with $140.8 million, reflecting lower distributions paid to unitholders. Cash and cash equivalents were zero at both period-end and the start of the period.
At September 30, 2016, total assets were $1.475 billion, principally the $1.475 billion investment in AB; total liabilities were $355,000. The filing reports no debt balance. Partners’ capital was $1.475 billion. AB Holding had 94.8 million units outstanding, down from 100.0 million at December 31, 2015, primarily due to unit retirements.
AB Holding declared a $0.45-per-unit distribution for Q3, payable November 17, 2016 to holders of record November 7. The partnership agreement generally requires distribution of available cash flow; management expects this to continue to be based on adjusted diluted net income per unit, subject to stated discretion.
Material changes, outlook, and risks
- Financial statement revision: AB identified an error in its tax provision calculation dating to 2010 and revised prior-period financial statements, including AB Holding’s. The nine-month 2015 revision reduced net income by $1.8 million and diluted earnings per unit by $0.02; the Q3 2015 revision reduced net income by $0.6 million and per-unit earnings by $0.01. The cumulative effect on partners’ capital at December 31, 2015 was a $13.8 million reduction. The six months ended June 30, 2016 were also revised, reducing net income by $1.8 million.
- Outlook and sensitivities: No specific earnings or revenue guidance is provided. AB Holding says it expects cash flow from AB to support its financial obligations. That cash flow depends on AB’s operating performance, capital markets, client assets, and other factors. Management also expects its effective tax rate to increase from January 1, 2017 due to repatriation of future non-U.S. earnings.
- Legal contingency: A former U.K. pension client, Philips, claims negligence involving a £500 million U.S. mortgage-backed securities portfolio and alleges damages of $177 million to $234 million plus interest. AB disputes the claims and intends to defend them. Management says probable, estimable losses have been accrued, but it cannot estimate possible additional losses; it does not currently expect pending matters to have a material adverse effect, while acknowledging uncertainty.
- Other notable item: Assets under management in the acquired W.P. Stewart business were approximately $4.4 billion at September 30, 2016, below the $5 billion milestone required by December 12, 2016 for contingent value right holders to receive an additional payment. Management said the milestone had not been achieved as of Q3.
- Management reported no material change in risk factors or market-risk disclosures and concluded disclosure controls were effective; no materially affecting change in internal control was reported.
Important facts for investors to verify
- Review AB’s accompanying Form 10-Q (Exhibit 99.1), since AB Holding’s earnings and distributions depend primarily on AB.
- Assess the tax-provision correction, its cumulative capital impact, and the revised comparative periods.
- Track AB’s distributions to AB Holding, available cash flow, unit repurchases and resulting unit count.
- Monitor the Philips litigation, other contingencies, and the W.P. Stewart contingent value right milestone.
- Evaluate market, client-asset, tax-status, and tax-rate risks underlying management’s forward-looking statements.