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ALLIANCEBERNSTEIN HOLDING L.P. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 30, 2014

Holding's principal source of income and cash flow is attributable to its investment in AllianceBernstein limited partnership Units. 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 AllianceBernstein included as an exhibit to this Form 10-Q. They also should be read in conjunction with AllianceBernstein's audited financial statements and notes and MD&A included in Holding's Form 10-K for the year ended December 31, 2013. Results of Operations Three Months Ended Six Months Ended June 30, June 30, 2014 2013 % Change 2014 2013 % Change (in millions, except per unit amounts) Net income attributable to AllianceBernstein Unitholders $ 136.4$ 120.7 13.0 % $ 253.2$ 235.2 7.6 % Weighted average equity ownership interest 35.5 % 37.6 % 35.5 % 37.6 % Equity in net income attributable to AllianceBernstein Unitholders $ 48.5$ 45.4 6.7 $ 89.8$ 88.4 1.6 Net income of Holding $ 42.9$ 40.3 6.4 $ 79.0$ 78.5 0.6 Diluted net income per Holding Unit $ 0.44$ 0.40 10.0 $ 0.82$ 0.78 5.1 Distribution per Holding Unit $ 0.45$ 0.41 9.8 $ 0.84$ 0.79 6.3 Net income for the three and six months ended June 30, 2014 increased $2.6 million and $0.5 million, respectively, to $42.9 million and $79.0 million from net income of $40.3 million and $78.5 million for the corresponding prior-year periods. The increases reflect higher net income attributable to AllianceBernstein unitholders offset by lower weighted average ownership interest. Holding's income taxes represent a 3.5% federal tax on its partnership gross income from the active conduct of a trade or business. Holding's partnership gross income is derived from its interest in AllianceBernstein. Holding's income tax is computed by multiplying certain AllianceBernstein qualifying revenues (primarily U.S. investment advisory fees and brokerage commissions) by Holding's ownership interest in AllianceBernstein (adjusted for Holding Units owned by AllianceBernstein's consolidated rabbi trust), multiplied by the 3.5% tax rate. Holding's effective tax rate during the second quarter of 2014 was 11.6%, compared to 11.4% during the second quarter of 2013. Holding's effective tax rate during the six months ended June 30, 2014 was 12.0%, compared to 11.2% during the six months ended June 30, 2013. The higher effective rates for the three- and six-month periods ended June 30, 2014 are due to increases of 8.7% and 9.0%, respectively, in income tax expense, primarily a result of higher AllianceBernstein qualifying revenues and a higher weighted average ownership interest for calculating the tax, exceeding increases of 6.7% and 1.6%, respectively, in equity in net income attributable to AllianceBernstein unitholders. See Note 7 to the condensed financial statements contained in Item 1. Units Outstanding Effective July 1, 2013, management retired all unallocated Holding Units in AllianceBernstein's consolidated rabbi trust. To retire such units, AllianceBernstein delivered the unallocated Holding Units held in its consolidated rabbi trust to Holding in exchange for the same number of AllianceBernstein units. Each entity then retired its units. As a result, on July 1, 2013, each of AllianceBernstein's and Holding's units outstanding decreased by approximately 13.1 million units. AllianceBernstein and Holding intend (subject to compliance with applicable safe harbor rules to avoid AllianceBernstein being treated as a publicly-traded partnership) to retire additional units as AllianceBernstein purchases Holding Units on the open market or when AllianceBernstein purchases Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards, if such units are not required to fund new employee awards in the near future. If a sufficient number of Holding Units is not available in the rabbi trust to fund new awards, AllianceBernstein will purchase newly-issued Holding Units from Holding. When AllianceBernstein purchases newly-issued Holding Units from Holding, Holding is required to use the proceeds it receives from AllianceBernstein to purchase the equivalent number of newly-issued AllianceBernstein Units.



Management Operating Metrics

As supplemental information, AllianceBernstein 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 AllianceBernstein. Such measures are not based on generally accepted accounting principles ("non-GAAP measures"). See AllianceBernstein's MD&A contained in Exhibit 99.1. The impact of these adjustments on Holding's net income and diluted net income per Holding Unit are as follows: 11



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Index Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 (in thousands, except per unit amounts) AllianceBernstein non-GAAP adjustments, before taxes $ 1,046$ 2,257$ 3,936$ 2,924 Income tax credit (expense) on non-GAAP adjustments 122 (26 ) 76 (124 ) AllianceBernstein non-GAAP adjustments, after taxes 1,168 2,231 4,012 2,800 Holding's weighted average equity ownership interest in AllianceBernstein 35.5 % 37.6 % 35.5 % 37.6 %



Impact on Holding's net income of AllianceBernstein non-GAAP adjustments $ 415 $ 840 $ 1,424$ 1,053

Net income - diluted, GAAP basis $ 43,230$ 40,617$ 79,685$ 79,099 Impact on Holding's net income of AllianceBernstein non-GAAP adjustments 415 840 1,424 1,053 Adjusted net income - diluted $ 43,645 $



41,457 $ 81,109$ 80,152

Diluted net income per Holding Unit, GAAP basis $ 0.44 $ 0.40 $ 0.82$ 0.78 Impact of AllianceBernstein non-GAAP adjustments 0.01 0.01 0.01 0.01 Adjusted diluted net income per Holding Unit $ 0.45 $ 0.41 $ 0.83$ 0.79 The impact on Holding's net income of AllianceBernstein's non-GAAP adjustments reflects Holding's share (based on its ownership percentage of AllianceBernstein over the applicable period) of AllianceBernstein's non-GAAP adjustments to its net income. 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 the 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 AllianceBernstein's revenues and expenses.



Cash Distributions

Holding is required to distribute all of its Available Cash Flow, as defined in the Holding Partnership Agreement, to its unitholders (including the General Partner). Since the third quarter of 2012, Available Cash Flow has been 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 that one or more non-GAAP adjustments that are made for adjusted net income should not be made with respect to the Available Cash Flow calculation. See Note 2 to the condensed financial statements contained in Item 1 for a description of Available Cash Flow.



Capital Resources and Liquidity

During the six months ended June 30, 2014, net cash provided by operating activities was $94.5 million, compared to $82.5 million during the corresponding 2013 period. The increase was primarily due to higher cash distributions received from AllianceBernstein of $22.4 million.

During the six months ended June 30, 2014, net cash used in investing activities was $12.0 million, compared to $25.2 million during the corresponding 2013 period. The decrease was primarily due to lower investments in AllianceBernstein from cash distributions paid to AllianceBernstein's consolidated rabbi trust of $11.9 million.



During the six months ended June 30, 2014, net cash used in financing activities was $82.5 million, compared to $57.3 million during the corresponding 2013 period. The increase was primarily due to higher cash distributions paid to unitholders of $24.8 million.

Management believes that the cash flow realized from its investment in AllianceBernstein will provide Holding with the resources necessary to meet its financial obligations.

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Index

Commitments and Contingencies

See Note 8 to the condensed financial statements contained in Item 1.

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS

Certain statements provided by management in this report and in the portion of AllianceBernstein'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, such 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 ended December 31, 2013 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 the SEC, 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 also could affect adversely our financial condition, results of operations and business prospects.



The forward-looking statements referred to in the preceding paragraph, most of which directly affect AllianceBernstein but also affect Holding because Holding's principal source of income and cash flow is attributable to its investment in AllianceBernstein, include statements regarding:

Our belief that the cash flow Holding realizes from its investment in

AllianceBernstein will provide Holding with the resources necessary to meet its

financial obligations: Holding's cash flow is dependent on the quarterly cash

distributions it receives from AllianceBernstein. Accordingly, Holding's

ability to meet its financial obligations is dependent on AllianceBernstein'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 long-term 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

certain 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 pending or future legal proceeding could be

significant, and could have such an effect.

The possibility that AllianceBernstein will engage in open market purchases of

Holding Units to help fund anticipated obligations under our incentive

compensation award program: The number of Holding Units AllianceBernstein 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 a 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 being higher than 50% of our adjusted

net revenues.


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