UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on the New York Stock Exchange on June 30, 2022, was $
As of February 24, 2023, the registrant had
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2023 annual meeting of stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
Table of Contents
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
F-1 |
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Item 9. |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. |
F-49 |
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Item 9C. |
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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PART III |
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Item 10. |
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Item 11. |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
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Item 15. |
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Item 16 |
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Explanatory Note
This Annual Report on Form 10-K includes information pertaining to periods prior to the closing of the Business Combination (as defined in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"). Refer to Note 1 “Basis of Presentation and Nature of Business” to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022 for further information regarding the basis of presentation.
Disclaimer Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include, but are not limited to, statements that relate to expectations regarding future financial performance, and business strategies or expectations for our business. Forward-looking statements can often be identified by the use of words such as “anticipate,” “appear,” “approximate,” “believe,” “continue,” “could,” “estimate,” “expect,” “foresee,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “would” or similar expressions or the negative thereof. These forward-looking statements are based on information available as of the date of this report and the Company’s management’s current expectations, forecasts and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company’s views as of any subsequent date. The Company does not undertake any obligation to update, add or otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws.
A number of risks and uncertainties that could cause actual results to differ materially from the results reflected in these forward-looking statements are identified under “Risk Factors” in Item 1A of this Annual Report on Form 10-K. These statements are based on assumptions that may not come true and are subject to significant risks and uncertainties.
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Summary of Risk Factors
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors,” that represent challenges that we face in connection with the successful implementation of our strategy and growth of our business. The occurrence of one or more of the events or circumstances described in the section titled “Risk Factors,” alone or in combination with other events or circumstances, may adversely affect our business, financial condition, results of operations, and prospects. A summary of the principal factors that create risk in investing in our securities and might cause actual results to differ is set forth below:
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These risk factors do not identify all risks that we face, and our business, financial condition and results of operations could also be affected by factors, events or uncertainties that are not presently known to us or that we currently do not consider to present material risks.
Website and Social Media Disclosure
We use our website (www.alight.com) and our corporate Facebook (http://www.facebook.com/AlightGlobal), Instagram (@alight_solutions), LinkedIn (www.linkedin.com/company/alightsolutions), Twitter (@alightsolutions), and YouTube (www.youtube.com/c/AlightSolutions) accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, filings made with the Securities and Exchange Commission (the "SEC") and public conference calls and webcasts. The information on our website is not part of this Annual Report.
The Company makes available free of charge on its website or provides a link on its website to the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. To access these filings, go to the Company’s website and under the “Investors” heading, click on “Financials.”
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PART I
Item 1. Business.
Throughout this section, references to “we,” “us,” and “our” refer to Alight and its consolidated subsidiaries as the context so requires.
Alight is defining the future of employee wellbeing through the power of our integrated health, wealth, wellbeing and payroll solutions powered by Alight Worklife®. Alight Worklife® is a high-tech employee engagement platform with a human touch – that brings together our mission-critical wellbeing solutions to our clients to drive better outcomes for organizations and individuals.
Against the current macro environment, both employers and employees face considerable challenges that impact their ability to succeed and thrive now and in the future. Employees are shouldering more and more responsibility for healthcare costs, while struggling with short-and-long-term financial needs in an inflationary environment, among other daily challenges. These trends have driven the need for integrated, personalized tools to help employees make more informed decisions around all aspects of their health, finances and wellbeing. For their part, employers are facing increasing cost pressures, ever-changing workforce regulations and evolving dynamics across the employer/employee relationship, driving the need for flexibility, engagement and effective solutions for compliance. We believe Alight is uniquely positioned between the employer and employee to address these factors and drive better outcomes for both.
We aim to be the pre-eminent employee experience partner by providing personalized experiences that help employees make the best decisions for themselves and their families about their health, wealth and wellbeing. At the same time, we help employers tackle their biggest people and business challenges by helping them understand prevalence, trends and risks to generate better outcomes for the future and realize a return on their people investment. Our data, analytics and Artificial Intelligence ("AI") allow us to deliver actionable insights that drive measurable outcomes for companies and their people. We provide solutions to manage health and retirement benefits, tools for payroll and HR management, as well as solutions to manage the workforce from the cloud. Our solutions include:
Employer Solutions: driven by our digital, software and AI-led capabilities powered by the Alight Worklife® platform and spanning total employee wellbeing, including integrated benefits administration, healthcare navigation, financial wellbeing, leave of absence management, retiree healthcare and payroll. We leverage data across all interactions and activities to improve the employee experience, reduce operational costs and better inform management processes and decision-making. Our clients' employees benefit from an integrated platform and user experience, coupled with a full-service customer care center, helping them manage the full life cycle of their health, wealth and careers.
Professional Services: includes our project-based cloud deployment and consulting offerings that provide expertise with both human capital and financial platforms. Specifically, this includes cloud advisory and deployment, and optimization services for cloud platforms such as Workday, SAP SuccessFactors, Oracle, and Cornerstone OnDemand.
We deliver our solutions through a set of proprietary and partner technologies, a well-developed network of providers and a structured approach to instill and sustain enterprise-wide practices of excellence. Our solutions are supported through a secure and scalable cloud infrastructure, together with our core benefits processing platforms and consumer engagement tools and integrated with over 350 external platforms and partners. Our data and access across the breadth of human capital solutions provides us with comprehensive employee records to enable AI-driven, omnichannel engagement and a personalized, integrated experience for our clients’ employees. Through the use of predictive analytics and omnichannel engagement, Alight is able to tailor an employee experience that is unique to each individual’s needs and circumstance.
We generate primarily all of our revenue, which is highly recurring, from fees for services provided from contracts across all solutions, which is primarily based on a contracted fee charged per participant per period (e.g., monthly or annually, as applicable). Our contracts typically have three to five-year terms for ongoing services with mutual renewal options. The majority of our revenue is recognized over time when control of the promised services is transferred, and the customers simultaneously receive and consume the benefits of our services. Payment terms are consistent with industry practice.
We use annual revenue retention rates as some of the measures to manage our business. We calculate annual revenue retention by identifying the clients from whom we generate revenue in the prior year and determining what percentage of that revenue is generated from those same clients for the same solutions in the subsequent year.
Principal Services and Segments
We currently operate under three reportable segments, Employer Solutions, Professional Services and Hosted Business, which accounted for 87%, 12% and 1% of revenue, respectively, for the year ended December 31, 2022.
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Technology
We deliver our solutions through a set of proprietary and partner technologies, a well-developed network of providers and a structured approach to instill and sustain enterprise-wide practices of excellence. With this in mind, there are four layers to our technology strategy, all reinforced with a critical security framework:
Seasonality
Due to buying patterns and delivery of certain products in the markets we serve, particularly given the timing of annual benefits enrollment, our revenues tend to be higher in the third and fourth quarters of each year.
Licensing and Regulation
Our business activities are subject to licensing requirements and extensive regulation under the laws of countries in which we operate, including United States (“U.S.”) federal and state laws. See the discussion contained in "Risk Factors" in Item 1A of this Annual Report on Form 10-K, for information regarding how actions by regulatory authorities or changes in legislation and regulation in the jurisdictions in which we operate may have an adverse effect on our business.
Clients
We serve a broad range of clients, including Fortune 500 companies and mid-market businesses, and seek to establish high-quality, strong, long-term relationships with our clients. We proactively solicit client feedback through ongoing surveys and client councils held throughout the year, and we use this critical feedback to enhance our client services and correct course when necessary. Through these surveys, we have learned that clients value the strength and depth of our relationships, scale and breadth of our solutions and our commitment to innovation and continuous improvement.
Competition
The markets for our solutions are competitive, rapidly evolving and fragmented. Our business faces competition from other global and national companies. The market for our solutions is subject to change as a result of economic, regulatory and legislative changes, technological developments, shifting client needs and increased competition from established and new competitors.
We do not believe there is any single competitor with the breadth of our solutions, and thus our competitors vary for each of our solutions. Our primary competitors include Accenture, Accolade, ADP, bswift, Businessolver, Cognizant, Conduent, Deloitte, eHealth, Empower, Fidelity, GoHealth, Included Health, HealthEquity, Mercer, OneSource Virtual, Quantum Health, SD Worx, Voya, WTW, and Workday.
We compete primarily on the basis of product and service quality, technology, breadth of offerings, ease of use and accessibility of technology, data protection, innovation, trust and reliability, price, and reputation.
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Human Capital Management
As of December 31, 2022, we employed more than 18,000 colleagues, approximately 67% of whom were located in the Americas, 18% were located in Europe, and 15% were located in Asia. In the United States, 66% of our colleagues identified as female and 41% of our colleagues self-identified as a minority group. We believe that our relations with our colleagues in all locations are positive.
Attracting, developing, and retaining talent is critical to executing our strategy and our ability to compete effectively. We believe in the importance of creating a diverse and inclusive work environment for our colleagues, supporting their wellbeing with fair and market-competitive pay and benefits, and investing in their growth and development.
We also value feedback from our colleagues and regularly survey them to understand how they feel about the company and subsequently take appropriate actions, if necessary, and employ employee engagement best practices to improve their work experience. Our efforts have resulted in being recognized as a Great Place to Work® for the fifth consecutive year and being listed among the top 100 companies for remote workers by Flexjobs.
Inclusion and Diversity
At Alight, we know that we cannot improve others’ lives without first enriching our own employees’ wellbeing. Diversity, equity, and inclusion ("DE&I") is essential to creating a sense of belonging in the workplace, and to making Alight a place where all colleagues can feel happy and fulfilled while serving our clients and their people with excellence. Our people bring a diverse range of backgrounds and perspectives to the table, and that diversity is what helps us better serve the needs of all our customers. This includes race, ethnicity, age, citizenship status, education, income, skills, gender identity, sexual orientation, nationality, physical or cognitive ability, beliefs, upbringing, and lived experiences. We are committed to developing these diverse talents so we can become stronger and brighter together. To increase cross-cultural sharing and appreciation, we prioritize global recognition of cultures and heritage and provide inclusion training.
In addition, the Nominating and Corporate Governance Committee of our Board of Directors reviews and makes recommendations regarding the composition and size of our Board of Directors to ensure, among other things, that our Board of Director membership consists of persons with sufficiently diverse and independent backgrounds.
Total Rewards
Our benefits are designed to help colleagues and their families stay healthy, meet their financial goals, protect their income and help them balance their work and personal lives. These benefits include health and wellness, paid time off, employee assistance, competitive pay, career growth opportunities, paid volunteer time, and a culture of recognition.
Growth and Development
We understand that developing our talent is both critical for continuing success in a rapidly evolving environment and for colleague engagement and retention, and we are committed to actively fostering a learning culture and investing in ongoing professional and career development for our colleagues. We empower managers and employees with collective accountability for developing themselves and others, and promote ongoing dialogue, coaching, feedback, and improvement through our continuous performance management practices. We offer employees an extensive number of programs and tools for their personal and professional development including instructor-led training courses, leadership development programs, on-demand virtual learning, individual development planning, roles-based functional and technical training, compliance training, peer learning opportunities, and tuition reimbursement programs. We also aligned our talent and succession planning framework at a global level for our Director-level and above roles to support the development of our internal talent pipeline for current and future organizational needs, and to provide an overall health gauge of our global talent pool. The Nominating and Corporate Governance Committee of our Board of Directors oversees and approves the management continuity planning process.
Intellectual Property
Our intellectual property portfolio is primarily comprised of various copyrights (including copyrights in software) and trademarks, as well as certain trade secrets or proprietary know-how of our business. Our success has resulted in part from our proprietary methodologies, process and other intellectual property, such as certain of Alight's platforms. However, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantages.
Our business relies on software provided by both internal development and external sourcing to deliver its services. With respect to internally developed software, we claim copyright on all such software, registering works where appropriate. We require all employees and contractors to assign to us the rights to works developed on our behalf. In addition, we rely on maintaining source code confidentiality to maintain our market competitiveness. With respect to externally sourced software, we rely on contracts to allow for
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continued access for its business usage.
In the United States, trademark registrations may have a perpetual life, subject to continuous use and renewal every ten years, and may be subject to cancellation or invalidation based on certain use requirements and third-party challenges, or on other grounds. We vigorously enforce and protect our trademarks.
Information about our Executive Officers
The executive officers of the Company as of March 1, 2023 were as follows:
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Position |
Stephan D. Scholl |
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52 |
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Chief Executive Officer |
Katie J. Rooney |
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44 |
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Chief Financial Officer |
Gregory R. Goff |
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51 |
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Chief Technology & Delivery Officer |
Cesar Jelvez |
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49 |
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Chief Professional Services and Global Payroll Officer |
Michael J. Rogers |
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41 |
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Chief Human Resources Officer |
Dinesh V. Tulsiani |
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49 |
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Chief Strategy Officer |
Martin T. Felli |
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55 |
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Chief Legal Officer and Corporate Secretary |
Stephan D. Scholl has served as Alight’s Chief Executive Officer since April 2020. Mr. Scholl has more than 25 years of experience in the industry. Prior to joining Alight, Mr. Scholl served as President of Infor Global Solutions from April 2012 to July 2018. Prior to that, from 2011 until 2012, Mr. Scholl served as President and Chief Executive Officer of Lawson Software from 2011 until 2012. In addition, Mr. Scholl served in various senior roles at both Oracle and Peoplesoft for more than a decade, including leading Oracle’s North America Consulting Group and leading its Tax and Utilities Global Business unit. Mr. Scholl serves on the boards of Avaya Holdings Corp. (NYSE: AVYA) and 1010 Data, a leader in analytical intelligence and alternative data. Mr. Scholl holds a bachelor’s degree from McGill University in Montreal.
Katie J. Rooney has served as Alight’s Chief Financial Officer since May 2017. Ms. Rooney has more than 20 years of experience in the industry. Prior to joining Alight, Ms. Rooney served as the Chief Financial Officer for Aon Hewitt from January 2016 to May 2017. Prior to that, she served across various financial roles within Aon Hewitt and Aon from January 2009 to December 2015, including Chief Financial Officer of the Outsourcing business, the Finance Chief Operating Officer and Assistant Treasurer for Aon. Before joining Aon, Ms. Rooney worked in Investment Banking at Morgan Stanley. Ms. Rooney serves on the Board of Trustees for Window to the World Communications, Inc., a not-for-profit organization and the owner of WTTW and WFMT public broadcasting service. Ms. Rooney holds a B.B.A. in Finance from the University of Michigan.
Gregory R. Goff has served as Alight’s Chief Product and Technology Officer since May 2020. Mr. Goff has more than 15 years of experience in the industry. Prior to joining Alight, Mr. Goff served as Chief Product Officer of Uptake since 2015. Mr. Goff served as Chief Technology Officer of Morningstar from 2011 through 2015. Prior to that, Mr. Goff served in a number of technology roles at Nielsen and Accenture. Mr. Goff serves on the board of directors of InMoment, a consumer experience provider. Mr. Goff holds a Bachelor of Science degree in electrical engineering from the University of Illinois at Urbana-Champaign.
Cesar Jelvez has served as Alight’s Chief Customer Experience Officer since July 2020. Mr. Jelvez has more than 20 years of experience in the industry. Prior to joining Alight, Mr. Jelvez was a partner at Elixirr. From 2018 through 2019, Mr. Jelvez was Global Leader of Strategic Programs and Global Delivery Services at Infor. And from 2017 through 2018, Mr. Jelvez was Vice President of Digital Enterprise Application Services at DXC Technology. Prior to that, Mr. Jelvez served in a number of roles at Cognizant Technology Solutions, Infosys, IBM Global Business Services and Accenture. Mr. Jelvez holds a Master of Science degree in finance and investment from the University of York in the United Kingdom.
Michael J. Rogers has served as Alight’s Chief Human Resources Officer since June 2020. Mr. Rogers has more than 15 years of experience in the industry. Prior to joining Alight, Mr. Rogers served as Chief People Officer of NGA Human Resources. Prior to that, Mr. Rogers held key human resources roles across a variety of companies, including Vistaprint, where he played a key role in driving its rapid growth across Europe, and Travelocity (lastminute.com). Mr. Rogers holds a degree in Business with first-class honors from the University of Brighton, Brighton, England.
Dinesh V. Tulsiani has served as Alight’s Chief Strategy Officer since October 2020. He previously served as Alight’s Head of Strategy and Corporate Development. Prior to joining Alight, from 2013 to 2017, Mr. Tulsiani led corporate development for Aon’s HR solutions segment and served in various other key strategic roles with Aon, including Senior Vice President, Corporate Strategy and Vice President, Corporate Development and Strategy at Hewitt Associates. Prior to that, he worked at IHS Markit from 2007 to
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2010 and Ernst & Young LLP from 1999 to 2005. Mr. Tulsiani holds a B.B.A. in Finance and Economics from Delhi University and an M.B.A. from Wake Forest University. Mr. Tulsiani is also a Chartered Financial Analyst.
Martin T. Felli has served as Alight’s Chief Legal Officer and Corporate Secretary since January 2023. Mr. Felli has more than 27 years of legal experience. Prior to joining Alight, Mr. Felli served as Executive Vice President, Chief Legal and Chief Administrative Officer at Blue Yonder Holding, Inc., a Blackstone Inc. (“Blackstone”) and New Mountain Capital (“New Mountain”) sponsored company, from 2018 to April 2022. Prior to that, Mr. Felli held other key legal leadership roles at Blue Yonder from 2013 to 2018, was General Counsel and Corporate Counsel at Ecotality, Inc., from 2011 to 2013, and held additional senior legal positions across a broad range of organizations including Clear Channel Outdoor, Inc., from 2006 to 2011, and HBO, from 2000 to 2004. In 2014, Mr. Felli voluntarily filed for personal bankruptcy under Chapter 7 in connection with certain real estate investments made from 2006-2008, and the bankruptcy was discharged on December 30, 2014. Mr. Felli holds a juris doctor degree from the University of Pennsylvania Law School and a B.A. magna cum laude from Baruch College.
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Item 1A. Risk Factors.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our Company and our business. Any of the following risks could materially and adversely affect our business financial condition and results of operations.
Risks Related to Our Business and Industry
An overall decline in economic activity could adversely affect the financial condition and results of operations of our business.
The results of our business are generally affected by the level of business activity of our clients, which in turn is affected by the level of economic activity in the industries, markets and regions these clients serve. The level of economic activity may be affected by unforeseen events, such as adverse weather conditions, natural disasters (including those as a result of climate change), catastrophic events, war (including the ongoing conflict between Russia and Ukraine), terrorism or public health conditions (including the ongoing COVID-19 pandemic). Additionally, substantial changes to trade, inflation rates, interest rates, currency exchange rates, monetary and fiscal policies, political conditions, employment rates (including as a result of an increasingly competitive job market), limitations on a government's spending and/or ability to issue debt, and constriction and volatility in the credit markets, may occur and would affect our business. For example, rising interest rates and challenging credit markets may adversely impact our clients’ ability to grow their business and contract with us. While interest rates had remained at historically low levels in recent years, the Federal Reserve Board significantly increased the federal funds rate in 2022 and has indicated that it expects continued increases in interest rates in 2023 and 2024 to combat rising inflation. Economic downturns in some markets may cause reductions in technology and discretionary spending by our clients, which may result in reductions in the growth of new business as well as reductions in existing business. If our clients become financially less stable, enter bankruptcy, liquidate their operations or consolidate, our revenues and/or collectability of receivables could be adversely affected. Our contracts also depend upon the number of our clients’ employees or the number of participants in our clients’ employee benefit plans. If our clients become financially less stable, change their staffing models, enter bankruptcy, liquidate their operations or consolidate, that could result in layoffs or other reductions in the number of participants in our clients’ employee benefit plans. We may also experience decreased demand for our services as a result of postponed or terminated outsourcing of human resource (“HR”) functions. Reduced demand for our services could increase price competition and have an adverse effect on our financial condition or results of operations.
We face significant competition and our failure to compete successfully could have a material adverse effect on the financial condition and results of operations of our business.
Our competitors may have greater resources, larger customer bases, greater name recognition, stronger presence in certain geographies and more established relationships with their customers and suppliers than we have. In addition, new competitors, alliances among competitors or mergers of competitors could result in our competitors gaining significant market share and some of our competitors may have or may develop a lower cost structure, adopt more aggressive pricing policies or provide services that gain greater market acceptance than the services that we offer or develop. Large and well-capitalized competitors may be able to respond to the need for technological changes and innovate faster, or price their services more aggressively. They may also compete for skilled professionals, finance acquisitions, fund internal growth and compete for market share more effectively than we do. If we are unable to compete successfully, we could lose market share and clients to competitors, which could materially adversely affect our results of operations. To respond to increased competition and pricing pressure, we may have to lower the cost of our solutions or decrease the level of service provided to clients, which could have an adverse effect on our financial condition or results of operations.
We rely on complex information technology systems and networks to operate our business. Any significant system or network disruption could expose us to legal liability, impair our reputation or have a negative impact on our operations, sales and operating results and could expose us to litigation and negatively impact our relationships with customers.
We rely on the efficient, uninterrupted and secure operation of complex information technology systems, and networks and data centers, some of which are within our business and some of which are outsourced to third-party providers, including cloud infrastructure service providers such as Amazon Web Services (AWS) and Microsoft Azure Cloud. We do not have control over the operations of such third parties. We also may decide to employ additional offsite data centers in the future to accommodate growth. Problems faced by our data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their clients, including us, could adversely affect the availability and processing of our solutions and related services and the experience of our clients. If our data centers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business and cause us to incur additional expense. In addition, any financial difficulties faced by our third-party data center’s operator or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. These facilities are vulnerable to damage or interruption from catastrophic events, such as earthquakes, hurricanes, floods, fires, cyber security attacks
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(including "ransomware" and phishing attacks), terrorist attacks, power losses, telecommunications failures and similar events. The risk of cyber-attacks could be exacerbated by geopolitical tensions, including the ongoing Russia-Ukraine conflict, or other hostile actions taken by nation-states and terrorist organizations. While we have adopted, and continue to enhance, business continuity and disaster recovery plans and strategies, there is no guarantee that such plans and strategies will be effective, which could interrupt the functionality of our information technology systems or those of third parties. The occurrence of a natural disaster (or other extreme weather as a result of climate change) or an act of terrorism, a decision to close the facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions in our services and solutions. The facilities also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services, or our own systems could negatively impact our relationships with customers and adversely affect our business and could expose us to third-party liabilities. Any errors, defects, disruptions or other performance problems with our information technology systems including any changes in service levels at our third-party data center could adversely affect our reputation and may damage our clients’ stored files or result in lengthy interruptions in our services. Interruptions in our services might reduce our revenues, subject us to potential liability or other expenses or adversely affect our renewal rates.
In relation to our third-party data centers, while we own, control and have access to our servers and all of the components of our network that are located in these centers, we do not control the operation of these facilities. The operators of our third-party data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if the data center operators are acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur costs and experience service interruption in doing so.
Improper access to, misappropriation, destruction or disclosure of confidential, personal or proprietary data as a result of employee or vendor malfeasance or cyber-attacks could result in financial loss, regulatory scrutiny, legal liability or harm to our reputation.
One of our significant responsibilities is to maintain the security, including cybersecurity, and privacy of our employees’ and clients’ confidential and proprietary information and the confidential information about clients’ employees’ compensation, health and benefits information and other personally identifiable information. However, all information technology systems are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to cyber-attacks, computer viruses, malware, hacking, fraudulent use attempts, phishing attacks and security breaches. Our systems are also subject to compromise from internal threats such as improper action by employees, vendors and other third parties with otherwise legitimate access to our systems. Despite our efforts, from time to time, we experience attacks and other cyber-threats to our systems and networks and have from time to time experienced cyber security incidents such as computer viruses, unauthorized parties gaining access to our information technology systems and similar matters, which to date have not had a material impact on our business. These attacks can seek to exploit, among other things, known or unknown vulnerabilities in technology included in our information systems or those of third-party providers. Because the techniques used to obtain unauthorized access are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we or our third-party providers may be unable to anticipate these techniques or implement sufficient preventative measures. If we are unable to efficiently manage the vulnerability of our systems and effectively maintain and upgrade our system safeguards, we may incur unexpected costs and certain of our systems may become more vulnerable to unauthorized access. For example, there has been a stark increase in new financial fraud schemes akin to ransomware attacks on large companies whereby a cybercriminal installs a type of malicious software, or malware, that prevents a user or enterprise from accessing computer files, systems, or networks and demands payment of a ransom for their return. Cyber criminals may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers. In addition, while we have certain standards for all vendors that provide us services, our vendors, and in turn, their own service providers, have experienced and in the future may continue to become subject to the same types of security breaches. In the future, these types of incidents could result in intellectual property or other confidential information being lost or stolen, including client, employee or business data. In addition, we may not be able to detect breaches in our information technology systems or assess the severity or impact of a breach in a timely manner.
We have implemented various measures to manage our risks related to system and network security and disruptions, but an actual or perceived security breach, a failure to make adequate disclosures to the public or law enforcement agencies following any such event or a significant and extended disruption in the functioning of our information technology systems could damage our reputation and cause us to lose clients, adversely impact our operations, sales and operating results and require us to incur significant expense to address and remediate or otherwise resolve such issues.
We maintain policies, procedures and technological safeguards designed to protect the security and privacy of this information. These include, for example, the appropriate encryption of information, the use of anti-virus, anti-malware and other protections. Nonetheless, we cannot eliminate the risk of human error or inadequate safeguards against employee or vendor malfeasance or cyber-attacks that could result in improper access to, misappropriation, destruction or disclosure of confidential, personal or proprietary information and we may not become aware in a timely manner of any such security breach. Such unauthorized access,
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misappropriation, destruction or disclosure could result in the loss of revenue, reputational damage, indemnity obligations, damages for contract breach, civil and criminal penalties for violation of applicable laws, regulations or contractual obligations, and significant costs, fees and other monetary payments for remediation. Furthermore, our clients may not be receptive to services delivered through our information technology systems and networks following an actual or perceived security breach due to concerns regarding transaction security, user privacy, the reliability and quality of internet service and other reasons. The release of confidential information as a result of a security breach could also lead to litigation or other proceedings against us by affected individuals or business partners, or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a significant negative impact on our business. Additionally, in order to maintain the level of security, service and reliability that our clients require, we may be required to make significant additional investments in our methods of delivering services.
In many jurisdictions, including North America and the European Union, we are subject to laws and regulations relating to the collection, use, retention, security and transfer of information including the Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”) and the HIPAA regulations governing, among other things, the privacy, security and electronic transmission of individually identifiable protected health information, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) and the European Union General Data Protection Regulation (“GDPR”). California also enacted legislation, the California Consumer Privacy Act of 2018 (“CCPA”) and the related California Privacy Rights Act (“CPRA”), that afford California residents expanded privacy protections and a private right of action for security breaches affecting their personal information. Virginia and Colorado have similarly enacted comprehensive privacy laws, the Consumer Data Protection Act and Colorado Privacy Act, respectively, both laws of which emulate the CCPA and CPRA in many respects. The Virginia Consumer Data Protection Act took effect on January 1, 2023, and the Colorado Privacy Act takes effect on July 1, 2023. In 2021, two bills were introduced (or reintroduced) in the United States Senate: the 2021 Data Privacy Act, which would create an agency to enforce data protection rules, ensure that data practices are fair and transparent, and promote data protection and privacy innovation, and the Setting an American Framework to Ensure Data Access, Transparency, and Accountability Act, which seeks to establish a comprehensive privacy regime including many of the concepts found in other state and federal privacy bills/laws, such as consent requirements for sensitive data, data subject rights, and privacy policy requirements. The Information Transparency & Personal Data Control Act was introduced in the United States House of Representatives, which would require the FTC to establish requirements for entities providing services to the public that collect, store, process, use, or otherwise control sensitive personal information. We anticipate federal and state regulators to continue to enact legislation related to privacy and cybersecurity. These and other similar laws and regulations are frequently changing and are becoming increasingly complex and sometimes conflict among the various jurisdictions and countries in which we provide services both in terms of substance and in terms of enforceability. This makes compliance challenging and expensive. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace. Further, regulatory initiatives in the area of data protection are more frequently including provisions allowing authorities to impose substantial fines and penalties, and therefore, failure to comply could also have a significant financial impact.
Changes in regulation, including changes in regulations related to health and welfare plans, fiduciary rules, pension reform, payroll and data privacy and data usage, their application and interpretation could have an adverse effect on our business.
In addition to the complexity of the laws and regulations themselves, the development of new laws and regulations, changes in application or interpretation of laws and regulations and our continued operational changes and development into new jurisdictions and new service offerings also increases our legal and regulatory compliance complexity as well as the type of governmental oversight to which we may be subject. These changes in laws and regulations could mandate significant and costly changes to the way we implement our services and solutions or could impose additional licensure requirements or costs to our operations and services. Furthermore, as we enter new jurisdictions or lines of businesses and other developments in our services, we may become subject to additional types of laws and policies and governmental oversight and supervision. In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. In addition, new regulatory or industry developments could create an increase in competition that could adversely affect us. These potential developments include:
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For example, there have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at addressing the availability of healthcare and containing or lowering the cost of healthcare. Although we cannot predict the ultimate content or timing of any healthcare reform legislation, potential changes resulting from any amendment, repeal or replacement of these programs, including any reduction in the future availability of healthcare insurance benefits, could adversely affect our business and future results of operations. Further, the federal government from time to time considers pension reform legislation, which could negatively impact our sales of defined benefit or defined contribution plan products and services and cause sponsors to discontinue existing plans for which we provide administrative or other services. Certain tax-favored savings initiatives that have been proposed could hinder sales and persistency of our products and services that support employment-based retirement plans.
Our services are also the subject of ever-evolving government regulation, either because the services provided to or business conducted by our clients are regulated directly or because third parties upon whom we rely to provide services to our clients are regulated, thereby indirectly impacting the manner in which we provide services to those clients. Changes in laws, government regulations or the way those regulations are interpreted in the jurisdictions in which we operate could affect the viability, value, use or delivery of benefits and HR programs, including changes in regulations relating to health and welfare plans (such as medical), defined contribution plans (such as 401(k)), defined benefit plans (such as pension) or payroll delivery, may adversely affect the demand for, or profitability of, our services.
In addition, as we, and the third parties upon whom we rely, implement and expand direct-to-consumer sales and marketing solutions, we are subject to various federal and state laws and regulations that prescribe when and how we may market to consumers (including, without limitation, the Telephone Consumer Protection Act (the “TCPA”) and other telemarketing laws and the Medicare Communications and Marketing Guidelines issued by the Center for Medicare Services of the U.S. Department of Health and Human Service). The TCPA provides for private rights of action and potential statutory damages for each violation and additional penalties for each willful violation. We have in the past and may in the future become subject to claims that we have violated the TCPA and/or other telemarketing laws. Changes to these laws could negatively affect our ability to market directly to consumers or increase our costs or liabilities.
Our business performance and growth plans could be negatively affected if we are not able to effectively apply technology in driving value for our clients or gaining internal efficiencies. Conversely, investments in innovative product offerings may fail to yield sufficient return to cover their costs.
Our success depends, in part, on our ability to develop and implement new or revised solutions that anticipate and keep pace with rapid and continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely and cost-effective basis, and our ideas may not be accepted in the marketplace. Additionally, the effort to gain technological expertise and develop new technologies requires us to incur significant expenses.
If we cannot offer new technologies as quickly as our competitors or if our competitors develop more cost-effective technologies, it could have a material adverse effect on our ability to obtain and complete client engagements. Innovations in software, cloud computing or other technologies that alter how our services are delivered could significantly undermine our investments in our business if we are slow or unable to take advantage of these developments.
We are continually developing and investing in innovative and novel service offerings, including a recent transition to a business process as a service (“BPaaS”) offering, which we believe will address needs that we identify in the markets. In some cases, our BPaaS offerings may require new or unique pricing structures, which may include performance guarantees or fees at risk that differ significantly from our historical practices. These initiatives carry the risks associated with any new solution development effort, including cost overruns, delays in delivery and implementation and performance issues. There can be no assurance that we will be successful in developing, marketing and selling new solutions or enhancements that meet these changing demands, that we will not
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experience difficulties that could delay or prevent the successful development, implementation, introduction and marketing of these solutions or enhancements, or that our new solutions and enhancements will adequately meet the demands for the marketplace and achieve market acceptance. Any of these developments could have an adverse impact on our future revenue and/or business prospects. Nevertheless, for those efforts to produce meaningful value, we are reliant on a number of other factors, some of which are outside of our control, to deem them suitable, and whether those parties will find them suitable will be subject to their own particular circumstances.
We are subject to professional liability claims against us as well as other contingencies and legal proceedings relating to our delivery of services, some of which, if determined unfavorably to us, could have an adverse effect on our financial condition or results of operations.
We assist our clients with outsourcing various HR functions. Third parties may allege that we are liable for damages arising from these services in professional liability claims against us. Such claims could include, for example, the failure of our employees or sub-agents, whether negligently or intentionally, to correctly execute transactions. It is not always possible to prevent and detect errors and omissions, and the precautions we take may not be effective in all cases. In addition, we are subject to other types of claims, litigation and proceedings in the ordinary course of business, which along with professional liability claims, may seek damages, including punitive damages, in amounts that could, if awarded, have a material adverse impact on our financial position, earnings and cash flows. In addition to potential liability for monetary damages, such claims or outcomes could harm our reputation or divert management resources away from operating our business. While we maintain insurance to cover various aspects of such professional liability and other claims, such coverage may not be adequate or applicable for certain claims or in the event of an adverse outcome related to such claims. In such circumstances, we would be responsible for payment of amounts that are not covered by insurance and that could have a material adverse impact on our business. In some cases, due to other business considerations, we may elect to pay or settle professional liability or other claims even where we may not be contractually or legally obligated to do so.
Accruals for exposures, and related insurance receivables, when applicable to us, have been provided to the extent that losses are deemed probable and are reasonably estimable. These accruals and receivables are adjusted from time to time as developments warrant and may also be adversely affected by disputes we may have with our insurers over coverage. Amounts related to our settlement provisions are recorded in other general expenses in our statements of income.
The ultimate outcome of these claims, lawsuits and proceedings cannot be ascertained, and liabilities in indeterminate amounts may be imposed on us. It is possible that our future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters.
We may become involved in claims, litigation or other proceedings that could harm the value of our business.
We are subject to, and may become a party to, various claims, lawsuits or other proceedings that arise in the ordinary course of our business. Our business is subject to the risk of litigation or other proceedings involving current and former employees, clients, partners, suppliers, shareholders or others. For example, participants in our clients’ benefit plans could claim that we did not adequately protect their data or secure access to their accounts. Regardless of the merits of the claims, the cost to defend litigation may be significant, and such matters can be time-consuming and divert management’s attention and resources. The outcomes of such matters in the ordinary course of our business are inherently uncertain, and adverse judgments or settlements could have a material adverse impact on our financial position or results of operations. In addition, we may become subject to future lawsuits, claims, audits and investigations, or suits, any of which could result in substantial costs and divert our attention and resources. Any claims or litigation, even if fully indemnified or insured, could damage our reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.
Our failure to protect our intellectual property rights, or allegations that we have infringed on the intellectual property rights of others, could harm our reputation, ability to compete effectively and financial condition.
To protect our intellectual property rights, we rely on a combination of trademark laws, copyright laws, patent laws, trade secret protection, confidentiality agreements and other contractual arrangements with our affiliates, employees, clients, strategic partners and others. However, the protective steps that we take may be inadequate to deter misappropriation of our proprietary information and technology. In addition, we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Further, effective trademark, copyright, patent and trade secret protection may not be available in every country in which we offer our services or competitors may develop products similar to our products that do not conflict with our related intellectual property rights. Failure to protect our intellectual property adequately could harm our reputation and affect our ability to compete effectively.
In addition, to protect or enforce our intellectual property rights, we may initiate litigation against third parties, such as infringement suits or interference proceedings. Third parties may assert intellectual property rights claims against us, which may be
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costly to defend, could require the payment of damages and could limit our ability to use or offer certain technologies, products or other intellectual property. Any intellectual property claims, with or without merit, could be expensive, take significant time and divert management’s attention from other business concerns. Successful challenges against us could require us to modify or discontinue our use of technology or business processes where such use is found to infringe or violate the rights of others, or require us to purchase licenses from third parties (which may not be available on terms acceptable to us, or at all), any of which could adversely affect our business, financial condition and operating results.
We might not be successful at acquiring, investing in or integrating businesses, entering into joint ventures or divesting businesses.
We may not successfully identify additional suitable investment opportunities. We expect to continue pursuing strategic and targeted acquisitions, investments and joint ventures to enhance or add to our skills and capabilities or offerings of services and solutions, or to enable us to expand in certain geographic and other markets. For more information on recent acquisitions, see Note 4, "Acquisitions" within the Consolidated Financial Statements.
Furthermore, we face risks in successfully integrating any businesses we have acquired, might acquire, or that we have created or may create through a joint venture or similar arrangement. Ongoing business may be disrupted, and our management’s attention may be diverted by acquisition, investment, transition or integration activities. In addition, we might need to dedicate additional management and other resources, and our organizational structure could make it difficult for us to efficiently integrate acquired businesses into our ongoing operations and assimilate and retain employees of those businesses into our culture and operations. The potential loss of key executives, employees, customers, suppliers and other business partners of businesses we acquire may adversely impact the value of the assets, operations or businesses. Furthermore, acquisitions or joint ventures may result in significant costs and expenses, including those related to retention payments, equity compensation, severance pay, early retirement costs, intangible asset amortization and asset impairment charges, assumed litigation and other liabilities, and legal, accounting and financial advisory fees, which could negatively affect our profitability. We may have difficulties as a result of entering into new markets where we have limited or no direct prior experience or where competitors may have stronger market positions.
We might fail to realize the expected benefits or strategic objectives of any acquisition, investment or joint venture we undertake. We might not achieve our expected return on investment or may lose money. We may be adversely impacted by liabilities that we assume from a company we acquire or in which we invest, including from that company’s known and unknown obligations, intellectual property or other assets, terminated employees, current or former clients or other third parties. In addition, we may fail to identify or adequately assess the magnitude of certain liabilities, shortcomings or other circumstances prior to acquiring, investing in or partnering with a company, including potential exposure to regulatory scrutiny and sanctions or liabilities resulting from an acquisition target’s previous activities, internal controls and security environment. If any of these circumstances occurs, they could result in unexpected legal or regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes or other adverse effects on our business. Litigation, indemnification claims and other unforeseen claims and liabilities may arise from the acquisition or operation of acquired businesses. If we are unable to complete the number and kind of investments for which we plan, or if we are inefficient or unsuccessful at integrating any acquired businesses into our operations, we may not be able to achieve our planned rates of growth or improve our market share, profitability or competitive position in specific markets or services.
We periodically evaluate, and have engaged in, the disposition of assets and businesses. Divestitures could involve difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention, the disruption of our business and the potential loss of key employees. After reaching an agreement with a buyer for the disposition of a business, the transaction may be subject to the satisfaction of pre-closing conditions, including obtaining necessary regulatory and government approvals, which, if not satisfied or obtained, may prevent us from completing the transaction. Divestitures may also involve continued financial involvement in or liability with respect to the divested assets and businesses, such as indemnities or other financial obligations, in which the performance of the divested assets or businesses could impact our results of operations. Any divestiture we undertake could adversely affect our results of operations.
Our growth depends in part on the success of our strategic partnerships with third parties.
We enter into strategic partnerships with third parties to enhance and extend the capabilities of our solutions in the ordinary course of our business. In order to continue to grow our business and enhance and extend our capabilities, we anticipate that we will continue to depend on the continuation and expansion of our strategic partnerships with third parties. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources.
If we are unsuccessful in establishing or maintaining our relationships with third parties, if we fail to comply with material terms (such as maintaining any required certifications) or if our strategic partners fail to perform as expected, our ability to compete in the marketplace or to grow our revenues could be impaired, which could adversely affect our business, financial condition, and results of operations. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our solutions or increased revenues.
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Our business is dependent on continued interest in outsourcing.
Our business and growth depend in large part on continued interest in outsourced services. Outsourcing means that an entity contracts with a third party, such as us, to provide services rather than perform such services in-house. There can be no assurance that this interest will continue, as organizations may elect to perform such services themselves and/or the business process outsourcing industry could move to an as-a-service model, thereby eliminating traditional outsourcing tasks. A significant change in this interest in outsourcing could materially adversely affect our results of operations and financial condition.
Our success depends on our ability to retain and attract experienced and qualified personnel, including our senior management team and other professional personnel.
We depend upon the members of our senior management team who possess extensive knowledge and a deep understanding of our business and our strategy. The unexpected loss of any of our senior management team could have a disruptive effect adversely impacting our ability to manage our business effectively and execute our business strategy. Competition for experienced professional personnel is intense, particularly for technology professionals in the areas in which we operate, and we are constantly working to retain and attract these professionals. If we cannot successfully do so, our business, operating results and financial condition could be adversely affected. We must develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of personnel retention. While we have plans for key management succession and long-term compensation plans designed to retain the senior employees, and continue to review and update those plans, if our succession plans do not operate effectively, particularly in an increasingly competitive job market, our business could be adversely affected.
Our inability to successfully recover should we experience a catastrophic event, disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.
Our operations are dependent upon our ability to protect our personnel, offices and technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations. Should we or a key vendor or other third party experience a local or regional disaster or other business continuity problem, such as an earthquake, fire, flood, hurricane, or other weather event, terrorist attack, pandemic (including the ongoing COVID-19 pandemic), security breach, power loss, telecommunications failure, software or hardware malfunctions or other natural or man-made disaster, our continued success will depend, in part, on the availability of our personnel, office facilities and the proper functioning of existing, new or upgraded computer systems, telecommunications and other related systems and operations. In events like these, while our operational size, the multiple locations from which we operate and our existing back-up systems provide us with some degree of flexibility, we still can experience near-term operational challenges with regard to particular areas of our operations. We could potentially lose access to key executives and personnel, client data or experience material adverse interruptions to our operations or delivery of services to our clients in a disaster recovery scenario. For example, during the COVID-19 pandemic, there were concerns for and restrictions on our personnel (including health concerns, quarantines, shelter-in-place orders and restrictions on travel), and increased privacy and cybersecurity risks in light of an increase in “remote work” among our workforce and our third-party service providers and vendors.
We regularly assess and take steps to improve upon our existing business continuity plans and key management succession. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm, damaged client relationships or legal liability.
If our clients are not satisfied with our services, we may face additional cost, loss of profit opportunities and damage to our reputation or legal liability.
We depend, to a large extent, on our relationships with our clients and our reputation to understand our clients’ needs and deliver solutions and services that are tailored to satisfy those needs. If a client is not satisfied with our services, it may be damaging to our business and could cause us to incur additional costs and impair profitability. Many of our clients are businesses that band together in industry groups and/or trade associations and actively share information among themselves about the quality of service they receive from their vendors. Accordingly, poor service to one client may negatively impact our relationships with multiple other clients. Moreover, if we fail to meet our contractual obligations, we could be subject to legal liability or loss of client relationships.
Damage to our reputation could have a material adverse effect on our business.
Our reputation is a key asset of our business. Our ability to attract and retain clients is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, financial condition and other subjective qualities. Negative perceptions or publicity regarding these matters could erode trust and confidence and damage our reputation among existing and potential clients, which could make it difficult for us to attract new clients and maintain existing ones as mentioned above. Negative
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public opinion could also result from actual or alleged conduct by us or those currently or formerly associated with us in any number of activities or circumstances, including operations, regulatory compliance, and the use and protection of data and systems, satisfaction of client expectations, and from actions taken by regulators or others in response to such conduct. This damage to our reputation could further affect the confidence of our clients, rating agencies, regulators, stockholders and the other parties in a wide range of transactions that are important to our business having a material adverse effect on our business, financial condition and operating results.
We depend on licenses of third-party software to provide our services. The inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.
Our applications incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our applications with new third-party software may require significant work and require substantial investment of our time and resources. To the extent that our applications depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our own applications, delay new application introductions, result in a failure of our applications and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties.
We rely on third parties to perform key functions of our business operations and to provide services to our clients. These third parties may act in ways that could harm our business.
As we continue to focus on reducing the expense necessary to support our operations, we have increasingly used outsourcing strategies for a significant portion of our information technology and business functions. We rely on third parties, and in some cases subcontractors, to provide services, data and information such as technology, information security, funds transfers, data processing, and administration and support functions that are critical to the operations of our business. We expect to continue to assess and potentially expand such relationships in the future. As we do not fully control the actions of these third parties, we are subject to the risk that their decisions may adversely impact us and replacing these service providers could create significant delay and expense. A failure by the third parties to comply with service level agreements or regulatory or legal requirements, in a high quality and timely manner, particularly during periods of our peak demand for their services, could result in economic and reputational harm to us. In addition, these third parties face their own technology, operating, business and economic risks, and any significant failures by them, including the improper use or disclosure of our confidential client, employee, or business information, could cause harm to our reputation. An interruption in or the cessation of service by any service provider as a result of systems failures, capacity constraints, financial difficulties or for any other reason could disrupt our operations, impact our ability to offer certain products and services, and result in contractual or regulatory penalties, liability claims from clients and/or employees, damage to our reputation and harm to our business.
Our business is exposed to risks associated with the handling of client funds.
Our business handles payroll processing, retirement and health plan administration and related services for certain clients. Consequently, at any given time, we may be holding or directing funds of our clients and their employees, while payroll or benefit plan payments are processed. This function creates a risk of loss arising from, among other things, fraud by employees or third parties, execution of unauthorized transactions or errors relating to transaction processing. We are also potentially at risk in the event the financial institution in which these funds are held suffers any kind of insolvency or liquidity event or fails, for any reason, to deliver their services in a timely manner. The occurrence of any of these types of events in connection with this function could cause us financial loss and reputational harm.
We are subject to extensive governmental regulation, which could reduce our profitability, limit our growth, or increase competition.
Our business is subject to extensive legal and regulatory oversight throughout the world including a variety of laws, rules, and regulations addressing, among other things, licensing, data privacy and protection, wage and hour standards, employment and labor relations, occupational health and safety, environmental matters, anti-competition, anti-corruption, economic sanctions, currency, reserves and government contracting. This legal and regulatory oversight could reduce our profitability or limit our growth by increasing the costs of legal and regulatory compliance; by limiting or restricting the products or services we sell, the markets we enter, the methods by which we sell our services, the prices we can charge for our services, and the form of compensation we can accept from our clients and third parties; or by subjecting our business to the possibility of legal and regulatory actions or proceedings. For example, when federal, local, state or foreign minimum wage rates increase, we may have to increase the wages of both minimum
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wage employees and employees whose wages are above the minimum wage. We may also face increased operating costs resulting from changes in federal, state or local laws and regulations relating to employment matters, including those relating to the classification of employees, employee eligibility for overtime and secure scheduling requirements, which often incorporate a premium pay mandate for scheduling deviations.
The global nature of our operations increases the complexity and cost of compliance with laws and regulations, including training and employee expenses, adding to our cost of doing business. In addition, many of these laws and regulations may have differing or conflicting legal standards across jurisdictions, increasing further the complexity and cost of compliance. In emerging markets and other jurisdictions with less developed legal systems, local laws and regulations may not be established with sufficiently clear and reliable guidance to provide us adequate assurance that we are operating our business in a compliant manner with all required licenses or that our rights are otherwise protected.
In addition, certain laws and regulations, such as the Foreign Corrupt Practices Act in the United States and similar laws in other jurisdictions in which we operate, could impact our operations outside of the legislating country by imposing requirements for the conduct of overseas operations, and in a number of cases, requiring compliance by foreign subsidiaries. We are also subject to economic and trade sanctions programs, including those administered by the U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC"), which prohibit or restrict transactions or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially designated, including narcotics traffickers and terrorists or terrorist organizations, among others.
The Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) requires companies subject to SEC reporting obligations under Section 13 of the Exchange Act to disclose in their periodic reports specified dealings or transactions involving Iran or other individuals and entities targeted by certain OFAC sanctions. In some cases, ITRA requires companies to disclose these types of transactions even if they were permissible under U.S. law. Companies that currently may be or may have been at the time considered our affiliates have from time to time publicly filed and/or provided to us the disclosure reproduced on Exhibit 99.1 of this report, which disclosure is hereby incorporated by reference herein. We do not independently verify or participate in the preparation of these disclosures. We are required to separately file with the SEC a notice when such activities have been disclosed in this report, and the SEC is required to post such notice of disclosure on its website and send the report to the President and certain U.S. Congressional committees. The President thereafter is required to initiate an investigation and, within 180 days of initiating such an investigation, determine whether sanctions should be imposed. Disclosure of such activity, even if such activity is not subject to sanctions under applicable law, and any sanctions actually imposed on us or our affiliates as a result of these activities, could harm our reputation and have a negative impact on our business, and any failure to disclose any such activities as required could additionally result in fines or penalties.
We have implemented policies and procedures to monitor and address compliance with applicable anti-corruption, economic and trade sanctions and anti-money laundering laws and regulations, and we are continuously in the process of reviewing, upgrading and enhancing certain of our policies and procedures. However, our employees, consultants or agents may still take actions in violation of our policies for which we may be ultimately responsible, or our policies and procedures may be inadequate or may be determined to be inadequate by regulators. Any violations of applicable anti-corruption, economic and trade sanctions or anti-money laundering laws or regulations could limit certain of our business activities until they are satisfactorily remediated and could result in civil and criminal penalties, including fines that could damage our reputation and have a materially adverse effect on our results of operation or financial condition.
Our global operations and growth strategy expose us to various international risks that could adversely affect our business.
Our operations are conducted globally. Additionally, one aspect of our growth strategy is to expand in key markets around the world. Accordingly, we are subject to legal, economic and market risks associated with operating in, and sourcing from, foreign countries, including:
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If we are unable to manage the risks of our global operations and geographic expansion strategy, our results of operations and ability to grow could be materially adversely affected.
Our global delivery capability is concentrated in certain key operational centers, which may expose us to operational risks.
Our business model is dependent on our global delivery capability, which includes employees and third-party personnel based at various delivery centers around the world. While these delivery centers are located throughout the world, we have based large portions of our delivery capability in Spain, India and the Philippines. Concentrating our global delivery capability in these locations presents operational risks, many of which are beyond our control. For example, natural disasters (including those as a result of climate change) and public health threats, particularly the ongoing COVID-19 pandemic and potential resurgences of the pandemic, could impair the ability of our people to safely travel to and work in our facilities and disrupt our ability to perform work through those delivery centers. Additionally, other countries may experience political instability, worker strikes, civil unrest and hostilities with neighboring countries. If any of these circumstances occurs, we have a greater risk that interruptions in communications with our clients and other locations and personnel, and any downtime in important processes we operate for clients, could result in a material adverse effect on our results of operations and our reputation in the marketplace.
The profitability of our engagements with clients may not meet our expectations due to unexpected costs, cost overruns, early contract terminations, unrealized assumptions used in our contract bidding process or the inability to maintain our prices in light of any inflationary circumstances.
Our profitability is highly dependent upon our ability to control our costs and improve our efficiency. As we adapt to change in our business, adapt to the regulatory environment, enter into new engagements, acquire additional businesses and take on new employees in new locations, we may not be able to manage our large, diverse and changing workforce, control our costs or improve our efficiency. In addition, certain client contracts may include unique or heavily customized requirements that limit our ability to fully recognize economies of scale across our business units.
Most new outsourcing arrangements undergo an implementation process whereby our systems and processes are customized to match a client’s plans and programs. The cost of this process is estimated by us and often only partially funded (if at all) by our clients. If the actual implementation expense exceeds our estimate or if the ongoing service cost is greater than anticipated, the client contract may be less profitable than expected. Even though outsourcing clients typically sign long-term contracts, many of these contracts may be terminated at any time, with or without cause, by the client upon written notice, typically between 90 to 360 days before expiration.
In such cases, our clients are generally required to pay a termination fee; however, this amount may not be sufficient to offset the costs we incurred in connection with the implementation and system set-up or fully compensate us for the profit we would have received if the contract had not been cancelled. A client may choose to delay or terminate a current or anticipated project as a result of factors unrelated to our work product or progress, such as the business or financial condition of the client or general economic conditions. When any of our engagements are terminated, we may not be able to eliminate associated ongoing costs or redeploy the affected employees in a timely manner to minimize the impact on profitability. Any increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control could have an adverse effect on our profit margin.
Our profit margin, and therefore our profitability, is largely a function of the rates we are able to charge for our services and the staffing costs for our personnel. Accordingly, if we are not able to maintain the rates we charge for our services or appropriately manage the staffing costs of our personnel, we may not be able to sustain our profit margin and our profitability will suffer. The prices we are able to charge for our services are affected by a number of factors, including competitive factors, cost of living adjustment provisions, the extent of ongoing clients’ perception of our ability to add value through our services and general economic conditions such as inflation (including wage inflation). Our profitability is largely based on our ability to drive cost efficiencies during the term of our contracts for our services provided to customers. If we cannot drive suitable cost efficiencies, our profit margins will suffer.
We might not be able to achieve the cost savings required to sustain and increase our profit margins.
We provide our outsourcing services over long-term periods for variable or fixed fees that generally are less than our clients’ historical costs to provide for themselves the services we contract to deliver. Clients’ demand for cost reductions may increase over the term of the agreement. As a result, we bear the risk of increases in the cost of delivering services to our clients, and our margins associated with particular contracts will depend on our ability to control our costs of performance under those contracts and meet our service commitments cost-effectively. Over time, some of our operating expenses will increase as we invest in additional
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infrastructure and implement new technologies to maintain our competitive position and meet our client service commitments. We must anticipate and respond to the dynamics of our industry and business by using quality systems, process management, improved asset utilization and effective supplier management tools. We must do this while continuing to grow our business so that our fixed costs are spread over an increasing revenue base. If we are not able to achieve this, our ability to sustain and increase profitability may be reduced.
We cannot guarantee that our previously-announced restructuring program will achieve its intended result.
On February 20, 2023, the Company approved a restructuring program that includes, among other things, the elimination of full-time positions, termination of certain contracts, and asset impairments, primarily related to facilities consolidations. We expect to record in the aggregate approximately $140.0 million in pre-tax restructuring charges associated with the restructuring program. A significant portion of these charges will result in future cash expenditures, and the program is expected to be substantially completed over an approximate two-year period. We cannot guarantee that the restructuring program will achieve or sustain the targeted benefits, or that the benefits, even if achieved, will be adequate to meet our long-term profitability expectations. Risks associated with the restructuring program also include additional unexpected costs, negative impacts on our cash flows from operations and liquidity, employee attrition and adverse effects on employee morale and our potential failure to meet operational and growth targets due to the loss of employees, any of which may impair our ability to achieve anticipated results from operations or otherwise harm our business.
Changes in accounting principles or in our accounting estimates and assumptions could negatively affect our financial position and results of operations.
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of our financial statements. We are also required to make certain judgments that affect the reported amounts of revenues and expenses during each reporting period. We periodically evaluate our estimates and assumptions including, but not limited to, those relating to revenue recognition, recoverability of assets including customer receivables, contingencies, income taxes, share-based payments and estimates and assumptions used for our long-term contracts. We base our estimates on historical experience and various assumptions that we believe to be reasonable based on specific circumstances. These assumptions and estimates involve the exercise of judgment and discretion, which may evolve over time in light of operational experience, regulatory direction, developments in accounting principles and other factors. Actual results could differ from these estimates, or changes in assumptions, estimates or policies or the developments in the business or the application of accounting principles related to these areas may change our results from operations.
We have identified a material weakness in our internal control over financial reporting relating to our accounting for income taxes which, if not remediated, could adversely affect our business, reputation and stock price.
In connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2022, management identified a material weakness in our internal control over financial reporting (see Part II, Item 9A of this report for further information). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness in our case relates to our internal controls over tax accounting. Although management is implementing remedial measures, if we are unable to remedy this or a similar material weakness that may arise in the future, or if we generally fail to establish and maintain effective internal controls appropriate for a public company, we may be unable to produce timely and accurate financial statements, and we may conclude that our internal control over financial reporting is not effective, which could adversely impact our investors’ confidence and our stock price. Furthermore, future deficiencies could result in non-compliance with Section 404 of the Sarbanes-Oxley Act of 2002 or expose us to an increased risk of fraud or misappropriation of assets. Such non-compliance could subject us to a variety of administrative sanctions, including review by the SEC or other regulatory authorities, or the potential delisting from the NYSE.
We may be required to record goodwill or other long-lived asset impairment charges, which could result in a significant charge to earnings.
We have a substantial amount of goodwill and purchased intangible assets on our consolidated balance sheet as a result of the recent Business Combination and other acquisitions. Under GAAP, we review our long-lived assets, such as goodwill, intangible assets and fixed assets, for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is assessed for impairment at least annually. Factors that may be considered in assessing whether goodwill or other long-lived assets may not be recoverable include reduced estimates of future cash flows and slower growth rates in our industry. We may experience unforeseen circumstances that adversely affect the value of our goodwill or other long-lived assets and trigger an evaluation of the recoverability of the recorded goodwill and other long-lived assets. Future goodwill or other long-lived asset impairment charges could materially impact our financial statements.
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Our work with government clients exposes us to additional risks inherent in the government contracting environment.
A portion of our revenues is derived from contracts with or on behalf of domestic and foreign national, state, regional and local governments and their agencies. In some cases, our services to public sector clients are provided though or dependent upon relationships with third parties. For instance, we provide services for the Federal Retirement Thrift Investment Board through our contract with Accenture Federal Services.
Government contracts are subject to heightened contractual risks compared to contracts with non-governmental commercial clients. For example, government contracts often contain high or unlimited liability for breaches. Additionally, government contracts are generally subject to routine audits and investigations by government agencies. If the government discovers improper or illegal activities or contractual non-compliance (including improper billing), we may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Also, the qui tam provisions of the federal and various state civil False Claims Acts authorize a private person to file civil actions under these statutes on behalf of the federal and state governments. Further, the negative publicity that could arise from any such penalties, sanctions or findings could have an adverse effect on our reputation and reduce our ability to compete for new contracts with both government and commercial clients. Moreover, government entities typically finance projects through appropriated funds. While these projects are often planned and executed as multi-year projects, government entities usually reserve the right to change the scope of or terminate these projects for lack of approved funding or at their convenience. Changes in government or political developments, including budget deficits, shortfalls or uncertainties, government spending reductions or other debt or funding constraints, could result in lower governmental sales and our projects being reduced in price or scope or terminated altogether, which also could limit our recovery of incurred costs, reimbursable expenses and profits on work completed prior to the termination. Any of the occurrences and conditions described above could have a material adverse effect on our business, financial condition and operating results.
We could be adversely affected by changes in applicable tax laws, regulations, or administrative interpretations thereof.
We could be adversely affected by changes in applicable tax laws, regulations, or administrative interpretations thereof in each country in which we do business. For example, the U.S. federal tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”), enacted in December 2017, resulted in fundamental changes to the Code, including, among many other things, a reduction to the federal corporate income tax rate, a partial limitation on the deductibility of business interest expense, a limitation on the deductibility of certain director and officer compensation expense, limitations on net operating loss carrybacks and carryovers and changes relating to the scope and timing of U.S. taxation on earnings from international business operations. Subsequent legislation, the CARES Act enacted on March 27, 2020, relaxed certain of the limitations imposed by the TCJA for certain taxable years, including the limitation on the use and carryback of net operating losses and the limitation on the deductibility of business interest expense. The exact impact of the TCJA and the CARES Act for future years is difficult to quantify, but these changes could materially affect our investors, the companies in which our funds invest, or us. In addition, other changes could be enacted in the future to increase the corporate tax rate, limit further the deductibility of interest, subject carried interests to more onerous taxation or effect other changes that could have a material adverse effect on our business, results of operations and financial condition. Such changes could also include increases in state taxes and other changes to state tax laws.
In addition, our effective tax rate and tax liability are based on the application of current income tax laws, regulations, and treaties. These laws, regulations and treaties are complex, and the manner which they apply to us and diverse set of business arrangements is often open to interpretation. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The tax authorities could challenge our interpretation of laws, regulations and treaties, resulting in additional tax liability or adjustment to our income tax provision that could increase our effective tax rate. Changes to tax laws may also adversely affect our ability to attract and retain key personnel.
A third party attempting to acquire us or a substantial position in our Class A Common Stock may be limited by the operation of FINRA Rule 1017.
One of our subsidiaries, Alight Financial Solutions, LLC (“AFS”), is a member in good standing with the Financial Industry Regulatory Authority (“FINRA”), and is subject to change in ownership or control regulations as a result. FINRA’s Rule 1017 requires that any member of FINRA file an application for approval of any change in ownership that would result in one person or entity directly or indirectly owning or controlling 25% or more of member firm’s equity capital. A “substantially complete” application must be filed at least 30 days prior to effecting a change. The approval process under Rule 1017 can take six months or more to complete. The required FINRA process under Rule 1017, including the required 30-day notice period before effecting a change in ownership, could hinder or delay a third party in any effort to acquire us or a substantial position in our Class A Common Stock following the business combination, where such acquisition would result in the applicable person or persons, directly or indirectly, owning or controlling 25% or more of AFS. A denial of FINRA approval could prevent or delay any transaction resulting
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from a change of control or AFS withdrawing its broker-dealer registration, either of which could have a material adverse effect on our business, results of operations or future prospects. A denial of any other application AFS has made under Rule 1017 could also have a material adverse effect on us.
Risks Related to Ownership of our Securities
The Sponsor Investors and Legacy Investors have significant influence over the Company and their interests may conflict with the Company’s or its stockholders in the future.
Certain legacy investors (comprised of investment funds affiliated with (i) Blackstone Inc. (the “Blackstone Investors”), (ii) New Mountain (the “New Mountain Investors”), (iii) GIC Private Limited and Jasmine Ventures (the “GIC Investors”) and (iv) Platinum Falcon B 2018 RSC Limited (the “PF Investors”) (collectively, our ”Legacy Investors”) beneficially collectively own approximately a 34.2% voting interest in the Company based on their ownership of Class A Common Stock and Class V Common Stock (in respect of Legacy Investors who hold Class A Units) as of December 31, 2022. In addition, the sponsor investors (by virtue of the ownership of Trasimene Capital FT, LP, Bilcar FT, LP, Cannae Holdings, LLC and THL FTAC LLC, and their affiliated transferees) (the “Sponsor Investors”) beneficially own approximately 10.7% of the Company’s Class A Common Stock as of December 31, 2022. As a result, for so long as they retain a significant ownership interest in the Company and/or Alight Holding Company LLC (f/k/a Tempo Holding Company, LLC) ("Alight Holdings"), the Sponsor Investors and Legacy Investors will have significant influence on the approval of actions requiring stockholder approval through the exercise of their voting power.
Moreover, under the Company's amended and restated certificate of incorporation ("Company Charter") and the Investor Rights Agreement that the Company entered into with the Sponsor Investors and the Legacy Investors as part of the Business Combination, as amended on February 2, 2023, the Company has agreed to nominate to the Company Board certain individuals designated by the Sponsor Investors and the Blackstone Investors, respectively, for so long as such investors retain a certain ownership interest in the Company and/or Alight Holdings. These designation rights may be disproportionate to the ownership interests of such investors in the Company. As a result, the Sponsor Investors and the Blackstone Investors have significant influence with respect to the Company’s management, business plans and policies, including the appointment and removal of the Company’s officers. In particular, for so long as such investors continue to own a significant percentage of the Class A Common Stock, such investors may be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your Class A Common Stock as part of a sale of our company and ultimately might affect the market price of our Class A Common Stock.
The Company’s directors may allocate some of their time to other businesses, which may cause conflicts of interest in their determination as to how much time to devote to the Company’s affairs and materially adversely affect the Company’s results of operations.
The Company’s directors may engage in other business activities, including serving as directors or executive officers of other businesses. The Company’s directors will need to determine how to allocate their time to the Company in addition to any such other activities. This may result in a conflict of interest in the determination as to how our directors allocate their time between their oversight of the management and operations of the Company and the operations of (or their engagement in) such other businesses. Any such conflicts may not always be resolved in the Company’s favor and may materially adversely affect the Company’s results of operations.
The Company Charter provides that none of the Sponsor Investors or the Legacy Investors or any director of the Company who is not employed by the Company or any of its affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or lines of business in which the Company operates or from otherwise competing with the Company, and contains a waiver of any interest or expectancy in certain opportunities by the Company, which may prevent the Company from receiving the benefit of certain corporate opportunities that would otherwise have been available to it.
The Sponsor Investors, the Legacy Investors, the Company’s non-employee directors and/or their respective affiliates are, and/or in the future may be, engaged in (or affiliated with entities that are engaged in) similar activities or related lines of business to the Company or activities that may otherwise overlap or compete with the Company’s business. Under the Company Charter, the Sponsor Investors, the Legacy Investors, the non-employee directors and their respective affiliates are permitted to engage in the same or similar business activities or lines of business to the Company or its affiliates and to otherwise compete with the Company. In addition, the Sponsor Investors, the Legacy Investors, the non-employee directors and their respective affiliates are not required to disclose or offer to the Company any corporate opportunities that such persons learn of which may be a corporate opportunity for both themselves and the Company and the Company will renounce any interest or expectancy in (or right to be offered or to participate in) any such opportunities so long as the opportunity is not presented to a person in their capacity as a director or officer of the Company. The Sponsor Investors, the Legacy Investors, the non-employee directors and their respective affiliates will not (to the fullest extent
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permitted by applicable law) have any liability to the Company for any breach of fiduciary duty for engaging in any such activities or from not disclosing any corporate opportunities to the Company or from pursuing or acquiring such opportunities themselves or offering or directing such opportunities to any other person. As a result of these provisions, the Company may be not be offered certain corporate opportunities which could be beneficial to the Company and its stockholders, or the Legacy Investors, the Sponsor Investors, the non-employee directors or their respective affiliates may direct such opportunities to certain other businesses in which they are engaged (or such other businesses may otherwise pursue such opportunities) causing them to compete with us, which may cause such opportunities not to be available to the Company or to become more expensive or difficult for the Company to pursue, which could adversely impact the Company’s business or prospects.
The Company Charter, Bylaws and Delaware law, as well as the Investor Rights Agreement, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our Class A Common Stock.
The Company Charter, the Company's amended and restated by-laws ("Bylaws") and Investor Rights Agreement contain provisions that may discourage, delay or prevent a merger, consolidation, acquisition, or other change in control transaction that stockholders may consider favorable, including transactions in which the Company’s stockholders might otherwise receive a premium for their Class A Common Stock. These provisions may also prevent or frustrate attempts by stockholders to replace or remove Company management, such as authorization to issue blank check preferred stock without stockholder approval, limitations on actions taken by stockholders, advance notice requirements for stockholder proposals, a classified board of directors, prohibitions on certain business combinations, the ability of the Board to fill certain director vacancies and limitations on the removal of directors by stockholders.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for the Company’s shares. They could also deter potential acquirers of the Company, thereby reducing the likelihood that stockholders could receive a premium for their shares in an acquisition. See “Description of Securities” included as Exhibit 4.1 to this Annual Report on Form 10-K for a more detailed discussion of these provisions.
The Company Charter provides that, unless the Company consents in writing to the selection of an alternative forum, the Delaware Court of Chancery will be the sole and exclusive forum for most legal actions between the Company and our stockholders, which could limit the ability of the Company’s stockholders to obtain a favorable judicial forum for disputes with the Company or our directors, officers, employees or agents.
The Company Charter specifies that, unless the Company consents in writing to the selection of an alternative forum and subject to certain limited exceptions, the Delaware Court of Chancery will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, other employee, agent or stockholder of the Company to the Company or our stockholders, or any claim for aiding and abetting any such alleged breach, (iii) any action asserting a claim against the Company or any current or former director, officer, other employee, agent or stockholder of the Company (a) arising pursuant to any provision of the DGCL, the Company Charter (as it may be amended or restated) or the Company Bylaws, (b) as to which the DGCL confers jurisdiction on the Delaware Court of Chancery or (c) governed by the internal affairs doctrine of the law of the State of Delaware. The Company Charter also specifies that the U.S. federal district courts will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for any claims arising under federal securities laws, including the Securities Act. In addition, these choice of forum provisions will not apply to suits brought to enforce any liability or duty created by the Exchange Act, or any other claim for which the U.S. federal district courts are the sole and exclusive forum. Any person or entity purchasing or otherwise acquiring any interest in shares of the Company’s capital stock will be deemed to have notice of and to have consented to these provisions of the Company Charter.
The Company believes this provision benefits the Company by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against the Company directors, officers, employees and agents as it may limit any stockholder’s ability to bring a claim in a judicial forum that such stockholder finds favorable for disputes with us or the Company directors, officers, employees or agents. The enforceability of similar choice of forum provisions in other companies’ bylaws or certificates of incorporation may be challenged, and if these challenges are successful, the Company may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect the Company’s business, financial condition or results of operations.
The Company incurs increased costs and is subject to additional regulations and requirements as a public company, which could lower our profits or make it more difficult to run our business.
As a public company, we incur significant legal, accounting and other expenses that Alight had not previously incurred as a private company, including costs associated with public company reporting requirements. We also incur costs associated with the
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Sarbanes-Oxley Act and related rules implemented by the SEC and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes (including due to increased focus on environmental, social and governance (commonly referred to as "ESG") and cybersecurity matters by certain investors and regulators) have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A Common Stock, fines, sanctions and other regulatory action and potentially civil litigation.
Compliance with any of the foregoing or future laws and regulations may result in enhanced disclosure obligations, which could negatively affect us or materially increase our regulatory burden. Increased regulations generally increase our costs, and we could continue to experience higher costs if new laws require us to spend more time, hire additional personnel or purchase new technology to comply effectively. For example, developing and acting on ESG initiatives, and collecting, measuring, and reporting ESG information and metrics can be costly, difficult and time consuming and is subject to evolving reporting standards, including the SEC’s proposed climate-related reporting requirements. We may also communicate certain initiatives and goals regarding environmental matters, diversity, responsible sourcing, social investments and other ESG matters in our SEC filings or in other public disclosures. These initiatives and goals could be difficult and expensive to implement, the technologies needed to implement them may not be cost effective and may not advance at a sufficient pace, and ensuring the accuracy, adequacy or completeness of the disclosure of our ESG initiatives can be costly, difficult and time-consuming. Further, statements about our ESG initiatives and goals, and progress against those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change. In addition, we could face scrutiny from certain stakeholders for the scope or nature of such initiatives or goals, or for any revisions to these goals. If our ESG-related data, processes and reporting are incomplete or inaccurate, or if we fail to achieve progress with respect to our ESG goals on a timely basis, or at all, our business, financial performance and growth could be adversely affected.
If securities or industry analysts cease to publish research or reports about our business, or if they downgrade their recommendations regarding our Class A Common Stock, the price of our Class A Common Stock and trading volume could decline.
The trading market for our Class A Common Stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If analysts who cover us downgrade our Class A Common Stock or publish inaccurate or unfavorable research about our business, the price of our Class A Common Stock may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price of our Class A Common Stock or trading volume to decline and our Class A Common Stock to be less liquid.
Future issuances of shares of Class A Common Stock by us, and the availability for resale of shares held by our Legacy Investors and other significant stockholders (including any shares of Class A Common Stock issued upon exchange of such investors’ Class A Units) may cause the market price of our Class A Common Stock to decline.
Sales of a substantial number of shares of our Class A Common Stock in the public market, or the perception that these sales could occur, could substantially decrease the market price of our Class A Common Stock. Under the Business Combination Agreement, the Legacy Investors received, among other things, a significant amount of Class A Common Stock and Class A Units (which are exchangeable for shares of Class A Common Stock). In addition, the Legacy Investors received shares of our Class B Common Stock or Class B Units which will automatically convert into Class A Common Stock or Class A Units upon the occurrence of certain events (including events tied to the trading price of our Class A Common Stock).
The Legacy Investors, the Sponsor Investors and certain other significant stockholders may sell large amounts of the Class A Common Stock in the open market or in privately negotiated transactions, which could have the effect of increasing the volatility in our stock price or putting significant downward pressure on the price of our Class A Common Stock. Some of our Legacy Investors have pledged shares to secure their indebtedness to certain banking institutions. If the price of our Class A Common Stock declines, those shares could be sold by one or more of the banking institutions in order to remain within the margin limitations imposed under the applicable terms of such loans. Such sales could cause the trading price of our Class A Common Stock to fall and make it more difficult for you to sell shares of Class A Common Stock.
In the future, we may also issue our securities in connection with corporate activity, such as investments or acquisitions. The amount of shares of our Class A Common Stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding shares of Class A Common Stock. The market price of our Class A Common Stock could drop
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significantly if we or our Legacy Investors and other significant stockholders sell shares or are perceived by the market as intending to sell them.
Because we have no current plans to pay cash dividends on our Class A Common Stock, you may not receive any return on your investment unless you sell your Class A Common Stock for a price greater than that which you paid for it.
We have no current plans to pay cash dividends. The declaration, amount and payment of any future dividends on our Class A Common Stock will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our shareholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends is limited by our credit facilities and may be limited by covenants of other indebtedness we or our subsidiaries incur in the future. As a result, you may not receive any return on an investment in our Class A Common Stock unless you sell your Class A Common Stock for a price greater than that which you paid for such stock.
The market price of shares of our Class A Common Stock has been, and may continue to be volatile and may decline regardless of our operating performance, which could cause the value of your investment to decline.
The market price of our Class A Common Stock has fluctuated significantly in response to numerous factors and may continue to be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. During the year ended December 31, 2022, the per share trading price of our Class A Common Stock fluctuated from a low of $6.31 to a high of $11.10. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our Class A Common Stock regardless of our operating performance. In addition, our operating results may fail to match our past performance and could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to shareholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, the performance of direct and indirect competitors, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals. In addition, the market price of shares of our Class A Common Stock could be subject to additional volatility or decrease significantly, as a result of speculation in the press or the investment community about our industry or our company, including, as a result of short sellers who publish, or arrange for the publication of, opinions or characterizations of our business prospects or similar matters calculated to create negative market momentum in order to profit from a decline in the market price of our Class A Common Stock. Stock markets and the price of our Class A Common Stock have, and may in the future, experience extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, including as a result of reports published by short sellers, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, as well as responding to reports published by short sellers or other speculation in the press or investment community, could result in substantial costs and a diversion of our management’s attention and resources.
The Company is a holding company, and our only material asset is our direct and indirect interests in Alight Holdings, and we are accordingly dependent upon distributions from Alight Holdings to pay dividends, taxes and other expenses, including payments under the Tax Receivable Agreement.
The Company is a holding company with no material assets other than its direct and indirect ownership of equity interests in Alight Holdings, of which the Company serves as the managing member. As a result, the Company has no independent means of generating revenue or cash flow and the Company is dependent on the financial results and cash flows of Alight Holdings and its subsidiaries and the distributions that we receive from Alight Holdings in order to pay taxes, make payments under the Tax Receivable Agreement, pay dividends (including any dividends or amounts payable in connection with the conversion or exchange of Class B Common Stock and Class B Units) and pay other costs and expenses of the Company. While we intend to cause Alight Holdings to make distributions to its members, including us, in an amount at least sufficient to allow us to pay all applicable taxes, to make payments under the Tax Receivable Agreement, and to pay our corporate and other overhead expenses, deterioration in the financial condition, earnings or cash flow of Alight Holdings for any reason could limit or impair Alight Holdings’ ability to pay such distributions. Additionally, to the extent that the Company needs funds and Alight Holdings is restricted from making such distributions under applicable laws or regulations or under the terms of any financing arrangements, or Alight Holdings is otherwise unable to provide such funds, it could materially adversely affect the Company’s liquidity and financial condition. Such restrictions include Alight Holdings’ financing facilities to which Alight Holdings’ subsidiaries are borrowers or guarantors. Alight Holdings’ distributions, as a result of such financing facilities, are limited based on the achievement of certain financial ratios and fixed dollar
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baskets, availability under which will vary depending on the Company’s financial performance. We currently anticipate that Alight Holdings will have sufficient capacity to make the dividends and other distributions described above. Distributions may also be restricted pursuant to the Alight Holdings Operating Agreement and applicable Delaware law. Under the Alight Holdings Operating Agreement, the Company (as managing member) is prohibited from making distributions if they would violate Section 18-607 of the Delaware Limited Liability Company Act ("DLLCA") or another applicable law. Under the DLLCA, limited liability companies are generally restricted from making distributions to their members to the extent that, after giving effect to any such distribution, the company’s liabilities (subject to certain limited exclusions) exceed the fair value of the company’s assets.
Under the terms of the Alight Holdings Operating Agreement, Alight Holdings is obligated to make tax distributions to holders of Alight Holdings Units (including us) at an assumed tax rate, subject to there being available cash. The amount of these tax distributions may in certain periods exceed our tax liabilities and obligations to make payments under the Tax Receivable Agreement, which may result in an excess of cash accumulation at the Company. The Company's Board of Directors, in its sole discretion, will determine from time to time how to use any cash that accumulates at the Company as a result, which may include, among other potential uses, repurchases of our Class A Common Stock or the payment of dividends thereon. However, we will have no obligation to distribute such cash (or other available cash other than as a result of any declared dividend) to our stockholders. To the extent that the Company does not use any such accumulated cash, following the exchange or redemption of Class A Units for Class A Common Stock, Continuing Tempo Unitholders may benefit from value attributable to such cash balances as a result of their ownership of Class A Common Stock, notwithstanding that such Continuing Tempo Unitholders may previously have participated or received distributions as holders of Alight Holdings Units that resulted in the excess cash balances at the Company.
The Company is required to pay certain parties for most of the benefits relating to any additional tax depreciation or amortization deductions that we may claim as a result of the Company’s direct and indirect allocable share of existing tax basis acquired in the Business Combination, the Company’s increase in its allocable share of existing tax basis and anticipated tax basis adjustments we receive in connection with sales or exchanges of Alight Holdings Units after the Business Combination and our utilization of certain tax attributes of the Tempo Blockers.
In connection with the Business Combination, we entered into a tax receivable agreement (the "Tax Receivable Agreement" or the "TRA") with certain of our pre-Business Combination owners (the "TRA Parties") that provides for the payment by the Company to such TRA Parties of 85% of the benefits, if any, that the Company is deemed to realize (calculated using certain assumptions) as a result of (i) the Company’s direct and indirect allocable share of existing tax basis acquired in the Business Combination, (ii) increases in the Company’s allocable share of existing tax basis and tax basis adjustments that will increase the tax basis of the tangible and intangible assets of Alight Holdings as a result of the Business Combination and as a result of sales or exchanges of Alight Holdings Units for shares of Class A Common Stock after the Business Combination and (iii) the Company’s utilization of certain tax attributes of the Tempo Blockers (including the Tempo Blockers allocable share of existing tax basis), and of certain other tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement. These increases in existing tax basis and tax basis adjustments generated over time may increase (for tax purposes) depreciation and amortization deductions and, therefore, may reduce the amount of tax that the Company would otherwise be required to pay in the future, although the Internal Revenue Service (the "IRS") may challenge all or part of the validity of that tax basis, and a court could sustain such a challenge. Actual tax benefits realized by the Company may differ from tax benefits calculated under the Tax Receivable Agreement as a result of the use of certain assumptions in the Tax Receivable Agreement, including the use of an assumed weighted-average state and local income tax rate to calculate tax benefits. The payment obligation under the Tax Receivable Agreement is an obligation of the Company and not of Alight Holdings. While the amount of existing tax basis, the anticipated tax basis adjustments and the actual amount and utilization of tax attributes, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of exchanges of Alight Holdings Units for shares of our Class A Common Stock, the applicable tax rate, the price of shares of our Class A Common Stock at the time of exchanges, the extent to which such exchanges are taxable and the amount and timing of our income, we expect that as a result of the size of the transfers and increases in the tax basis of the tangible and intangible assets of Alight Holdings and our possible utilization of tax attributes, including existing tax basis acquired at the time of the Business Combination, the payments that the Company may make under the Tax Receivable Agreement will be substantial. The payments under the Tax Receivable Agreement are not conditioned on the exchanging holders of Alight Holdings Units or other TRA Parties continuing to hold ownership interests in us. To the extent payments are due to the TRA Parties under the Tax Receivable Agreement, the payments are generally required to be made within ten business days after the tax benefit schedule (which sets forth the Company’s realized tax benefits covered by the Tax Receivable Agreement for the relevant taxable year) is finalized. The Company is required to deliver such a tax benefit schedule to the TRA Parties’ representative, for its review, within ninety calendar days after the due date (including extensions) of the Company’s federal corporate income tax return for the relevant taxable year.
25
In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits the Company realizes in respect of the tax attributes subject to the Tax Receivable Agreement.
The Company’s payment obligations under the Tax Receivable Agreement will be accelerated in the event of certain changes of control or its election to terminate the Tax Receivable Agreement early. The accelerated payments will relate to all relevant tax attributes then allocable to the Company in the case of an acceleration upon a change of control and to all relevant tax attributes allocable or that would be allocable to the Company (in the case of an election by the Company to terminate the Tax Receivable Agreement early, assuming all Alight Holdings Units were then exchanged). The accelerated payments required in such circumstances will be calculated by reference to the present value (at a specified discount rate determined by reference to LIBOR) of all future payments that holders of Alight Holdings Units or other recipients would have been entitled to receive under the Tax Receivable Agreement, and such accelerated payments and any other future payments under the Tax Receivable Agreement will utilize certain valuation assumptions, including that the Company will have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the Tax Receivable Agreement and sufficient taxable income to fully utilize any remaining net operating losses subject to the Tax Receivable Agreement on a straight line basis over the shorter of the statutory expiration period for such net operating losses or the five-year period after the early termination or change of control. In addition, recipients of payments under the Tax Receivable Agreement will not reimburse us for any payments previously made under the Tax Receivable Agreement if such tax basis and the Company’s utilization of certain tax attributes is successfully challenged by the IRS (although any such detriment would be taken into account in future payments under the Tax Receivable Agreement). The Company’s ability to achieve benefits from any existing tax basis, tax basis adjustments or other tax attributes, and the payments to be made under the Tax Receivable Agreement, will depend upon a number of factors, including the timing and amount of our future income. As a result, even in the absence of a change of control or an election to terminate the Tax Receivable Agreement, payments under the Tax Receivable Agreement could be in excess of 85% of the Company’s actual cash tax benefits.
Accordingly, it is possible that the actual cash tax benefits realized by the Company may be significantly less than the corresponding Tax Receivable Agreement payments or that payments under the Tax Receivable Agreement may be made years in advance of the actual realization, if any, of the anticipated future tax benefits. There may be a material negative effect on our liquidity if the payments under the Tax Receivable Agreement exceed the actual cash tax benefits that the Company realizes in respect of the tax attributes subject to the Tax Receivable Agreement and/or distributions to the Company by Alight Holdings are not sufficient to permit the Company to make payments under the Tax Receivable Agreement after it has paid taxes and other expenses. Based upon certain assumptions, we estimate that if Alight, Inc. were to exercise its termination right as of December 31, 2022, the aggregate amount of these termination payments would be significantly in excess of the Tax Receivable Agreement liability recorded in the Consolidated Financial Statements within this Annual Report on Form 10-K. We may need to incur additional indebtedness to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or otherwise, and these obligations could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For more information regarding our liability under the Tax Receivable Agreement, refer to the Consolidated Financial Statements within Item 8 of this Annual Report on Form 10-K, Note 15 "Tax Receivable Agreement".
The acceleration of payments under the Tax Receivable Agreement in the case of certain changes of control may impair our ability to consummate change of control transactions or negatively impact the value of our Class A Common Stock.
In the case of a “Change of Control” under the Tax Receivable Agreement (which is defined to include, among other things, a 50% change in control of the Company, the approval of a complete plan of liquidation or dissolution of the Company, or the disposition of all or substantially all of the Company’s direct or indirect assets), payments under the Tax Receivable Agreement will be accelerated and may significantly exceed the actual benefits the Company realizes in respect of the tax attributes subject to the Tax Receivable Agreement. We expect that the payments that we may make under the Tax Receivable Agreement (the calculation of which is described in the immediately preceding risk factor) in the event of a change of control will be substantial. As a result, our accelerated payment obligations and/or the assumptions adopted under the Tax Receivable Agreement in the case of a change of control may impair our ability to consummate change of control transactions or negatively impact the value received by owners of our Class A Common Stock in a change of control transaction.
26
Risks Related to Our Indebtedness
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
Interest rates may increase in the future. As a result, interest rates on our term loan facility, secured senior notes and revolving credit facility, or any other variable rate debt offerings that we may engage in, could be higher or lower than current levels. Although we use derivative financial instruments to some extent to manage a portion of our exposure to interest rate risks, we do not attempt to manage our entire expected exposure. As of December 31, 2022, we had approximately $2.5 billion of outstanding debt at variable interest rates. If interest rates increase, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
Changes in our credit ratings could adversely impact our operations and lower our profitability.
Credit rating agencies continually revise their ratings for the companies that they follow, including us. Credit rating agencies also evaluate our industry as a whole and may change their credit ratings for us based on their overall view of our industry. Failure to maintain our credit ratings on long-term and short-term debt, or a lowered outlook for us or for our industry, could increase our cost of borrowing, reduce our ability to obtain intra-day borrowing, which we may need to operate our business, and adversely impact our results of operations.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our corporate headquarters is located in leased office space in Lincolnshire, Illinois. We currently use approximately 290,000 square feet of office space in our headquarters. The lease expires on December 31, 2024. We have offices in locations throughout the world, including Texas, Florida, Georgia, Puerto Rico, Canada, Spain, India and Poland. All of our offices are located in leased premises.
We believe that the facilities we currently occupy are adequate for the purposes for which they are being used and are well maintained. In general, no difficulty is anticipated in negotiating renewals as leases expire or in finding other satisfactory space if the premises become unavailable. See Note 19 “Lease Obligations” within the Consolidated Financial Statements within Item 8 of this Annual Report on Form 10-K for further information.
Item 3. Legal Proceedings.
We are a party to a variety of legal proceedings that arise in the normal course of our business. While the results of these legal proceedings cannot be predicted with certainty, we believe that the final outcome of these proceedings will not have a material adverse effect, individually or in the aggregate, on our results of operations or financial condition.
Item 4. Mine Safety Disclosures.
Not applicable.
27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A Common Stock is listed on the NYSE under the symbol ALIT. Trading began on our Class A Common Stock on July 2, 2021. Prior to that time, there was no public market for our Class A Common Stock.
Market price information regarding our Class B-1 Common Stock, Class B-2 Common Stock, Class V Common Stock, Class Z-A Common Stock, Class Z-B-1 Common Stock and Class Z-B-2 Common Stock is not provided because there is no public market for such classes.
Holders of Record
Set forth below are the numbers of holders of record for each of our classes of Common Stock as of February 24, 2023.
Class |
|
Number of Holders of Record |
Class A common stock |
|
76 |
Class B-1 common stock |
|
98 |
Class B-2 common stock |
|
98 |
Class V common stock |
|
5 |
Class Z-A common stock |
|
58 |
Class Z-B-1 common stock |
|
58 |
Class Z-B-2 common stock |
|
58 |
Dividends
We do not intend to declare or pay cash dividends in the foreseeable future. Our management anticipates that earnings and other cash resources, if any, will primarily be retained for investment in our business.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
On August 1, 2022, we announced a share repurchase program, under which we may repurchase up to $100 million of issued and outstanding shares of Class A Common Stock, from time to time, depending on market conditions and alternate uses of capital. The program may be effected through open market purchases or privately negotiated transactions in compliance with Rule 10b-18 under the Exchange Act, including through Rule 10b5-1 trading plans. The Program has no expiration date and may be suspended or discontinued at any time.
We did not repurchase any shares in the fourth quarter of 2022. As of December 31, 2022, there remained approximately $88 million of authorized availability under the repurchase program.
28
Performance
The following graph compares the total shareholder return from July 2, 2021, the date on which our Class A common shares commenced trading on the NYSE, through December 31, 2022 of (i) our Class A Common Stock, (ii) the Standard and Poor's 500 Stock Index (“S&P 500”) and (iii) the Russell 2000 Index (the "Russell 2000"). The S&P 500 was selected because it serves as a broad market index. The Russell 2000 was selected because we do not believe we can reasonably identify an industry index or specific peer group that would offer a meaningful comparison. The Russell 2000 measures the performance of the small market capitalization segment of U.S. equity instruments.
The stock performance graph and table assume an initial investment of $100 on July 2, 2021, and that all dividends of the S&P 500 and the Russell 2000, were reinvested. Companies in the Russell 2000 are weighted by market capitalization. The performance graph and table are not intended to be indicative of future performance. The performance graph and table shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act.
Item 6. Reserved.
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion includes forward-looking statements. See ‘Disclaimer Regarding Forward-Looking Statements’ for certain cautionary information regarding forward-looking statements and ‘Risk Factors’ in Item 1A of this Annual Report on Form 10-K for a list of factors that could cause actual results to differ materially from those predicted in those statements.
This discussion includes references to non-GAAP financial measures as defined in the rules of the SEC. We present such non-GAAP financial measures as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent under U.S. generally accepted accounting principles (“U.S. GAAP”), and these provide a measure against which our businesses may be assessed in the future.
Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. These financial measures should be viewed in addition to, not in lieu of, the consolidated financial statements for the year ended December 31, 2022. See ‘Non-GAAP Financial Measures’ below for further discussion.
BUSINESS
Overview
Alight is defining the future of employee wellbeing through the power of our integrated health, wealth, wellbeing and payroll solutions powered by Alight Worklife®. Alight Worklife® is a high-tech employee engagement platform with a human touch – that brings together our mission-critical wellbeing solutions to our clients to drive better outcomes for organizations and individuals.
On July 2, 2021 (the “Closing Date”), Alight Holding Company, LLC (the "Predecessor") completed a business combination (the "Business Combination") with a special purpose acquisition company. On the Closing Date, pursuant to the Business Combination Agreement, the special purpose acquisition company became a wholly owned subsidiary of Alight, Inc. (“Alight”, “the Company”, “we” “us” “our” or the “Successor”). As a result of the Business Combination, and by virtue of such series of mergers and related transactions, the combined company is now organized in an “Up-C” structure, in which substantially all of the assets and business of Alight are held by the Predecessor, of which Alight is the managing member. Immediately following and as a result of the Business Combination, Alight owned approximately 85% of the economic interest in the Predecessor, had 100% of the voting power and controlled the management of the Predecessor. The non-voting ownership percentage held by noncontrolling interest was approximately 15%. As of December 31, 2022, Alight owned 88% of the economic interest in the Predecessor, had 100% of the voting power and controlled the management of the Predecessor and the non-voting ownership percentage held by noncontrolling interest was approximately 12%.
FACTORS AFFECTING THE COMPARABILITY OF OUR RESULTS OF OPERATIONS
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors that may impact the comparability of our results of operations in future operations.
Impact of the Business Combination
Alight is subject to corporate level tax rates at the federal, state and local levels. The Predecessor was and is treated as a flow-through entity for U.S. federal income tax purposes, and as such, has generally not been subject to U.S. federal income tax at the entity level. Accordingly, other than for certain consolidated subsidiaries of the Predecessor that are structured as corporations and unless otherwise specified, the historical results of operations and other financial information presented does not include any provision for U.S. federal income tax.
Alight (together with certain corporate subsidiaries through which it owns its interest in the Predecessor) pays U.S. federal and state income taxes as a corporation on its share of our taxable income. The Business Combination was accounted for as a business combination using the acquisition method of accounting. Accordingly, the assets and liabilities, including any identified intangible assets, were recorded at their preliminary fair values at the date of completion of the Business Combination, with any excess of the purchase price over the preliminary fair value recorded as goodwill. The application of business combination accounting required the use of significant estimates and assumptions.
As a result of the application of accounting for the Business Combination, the historical consolidated financial statements of the Predecessor are not necessarily indicative of the Successor’s future results of operations, financial position and cash flows. For example, increased tangible and intangible assets resulting from adjusting the basis of tangible and intangible assets to their fair value would result in increased depreciation and amortization expense in the periods following the consummation of the Business Combination.
30
In connection with the Business Combination, we entered into a Tax Receivable Agreement (the “TRA”) with certain of our pre-Business Combination owners that provides for the payment by Alight to such owners of 85% of the benefits that Alight is deemed to realize as a result of the Company’s share of existing tax basis acquired in the Business Combination and other tax benefits related to entering into the TRA.
Additionally, in connection with the Business Combination, we accounted for the issuance of warrants and Seller Earnout contingent consideration, which were a result of the issuance of non-voting shares of Class B-1 and Class B-2 Common Stock, as liabilities which require remeasurement to fair value at the end of each reporting period, as applicable and adopted the Alight 2021 Omnibus Incentive Plan which will result in higher share-based compensation expenses. As of December 31, 2022 and 2021, all warrants were exercised or redeemed. Lastly, the redemption of our Unsecured Senior Notes and partial paydown of the Term Loan in conjunction with the Business Combination, has resulted in lower interest expense.
EXECUTIVE SUMMARY OF FINANCIAL RESULTS
While the Closing Date was July 2, 2021, we determined the impact of one day was immaterial to the results of operations. As such, we utilized July 1, 2021 as the date of the Business Combination for accounting purposes. As a result of the Business Combination, the following tables present selected financial data for the Successor year ended December 31, 2022 and six months ended December 31, 2021, and the Predecessor six months ended June 30, 2021 and year ended December 31, 2020.
We prepared our discussion of the results of operations by comparing the results of the Successor year ended December 31, 2022 to the combined Successor six months ended December 31, 2021 and Predecessor six months ended June 30, 2021. The core business operations of the Predecessor and Successor were not significantly impacted by the consummation of the Business Combination. Therefore, we believe the combined results for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021 are comparable to the Successor year ended December 31, 2022, and provide enhanced comparability to the reader about the current year's results. We believe this approach provides the most meaningful basis of comparison and is useful in identifying current business trends for the periods presented. The combined results of operations included in our discussion below are not considered to be prepared in accordance with U.S. GAAP and have not been prepared as pro forma results under applicable regulations, may not reflect the actual results we would have achieved had the Business Combination occurred at the beginning of 2021, and should not be viewed as a substitute for the results of operations of the Predecessor and Successor periods presented in accordance with U.S. GAAP.
Year-to-year comparisons between 2021 and 2020 have been omitted from this Form 10-K, but may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Subsequent event
On February 20, 2023, the Company approved a two-year strategic transformation restructuring program (the “Program”) intended to accelerate the Company’s back-office infrastructure into the cloud and transform its operating model leveraging technology in order to reduce its overall future costs. The Program includes process and system optimization, third party costs associated with technology infrastructure transformation, and elimination of full-time positions. The Company currently expects to record in the aggregate approximately $140 million in pre-tax restructuring charges over the next two years. The restructuring charges are expected to include severance charges with an estimated range from $20 million to $30 million over the two-year period and other restructuring charges related to items such as data center exit costs, third party fees associated with the restructuring, and costs associated with transitioning existing technology and processes, which are estimated to account for between $100 million and $120 million over the two-year period. The Company estimates an annual savings of over $100 million after the Program is completed. The Program is expected to commence in the first quarter of 2023 and to be substantially completed over an estimated two-year period.
31
The following table sets forth our historical results of operations for the periods indicated below:
|
|
Successor |
|
|
|
Predecessor |
|
||||||||
|
|
Year Ended |
|
Six Months Ended |
|
|
|
Six Months Ended |
|
||||||
|
|
December 31, |
|
December 31, |
|
|
|
June 30, |
|
||||||
(in millions) |
|
2022 |
|
2021 |
|
|
|
2021 |
|
||||||
Revenue |
|
$ |
|
3,132 |
|
$ |
|
1,554 |
|
|
|
$ |
|
1,361 |
|
Cost of services, exclusive of depreciation and amortization |
|
|
|
2,080 |
|
|
|
1,001 |
|
|
|
|
|
888 |
|
Depreciation and amortization |
|
|
|
56 |
|
|
|
21 |
|
|
|
|
|
38 |
|
Gross Profit |
|
|
|
996 |
|
|
|
532 |
|
|
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Selling, general and administrative |
|
|
|
671 |
|
|
|
304 |
|
|
|
|
|
222 |
|
Depreciation and intangible amortization |
|
|
|
339 |
|
|
|
163 |
|
|
|
|
|
111 |
|
Total operating expenses |
|
|
|
1,010 |
|
|
|
467 |
|
|
|
|
|
333 |
|
Operating (Loss) Income |
|
|
|
(14 |
) |
|
|
65 |
|
|
|
|
|
102 |
|
Other (Income) Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|||
(Gain) Loss from change in fair value of financial instruments |
|
|
|
(38 |
) |
|
|
65 |
|
|
|
|
|
— |
|
(Gain) Loss from change in fair value of tax receivable agreement |
|
|
|
(41 |
) |
|
|
(37 |
) |
|
|
|
|
— |
|
Interest expense |
|
|
|
122 |
|
|
|
57 |
|
|
|
|
|
123 |
|
Other (income) expense, net |
|
|
|
(16 |
) |
|
|
3 |
|
|
|
|
|
9 |
|
Total other (income) expense, net |
|
|
|
27 |
|
|
|
88 |
|
|
|
|
|
132 |
|
Loss Before Income Tax Expense (Benefit) |
|
|
|
(41 |
) |
|
|
(23 |
) |
|
|
|
|
(30 |
) |
Income tax expense (benefit) |
|
|
|
31 |
|
|
|
25 |
|
|
|
|
|
(5 |
) |
Net Loss |
|
|
|
(72 |
) |
|
|
(48 |
) |
|
|
|
|
(25 |
) |
Net loss attributable to noncontrolling interests |
|
|
|
(10 |
) |
|
|
(13 |
) |
|
|
|
|
— |
|
Net (Loss) Income Attributable to Alight, Inc. |
|
$ |
|
(62 |
) |
$ |
|
(35 |
) |
|
|
$ |
|
(25 |
) |
REVIEW OF RESULTS
Key Components of Our Operations
Revenue
Our clients’ demand for our services ultimately drives our revenues. We generate primarily all of our revenue, which is highly recurring, from fees for services provided from contracts across all solutions, which is primarily based on a contracted fee charged per participant per period (e.g., monthly or annually, as applicable). Our contracts typically have three to five-year terms for ongoing services with mutual renewal options. The majority of the Company’s revenue is recognized over time when control of the promised services is transferred, and the customers simultaneously receive and consume the benefits of our services. Payment terms are consistent with industry practice. We calculate growth rates for each of our solutions in relation to recurring revenues and revenues from project work. One of the components of our growth in recurring revenues is the increase in net commercial activity which reflects items such as client wins and losses (“Net Commercial Activity”). We define client wins as sales to new clients and sales of new solutions to existing clients. We define client losses as instances where clients do not renew or terminate their arrangements in relation to individual solutions or all of the solutions that we provide. We measure revenue growth as it relates to the cloud-based products and solutions that are central to our Alight Worklife® platform and next generation product suite, BPaaS Solutions. These products capitalize on our robust data combined with AI & analytics to deliver greater employee engagement and employer outcomes. BPaaS products and services span across both the Employer Solutions and Professional Services segments. In addition, we also consider BPaaS bookings, defined as total contract value for BPaaS customer agreements executed in the period, to be a key indicator of future revenue growth and used as a metric of commercial activity by management and investors.
Cost of Services, exclusive of Depreciation and Amortization
Cost of services, exclusive of depreciation and amortization includes compensation-related and vendor costs directly attributable to client-related services and costs related to application development and client-related infrastructure.
Depreciation and Amortization
Depreciation and amortization expenses include the depreciation and amortization related to our hardware, software and application development. Depreciation and amortization may increase or decrease in absolute dollars in future periods depending on the future level of capital investments in hardware, software and application development.
32
Selling, General and Administrative
Selling, general and administrative expenses include compensation-related costs for administrative and management employees, system and facilities expenses, and costs for external professional and consulting services.
Depreciation and Intangible Amortization
Depreciation and intangible amortization expenses consist of charges relating to the depreciation of the property and equipment used in our business and the amortization of acquired customer-related and contract based intangible assets and technology related intangible assets. Depreciation and intangible amortization may increase or decrease in absolute dollars in future periods depending on the future level of capital investments in hardware and other equipment as well as amortization expense associated with future acquisitions.
(Gain) Loss from Change in Fair Value of Financial Instruments
(Gain) loss from change in fair value of financial instruments includes the impact of the revaluation to fair value at the end of each reporting period for our previously issued warrants and the Seller Earnouts contingent consideration.
(Gain) Loss from Change in Fair Value of Tax Receivable Agreement
(Gain) loss from change in fair value of Tax Receivable Agreement includes the impact of the revaluation to fair value at the end of each reporting period.
Interest Expense
Interest expense primarily includes interest expense related to our outstanding debt.
Other (Income) Expense, net
Other (income) expense, net includes non-operating expenses and income, including realized (gains) and losses from remeasurement of foreign currency transactions.
Results of Operations for the Year Ended December 31, 2022 (Successor) Compared to the Combined Year Ended December 31, 2021 (Successor and Predecessor)
Revenue
Revenues were $3,132 million for the Successor year ended December 31, 2022, and $1,554 million and $1,361 million for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively. The increase in revenue of $217 million, or 7.4%, over the combined Successor and Predecessor prior year was primarily driven by increased revenues from our Employer Solutions segment. We recorded BPaaS revenue of $564 million for the Successor year ended December 31, 2022 and $203 million and $187 million for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively. BPaaS revenue increased $174 million, or 44.6%, over the combined Successor and Predecessor prior year.
In addition, we also consider BPaaS bookings, defined as total contract value for BPaaS customer agreements executed in the period, to be a key indicator of future revenue growth and used as a metric of commercial activity by management and investors. BPaaS bookings were $871 million for the Successor year ended December 31, 2022 and $322 million and $280 million for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively. This represents an increase in BPaaS bookings of $269 million, or 44.7%, over the combined Successor and Predecessor prior year.
Recurring revenues were $2,638 million for the Successor year ended December 31, 2022. Recurring revenues were $1,299 million and $1,130 million for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively. The increase in recurring revenue of $209 million, or 8.6%, over the combined Successor and Predecessor prior year was primarily related to growth in Employer Solutions, which is a result of higher revenues related to acquisition activity, increased volumes and increases in Net Commercial Activity.
Project revenues increased $8 million, or 1.6%, when comparing the Successor year ended December 31, 2022 to the combined Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively, which was attributable to the Employer Solutions segment partially offset by a decrease in the Professional Services segment.
33
In addition, a majority of our revenue is generated in the U.S., which reflected 88% of the total revenue increase for the Successor year ended December 31, 2022 compared to the combined Successor and Predecessor prior year period.
Cost of Services, exclusive of Depreciation and Amortization
Cost of services, exclusive of depreciation and amortization were $2,080 million for the Successor year ended December 31, 2022. Cost of services, exclusive of depreciation and amortization were $1,001 million and $888 million, respectively, for the Successor six months ended December 31, 2021 and the Predecessor year ended June 30, 2021. The increase in Cost of services, exclusive of depreciation and amortization of $191 million, or 10.1%, over the combined Successor and Predecessor prior year was primarily driven by acquisitions in the fourth quarter of 2021, higher costs related to growth in current revenues, including investments in key resources, and increased compensation expenses related to share-based awards.
Selling, General and Administrative
Selling, general and administrative expense increased $145 million, or 27.6%, when comparing the Successor year ended December 31, 2022 to the combined Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively, which was primarily driven by an increase in share-based compensation expense.
Depreciation and Intangible Amortization
Depreciation and intangible amortization expense increased $62 million, or 18.6%, when comparing the Successor year ended December 31, 2022 to the combined Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, which was primarily driven by amortization related to the identifiable intangible assets acquired in conjunction with the Business Combination and recent acquisitions.
Change in Fair Value of Financial Instruments
A gain from a change in the fair value of financial instruments of $38 million was recorded for the Successor year ended December 31, 2022 versus a $65 million loss for the Successor six months ended December 31, 2021. There was no gain or loss for the Predecessor six months ended June 30, 2021. We are required to remeasure the financial instruments at the end of each reporting period and reflect a gain or loss for the change in fair value of the financial instruments in the period the change occurred. The change in the fair value was due to changes in the underlying assumptions, including the increase in the risk free interest rate and decrease in the closing stock price for the period ended December 31, 2022.
Change in Tax Receivable Agreement
A gain from the change in the fair value of the tax receivable agreement of $41 million was recorded for the Successor year ended December 31, 2022 as compared to a gain of $37 million for the combined Successor six months ended December 31, 2021. The remeasurement gain is due to an increase in the discount rate and the Company's assumptions related to the timing of the utilization of the tax attributes during the term of the TRA, which we are required to remeasure at the end of each reporting period. We did not have a tax receivable agreement in the Predecessor period prior to the Business Combination.
Interest Expense
Interest expense was $122 million for the Successor year ended December 31, 2022, a decrease of $58 million, or 32.2%, as compared to the combined Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively. The decrease was primarily due to the redemption of our Unsecured Senior Notes and the partial paydown of the Term Loan in conjunction with the Business Combination completed during the third quarter of 2021. See Note 8 “Debt” for further information.
Loss before Income Tax Expense (Benefit)
Loss before income tax expense was $41 million for the Successor year ended December 31, 2022. Loss before income tax expense was $23 million and $30 million for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively. The decrease in Loss before income tax expense of $12 million over the combined Successor and Predecessor prior year was due to the drivers identified above and the fair value remeasurement associated with certain liabilities.
34
Income Tax Expense (Benefit)
Income tax expense was $31 million for the Successor year ended December 31, 2022. Income tax expense was $25 million for the Successor six months ended December 31, 2021 and an income tax benefit of $5 million for the Predecessor six months ended June 30, 2021, respectively. The effective tax rate of (76%) for the Successor year ended December 31, 2022 was primarily due to foreign rate differences, valuation allowances, separate entity corporate taxes, changes in statutory reserves, and the noncontrolling interest associated with the portion of Alight Holdings income not allocable to the Company. The effective tax rate of (109%) for the Successor six months ended December 31, 2021 is lower than the 21% U.S. statutory corporate income tax rate primarily due to the Company's organizational structure and the noncontrolling interest associated with the portion of the Predecessor's income not allocable to the Company. The effective tax rate of 17% for the Predecessor six months ended June 30, 2021 was primarily driven by foreign and state income taxes payable in jurisdictions where the Company had operations that generated operating income. See Note 7 “Income Taxes” for further information.
Non-GAAP Financial Measures
The presentation of non-GAAP financial measures is used to enhance our management and stakeholders understanding of certain aspects of our financial performance. This discussion is not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with U.S. GAAP. Management also uses supplemental non-GAAP financial measures to manage and evaluate the business, make planning decisions, allocate resources and as performance measures for Company-wide bonus plans. These key financial measures provide an additional view of our operational performance over the long-term and provide useful information that we use in order to maintain and grow our business.
The measures referred to as “adjusted”, have limitations as analytical tools, and such measures should not be considered either in isolation or as a substitute for net income or other methods of analyzing our results as reported under U.S. GAAP. Some of the limitations are:
35
Adjusted Net Income and Adjusted Diluted Earnings Per Share
Adjusted Net Income, which is defined as net income (loss) attributable to Alight, Inc. adjusted for intangible amortization and the impact of certain non-cash items that we do not consider in the evaluation of ongoing operational performance, is a non-GAAP financial measure used solely for the purpose of calculating Adjusted Diluted Earnings Per Share.
Adjusted Diluted Earnings Per Share is defined as Adjusted Net Income divided by the adjusted weighted-average number of shares of common stock, diluted. The adjusted weighted shares calculation assumes the full exchange of the noncontrolling interest units, the total amount of warrants that were exercised, and non-vested time-based restricted units that were determined to be antidilutive and therefore excluded from the U.S. GAAP diluted earnings per share. Adjusted Diluted Earnings Per Share, including the adjusted weighted-average number of shares, is used by us and our investors to evaluate our core operating performance and to benchmark our operating performance against our competitors.
A reconciliation of Adjusted Net Income to Net Loss Attributable to Alight, Inc. and the computation of Adjusted Diluted Earnings Per Share is as follows:
|
|
Successor |
|
|||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
||||
|
|
December 31, |
|
|
December 31, |
|
||||
(in millions, except share and per share amounts) |
|
2022 |
|
|
2021 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
||
Net (Loss) Income Attributable to Alight, Inc. |
|
$ |
|
(62 |
) |
|
$ |
|
(35 |
) |
Conversion of noncontrolling interest |
|
|
|
(10 |
) |
|
|
|
(13 |
) |
Intangible amortization |
|
|
|
316 |
|
|
|
|
153 |
|
Share-based compensation |
|
|
|
181 |
|
|
|
|
67 |
|
Transaction and integration expenses |
|
|
|
19 |
|
|
|
|
13 |
|
Restructuring |
|
|
|
63 |
|
|
|
|
5 |
|
(Gain) Loss from change in fair value of financial instruments |
|
|
|
(38 |
) |
|
|
|
65 |
|
(Gain) Loss from change in fair value of tax receivable agreement |
|
|
|
(41 |
) |
|
|
|
(37 |
) |
Other |
|
|
|
(1 |
) |
|
|
|
12 |
|
Tax effect of adjustments (1) |
|
|
|
(121 |
) |
|
|
|
(62 |
) |
Adjusted Net Income |
|
$ |
|
306 |
|
|
$ |
|
168 |
|
|
|
|
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
|
|
|
||
Weighted average shares outstanding - basic |
|
|
|
458,558,192 |
|
|
|
|
439,800,624 |
|
Dilutive effect of the exchange of noncontrolling interest units |
|
|
|
— |
|
|
|
|
— |
|
Dilutive effect of RSUs |
|
|
|
— |
|
|
|
|
— |
|
Weighted average shares outstanding - diluted |
|
|
|
458,558,192 |
|
|
|
|
439,800,624 |
|
Exchange of noncontrolling interest units(2) |
|
|
|
74,665,373 |
|
|
|
|
77,459,687 |
|
Impact of warrants exercised(3) |
|
|
|
— |
|
|
|
|
14,490,641 |
|
Impact of unvested RSUs(4) |
|
|
|
7,624,817 |
|
|
|
|
7,007,072 |
|
Adjusted shares of Class A Common Stock outstanding - diluted(5) |
|
|
|
540,848,382 |
|
|
|
|
538,758,024 |
|
|
|
|
|
|
|
|
|
|
||
Basic (Net Loss) Earnings Per Share |
|
$ |
|
(0.14 |
) |
|
$ |
|
(0.08 |
) |
Adjusted Diluted Earnings Per Share(5) (6) |
|
$ |
|
0.57 |
|
|
$ |
|
0.31 |
|
36
Adjusted EBITDA and Adjusted EBITDA less Capital Expenditures
Adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation and intangible amortization adjusted for the impact of certain non-cash and other items that we do not consider in the evaluation of ongoing operational performance, is a non-GAAP financial measure used by management and our stakeholders to provide useful supplemental information that enables a better comparison of our performance across periods. Both Adjusted EBITDA and Adjusted EBITDA less Capital Expenditures are non-GAAP measures that are used by management and stakeholders to evaluate our core operating performance.
Adjusted EBITDA and Adjusted EBITDA less Capital Expenditures should not be considered as discretionary cash available to us to reinvest in the growth of our business or to distribute to stockholders or as a measure of cash that will be available to us to meet our obligations.
A reconciliation of Adjusted EBITDA and Adjusted EBITDA less Capital Expenditures to Net Loss is as follows:
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
(in millions) |
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Net Loss |
|
$ |
|
(72 |
) |
|
$ |
|
(48 |
) |
|
|
$ |
|
(25 |
) |
$ |
|
(103 |
) |
Interest expense |
|
|
|
122 |
|
|
|
|
57 |
|
|
|
|
|
123 |
|
|
|
234 |
|
Income tax expense (benefit) |
|
|
|
31 |
|
|
|
|
25 |
|
|
|
|
|
(5 |
) |
|
|
9 |
|
Depreciation |
|
|
|
79 |
|
|
|
|
31 |
|
|
|
|
|
49 |
|
|
|
91 |
|
Intangible amortization |
|
|
|
316 |
|
|
|
|
153 |
|
|
|
|
|
100 |
|
|
|
200 |
|
EBITDA |
|
|
|
476 |
|
|
|
|
218 |
|
|
|
|
|
242 |
|
|
|
431 |
|
Share-based compensation |
|
|
|
181 |
|
|
|
|
67 |
|
|
|
|
|
5 |
|
|
|
5 |
|
Transaction and integration expenses (1) |
|
|
|
19 |
|
|
|
|
13 |
|
|
|
|
|
— |
|
|
|
— |
|
Non-recurring professional expenses(2) |
|
|
|
— |
|
|
|
|
19 |
|
|
|
|
|
18 |
|
|
|
— |
|
Transformation initiatives(3) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
8 |
|
Restructuring |
|
|
|
63 |
|
|
|
|
5 |
|
|
|
|
|
9 |
|
|
|
77 |
|
(Gain) Loss from change in fair value of financial instruments |
|
|
|
(38 |
) |
|
|
|
65 |
|
|
|
|
|
— |
|
|
|
— |
|
(Gain) Loss from change in fair value of tax receivable agreement |
|
|
|
(41 |
) |
|
|
|
(37 |
) |
|
|
|
|
— |
|
|
|
— |
|
Other(4) |
|
|
|
(1 |
) |
|
|
|
(7 |
) |
|
|
|
|
4 |
|
|
|
43 |
|
Adjusted EBITDA |
|
$ |
|
659 |
|
|
$ |
|
343 |
|
|
|
$ |
|
278 |
|
|
|
564 |
|
Capital expenditures |
|
|
|
(148 |
) |
|
|
|
(59 |
) |
|
|
|
|
(55 |
) |
|
|
(90 |
) |
Adjusted EBITDA less Capital Expenditures |
|
$ |
|
511 |
|
|
$ |
|
284 |
|
|
|
$ |
|
223 |
|
$ |
|
474 |
|
37
Segment Revenue and Adjusted EBITDA
Employer Solutions Segment Results
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Employer Solutions Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring revenue |
|
$ |
|
2,467 |
|
|
$ |
|
1,213 |
|
|
|
$ |
|
1,049 |
|
$ |
|
2,051 |
|
Project revenue |
|
|
|
251 |
|
|
|
|
134 |
|
|
|
|
|
107 |
|
|
|
237 |
|
Total Employer Solutions Revenue |
|
$ |
|
2,718 |
|
|
$ |
|
1,347 |
|
|
|
$ |
|
1,156 |
|
$ |
|
2,288 |
|
Employer Solutions Gross Profit |
|
$ |
|
911 |
|
|
$ |
|
489 |
|
|
|
$ |
|
392 |
|
$ |
|
725 |
|
Employer Solutions Gross Profit Margin |
|
|
|
34 |
% |
|
|
|
36 |
% |
|
|
|
|
34 |
% |
|
|
32 |
% |
Employer Solutions Adjusted EBITDA(1) |
|
$ |
|
659 |
|
|
$ |
|
344 |
|
|
|
$ |
|
274 |
|
$ |
|
533 |
|
Employer Solutions Adjusted EBITDA Margin |
|
|
|
24 |
% |
|
|
|
26 |
% |
|
|
|
|
24 |
% |
|
|
23 |
% |
Employer Solutions Revenue
Employer Solutions total revenues were $2,718 million for the Successor year ended December 31, 2022. Employer Solutions total revenues were $1,347 million and $1,156 million for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively, or $2,503 million for the combined year ended December 31, 2021. The increase of $215 million, or 9%, over the combined Successor and Predecessor prior year was primarily attributable to an increase of recurring revenues of $205 million, or 9%, as a result of acquisitions, increased volumes and increases in Net Commercial Activity. We experienced annual revenue retention rates of 98% and 97% in 2022 and 2021, respectively.
Employer Solutions Gross Profit
Employer Solutions Gross Profit was $911 million for the Successor year ended December 31, 2022. Employer Solutions Gross Profit was $489 million and $392 million for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, respectively, or $881 million for the combined year ended December 31, 2021. The increase of $30 million, or 3%, over the combined Successor and Predecessor prior year was primarily due to revenue growth as discussed above and lower expenses related to productivity initiatives.
Employer Solutions Adjusted EBITDA
Employer Solutions Adjusted EBITDA was $659 million for the Successor year ended December 31, 2022. Employer Solutions Adjusted EBITDA was $344 million and $274 million for the Predecessor six months ended December 31, 2021 and Predecessor six months ended June 30, 2021, respectively, or $618 million for the combined year ended December 31, 2021. The increase of $41 million, or 7%, over the combined Successor and Predecessor prior periods was primarily due to revenue growth as discussed above, partially offset by increases in costs associated with growth of current revenues, including investments in our commercial functions and technology.
38
Professional Services Segment Results
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Professional Services Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring revenue |
|
$ |
|
128 |
|
|
$ |
|
65 |
|
|
|
$ |
|
60 |
|
$ |
|
108 |
|
Project revenue |
|
|
|
243 |
|
|
|
|
121 |
|
|
|
|
|
124 |
|
|
|
260 |
|
Total Professional Services Revenue |
|
$ |
|
371 |
|
|
$ |
|
186 |
|
|
|
$ |
|
184 |
|
$ |
|
368 |
|
Professional Services Gross Profit |
|
$ |
|
86 |
|
|
$ |
|
44 |
|
|
|
$ |
|
46 |
|
$ |
|
106 |
|
Professional Services Gross Profit Margin |
|
|
|
23 |
% |
|
|
|
24 |
% |
|
|
|
|
25 |
% |
|
|
29 |
% |
Professional Services Adjusted EBITDA(1) |
|
$ |
|
1 |
|
|
$ |
|
1 |
|
|
|
$ |
|
7 |
|
$ |
|
31 |
|
Professional Services Adjusted EBITDA Margin |
|
|
|
0 |
% |
|
|
|
1 |
% |
|
|
|
|
4 |
% |
|
|
8 |
% |
Professional Services Segment Results of Operations for the Year Ended December 31, 2022 (Successor) Compared to the Combined Year Ended December 31, 2021 (Successor and Predecessor)
Professional Services Revenue
Professional Services total revenues were $371 million for the Successor year ended December 31, 2022. Professional Services total revenues were $186 million and $184 million for the Successor six months ended December 31, 2021 and Predecessor six months ended June 30, 2021, respectively, or $370 million for the combined year ended December 31, 2021. The increase of $1 million over the combined Successor and Predecessor prior periods was driven by an increase in recurring revenue, partially offset by a decrease in project revenue.
Professional Services Gross Profit
Professional Services Gross Profit was $86 million for the Successor year ended December 31, 2022. Professional Services Gross Profit was $44 million and $46 million for the Successor six months ended December 31, 2021 and Predecessor six months ended June 30, 2021, respectively, or $90 million for the combined year ended December 31, 2021. The decrease of $4 million over the combined Successor and Predecessor prior periods was primarily due to increases in costs associated with growth of current revenues, including investments in key resources, partially offset by revenue growth as discussed above.
Professional Services Adjusted EBITDA
Professional Services Adjusted EBITDA was $1 million for the Successor year ended December 31, 2022. Professional Services Adjusted EBITDA was $1 million and $7 million for the Successor six months ended December 31, 2021 and Predecessor six months ended June 30, 2021, respectively, or $8 million for the combined year ended December 31, 2021. The $7 million decrease over the combined Successor and Predecessor prior periods was primarily due to increases in costs associated with growth of current revenues, including investments in our commercial functions, partially offset by revenue growth as discussed above.
39
Hosted Business Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Hosted Business Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring revenue |
|
$ |
|
43 |
|
|
$ |
|
21 |
|
|
|
$ |
|
21 |
|
$ |
|
72 |
|
Total Hosted Business Revenue |
|
$ |
|
43 |
|
|
$ |
|
21 |
|
|
|
$ |
|
21 |
|
$ |
|
72 |
|
Hosted Business Gross Profit |
|
$ |
|
(1 |
) |
|
$ |
|
(1 |
) |
|
|
$ |
|
(3 |
) |
$ |
|
3 |
|
Hosted Business Gross Profit Margin |
|
|
|
-2 |
% |
|
|
|
-5 |
% |
|
|
|
|
-14 |
% |
|
|
4 |
% |
Hosted Business Adjusted EBITDA(1) |
|
$ |
|
(1 |
) |
|
$ |
|
(2 |
) |
|
|
$ |
|
(3 |
) |
$ |
|
— |
|
Hosted Business Adjusted EBITDA Margin |
|
|
|
-2 |
% |
|
|
|
-10 |
% |
|
|
|
|
-14 |
% |
|
|
0 |
% |
Hosted Business Segment Results of Operations for the Year Ended December 31, 2022 (Successor) Compared to the Combined Year Ended December 31, 2021 (Successor and Predecessor)
Hosted Business Revenue
Hosted Business revenues were $43 million for the Successor year ended December 31, 2022. Hosted Business total revenues were $21 million and $21 million for the Successor six months ended December 31, 2021 and Predecessor six months ended June 30, 2021, respectively, or $42 million for the combined year ended December 31, 2021. The increase of $1 million over the combined Successor and Predecessor prior period was due to increased contract volumes.
Hosted Business Gross Profit
Hosted Business Gross Profit was ($1) million for the Successor year ended December 31, 2022. Hosted Business Gross Profit was ($1) million and ($3) million for the Successor six months ended December 31, 2021 and Predecessor six months ended June 30, 2021, respectively, or ($4) million for the combined year ended December 31, 2021.
Hosted Business Adjusted EBITDA
Hosted Business Adjusted EBITDA was ($1) million for the Successor year ended December 31, 2022. Hosted Adjusted EBITDA was ($2) and ($3) million for the Successor six months ended December 31, 2021 and Predecessor six months ended June 30, 2021, respectively, or ($5) million for the combined year ended December 31, 2021. The decreased loss is due primarily to reduced costs associated with serving the remaining clients.
LIQUIDITY, FINANCIAL CONDITION, AND CAPITAL RESOURCES
Executive Summary
Our primary sources of liquidity include our existing cash and cash equivalents, cash flows from operations and availability of funds under our revolving credit facility. Our primary uses of liquidity are operating expenses, funding of our debt requirements and capital expenditures.
We believe that our available cash and cash equivalents, cash flows from operations and availability under our revolving credit facility will be sufficient to meet our liquidity needs, including principal and interest payments on debt obligations, capital expenditures, payments on our Tax Receivable Agreement and anticipated working capital requirements for the foreseeable future. We believe our liquidity position at December 31, 2022 remains strong. We will continue to closely monitor and proactively manage our liquidity position in light of changing economic conditions and the impact of a rising interest rate environment.
In August 2022, we established a repurchase program allowing for up to $100 million in authorized share repurchases. As of December 31, 2022, approximately $88 million remains available for share repurchases under our share repurchase program.
Cash on our balance sheet includes funds available for general corporate purposes. Funds held on behalf of clients in a fiduciary capacity are segregated and shown in Fiduciary assets on the Consolidated Balance Sheets as of December 31, 2022 and December 31,
40
2021, with a corresponding amount in Fiduciary liabilities. Fiduciary funds are not used for general corporate purposes and are not a source of liquidity for us.
The following table provides a summary of cash flows from operating, investing, and financing activities for the periods presented.
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||
|
|
Year Ended |
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
December 31, |
|
|
|
June 30, 2021 |
|
December 31, |
|
||||||||
(in millions) |
|
2022 |
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Cash provided by (used for) operating activities |
|
$ |
|
286 |
|
$ |
|
57 |
|
|
|
$ |
|
58 |
|
$ |
|
233 |
|
Cash used for investing activities |
|
|
|
(235 |
) |
|
|
(1,852 |
) |
|
|
|
|
(55 |
) |
|
|
(142 |
) |
Cash provided by (used for) financing activities |
|
|
|
54 |
|
|
|
2,400 |
|
|
|
|
|
(64 |
) |
|
|
463 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
|
2 |
|
|
|
11 |
|
|
|
|
|
— |
|
|
|
(3 |
) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
107 |
|
|
|
616 |
|
|
|
|
|
(61 |
) |
|
|
551 |
|
Cash, cash equivalents, and restricted cash at end of period |
|
$ |
|
1,759 |
|
$ |
|
1,652 |
|
|
|
$ |
|
1,475 |
|
$ |
|
1,536 |
|
Operating Activities
Net cash provided from operating activities was $286 million for the Successor year ended December 31, 2022. The increase of $171 million from $115 million for the combined Successor and Predecessor year ended December 31, 2021 was primarily due to a decrease in our net working capital requirements as compared to the prior year where we incurred significant on-going costs related to the Business Combination.
Investing Activities
Cash used for investing activities for the Successor year ended December 31, 2022 was $235 million. The primary drivers of cash used for investing activities were $148 million used for capital expenditures and $87 million for an acquisition during the fourth quarter of 2022.
Cash used for investing activities for the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021 was $1,852 million and $55 million, respectively. The primary drivers of the cash used for investing activities for the Successor six months ended December 31, 2021 was $1,793 million related to the Business Combination and $59 million of capital expenditures. For the Predecessor six months ended June 30, 2021, $55 million was used for capital expenditures.
Financing Activities
Cash provided by financing activities for the Successor year ended December 31, 2022 was $54 million. The primary drivers of cash provided by financing activities were due to a net increase of $229 million in fiduciary liabilities, $85 million of deferred and contingent consideration payments and $37 million of repayments to banks net of borrowings. The increase in fiduciary cash is primarily due to timing of client funding and subsequent disbursement of payments.
Cash provided by financing activities for the Successor six months ended December 31, 2021 was $2,400 million. The primary drivers of the cash provided by financing activities for the Successor six months ended December 31, 2021 were proceeds related to FTAC investors in connection with the Business Combination of $1,813 million and bank borrowings of $627 million, partially offset by FTAC share redemptions of $142 million, loan repayments of $120 million, finance lease payments of $14 million and financing fees related to new debt of $8 million. Net cash flows from financing activities also changed due to a net increase in the cash flow from client funds obligations of $266 million, primarily due to timing of client funding and subsequent disbursement of payments.
Cash used for financing activities for the Predecessor six months ended June 30, 2021 was $64 million. The primary drivers of the cash used for financing activities were loan repayments of $124 million, finance lease payments of $17 million, partially offset by bank borrowings of $110 million. Net cash flows from financing activities also changed due to a net decrease in the cash flow from client funds obligations of $15 million, primarily due to timing of client funding and subsequent disbursement of payments.
Cash, Cash Equivalents and Fiduciary Assets
At December 31, 2022, our cash and cash equivalents were $250 million, a decrease of $122 million from December 31, 2021. Of the total balances of cash and cash equivalents as of December 31, 2022 and December 31, 2021, none of the balances were restricted as to its use.
41
Some of our client agreements require us to hold funds on behalf of clients to pay obligations on their behalf. The levels of Fiduciary assets and liabilities can fluctuate significantly, depending on when we collect the amounts from clients and make payments on their behalf. Such funds are not available to service our debt or for other corporate purposes. There is typically a short period of time between when the Company receives funds and when it pays obligations on behalf of clients. We are entitled to retain investment income earned on fiduciary funds, when investment strategies are deployed, in accordance with industry custom and practice, which has historically been immaterial. In our Consolidated Balance Sheets, the amount we report for Fiduciary assets and Fiduciary liabilities are equal. Our Fiduciary assets included cash of $1,509 million and $1,280 million at December 31, 2022 and December 31, 2021, respectively.
Other Liquidity Matters
Our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties. For further information, see the “Risk Factors” section within Item 1A of this Annual Report on Form 10-K.
We do not have any material business, operations or assets in Russia, Belarus or Ukraine and we have not been materially impacted by the actions of the Russian government. Our total revenues from these three countries are de minimis for all periods presented.
Tax Receivable Agreement
In connection with the Business Combination, we entered into the TRA with certain of our pre-Business Combination owners that provides for the payment by Alight to such owners of 85% of the benefits that Alight is deemed to realize as a result of the Company’s share of existing tax basis acquired in the Business Combination and other tax benefits related to entering into the Tax Receivable Agreement.
Actual tax benefits realized by Alight may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including the use of an assumed weighted-average state and local income tax rate to calculate tax benefits. While the amount of existing tax basis, the anticipated tax basis adjustments and the actual amount and utilization of tax attributes, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, we expect that the payments that Alight may make under the TRA will be substantial. As of December 31, 2022, we expect to make payments of $7 million and $50 million in 2023 and 2024, respectively.
Contractual Obligations and Commitments
The Company has various obligations and commitments outstanding as of December 31, 2022 including debt of $2,820 million, operating leases of $151 million, finance leases of $44 million and purchase obligations of $69 million. Over the twelve months ended December 31, 2023, we expect to pay $31 million, $37 million, $21 million and $26 million for our debt, operating leases, finance leases and purchase obligations, respectively. For further information of each these obligations, refer to the Consolidated Financial Statements within Item 8 of this Annual Report on Form 10-K, Note 8 “Debt”, Note 19 “Lease Obligations” and Note 20 “Contractual Obligations”.
During 2018, the Company executed an agreement to form a strategic partnership with Wipro, a leading global information technology, consulting and business process services company, through 2028. As of December 31, 2022, the non-cancellable services obligation totaled $965 million, with $147 million expected to be paid over the twelve months ended December 31, 2023. We may terminate our arrangement with Wipro with cause or for our convenience. In the case of a termination for convenience, we would be required to pay a termination fee. If we had terminated the Wipro arrangement on December 31, 2022, we estimate that the termination charges would have been approximately $316 million.
Other Liquidity Matters
Our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties. For further information, see the “Risk Factors” section within Item 1A of this Annual Report on Form 10-K.
Critical Accounting Estimates
These consolidated financial statements conform to U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. The areas that we believe include critical accounting policies are revenue recognition, goodwill and accounting for the Tax Receivable Agreement. The critical accounting policies discussed below involve making difficult, subjective or complex accounting estimates that could have a material effect on our
42
financial condition and results of operations. Different estimates that we could have used, or changes in estimates that are reasonably likely to occur, may have a material effect on our results of operations and financial condition.
Revenue Recognition
Revenues are recognized when control of the promised services is transferred to the customer in the amount that best reflects the consideration to which the Company expects to be entitled in exchange for those services. Substantially all of the Company’s revenue is recognized over time as the customer simultaneously receives and consumes the benefits of our services. On occasion, we may be entitled to a fee based on achieving certain performance criteria or contract milestones. Any taxes assessed on revenues relating to services provided to our clients are recorded on a net basis.
The Company capitalizes incremental costs to obtain and fulfill contracts with a customer that are expected to be recovered. Assets recognized for the costs to fulfill a contract are amortized on a systematic basis over the expected life of the underlying customer relationships.
For further discussion, see Note 3 “Revenue from Contracts with Customers” within the Consolidated Financial Statements.
Tax Receivable Agreement
The Company accounts for the TRA as a liability at fair value and is subject to remeasurement at each balance sheet date. Any change in fair value is recognized within the Consolidated Statements of Comprehensive Income (Loss).
Actual tax benefits realized by Alight may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including the use of an assumed weighted-average state and local income tax rate to calculate tax benefits. While the amount of existing tax basis, the anticipated tax basis adjustments and the actual amount and utilization of tax attributes, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, we expect that the payments that Alight may make under the TRA will be substantial.
The Company’s TRA liability is measured at fair value on a recurring basis using significant unobservable inputs. The $575 million TRA liability balance at December 31, 2022 assumes: (i) a constant blended U.S. federal, state and local income tax rate of 26.4%, (ii) no material changes in tax law, (iii) the ability to utilize tax attributes based on current alternative tax forecasts, and (iv) future payments under the TRA are made when due under the TRA. The amount of the expected future payments under the TRA has been discounted to its present value using a discount rate of 9.18%, which was determined based on benchmark rates of a similar duration. A hypothetical increase or decrease of 75 bps in the discount rate assumptions used for fiscal year 2022, would result in a change of approximately $22 million.
Goodwill
Goodwill for each reporting unit is tested for impairment annually during the fourth quarter, or more frequently if there are indicators that a reporting unit may be impaired. Accounting Standard Codification 350, Intangibles and Other ("ASC 350") states that an optional qualitative impairment assessment can be performed to determine whether an impairment is more likely than not by considering various factors such as macroeconomic and industry trends, reporting unit performance and overall business changes. If inconclusive evidence results from the qualitative impairment test, a quantitative assessment is performed where the Company determines the fair value of the reporting units by using a combination of the present value of expected future cash flows and a market approach based on earnings multiple data from peer companies. If an impairment is identified, an impairment is recorded by the amount that the carrying value exceeds the fair value for each reporting unit. While the future cash flows are consistent with those that are used in our internal planning process inclusive of long-term growth assumptions, estimating cash flows requires significant judgment. Future changes to our projected cash flows can vary from the cash flows eventually realized, which may have a material impact on the outcomes of future goodwill impairment tests. The Company uses a weighted average cost of capital that represents the blended average required rate of return for equity and debt capital based on observed market return data and company specific risk factors.
During the fourth quarter of 2022, the Company performed a quantitative assessment in accordance with ASC 350. We evaluated the potential for goodwill impairment by considering macroeconomic conditions, industry and market conditions, cost factors, both current and future expected financial performance, and relevant entity-specific events for each of the reporting units. We also considered our overall market performance discretely as well as in relation to our peers. We utilized a discount rate of 11.0% and a long-term growth rate of 3.5% consistently across all reporting units in the determination of the reporting unit fair value. Other significant assumptions utilized included the Company’s projections of expected future revenues and EBITDA margin. The Company determined the fair value for each reporting unit exceeded the carrying value as of October 1, 2022, and therefore, goodwill was not impaired. Based on the results of the Company’s quantitative assessment, the fair value of the Health Solutions, Wealth Solutions, Cloud Services and Professional Services reporting units exceeded their carrying values by less than 1%, 6%, 1%, and 29%, respectively. A hypothetical 25-basis point increase in the discount rate or a hypothetical 50-basis point decrease in the long-term growth rate could have resulted in goodwill impairment in the Company’s Health Solutions reporting unit of $174 million and the
43
Cloud Services reporting unit of $36 million. The Company’s Wealth Solutions and Professional services reporting units fair value continued to exceed carrying value.
Subsequent to our annual impairment test and until the end of the reporting period, we evaluated changes in macroeconomic conditions, industry and market conditions and determined that these factors were broadly consistent with those that existed as of our annual impairment test date. As such, we determined that no additional goodwill impairment testing was warranted, and goodwill remained recoverable as of December 31, 2022. At December 31, 2022, our reporting units has the following amounts of goodwill: Health Solutions, Wealth Solutions, Cloud Services and Professional Services had $3,075 million, $127 million, $404 million and $73 million, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to potential fluctuations in earnings, cash flows, and the fair values of certain of our assets and liabilities due to changes in interest rates. To manage the risk from this exposure, we enter into a variety of hedging arrangements. We do not enter into derivatives or financial instruments for trading or speculative purposes. We are not subject to significant foreign exchange rate risk.
A discussion of our accounting policies for hedging activities is outlined in Note 2 “Accounting Policies and Practices” within the Consolidated Financial Statements.
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on our borrowings, which carry variable interest rates. Our term loans and revolving credit facility borrowings bear interest at a variable rate, so we are exposed to market risks relating to changes in interest rates. Although we use derivative financial instruments to some extent to manage a portion of our exposure to interest rate risks, we do not attempt to manage our entire expected exposure. These instruments expose us to credit risk in the event that our counterparties default on their obligations. More information regarding the terms and market value of our derivative instruments can be found in Note 13 "Derivative Financial Instruments" and in Note 16 "Fair Value Measurement" within the Consolidated Financial Statements.
Our term loan agreements include an interest rate floor of 50 basis points (“bps”) plus a margin based on defined ratios. During the year ended December 31, 2022, applicable interest rates on these loans moved from below the floor in the early part of the year, to above the floor during the second quarter due to the rising interest rate environment. We also utilized interest rate swap agreements (designated as cash flow hedges) to fix portions of the floating interest rates through December 2026. A hypothetical increase of 25 bps in our term loans, net of hedging activity, would have resulted in a change to annual interest expense of $2 million in fiscal year 2022. For more information regarding our term loans and their applicable variable rates, see Note 8 "Debt" within the Consolidated Financial Statements.
44
Item 8. Financial Statements and Supplementary Data.
Alight, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: |
F-2 |
|
|
Consolidated Balance Sheets as of December 31, 2022 (Successor) and December 31, 2021 (Successor) |
F-4 |
|
|
F-5 |
|
|
|
F-6 |
|
|
|
F-7 |
|
|
|
F-8 |
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Alight, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Alight, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for the year ended December 31, 2022, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for the period from July 1, 2021 through December 31, 2021 (Successor), the related consolidated statements of comprehensive income (loss), members’ equity and cash flows for the period from January 1, 2021 through June 30, 2021 (Predecessor) and the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the year ended December 31, 2022, the period from July 1, 2021 through December 31, 2021 (Successor), the period from January 1, 2021 through June 30, 2021 (Predecessor) and the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2023 expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment
|
|
Description of the Matter |
At December 31, 2022, the Company’s goodwill for their Health Solutions, Wealth Solutions, and Cloud Services reporting units was $3,075 million, $127 million, and $404 million, respectively, as disclosed in Note 6 to the consolidated financial statements. Goodwill is tested for impairment at the reporting unit level at least annually or when impairment indicators are present. The Company determined the fair value of each reporting unit exceeded its carrying value. Auditing management’s goodwill impairment assessment was complex and highly judgmental due to the significant estimation required in determining the fair value of the Company’s Health Solutions, Wealth Solutions, and Cloud Services reporting units. The more subjective assumptions used in the analysis were projections of future revenue growth and earnings before interest, taxes, depreciation and intangible amortization margin, the long term growth rate, and the discount rate, which are all affected by expectations about future market or economic conditions.
|
F-2
How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management's review of the significant assumptions discussed above. We also tested management's controls over the completeness and accuracy of the underlying data used in the valuation. To test the estimated fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We involved our valuation specialists to review the Company’s model, methods, and the more sensitive assumptions utilized such as the discount rate. We compared the significant assumptions used by management to current industry, market and economic trends. In addition, we assessed the historical accuracy of management’s estimates, performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions, and reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company. We also tested the completeness and accuracy of the underlying data used by management in its analysis.
|
Measurement of the Tax Receivable Agreement Liability
|
|
Description of the Matter |
As discussed in Note 15 of the consolidated financial statements, the Company has a Tax Receivable Agreement (“TRA”) with certain current and historical holders of LLC interests, which is a contractual commitment to distribute 85% of any tax benefits (“TRA Payment”), realized or deemed to be realized by the Company to the parties to the TRA. The TRA payments are contingent upon, among other things, the generation of future taxable income over the term of the TRA and future changes in tax laws. At December 31, 2022, the Company’s liability due to the holders of LLC interests under the TRA (“TRA liability”), was $575 million. Auditing management’s accounting for the TRA liability is especially challenging and judgmental due to the complex model used to calculate the TRA liability. The liability recorded is based on several inputs, including the discount rate applied to the TRA payments. Significant changes in the discount rate could have a material effect on the Company’s results of operations.
|
How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s TRA liability, including testing management's controls over the completeness and accuracy of the underlying data used in the valuation and the controls over management's review of the significant assumptions discussed above.
Our audit procedures included among others, testing the measurement of the TRA liability by evaluating whether the calculation of the TRA liability was in accordance with the terms set out in the TRA and recalculating the TRA liability. With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by validating the third-party inputs and testing the valuation methodology employed.
|
/s/
We have served as the Company’s auditor since 2016.
March 1, 2023
F-3
Alight, Inc.
Consolidated Balance Sheets
|
|
December 31, |
|
|
December 31, |
|
||||
|
|
2022 |
|
|
2021 |
|
||||
(in millions, except share and per share amounts) |
|
|
|
|
|
|
|
|||
Assets |
|
|
|
|
|
|
|
|
||
Current Assets |
|
|
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
||
Receivables, net |
|
|
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
|
|
||
Total Current Assets Before Fiduciary Assets |
|
|
|
|
|
|
|
|
||
Fiduciary assets |
|
|
|
|
|
|
|
|
||
Total Current Assets |
|
|
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
|
|
||
Fixed assets, net |
|
|
|
|
|
|
|
|
||
Deferred tax assets, net |
|
|
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
|
|
||
Total Assets |
|
$ |
|
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
|
||
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
|
|
|
||
Current Liabilities |
|
|
|
|
|
|
|
|
||
Accounts payable and accrued liabilities |
|
$ |
|
|
|
$ |
|
|
||
Current portion of long-term debt, net |
|
|
|
|
|
|
|
|
||
Other current liabilities |
|
|
|
|
|
|
|
|
||
Total Current Liabilities Before Fiduciary Liabilities |
|
|
|
|
|
|
|
|
||
Fiduciary liabilities |
|
|
|
|
|
|
|
|
||
Total Current Liabilities |
|
|
|
|
|
|
|
|
||
Deferred tax liabilities |
|
|
|
|
|
|
|
|
||
Long-term debt, net |
|
|
|
|
|
|
|
|
||
Long-term tax receivable agreement |
|
|
|
|
|
|
|
|
||
Financial instruments |
|
|
|
|
|
|
|
|
||
Other liabilities |
|
|
|
|
|
|
|
|
||
Total Liabilities |
|
$ |
|
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
|||
Stockholders' Equity |
|
|
|
|
|
|
|
|
||
Preferred stock at $ |
|
$ |
|
— |
|
|
$ |
|
— |
|
Class A Common Stock; $ |
|
|
|
— |
|
|
|
|
— |
|
Class B Common Stock; $ |
|
|
|
— |
|
|
|
|
— |
|
Class V Common Stock; $ |
|
|
|
— |
|
|
|
|
— |
|
Class Z Common Stock; $ |
|
|
|
— |
|
|
|
|
— |
|
Treasury stock, at cost ( |
|
|
|
( |
) |
|
|
|
— |
|
Additional paid-in-capital |
|
|
|
|
|
|
|
|
||
Retained deficit |
|
|
|
( |
) |
|
|
|
( |
) |
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
||
Total Alight, Inc. Equity |
|
$ |
|
|
|
$ |
|
|
||
Noncontrolling interest |
|
|
|
|
|
|
|
|
||
Total Stockholders' Equity |
|
$ |
|
|
|
$ |
|
|
||
Total Liabilities and Stockholders' Equity |
|
$ |
|
|
|
$ |
|
|
||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-4
Alight, Inc.
Consolidated Statements of Comprehensive Income (Loss)
|
Successor |
|
|
|
Predecessor |
|
||||||||||||
|
Year Ended |
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
December 31, |
|
December 31, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
(in millions, except per share amounts) |
2022 |
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Revenue |
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
Cost of services, exclusive of depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and intangible amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating (Loss) Income |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Other (Income) Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
(Gain) Loss from change in fair value of financial instruments |
|
|
( |
) |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
(Gain) Loss from change in fair value of tax receivable agreement |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
— |
|
|
|
— |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other (income) expense, net |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Total other (income) expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss Before Income Tax Expense (Benefit) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
( |
) |
Income tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Net Loss |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
( |
) |
Net loss attributable to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
— |
|
|
|
— |
|
Net (Loss) Income Attributable to Alight, Inc. |
$ |
|
( |
) |
$ |
|
( |
) |
|
|
$ |
|
( |
) |
$ |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic (net loss) earnings per share |
$ |
|
( |
) |
$ |
|
( |
) |
|
|
|
|
|
|
|
|
||
Diluted (net loss) earnings per share |
$ |
|
( |
) |
$ |
|
( |
) |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net Loss |
$ |
|
( |
) |
$ |
|
( |
) |
|
|
$ |
|
( |
) |
$ |
|
( |
) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Change in fair value of derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Foreign currency translation adjustments |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
||
Total other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Comprehensive (Loss) Income Before Noncontrolling Interests |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
||
Comprehensive (loss) income attributable to noncontrolling interests |
|
|
|
|
|
( |
) |
|
|
|
|
— |
|
|
|
— |
|
|
Comprehensive (Loss) Income Attributable to Alight, Inc. |
$ |
|
|
$ |
|
( |
) |
|
|
$ |
|
|
$ |
|
( |
) |
||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-5
Alight, Inc.
Consolidated Statements of Stockholders’ Equity
|
|
Successor |
|
|||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
Total |
|
||||||||||||||||
|
|
Common |
|
|
Treasury |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Alight, Inc. |
|
|
Noncontrolling |
|
|
Stockholders' |
|
||||||||||||||||
(in millions) |
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Deficit |
|
|
Income |
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
||||||||||||||||
Balance at July 1, 2021 |
|
$ |
|
— |
|
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
||||
Net loss |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Other comprehensive income, net |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrant redemption |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Distribution of equity |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
Share-based compensation expense |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|||
Shares vested, net of shares withheld in lieu of taxes |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
Balance at December 31, 2021 |
|
$ |
|
— |
|
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|||||
Net loss |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Other comprehensive income, net |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Distribution of equity |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
Conversion of noncontrolling interest |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
( |
) |
||||
Share-based compensation expense |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|||
Shares vested, net of shares withheld in lieu of taxes |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
Share repurchases |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
Balance at December 31, 2022 |
|
$ |
|
— |
|
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|||||
Consolidated Statements of Members’ Equity
|
|
Predecessor |
|
||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|||||||||
|
|
Members' Equity |
|
|
Other |
|
|
|
|
|
|||||||||||||||||||||||||||
|
|
Class A Units |
|
|
Class A-1 Units |
|
|
Class B Units |
|
|
Comprehensive |
|
|
|
|
|
|||||||||||||||||||||
(in millions, except unit amounts) |
|
Units |
|
|
Amount |
|
|
Units |
|
|
Amount |
|
|
Units |
|
|
Amount |
|
|
Income (Loss) |
|
|
Total |
|
|||||||||||||
Balance at December 31, 2019 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||||||
Comprehensive income (loss), net of tax |
|
|
— |
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Distribution of members' equity |
|
|
— |
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
Restricted share units vested, net of units withheld in lieu of taxes |
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
||
Unit repurchases |
|
|
— |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
Share-based compensation expense |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|||
Balance at December 31, 2020 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||||||
Comprehensive loss, net of tax |
|
|
— |
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Restricted share units vested, net of units withheld in lieu of taxes |
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
( |
) |
||
Unit repurchases |
|
|
— |
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
( |
) |
Share-based compensation expense |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|||
Balance at June 30, 2021 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-6
Alight, Inc.
Consolidated Statements of Cash Flows
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||
|
|
Year Ended |
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
December 30, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
(in millions) |
|
2022 |
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
|
( |
) |
$ |
|
( |
) |
|
|
$ |
|
( |
) |
$ |
|
( |
) |
Adjustments to reconcile net loss to net cash provided by (used for) operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Intangible amortization expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Noncash lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financing fee and premium amortization |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
(Gain) loss from change in fair value of financial instruments |
|
|
|
( |
) |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
(Gain) loss from change in fair value of tax receivable agreement |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
— |
|
|
|
— |
|
Release of unrecognized tax provision |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
||
Deferred tax expense (benefit) |
|
|
|
|
|
|
— |
|
|
|
|
|
( |
) |
|
|
— |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Receivables |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Accounts payable and accrued liabilities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Other assets and liabilities |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
( |
) |
Cash provided by (used for) operating activities |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Acquisition of businesses, net of cash acquired |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
— |
|
|
|
( |
) |
Capital expenditures |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
( |
) |
Cash used for investing activities |
|
$ |
|
( |
) |
$ |
|
( |
) |
|
|
$ |
|
( |
) |
$ |
|
( |
) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net increase (decrease) in fiduciary liabilities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Distributions of equity |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
— |
|
|
|
— |
|
Borrowings from banks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financing fees |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
— |
|
|
|
( |
) |
Repayments to banks |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
( |
) |
Principal payments on finance lease obligations |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
( |
) |
Tax payment for shares/units withheld in lieu of taxes |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
— |
|
Deferred and contingent consideration payments |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
— |
|
FTAC share redemptions |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
— |
|
|
|
— |
|
Proceeds related to FTAC investors |
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Repurchase of shares |
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
Other financing activities |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
( |
) |
|
|
( |
) |
Cash provided by (used for) financing activities |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
( |
) |
$ |
|
|
|||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
||
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest paid |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
Income taxes paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fixed asset additions acquired through finance leases |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
Right of use asset additions acquired through operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Non-cash fixed asset additions |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-7
Alight, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation and Nature of Business
Alight is defining the future of employee wellbeing through the power of our integrated health, wealth, wellbeing and payroll solutions powered by Alight Worklife®. Alight Worklife® is a high-tech employee engagement platform with a human touch – that brings together our mission-critical wellbeing solutions to our clients to drive better outcomes for organizations and individuals.
On
Basis of Presentation
As a result of the prior year Business Combination, for accounting purposes, the Company is the acquirer and Alight Holdings is the acquiree and accounting predecessor. While the Closing Date was July 2, 2021, we determined the impact of one day would be immaterial to the results of operations. As such, we utilized July 1, 2021 as the date of the Business Combination for accounting purposes. Therefore, the financial statement presentation includes the financial statements of Alight Holdings as Predecessor for the periods prior to July 1, 2021 and the Company as Successor for the periods including and after July 1, 2021, including the consolidation of Alight Holdings.
Nature of Business
We are a leading cloud-based provider of integrated digital human capital and business solutions. We have an unwavering belief that a company’s success starts with its people, and our solutions connect human insights with technology. The Alight Worklife® employee engagement platform provides a seamless customer experience by combining content, plus artificial intelligence (“AI”) and data analytics to enable Alight’s business process as a service ("BPaaS") model. Our mission-critical solutions enable employees to enrich their health, wealth and wellbeing which helps global organizations achieve a high-performance culture. Our solutions include:
2. Accounting Policies and Practices
Use of Estimates
The preparation of the accompanying Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of reserves and expenses.
These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Management believes its estimates to be reasonable given the current facts available. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, and foreign currency exchange rate movements increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be predicted
F-8
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
with certainty, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment would, if applicable, be reflected in the financial statements in future periods.
Concentration of Risk
The Company has no significant off-balance sheet risks related to foreign exchange contracts or other foreign hedging arrangements. Management believes that its account receivable credit risk exposure is limited, and the Company has not experienced significant write-downs in its accounts receivable balances. Additionally, there was no single client who accounted for more than 10% of the Company’s revenues in any of the periods presented.
Cash and Cash Equivalents
Cash and cash equivalents include cash balances. At December 31, 2022 and December 31, 2021, Cash and cash equivalents totaled $
Fiduciary Assets and Liabilities
Some of the Company’s agreements require it to hold funds to pay certain obligations on behalf of its clients. Funds held on behalf of clients are segregated from Company funds, and their use is restricted to the payment of obligations on behalf of clients. There is typically a short period of time between when the Company receives funds and when it pays obligations on behalf of clients. These funds are recorded as Fiduciary assets with the related obligation recorded as Fiduciary liabilities in the Consolidated Balance Sheets. Our Fiduciary assets included cash of $
Commissions Receivable
Commissions receivable, which is recorded in Other current assets and Other assets in the Consolidated Balance Sheets, are contract assets that represent estimated variable consideration for commissions to be received from insurance carriers for performance obligations that have been satisfied. The current portion of Commissions receivable is expected to be received within one year, while the non-current portion of Commissions receivable is expected to be received beyond one year.
Allowance for Expected Credit Losses
The Company’s allowance for expected credit losses with respect to trade receivables and contract assets is based on a combination of factors, including evaluation of historical write-offs, current conditions and reasonable economic forecasts that affect collectability and other qualitative and quantitative analysis. Receivables, net included an allowance for expected credit losses of $
Fixed Assets, Net
The Company records fixed assets at cost. We compute depreciation and amortization using the straight-line method on the estimated useful lives of the assets, which are generally as follows:
Asset Description |
|
Asset Life |
Capitalized software |
|
|
Leasehold improvements |
|
|
Furniture, fixtures and equipment |
|
|
Computer equipment |
|
|
Goodwill and Intangible Assets, Net
F-9
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Derivatives
The Company uses derivative financial instruments, such as interest rate swaps. Interest rate swaps are used to manage interest risk exposures and have been designated as cash flow hedges. The changes in the fair value of derivatives that qualify for hedge accounting as cash flow hedges are recorded in Accumulated other comprehensive income (loss). Amounts are reclassified from Accumulated other comprehensive income (loss) into earnings when the hedge exposure affects earnings.
The Company discontinues hedge accounting prospectively when: (1) the derivative expires or is sold, terminated, or exercised; (2) the qualifying criteria are no longer met; or (3) management removes the designation of the hedging relationship.
Foreign Currency
Certain of the Company’s non-U.S. operations use their respective local currency as their functional currency. The operations that do not have the U.S. dollar as their functional currency translate their financial statements at the current exchange rates in effect at the balance sheet date and revenues and expenses using rates that approximate those in effect during the period. The resulting translation adjustments are included in net foreign currency translation adjustments within the Consolidated Statements of Stockholders’ Equity. Gains and losses from the remeasurement of monetary assets and liabilities that are denominated in a non-functional currency are included in Other (income) expense, net within the Consolidated Statements of Comprehensive Income (Loss). The impact of the foreign exchange gains and losses for the Successor year ended December 31, 2022 and six months ended December 31, 2021 was a gain of $
Share-Based Compensation Costs
Share-based payments, including grants of restricted share units (“RSUs”) and performance-based restricted share units (“PRSUs”), for both the Predecessor and Successor periods, are measured based on their estimated grant date fair value. The Company recognizes compensation expense on a straight-line basis over the requisite service period for awards expected to ultimately vest. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
Earnings Per Share
Warrants
Warrant agreements related to warrants to purchase the Company’s Class A Common Stock were accounted for as liabilities at fair value within Financial instruments on the Consolidated Balance Sheets and were subject to remeasurement at each balance sheet date. Any change in fair value was recognized within the Consolidated Statements of Comprehensive Income (Loss). As of December 31, 2022 and 2021, all warrants were exercised or redeemed.
Tax Receivable Agreement
In connection with the Business Combination, we entered into a Tax Receivable Agreement (the “TRA”) with certain of our pre-Business Combination owners that provides for the payment by Alight to such owners of
Subsequent to the Business Combination, upon equity exchanges of the noncontrolling interests, the Company records obligations under the TRA at the gross undiscounted amount of the expected future payments as an increase to the liability with an offset to Additional paid-in-capital.
F-10
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Seller Earnouts
Noncontrolling Interest
Noncontrolling interest represents the Company’s noncontrolling interest in consolidated subsidiaries which are not attributable, directly or indirectly, to the controlling Class A Common Stock ownership of the Company. Net (loss) income is reduced by the portion of net (loss) income that is attributable to noncontrolling interests. These noncontrolling interests are convertible into Class A Common Stock of the Company at the holder’s discretion.
Income Taxes
During the Predecessor periods, a portion of the Company’s earnings were subject to certain U.S. federal, state and foreign taxes. During the Successor period, the portion of earnings allocable to the Company is subject to corporate level tax rates at the U.S. federal, state and local levels. Therefore, the amount of income taxes recorded in the Predecessor periods is not representative of the expenses expected in the future.
The Company accounts for income taxes pursuant to the asset and liability method which requires it to recognize current tax liabilities or receivables for the amount of taxes it estimates are payable or refundable for the current year, deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.
The Company recognizes the benefits of tax return positions in the financial statements if it is “more-likely-than-not” they will be sustained by a taxing authority. The measurement of a tax position meeting the more-likely-than-not criteria is based on the largest benefit that is more than
3. Revenue from Contracts with Customers
The majority of the Company’s revenue is highly recurring and is derived from contracts with customers to provide integrated, cloud-based human capital solutions that empower clients and their employees to manage their health, wealth and HR needs. The Company’s revenues are disaggregated by recurring and project revenues within each reportable segment. Recurring revenues are typically longer term in nature and more predictable on an annual basis, while project revenues consist of project work of a shorter duration. See Note 12 “Segment Reporting” for quantitative disclosures of recurring and project revenues by reportable segment. The Company’s reportable segments are Employer Solutions, Professional Services and Hosted Business. Employer Solutions are driven by our digital, software and AI-led capabilities powered by the Alight Worklife® platform and spanning total employee wellbeing and engagement, including integrated benefits administration, healthcare navigation, financial health and employee wellbeing and payroll. Professional Services includes project-based cloud deployment and consulting offerings. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.
Revenues are recognized when control of the promised services is transferred to the customer in the amount that best reflects the consideration to which the Company expects to be entitled in exchange for those services. The majority of the Company’s revenue is recognized over time as the customer simultaneously receives and consumes the benefits of our services. On occasions, we may be entitled to a fee based on achieving certain performance criteria or contract milestones. To the extent that we cannot estimate with reasonable assurance the likelihood that we will achieve the performance target, we will constrain this portion of the transaction price and recognize it when or as the uncertainty is resolved. Any taxes assessed on revenues relating to services provided to our clients are recorded on a net basis. All of the Company’s revenues are described in more detail below.
F-11
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Administrative Services
We provide benefits, human resource and payroll administration services across all of our solutions, which are highly recurring. The Company’s contracts may include administration services across one or multiple solutions and typically have to
These contracts typically consist of an implementation phase and an ongoing administration phase:
Implementation phase – In connection with the Company’s long-term agreements, highly customized implementation efforts are often necessary to set up clients and their human resource, payroll or benefit programs on the Company’s systems and operating processes. Work performed during the implementation phase is considered a set-up activity because it does not transfer a service to the customer. Therefore, it is not a separate performance obligation. As these agreements are longer term in nature, our contracts generally provide that if the client terminates a contract, we are entitled to an additional payment for services performed through the termination date designed to recover our up-front costs of implementation. Any fees received from the customer as part of the implementation are in effect, an advance payment for the future ongoing administration services to be provided.
Ongoing administration services phase – For all solutions, the ongoing administration phase includes a variety of plan and payroll administration services and system support services. More specifically, these services include data management, calculations, reporting, fulfillment/communications, compliance services, call center support, and in our Health Solutions agreements, annual on-boarding and enrollment support. While there are a variety of activities performed across all solutions, the overall nature of the obligation is to provide integrated administration solutions to the customer. The agreement represents a stand-ready obligation to perform these activities across all solutions on an as-needed basis. The customer obtains value from each period of service, and each time increment (i.e., each month, or each benefit cycle in the case of our Health Solutions arrangements) is distinct and substantially the same. Accordingly, the ongoing administration services for each solution represents a series and each series (i.e., each month, or each benefit cycle including the enrollment period in the case of our Health Solutions arrangements) of distinct services are deemed to be a single performance obligation. In agreements that include multiple performance obligations, the transaction price related to each performance obligation is based on a relative stand-alone selling price basis. We establish the stand-alone selling price using observable market prices that the Company charges separately for similar solutions to similar customers.
Our contracts with our clients specify the terms and conditions upon which the services are based. Fees for these services are primarily based on a contracted fee charged per participant per period (e.g., monthly or annually, as applicable). These contracts may also include fixed components, including lump-sum implementation fees. Our fees are not typically payable until the commencement of the ongoing administration phase. Once fees become payable, payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination.
For Health Solutions administration services, each benefits cycle inclusive of the enrollment period represents a time increment under the series guidance and is a single performance obligation. Although ongoing fees are typically not payable until the commencement of the ongoing administrative phase, we begin transferring services to our customers approximately four months prior to payments being due as part of our annual enrollment services. Although our per-participant fees are considered variable, they are typically predictable in nature, and therefore we do not generally constrain any portion of our transaction price estimates. We use an input method based on the labor costs incurred relative to total labor costs as the measure of progress in satisfying our Health Solutions performance obligation commencing when the customer’s annual enrollment services begin. Given that the Health Solutions enrollment and administrative services are stand-ready in nature, it can be difficult to estimate the total expected efforts or hours we will incur for a particular benefits cycle. Therefore, the input measure is based on the historical effort expended, which is measured as labor cost.
For all other benefits administration, human resources and payroll services where each month represents a distinct time increment under the series guidance, we allocate the transaction price to the month we are performing our services. Therefore, the amount recognized each month is the variable consideration related to that month plus any fixed monthly or annual fee, which is recognized on a straight-line basis. Revenue for these types of arrangements is therefore more consistent throughout the year.
In the normal course of business, we enter into change orders or other contract modifications to add or modify services provided to the customer. We evaluate whether these modifications should be accounted for as separate contracts or a modification to an existing contract. To the extent that the modification changes a promise that forms part of the underlying series, the modification is not accounted for as a separate contract.
F-12
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Other Contracts
In addition to the ongoing administration services, the Company also has services across all solutions that represent separate performance obligations and that are often shorter in duration, such as our cloud deployment services, cloud advisory services, participant financial advisory services, and enrollment services not bundled with ongoing administration services.
Fee arrangements can be in the form of fixed-fee, time-and-materials, or fees based on assets under management. Payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination.
Services may represent stand-ready obligations that meet the series provision, in which case all variable consideration is allocated to each distinct time increment.
Other services are recognized over-time based on a method that faithfully depicts the transfer of value to the customer, which may be based on the value of labor hours worked or time elapsed, depending on the facts and circumstances.
The majority of the fees for enrollment services not bundled with ongoing administration services may be in the form of commissions received from insurance carriers for policy placement and are variable in nature. These annual enrollment services include both employer-sponsored arrangements that place both retiree Medicare coverage and voluntary benefits and direct-to-consumer Medicare placement. Our performance obligations under these annual enrollment services are typically completed over a short period upon which a respective policy is placed or confirmed with no ongoing fulfillment obligations. For both the employer-sponsored and direct-to-consumer arrangements, we recognize the majority of the placement revenue in the fourth quarter of the calendar year, which is when most of the placement or renewal activity occurs. However, the Company may continue to receive commissions from carriers until the respective policy lapses or is cancelled. The Company bases the estimates of total transaction price on supportable evidence from an analysis of past transactions, and only includes amounts that are probable of being received or not refunded.
As it relates to the direct-to consumer arrangements, because our obligation is complete upon placement of the policy, we recognize revenue at that date, which includes both compensation due to us in the first year as well as an estimate of the total renewal commissions that will be received over the lifetime of the policy. The variable consideration estimate requires significant judgement, and will vary based on product type, estimated commission rates and the expected lives of the respective policies and other factors.
For both the employer-sponsored and direct-to-customer arrangements, the estimated total transaction price may differ from the ultimate amount of commissions we may collect. Consequently, the estimate of total transaction price is adjusted over time as the Company receives confirmation of cash received, or as other information becomes available.
A portion of the Company's revenue is subscription-based where monthly fees are paid to the Company. The Company receives these fees from insurance carriers and are priced based on a per-employee, per-month (PEPM) basis over a specific term based on the estimated number of employees who will have access to their product. The subscription-based revenue is recognized straight-line over the contract term, which is generally
Contract Costs
Costs to obtain a Contract
The Company capitalizes incremental costs to obtain a contract with a customer that are expected to be recovered. Assets recognized for the costs to obtain a contract, which primarily includes sales commissions paid in relation to the initial contract, are amortized over the expected life of the underlying customer relationships, which is
Costs to fulfill a Contract
The Company capitalizes costs to fulfill contracts which includes highly customized implementation efforts to set up clients and their human resource, payroll or benefit programs. Assets recognized for the costs to fulfill a contract are amortized on a systematic
F-13
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
basis over the expected life of the underlying customer relationships, which is
Amortization for all contracts costs is recorded in Cost of services, exclusive of depreciation and amortization in the Consolidated Statements of Comprehensive Income (Loss) (see Note 5 “Other Financial Data”).
4. Acquisitions
2022 Acquisition
In December 2022, the Company completed the acquisition of ReedGroup for a preliminary purchase price of approximately $
2021 Acquisitions
Alight Business Combination
On July 2, 2021, the Company completed the Business Combination for consideration transferred of approximately $
On the Closing Date, the Company paid $
On the Closing Date, approximately $
The following table summarizes the final consideration transferred (in millions):
Cash consideration to prior equityholders(1) |
|
$ |
|
|
|
Repayment of debt |
|
|
|
|
|
Total cash consideration |
|
$ |
|
|
|
Continuing unitholders rollover equity into the Company(2) |
|
|
|
|
|
Contingent consideration - Tax Receivable Agreement(3) |
|
|
|
|
|
Contingent consideration - Seller Earnouts(3) |
|
|
|
|
|
Total consideration transferred |
|
$ |
|
|
|
Noncontrolling interest(4) |
|
$ |
|
|
(1) Includes cash consideration paid to reimburse seller for certain transaction expenses.
(2) The Company issued approximately
(3) The TRA and Seller Earnouts represent liability classified contingent consideration. Refer to Note 9 “Stockholders’ and Members’ Equity”, Note 14 “Financial Instruments” and Note 15 “Tax Receivable Agreement” to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022 for further discussion.
F-14
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
(4) The fair value of the noncontrolling interest is based on the fair value of acquired business, which was determined based on the price of the Company's Class A Common Stock at the July 2, 2021 Closing Date, plus the contingent consideration related to the Seller Earnouts. The noncontrolling interest is exchangeable for Class A Common Stock at the option of the holder. Refer to Note 9 “Stockholders’ and Members’ Equity” to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022 for additional information.
The following table summarizes the final purchase price allocation (in millions):
Cash and cash equivalents |
|
$ |
|
|
|
Receivables |
|
|
|
|
|
Fiduciary assets |
|
|
|
|
|
Other current assets |
|
|
|
|
|
Fixed assets |
|
|
|
|
|
Other assets |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
( |
) |
Fiduciary liabilities |
|
|
|
( |
) |
Other current liabilities |
|
|
|
( |
) |
Debt assumed |
|
|
|
( |
) |
Deferred tax liabilities |
|
|
|
( |
) |
Other liabilities |
|
|
|
( |
) |
Intangible assets |
|
|
|
|
|
Total identifiable net assets |
|
$ |
|
|
|
Goodwill |
|
$ |
|
|
Measurement Period Adjustments
During the first half of 2022, the Company recorded measurement period adjustments to its initial allocation of purchase price as a result of ongoing valuation procedures on assets acquired and liabilities assumed, including (i) a decrease in Receivables of $
Intangible Assets
Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The trade name intangible asset represents the corporate Alight tradename, which was valued using the relief-from-royalty method. The technology related intangible assets represent software developed by Alight Holdings to differentiate its product/service offerings for its customers, valued using the relief-from-royalty method. The customer-related and contract-based intangible assets represent strong, long-term relationships with customers, valued using the multi-period excess earnings method.
|
|
Fair value |
|
|
Useful life |
|
|||
Identifiable intangible assets |
|
(in millions) |
|
|
(in years) |
|
|||
Definite lived trade names |
|
$ |
|
|
|
|
|
||
Technology related intangibles |
|
$ |
|
|
|
|
|
||
Customer-related and contract-based intangibles |
|
$ |
|
|
|
|
|
||
Goodwill
Approximately $
F-15
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Retiree Health Exchange
On October 1, 2021, the Company completed the acquisition of AON Retiree Health Exchange, Inc., a retiree health exchange, for consideration transferred of approximately $
The following table summarizes the purchase price allocation (in millions):
Receivables |
|
$ |
|
|
|
Other current assets |
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
( |
) |
Intangible assets |
|
|
|
|
|
Fair value of net assets acquired and liabilities assumed |
|
|
|
|
|
Goodwill |
|
|
|
|
|
Total consideration |
|
$ |
|
|
Measurement Period Adjustments
During the third quarter of 2022, the Company recorded a measurement period adjustment to its initial allocation of purchase price as a result of ongoing valuation procedures on assets acquired and liabilities assumed of an increase of $
Intangible Assets and Goodwill
Intangible assets include customer-related and contract-based intangibles and technology with estimated useful lives of
Other Acquisitions
The Company also completed one acquisition during the year ended December 31, 2021. The acquisition was not material to the Company’s results of operations, financial position, or cash flows. The Company accounted for the acquisition as a business combination under ASC 805. The goodwill identified by this acquisition is primarily attributed to the synergies that are expected to be realized as well as intangible assets that do not qualify for separate recognition, such as assembled workforce. Goodwill is not amortized and is deductible for tax purposes. Upon completion of this acquisition, the business is now wholly-owned by the Company.
5. Other Financial Data
Consolidated Balance Sheets Information
Receivables, net
The components of Receivables, net are as follows (in millions):
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
Billed and unbilled receivables |
|
$ |
|
|
|
|
$ |
|
|
||
Allowance for expected credit losses |
|
|
|
( |
) |
|
|
|
|
( |
) |
Balance at end of period |
|
$ |
|
|
|
|
$ |
|
|
||
As a result of the prior year Business Combination, all receivables acquired were recorded at fair value and allowance for expected credit losses previously recorded by the Predecessor were reduced to
F-16
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Other current assets
The components of Other current assets are as follows (in millions):
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
Deferred project costs |
|
$ |
|
|
|
|
$ |
|
|
||
Prepaid expenses |
|
|
|
|
|
|
|
|
|
||
Commissions receivable |
|
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
$ |
|
|
||
Other assets
The components of Other assets are as follows (in millions):
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
Deferred project costs |
|
$ |
|
|
|
|
$ |
|
|
||
Operating lease right of use asset |
|
|
|
|
|
|
|
|
|
||
Commissions receivable |
|
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
$ |
|
|
||
The current and non-current portions of deferred project costs relate to costs to obtain and fulfill contracts (see Note 3 “Revenue from Contracts with Customers”). During the Successor year ended December 31, 2022, the six months ended December 31, 2021, the Predecessor six months ended June 30, 2021 and year ended December 31, 2020, total amortization expense of $
The current portion of the commissions receivable balance as of December 31, 2021 includes commission receivables related to the Retiree Health acquisition completed during the fourth quarter of 2021.
Other current assets and Other assets include the fair value of outstanding derivative instruments related to interest rate swaps. The balance in as of December 31, 2022 and December 31, 2021 was $
See Note 19 "Lease Obligations" for further information regarding the Operating lease right of use assets recorded as of December 31, 2022 and 2021.
Fixed assets, net
The components of Fixed assets, net are as follows (in millions):
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
Capitalized software |
|
$ |
|
|
|
|
$ |
|
|
||
Leasehold improvements |
|
|
|
|
|
|
|
|
|
||
Computer equipment |
|
|
|
|
|
|
|
|
|
||
Furniture, fixtures and equipment |
|
|
|
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
|
|
|
||
Total Fixed assets, gross |
|
|
|
|
|
|
|
|
|
||
Less: Accumulated depreciation |
|
|
|
|
|
|
|
|
|
||
Fixed assets, net |
|
$ |
|
|
|
|
$ |
|
|
||
As a result of the prior year Business Combination, all fixed assets acquired were recorded at fair value and accumulated depreciation previously recorded by the Predecessor was reduced to
F-17
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
to internally developed software in-service as of the Closing Date was reclassified and included in the fair value of the Technology related intangible assets acquired.
Included in Computer equipment are assets under finance leases. The balances as of December 31, 2022 and 2021, net of accumulated depreciation related to these assets, were $
Other current liabilities
The components of Other current liabilities are as follows (in millions):
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
Deferred revenue |
|
$ |
|
|
|
|
$ |
|
|
||
Operating lease liabilities |
|
|
|
|
|
|
|
|
|
||
Finance lease liabilities |
|
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
$ |
|
|
||
Other liabilities
The components of Other liabilities are as follows (in millions):
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
Deferred revenue |
|
$ |
|
|
|
|
$ |
|
|
||
Operating lease liabilities |
|
|
|
|
|
|
|
|
|
||
Finance lease liabilities |
|
|
|
|
|
|
|
|
|
||
Unrecognized tax positions |
|
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
$ |
|
|
||
The current and non-current portions of deferred revenue relates to consideration received in advance of performance under client contracts. During the Successor year ended December 31, 2022, the six months ended December 31, 2021, the Predecessor six months ended June 30, 2021 and year ended December 31, 2020, revenue of approximately $
Other current liabilities as of December 31, 2021 includes a deferred consideration payment of $
As of December 31, 2022 the current and non-current portions of operating lease liabilities represent the Company’s obligation to make lease payments arising from a lease (see Note 19 “Lease Obligations” for further information). Operating leases for the Company’s office facilities expire at various dates through
Other current liabilities and Other liabilities include the fair value of outstanding derivative instruments related to interest rate swaps. There were
F-18
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
6. Goodwill and Intangible assets, net
The changes in the net carrying amount of goodwill are as follows (in millions):
|
|
Employer |
|
|
Professional |
|
|
|
|
|
|||||
|
|
Solutions |
|
|
Services |
|
|
Total |
|
||||||
Balance as of December 31, 2021 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|||
Acquisitions(1) |
|
|
|
|
|
|
|
— |
|
|
|
|
|
||
Foreign currency translation |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Balance as of December 31, 2022 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|||
(1)
Goodwill for each reporting unit is tested for impairment annually during the fourth quarter, or more frequently if there are indicators that a reporting unit may be impaired. Accounting Standard Codification 350, Intangibles and Other ("ASC 350") states that an optional qualitative impairment assessment can be performed to determine whether an impairment is more likely than not by considering various factors such as macroeconomic and industry trends, reporting unit performance and overall business changes. If inconclusive evidence results from the qualitative impairment test, a quantitative assessment is performed where the Company determines the fair value of the reporting units by using a combination of the present value of expected future cash flows and a market approach based on earnings multiple data from peer companies using unobservable level 3 inputs. If an impairment is identified, an impairment is recorded by the amount that the carrying value exceeds the fair value for each reporting unit. While the future cash flows are consistent with those that are used in our internal planning process inclusive of long-term growth assumptions, estimating cash flows requires significant judgment. Future changes to our projected cash flows can vary from the cash flows eventually realized, which may have a material impact on the outcomes of future goodwill impairment tests. The Company uses a weighted average cost of capital that represents the blended average required rate of return for equity and debt capital based on observed market return data and company specific risk factors.
During the fourth quarter of 2022, the Company performed a quantitative assessment in accordance with ASC 350. We evaluated the potential for goodwill impairment by considering macroeconomic conditions, industry and market conditions, cost factors, both current and future expected financial performance, and relevant entity-specific events for each of the reporting units. We also considered our overall market performance discretely as well as in relation to our peers. We utilized a discount rate of
Subsequent to our annual impairment test and until the end of the reporting period, we evaluated changes in macroeconomic conditions, industry and market conditions and determined that these factors were broadly consistent with those that existed as of our annual impairment test date. As such, we determined that no additional goodwill impairment testing was warranted, and goodwill remained recoverable as of December 31, 2022. At December 31, 2022, our reporting units has the following amounts of goodwill: Health Solutions, Wealth Solutions, Cloud Services and Professional Services had $
F-19
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Intangible assets by asset class are as follows (in millions):
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||||||||
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
||||||||||
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
||||||||||||
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
||||||||||||
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Customer-related and contract based |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
||||||
Technology related intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trade name (finite life) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
||||||
The net carrying amount of Intangible assets as of December 31, 2022 includes customer-related and contract based identifiable intangible assets, technology related intangible assets and trade name intangible assets.
Amortization expense from finite-lived intangible assets for the Successor year ended December 31, 2022, the six months ended December 31, 2021, and the Predecessor six months ended June 30, 2021 and year ended December 31, 2020 was $
The following table reflects intangible asset net carrying amount and weighted average remaining useful lives as of December 31, 2022 (in millions, except for years):
|
|
Net |
|
|
Weighted-Average |
|
||||
|
|
Carrying |
|
|
Remaining |
|
||||
|
|
Amount |
|
|
Useful Lives |
|
||||
Intangible assets at December 31, 2022: |
|
|
|
|
|
|
|
|
||
Customer-related and contract-based |
|
$ |
|
|
|
|
|
|
||
Technology-related intangibles |
|
|
|
|
|
|
|
|
||
Trade name (finite life) |
|
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
|
|
||
Subsequent to December 31, 2022, the annual amortization expense is expected to be as follows (in millions):
|
|
Customer-Related |
|
|
Technology |
|
|
Trade |
|
||||||
|
|
and Contract Based |
|
|
Related |
|
|
Name |
|
||||||
|
|
Intangibles |
|
|
Intangibles |
|
|
Intangibles |
|
||||||
2023 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|||
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Thereafter |
|
|
|
|
|
|
|
— |
|
|
|
|
|
||
Total amortization expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|||
F-20
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
7. Income Taxes
Provision for Income Taxes
(Loss) income before income tax expense (benefit) consists of the following (in millions):
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Year Ended |
|
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
|
Year Ended, |
|
|||||||
|
|
December 31, |
|
|
|
December 31, |
|
|
|
June 30, |
|
|
December 31, |
|
|||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
2021 |
|
|
2020 |
|
|||||||
(Loss) income before income tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. (loss) income |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
|
$ |
|
( |
) |
|
$ |
|
( |
) |
Non-U.S. (loss) income |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
( |
) |
|
|
|
( |
) |
Total |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
|
$ |
|
( |
) |
|
$ |
|
( |
) |
(Loss) income before income tax expense (benefit) shown above is based on the location of the business unit to which such earnings are attributable for tax purposes. In addition, because the earnings shown above may in some cases be subject to taxation in more than one country, the income tax provision shown below as federal, state, or foreign may not correspond to the geographic attribution of the earnings.
The provision for income tax consists of the following (in millions):
|
|
|
|
|
|
|
|
||||||||||||||
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
|
Year Ended, |
|
||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
|
December 31, |
|
||||||||
Income tax expense (benefit): |
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
|
2020 |
|
||||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Federal |
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
— |
|
||
State |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|||
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total current tax expense (benefit) |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||
Deferred tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Federal |
|
$ |
|
|
|
$ |
|
— |
|
|
|
$ |
|
— |
|
|
$ |
|
( |
) |
|
State |
|
|
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
||
Foreign |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
( |
) |
|
|
|
— |
|
|
Total deferred tax (benefit) expense |
|
$ |
|
|
|
$ |
|
( |
) |
|
|
$ |
|
( |
) |
|
$ |
|
— |
|
|
Total income tax expense (benefit) |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|||
Effective Tax Rate Reconciliation
The reconciliation of the effective tax rate for all periods presented is as follows (in millions):
F-21
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
|
|
Successor |
|
|
Predecessor |
||||||||||||||||||||||||||||||||||||
|
|
Year Ended |
|
Six Months Ended |
|
|
Six Months Ended |
|
Year Ended |
||||||||||||||||||||||||||||||||
|
|
December 31, |
|
December 31, |
|
|
June 30, |
|
December 31, |
||||||||||||||||||||||||||||||||
|
|
2022 |
|
2021 |
|
|
2021 |
|
2020 |
||||||||||||||||||||||||||||||||
|
|
Amount |
|
|
% |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Amount |
|
|
% |
||||||||||||||||||||
(Loss) income before income tax expense (benefit) |
|
$ |
|
( |
) |
|
|
|
|
|
$ |
|
( |
) |
|
|
|
|
|
|
$ |
|
( |
) |
|
|
|
|
|
$ |
|
( |
) |
|
|
|
|
||||
Provision for income taxes at the statutory rate |
|
$ |
|
( |
) |
|
|
|
% |
|
$ |
|
( |
) |
|
|
|
% |
|
|
$ |
|
— |
|
|
|
— |
|
% |
|
$ |
|
— |
|
|
|
— |
|
|
||
State income taxes, net of federal benefit |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
— |
|
|
|
— |
|
% |
|
|
|
|
|
|
— |
|
|
|||
Jurisdictional rate differences |
|
|
|
|
|
|
( |
) |
% |
|
|
|
( |
) |
|
|
|
% |
|
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
|
|
( |
) |
% |
||||
Changes in valuation allowances |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
( |
) |
|
|
|
% |
|
|
|
— |
|
|
|
— |
|
|
|||
Benefit of income not allocated to the Company |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
||
Income in separate U.S. tax consolidations |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
||
Non-deductible expenses |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
|
|
( |
) |
% |
|
|
|
|
( |
) |
|
|
|
% |
|
|
|
— |
|
|
|
— |
|
|
|||
Tax credits |
|
|
|
( |
) |
|
|
|
% |
|
|
|
( |
) |
|
|
|
% |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
||
Change in uncertain tax positions |
|
|
|
( |
) |
|
|
|
% |
|
|
|
( |
) |
|
|
|
% |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
||
Other |
|
|
|
— |
|
|
|
— |
|
% |
|
|
|
( |
) |
|
|
( |
) |
% |
|
|
|
|
( |
) |
|
|
|
% |
|
|
|
( |
) |
|
|
|
% |
||
Income tax expense (benefit) |
|
$ |
|
|
|
|
( |
) |
% |
|
$ |
|
|
|
|
( |
) |
% |
|
|
$ |
|
( |
) |
|
|
|
% |
|
$ |
|
|
|
|
( |
) |
% |
||||
The Company’s effective tax rate for the Successor year ended December 31, 2022 and six months ended December 31, 2021 was (
The Company’s income tax expense varies from the expense that would be expected based on statutory rates due principally to its organizational structure. Prior to the Business Combination, Alight Holdings operated as a U.S. Partnership which generally is not subject to federal and state income taxes. Subsequent to the Business Combination, the Company’s effective tax rate differs from the U.S.’s statutory rate primarily due to foreign rate differences, valuation allowances, separate entity corporate taxes, changes in statutory reserves, and the noncontrolling interest associated with the portion of Alight Holdings income not allocable to the Company. The Company is taxed as a corporation and is subject to corporate federal, state, and local taxes on the income allocated to it from Alight Holdings, based upon the Company’s economic interest in Alight Holdings, and any stand-alone income or loss generated by the Company. Alight Holdings and certain subsidiaries combine to form a single entity taxable as a partnership for U.S. federal and most applicable state and local income tax purposes. As such, Alight Holdings is not subject to U.S. federal and certain state and local income taxes. The partners of Alight Holdings, including the Company, are liable for federal, state, and local income taxes based on their allocable share of Alight Holdings’ pass-through taxable income, which includes income of Alight Holdings’ subsidiaries that are treated as disregarded entities separate from Alight Holdings for income tax purposes. The effective tax rate for the Successor year ended December 31, 2022 is lower than the
Deferred Income Taxes
The components of the Company’s deferred tax assets and liabilities are as follows (in millions):
F-22
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
|
|
Successor |
|
||||||||
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
||
Employee benefit plans |
|
$ |
|
|
|
|
$ |
|
|
||
Interest expense carryforward |
|
|
|
|
|
|
|
|
|
||
Other credits |
|
|
|
|
|
|
|
|
|
||
Tax receivable agreement |
|
|
|
|
|
|
|
|
|
||
Other accrued expenses |
|
|
|
— |
|
|
|
|
|
|
|
Seller Earnouts |
|
|
|
|
|
|
|
|
|
||
Fixed assets |
|
|
|
— |
|
|
|
|
|
|
|
Intangible assets |
|
|
|
— |
|
|
|
|
|
— |
|
Net operating losses |
|
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
|
|
|
||
Valuation allowance on deferred tax assets |
|
|
|
( |
) |
|
|
|
|
( |
) |
Total |
|
$ |
|
|
|
|
$ |
|
|
||
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
||
Intangible assets |
|
$ |
|
( |
) |
|
|
$ |
|
( |
) |
Investment in partnership |
|
|
|
( |
) |
|
|
|
|
( |
) |
Interest rate swap |
|
|
|
( |
) |
|
|
|
|
— |
|
Other |
|
|
|
( |
) |
|
|
|
|
( |
) |
Total |
|
$ |
|
( |
) |
|
|
$ |
|
( |
) |
Net deferred tax (liability) asset |
|
$ |
|
( |
) |
|
|
$ |
|
( |
) |
As a result of the Business Combination, the Company established a deferred tax asset for the value of certain tax loss and credit carryforward attributes of the merged entities. In addition, the Company established a deferred tax liability to account for the difference between the Company’s book and tax basis in its investment in Alight Holdings. The Company also has historically maintained deferred tax assets on certain tax loss carryforwards in non-U.S. jurisdictions.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjusts the valuation allowance accordingly. Considerations with respect to the realizability of deferred tax assets include the period of expiration, historical earnings, and future sources of taxable income by jurisdiction to which the tax asset relates. Management judgment is required in determining the assumptions and estimates related to the amount and timing of future taxable income. The Company maintains valuation allowances with regard to the tax benefits of certain net operating losses and other deferred tax assets, and periodically assesses the adequacy thereof. Valuation allowances decreased by $
As of December 31, 2022 and 2021, the Company had U.S. and foreign net operating losses (“NOLs”) of $
F-23
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Uncertain Tax Positions
The following is a reconciliation of the Company’s beginning and ending amount of uncertain tax positions (in millions):
|
|
|
|
||
Balance at January 1, 2021 (Predecessor) |
|
$ |
|
|
|
Additions for tax positions of prior years |
|
|
|
|
|
Balance at June 30, 2021 (Predecessor) |
|
$ |
|
|
|
|
|
|
|
|
|
Balance at July 1, 2021 (Successor) |
|
|
|
|
|
Lapse of statute of limitations |
|
|
|
( |
) |
Balance at December 31, 2021 (Successor) |
|
$ |
|
|
|
Lapse of statute of limitations |
|
|
|
( |
) |
Balance at December 31, 2022 (Successor) |
|
$ |
|
|
|
The Company’s liability for uncertain tax positions as of December 31, 2022 and 2021 includes $
The Company records interest and penalties related to uncertain tax positions in its provision for income taxes. The Company accrued potential interest and penalties of $
The Company and its subsidiaries file income tax returns in their respective jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2018. The Company has concluded income tax examinations in its primary non-U.S. jurisdictions through 2015. With respect to open tax periods, the Company expects unrecognized tax benefits to decrease by approximately $
8. Debt
Debt outstanding consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
December 31, |
|
|
December 31, |
|
||||
|
|
Maturity Date |
|
2022 |
|
|
2021 |
|
||||
Term Loan |
|
|
$ |
|
|
|
$ |
|
|
|||
Term Loan, Amended |
|
|
|
|
— |
|
|
|
|
|
||
Term Loan, Third Incremental(1) |
|
|
|
|
— |
|
|
|
|
|
||
Term Loan, B-1(2) |
|
|
|
|
|
|
|
|
— |
|
||
Secured Senior Notes |
|
|
|
|
|
|
|
|
|
|||
$ |
|
|
|
|
— |
|
|
|
|
— |
|
|
Other |
|
|
|
|
— |
|
|
|
|
|
||
Total debt, net |
|
|
|
|
|
|
|
|
|
|
||
Less: current portion of long-term debt, net |
|
|
|
|
|
( |
) |
|
|
|
( |
) |
Total long-term debt, net |
|
|
|
$ |
|
|
|
$ |
|
|
||
Purchase Accounting
As part of purchase accounting for the prior year Business Combination, the debt obligations assumed were recorded at fair value, under ASC 805, which resulted in an aggregate increase in the debt liability of $
Term Loan
In May 2017, the Company entered into a
F-24
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Term Loan by paying down $
Interest rates on the original Term Loan borrowings are based on the London Interbank Offered Rate (“LIBOR”) plus a margin based on defined ratios (
During the Successor year ended and six months ended December 31, 2022 and December 31, 2021, respectively, and the Predecessor six months and year ended June 30, 2021 and December 31, 2020, respectively, the Company made total principal payments of $
Secured Senior Notes
During May 2020, the Company issued $
Unsecured Senior Notes
In May 2017, the Company issued $
As part of the consideration transferred in the Business Combination, the Unsecured Senior Notes were fully redeemed.
Revolving Credit Facility
In May 2017, the Company entered into a
As part of the acquisition of NGA Human Resources ("NGA HR") during the year ended December 31, 2019, the Company acquired a revolving credit facility of approximately $
Financing Fees, Premiums and Interest Expense
The Company capitalized financing fees and premiums related to the Term Loan, Revolver and Secured Senior Notes issued. These financing fees and premiums were recorded as an offset to the aggregate debt balances and are being amortized over the respective loan terms.
F-25
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Total interest expense related to the debt instruments for the Successor year and six months ended December 31, 2022 and December 31, 2021, respectively, and the Predecessor six months and year ended June 30, 2021 and December 31, 2020, respectively, was $
Principal Payments
Aggregate contractual principal payments as of December 31, 2022 are as follows (in millions):
2023 |
|
$ |
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
2027 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total payments |
|
$ |
|
|
9. Stockholders’ and Members’ Equity
Predecessor Equity
Class A Common Units
There were
Class A-1 Common Units
During the six months ended June 30, 2021, the Company granted
Class B Common Units
During the six months ended June 30, 2021 there were
Successor Equity
Preferred Stock
Upon the Closing of the Business Combination,
Class A Common Stock
As of December 31, 2022,
Class B Common Stock
Upon the Closing of the Business Combination, the Seller Earnouts resulted in the issuance of a total of
F-26
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
in the Business Combination received Class B common shares, and the equityholders of the Predecessor that continue to hold Class A units of Alight Holdings (“Continuing Unitholders”) received Class B common units of Alight Holdings.
The Class B Common Stock and Class B common units are not entitled to a vote and accrue dividends equal to amounts declared per corresponding Class A common share and Class A unit; however, such dividends are paid if and when such Class B share or Class B unit converts into a Class A share or Class A unit. If any of the Class B common shares or Class B common units do not vest on or before the seventh anniversary of the Closing Date, such shares or units will be automatically forfeited and cancelled for no consideration and will not be entitled to receive any cumulative dividend payments.
These Class B instruments (excluding the Unvested B common shares related to employee compensation) are liability classified; refer to Note 14 “Financial Instruments” to our consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2022 for additional information.
As further described below, there are two series of Class B instruments outstanding.
Class B-1
As of December 31, 2022,
To the extent any Unvested Class B-1 common share automatically converts into a share of Class A Common Stock, (i) such share or unit shall remain unvested in accordance with the terms and conditions of the applicable award agreement until it vests or is forfeited in accordance with the terms thereof and (ii) such share or unit shall be treated as Unvested Class A consideration as if such share or unit was part of the Unvested Class A consideration as of the Closing Date.
As of December 31, 2022,
Class B-2
As of December 31, 2022,
To the extent any Unvested Class B-2 common share automatically converts into a share of Class A Common Stock, (i) such share or unit shall remain unvested in accordance with the terms and conditions of the applicable award agreement until it vests or is forfeited in accordance with the terms thereof and (ii) such share or unit shall be treated as Unvested Class A consideration as if such share or unit was part of the Unvested Class A consideration as of the Closing Date.
As of December 31, 2022,
Class B-3
Upon the Closing of the Business Combination,
Class V Common Stock
As of December 31, 2022,
F-27
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Class Z Common Stock
Upon the Closing of the Business Combination, a total of
As of December 31, 2022,
As of December 31, 2022,
Class A Units
Holders of Alight Holdings Class A units can exchange all or any portion of their Class A units, together with the cancellation of an equal number of shares of Alight Class V Common Stock, for a number of shares of Alight Class A Common Stock equal to the number of exchanged Class A units. Alight has the option to cash settle any future exchange.
The Continuing Unitholders’ ownership of Class A units represents the noncontrolling interest of the Company, which is accounted for as permanent equity on the Consolidated Balance Sheets. As of December 31, 2022, there were
The Alight Holdings Operating Agreement contains provisions which require that a one-to-one ratio is maintained between each class of Alight Holdings units held by Alight and its subsidiaries (including the FTAC Surviving Corporation and the Alight Blockers, but excluding subsidiaries of Alight Holdings) and the number of outstanding shares of the corresponding class of Alight common stock, subject to certain exceptions (including in respect of management equity in the form of options, rights or other securities which have not been converted into or exercised for Alight common stock). In addition, the Alight Holdings Operating Agreement permits Alight, in its capacity as the managing member of Alight Holdings, to take actions to maintain such ratio, including undertaking stock splits, combinations, recapitalizations and exercises of the exchange rights of holders of Alight Holdings units.
Exchange of Class A Units
During the Successor year ended December 31, 2022,
Share Repurchase Program
On August 1, 2022, the Company's Board of Directors authorized a share repurchase program (the "Program"), under which the Company may repurchase up to $
During the Successor year ended December 31, 2022,
F-28
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
under the Program authorization for future share repurchases. Repurchased shares are reflected as Treasury Stock on the Consolidated Balance Sheets as a component of equity.
|
|
Class A (2) |
|
|
Class B-1 |
|
|
Class B-2 |
|
|
Class V |
|
|
Class Z |
|
|
Treasury |
|
||||||
Balance at December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
Conversion of noncontrolling interest |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
Shares granted upon vesting |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance for compensation to non-employees(1) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance at March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
Conversion of noncontrolling interest |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
Shares granted upon vesting |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Issuance for compensation to non-employees(1) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance at June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
Conversion of noncontrolling interest |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
Shares granted upon vesting |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance for compensation to non-employees(1) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Share repurchases |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Balance at September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Conversion of noncontrolling interest |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
Shares granted upon vesting |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance for compensation to non-employees(1) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Share repurchases |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance at December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Dividends
There were no dividends declared during the Successor year ended December 31, 2022.
F-29
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Accumulated Other Comprehensive Income
As of December 31, 2022, the Accumulated other comprehensive income balance included unrealized losses for interest rate swaps and foreign currency translation adjustments related to our foreign subsidiaries that do not have the U.S. dollar as their functional currency. The tax effect for all periods presented was immaterial.
Changes in accumulated other comprehensive income (loss), net of noncontrolling interests and tax, are as follows (in millions):
|
|
Predecessor |
|
||||||||||||
|
|
Foreign |
|
|
|
|
|
|
|
|
|
||||
|
|
Currency |
|
|
Interest |
|
|
|
|
|
|||||
|
|
Translation |
|
|
Rate |
|
|
|
|
|
|||||
|
|
Adjustments(1) |
|
|
Swaps(2) |
|
|
Total |
|
||||||
Balance at December 31, 2019 |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
Other comprehensive (loss) income before reclassifications, net of tax |
|
|
|
|
|
|
|
( |
) |
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net current period other comprehensive (loss) income |
|
|
|
|
|
|
|
( |
) |
|
|
|
( |
) |
|
Balance at December 31, 2020 |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
Other comprehensive (loss) income before reclassifications, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Amounts reclassified from accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net current period other comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Balance at June 30, 2021 |
|
$ |
|
|
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Successor |
|
||||||||||||
|
|
Foreign |
|
|
|
|
|
|
|
|
|
||||
|
|
Currency |
|
|
Interest |
|
|
|
|
|
|||||
|
|
Translation |
|
|
Rate |
|
|
|
|
|
|||||
|
|
Adjustments(1) |
|
|
Swaps(2) |
|
|
Total |
|
||||||
Balance at July 1, 2021 |
|
$ |
|
— |
|
|
$ |
|
— |
|
|
$ |
|
— |
|
Other comprehensive (loss) income before reclassifications |
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Tax expense (benefit) |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Other comprehensive (loss) income before reclassifications, net of tax |
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Amounts reclassified from accumulated other comprehensive income |
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Tax expense |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
Amounts reclassified from accumulated other comprehensive income, net of tax |
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Net current period other comprehensive income, net of tax |
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Balance at December 31, 2021 |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
|
||
Other comprehensive (loss) income before reclassifications |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Tax expense (benefit) |
|
|
|
|
|
|
|
( |
) |
|
|
|
( |
) |
|
Other comprehensive (loss) income before reclassifications, net of tax |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Amounts reclassified from accumulated other comprehensive income |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Tax expense |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
Amounts reclassified from accumulated other comprehensive income, net of tax |
|
|
|
— |
|
|
|
|
( |
) |
|
|
|
( |
) |
Net current period other comprehensive income, net of tax |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Balance at December 31, 2022 |
|
$ |
|
( |
) |
|
$ |
|
|
|
$ |
|
|
||
F-30
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
10. Share-Based Compensation Expense
Predecessor Plans
Prior to the Business Combination, share-based payments to employees include grants of restricted share units (“RSUs”) and performance based restricted share units (“PRSUs”), which consist of both Class A-1 and Class B common units in each type, are measured based on their estimated grant date fair value. The grant date fair value of the RSUs is equal to the value of the shares acquired by the Predecessor’s initial investors at the time of Alight Holding’s formation in 2017. The grant date fair values of the PRSUs are based on a Monte Carlo simulation methodology, which requires management to make certain assumptions and apply judgement.
Management determined the expected volatility based on the average implied asset volatilities of comparable companies as we do not have sufficient trading history for the PRSUs. The expected term represents the period that the PRSUs are expected to be outstanding. Because of the lack of sufficient historical data necessary to calculate the expected term, we used the contractual vesting period of five years to estimate the expected term. For the Predecessor period, the key assumptions included in the Monte Carlo simulation were expected volatility of
The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period for awards expected to ultimately vest. As a result of the change in control related to the Business Combination, the vesting of the time-based PRSU Class B units accelerated on the Closing Date. Prior to the Closing Date, the time-based PRSUs vested ratably over periods of to
The following tables summarizes the unit activity related to the RSUs and PRSUs during the Predecessor periods as follows:
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
||||||
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
||||||
|
|
|
|
|
Grant Date |
|
|
|
|
|
Grant Date |
|
||||||
|
|
|
|
|
Fair Value |
|
|
|
|
|
Fair Value |
|
||||||
Predecessor |
|
RSUs |
|
|
Per Unit |
|
|
PRSUs |
|
|
Per Unit |
|
||||||
Balance as of December 31, 2019 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested |
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
||
Balance as of December 31, 2020 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested |
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
||
Balance as of June 30, 2021 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||
Successor Plans
Share-based payments consist of grants of RSUs and PRSUs. The Company recognizes compensation expense on a straight-line basis over the requisite service period for awards expected to ultimately vest.
Predecessor Replacement Awards
In connection with the Business Combination, the holders of certain unvested awards under the Predecessor plans were granted replacement awards in the Successor company.
F-31
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
The Class B and Class A-1 units that were replaced represent the Unvested Class A, Unvested Class B-1 and Unvested Class B-2 common shares subject to the forfeiture re-allocation provision per the Class Z instruments discussed in Note 9 “Stockholders’ and Members’ Equity”. These unvested shares are accounted for as restricted stock in accordance with ASC 718.
Successor Awards
In connection with the Business Combination, the Company adopted the Alight, Inc. 2021 Omnibus Incentive Plan. Under this plan, for grants issued during the Successor year ended December 31, 2022 and six months ended December 31, 2021, approximately
The Company begins to recognize expense associated with the PRSUs when the achievement of the performance condition is deemed probable. During the year ended December 31, 2022, based on management's analysis of the corresponding performance conditions, the Company increased expected achievement levels related to the PRSUs granted in 2021.
The fair value of each RSU and PRSU is based upon the grant date market price. The aggregate grant date fair value of RSUs and PRSUs granted during the Successor year ended December 31, 2022 was $
Restricted Share Units and Performance Based Restricted Share Units
The following tables summarizes the unit activity related to the RSUs and PRSUs during the Successor year ended December 31, 2022 and six months ended December 31, 2021:
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
||||||
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
||||||
|
|
|
|
|
Grant Date |
|
|
|
|
|
Grant Date |
|
||||||
|
|
|
|
|
Fair Value |
|
|
|
|
|
Fair Value |
|
||||||
|
|
RSUs(1) |
|
|
Per Unit |
|
|
PRSUs(1)(2) |
|
|
Per Unit |
|
||||||
Balance as of July 1, 2021 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested |
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
||
Balance as of December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested |
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
||
Balance as of December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
||||
Employee Stock Purchase Plan
In December 2022, the Company began offering its employees an Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, all full-time and certain part-time employees of the Company are eligible to purchase Class A common stock of the Company
F-32
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
twice per year at the end of a six-month payment period (a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than
Share-based Compensation
Total share-based compensation costs related to the RSUs and PRSUs are recorded in the Consolidated Statement of Comprehensive Income (Loss) as follows (in millions):
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
|
Year Ended, |
|
||||||||
|
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
|
December 31, |
|
||||||||
|
|
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
|
2020 |
|
||||||||
Cost of services, exclusive of depreciation and amortization |
|
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total share-based compensation expense |
|
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
As of December 31, 2022, total future compensation expense related to unvested RSUs is $
11. Earnings Per Share
Basic earnings per share is calculated by dividing the net (loss) income attributable to Alight, Inc. by the weighted average number of shares of Class A Common Stock issued and outstanding for the Successor period. The computation of diluted earnings per share reflects the potential dilution that could occur if dilutive securities and other contracts to issue shares were exercised or converted into shares or resulted in the issuance of shares that would then share in the net income of Alight, Inc. The Company’s Class V Common Stock and Class Z Common Stock do not participate in the earnings or losses of the Company and are therefore not participating securities and have not been included in either the basic or diluted earnings per share calculations.
In conjunction with the Business Combination, the Company issued Seller Earnouts contingent consideration, which is payable in the Company’s Common Stock when the related market conditions are achieved. As the related conditions to pay the consideration had not been satisfied as of the end of the Successor period, the Seller Earnouts were excluded from the diluted earnings per share calculations.
Basic and diluted (net loss) earnings per share are as follows (in millions, except for share and per share amounts):
|
|
Year Ended |
|
|
Six Months Ended |
|
||||
|
|
December 31, |
|
|
December 31, |
|
||||
|
|
2022 |
|
|
2021 |
|
||||
Basic and diluted (net loss) earnings per share: |
|
|
|
|
|
|
|
|
||
Numerator |
|
|
|
|
|
|
|
|
||
Net (loss) income attributable to Alight, Inc. - basic and diluted |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
Denominator |
|
|
|
|
|
|
|
|
||
Weighted-average shares outstanding - basic and diluted |
|
|
|
|
|
|
|
|
||
Basic and diluted (net loss) earnings per share |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
For the Successor year ended December 31, 2022,
F-33
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
12. Segment Reporting
The Company’s reportable segments have been determined using a management approach, which is consistent with the basis and manner in which the Company’s chief operating decision maker (“CODM”) uses financial information for the purposes of allocating resources and evaluating performance. The Company’s CODM is its Chief Executive Officer. The CODM evaluates the performance of the Company based on its total revenue and segment profit.
The CODM also uses revenue and segment profit to manage and evaluate our business, make planning decisions, and as performance measures for a Company-wide bonus plans. These key financial measures provide an additional view of our operational performance over the long-term and provide useful information that we use in order to maintain and grow our business.
The accounting policies of the segments are the same as those described in Note 2 “Accounting Policies and Practices.” The Company does not report assets by reportable segments as this information is not reviewed by the CODM on a regular basis.
Information regarding the Company’s current reportable segments is as follows (in millions):
|
|
Revenue |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||
|
|
Year Ended |
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
December 31, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
|
|
2022 |
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Employer Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
Project |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Employer Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Professional Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Project |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Professional Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Hosted Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
F-34
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
|
|
Segment Profit |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||
|
|
Year Ended |
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
December 31, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
|
|
2022 |
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Employer Solutions |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
Professional Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Hosted Business |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
— |
|
Total of all reportable segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction and integration expenses(1) |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Non-recurring professional expenses(2) |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
||
Transformation initiatives(3) |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other(4) |
|
|
|
|
|
|
( |
) |
|
|
|
|
( |
) |
|
|
|
||
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Intangible amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating (Loss) Income |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
(Gain) Loss from change in fair value of financial instruments |
|
|
|
( |
) |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
(Gain) Loss from change in fair value of tax receivable agreement |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
— |
|
|
|
— |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other (income) expense, net |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Loss Before Income Tax Expense (Benefit) |
|
$ |
|
( |
) |
$ |
|
( |
) |
|
|
$ |
|
( |
) |
$ |
|
( |
) |
Revenue by geographic location is as follows (in millions):
|
|
Successor |
|
|
|
|
Predecessor |
|
|||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
|
Six Months Ended |
Year Ended |
|
|||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
|
December 31, |
December 31, |
|
|||||||||
|
|
2022 |
|
|
2021 |
|
|
|
|
2021 |
2020 |
|
|||||||||
United States |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Rest of world |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
There was no single client who accounted for more than 10% of the Company’s revenues in any of the periods presented.
Long-lived assets, representing Fixed assets, net and Operating lease right of use assets, by geographic location is as follows (in millions):
|
|
Successor |
|
||||||||
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
United States |
|
$ |
|
|
|
|
$ |
|
|
||
Rest of world |
|
|
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
$ |
|
|
||
F-35
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
13. Derivative Financial Instruments
The Company is exposed to market risks, including changes in interest rates. To manage the risk related to these exposures, the Company has entered into various derivative instruments that reduce these risks by creating offsetting exposures.
Interest Rate Swaps
The Company has utilized swap agreements that will fix the floating interest rates associated with its Term Loan as shown in the following table:
Designation Date |
|
Effective Date |
|
Initial Notional Amount |
|
|
Notional Amount Outstanding as of |
|
|
Fixed Rate |
|
Expiration Date |
|||||||
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
||||||
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
||||||
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
||||||
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
||||||
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
||||||
|
|
$ |
|
|
|
|
n/a |
|
|
|
|
% |
|
||||||
|
|
$ |
|
|
|
|
n/a |
|
|
|
|
% |
|
||||||
|
|
$ |
|
|
|
|
n/a |
|
|
|
|
% |
|
||||||
|
|
$ |
|
|
|
|
n/a |
|
|
|
|
% |
|
||||||
Concurrent with the Term Loan refinancing, we amended our interest rate swap to incorporate Term SOFR. In accordance with Accounting Standards Codification Topic 848, Reference Rate Reform, we did not redesignate the interest rate hedges when they were amended from LIBOR to SOFR; as we are permitted to maintain designation through the transition. Also, during the Successor year ended December 31, 2022, we executed an additional interest rate swap, which has been designated as a cash flow hedge.
Our swap agreements amortize or accrete based on achieving targeted hedge ratios. All interest rate swaps have been designated as cash flow hedges. As a result of hedge amendments in December 2021 and July 2021, the fair value of the instruments at the time of re-designation are being amortized into interest expense over the remaining life of the instruments.
Financial Instrument Presentation
The fair values and location of outstanding derivative instruments recorded in the Consolidated Balance Sheets are as follows (in millions):
|
|
December 31, |
|
|
|
December 31, |
|
||||
|
|
2022 |
|
|
|
2021 |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
||
Other current assets |
|
$ |
|
|
|
|
$ |
|
|
||
Other assets |
|
|
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
|
|
|
|
||
Other current liabilities |
|
$ |
|
— |
|
|
|
$ |
|
|
|
Other liabilities |
|
|
|
— |
|
|
|
|
|
|
|
Total |
|
$ |
|
— |
|
|
|
$ |
|
|
|
The Company estimates that approximately $
F-36
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
14. Financial Instruments
Seller Earnouts
Upon completion of the Business Combination, the equity owners of Alight Holdings received an earnout in the form of non-voting shares of Class B-1 and Class B-2 Common Stock, which automatically converts into Class A Common Stock if, at any time during the seven years following the Closing Date certain criteria are achieved. See Note 9 “Stockholders’ and Members’ Equity” for additional information regarding the Seller Earnouts.
The portion of the Seller Earnouts related to employee compensation is accounted for as share-based compensation. See Note 10 “Share-Based Compensation Expense” for additional information.
The majority of the Seller Earnouts, which are not related to employee compensation, are accounted for as a contingent consideration liability at fair value within Financial instruments on the Consolidated Balance Sheets because the Seller Earnouts do not meet the criteria for classification within equity. This portion of the Seller Earnouts are subject to remeasurement at each balance sheet date and as of December 31, 2022 and December 31, 2021, the Seller Earnouts had a fair value of $
The fair value of the Seller Earnouts is determined using Monte Carlo simulation and Option Pricing Methods (Level 3 inputs, see Note 16 "Fair Value Measurements"). Significant unobservable inputs are used in the assessment of fair value, including the following assumptions: volatility of
Warrants
Upon the completion of the prior year Business Combination, there were issued and outstanding Company warrants to purchase shares of Class A Common Stock at a price of $
The Warrants had an expiration date of
The Company accounted for Warrants as liabilities at fair value within Financial instruments on the Consolidated Balance Sheets because the Warrants do not meet the criteria for classification within equity. The Warrants were subject to remeasurement at each balance sheet date. In December 2021, the majority of the Warrants were exercised under cashless (net) exercise provisions resulting in the issuance of
Just prior to the exercise and redemption of the Warrants, the Company remeasured the warrant liability to its fair value. Upon exercise of the Warrants, the respective carrying value of the warrant liability was reclassified into additional paid in capital. As of December 31, 2022 and 2021,
15. Tax Receivable Agreement
In connection with the Business Combination, Alight entered into the TRA with certain owners of Alight Holdings prior to the Business Combination. Pursuant to the TRA, the Company will pay certain sellers, as applicable, 85% of the tax benefits, of any savings that we realize, calculated using certain assumptions, as a result of (i) tax basis adjustments from sales and exchanges of Alight Holdings equity interests in connection with or following the Business Combination and certain distributions with respect to
F-37
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Alight Holdings equity interests, (ii) our utilization of certain tax attributes, and (iii) certain other tax benefits related to entering into the TRA.
Actual tax benefits realized by Alight may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including the use of an assumed weighted-average state and local income tax rate to calculate tax benefits. While the amount of existing tax basis, the anticipated tax basis adjustments and the actual amount and utilization of tax attributes, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, we expect that the payments that Alight may make under the TRA will be substantial.
The Company’s TRA liability established upon completion of the Business Combination is measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The TRA liability balance at December 31, 2022 assumes: (i) a constant blended U.S. federal, state and local income tax rate of
Subsequent to the Business Combination, we will record additional liabilities under the TRA when Class A units of Alight Holdings are exchanged for Class A Common Stock. Liabilities resulting from these exchanges will be recorded on a gross undiscounted basis and are not remeasured at fair value. During the Successor year ended December 31, 2022, an additional TRA liability of $
The following table summarizes the changes in the TRA liabilities (in millions):
|
|
Tax Receivable |
|
||
|
|
Agreement Liability |
|
||
Beginning balance as of December 31, 2021 |
|
$ |
|
|
|
Measurement period adjustment |
|
|
|
( |
) |
Fair value remeasurement |
|
|
|
( |
) |
Conversion of noncontrolling interest |
|
|
|
|
|
Ending Balance as of December 31, 2022 |
|
|
|
|
|
Less: current portion included in other current liabilities |
|
|
|
( |
) |
Total long-term tax receivable agreement liability |
|
$ |
|
|
|
16. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on reliability, as follows:
The Company’s financial assets and liabilities measured at fair value on a recurring basis are as follows (in millions):
|
|
December 31, 2022 |
|
|||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest rate swaps |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
||
Total assets recorded at fair value |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contingent consideration liability |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Seller Earnouts liability |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Tax receivable agreement liability |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Total liabilities recorded at fair value |
|
$ |
|
— |
|
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
|
||
F-38
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
|
|
December 31, 2021 |
|
|||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest rate swaps |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
||
Total assets recorded at fair value |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest rate swaps |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
||
Contingent consideration liability |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Seller Earnouts liability |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Tax receivable agreement liability |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Total liabilities recorded at fair value |
|
$ |
|
— |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives
The valuations of the derivatives intended to mitigate our interest rate risk are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves, interest rate volatility, or spot and forward exchange rates, and reflects the contractual terms of these instruments, including the period to maturity. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential non-performance risk.
Contingent Consideration
The contingent consideration liabilities relate to acquisitions completed during the Successor six months ended December 31, 2021, the Predecessor years ended December 31, 2020 and 2018, and are included in Other current liabilities and Other liabilities on the Consolidated Balance Sheets. The fair value of these liabilities is determined using a discounted cash flow analysis. Changes in the fair value of the liabilities are included in Other (income) expense, net in the Consolidated Statements of Comprehensive Income (Loss). Significant unobservable inputs are used in the assessment of fair value, including assumptions regarding discount rates and probability assessments based on the likelihood of reaching the various targets set out in the acquisition agreements.
The following table summarizes the changes in deferred contingent consideration liabilities (in millions):
|
|
Successor |
|
|
|
Predecessor |
|
|||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
Year Ended |
|
||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
December 31, |
|
||||||||
|
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
2020 |
|
||||||||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
Acquisitions |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Measurement period adjustments |
|
|
|
( |
) |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
Accretion of contingent consideration |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
— |
|
||
Remeasurement of acquisition-related contingent consideration |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
— |
|
|
|
|
|
Payments |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
— |
|
|
|
( |
) |
Ending Balance |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
||||
F-39
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Non-Recurring Fair Value Measurements
The Company’s financial liabilities measured at fair value on a non-recurring basis are as follows (in millions):
|
|
December 31, 2022 |
|
|
|
December 31, 2021 |
|
||||||||||||||
|
|
Carrying Value |
|
|
Fair Value |
|
|
|
Carrying Value |
|
|
Fair Value |
|
||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Current portion of long-term debt, net |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Long-term debt, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
The carrying value of the Term Loan, Secured Senior Notes and Unsecured Senior Notes include the outstanding principal balances, less any unamortized discount or premium. The carrying value of the Term Loan approximates fair value as it bears interest at variable rates, and we believe our credit risk is consistent with when the debt originated. The outstanding balances under the Senior Notes have fixed interest rates and the fair value is classified as Level 2 within the fair value hierarchy and corroborated by observable market data (see Note 8 “Debt”).
The carrying amounts of Cash and cash equivalents, Receivables, net and Accounts payable and accrued liabilities approximate their fair values due to the short-term maturities of these instruments.
During the Successor year ended December 31, 2022, the six months ended December 31, 2
17. Restructuring and Integration
During the third quarter of 2019, management initiated a restructuring and integration plan (“the Plan”) following the completion of the Hodges acquisition and in anticipation of the NGA HR acquisition, which was completed on November 1, 2019. The Plan is intended to integrate and streamline operations across the Company and is expected to generate cost reductions related to position eliminations and facility and system rationalizations. This restructuring and integration plan is complete as of December 31, 2022.
From the inception of the Plan through December 31, 2022, the Company has incurred total expenses of $
The following table summarizes restructuring costs by type that have been incurred through December 31, 2022:
|
|
Successor |
|
|
|
Predecessor |
|
|
|
|
|||||||||||
|
|
|
Year Ended |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
December 31, |
|
|
Six months ended |
|
|
|
Six months ended |
|
|
Total Spend |
|
||||||||
|
|
2022 |
|
|
December 31, 2021 |
|
|
|
June 30, 2021 |
|
|
From Inception |
|
||||||||
Employer Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Severance and Related Benefits |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Other Restructuring Costs(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Employer Solutions |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Professional Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Severance and Related Benefits |
|
$ |
|
|
|
$ |
|
— |
|
|
|
$ |
|
|
|
$ |
|
|
|||
Other Restructuring Costs(1) |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|||
Total Professional Services |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Total Restructuring Costs |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
F-40
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
As of December 31, 2022, approximately $
|
|
Severance and Related Benefits |
|
|
Other Restructuring Costs |
|
|
Total |
|
||||||
Accrued restructuring liability as of December 31, 2021 |
|
$ |
|
|
|
$ |
|
— |
|
|
$ |
|
|
||
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cash payments |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Non-cash charges(1) |
|
|
|
— |
|
|
|
|
|
|
|
|
|
||
Accrued restructuring liability as of December 31, 2022 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|||
18. Employee Benefits
Defined Contribution Savings Plans
Certain of the Company’s employees participate in a defined contribution savings plan sponsored by the Company. For the Successor year ended December 31, 2022, the six months ended December 31, 2021, and the Predecessor six months ended June 30, 2021 and year ended December 31, 2020, expenses were $
19. Lease Obligations
The Company determines if an arrangement is a lease at inception. Operating leases are included in Other assets, Other current liabilities and Other liabilities in the Consolidated Balance Sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate which is based on the information available at the lease commencement date. The Company’s lease terms may include options to extend or not terminate the lease when it is reasonably certain that it will exercise any such options. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the expected lease term.
The Company’s most significant leases are office facilities. For these leases, the Company has elected the practical expedient permitted under Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASC 842”) to combine lease and non-lease components. As a result, non-lease components are accounted for as an element within a single lease. The Company’s remaining operating leases are primarily comprised of equipment leases. The Company also leases certain IT equipment under finance leases which are reflected on the Company’s Consolidated Balance Sheets as computer equipment within Fixed assets, net.
Certain of the Company’s operating lease agreements include variable payments that are passed through by the landlord, such as insurance, taxes, common area maintenance, payments based on the usage of the asset, and rental payments adjusted periodically for inflation. These variable payments are not included in the lease liabilities reflected on the Company’s Consolidated Balance Sheets.
The Company does sublease portions of our buildings to third parties. The right of use liability associated with these leases are not offset with expected rental incomes, as we remain primarily obligated for the leases.
The Company’s lease agreements do not contain material residual value guarantees, restrictions, or covenants.
The components of lease expense were as follows (in millions):
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
|
Year Ended |
|
||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
|
December 31, |
|
||||||||
|
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
|
2020 |
|
||||||||
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of leased assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest of lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Variable and short-term lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sublease income |
|
|
|
( |
) |
|
|
|
( |
) |
|
|
|
|
( |
) |
|
|
|
( |
) |
Total lease cost |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
F-41
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
|
|
Successor |
|
|||||||
|
|
December 31, |
|
|
December 31, |
|
||||
|
|
2022 |
|
|
2021 |
|
||||
Operating Leases |
|
|
|
|
|
|
|
|
||
|
$ |
|
|
|
$ |
|
|
|||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Total operating lease liabilities |
|
$ |
|
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
|
||
Finance Leases |
|
|
|
|
|
|
|
|
||
Fixed assets, net |
|
$ |
|
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
|
||
Current finance lease liabilities |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|||
Total finance lease liabilities |
|
$ |
|
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
|
||
Weighted Average Remaining Lease Term (in years) |
|
|
|
|
|
|
|
|
||
Operating leases |
|
|
|
|
|
|
|
|
||
Finance leases |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
||
Operating leases |
|
|
|
% |
|
|
|
% |
||
Finance leases |
|
|
|
% |
|
|
|
% |
||
Supplemental cash flow and other information related to leases was as follows (in millions):
|
|
Successor |
|
|
|
Predecessor |
|
||||||||||||||
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
|
Year Ended |
|
||||||||
|
|
December 31, |
|
|
December 31, |
|
|
|
June 30, |
|
|
December 31, |
|
||||||||
|
|
2022 |
|
|
2021 |
|
|
|
2021 |
|
|
2020 |
|
||||||||
Cash paid for amounts included in the measurement of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating cash flows from operating leases |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Operating cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financing cash flows from finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Right-of use assets obtained in exchange for lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating leases |
|
$ |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
|
|
||||
Finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
F-42
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
Future lease payments for lease obligations with initial terms in excess of one year as of December 31, 2022 are as follows (in millions):
|
|
Finance |
|
|
Operating |
|
||||
2023 |
|
$ |
|
|
|
$ |
|
|
||
2024 |
|
|
|
|
|
|
|
|
||
2025 |
|
|
|
|
|
|
|
|
||
2026 |
|
|
|
— |
|
|
|
|
|
|
2027 |
|
|
|
— |
|
|
|
|
|
|
Thereafter |
|
|
|
— |
|
|
|
|
|
|
Total lease payments |
|
|
|
|
|
|
|
|
||
Less: amount representing interest |
|
|
|
( |
) |
|
|
|
( |
) |
Total lease obligations, net |
|
|
|
|
|
|
|
|
||
Less: current portion of lease obligations, net |
|
|
|
( |
) |
|
|
|
( |
) |
Total long-term portion of lease obligations, net |
|
$ |
|
|
|
$ |
|
|
||
The operating lease future lease payments include sublease rental income of $
20. Commitments and Contingencies
Legal
The Company is subject to various claims, tax assessments, lawsuits, and proceedings that arise in the ordinary course of business relating to the delivery of our services and the effectiveness of our technologies. The damages claimed in these matters are or may be substantial. Accruals for any exposures, and related insurance or other receivables, when applicable, are included on the Consolidated Balance Sheets and have been recognized in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to the extent that losses are deemed probable and are reasonably estimable. These amounts are adjusted from time to time as developments warrant. Management believes that the reserves established are appropriate based on the facts currently known. The reserves recorded at December 31, 2022 and December 31, 2021 were not material.
Guarantees and Indemnifications
The Company provides a variety of service performance guarantees and indemnifications to its clients. The maximum potential amount of future payments represents the notional amounts that could become payable under the guarantees and indemnifications if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or other methods. These notional amounts may bear no relationship to the future payments that may be made, if any, for these guarantees and indemnifications.
To date, the Company has not been required to make any payment under any client arrangement as described above. The Company has assessed the current status of performance risk related to the client arrangements with performance guarantees and believes that any potential payments would be immaterial to the Consolidated Financial Statements.
Purchase Obligations
The Company’s expected cash outflow for non-cancellable purchase obligations related to purchases of information technology assets and services is $
Service Obligations
On September 1, 2018, the Company executed an agreement to form a strategic partnership with Wipro, a leading global information technology, consulting and business process services company.
The Company’s expected cash outflow for non-cancellable service obligations related to our strategic partnership with Wipro is $
F-43
Alight, Inc.
Notes to Consolidated Financial Statements — Continued
The Company may terminate its arrangement with Wipro for cause or for the Company’s convenience. In the case of a termination for convenience, the Company would be required to pay a termination fee, including certain of Wipro’s unamortized costs, plus
F-44
21. Subsequent Events
Two-Year Strategic Transformation Restructuring Program
F-45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required or necessary disclosures. Based on the aforementioned evaluation, our principal executive officer and principal financial officer concluded that, due to the material weaknesses in our internal control over financial reporting related to our income tax accounting as further described below, our disclosure controls and procedures were not effective as of December 31, 2022.
Notwithstanding, the conclusion by management that our disclosure controls and procedures as of December 31, 2022 were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described below, management believes that the consolidated financial statements and related financial information included in this Annual Report on Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with U.S. GAAP.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a–15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management, including the principal executive officer and the principal financial officer) and the Company’s Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with GAAP. The Company’s accounting policies and internal controls over financial reporting, established and maintained by management, are under the general oversight of the Audit Committee of the Board of Directors (the “Audit Committee”).
The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, our management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.
Based on this evaluation, management concluded that as of December 31, 2022, our internal control over financial reporting was not effective because of a material weakness in internal control over financial reporting as described below; this material weakness related to internal controls over the accounting for the income tax provision in accordance with GAAP.
Specifically, the Company did not have the appropriate complement of resources within its tax department commensurate with the nature and complexity associated with the Company’s income tax provision process. As a result, the design and operation of our internal controls associated with the accounting for the Company’s income tax provision was not designed to operate at a level of precision necessary to provide reasonable assurance that a material misstatement of the Company’s annual or interim financial statements would be detected or prevented.
As disclosed above, management does not believe that these control deficiencies materially affected the results and accuracy of any of its annual or interim financial statements. Further, management believes and has concluded that the consolidated financial statements for the prior periods and included in this report fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
F-46
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
We are committed to maintaining a strong internal control environment. We have made initial progress towards remediation and continue to implement our remediation plan for the material weakness in internal control over financial reporting described above, with appropriate oversight from the Audit Committee. Specific remedial actions currently in progress include:
(i) conducting a complete assessment of the organizational structure of the Company’s tax team to identify any gaps or weaknesses, including necessary subject matter expertise, and make necessary changes to the personnel;
(ii) engaging and working with an independent, third-party review team to conduct a review of tax department processes and procedure with a particular emphasis on roles, responsibilities and accountabilities;
(iii) enhancing the level of precision in management’s review controls related to the review of significant tax balances to ensure transactions are recorded accurately and completely in accordance with GAAP, and
(iv) strengthening our income tax internal controls with enhanced documentation, technical oversight and training. Management believes that the remediation plan’s design and implementation will effectively remediate the material weakness. Until the remediation activities are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weakness described above will continue to exist. Management believes the remediation measures will strengthen the Company’s internal control over financial reporting when fully implemented and remediate the material weakness.
Changes in Internal Control Over Financial Reporting
Except for the determination by management of the material weaknesses in internal controls over financial reporting described above, there have been no other changes in our internal control over financial reporting that occurred during the fourth quarter of the year ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this annual report, has issued a report on our internal control over financial reporting. That report follows.
F-47
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Alight, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Alight, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Alight, Inc. (the Company) has not maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management identified a material weakness in the design and operating effectiveness of controls over the accounting for income taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for the year ended December 31, 2022, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for the period from July 1, 2021 through December 31, 2021 (Successor), the related consolidated statements of comprehensive income (loss), members’ equity and cash flows for the period from January 1, 2021 through June 30, 2021 (Predecessor) and the year ended December 31, 2020, and the related notes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated March 1, 2023, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
March 1, 2023
F-48
Item 9B. Other Information.
Section 13(r) Disclosure
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the Exchange Act, we hereby incorporate by reference herein Exhibit 99.1 of this report, which includes disclosures regarding activities at Atlantia S.p.A., which may be, or may have been considered at the time, an affiliate of Blackstone and, therefore, our affiliate.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
F-49
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required under this Item will be contained in the definitive Proxy Statement for our 2023 annual meeting of stockholders (the "Proxy Statement"), incorporated herein by reference.
Item 11. Executive Compensation.
The information required under this Item will be contained in our Proxy Statement, incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required under this Item will be contained in our Proxy Statement, incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required under this Item will be contained in our Proxy Statement, incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required under this Item will be contained in our Proxy Statement, incorporated herein by reference.
F-50
PART IV
Item 15. Exhibit and Financial Statement Schedules.
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements of Alight, Inc.
Financial Statements:
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022, 2021, and 2020
Consolidated Balance Sheets at December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
Exhibit Number |
|
Description |
2.1† |
|
|
3.1 |
|
|
3.2 |
|
|
4.1 |
|
|
4.2 |
|
|
4.3 |
|
Form of 6.750% Senior Notes due 2025 (included in Exhibit 4.1) |
4.4 |
|
|
4.5 |
|
|
4.6 |
|
|
4.7 |
|
|
4.8 |
|
|
4.9 |
|
F-51
|
|
|
4.10 |
|
|
4.11 |
|
Form of 5.750% Senior Secured Notes due 2025 (included in Exhibit 4.9). |
4.12 |
|
|
10.1 |
|
|
10.2 |
|
|
10.3† |
|
|
10.4 |
|
|
10.5 |
|
|
10.6 |
|
|
10.7 |
|
|
10.8 |
|
|
10.9+ |
|
|
10.10+ |
|
|
10.11+ |
|
|
10.12+ |
|
|
10.1+ |
|
|
10.14 |
|
|
10.15 |
|
F-52
10.16+ |
|
|
10.17+ |
|
|
10.18 |
|
|
10.19 |
|
|
10.20 |
|
|
10.21* |
|
|
10.22* |
|
|
10.23 |
|
|
21.1* |
|
|
23.1* |
|
|
31.1* |
|
|
31.2* |
|
|
32.1** |
|
|
32.2** |
|
|
99.1* |
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance Document |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
** Furnished herewith.
+ Indicates a management or compensatory plan.
† Schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Registration S-K. The Registrant hereby agrees to furnish a copy of any omitted schedules to the Commission upon request.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
Item 16. Form 10-K Summary
None.
F-53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Alight, Inc. |
|
|
|
|
|
Date: March 1, 2023 |
|
By: |
/s/ Stephan D. Scholl |
|
|
|
Stephan D. Scholl |
|
|
|
Principal Executive Officer |
F-54
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on the 1st day of March, 2023.
Name |
|
Title |
|
|
|
/s/ Stephan D. Scholl |
|
Chief Executive Officer and Director |
Stephan D. Scholl |
|
(Principal Executive Officer) |
|
|
|
/s/ Katie Rooney |
|
Chief Financial Officer |
Katie Rooney |
|
(Principal Financial Officer and Principal Accounting Officer) |
|
|
|
/s/ William P. Foley, II |
|
Chairman of the Board of Directors |
William P. Foley, II |
|
|
|
|
|
/s/ Daniel S. Henson |
|
Director |
Daniel S. Henson |
|
|
|
|
|
/s/ David N. Kestnbaum |
|
Director |
David N. Kestnbaum |
|
|
|
|
|
/s/ Richard N. Massey |
|
Director |
Richard N. Massey |
|
|
|
|
|
/s/ Erika Meinhardt |
|
Director |
Erika Meinhardt |
|
|
|
|
|
/s/ Regina M. Paolillo |
|
Director |
Regina M. Paolillo |
|
|
|
|
|
/s/ Peter F. Wallace |
|
Director |
Peter F. Wallace |
|
|
|
|
|
/s/ Denise Williams |
|
Director |
Denise Williams |
|
|
F-55