Business context and reporting period
AllianceBernstein Holding L.P. (AB Holding) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. AB Holding’s primary source of income and cash flow is its investment in AllianceBernstein L.P. (AB), an investment manager serving institutional, retail and private wealth clients and providing research services. Accordingly, AB Holding’s reported results primarily reflect its share of AB’s earnings, not AB’s consolidated operating revenue.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Equity in AB net income attributable to AB unitholders | $72.8 million | $49.1 million | $203.9 million | $146.7 million |
| AB Holding net income | $65.9 million | $43.2 million | $182.5 million | $128.8 million |
| Diluted net income per unit | $0.68 | $0.46 | $1.87 | $1.35 |
| Distribution per unit | $0.69 declared after quarter-end | $0.51 | $2.04 | $1.46 |
| Net cash provided by operating activities | Not presented separately for the quarter | Not presented separately for the quarter | $213.3 million | $154.8 million |
Q3 net income increased 52.6%; nine-month net income increased 41.7%. Management attributed the increases to higher AB earnings and a higher average ownership interest in AB. AB Holding’s effective tax rate was 9.5% in Q3 and 10.5% for the nine-month period, versus 12.0% and 12.2%, respectively, in 2017. AB Holding’s standalone revenue and operating margin are not presented in this filing.
At September 30, 2018, total assets were $1.489 billion, consisting principally of a $1.489 billion investment in AB. Total liabilities were $525,000; the filing reports no borrowings or debt balance. Partners’ capital was $1.489 billion. AB Holding reported no cash or cash equivalents at period-end. Nine-month investing cash use was $10.8 million and financing cash use was $202.5 million, mainly reflecting $214.7 million of distributions to unitholders. Operating cash flow rose primarily because distributions received from AB increased by $62.3 million.
Material changes and unusual items
- AB Holding’s equity in AB earnings rose 48.4% in Q3 and 39.0% for the first nine months. AB’s net income attributable to its unitholders increased 44.5% and 36.9%, respectively; AB Holding’s average equity ownership was 35.7% in Q3 and 35.8% for the nine months.
- AB adopted ASC 606 effective January 1, 2018. The standard had no impact on AB Holding’s income statement; AB Holding recorded a $12.5 million cumulative-effect increase to partners’ capital through its investment in AB.
- AB Holding’s reported nine-month diluted earnings per unit were $1.87; adjusted diluted earnings per unit, reflecting AB non-GAAP adjustments, were $2.03. The comparable adjusted figure was $1.47 in 2017. The filing cautions that these non-GAAP measures are not substitutes for GAAP measures.
- AB Holding declared a $0.69-per-unit distribution on October 24, payable November 15, 2018, to holders of record November 5. Distributions are based on Available Cash Flow, typically tied to adjusted diluted earnings per unit.
- AB repurchased 1.6 million AB Holding units in Q3 for incentive-compensation funding, at an average price of $29.81 per unit. The quarter’s repurchase plan expired October 22, 2018.
Outlook, risks and contingencies
No specific near-term earnings or revenue guidance is provided. Management said it believes cash flows from AB will provide resources to meet AB Holding’s obligations; that capacity depends on AB’s operating cash flow and quarterly distributions. The filing references AB’s 2020 margin target and relocation strategy but does not provide their numerical targets or estimates in the AB Holding text supplied.
The company reported that market volatility accelerated during October 2018 amid concerns about trade conflicts, slower global growth, inflation and more aggressive U.S. monetary policy. These conditions could weaken markets, reduce AB assets under management and lower revenues. Other stated risks include investment performance, client flows, competition, regulation and taxation. AB may incur losses in connection with litigation or regulatory matters, but management could not estimate potential losses; it did not believe pending matters would individually or collectively have a material adverse effect, while noting outcomes remain uncertain.
AB Holding’s publicly traded partnership tax status is important: loss of its grandfathered status could subject it to corporate income tax and materially reduce net income and distributions. Management states it monitors activities to preserve that status. Management also identifies uncertainty around compensation levels, relocation costs and savings, and assumptions underlying the 2020 margin target.
Most important facts for investors to verify
- Review AB’s accompanying Form 10-Q for operating revenue, assets under management, client flows, margins, debt and the detailed drivers of AB’s earnings; AB Holding’s filing directs readers to that report.
- Confirm the distribution’s payment and the ongoing relationship between AB distributions, Available Cash Flow and per-unit distributions.
- Assess the effect of October 2018 market volatility on AB’s assets under management, revenue and future distributions.
- Monitor AB Holding’s continued eligibility for grandfathered publicly traded partnership tax treatment.
- Follow developments in AB’s legal and regulatory matters, for which potential losses were not estimable in this filing.