AllianceBernstein Holding L.P. — Q1 2012 Form 10-Q
Business and period: Holding is a publicly traded partnership whose principal income and cash flow come from its investment in AllianceBernstein L.P., an investment-management and research-services business. This filing covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. Holding owned a 37.5% weighted-average equity interest in AllianceBernstein during Q1 2012.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Equity in AllianceBernstein net income attributable to its unitholders | $32.7 million | $51.1 million; down 35.9% |
| Holding net income | $26.7 million | $43.7 million; down 38.9% |
| Basic and diluted net income per unit | $0.26 | $0.42; down 38.1% |
| Cash distributions received from AllianceBernstein | $17.9 million | $51.5 million |
| Operating cash flow | $11.8 million | $43.8 million |
| Cash distributions paid to unitholders | $11.8 million | $43.8 million |
At March 31, 2012, total assets were $1.672 billion, including a $1.661 billion investment in AllianceBernstein and $11.6 million due from it. Total liabilities were $5.3 million and partners’ capital was $1.667 billion. The filing reports no cash or cash equivalents at period-end and no debt balance on Holding’s statement of financial condition. Holding-level revenue and operating margin are not presented; the filing’s results principally reflect equity-method income and taxes. Its adjusted diluted net income per unit, incorporating AllianceBernstein non-GAAP adjustments, was $0.29 versus $0.41 in Q1 2011; this is a non-GAAP measure, not a substitute for GAAP results.
Holding’s effective tax rate was 18.4% in Q1 2012, compared with 14.5% in Q4 2011. The tax provision fell 18.6% from Q1 2011, as qualifying AllianceBernstein revenues declined. Holding declared a $0.26-per-unit distribution, totaling $27.3 million, on May 2, payable May 24 to unitholders of record May 11.
Material changes and management commentary
- Lower AllianceBernstein earnings drove the decline in Holding’s equity income and net income. Management attributed the lower operating cash flow primarily to a $33.6 million reduction in cash distributions received from AllianceBernstein.
- Holding distributed $11.8 million in Q1, versus $43.8 million in the prior-year quarter. The partnership agreement generally requires distribution of available cash flow, although the general partner may retain or release cash at its discretion. Management believes cash flow from the investment in AllianceBernstein will cover Holding’s financial obligations.
- AllianceBernstein changed its employee long-term incentive compensation program in Q4 2011. The change accelerated recognition of prior deferred incentive compensation and resulted in a $587.1 million non-cash charge in Q4 2011; it also recognized the full $159.9 million expense for 2011 deferred awards in that quarter. Management expects future annual incentive expense to include 100% of each year’s deferred awards. These were prior-period items, not Q1 2012 charges.
- AllianceBernstein repurchased 4.48 million Holding units during Q1 at an average $14.75 per unit, primarily to fund incentive compensation obligations. Its Q1 Rule 10b5-1 repurchase plan expired May 1; management stated it intended to adopt additional plans.
Risks, contingencies, and outlook
- A former European pension fund client alleged negligence involving a £500 million U.S. mortgage-backed securities portfolio. Claimed damages were $177 million to $234 million, plus compound interest on alleged realized losses of $125 million. AllianceBernstein disputes the claims and intends to defend them; management said a loss was reasonably possible but could not predict the outcome or estimate a loss range.
- Other litigation, regulatory inquiries, and proceedings were disclosed. Management considered possible losses from these other matters immaterial and did not expect them, individually or collectively, to materially adversely affect results or financial condition.
- Holding’s cash flow and ability to meet obligations depend on distributions from AllianceBernstein, which are exposed to capital-market performance, client assets and flows, investment performance, competition, economic conditions, and regulation. The filing also identifies potential goodwill impairment, possible effects of proposed 12b-1 fee rule changes, and uncertainty around unfunded institutional mandates.
- Holding’s federal publicly traded partnership tax status depends on not entering a substantial new line of business. Losing its grandfathered status could subject it to corporate income tax and materially reduce net income and distributions.
- Management said market risk had not materially changed during the quarter. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Review AllianceBernstein’s accompanying Form 10-Q (Exhibit 99.1) for underlying assets under management, operating results, margins, and the drivers of the decline in earnings and distributions; those details are not provided in clear values in this Holding filing excerpt.
- Monitor AllianceBernstein’s distributions to Holding and Holding’s available cash flow, since Holding has no reported cash balance and relies on that cash flow to fund distributions and obligations.
- Track the pension-fund claim, including any change in estimated exposure, settlement, or litigation status.
- Assess future deferred compensation expense, repurchases, and unit dilution, as well as the sustainability of distributions relative to earnings and cash received.
- Note that the interim financial statements were reviewed by the independent auditor, not audited; the review report expresses no audit opinion.