AllianceBernstein Holding L.P. — Q3 2019 Form 10-Q
Business and period: The filing covers the quarter and nine months ended September 30, 2019. AB Holding’s principal income and cash flow come from its investment in AllianceBernstein L.P. (AB), an investment-management and research firm. AB Holding accounts for that investment using the equity method; its reported results therefore largely reflect its share of AB’s earnings and distributions.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Equity in AB net income | $66.7 million | $72.8 million | $178.4 million | $203.9 million |
| AB Holding net income | $59.8 million | $65.9 million | $158.5 million | $182.5 million |
| Diluted net income per unit | $0.62 | $0.68 | $1.65 | $1.87 |
| Distribution per unit | $0.63 | $0.69 | $1.68 | $2.04 |
Net income declined 9.2% in Q3 and 13.1% for the nine-month period. Equity in AB net income fell 8.4% and 12.5%, respectively. AB Holding’s effective tax rate was 10.3% in Q3 versus 9.5%, and 11.1% for nine months versus 10.5%.
Cash flow and liquidity: For the first nine months, operating cash flow was $162.7 million, down from $213.3 million, primarily because distributions received from AB fell $52.8 million to $182.5 million. Investing cash outflow was $9.6 million; financing cash outflow was $153.0 million, including $162.2 million of distributions to unitholders. Cash and cash equivalents were zero at period-end. Management said cash flow from its AB investment should provide resources to meet obligations.
Balance sheet and margins: At September 30, 2019, total assets were $1.455 billion, almost entirely the $1.455 billion investment in AB; liabilities were $0.7 million and partners’ capital was $1.455 billion. The filing does not report AB Holding revenue or operating margins as standalone metrics. In discussing AB, management said adjusted operating margin was 25.7% for the first nine months of 2019, down from 29.1% in 2018, and that reaching its 30% margin target by 2020 was unlikely. No material change in market-risk disclosures was reported.
Distributions, outlook and risks
- On October 24, 2019, the general partner declared a $0.63-per-unit distribution for Q3, payable November 14 to holders of record November 4.
- Management said it was taking additional actions to align expenses with expected revenues and remained committed to a 30% adjusted operating margin in years after 2020, subject to market conditions and business mix.
- Results and AB Holding cash generation depend substantially on AB’s operating cash flow, client assets and financial-market performance. Other cited risks include competition, regulation and tax changes, and the ability to access capital markets.
- AB may incur losses from regulatory inquiries, proceedings or litigation, but management could not estimate potential losses; it did not believe pending matters would have a material adverse effect, while noting outcomes remain uncertain.
- AB Holding’s grandfathered publicly traded partnership tax status is important: losing it could subject the partnership to corporate income tax and materially reduce net income and distributions.
- AB’s stated 2020 margin target was no longer considered likely based on current projections. Forward-looking statements are subject to uncertainty and are not guarantees.
Most important facts to verify
- Review AB’s accompanying Form 10-Q for the underlying revenue, AUM, operating results, margin detail and drivers of lower earnings and distributions.
- Assess the sustainability of AB cash distributions, which are AB Holding’s primary source of cash and support its unitholder distributions.
- Monitor progress on expense actions and the revised timing of the 30% adjusted operating-margin goal.
- Track litigation and regulatory developments, and changes that could affect AB Holding’s partnership tax status.