# Alight, Inc. / Delaware (ALIT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Alight, Inc. / Delaware's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1809104/000095017023005480/alit-20221231.htm
Accession: 0000950170-23-005480
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ALIT/
All MD&A years: /company/ALIT/mda/
Previous year: /company/ALIT/mda/fy2021/ (FY 2021)
Next year: /company/ALIT/mda/fy2023/ (FY 2023)

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.

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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.

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The following table sets forth our historical results of operations for the periods indicated below:

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[[/GREPCENT_TABLE]]

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.

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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:

•
Measure does not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;

•
Measure does not reflect our interest expense or the cash requirements to service interest or principal payments on our indebtedness;

•
Measure does not reflect our tax expense or the cash requirements to pay our taxes, including payments related to the Tax Receivable Agreement;

•
Measure does not reflect the impact on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

•
Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often need to be replaced in the future, and the adjusted measure does not reflect any cash requirements for such replacements; and

•
Other companies may calculate adjusted measures differently, limiting its usefulness as a comparative measure.

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:

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(1)
Income tax effects have been calculated based on the statutory tax rates for both U.S. and foreign jurisdictions based on the Company's mix of income and adjusted for significant changes in fair value measurement.

(2)
Assumes the full exchange of the units held by noncontrolling interests for shares of Class A Common Stock of Alight, Inc. pursuant to the exchange agreement.

(3)
Represents the number of shares of Class A Common Stock issued in relation to the warrant exercises completed in December 2021, not fully included in the weighted average shares outstanding.

(4)
Includes non-vested time-based restricted stock units that were determined to be antidilutive for U.S. GAAP diluted earnings per share purposes.

(5)
Excludes two tranches of contingently issuable seller earnout shares: (i) 7.5 million shares will be issued if the Company's Class A Common Stock's volume-weighted average price ("VWAP") is $12.50 for 20 consecutive trading days; (ii) 7.5 million share will be issued if the Company's Class A Common Stock VWAP is $15.00 for 20 consecutive trading days. Both tranches have a seven-year duration.

(6)
Excludes 32,852,974 and 16,036,220 performance-based units, which represents maximum achievement of the respective performance conditions for units granted during the year and six months ended December 31, 2022 and 2021, respectively.

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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:

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(1)
Transaction and integration expenses includes activity related to the 2022, 2021 and 2020 acquisitions.

(2)
Non-recurring professional expenses includes external advisor and legal costs related to the Company's Business Combination completed in 2021.

(3)
Transformation initiatives in fiscal year 2020 includes expenses related to enhancing our data center.

(4)
For the year ended December 31, 2022, other primarily includes expenses related to debt refinancing completed in the first quarter of 2022 and other non-operational activities. For the Successor six months ended December 31, 2021 and the Predecessor six months ended June 30, 2021, other primarily includes activities related to long-term incentives. For the Predecessor year ended December 31, 2020, other primarily includes expenses related to long-term incentives and acquisitions.

37

Segment Revenue and Adjusted EBITDA

Employer Solutions Segment Results

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[[/GREPCENT_TABLE]]

(1)
A reconciliation of the Company's Net Loss to Adjusted EBITDA on a consolidated basis is presented above under "Non-GAAP Financial Measures."

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

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[[/GREPCENT_TABLE]]

(1)
A reconciliation of the Company’s Net Loss to Adjusted EBITDA on a consolidated basis is presented above under “Non-GAAP Financial Measures.”

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

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[[/GREPCENT_TABLE]]

(1)
A reconciliation of the Company’s Net Loss to Adjusted EBITDA on a consolidated basis is presented above under “Non-GAAP Financial Measures.”

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.

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[[/GREPCENT_TABLE]]

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.