Business context and reporting period
AllianceBernstein Holding L.P. (Holding) filed this Form 10-Q for the quarter and six months ended June 30, 2014. Holding’s principal income and cash flow come from its investment in AllianceBernstein L.P.; its results therefore largely reflect its share of AllianceBernstein’s performance. Holding provides no standalone operating revenue figure in this filing.
Financial results and liquidity
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Equity in AllianceBernstein income | $48.5 million | $89.8 million |
| Holding net income | $42.9 million | $79.0 million |
| Diluted net income per unit | $0.44 | $0.82 |
| Distribution per unit | $0.45 declared for the quarter | $0.84 reported for the six-month period |
For the six months, operating cash flow was $94.5 million, cash distributions received from AllianceBernstein were $105.9 million, and distributions paid to Holding unitholders were $95.4 million. Investing cash outflow was $12.0 million and financing cash outflow was $82.5 million. Holding reported no cash at period end. Total assets were $1.535 billion, almost entirely its investment in AllianceBernstein; total liabilities were $246,000. The filing lists no debt balance for Holding. No standalone operating margin is reported.
Holding’s effective tax rate was 11.6% for the quarter and 12.0% for the six months. The filing attributes the higher six-month rate versus 11.2% a year earlier primarily to higher qualifying revenues and a higher ownership percentage used in the tax calculation.
Changes versus prior comparable periods
Quarterly Holding net income increased 6.4% from $40.3 million, and diluted earnings per unit rose 10.0% from $0.40. For the six months, net income increased 0.6% from $78.5 million and diluted earnings per unit increased 5.1% from $0.78. Management said higher AllianceBernstein income was partly offset by Holding’s lower weighted-average ownership interest, 35.5% versus 37.6% in 2013. AllianceBernstein income attributable to its unitholders rose 13.0% in the quarter and 7.6% in the six-month period.
Six-month operating cash flow increased from $82.5 million in 2013, mainly due to $22.4 million more in distributions received from AllianceBernstein. Cash distributions paid to Holding unitholders increased by $24.8 million. Prior-year unit comparisons are affected by the July 2013 retirement of approximately 13.1 million units at both Holding and AllianceBernstein.
Outlook, risks and unusual items
Holding declared a $0.45-per-unit distribution on July 30, 2014, payable August 28 to holders of record August 11. Management expects cash flow from its AllianceBernstein investment to provide resources for Holding’s obligations, but this depends on AllianceBernstein’s operating cash flow and capital-market conditions. The filing provides no earnings or revenue guidance.
Management identifies market performance, investment results, client assets under management, competition, regulation and tax treatment as significant risks. Holding’s federal tax status as a grandfathered publicly traded partnership depends on avoiding a substantial new line of business; loss of that status could materially reduce net income and distributions.
AllianceBernstein faces a Philips pension-client claim in the U.K. alleging negligence concerning a £500 million mortgage-backed-securities portfolio. Claimed damages are $177 million to $234 million, plus compound interest on alleged realized losses. AllianceBernstein disputes the claims and says it cannot estimate a reasonably possible loss range; management believes recorded accruals for estimable probable losses are adequate. Other litigation and regulatory matters also remain, with additional potential losses not currently estimable.
W.P. Stewart’s contingent value rights could require a further $4 per eligible acquired share if specified assets under management exceed $5 billion by December 12, 2016. AUM was approximately $2.3 billion at June 30, 2014, and management said the milestone was not met in the second quarter.
Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. AllianceBernstein made no open-market Holding-unit repurchases in the first six months; its second-quarter unit purchases were employee tax-withholding transactions.
Important facts for investors to verify
- Review AllianceBernstein’s accompanying Form 10-Q for the underlying operating revenue, margins, assets under management and detailed business drivers; Holding’s filing primarily reports equity-method results.
- Track AllianceBernstein distributions to Holding and the resulting Holding distributions, since Holding reported no cash at quarter-end and depends on those receipts.
- Monitor the Philips litigation, including the claimed damages and the company’s inability to estimate a loss range.
- Assess the W.P. Stewart AUM milestone against the $5 billion threshold and its December 2016 deadline.
- Confirm ongoing compliance with the conditions for Holding’s grandfathered publicly traded partnership tax status.