Alight, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021. Alight provides cloud-based human-capital and business services, including benefits administration, healthcare navigation, payroll, and cloud consulting.
Comparability note: Alight completed its business combination on July 2, 2021. Accordingly, Q3 2021 is reported as the “Successor” period and Q3 2020 as the “Predecessor” period; acquisition accounting and the new capital structure limit direct comparability. Management also presents combined 2021 nine-month results for trend analysis, which are not GAAP results.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 |
|---|---|---|
| Revenue | $690 million | $668 million |
| Gross profit | $238 million | $227 million |
| Gross margin | 34.5% | 34.0% |
| Operating income | $25 million | $42 million |
| Net loss attributable to Alight | $107 million | $39 million |
| Basic and diluted loss per share | $(0.24) | Not presented on a comparable basis |
| Adjusted EBITDA (non-GAAP) | $153 million | $132 million |
| Cash from operating activities | $(7) million | Not clearly provided for the comparable quarter in the cash-flow table |
- Revenue increased 3% year over year. Employer Solutions revenue rose 5% to $587 million; Professional Services was flat at $93 million; Hosted Business declined 38% to $10 million.
- BPaaS revenue was $97 million, up 20%; BPaaS bookings were $179 million, up 42% year over year.
- Operating income fell despite revenue growth, primarily reflecting higher selling, general and administrative costs and substantially higher acquired-intangible amortization. Net loss also included $90 million of fair-value losses on financial instruments and a $27 million loss on remeasurement of the tax receivable agreement (TRA).
- Interest expense was $28 million, down 54% from the prior-year quarter, following redemption of unsecured notes and repayment of part of the term loan.
- At September 30, cash and cash equivalents were $769 million; net debt was $2.882 billion. The company had a $294 million revolving facility with no borrowings and $4 million of letters of credit. Fiduciary cash of $1.468 billion is restricted to client obligations and is not available for corporate use.
- Q3 investing cash outflow was $1.421 billion, including $1.394 billion related to the business combination and $27 million of capital expenditures. Financing cash inflow was $2.625 billion, principally reflecting transaction proceeds and bank borrowings.
- For the combined nine months, management reported revenue of $2.051 billion, up 2%, Adjusted EBITDA of $431 million versus $416 million in the prior-year nine months, and operating cash flow of $51 million versus $131 million.
Material changes, outlook, and risks
- The business combination was accounted for as an acquisition, creating preliminary goodwill of $3.356 billion and identifiable intangible assets of $4.078 billion. The purchase-price allocation remained preliminary.
- Debt fell from $4.078 billion net at December 31, 2020 to $2.882 billion net at September 30, 2021. In August, Alight added a $525 million term loan maturing in 2028 and replaced its revolver with a $294 million facility maturing in 2026.
- The TRA requires payments to certain former owners equal to 85% of specified realized tax benefits. Its reported fair-value liability was $605 million; management cautioned that future payments may be substantial.
- No formal financial guidance is provided. Management said available cash, operating cash flow, and revolving-credit availability should meet foreseeable liquidity needs, while noting ongoing uncertainty related to COVID-19.
- A restructuring and integration plan is expected to cost approximately $135 million in total, with $103 million incurred through September 30 and $32 million estimated to remain. Management expects annual savings of approximately $196 million by 2022.
- Non-cancellable Wipro service obligations total approximately $1.140 billion. Management estimated that termination for convenience on September 30 would have required at least $376 million in termination charges.
- Disclosure controls were deemed ineffective because of a material weakness in accounting controls for warrants and forward purchase agreements. Management was implementing remediation and expected completion by year-end; the weakness was not yet remediated at quarter-end.
- Two acquisitions closed in October 2021: Aon’s Retiree Health Exchange for approximately $200 million and ConsumerMedical, which Alight said was not expected to be material.
- Management reported ordinary-course legal proceedings, with recorded reserves not significant, and stated that no material changes had occurred in previously disclosed risk factors.
Most important facts for investors to verify
- How much of reported growth and adjusted profitability persists after acquisition-related accounting effects and non-GAAP adjustments.
- The final purchase-price allocation, ongoing amortization expense, and sensitivity of warrant, seller-earnout, and TRA valuations.
- Cash generation and debt reduction, excluding fiduciary funds and one-time business-combination financing flows.
- Progress toward the stated restructuring savings and the remaining costs required to achieve them.
- Remediation of the material weakness in controls over warrants and forward purchase agreements.
- Integration, financing, and performance of the October acquisitions, and the potential cash burden of the TRA and Wipro commitments.