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, 2016. Its principal source of income and cash flow is its investment in AllianceBernstein L.P. (AB), an investment manager serving institutional, retail and private wealth clients, as well as institutional research clients. AB’s separate Form 10-Q is included as an exhibit and contains the underlying operating results.
Financial Results and Liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| AB Holding net income | $39.9 million | $48.2 million | $95.5 million | $93.8 million |
| Diluted net income per unit | $0.41 | $0.48 | $0.97 | $0.93 |
| Equity in AB net income | $45.5 million | $54.4 million | $106.6 million | $106.0 million |
| Cash distributions per unit | $0.40 declared after quarter-end | $0.48 | $0.80 | $0.93 |
Second-quarter net income fell 17.3% year over year, primarily reflecting lower AB income attributable to its unitholders and AB Holding’s lower average ownership interest in AB. Six-month net income rose 1.8%. No standalone revenue, operating margin, or debt amount is reported for AB Holding in this filing; it reports its AB investment using the equity method.
At June 30, 2016, total assets were $1.519 billion, almost entirely the investment in AB; total liabilities were $159,000, and partners’ capital was $1.519 billion. For the first six months, operating cash flow was $88.2 million versus $102.6 million a year earlier, mainly due to $14.8 million lower distributions received from AB. Financing cash outflow was $85.8 million, including $88.9 million of distributions to unitholders. Cash and cash equivalents were zero at both period end and the start of the period. Management said cash flow from AB should provide resources to meet obligations.
Changes, Outlook and Risks
- AB Holding’s ownership interest used in reporting AB equity income averaged 35.8% in Q2 2016 versus 36.5% in Q2 2015, and 36.0% versus 36.5% for the six-month periods.
- The general partner declared a $0.40-per-unit distribution on July 28, 2016, payable August 25 to holders of record August 8. Distributions depend on cash received from AB and the partnership agreement’s Available Cash Flow calculation.
- AB purchased 1.9 million AB Holding units in Q2, primarily in open-market purchases to fund incentive compensation. Units outstanding declined to 96.5 million from 100.0 million at year-end 2015, mainly due to unit retirements.
- A former U.K. pension client alleges negligence concerning a £500 million mortgage-backed securities portfolio and seeks $177 million to $234 million plus interest. AB disputes the claims and intends to defend them. Management says it has accrued probable estimable losses but cannot estimate possible additional losses; it believes pending matters are not expected to have a material adverse effect, while noting outcomes are uncertain.
- AB Holding’s grandfathered publicly traded partnership tax status is important: losing it could subject the partnership to corporate income tax and materially reduce net income and distributions. Other stated risk drivers include markets, investment performance, client assets, competition, regulation and access to capital.
- W.P. Stewart’s contingent value right could trigger an additional $4 per eligible acquired share if specified AUM exceeds $5 billion by December 12, 2016. AUM was approximately $4.0 billion at June 30, and management said the milestone had not been reached in Q2.
- No material changes to previously disclosed risk factors or market risk were reported. Management concluded disclosure controls were effective and reported no material change in internal controls during Q2. No specific earnings or distribution guidance was provided.
Important Facts to Verify
- Review AB’s attached Form 10-Q for revenue, operating expenses, margins, assets under management, flows and investment performance underlying AB Holding’s equity income.
- Monitor AB distributions to AB Holding, Available Cash Flow, and the sustainability of the per-unit distribution amid market and earnings changes.
- Track developments, accruals and potential exposure in the Philips litigation and other legal or regulatory matters.
- Confirm progress toward the W.P. Stewart AUM milestone before its December 12, 2016 deadline.
- Assess the implications of AB Holding’s limited standalone liquidity and dependence on distributions from AB, alongside the tax-status risk.