AllianceBernstein Holding L.P. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Holding’s principal income and cash flow come from its investment in AllianceBernstein L.P. (AB), an investment-management and research firm. Holding accounts for its AB investment using the equity method.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| AB net income attributable to unitholders | $116.7 million | $114.5 million | +1.9% |
| Holding’s equity in AB earnings | $41.4 million | $43.0 million | -3.8% |
| Holding net income | $36.2 million | $38.2 million | -5.4% |
| Holding diluted net income per unit | $0.38 | $0.38 | No change |
| Holding distribution per unit | $0.39 declared after quarter-end | $0.38 | +2.6% |
| Operating cash flow | $63.5 million | $42.2 million | Increased |
Holding’s results do not present operating revenue or operating margins; its reported earnings primarily reflect its share of AB’s income, less Holding income taxes. Holding’s income taxes rose 9.4% to $5.2 million, and its effective tax rate increased to 12.6% from 11.1%. Management attributed the decline in Holding net income to higher taxes and a lower average ownership share of AB (35.4%, versus 37.5%).
Cash distributions received from AB were $63.5 million, compared with $40.1 million. Holding used $58.8 million in financing activities, including $57.7 million of distributions to unitholders. Cash and cash equivalents were zero at period-end and at the beginning of both comparative periods. The balance sheet reported $1.523 billion of assets, principally its AB investment, and $6.0 million of other liabilities; no debt is reported in the presented Holding balance sheet. Management said expected cash flow from AB should provide resources to meet Holding’s obligations.
Material changes and notable items
- Holding’s AB investment declined to $1.523 billion from $1.534 billion at December 31, 2013, despite its share of AB earnings, reflecting distributions and other investment movements.
- Operating cash flow increased primarily because AB distributions received were $23.4 million higher. Financing cash use increased mainly because unitholder distributions were $21.4 million higher.
- Holding declared a $0.39-per-unit distribution on April 30, payable May 22, 2014 to holders of record May 12. Holding’s partnership agreement generally requires distribution of available cash flow.
- Holding had 96.238 million units outstanding at March 31, 2014. Its ownership interest in AB was 35.5% at quarter-end; the weighted-average interest used in reported equity earnings was 35.4%.
- AB had acquired W.P. Stewart in December 2013. Its assets under management were approximately $2.2 billion at March 31, 2014; the $4-per-share contingent value right payment is conditional on exceeding $5 billion by December 12, 2016. Management said the milestone was not achieved in Q1.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Holding’s outlook depends substantially on AB’s cash flows, which are exposed to capital-market performance, investment results, client assets, competition, economic conditions and regulation. Management’s stated belief that cash flows will cover Holding’s obligations is therefore dependent on AB’s performance.
Holding’s federal tax treatment as a grandfathered publicly traded partnership is important: losing that status could subject it to corporate income tax and materially reduce net income and distributions. Holding must avoid entering, directly or indirectly through AB, a substantial new line of business to preserve that status.
AB faces litigation brought by former client Philips concerning management of a £500 million U.S. mortgage-backed securities portfolio. Philips alleges damages of $177 million to $234 million, plus compound interest on alleged realized losses. AB disputes the allegations and intends to defend the case; management said it could not estimate a reasonably possible loss range because the matter was at an early stage. AB also disclosed other regulatory, administrative and litigation matters. Management considered accruals adequate for estimable probable losses, but could not estimate possible additional losses.
The filing reported no material change in Holding’s market risk. Disclosure controls were concluded to be effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Review AB’s attached Form 10-Q for operating revenue, margins, assets under management, debt, liquidity, and the drivers of its underlying performance; those details are not provided in this Holding summary.
- Track AB distributions to Holding and the resulting coverage of Holding’s obligations and per-unit distributions.
- Monitor the Philips litigation, other legal and regulatory matters, and any change in management’s ability to estimate potential losses.
- Assess the risk to Holding’s partnership tax status and the potential effect of any change in tax treatment.
- Follow W.P. Stewart assets under management against the $5 billion CVR milestone and its December 12, 2016 deadline.