AllianceBernstein Holding L.P. — Q2 2015 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2015. AB Holding’s principal income and cash flow come from its investment in AllianceBernstein L.P. (AB); it accounts for that investment using the equity method. AB provides investment management, research, brokerage and related services. AB Holding’s reported results therefore primarily reflect its share of AB’s earnings, not a standalone operating revenue base.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Equity in AB net income | $54.4 million | $48.5 million | $106.0 million | $89.8 million |
| Income taxes | $6.2 million | $5.6 million | $12.2 million | $10.8 million |
| Net income | $48.2 million | $42.9 million | $93.8 million | $79.0 million |
| Diluted net income per unit | $0.48 | $0.44 | $0.93 | $0.82 |
| Distribution per unit | $0.48 | $0.45 | $0.93 | $0.84 |
For Q2, AB Holding net income rose 12.5% and diluted earnings per unit rose 9.1% year over year. For the first half, net income increased 18.7% and diluted earnings per unit increased 13.4%. Management attributed the gains mainly to higher AB earnings and a larger average AB ownership interest. Holding’s weighted average equity interest was 36.5%, versus 35.5% in 2014.
For the six months, operating cash flow was $102.6 million, compared with $94.5 million; distributions received from AB were $114.5 million, versus $105.9 million. Investing cash outflow was $9.0 million and financing cash outflow was $93.7 million, including $102.5 million of distributions to unitholders. Cash and cash equivalents were zero at period end and throughout the reported cash flow statements. AB Holding reported $1.6 billion in total assets, almost entirely its investment in AB, and $595,000 in liabilities; the filing reports no debt balance. Total partners’ capital was $1.612 billion.
The Q2 effective tax rate was 11.4%, compared with 11.6%; the first-half rate was 11.5%, compared with 12.0%. AB Holding is generally not subject to federal or state corporate income tax but is subject to specified partnership-related federal and New York City taxes. Operating margin is not meaningful for this holding entity; the filing points to AB’s accompanying report for AB operating metrics.
Material changes, distributions and other items
On July 30, 2015, the general partner declared a $0.48-per-unit distribution for Q2, payable August 27 to holders of record August 10. The partnership agreement generally requires distribution of available cash flow. AB Holding’s AB investment declined from $1.628 billion at year-end 2014 to $1.613 billion at June 30, 2015, after earnings, distributions, other capital transactions and comprehensive loss.
During the first half, AB Holding received $114.5 million in distributions from AB and paid $102.5 million to unitholders. AB repurchased AB Holding units to help fund incentive compensation, including 134,043 units on the open market in June under a Rule 10b5-1 plan that expired July 29. No units were sold by AB Holding in unregistered transactions.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management said cash flow from AB is expected to provide resources to meet AB Holding’s obligations, but its liquidity depends on AB’s distributions, which are exposed to capital-market performance and other factors. Forward-looking risks include market and investment performance, client assets, competition, regulation and tax changes. Loss of AB Holding’s grandfathered publicly traded partnership tax status could materially reduce net income and distributions.
AB faces a U.K. lawsuit brought by former client Philips alleging negligence in managing a $500 million mortgage-backed securities portfolio. Philips seeks $177 million to $234 million in damages, plus interest on alleged realized losses. AB disputes the claims and intends to defend the matter; management said it could not estimate a reasonably possible loss range. AB is also involved in other regulatory inquiries and litigation; management reported accruals for probable, estimable losses but could not estimate additional possible losses.
The W.P. Stewart acquisition included contingent value rights tied to acquired assets under management exceeding $5 billion by December 12, 2016. AUM was approximately $3.2 billion at June 30, 2015, and management said the milestone had not been reached in Q2. The filing also disclosed certain AXA affiliate insurance and pension dealings covered by Iran-related reporting requirements; their estimated aggregate annual premiums/contributions were approximately $27,600 and estimated net profit approximately $13,800, immaterial relative to AXA’s scale.
Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- Review AB’s accompanying Form 10-Q for operating revenues, margins, assets under management and the drivers of AB’s earnings and distributions; those underlying details are not presented here.
- Monitor AB’s cash distributions to AB Holding and the effect of market performance on the partnership’s available cash flow and per-unit distributions.
- Track developments in the Philips litigation and other AB legal or regulatory matters, for which additional losses could not be estimated.
- Confirm progress toward the W.P. Stewart $5 billion AUM milestone before its December 2016 deadline.
- Assess the tax-status risk: loss of grandfathered PTP treatment could materially affect net income and distributions.