AllianceBernstein Holding L.P. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Holding is a publicly traded partnership whose principal income and cash flow come from its equity-method investment in AllianceBernstein L.P. The filing’s figures below are for Holding unless otherwise noted. Amounts are in U.S. dollars.
Financial results and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Equity in AllianceBernstein unitholder net income | $18.9 million | $68.7 million | $112.0 million | $125.4 million |
| Holding net income | $12.2 million | $62.5 million | $91.2 million | $107.5 million |
| Diluted net income per unit | $0.12 | $0.67 | $0.90 | $1.17 |
| Distributions per unit | $0.12 | $0.67 | $0.89 | $1.15 |
- Holding does not report operating revenue or operating margins as a standalone business; the filing’s central earnings measure is equity in AllianceBernstein’s income.
- Net income fell 80.5% in Q3 and 15.1% for the nine-month period year over year. Diluted earnings per unit declined 82.1% and 23.1%, respectively.
- At September 30, total assets were $1.743 billion, primarily the $1.742 billion investment in AllianceBernstein. Partners’ capital was $1.743 billion and total liabilities were $73,000. The presented balance sheet shows no debt balance.
- For the first nine months, operating cash flow was negative $24.5 million; investing cash flow was positive $155.9 million, including $164.0 million of distributions from AllianceBernstein; financing cash flow was negative $131.4 million, including $139.5 million distributed to unitholders. Holding reported no cash at period end.
- The General Partner declared a $12.3 million distribution, or $0.12 per unit, for Q3, payable November 18, 2010 to holders of record November 8.
Material changes and management commentary
- Management attributed lower earnings chiefly to reduced AllianceBernstein income, primarily reflecting a $90 million real estate charge recorded by AllianceBernstein in Q3. Holding’s higher ownership interest partly offset the decline.
- Holding’s effective tax rate increased to 35.4% from 9.0% in Q3 and to 18.6% from 14.3% for the nine-month period. The filing attributes this to higher applicable revenues and ownership percentage, alongside lower equity earnings.
- Management also presented non-GAAP adjusted results reflecting AllianceBernstein adjustments: adjusted diluted net income per Holding unit was $0.36 for Q3 2010 versus $0.48 a year earlier, and $1.20 for the nine months versus $0.79. These measures are supplemental, not substitutes for GAAP results.
- AllianceBernstein purchased 1.9 million Holding units for $49.3 million in Q3 and 4.9 million units for $135.4 million through September 30 to help fund incentive compensation. Holding’s ownership interest in AllianceBernstein averaged 36.7% in Q3, versus 34.5% a year earlier.
Outlook, risks, and contingencies
- Management expects Holding’s cash flow from AllianceBernstein distributions to meet its obligations, but Holding’s liquidity depends on AllianceBernstein’s operating cash flow and distributions, which are exposed to capital-market and other factors.
- AllianceBernstein stated that, based on expected 2010 revenues, adjusted employee compensation expense should be 45%–50% of adjusted revenues; actual results may fall outside that range.
- Management said the $90 million real estate charge is expected to reduce future occupancy costs, but estimates depend on subleasing timing and rental rates; incorrect assumptions could lead to another charge or smaller savings.
- A derivative lawsuit brought on behalf of Holding concerning alleged market timing and late trading remains pending. Plaintiffs seek unspecified damages; management said it cannot predict the outcome or estimate a possible loss. Related shareholder, mutual fund derivative, and ERISA claims were settled for $30 million, previously expensed and paid.
- Holding relies on its grandfathered publicly traded partnership tax status. Loss of that status could subject it to corporate income tax and materially reduce net income and distributions. Other identified risks include market performance, client assets and investment results, regulation, competition, and litigation.
- Approximately 2.7 million employee deferred incentive units were scheduled to vest in December 2010; the company estimated about 1.6 million units would be distributed net of withholding. Potential employee sales could affect unit trading volume and price.
Important facts for investors to verify
- Review AllianceBernstein’s accompanying Form 10-Q for the full explanation of the real estate charge, operating performance, and non-GAAP adjustments.
- Assess whether AllianceBernstein’s distributions can sustain Holding’s cash distributions and obligations, given Holding’s negative operating cash flow and zero reported cash balance.
- Monitor the pending derivative litigation and any developments in the assumptions behind future occupancy-cost savings.
- Confirm the effects of incentive-unit purchases, vesting, and potential employee sales on unit count, dilution, and market price.
- Consider the tax consequences if Holding were to lose its grandfathered partnership status.