AB Holding's principal source of income and cash flow is attributable to its investment in AB Units.AB Holding's interim condensed financial statements and notes and management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with those of AB included as an exhibit to this Form 10-Q. They also should be read in conjunction with AB's audited financial statements and notes and MD&A included inAB Holding's Form 10-K for the year endedDecember 31, 2020 . Results of Operations Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change (in thousands, except per unit amounts) Net income attributable to AB Unitholders$ 264,695 $ 207,976 27.3 %$ 776,396 $ 579,617 33.9 % Weighted average equity ownership interest 36.2 % 35.5 % 36.4 % 35.7 % Equity in net income attributable to AB Unitholders 95,921 73,874 29.8 282,235 206,989 36.4 Income taxes 7,245 6,875 5.4 21,555 20,805 3.6 Net income of AB Holding$ 88,676 $ 66,999 32.4$ 260,680 $ 186,184 40.0 Diluted net income per AB Holding Unit $ 0.89$ 0.70 27.1 $ 2.61$ 1.95 33.8 Distribution perAB Holding Unit(1) $ 0.89$ 0.69 29.0 $ 2.61$ 1.94 34.5 ________________________
(1)Distributions reflect the impact of AB's non-GAAP adjustments.
AB Holding's net income for the three and nine months endedSeptember 30, 2021 increased$21.7 million and$74.5 million , respectively, due to higher net income attributable to AB Unitholders and a slightly higher weighted average equity ownership interest.AB Holding's partnership gross income is derived from its interest in AB.AB Holding's income taxes, which reflect a 3.5% federal tax on its partnership gross income from the active conduct of a trade or business, are computed by multiplying certain AB qualifying revenues (primarilyU.S. investment advisory fees, research payments and brokerage commissions) byAB Holding's ownership interest in AB, multiplied by the 3.5% tax rate.AB Holding's effective tax rate was 7.6% during the three months endedSeptember 30, 2021 , compared to 9.3% during the three months endedSeptember 30, 2020 .AB Holding's effective tax rate during the nine months endedSeptember 30, 2021 was 7.6% compared to 10.1% during the nine months endedSeptember 30, 2020 . See Note 7 to the condensed financial statements in Item 1 for the calculation of income tax expense.
Management Operating Metrics
As supplemental information, AB provides the performance measures "adjusted net revenues," "adjusted operating income" and "adjusted operating margin," which are the principal metrics management uses in evaluating and comparing the period-to-period operating performance of AB. Management principally uses these metrics in evaluating performance because they present a clearer picture of AB's operating performance and allow management to see long-term trends without the distortion primarily caused by long-term incentive compensation-related mark-to-market adjustments, real estate charges and other adjustment items. Similarly, management believes that these management operating metrics help investors better understand the underlying trends in AB's results and, accordingly, provide a valuable perspective for investors. Such measures are not based on generally accepted accounting principles ("non-GAAP measures"). These non-GAAP measures are provided in addition to, and not as substitutes for, net revenues, operating income and operating margin, and they may not be comparable to non-GAAP measures presented by other companies. Management uses both GAAP and non-GAAP measures in evaluating the company's financial performance. The non-GAAP measures alone may pose limitations because they do not include all of AB's revenues and expenses. Further, adjusted diluted net income perAB Holding Unit is not a liquidity measure and should not be used in place of cash flow measures.See AB's MD&A contained in Exhibit 99.1. 12
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The impact of these adjustments on
Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in
thousands, except per Unit amounts)
AB non-GAAP adjustments, before taxes$ (8) $ (840) $ (1,702) $ 7,262 AB income tax (expense) benefit on non-GAAP adjustments (56) 29 239 (584) AB non-GAAP adjustments, after taxes (64) (811) (1,463) 6,678AB Holding's weighted average equity ownership interest in AB 36.2 % 35.5 % 36.4 % 35.7 % Impact onAB Holding's net income of AB non-GAAP adjustments$ (23) $
(289) $ (532)
Net income - diluted, GAAP basis$ 88,678 $ 67,013 $ 260,706 $ 186,216 Impact onAB Holding's net income of AB non-GAAP adjustments (23) (289) (532) 2,385 Adjusted net income - diluted$ 88,655 $ 66,724 $ 260,174 $ 188,601 Diluted net income per AB Holding Unit, GAAP basis$ 0.89 $ 0.70 $ 2.61$ 1.95 Impact of AB non-GAAP adjustments - (0.01) (0.01) 0.03 Adjusted diluted net income perAB Holding Unit$ 0.89 $ 0.69 $ 2.60$ 1.98
The degree to which AB's non-GAAP adjustments impact
Cash Distributions
AB Holding is required to distribute all of its Available Cash Flow, as defined in the AB Holding Partnership Agreement, to its Unitholders (including the General Partner). Available Cash Flow typically is the adjusted diluted net income per unit for the quarter multiplied by the number of units outstanding at the end of the quarter. Management anticipates that Available Cash Flow will continue to be based on adjusted diluted net income per unit, unless management determines, with concurrence of the Board of Directors, that one or more adjustments made to adjusted net income should not be made with respect to the Available Cash Flow calculation. See Note 2 to the condensed financial statements in Item 1 for a description of Available Cash Flow.
Capital Resources and Liquidity
During the nine months ended
During the nine months endedSeptember 30, 2021 , net cash used in investing activities was$3.4 million , compared to$0.1 million during the corresponding 2020 period. The activity in both periods reflects the investments in AB with proceeds from exercises of compensatory options to buy AB Holding Units.
During the nine months ended
Management believes thatAB Holding will have the resources it needs to meet its financial obligations as a result of the cash flowAB Holding realizes from its investment in AB. Commitments and Contingencies
See Note 8 to the condensed financial statements in Item 1.
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CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements provided by management in this report and in the portion of AB's Form 10-Q attached hereto as Exhibit 99.1 are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The most significant of these factors include, but are not limited to, the following: the performance of financial markets, the investment performance of sponsored investment products and separately-managed accounts, general economic conditions, industry trends, future acquisitions, integration of acquired companies, competitive conditions and government regulations, including changes in tax regulations and rates and the manner in which the earnings of publicly-traded partnerships are taxed. We caution readers to carefully consider such factors. Further, these forward-looking statements speak only as of the date on which such statements are made; we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. For further information regarding these forward-looking statements and the factors that could cause actual results to differ, see "Risk Factors" in Part I, Item 1A of our Form 10-K for the year endedDecember 31, 2020 and Part II, Item 1A in this Form 10-Q. Any or all of the forward-looking statements that we make in our Form 10-K, this Form 10-Q, other documents we file with or furnish to theSEC , and any other public statements we issue, may turn out to be wrong. It is important to remember that other factors besides those listed in "Risk Factors" and those listed below could also adversely impact our revenues, financial condition, results of operations and business prospects. The forward-looking statements referred to in the preceding paragraph, most of which directly affect AB but also affectAB Holding becauseAB Holding's principal source of income and cash flow is attributable to its investment in AB, include statements regarding: •Our belief that the cash flowAB Holding realizes from its investment in AB will provideAB Holding with the resources it needs to meet its financial obligations:AB Holding's cash flow is dependent on the quarterly cash distributions it receives from AB.Accordingly, AB Holding's ability to meet its financial obligations is dependent on AB's cash flow from its operations, which is subject to the performance of the capital markets and other factors beyond our control. •Our financial condition and ability to access the public and private capital markets providing adequate liquidity for our general business needs: Our financial condition is dependent on our cash flow from operations, which is subject to the performance of the capital markets, our ability to maintain and grow client assets under management and other factors beyond our control. Our ability to access public and private capital markets on reasonable terms may be limited by adverse market conditions, our firm's credit ratings, our profitability and changes in government regulations, including tax rates and interest rates. •The outcome of litigation: Litigation is inherently unpredictable, and excessive damage awards do occur. Though we have stated that we do not expect any pending legal proceedings to have a material adverse effect on our results of operations, financial condition or liquidity, any settlement or judgment with respect to a legal proceeding could be significant and could have such an effect. •The possibility that we will engage in open market purchases ofAB Holding Units to help fund anticipated obligations under our incentive compensation award program: The number ofAB Holding Units AB may decide to buy in future periods, if any, to help fund incentive compensation awards depends on various factors, some of which are beyond our control, including the fluctuation in the price of an AB Holding Unit (NYSE: AB) and the availability of cash to make these purchases. •Our determination that adjusted employee compensation expense should not exceed 50% of our adjusted net revenues: Aggregate employee compensation reflects employee performance and competitive compensation levels. Fluctuations in our revenues and/or changes in competitive compensation levels could result in adjusted employee compensation expense exceeding 50% of our adjusted net revenues. •Our Relocation Strategy: While the expenses, expense savings and EPU impact we expect will result from our Relocation Strategy are presented with numerical specificity, and we believe these figures to be reasonable as of the date of this report, the uncertainties surrounding the assumptions on which our estimates are based create a significant risk that our current estimates may not be realized. These assumptions include:
•the amount and timing of employee relocation costs, severance and overlapping compensation and occupancy costs we experience; and
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• the timing for execution of each phase of our relocation implementation plan. •The Adverse Impact of COVID-19: The severity of any possible adverse impact on our AUM and revenues of any new economic downturn caused by a possible resurgence of the COVID-19 pandemic would depend on the depth and length of any such downturn and its impact on the companies in which we invest. Our conclusions about the possible adverse impact on us are based on our assumptions that the recovery from any such possible new economic downturn would be gradual and that there could again be significant, lasting high unemployment and economic damage. We believe that these assumptions are reasonable, but they may not be correct and economic conditions likely will differ from our assumptions. Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in
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