AllianceBernstein Holding L.P. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. AB Holding is a publicly traded partnership whose principal income and cash flow come from its equity-method investment in AllianceBernstein L.P. (AB), an investment-management and research-services business. The reported figures below are for AB Holding unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Equity in net income attributable to AB Unitholders | $49.7 million | $60.2 million | Down 17.5% |
| AB Holding net income | $43.9 million | $54.6 million | Down 19.6% |
| Diluted net income per unit | $0.46 | $0.55 | Down 16.4% |
| Distribution per unit | $0.46 | $0.40 | Up 15.0% |
| Net cash provided by operating activities | $64.3 million | $56.0 million | Up $8.4 million |
AB reported net income attributable to its Unitholders of $139.9 million, down 15.8% from $166.3 million. AB Holding’s weighted-average equity ownership in AB declined to 35.5% from 36.2%, contributing to the lower equity-method income. AB qualifying revenues used in AB Holding’s tax calculation rose 6.3% to $546.2 million; income taxes were $5.8 million, up 3.1%, and the effective tax rate increased to 11.6% from 9.3%.
Operating cash flow increased primarily because cash distributions received from AB rose to $70.4 million from $55.9 million, partly offset by a decrease in other liabilities. Investing cash outflow was $4.5 million, while financing cash outflow was $59.9 million, including $64.8 million of distributions to Unitholders. Cash and cash equivalents were zero at both quarter-end and the prior-year period-end; the filing describes cash distributions from AB as the source of liquidity. Total assets were $1.512 billion, almost entirely the investment in AB. Total liabilities were $0.3 million; the filing reports no debt balance. Operating margins and standalone operating revenue are not meaningful measures presented for AB Holding in this filing.
Material changes and unusual items
- Net income fell $10.7 million year over year, reflecting lower AB income attributable to Unitholders and AB Holding’s lower weighted-average ownership interest.
- Cash distributions paid to Unitholders rose to $64.8 million from $49.8 million. After quarter-end, the General Partner declared a $0.46-per-unit distribution for Q1, payable May 18, 2017 to holders of record May 8, 2017.
- The 2016 comparative results were revised following an error in AB’s tax-provision calculation dating to 2010. For Q1 2016, equity in AB income and AB Holding net income were each reduced by $955,000, and reported basic and diluted earnings per unit were reduced by $0.01 to $0.55.
- AB purchased 1.32 million AB Holding units during Q1, including 1.18 million open-market purchases to fund incentive compensation and employee unit withholding purchases. The prior Rule 10b5-1 plan expired February 10, 2017; no new plan was adopted in the quarter.
Outlook, risks, and contingencies
Management expects AB Holding to have resources to meet its obligations through cash flow from its investment in AB. Available Cash Flow is generally based on adjusted diluted net income per unit, subject to the partnership agreement and management’s discretion. This is not a quantified earnings or revenue forecast.
AB Holding’s ability to fund obligations and distributions depends on AB’s operating cash flow and distributions, which are exposed to capital-market performance, client assets and other factors. Other identified risks include investment performance, economic and industry conditions, competition, regulation and tax changes. Losing grandfathered publicly traded partnership status would subject AB Holding to corporate income tax and could materially reduce net income and distributions. AB reported various legal and regulatory matters for which losses are reasonably possible but not currently estimable; management did not expect pending matters to have a material adverse effect, while acknowledging that outcomes remain uncertain. Management reported no material change in risk factors or market risk from the 2016 Form 10-K.
AB Holding states that its disclosure controls were effective at quarter-end and that no material change in internal control over financial reporting occurred during Q1.
Important facts for investors to verify
- Review AB’s accompanying 10-Q, included as Exhibit 99.1, for the operating drivers behind AB’s lower net income and the broader revenue, margin, assets-under-management and cash-flow trends.
- Assess the effect of the lower ownership interest in AB and the higher effective tax rate on future AB Holding earnings and distributions.
- Confirm the basis and sustainability of the $0.46 distribution, given that quarterly cash distributions paid exceeded AB Holding net income and cash balances were zero at period-end.
- Review the disclosed historical tax-provision correction and any subsequent developments in AB’s legal and regulatory matters.
- Monitor market, investment-performance and tax-status risks, including the potential consequences if AB Holding loses its grandfathered partnership tax treatment.