AllianceBernstein Holding L.P. — Q1 2020 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2020. AB Holding’s principal source of income and cash flow is its investment in AllianceBernstein L.P. (AB); it accounts for that investment under the equity method. AB provides investment management, research and related services. Accordingly, AB Holding’s results are closely tied to AB’s performance. The filing refers investors to AB’s accompanying Form 10-Q for its operating details.
Financial results and liquidity
- Income: Equity in AB net income attributable to AB unitholders was $69.9 million, up 32.8% from $52.6 million. AB Holding net income was $62.3 million, up 34.1% from $46.4 million; diluted earnings per unit rose to $0.63 from $0.49.
- Revenue and margins: AB Holding’s statement does not present standalone revenue or operating margin. AB reported adjusted operating margin of 27.6% for Q1, compared with 27.5% for 2019; this is a non-GAAP AB metric.
- Cash flow: Operating cash flow was $83.0 million versus $59.9 million, primarily reflecting $91.6 million of cash distributions received from AB, up from $67.5 million. Financing cash outflow was $82.9 million, mainly distributions to unitholders; investing cash outflow was $0.1 million. Cash and cash equivalents were zero at both period-end and year-end.
- Distributions: AB Holding paid $83.7 million to unitholders during the quarter, versus $60.8 million a year earlier. On April 28, 2020, it declared a $0.64-per-unit distribution for Q1, payable May 28 to holders of record May 11; the comparable prior-period distribution was $0.49 per unit.
- Financial position: Total assets were $1.517 billion, almost entirely the investment in AB, compared with $1.554 billion at December 31, 2019. Partners’ capital was $1.516 billion. Other liabilities totaled $0.8 million. The filing’s balance sheet does not identify debt.
- Taxes: Income tax expense was $7.7 million, up from $6.2 million; the effective tax rate declined to 10.9% from 11.8%.
Changes versus Q1 2019
Net income and earnings per unit increased, supported by higher AB income and a slightly higher weighted-average ownership interest in AB (36.0% versus 35.3%). Operating cash flow rose, while cash distributions to unitholders also increased. Other comprehensive loss was $7.5 million, compared with $1.4 million of comprehensive income in Q1 2019, principally reflecting foreign currency translation.
Outlook, risks and contingencies
- Management said the 2020 adjusted operating margin target of 30% was unlikely to be achieved, based on current revenue and expense projections, and said it was taking additional actions to align expenses with expected revenues. It remained committed to the 30% target in subsequent years, subject to market conditions and business mix.
- Management warned that COVID-19-related market declines and economic disruption could materially reduce AB’s assets under management, revenues and net income in 2020. Volatility and limited liquidity in certain asset-backed and other securities could also make it harder for funds to meet redemptions.
- Poor relative performance in many fixed-income funds during Q1 could lead to increased redemptions, potentially reducing assets under management and related revenue and income.
- AB may be involved in regulatory inquiries, proceedings and litigation. Losses are reasonably possible, but management could not estimate them; management did not expect pending or threatened matters, individually or collectively, to have a material adverse effect, while noting outcomes remain uncertain.
- AB Holding’s ability to meet obligations depends on distributions from AB and, in turn, AB’s operating cash flow and market conditions. Losing its grandfathered publicly traded partnership tax status could materially reduce net income and distributions.
Important facts for investors to verify
- Review AB’s accompanying Q1 filing for revenue, assets under management, operating results, debt, liquidity and the drivers of AB’s income.
- Track the effects of COVID-19 market conditions, fixed-income performance, fund flows and security liquidity on AB’s assets under management and distributions.
- Monitor whether AB Holding’s $0.64-per-unit declared distribution is supported by future cash received from AB.
- Assess progress against the 30% adjusted operating margin target and the expense actions management described; the measure is non-GAAP.
- Follow developments in legal and regulatory matters and any changes that could affect AB Holding’s partnership tax status.