Alight, Inc. / Delaware (ALIT) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 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, 2023. See ‘Non-GAAP Financial Measures’ below for further discussion.
BUSINESS
Overview
Alight delivers human capital management solutions to many of the world’s largest and most complex companies. This includes the implementation and administration of both employee wellbeing (e.g. health, wealth and leaves benefits) and global payroll solutions. In addition, the Company implements and runs human capital management software platforms on behalf of third-party providers. Alight’s numerous solutions and services are utilized year-round by employees and their family members in support of their overall health, wealth and wellbeing goals. Participants can access their solutions digitally, including through a mobile application on Alight Worklife®, our intuitive, cloud-based employee engagement platform. Through Alight Worklife, the Company believes it is defining the future of employee wellbeing by providing an enterprise level, integrated offering designed to drive better outcomes for organizations and individuals.
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, such as improved employee productivity and retention, while also realizing a return on their people investment. Our data, analytics and AI allow us to deliver actionable insights that drive measurable outcomes, such as healthcare claims savings, 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.
On July 2, 2021 (the “Closing Date”), Alight Holding Company, LLC (the "Predecessor" or "Alight Holdings") 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 of December 31, 2023, Alight owned 95% 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 5% as of December 31, 2023.
As a result of the Business Combination, for accounting purposes, the Company is the acquirer and Alight Holdings is the acquiree and accounting predecessor.
Segment Reporting
Effective January 1, 2023, the Company's former Hosted business revenues and gross margin are reported in Other as the business is no longer core to the Company’s operations. There is no change in composition among the Employer Solutions and Professional Services segments.
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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 years ended December 31, 2023, December 31, 2022 and the six months ended December 31, 2021, and the Predecessor six months ended June 30, 2021.
We prepared our discussion of the results of operations by comparing the results of the Successor year ended December 31, 2023 to the Successor year ended December 31, 2022 and 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 end, 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.
Except for the discussion of adjusted gross profit, year-to-year comparisons between 2022 and 2021 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, 2022.
The following table sets forth our historical results of operations for the periods indicated below:
| Successor | Predecessor | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended | Year Ended | Six Months Ended | Six Months Ended | ||||||||||||||||
| December 31, | December 31, | December 31, | June 30, | ||||||||||||||||
| (in millions) | 2023 | 2022 | 2021 | 2021 | |||||||||||||||
| Revenue | $ | 3,410 | $ | 3,132 | $ | 1,554 | $ | 1,361 | |||||||||||
| Cost of services, exclusive of depreciation and amortization | 2,188 | 2,080 | 1,001 | 888 | |||||||||||||||
| Depreciation and amortization | 82 | 56 | 21 | 38 | |||||||||||||||
| Gross Profit | 1,140 | 996 | 532 | 435 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||
| Selling, general and administrative | 754 | 671 | 304 | 222 | |||||||||||||||
| Depreciation and intangible amortization | 339 | 339 | 163 | 111 | |||||||||||||||
| Goodwill Impairment | 148 | — | — | — | |||||||||||||||
| Total Operating expenses | 1,241 | 1,010 | 467 | 333 | |||||||||||||||
| Operating Income (Loss) | (101 | ) | (14 | ) | 65 | 102 | |||||||||||||
| Other (Income) Expense | |||||||||||||||||||
| (Gain) Loss from change in fair value of financial instruments | 10 | (38 | ) | 65 | — | ||||||||||||||
| (Gain) Loss from change in fair value of tax receivable agreement | 118 | (41 | ) | (37 | ) | — | |||||||||||||
| Interest expense | 131 | 122 | 57 | 123 | |||||||||||||||
| Other (income) expense, net | 6 | (16 | ) | 3 | 9 | ||||||||||||||
| Total Other (income) expense, net | 265 | 27 | 88 | 132 | |||||||||||||||
| Income (Loss) Before Taxes | (366 | ) | (41 | ) | (23 | ) | (30 | ) | |||||||||||
| Income tax expense (benefit) | (4 | ) | 31 | 25 | (5 | ) | |||||||||||||
| Net Income (Loss) | (362 | ) | (72 | ) | (48 | ) | (25 | ) | |||||||||||
| Net income (loss) attributable to noncontrolling interests | (17 | ) | (10 | ) | (13 | ) | — | ||||||||||||
| Net Income (Loss) Attributable to Alight, Inc. | $ | (345 | ) | $ | (62 | ) | $ | (35 | ) | $ | (25 | ) |
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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 clients 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.
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.
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.
Goodwill impairment
Goodwill impairment consists of charges relating to Goodwill. We review goodwill for impairment annually on October 1 and more frequently if events or changes in circumstances indicate that an impairment may exist. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit’s goodwill is calculated and an impairment loss equal to the excess is recorded.
(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 (the "TRA") 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.
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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, 2023 Compared to the Year Ended December 31, 2022
Revenue
Revenues were $3,410 million for the twelve months ended December 31, 2023 as compared to $3,132 million for the prior year period. The increase of $278 million reflects growth of 9.0% in our Employer Solutions segment and 13.5% in our Professional Services segment. We also measure revenue growth as it relates to our cloud-based products and solutions that are central to our Alight Worklife® platform and our next generation product suite, BPaaS Solutions. For the twelve months ended December 31, 2023, we recorded BPaaS revenue of $756 million, which represented growth of 34.0% compared to the prior year period.
In addition, we also consider BPaaS bookings, defined as total contract value ("TCV") for BPaaS customer agreements executed in the period, to be a key indicator of future revenue growth and is used as a metric of commercial activity by management and investors. For the twelve months ended December 31, 2023, BPaaS bookings of $747 million represents a decrease of 14.2% compared to the prior year period. Since the start of 2021, we have delivered BPaaS TCV bookings of nearly $2.2 billion, ahead of our three-year goal of $1.5 billion by the end of 2023.
Recurring revenues, excluding Other increased by $242 million, or 9.3%, to $2,837 million from $2,595 million, primarily due to growth in both the Employer Solutions and Professional Services segments. Growth in Employer Solutions is a result of higher revenues related to net commercial activity and our 2022 acquisition, partially offset by lower volumes. Growth in Professional Services is primarily a result of higher project revenues.
Cost of Services, exclusive of Depreciation and Amortization
Cost of services, exclusive of depreciation and amortization, increased $108 million, or 5.2%, for the year ended December 31, 2023 as compared to the prior year period. The increase was primarily driven by growth in revenues, including investments in key resources and as a result of our 2022 acquisition, partially offset by productivity initiatives.
Selling, General and Administrative
Selling, general and administrative expenses increased $83 million, or 12.4%, for the year ended December 31, 2023 as compared to the prior year period. The increase was primarily driven by the inclusion of expenses from our 2022 acquisition and costs incurred from our previously announced restructuring program, partially offset by lower compensation expenses related to share-based awards.
Depreciation and Intangible Amortization
Depreciation and intangible amortization expenses remained consistent when comparing the year ended December 31, 2023 to the prior year period.
Goodwill Impairment
In connection with our strategic portfolio review, we identified a goodwill impairment in the Cloud Services reporting unit and recorded a $148 million non-cash goodwill impairment charge during the year ended December 31, 2023. There was no impairment recognized in the year ended December 31, 2022.
Change in Fair Value of Financial Instruments
There was a loss of $10 million related to the change in the fair value of financial instruments for the year ended December 31, 2023 compared to a gain of $38 million for the prior year period. 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. Changes in the fair value are due to changes in the underlying assumptions, including changes in the risk-free interest rate, volatility, and the closing stock price for the period. See Note 14 "Financial Instruments" for additional information.
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Change in Fair Value of Tax Receivable Agreement
The remeasurement of the fair value of the TRA resulted in a loss of $118 million for twelve months ended December 31, 2023, compared to a gain of $41 million for the prior year period. This revaluation loss was due to changes in the discount rate, passage of time, and changes in the expected timing of the utilization of tax attributes during the term of the TRA, which we are required to revalue at the end of each reporting period.
Interest Expense
Interest expense increased $9 million for the year ended December 31, 2023 as compared to the prior year period. The increase was primarily due to higher interest expense on our Term Loan due to movement in market interest rates. See Note 8 “Debt” for additional information.
Loss before Income Tax Expense (Benefit)
Loss before income taxes was $366 million for the year ended December 31, 2023 as compared to loss before taxes of $41 million for the year ended December 31, 2022. The increase in loss before income taxes was primarily due to the non-cash goodwill impairment charge, and non-operating fair value remeasurements associated with financial instruments and the TRA.
Income Tax Expense (Benefit)
Income tax benefit was $4 million for the year ended December 31, 2023, as compared to an income tax expense of $31 million for the prior year period. The effective tax rate of 1% for the year ended December 31, 2023 is lower than the 21% U.S. statutory corporate income tax rate primarily due to the Company's organizational structure after the Business Combination, the recognition of expenses which are not deductible for income tax purposes, including the goodwill impairment charge, and valuation allowances. The effective tax rate of (76%) for the year ended December 31, 2022 was primarily due to the recognition of a benefit for an uncertain tax position for which the statute of limitations has lapsed, and partially offset by losses in certain non-U.S. jurisdictions for which tax benefits have not been recorded. See Note 7 “Income Taxes” for additional 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.
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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:
| Year Ended | Year Ended | Six Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | December 31, | |||||||||||||
| (in millions, except share and per share amounts) | 2023 | 2022 | 2021 | ||||||||||||
| Numerator: | |||||||||||||||
| Net (Loss) Income Attributable to Alight, Inc. | $ | (345 | ) | $ | (62 | ) | $ | (35 | ) | ||||||
| Conversion of noncontrolling interest | (17 | ) | (10 | ) | (13 | ) | |||||||||
| Intangible amortization | 319 | 316 | 153 | ||||||||||||
| Share-based compensation | 160 | 181 | 67 | ||||||||||||
| Transaction and integration expenses (1) | 29 | 19 | 13 | ||||||||||||
| Restructuring | 85 | 63 | 5 | ||||||||||||
| (Gain) Loss from change in fair value of financial instruments | 10 | (38 | ) | 65 | |||||||||||
| (Gain) Loss from change in fair value of tax receivable agreement | 118 | (41 | ) | (37 | ) | ||||||||||
| Other (2) | 151 | (1 | ) | 12 | |||||||||||
| Tax effect of adjustments (3) | (125 | ) | (121 | ) | (62 | ) | |||||||||
| Adjusted Net Income | $ | 385 | $ | 306 | $ | 168 | |||||||||
| Denominator: | |||||||||||||||
| Weighted average shares outstanding - basic | 489,461,259 | 458,558,192 | 439,800,624 | ||||||||||||
| Weighted average shares outstanding - diluted | 489,461,259 | 458,558,192 | 439,800,624 | ||||||||||||
| Exchange of noncontrolling interest units(4) | 44,569,341 | 74,665,373 | 77,459,687 | ||||||||||||
| Impact of warrants exercised(5) | — | — | 14,490,641 | ||||||||||||
| Impact of unvested RSUs(6) | 10,080,390 | 7,624,817 | 7,007,072 | ||||||||||||
| Adjusted shares of Class A Common Stock outstanding - diluted(7)(8) | 544,110,990 | 540,848,382 | 538,758,024 | ||||||||||||
| Basic (Net Loss) Earnings Per Share | $ | (0.70 | ) | $ | (0.14 | ) | $ | (0.08 | ) | ||||||
| Diluted (Net Loss) Earnings Per Share | $ | (0.70 | ) | $ | (0.14 | ) | $ | (0.08 | ) | ||||||
| Adjusted Diluted Earnings Per Share(7) (8) | $ | 0.71 | $ | 0.57 | $ | 0.31 |
(1)
Transaction and integration expenses primarily relate to acquisition and divestiture activities.
(2)
Other primarily includes a $148 million non-cash goodwill impairment charge for the year ended December 31, 2023 related to the Company’s Cloud Services reporting unit.
(3)
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.
(4)
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.
(5)
Represents the number of shares of Class A Common Stock issued in relation to warrant exercises completed in December 2021, not fully included in the weighted average shares outstanding.
(6)
Includes non-vested time-based restricted stock units that were determined to be antidilutive for U.S. GAAP diluted earnings per share purposes.
(7)
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 any 20 trading days within a consecutive period of 30 trading days; (ii) 7.5
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million share will be issued if the Company's Class A Common Stock VWAP is $15.00 for any 20 trading days within a consecutive period of 30 trading days. Both tranches have a seven-year duration.
(8)
Excludes 27,411,360 and 32,852,974 performance-based units, which represents the gross number of shares expected to vest based on achievement of performance conditions as of December 31, 2023 and 2022, respectively.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA 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. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue. Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures used by management and our stakeholders to provide useful supplemental information that enables a better comparison of our performance across periods as well as to evaluate our core operating performance. A reconciliation of Adjusted EBITDA to Net Loss is as follows:
| Successor | Predecessor | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended | Year Ended | Six Months Ended | Six Months Ended | ||||||||||||||||||
| December 31, | December 31, | December 31, | June 30, | ||||||||||||||||||
| (in millions) | 2023 | 2022 | 2021 | 2021 | |||||||||||||||||
| Net Loss | $ | (362 | ) | $ | (72 | ) | $ | (48 | ) | $ | (25 | ) | |||||||||
| Interest expense | 131 | 122 | 57 | 123 | |||||||||||||||||
| Income tax expense (benefit) | (4 | ) | 31 | 25 | (5 | ) | |||||||||||||||
| Depreciation | 102 | 79 | 31 | 49 | |||||||||||||||||
| Intangible amortization | 319 | 316 | 153 | 100 | |||||||||||||||||
| EBITDA | 186 | 476 | 218 | 242 | |||||||||||||||||
| Share-based compensation | 160 | 181 | 67 | 5 | |||||||||||||||||
| Transaction and integration expenses (1) | 29 | 19 | 13 | — | |||||||||||||||||
| Non-recurring professional expenses(2) | — | — | 19 | 18 | |||||||||||||||||
| Restructuring | 85 | 63 | 5 | 9 | |||||||||||||||||
| (Gain) Loss from change in fair value of financial instruments | 10 | (38 | ) | 65 | — | ||||||||||||||||
| (Gain) Loss from change in fair value of tax receivable agreement | 118 | (41 | ) | (37 | — | ||||||||||||||||
| Other(3) | 151 | (1 | ) | (7 | ) | 4 | |||||||||||||||
| Adjusted EBITDA | $ | 739 | $ | 659 | $ | 343 | 278 | ||||||||||||||
| Revenue | $ | 3,410 | $ | 3,132 | $ | 1,554 | $ | 1,361 | |||||||||||||
| Adjusted EBITDA Margin(4) | 21.7 | % | 21.0 | % | 22.1 | % | 20.4 | % |
(1)
Transaction and integration expenses primarily relate to acquisition and divestiture activities.
(2)
Non-recurring professional expenses includes external advisor and legal costs related to the Company's Business Combination completed in 2021.
(3)
Other primarily includes a $148 million non-cash goodwill impairment charge for the year ended December 31, 2023 related to the Company’s Cloud Services reporting unit.
(4)
Adjusted EBITDA Margin is defined as Adjusted EBITDA as a percentage of revenue.
Segment Revenue and Adjusted Gross Profit
Adjusted gross profit is defined as revenue less cost of services adjusted for depreciation, amortization and share-based compensation. Adjusted gross profit margin percent is defined as adjusted gross profit divided by revenue. Management uses adjusted gross profit and adjusted gross profit margin percent as key measures in making financial, operating and planning decisions and in evaluating our performance. We believe that presenting adjusted gross profit and adjusted gross profit margin percent is useful to investors as it eliminates the impact of certain non-cash expenses and allows a direct comparison between periods.
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Employer Solutions Segment Results
| Successor | Predecessor | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended | Year Ended | Six Months Ended | Six Months Ended | ||||||||||||||||||
| December 31, | December 31, | December 31, | June 30, | ||||||||||||||||||
| ($ in millions) | 2023 | 2022 | 2021 | 2021 | |||||||||||||||||
| Employer Solutions Revenue | |||||||||||||||||||||
| Recurring | $ | 2,695 | $ | 2,467 | $ | 1,213 | $ | 1,049 | |||||||||||||
| Project | 268 | 251 | 134 | 107 | |||||||||||||||||
| Total Employer Solutions Revenue | $ | 2,963 | $ | 2,718 | $ | 1,347 | $ | 1,156 | |||||||||||||
| Employer Solutions Gross Profit | $ | 1,033 | $ | 911 | $ | 489 | $ | 392 | |||||||||||||
| Employer Solutions Gross Profit Margin | 34.9 | % | 33.5 | % | 36.3 | % | 33.9 | % | |||||||||||||
| Employer Solutions Adjusted Gross Profit | $ | 1,147 | $ | 1,001 | $ | 527 | $ | 429 | |||||||||||||
| Employer Solutions Adjusted Gross Profit Margin | 38.7 | % | 36.8 | % | 39.1 | % | 37.1 | % |
Employer Solutions Segment Results of Operations for the Successor Year Ended December 31, 2023 Compared to the Successor Year Ended December 31, 2022
Employer Solutions Revenue
Employer Solutions total revenues were $2,963 million and $2,718 million, respectively for the Successor years ended December 31, 2023 and 2022. The increase of $245 million, or 9.0%, over the prior year was primarily attributable to an increase of recurring revenues of $228 million, or 9.2%, as a result of the 2022 acquisition, increased volumes and increases in Net Commercial Activity.
Employer Solutions Gross Profit and Adjusted Gross Profit
Employer Solutions Gross Profit was $1,033 million for the twelve months ended December 31, 2023 as compared to $911 million for the prior year period. The increase of $122 million, or 13.4% over the prior year was driven by revenue growth and lower expenses related to productivity initiatives, partially offset by employee compensation costs and increases in costs associated with funding growth of current and future revenues. Employer Solutions adjusted gross profit for the year ended December 31, 2023 increased $146 million to $1,147 million from $1,001 million in the prior year period primarily due to revenue growth and lower expenses related to productivity initiatives, partially offset by employee compensation costs and increases in costs associated with funding growth of current and future revenues. Employer Solutions adjusted gross profit for the Successor year ended December 31, 2022 increased $45 million to $1,001 million from $956 million in the combined prior year period primarily due to revenue growth and lower expenses related to productivity initiatives, partially offset by employee compensation costs and increases in costs associated with funding growth of current and future revenues.
Professional Services Segment Results
| Successor | Predecessor | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended | Year Ended | Six Months Ended | Six Months Ended | ||||||||||||||||||
| December 31, | December 31, | December 31, | June 30, | ||||||||||||||||||
| ($ in millions) | 2023 | 2022 | 2021 | 2021 | |||||||||||||||||
| Professional Services Revenue | |||||||||||||||||||||
| Recurring | $ | 142 | $ | 128 | $ | 65 | $ | 60 | |||||||||||||
| Project | 279 | 243 | 121 | 124 | |||||||||||||||||
| Total Professional Services Revenue | $ | 421 | $ | 371 | $ | 186 | $ | 184 | |||||||||||||
| Professional Services Gross Profit | $ | 109 | $ | 86 | $ | 44 | $ | 46 | |||||||||||||
| Professional Services Gross Profit Margin | 25.9 | % | 23.2 | % | 23.7 | % | 25.0 | % | |||||||||||||
| Professional Services Adjusted Gross Profit | $ | 114 | $ | 90 | $ | 45 | $ | 47 | |||||||||||||
| Professional Services Adjusted Gross Profit Margin | 27.1 | % | 24.3 | % | 24.2 | % | 25.5 | % |
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Professional Services Segment Results of Operations for the Successor Year Ended December 31, 2023 Compared to the Successor Year Ended December 31, 2022.
Professional Services Revenue
Professional Services total revenues was $421 million for the twelve months ended December 31, 2023 as compared to $371 million for the prior year period. The increase of $50 million, or 13.5%, over the Successor prior year was primarily attributable to an increase of project revenues of $36 million, or 14.8%, coupled with an increase of recurring revenue of $14 million.
Professional Services Gross Profit and Adjusted Gross Profit
Professional Services Gross Profit was $109 million, for the twelve months ended December 31, 2023 as compared to $86 for the prior year period. The increase of $23 million, or 26.7%, over the prior year was 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. Professional Services adjusted gross profit for the year ended December 31, 2023 increased $24 million to $114 million from $90 million in the prior year period primarily due to growth of project revenue, and net commercial activity, partially offset by the costs as discussed above. Professional Services adjusted gross profit for the year ended December 31, 2022 decreased $2 million to $90 million as compared to the combined prior year and was consistent with the prior year period.
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Gross Profit to Adjusted Gross Profit Reconciliation by Segment
| Successor | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2023 | |||||||||||||
| ($ in millions) | Employer Solutions | Professional Services | Other | Total | |||||||||
| Gross Profit | $ | 1,033 | $ | 109 | $ | (2 | ) | $ | 1,140 | ||||
| Add: stock-based compensation | $ | 35 | $ | 4 | $ | - | $ | 39 | |||||
| Add: depreciation and amortization | $ | 79 | $ | 1 | $ | 2 | $ | 82 | |||||
| Adjusted Gross Profit | $ | 1,147 | $ | 114 | $ | - | $ | 1,261 | |||||
| Gross Profit Margin | 34.9 | % | 25.9 | % | -7.7 | % | 33.4 | % | |||||
| Adjusted Gross Profit Margin | 38.7 | % | 27.1 | % | 0.0 | % | 37.0 | % | |||||
| Successor | |||||||||||||
| December 31, 2022 | |||||||||||||
| ($ in millions) | Employer Solutions | Professional Services | Other | Total | |||||||||
| Gross Profit | $ | 911 | $ | 86 | $ | (1 | ) | $ | 996 | ||||
| Add: stock-based compensation | 37 | 3 | - | 40 | |||||||||
| Add: depreciation and amortization | 53 | 1 | 2 | 56 | |||||||||
| Adjusted Gross Profit | $ | 1,001 | $ | 90 | $ | 1 | $ | 1,092 | |||||
| Gross Profit Margin | 33.5 | % | 23.2 | % | -2.3 | % | 31.8 | % | |||||
| Adjusted Gross Profit Margin | 36.8 | % | 24.3 | % | 2.3 | % | 34.9 | % | |||||
| Successor | |||||||||||||
| Six Months Ended | |||||||||||||
| December 31, 2021 | |||||||||||||
| ($ in millions) | Employer Solutions | Professional Services | Other | Total | |||||||||
| Gross Profit | $ | 489 | $ | 44 | $ | (1 | ) | $ | 532 | ||||
| Add: stock-based compensation | 18 | 1 | - | 19 | |||||||||
| Add: depreciation and amortization | 20 | — | 1 | 21 | |||||||||
| Adjusted Gross Profit | $ | 527 | $ | 45 | $ | - | $ | 572 | |||||
| Gross Profit Margin | 36.3 | % | 23.7 | % | -4.8 | % | 34.2 | % | |||||
| Adjusted Gross Profit Margin | 39.1 | % | 24.2 | % | 0.0 | % | 36.8 | % | |||||
| Predecessor | |||||||||||||
| Six Months Ended | |||||||||||||
| June 30, 2021 | |||||||||||||
| ($ in millions) | Employer Solutions | Professional Services | Other | Total | |||||||||
| Gross Profit | $ | 392 | $ | 46 | $ | (3 | ) | $ | 435 | ||||
| Add: stock-based compensation | 1 | - | - | 1 | |||||||||
| Add: depreciation and amortization | 36 | 1 | 1 | 38 | |||||||||
| Adjusted Gross Profit | $ | 429 | $ | 47 | $ | (2 | ) | $ | 474 | ||||
| Gross Profit Margin | 33.9 | % | 25.0 | % | -14.3 | % | 32.0 | % | |||||
| Adjusted Gross Profit Margin | 37.1 | % | 25.5 | % | -9.5 | % | 34.8 | % |
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 under our revolving credit facility. Our primary uses of liquidity are operating expenses, funding of our debt requirements and capital expenditures.
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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, 2023 remains strong. We will continue to closely monitor and proactively manage our liquidity position in light of changing economic conditions and the volatility of interest rates.
In August 2022, we established a repurchase program allowing for up to $100 million in authorized share repurchases. As of December 31, 2023, approximately $48 million remained 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, 2023 and December 31, 2022, 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 | Year Ended | Six Months Ended | Six Months Ended | ||||||||||||||||||
| December 31, | December 31, | December 31, | June 30, | ||||||||||||||||||
| (in millions) | 2023 | 2022 | 2021 | 2021 | |||||||||||||||||
| Cash provided by operating activities | $ | 386 | $ | 286 | $ | 57 | $ | 58 | |||||||||||||
| Cash used in investing activities | (159 | ) | (235 | ) | (1,852 | ) | (55 | ) | |||||||||||||
| Cash provided by (used in) financing activities | (231 | ) | 54 | 2,400 | (64 | ) | |||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 4 | 2 | 11 | — | |||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | — | 107 | 616 | (61 | ) | ||||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 1,759 | $ | 1,759 | $ | 1,652 | $ | 1,475 |
Operating Activities
Net cash provided by operating activities was $386 million for the year ended December 31, 2023 compared to $286 million for the year ended December 31, 2022. The increase in cash provided by operating activities was primarily due to improved profitability and decrease in our net working capital requirements.
Investing Activities
Cash used for investing activities for the Successor year ended December 31, 2023 was $159 million. The primary drivers of cash used for investing activities were $160 million used for capital expenditures.
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.
Financing Activities
Cash used for financing activities for the Successor year ended December 31, 2023 was $231 million. The primary drivers of cash provided by financing activities were due to a net decrease of $108 million in fiduciary liabilities, $40 million in share repurchases, $25 million of repayments to banks net of borrowings, $25 million principal payments on finance lease obligations, and $16 million for tax payment for shares/units withheld in lieu of taxes. The decrease in fiduciary cash is primarily due to timing of client funding and subsequent disbursement of payments.
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.
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Cash, Cash Equivalents and Fiduciary Assets
At December 31, 2023, our cash and cash equivalents were $358 million, an increase of $108 million from December 31, 2022. Of the total balances of cash and cash equivalents as of December 31, 2023 and December 31, 2022, none of the balances were restricted as to its use.
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 $1,401 million and $1,509 million at December 31, 2023 and December 31, 2022, 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.
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. For the year ended December 31, 2023, we paid $7 million related to the TRA. As of December 31, 2023, we expect to make payments of $62 million and $89 million in 2024 and 2025, respectively.
Contractual Obligations and Commitments
For the year ended December 31, 2023, the Company had various obligations and commitments outstanding including debt of $2,794 million, operating leases of $106 million, finance leases of $18 million and purchase obligations of $100 million. Over the twelve months ending December 31, 2024, we expect to pay $25 million, $33 million, $9 million and $32 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, Note 8 “Debt”, Note 19 “Lease Obligations” and Note 20 “Commitments and Contingencies”.
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, 2023, the non-cancellable services obligation totaled $818 million, with $154 million expected to be paid over the twelve months ended December 31, 2024. 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, 2023, we estimate that the termination charges would have been approximately $288 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.
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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 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’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).
We record additional liabilities under the TRA as and 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 year ended December 31, 2023, an additional TRA liability of $109 million was established as a result of these exchanges. This amount along with the total impact of exchanges of $43 million for the year ended December 31, 2023, are excluded from the portion of the TRA liability that is measured at fair value on a recurring basis.
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 $733 million TRA liability balance at December 31, 2023 assumes: (i) a constant blended U.S. federal, state and local income tax rate of 27.0%, (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 7.9%, 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 2023, would result in a change of approximately $24 million.
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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 2023, 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 11.5% and a long-term growth rate of 3.5% for our Health and Wealth Solutions reporting units in the determination of fair value. We utilized a discount rate of 12.0% and a long-term growth rate of 3.5% in the determination of fair value for our Cloud Services reporting unit. We utilized a discount rate of 15.0% and a long-term growth rate of 3.0% for our Professional Services reporting unit fair value determination. Other significant assumptions utilized included the Company’s projections of expected future revenues and EBITDA margin, which is defined as earnings before interest, taxes, depreciation and intangible amortization as a percentage of revenue.
The Company determined the fair value of its reporting units exceeded the carrying value as of October 1, 2023, and therefore, goodwill was not impaired. Based on the results of the Company’s quantitative assessment, the fair value of the Health Solutions and Wealth Solutions reporting units exceeded their carrying values by 1.8% and 7.1%, 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 a goodwill impairment in the Company’s Health Solutions reporting unit of $82 million.
Subsequent to our October 1, 2023 annual impairment test, we evaluated the macroeconomic, industry and market conditions to determine whether there had been any significant changes. While these factors remained broadly consistent with those that existed as of our annual impairment test date, subsequent to that date, the Company had begun a strategic portfolio review which resulted in new market information relating to the Cloud Services and Professional Services reporting units that did not exist as of October 1, 2023. Management determined there was an interim indicator of impairment with the Cloud Services and Professional Services reporting units. As part of this process, the Company identified a goodwill impairment in its Cloud Services reporting unit and recorded a $148 million non-cash goodwill impairment charge, which is included in the accompanying Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2023. No additional goodwill impairment testing was warranted based on this assessment. The Company's Professional Services reporting unit fair value exceeded its carrying value by 0.7% or approximately $1 million, and the estimated fair value of the Health Solutions and Wealth Solutions reporting units continued to exceed their respective carrying values. At December 31, 2023, our Health Solutions, Wealth Solutions, Cloud Services and Professional Services reporting units had $3,084 million, $128 million, $258 million and $73 million of goodwill, respectively.