Alight, Inc. / Delaware 8-K/A, filed Aug 12, 2021
Alight, Inc. / Delaware (ALIT)
About this 8-K/A
Alight, Inc. / Delaware filed this 8-K/A on August 12, 2021, reporting on events of July 2, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 12, 2021 (
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| Pre-commencements communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading |
Name of each exchange | ||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
EXPLANATORY NOTE
| Item 9.01. | Financial Statement and Exhibits. |
(a) Financial Statements of Business Acquired.
The condensed consolidated financial statements of Tempo for the quarterly and year to date periods ended June 30, 2021 are filed herewith as Exhibit 99.1. Also included herewith as Exhibit 99.2 and incorporated by reference herein is the related Management’s Discussion and Analysis of Financial Condition and Results of Operations of Tempo.
(d) Exhibits.
The Exhibit Index is incorporated by reference herein.
| Exhibit |
Description | |
| 99.1 | Condensed consolidated financial statements of Tempo for the quarterly and year to date periods ended June 30, 2021. | |
| 99.2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations of Tempo. | |
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Alight, Inc. | ||
| By: | /s/ Paulette R. Dodson | |
| Name: | Paulette R. Dodson | |
| Title: | General Counsel and Corporate Secretary | |
Date: August 12, 2021
Exhibit 99.1
FINANCIAL STATEMENTS
Tempo Holding Company, LLC
For the quarterly and year to date periods ended
June 30, 2021
FINANCIAL STATEMENTS
Tempo Holding Company, LLC
Condensed Consolidated Balance Sheets
(Unaudited)
| (in millions) | June 30, 2021 |
December 31, 2020 |
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| Assets |
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| Current Assets |
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| Cash and cash equivalents |
$ | 460 | $ | 506 | ||||
| Receivables, net |
486 | 532 | ||||||
| Other current assets |
165 | 163 | ||||||
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| Total Current Assets Before Fiduciary Assets |
1,111 | 1,201 | ||||||
| Fiduciary assets |
1,015 | 1,030 | ||||||
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| Total Current Assets |
2,126 | 2,231 | ||||||
| Goodwill |
2,250 | 2,245 | ||||||
| Intangible assets, net |
1,634 | 1,733 | ||||||
| Fixed assets, net |
338 | 334 | ||||||
| Deferred tax assets, net |
5 | 5 | ||||||
| Other assets |
445 | 408 | ||||||
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| Total Assets |
$ | 6,798 | $ | 6,956 | ||||
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| Liabilities and Members’ Equity |
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| Liabilities |
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| Current Liabilities |
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| Accounts payable and accrued liabilities |
$ | 336 | $ | 394 | ||||
| Current portion of long term debt |
37 | 37 | ||||||
| Other current liabilities |
304 | 324 | ||||||
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| Total Current Liabilities Before Fiduciary Liabilities |
677 | 755 | ||||||
| Fiduciary liabilities |
1,015 | 1,030 | ||||||
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| Total Current Liabilities |
1,692 | 1,785 | ||||||
| Long term debt |
4,035 | 4,041 | ||||||
| Other liabilities |
380 | 447 | ||||||
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| Total Liabilities |
$ | 6,107 | $ | 6,273 | ||||
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| Commitments and Contingencies (Note 16) |
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| Members’ Equity |
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| Members’ equity (123,700 and 123,700 A units, 1,817 and 1,800 A-1 units and 2,088 and 1,736 B units issued and outstanding, in each case, as of June 30, 2021 and December 31, 2020, respectively) |
$ | 854 | $ | 852 | ||||
| Retained deficit |
(152 | ) | (127 | ) | ||||
| Accumulated other comprehensive loss |
(11 | ) | (42 | ) | ||||
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| Total Members’ Equity |
$ | 691 | $ | 683 | ||||
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| Total Liabilities and Members’ Equity |
$ | 6,798 | $ | 6,956 | ||||
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
2
Tempo Holding Company, LLC
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| (in millions, except per unit amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Revenue |
$ | 672 | $ | 647 | $ | 1,361 | $ | 1,340 | ||||||||
| Cost of services, exclusive of depreciation and amortization |
436 | 444 | 888 | 906 | ||||||||||||
| Depreciation and amortization |
19 | 16 | 38 | 29 | ||||||||||||
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| Gross Profit |
217 | 187 | 435 | 405 | ||||||||||||
| Operating Expenses |
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| Selling, general and administrative |
105 | 112 | 222 | 236 | ||||||||||||
| Depreciation and intangible amortization |
56 | 57 | 111 | 113 | ||||||||||||
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| Total operating expenses |
161 | 169 | 333 | 349 | ||||||||||||
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| Operating Income |
56 | 18 | 102 | 56 | ||||||||||||
| Interest expense |
61 | 53 | 123 | 111 | ||||||||||||
| Other expense (income), net |
1 | (5 | ) | 9 | (4 | ) | ||||||||||
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| Loss Before Income Tax Benefit |
(6 | ) | (30 | ) | (30 | ) | (51 | ) | ||||||||
| Income tax benefit |
(2 | ) | (5 | ) | (5 | ) | (5 | ) | ||||||||
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| Net Loss |
$ | (4 | ) | $ | (25 | ) | $ | (25 | ) | $ | (46 | ) | ||||
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| Net Loss Per Unit: |
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| Basic |
$ | (33.65 | ) | $ | (196.81 | ) | $ | (201.31 | ) | $ | (368.90 | ) | ||||
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| Diluted |
$ | (33.65 | ) | $ | (196.81 | ) | $ | (201.31 | ) | $ | (368.90 | ) | ||||
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| Net Loss |
$ | (4 | ) | $ | (25 | ) | $ | (25 | ) | $ | (46 | ) | ||||
| Other comprehensive income (loss), net of tax: |
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| Change in fair value of derivatives |
6 | (1 | ) | 23 | (36 | ) | ||||||||||
| Foreign currency translation adjustments |
4 | (5 | ) | 8 | (21 | ) | ||||||||||
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| Total other comprehensive income (loss), net of tax: |
10 | (6 | ) | 31 | (57 | ) | ||||||||||
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| Comprehensive Income (Loss) |
$ | 6 | $ | (31 | ) | $ | 6 | $ | (103 | ) | ||||||
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
3
Tempo Holding Company, LLC
Condensed Consolidated Statements of Members’ Equity
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||||||
| Members’ Equity | Other | |||||||||||||||||||||||||||||||
| Class A Units | Class A-1 Units | Class B Units | Comprehensive | |||||||||||||||||||||||||||||
| (in millions, except unit amounts) | Units | Amount | Units | Amount | Units | Amount | (Loss) Income | Total | ||||||||||||||||||||||||
| Balance at December 31, 2020 |
123,700 | $ | 699 | 1,800 | $ | 12 | 1,736 | $ | 14 | $ | (42 | ) | $ | 683 | ||||||||||||||||||
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| Comprehensive (loss) income, net of tax |
— | (21 | ) | — | — | — | — | 21 | — | |||||||||||||||||||||||
| Restricted share units vested, net of units withheld in lieu of taxes |
— | — | 1 | — | 50 | — | — | — | ||||||||||||||||||||||||
| Unit repurchases |
— | — | (75 | ) | (1 | ) | (89 | ) | (1 | ) | — | (2 | ) | |||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | — | 2 | — | 2 | ||||||||||||||||||||||||
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| Balance at March 31, 2021 |
123,700 | $ | 678 | 1,726 | $ | 11 | 1,697 | $ | 15 | $ | (21 | ) | $ | 683 | ||||||||||||||||||
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| Comprehensive (loss) income, net of tax |
— | (4 | ) | — | — | — | — | 10 | 6 | |||||||||||||||||||||||
| Restricted share units vested, net of units withheld in lieu of taxes |
— | — | 91 | (1 | ) | 391 | — | — | (1 | ) | ||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | 1 | — | 2 | — | 3 | ||||||||||||||||||||||||
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| Balance at June 30, 2021 |
123,700 | $ | 674 | 1,817 | $ | 11 | 2,088 | $ | 17 | $ | (11 | ) | $ | 691 | ||||||||||||||||||
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| Accumulated | ||||||||||||||||||||||||||||||||
| Members’ Equity | Other | |||||||||||||||||||||||||||||||
| Class A Units | Class A-1 Units | Class B Units | Comprehensive | |||||||||||||||||||||||||||||
| (in millions, except unit amounts) | Units | Amount | Units | Amount | Units | Amount | Loss | Total | ||||||||||||||||||||||||
| Balance at December 31, 2019 |
123,700 | $ | 804 | 1,683 | $ | 15 | 1,107 | $ | 11 | $ | (25 | ) | $ | 805 | ||||||||||||||||||
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| Comprehensive loss, net of tax |
— | (21 | ) | — | — | — | — | (51 | ) | (72 | ) | |||||||||||||||||||||
| Restricted share units vested, net of units withheld in lieu of taxes |
— | — | 11 | — | 15 | — | — | — | ||||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | — | 2 | — | 2 | ||||||||||||||||||||||||
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| Balance at March 31, 2020 |
123,700 | $ | 783 | 1,694 | $ | 15 | 1,122 | $ | 13 | $ | (76 | ) | $ | 735 | ||||||||||||||||||
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| Comprehensive loss, net of tax |
— | (25 | ) | — | — | — | — | (6 | ) | (31 | ) | |||||||||||||||||||||
| Distribution of members’ equity |
— | (1 | ) | — | — | — | — | — | (1 | ) | ||||||||||||||||||||||
| Restricted share units vested, net of units withheld in lieu of taxes |
— | — | 157 | (1 | ) | 209 | — | — | (1 | ) | ||||||||||||||||||||||
| Unit repurchases |
— | — | (55 | ) | (2 | ) | (88 | ) | (1 | ) | — | (3 | ) | |||||||||||||||||||
| Share-based compensation expense |
— | — | — | 1 | — | 1 | — | 2 | ||||||||||||||||||||||||
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| Balance at June 30, 2020 |
123,700 | $ | 757 | 1,796 | $ | 13 | 1,243 | $ | 13 | $ | (82 | ) | $ | 701 | ||||||||||||||||||
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
4
Tempo Holding Company, LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| (in millions) | 2021 | 2020 | ||||||
| Cash flows from operating activities |
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| Net loss |
$ | (25 | ) | $ | (46 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operations: |
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| Depreciation |
49 | 42 | ||||||
| Intangible amortization expense |
100 | 100 | ||||||
| Noncash lease expense |
10 | 16 | ||||||
| Financing fee and premium amortization |
9 | 10 | ||||||
| Share-based compensation expense |
5 | 4 | ||||||
| Other |
1 | 1 | ||||||
| Change in assets and liabilities: |
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| Receivables |
51 | 38 | ||||||
| Accounts payable and accrued liabilities |
(45 | ) | (34 | ) | ||||
| Other assets and liabilities |
(97 | ) | (111 | ) | ||||
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| Cash provided by operating activities |
$ | 58 | $ | 20 | ||||
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| Cash flows from investing activities |
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| Acquisition of businesses, net of cash acquired |
— | 3 | ||||||
| Capital expenditures |
(55 | ) | (47 | ) | ||||
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| Cash used for investing activities |
$ | (55 | ) | $ | (44 | ) | ||
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| Cash flows from financing activities |
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| Net (decrease) increase in fiduciary liabilities |
(15 | ) | 46 | |||||
| Members’ equity unit repurchase |
(2 | ) | (3 | ) | ||||
| Distributions of members’ equity |
— | (1 | ) | |||||
| Borrowings from banks |
110 | 401 | ||||||
| Financing fees |
— | (4 | ) | |||||
| Repayments to banks |
(124 | ) | (111 | ) | ||||
| Principal payments on finance lease obligations |
(17 | ) | (11 | ) | ||||
| Settlements of interest rate swaps |
(14 | ) | (7 | ) | ||||
| Tax payment for units withheld in lieu of taxes |
(1 | ) | (1 | ) | ||||
| Contingent consideration payments |
(1 | ) | (1 | ) | ||||
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| Cash (used for) provided by financing activities |
$ | (64 | ) | $ | 308 | |||
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| Effect of exchange rate changes on cash, cash equivalents and restricted cash |
— | (3 | ) | |||||
| Net (decrease) increase in cash, cash equivalents and restricted cash |
(61 | ) | 281 | |||||
| Cash, cash equivalents and restricted cash at beginning of period |
1,536 | 985 | ||||||
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| Cash, cash equivalents and restricted cash at end of period |
$ | 1,475 | $ | 1,266 | ||||
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| Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets |
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| Cash and cash equivalents |
$ | 460 | $ | 453 | ||||
| Restricted cash included in fiduciary assets |
1,015 | 813 | ||||||
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| Total cash, cash equivalents and restricted cash |
$ | 1,475 | $ | 1,266 | ||||
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| Supplemental disclosures: |
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| Interest paid |
$ | 112 | $ | 99 | ||||
| Income taxes paid |
5 | 13 | ||||||
| Supplemental disclosure of non-cash financing activities: |
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| Fixed asset additions acquired through finance leases |
$ | 2 | $ | 51 | ||||
| Right of use asset additions acquired through operating leases |
10 | 25 | ||||||
| Non-cash fixed asset additions |
— | 26 | ||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
5
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation and Nature of Business
Tempo Holding Company, LLC (“Holdco,” the “Company” or “we”) was formed under the laws of the State of Delaware on March 7, 2017. Holdco is owned by Tempo Management, LLC and certain investment funds affiliated with The Blackstone Group L.P. (“Blackstone”) and other co-investors (collectively, the “Initial Investors”). Holdco is a holding company which conducts substantially all of its business operations through a 100% owned subsidiary, Tempo Acquisition, LLC.
Tempo Acquisition, LLC was formed under the laws of the State of Delaware on February 6, 2017. On February 9, 2017, Tempo Acquisition, LLC, entered into a purchase agreement (“the Purchase Agreement”) with Aon plc (“Aon”) whereby the Company agreed to purchase all of the outstanding equity interest in certain technology-enabled human resources solutions of Aon, plus certain related assets, for a purchase price of $4.3 billion in cash payable at closing, subject to customary adjustments set forth in the Purchase Agreement plus the assumption of certain liabilities (together the “Separation”). The Separation was completed on May 1, 2017.
On July 2, 2021 (the “Closing Date”), the Company completed its previously announced business combination transaction (as amended and restated as of April 29, 2021) (the “Business Combination Agreement”) with Foley Trasimene Acquisition Corp, its wholly owned subsidiary Alight, Inc. (“Alight”), and certain other parties thereto. On the Closing Date, pursuant to the Business Combination Agreement, among other things, (i) Foley Trasimene became a subsidiary of Alight, (ii) the combined company is now organized in an “Up-C” structure. (see Note 17 – “Subsequent Events”)
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and should be read in conjunction with the Consolidated Financial Statements contained in the Company’s December 31, 2020 annual financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation have been included. All significant intercompany transactions and balances have been eliminated upon consolidation. The results of operations for interim periods are not necessarily indicative of the results to be expected for future quarters or for the full fiscal year ending December 31, 2021.
In the third quarter of 2020, the Company realigned and renamed certain of its reportable segments due to a reorganization as a result of leadership and strategy changes. All prior period information has been recast to reflect this change in reportable segments. See Note 11 “Segment Reporting” for more details.
Nature of Business
We are a leading cloud-based provider of integrated digital human capital and business solutions. We have an unwavering belief that a company’s success starts with its people, and our solutions connect human insights with technology. Leveraging artificial intelligence (“AI”) and data analytics, we provide an integrated, personalized experience for employees using technology-driven solutions that unlock value for employers. Our mission-critical solutions enable employees to enrich their health, wealth and wellbeing which helps global organizations achieve a high-performance culture. Our solutions include:
| • | Employer Solutions: driven by our digital, software and AI-led capabilities and spanning total employee wellbeing and engagement, including integrated benefits administration, healthcare navigation, financial health, employee wellness and payroll. These solutions are designed to support employers in effectively managing their workforce through a seamless, integrated platform. We leverage data across all interactions and activities to improve the consumer experience, reduce operational costs and better inform management processes and decision-making. In addition, employees benefit from an integrated portal and user experience, coupled with a full-service client care center, helping them manage the full life cycle of their health, wealth and careers. |
| • | Professional Services: includes our project-based cloud deployment and consulting offerings that provide expertise with both human capital and financial platforms. Specifically, this includes cloud advisory and deployment, and optimization services for cloud platforms such as Workday, SAP SuccessFactors, Oracle, and Cornerstone OnDemand. |
6
2. Accounting Policies and Practices
Use of Estimates
The preparation of the accompanying Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of reserves and expenses.
These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Management believes its estimates to be reasonable given the current facts available. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, and foreign currency exchange rate movements increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be predicted with certainty, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment would, if applicable, be reflected in the financial statements in future periods.
Concentration of Risk
The Company has no significant off-balance sheet risks related to foreign exchange contracts or other foreign hedging arrangements. Management believes that its account receivable credit risk exposure is limited, and the Company has not experienced significant write-downs in its accounts receivable balances. Additionally, there was no single client who accounted for more than 10% of the Company’s revenues in any of the periods presented.
Cash and Cash Equivalents
Cash and cash equivalents include cash balances. At June 30, 2021 and December 31, 2020, Cash and cash equivalents totaled $460 million and $506 million, respectively, and none of the balances were restricted as to its use.
Fiduciary Assets and Liabilities
Some of the Company’s agreements require it to hold funds to pay certain obligations on behalf of its clients. Funds held on behalf of clients are segregated from Company funds, and their use is restricted to the payment of obligations on behalf of clients. There is typically a short period of time between when the Company receives funds and when it pays obligations on behalf of clients. These funds are recorded as Fiduciary assets with the related obligation recorded as Fiduciary liabilities in the Condensed Consolidated Balance Sheets.
Commissions Receivable
Commissions receivable, which are recorded in Other current assets and Other assets in the Condensed Consolidated Balance Sheets, are contract assets that represent estimated variable consideration for commissions to be received from insurance carriers for performance obligations that have been satisfied. The current portion of commissions receivable are expected to be received within one year, while the non-current portion of commissions receivable are expected to be received beyond one year.
Allowance for Expected Credit Losses
The Company’s allowance for expected credit losses with respect to trade receivables and contract assets is based on a combination of factors, including evaluation of historical write-offs, current conditions and reasonable economic forecasts that affect collectability and other qualitative and quantitative analysis. Receivables, net included an allowance for expected credit losses of $16 million and $15 million at June 30, 2021 and December 31, 2020, respectively.
7
Fixed Assets, Net
The Company records fixed assets at cost. We compute depreciation and amortization using the straight-line method on the estimated useful lives of the assets, which are generally as follows:
| Asset Description |
Asset Life | |
| Capitalized software |
Lesser of the life of an associated license, or 4 to 7 years | |
| Leasehold improvements |
Lesser of estimated useful life or lease term, not to exceed 10 years | |
| Furniture, fixtures and equipment |
4 to 10 years | |
| Computer equipment |
4 to 6 years |
Goodwill and Intangible Assets, Net
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill is not amortized, but rather is tested for impairment on an annual basis during the fourth quarter or when impairment indicators are present.
Our intangible assets consist primarily of assets acquired through business combinations, including customer related contract based intangibles and technology related intangibles, and trademarks. Amortization of the finite-lived intangible assets is computed on a straight-line basis using the estimated useful life of the assets. The estimated useful life of customer related contract based intangibles and technology related intangibles range from 6 to 15 years, and the estimated useful life of finite-lived trade name intangibles range from 1 to 6 years. See Note 6 “Goodwill and Intangible assets, net” for more information. The Company reviews intangible assets that are being amortized for impairment whenever events or changes in circumstances indicate that their carrying value amount may not be recoverable. One of the trademark intangible assets is indefinite-lived and is not amortized.
Derivatives
The Company uses derivative financial instruments, such as interest rate swaps. Interest rate swaps are used to manage interest risk exposures and have been designated as cash flow hedges. The changes in the fair value of derivatives that qualify for hedge accounting as cash flow hedges are recorded in Accumulated other comprehensive loss. Amounts are reclassified from Accumulated other comprehensive loss into earnings when the hedge exposure affects earnings.
The Company discontinues hedge accounting prospectively when: (1) the derivative expires or is sold, terminated, or exercised, (2) the qualifying criteria are no longer met, or (3) management removes the designation of the hedging relationship.
Foreign Currency
Certain of the Company’s non-U.S. operations use their respective local currency as their functional currency. The operations that do not have the U.S. dollar as their functional currency translate their financial statements at the current exchange rates in effect at the balance sheet date and revenues and expenses using rates that approximate those in effect during the period. The resulting translation adjustments are included in net foreign currency translation adjustments within the Condensed Consolidated Statements of Members’ Equity. Gains and losses from the remeasurement of monetary assets and liabilities that are denominated in a non-functional currency are included in Other expense (income), net within the Condensed Consolidated Statements of Comprehensive Income (Loss). The impact of the foreign exchange gains and losses for the three and six months ended June 30, 2021 and 2020 were losses of $1 million and $9 million, and gains of $6 million and $5 million, respectively.
Share-Based Compensation Costs
Share-based payments to employees, including grants of restricted share units and performance-based restricted share units, are measured based on their estimated grant date fair value. The Company recognizes compensation expense on a straight-line basis over the requisite service period for awards expected to ultimately vest. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
8
Income Taxes
The Company is treated as a U.S. partnership and files a U.S. partnership income tax return. Taxable income or losses are reported in separate tax returns. The Company’s operating results, except for the business entities that file separate stand-alone income tax returns or non-U.S. jurisdiction tax returns, were included in the Company’s U.S. federal and state partnership income tax returns or non-U.S. jurisdiction tax returns. Accordingly, no provision, has been made for federal income taxes for the Company. Included in the Company’s Condensed Consolidated Financial Statements are business entities that file separate stand-alone U.S. federal income tax returns and are not included in the U.S. federal partnership tax returns for the Company. The Company is liable for the required U.S. federal income tax provisions for these entities as well as the various state income taxes, fees and foreign taxes which are shown in Note 7 “Income Taxes”.
The Company recognizes the benefits of tax return positions in the financial statements if it is “more-likely-than-not” they will be sustained by a taxing authority. The measurement of a tax position meeting the more-likely-than-not criteria is based on the largest benefit that is more than 50 percent likely to be realized. Only information that is available at the reporting date is considered in the Company’s recognition and measurement analysis and events or changes in facts and circumstances are accounted for in the period in which the event or change in circumstance occurs.
New Accounting Pronouncements: Recently Adopted
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides optional expedients and exceptions for certain contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate that is expected to be discontinued because of reference rate reform. The guidance permits entities not to apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the dedesignation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. For held-to-maturity debt securities, one-time sale and/or transfer to available-for-sale or trading may be made for held-to-maturity debt securities that both reference an eligible reference rate and were classified as held-to-maturity before January 1, 2020. In January 2021, the FASB issued ASU 2021-01, which provides optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. An entity will apply this guidance on a prospective basis. The new guidance is effective as of March 12, 2020, and will not apply to any contract modifications made, sales and transfers of held-to-maturity debt securities, and hedging relationships entered into or evaluated after December 31, 2022. At the time of adoption, there was no impact to our Condensed Consolidated Financial Statements. The Company will continue to assess the impact as the reference rate transition occurs over the next two years.
Callable Debt Securities
In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20 – Receivables – Nonrefundable Fees and Other Costs.” The new accounting guidance clarifies that a reporting entity should assess whether a callable debt security purchased at a premium is within the scope of ASC 310-20-35-33 each reporting period, which impacts the amortization period for nonrefundable fees and other costs. The guidance must be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The new guidance is effective for the Company for the fiscal year 2021 and respective interim periods. The Company adopted this standard on January 1, 2021. The adoption of this guidance had no material impact upon our Condensed Consolidated Financial Statements.
3. Revenue from Contracts with Customers
Substantially all of the Company’s revenue is highly recurring and is derived from contracts with customers to provide integrated, cloud-based human capital solutions that empower clients and their employees to manage their health, wealth and HR needs. The Company’s revenues are disaggregated by recurring and project revenues within each reportable segment. Recurring revenues are typically longer term in nature and more predictable on an annual basis, while project revenues consist of project work of a shorter duration. See Note 11 “Segment Reporting” for quantitative disclosures of recurring and project revenues by reportable segment. The Company’s reportable segments are Employer
9
Solutions, Professional Services and Hosted business. Employer Solutions are driven by our digital, software and AI-led capabilities and spans total employee wellbeing and engagement, including integrated employee wellness, benefits administration, healthcare navigation and financial health. Professional Services includes our cloud deployment, advisory and application management services. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.
Revenues are recognized when control of the promised services is transferred to the customer in the amount that best reflects the consideration to which the Company expects to be entitled in exchange for those services. 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. To the extent that we cannot estimate with reasonable assurance the likelihood that we will achieve the performance target, we will constrain this portion of the transaction price and recognize it when or as the uncertainty is resolved. Any taxes assessed on revenues relating to services provided to our clients are recorded on a net basis. All of the Company’s revenues are described in more detail below.
Administrative Services
We provide benefits, human resource and payroll administration services across all of our solutions, which are highly recurring. The Company’s contracts may include administration services across one or multiple solutions and typically have three to five-year terms with mutual renewal options.
These contracts typically consist of an implementation phase and an ongoing administration phase:
Implementation phase – In connection with the Company’s long-term agreements, highly customized implementation efforts are often necessary to set up clients and their human resource, payroll or benefit programs on the Company’s systems and operating processes. Work performed during the implementation phase is considered a set-up activity because it does not transfer a service to the customer. Therefore it is not a separate performance obligation. As these agreements are longer term in nature, our contracts generally provide that if the client terminates a contract, we are entitled to an additional payment for services performed through the termination date designed to recover our up-front costs of implementation. Any fees received from the customer as part of the implementation are in effect, an advance payment for the future ongoing administration services to be provided.
Ongoing administration services phase – For all solutions, the ongoing administration phase includes a variety of plan and payroll administration services and system support services. More specifically, these services include data management, calculations, reporting, fulfillment/communications, compliance services, call center support, and in our Health solutions agreements, annual on-boarding and enrollment support. While there are a variety of activities performed across all solutions, the overall nature of the obligation is to provide integrated administration solutions to the customer. The agreement represents a stand-ready obligation to perform these activities across all solutions on an as-needed basis. The customer obtains value from each period of service, and each time increment (i.e., each month, or each benefit cycle in the case of our Health solutions arrangements) is distinct and substantially the same. Accordingly, the ongoing administration services for each solution represents a series and each series (i.e., each month, or each benefit cycle including the enrollment period in the case of our Health solutions arrangements) of distinct services are deemed to be a single performance obligation. In agreements that include multiple performance obligations, the transaction price related to each performance obligation is based on a relative stand-alone selling price basis. We establish the stand-alone selling price using observable market prices that the Company charges separately for similar solutions to similar customers.
Our contracts with our clients specify the terms and conditions upon which the services are based. Fees for these services are primarily based on a contracted fee charged per participant per period (e.g., monthly or annually, as applicable). These contracts may also include fixed components, including lump-sum implementation fees. Our fees are not typically payable until the commencement of the ongoing administration phase. Once fees become payable, payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination.
For Health solution administration services, each benefits cycle inclusive of the enrollment period represents a time increment under the series guidance and is a single performance obligation. Although ongoing fees are typically not payable until the commencement of the ongoing administrative phase, we begin transferring services to our customers approximately four months prior to payments being due as part of our annual enrollment services. Although our per-participant fees are considered variable, they are typically predictable in nature, and therefore we do not generally constrain any portion of our transaction price estimates. We use an input method based on the labor costs incurred
10
relative to total labor costs as the measure of progress in satisfying our Health solution performance obligation commencing when the customer’s annual enrollment services begin. Given that the Health solution enrollment and administrative services are stand-ready in nature, it can be difficult to estimate the total expected efforts or hours we will incur for a particular benefits cycle. Therefore, the input measure is based on the historical effort expended each month, which is measured as labor cost.
For all other benefits administration, human resources and payroll services where each month represents a distinct time increment under the series guidance, we allocate the transaction price to the month we are performing our services. Therefore, the amount recognized each month is the variable consideration related to that month plus any fixed monthly or annual fee, which is recognized on a straight-line basis. Revenue for these types of arrangements are therefore more consistent throughout the year.
In the normal course of business, we enter into change orders or other contract modifications to add or modify services provided to the customer. We evaluate whether these modifications should be accounted for as separate contracts or a modification to an existing contract. To the extent that the modification changes a promise that forms part of the underlying series, the modification is not accounted for as a separate contract.
Other Contracts
In addition to the ongoing administration services, the Company also has services across all solutions that represent separate performance obligations and that are often shorter in duration, such as our cloud deployment services, cloud advisory services, participant financial advisory services, and enrollment services not bundled with ongoing administration services.
Fee arrangements can be in the form of fixed-fee, time-and-materials, or fees based on assets under management. Payment is typically due on a monthly basis as we perform under the contract, and we are entitled to be reimbursed for work performed to date in the event of termination.
Services may represent stand-ready obligations that meet the series provision, in which case all variable consideration is allocated to each distinct time increment.
Other services are recognized over-time based on a method that faithfully depicts the transfer of value to the customer, which may be based on the value of labor hours worked or time elapsed, depending on the facts and circumstances.
A portion of the fees for enrollment services not bundled with ongoing administration services are in the form of commissions received from carriers and are variable in nature. These annual enrollment services are typically completed over a short period. However, the Company may continue to receive commissions from carriers until the respective policy lapses or is cancelled. The Company bases the estimates of total transaction price on supportable evidence from an analysis of past transactions, and only includes amounts that are probable of being received or not refunded. This is an area requiring significant judgement and as a result, the estimated total transaction price may be lower than the ultimate amount of commissions we may collect. Consequently, the estimate of total transaction price is adjusted over time as the Company receives confirmation of cash received, or as other information becomes available.
The Company has elected to apply practical expedients to not disclose the revenue related to unsatisfied performance obligations if (1) the contract has an original duration of 1 year or less, or (2) the variable consideration is allocated entirely to an unsatisfied performance obligation which is recognized as a series of distinct goods and services that form a single performance obligation.
Contract Costs
Costs to obtain a Contract
The Company capitalizes incremental costs to obtain a contract with a customer that are expected to be recovered. Assets recognized for the costs to obtain a contract, which primarily includes sales commissions paid in relation to the initial contract, are amortized over the expected life of the underlying customer relationships, which is 7 years for our payroll and cloud solutions and 15 years for all of our other solutions. Commissions paid in relation to contract renewals were immaterial for all periods. The expected life of the underlying customer relationships considers the initial contract terms, which range from 3-5 years as well as expected renewals. For situations where the duration of the contract is 1 year or less, the Company has applied a practical expedient and recognized the costs of obtaining a contract as an expense when incurred. These costs are recorded in Cost of services, exclusive of depreciation and amortization in the Condensed Consolidated Statements of Comprehensive Income (Loss).
11
Costs to fulfill a Contract
The Company capitalizes costs to fulfill contracts which includes highly customized implementation efforts to set up clients and their human resource, payroll or benefit programs. Assets recognized for the costs to fulfill a contract are amortized on a systematic basis over the expected life of the underlying customer relationships, which is 7 years for our payroll and cloud solutions and 15 years for all of our other solutions.
Amortization for all contracts costs are recorded in Cost of services, exclusive of depreciation and amortization in the Condensed Consolidated Statements of Comprehensive Income (Loss) (see Note 5 “Other Financial Data”).
4. Acquisitions
2020 Acquisition
The Company completed one acquisition during the year ended December 31, 2020. The acquisition was not material to the Company’s results of operations, financial position, or cash flows. The Company accounted for the acquisition as a business combination under Accounting Standards Codification Topic 805, Business Combinations. The goodwill identified by this acquisition is primarily attributed to the synergies that are expected to be realized as well as intangible assets that do not qualify for separate recognition, such as workforce. Goodwill is not amortized and is deductible for tax purposes. Upon completion of this acquisition, the business is now wholly-owned by the Company.
5. Other Financial Data
Condensed Consolidated Balance Sheets Information
Receivables, net
The components of Receivables, net are as follows (in millions):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Billed and unbilled receivables |
$ | 502 | $ | 547 | ||||
| Allowance for expected credit losses |
(16 | ) | (15 | ) | ||||
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|
|
|
|||||
| Balance at end of period |
$ | 486 | $ | 532 | ||||
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|
|
|
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The Company has not experienced significant write-downs in its receivable balances.
Other current assets
The components of Other current assets are as follows (in millions):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Deferred project costs |
$ | 47 | $ | 53 | ||||
| Prepaid expenses |
55 | 57 | ||||||
| Commissions receivable |
32 | 32 | ||||||
| Other |
31 | 21 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 165 | $ | 163 | ||||
|
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|
|
|
|||||
Other assets
The components of Other assets are as follows (in millions):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Deferred project costs |
$ | 257 | $ | 228 | ||||
| Operating lease right of use asset |
129 | 129 | ||||||
| Commissions receivable |
28 | 25 | ||||||
| Other |
31 | 26 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 445 | $ | 408 | ||||
|
|
|
|
|
|||||
The current and non-current portions of deferred project costs relate to costs to obtain and fulfill contracts (see Note 3 “Revenue from Contracts with Customers”). During the three and six months ended June 30, 2021 and 2020, total amortization expense of $17 million, $33 million, $16 million and $32 million, respectively, was recorded in Cost of services, exclusive of depreciation and amortization in the Condensed Consolidated Statements of Comprehensive Income (Loss).
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Other assets include the fair value of outstanding derivative instruments related to interest rate swaps. The balance in Other assets as of June 30, 2021 was $6 million (see Note 12 “Derivative Financial Instruments” for further information).
Fixed assets, net
The components of Fixed assets, net are as follows (in millions):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Capitalized software |
$ | 268 | $ | 242 | ||||
| Leasehold improvements |
63 | 63 | ||||||
| Computer equipment |
197 | 192 | ||||||
| Furniture, fixtures and equipment |
21 | 21 | ||||||
| Construction in progress |
49 | 28 | ||||||
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|
|
|||||
| Total Fixed assets, gross |
598 | 546 | ||||||
| Less: Accumulated depreciation |
260 | 212 | ||||||
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|
|
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| Fixed assets, net |
$ | 338 | $ | 334 | ||||
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|
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Included in Computer equipment are assets under finance leases. The balances as of June 30, 2021 and December 31, 2020, net of accumulated depreciation related to these assets were $72 million and $83 million, respectively.
Other current liabilities
The components of Other current liabilities are as follows (in millions):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Deferred revenue |
$ | 119 | $ | 148 | ||||
| Operating lease liabilities |
54 | 41 | ||||||
| Finance lease liabilities |
28 | 28 | ||||||
| Other |
103 | 107 | ||||||
|
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|
|
|
|||||
| Total |
$ | 304 | $ | 324 | ||||
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|
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Other liabilities
The components of Other liabilities are as follows (in millions):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Deferred revenue |
$ | 57 | $ | 60 | ||||
| Operating lease liabilities |
140 | 155 | ||||||
| Finance lease liabilities |
44 | 59 | ||||||
| Unrecognized tax positions |
49 | 48 | ||||||
| Other |
90 | 125 | ||||||
|
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|
|
|
|||||
| Total |
$ | 380 | $ | 447 | ||||
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|
|||||
The current and non-current portions of deferred revenue relates to consideration received in advance of performance under client contracts. During the six months ended June 30, 2021 and 2020, revenue of approximately $101 million and $133 million was recognized that was recorded as deferred revenue at the beginning of each period, respectively.
Other current liabilities and Other liabilities include the fair value of outstanding derivative instruments related to interest rate swaps. The balance in Other current liabilities as of June 30, 2021 and December 31, 2020 was $27 million and $28 million, respectively. The balances in Other liabilities as of June 30, 2021 and December 31, 2020 were $3 million and $19 million, respectively (see Note 12 “Derivative Financial Instruments” for further information).
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6. Goodwill and Intangible assets, net
The changes in the net carrying amount of goodwill for the six months ended June 30, 2021 are as follows (in millions):
| Employer Solutions |
Professional Services |
Total | ||||||||||
| Balance as of December 31, 2020 |
$ | 1,985 | $ | 260 | $ | 2,245 | ||||||
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|||||||
| Measurement period adjustments |
2 | — | 2 | |||||||||
| Foreign currency translation |
2 | 1 | 3 | |||||||||
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|
|
|
|||||||
| Balance as of June 30, 2021 |
$ | 1,989 | $ | 261 | $ | 2,250 | ||||||
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Intangible assets by asset class are as follows (in millions):
| June 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||
| Intangible assets: |
||||||||||||||||||||||||
| Customer related and contract based intangibles |
$ | 2,079 | $ | 560 | $ | 1,519 | $ | 2,078 | $ | 486 | $ | 1,592 | ||||||||||||
| Technology related intangibles |
316 | 206 | 110 | 316 | 180 | 136 | ||||||||||||||||||
| Trade name (finite life) |
8 | 6 | 2 | 8 | 6 | 2 | ||||||||||||||||||
| Trade name (indefinite life) |
3 | — | 3 | 3 | — | 3 | ||||||||||||||||||
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|
|
|
|
|
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|
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|
|||||||||||||
| Total |
$ | 2,406 | $ | 772 | $ | 1,634 | $ | 2,405 | $ | 672 | $ | 1,733 | ||||||||||||
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|
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The change in gross carrying amounts for customer related and contract-based intangibles relates to the favorable impact of foreign currency translation adjustments.
Amortization expense from finite-lived intangible assets was $50 million, $100 million, $50 million and $100 million for the three and six months ended June 30, 2021 and 2020, respectively, which was recorded in Depreciation and intangible amortization in the Condensed Consolidated Statements of Comprehensive Income (Loss).
Subsequent to June 30, 2021, the annual amortization expense is expected to be as follows (in millions):
| Customer Related and Contract Based Intangibles |
Technology Related Intangibles |
|||||||
| Remainder of 2021 (July - December) |
$ | 72 | $ | 27 | ||||
| 2022 |
146 | 53 | ||||||
| 2023 |
146 | 22 | ||||||
| 2024 |
146 | 5 | ||||||
| 2025 |
146 | 3 | ||||||
| Thereafter |
863 | — | ||||||
|
|
|
|
|
|||||
| Total amortization expense |
$ | 1,519 | $ | 110 | ||||
|
|
|
|
|
|||||
The estimated annual amortization expense for finite life trade name intangible assets is expected to be $1 million annually for 2021 through January of 2024.
The amortization expense from finite-lived intangible assets subsequent to June 30, 2021 will change from the amounts reflected above as a result of the Company’s Business Combination Agreement completed on July 2, 2021 (see Note 17 – “Subsequent Events”).
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7. Income Taxes
For the three and six months ended June 30, 2021 and 2020, the Company’s effective tax rates were (34)%, (17)%, (17)% and (9)%, respectively.
The Company and certain of its subsidiaries operate in the U.S. as partnerships for income tax purposes (partnerships generally are not subject to federal income taxes) and generally as corporate entities in non-U.S. jurisdictions. The Company’s effective tax rate for the three and six months ended June 31, 2021 and 2020 was substantially due to the fact that certain subsidiaries are subject to federal, state, local and foreign income taxes (as applicable).
Deferred income taxes, reflecting assets and liabilities netted by jurisdiction, have been classified on the Condensed Consolidated Balance Sheets as follows (in millions):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Deferred tax assets - non-current |
$ | 5 | $ | 5 | ||||
| Deferred tax liabilities - non-current |
— | — | ||||||
|
|
|
|
|
|||||
| Net deferred tax asset |
$ | 5 | $ | 5 | ||||
|
|
|
|
|
|||||
8. Debt
Debt outstanding consisted of the following (in millions):
| Maturity Date | June 30, 2021 |
December 31, 2020 |
||||||||||
| Term Loan |
May 1, 2024 | $ | 631 | $ | 634 | |||||||
| Term Loan, Amended |
October 31, 2026 | 1,966 | 1,976 | |||||||||
| Secured Senior Notes |
June 1, 2025 | 300 | 300 | |||||||||
| Unsecured Senior Notes |
June 1, 2025 | 1,230 | 1,230 | |||||||||
| $24m Revolving Credit Facility |
May 1, 2022 | — | — | |||||||||
| $226m Revolving Credit Facility, Amended |
October 31, 2024 | — | — | |||||||||
| Other |
December 31, 2021 | 10 | 10 | |||||||||
|
|
|
|
|
|||||||||
| Total |
4,137 | 4,150 | ||||||||||
| Less: term loan and senior note financing fees and premium, net |
(65 | ) | (72 | ) | ||||||||
|
|
|
|
|
|||||||||
| Total debt, net |
4,072 | 4,078 | ||||||||||
| Less: current portion of long term debt, net |
(37 | ) | (37 | ) | ||||||||
|
|
|
|
|
|||||||||
| Total long term debt, net |
$ | 4,035 | $ | 4,041 | ||||||||
|
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|
|
|
|||||||||
Term Loan
In connection with the Separation, in May 2017, the Company entered into a 7-year Initial Term Loan. During November 2017 and November 2019, the Company entered into Incremental Term Loans under identical terms as the Initial Term Loan. In August 2020, the Company refinanced the Term Loan by paying down $270 million of principal using the proceeds from the August 2020 Unsecured Senior Notes issuance, extending the maturity date on $1,986 million of the balance to October 31, 2026, and adding an interest rate floor of 50 bps. Interest rates on the Term Loan borrowings are based on the London Interbank Offered Rate (“LIBOR”) plus 275 or 300 bps, based on defined ratios, and LIBOR plus 325 or 350 bps, based on defined ratios for the amended portion. The Company used the 1-month LIBOR rate for all periods presented. The Company is required to make principal payments at the end of each fiscal quarter based on defined terms in the agreement with the remaining principal balances due on the maturity dates. During the six months ended June 30, 2021, the Company made total principal payments of $13 million. The Company utilized swap agreements to fix a portion of the floating interest rates to May 2024 (see Note 12 “Derivative Financial Instruments”).
In July 2021, the Company paid $556 million of principal on the Term Loan using proceeds from the completed Business Combination Agreement (see Note 17 – “Subsequent Events”). The portion of the unamortized financing fees associated with the principal that has been paid was also written off concurrently with the principal payment. In addition, the Company modified its related interest rate derivatives, which we do not expect to have a material impact on the Consolidated Financial Statements.
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Secured Senior Notes
During May 2020, the Company issued $300 million of Secured Senior Notes. These Secured Senior Notes have a maturity date of June 1, 2025 and accrue interest at a fixed rate of 5.75% per annum, payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2020.
Unsecured Senior Notes
In connection with the Separation, in May 2017, the Company issued $500 million of Initial Unsecured Senior Notes. During November 2017, July 2019, and August 2020, the Company issued additional Unsecured Senior Notes under identical terms as the Initial Unsecured Senior Notes for $180 million, $280 million, and $270 million, respectively (collectively “Unsecured Senior Notes”). The Unsecured Senior Notes have a maturity date of June 1, 2025 and accrue interest at a fixed rate of 6.750% per annum, payable semi-annually on June 1 and December 1 of each year.
In July 2021, the Company redeemed the Unsecured Senior Notes for approximately $1.3 billion using proceeds from the complete Business Combination Agreement (see Note 17 – “Subsequent Events”). The pro rata interest of approximately $7 million due on the Unsecured Senior Notes was also paid at that time.
Revolving Credit Facility
In connection with the Separation, in May 2017, the Company entered into a 5-year $250 million Revolver with a multi-bank syndicate with a maturity date of May 1, 2022. During August 2020, the Company extended the maturity date for $226 million of the Revolver to October 31, 2024. At June 30, 2021, $11 million of unused letters of credit related to various insurance policies and real estate leases were issued under the Revolver and there were no additional borrowings. The Company is required to make periodic payments for commitment fees and interest related to the Revolver and outstanding letters of credit. During the three and six months ended June 30, 2021 and 2020 the Company made immaterial payments related to these fees.
As part of the acquisition of NGA HR during the year ended December 31, 2019, the Company acquired a revolving credit facility of approximately $21 million secured on the accounts receivable balance of NGA HR. As of June 30, 2021, the outstanding borrowings under this facility were $10 million, which are reflected in Other in the table above. The facility matures on December 31, 2021, at which time any outstanding borrowings are repayable in full, with interest payable monthly. Interest is calculated as LIBOR plus 3.5% per annum.
Financing Fees, Premiums and Interest Expense
The Company capitalized financing fees and premiums related to the Term Loan, Revolver, Unsecured Senior Notes and Secured Senior Notes issued.
The financing fees and premiums related to the Term Loan, Unsecured Senior Notes and Secured Senior Notes are recorded as an offset to the aggregate debt balances and are being amortized over the respective loan terms. For the three and six months ended June 30, 2021 and 2020, $3 million, $7 million, $4 million and $8 million, respectively, was amortized and recorded in Interest expense in the Condensed Consolidated Statements of Comprehensive Income (Loss).
As the Revolver has no outstanding balance as of June 30, 2021, the related $7 million of financing fees are recorded in Other assets and are being amortized on a straight-line basis over the term of the Revolver. The straight-line amortization is approximately $1 million for each year. Amortization for all periods was recorded in Interest expense in the Condensed Consolidated Statements of Comprehensive Income (Loss). As of June 30, 2021, $1 million of unamortized financing fees related to the Revolver are recorded in Other current assets, on the Condensed Consolidated Balance Sheets. As of December 31, 2020, $1 million and $1 million of unamortized financing fees related to the Revolver are recorded in Other current assets and Other assets, respectively, on the Condensed Consolidated Balance Sheets.
Total interest expense related to the debt instruments for the three and six months ended June 30, 2021 and 2020 was $52 million, $105 million, $47 million and $100 million, respectively, which included amortization of financing fees of $4 million, $8 million, $5 million and $9 million for the three and six months ended June 30, 2021 and 2020, respectively. Interest expense is recorded in Interest expense in the Condensed Consolidated Statements of Comprehensive Income (Loss).
16
9. Members’ Equity
Class A Common Units
There were no grants of Class A common units during the six months ended June 30, 2021 and June 30, 2020. Each holder of Class A common units is entitled to one vote per unit.
Class A-1 Common Units
During the six months ended June 30, 2021, the Company granted 643 Restricted Class A-1 common units (“Class A-1 common units”) and during the six months ended June 30, 2020 there were no grants of Class A-1 common units. Holders of Class A-1 common units are not entitled to voting rights.
Class B Common Units
During the six months ended June 30, 2021 there were no grants of Class B common units, and during the six months ended June 30, 2020 the Company granted 5,309 units. Holders of Class B common units are not entitled to voting rights.
Distributions
The Company’s Board of Directors may declare distributions to the holders of the Company’s common units listed above based on the following order of priorities: (1) first to the holders of Class A and Class A-1 common units, pro rata based on the amount of the Class A and Class A-1 unreturned capital value, defined as the excess of the value of the common units upon issuance minus the aggregate amount of all distributions made by the Company to the date of the distribution and (2) second to the holders of Class A, Class A-1 and Class B common units, pro rata based on the number of units held. For the six months ended June 30, 2021, only the Class A and Class A-1 unit holders were entitled to distributions of undistributed earnings. The Class B unit holders were not entitled to any distributions as the first condition in the order of priorities above had not been satisfied.
During both the six months ended June 30, 2021 and 2020, the Company made tax related distributions on behalf of the Class A and Class A-1 unit holders that were immaterial and $1 million, respectively.
Share-Based Compensation Expense
Share-based payments to employees include grants of restricted share units (“RSUs”) and performance-based restricted share units (“PRSUs”), which consist of both Class A-1 and Class B common units in each type, are measured based on their estimated grant date fair value. The Company recognizes compensation expense on a straight-line basis over the requisite service period for awards expected to ultimately vest. The RSUs vest ratably over periods of one to five years. The majority of the PRSUs have vesting conditions that are contingent upon the achievement of defined internal rates of return and multiples on invested capital occurrence and of certain liquidity events. The Company recorded share-based compensation expense of $3 million, $5 million, $2 million and $4 million for the three and six months ended June 30, 2021 and 2020, respectively.
The following table summarizes the unit activity during the six months ended June 30, 2021:
| RSUs | Weighted Average Grant Date Fair Value Per Unit |
PRSUs | Weighted Average Grant Date Fair Value Per Unit |
|||||||||||||
| Balance as of December 31, 2020 |
2,999 | $ | 4,563 | 9,223 | $ | 4,015 | ||||||||||
|
|
|
|
|
|||||||||||||
| Granted |
254 | 28,875 | 389 | 24,420 | ||||||||||||
| Vested |
(517 | ) | 5,459 | — | — | |||||||||||
| Forfeited |
(121 | ) | 4,527 | (567 | ) | 2,626 | ||||||||||
|
|
|
|
|
|||||||||||||
| Balance as of June 30, 2021 |
2,614 | $ | 6,741 | 9,045 | $ | 4,888 | ||||||||||
|
|
|
|
|
|||||||||||||
17
As of June 30, 2021, total future compensation expense related to unvested RSUs was $15 million which will be recognized over a remaining weighted-average amortization period of approximately 3.5 years. As of June 30, 2021, total future compensation expense related to PRSUs was $35 million which will be recognized over approximately the next 3.1 years.
Accumulated Other Comprehensive Loss
As of June 30, 2021, the Accumulated other comprehensive loss balance included unrealized losses for interest rate swaps and foreign currency translation adjustments related to our foreign subsidiaries that do not have the U.S. dollar as their functional currency.
Changes in Accumulated other comprehensive income (loss) by component, are as follows (in millions):
| Foreign Currency Translation Adjustments |
Interest Rate Swaps(1) |
Total | ||||||||||
| Balance at December 31, 2020 |
$ | 5 | $ | (47 | ) | $ | (42 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income before reclassifications |
4 | 10 | 14 | |||||||||
| Tax expense |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income before reclassifications, net |
4 | 10 | 14 | |||||||||
| Amounts reclassified from accumulated other comprehensive loss, net |
— | 7 | 7 | |||||||||
| Tax expense |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Amounts reclassified from accumulated other comprehensive loss, net |
— | 7 | 7 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net current period other comprehensive income |
4 | 17 | 21 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at March 31, 2021 |
$ | 9 | $ | (30 | ) | $ | (21 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income (loss) before reclassifications |
4 | (1 | ) | 3 | ||||||||
| Tax expense |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income (loss) before reclassifications, net |
4 | (1 | ) | 3 | ||||||||
| Amounts reclassified from accumulated other comprehensive loss, net |
— | 7 | 7 | |||||||||
| Tax expense |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Amounts reclassified from accumulated other comprehensive loss, net |
— | 7 | 7 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net current period other comprehensive income |
4 | 6 | 10 | |||||||||
| Balance at June 30, 2021 |
$ | 13 | $ | (24 | ) | $ | (11 | ) | ||||
|
|
|
|
|
|
|
|||||||
| (1) | Reclassifications from this category are recorded in Interest expense. See Note 12 “Derivative Financial Instruments” for additional information. |
10. Earnings Per Unit
The Company calculates basic and diluted earnings per unit for the Class A, Class A-1 and Class B common units according to their participation rights in the distributions of undistributed earnings. The earnings available to each class of unit are divided by the weighted average number of units for the period in each class. Diluted earnings per unit assume the issuance of units for all potentially dilutive unit equivalents outstanding; however, none of the Performance-based Class B common units were included as the conditions related to the achievement of the defined internal rates of return and multiples on invested capital were not met as of June 30, 2021.
18
Basic and diluted earnings per unit are as follows (in millions, except for unit and per unit amounts):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss available to unit holders |
$ | (4 | ) | $ | (25 | ) | $ | (25 | ) | $ | (46 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Basic weighted average units outstanding |
125,464 | 125,428 | 125,457 | 125,408 | ||||||||||||
| Dilutive effect |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted weighted average units outstanding |
125,464 | 125,428 | 125,457 | 125,408 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Basic loss per unit |
$ | (33.65 | ) | $ | (196.81 | ) | $ | (201.31 | ) | $ | (368.90 | ) | ||||
| Dilutive effect |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted loss per unit |
$ | (33.65 | ) | $ | (196.81 | ) | $ | (201.31 | ) | $ | (368.90 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
For the three and six months ended June 30, 2021 and June 30, 2020, 290 units, 298 units, 630 units and 268 units, respectively, were not included in the computation of diluted loss per unit because their inclusion would be anti-dilutive. Furthermore, for the three and six months ended June 30, 2021 and June 30, 2020, the pro forma effect of the number of shares whose proceeds were used to pay for tax related distributions were not included in the computation of diluted loss per unit because their inclusion would be anti-dilutive.
11. Segment Reporting
The Company’s reportable segments have been determined using a management approach, which is consistent with the basis and manner in which the Company’s chief operating decision maker (“CODM”) uses financial information for the purposes of allocating resources and evaluating performance. The Company’s CODM is its Chief Executive Officer. The CODM evaluates the performance of the Company based on its total revenue and segment profit.
The CODM also uses revenue and segment profit to manage and evaluate our business, make planning decisions, and as performance measures for Company-wide bonus plans and executive compensation plans. These key financial measures provide an additional view of our operational performance over the long-term and provide useful information that we use in order to maintain and grow our business.
The accounting policies of the segments are the same as those described in Note 2 “Accounting Policies and Practices.” The Company does not report assets by reportable segments as this information is not reviewed by the CODM on a regular basis.
Information regarding the Company’s current reportable segments is as follows (in millions):
| Revenue | ||||||||||||||||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Employer Solutions |
||||||||||||||||
| Recurring |
$ | 516 | $ | 489 | $ | 1,049 | $ | 1,018 | ||||||||
| Project |
53 | 51 | 107 | 101 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Employer Solutions |
569 | 540 | 1,156 | 1,119 | ||||||||||||
| Professional Services |
||||||||||||||||
| Recurring |
31 | 26 | 60 | 50 | ||||||||||||
| Project |
61 | 63 | 124 | 129 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Professional Services |
92 | 89 | 184 | 179 | ||||||||||||
| Hosted Business |
11 | 18 | 21 | 42 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 672 | $ | 647 | $ | 1,361 | $ | 1,340 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
19
| Segment Profit | ||||||||||||||||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Employer Solutions |
$ | 138 | $ | 127 | $ | 274 | $ | 269 | ||||||||
| Professional Services |
7 | 9 | 7 | 11 | ||||||||||||
| Hosted Business |
— | — | (3 | ) | 4 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total of all reportable segments |
145 | 136 | 278 | 284 | ||||||||||||
| Share-based compensation |
3 | 2 | 5 | 4 | ||||||||||||
| Non-recurring professional expenses(1) |
9 | — | 18 | — | ||||||||||||
| Transformation initiatives(2) |
— | 8 | — | 11 | ||||||||||||
| Restructuring |
2 | 22 | 9 | 47 | ||||||||||||
| Other(3) |
— | 13 | (5 | ) | 24 | |||||||||||
| Depreciation |
25 | 23 | 49 | 42 | ||||||||||||
| Intangible amortization |
50 | 50 | 100 | 100 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating Income |
56 | 18 | 102 | 56 | ||||||||||||
| Interest expense |
61 | 53 | 123 | 111 | ||||||||||||
| Other expense (income), net |
1 | (5 | ) | 9 | (4 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Loss Before Income Tax Benefit |
$ | (6 | ) | $ | (30 | ) | $ | (30 | ) | $ | (51 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Non-recurring professional expenses primarily includes external advisor costs related to the Company’s Business Combination Agreement completed on July 2, 2021 (see Note 17 – “Subsequent Events”). |
| (2) | Transformation initiatives in fiscal year 2020 includes expenses related to enhancing our data center. |
| (3) | Other primarily includes long-term incentive expenses and expenses related to acquisitions in fiscal year 2020, offset by Other expense (income), net. |
There was no single client who accounted for more than 10% of the Company’s revenues in any of the periods presented.
12. Derivative Financial Instruments
The Company is exposed to market risks, including changes in interest rates. To manage the risk related to these exposures, the Company has entered into various derivative instruments that reduce these risks by creating offsetting exposures.
Interest Rate Swaps
The Company has utilized swap agreements that will fix the floating interest rates associated with its Term Loan as shown in the following table:
| Designation Date |
Effective Date | Initial Notional Amount |
Notional Amount Outstanding as of June 30, 2021 |
Fixed Rate | Expiration Date | |||||||||||
| May 2017 |
May 2019 | $ | 427,500,000 | $ | 427,500,000 | 2.0850 | % | May 2022 | ||||||||
| May 2017 |
May 2019 | 100,000,000 | 100,000,000 | 2.0850 | % | May 2022 | ||||||||||
| August 2020 |
August 2020 | 557,500,000 | 557,500,000 | 2.5070 | % | May 2022 | ||||||||||
| August 2020 |
July 2020 | 110,136,580 | 103,564,180 | 2.6250 | % | February 2023 | ||||||||||
| August 2020 |
August 2020 | 89,863,420 | 96,435,820 | 3.0854 | % | February 2023 | ||||||||||
| August 2020 |
August 2020 | 181,205,050 | 170,765,250 | 0.7775 | % | May 2024 | ||||||||||
| August 2020 |
August 2020 | 388,877,200 | 376,946,000 | 0.7430 | % | May 2024 | ||||||||||
| August 2020 |
May 2022 | 220,130,318 | n/a | 0.2640 | % | May 2024 | ||||||||||
| August 2020 |
May 2022 | 306,004,562 | n/a | 0.2450 | % | May 2024 | ||||||||||
The swap agreements entered into in May 2020 and amended in August 2020 will maintain a constant fixed debt ratio by stepping up as existing swaps mature and also amortize to maturity as the required minimum principal payments are made on the Term Loan. The August 2020 swap agreement modification was executed in conjunction with the refinancing of the Term Loan, which incorporated an interest rate floor of 50 bps on a portion of the swaps related to the extended Term Loan. All interest rate swaps have been designated as cash flow hedges. As a result of the amendment, the fair value of the instruments at the time of re-designation are being amortized into interest expense over the remaining life of the instruments.
20
In July 2021, the Company modified the interest rate derivatives in conjunction with the principal payment on the Term Loan using proceeds from the completed Business Combination Agreement (see Note 17 – “Subsequent Events”). The Company does not expect these modifications to have a material impact on the Consolidated Financial Statements.
Financial Instrument Presentation
The fair values and location of outstanding derivative instruments recorded in the Condensed Consolidated Balance Sheets are as follows (in millions):
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets |
||||||||
| Other assets |
$ | 6 | $ | — | ||||
|
|
|
|
|
|||||
| Total |
$ | 6 | $ | — | ||||
|
|
|
|
|
|||||
| Liabilities |
||||||||
| Other current liabilities |
$ | 27 | $ | 28 | ||||
| Other liabilities |
3 | 19 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 30 | $ | 47 | ||||
|
|
|
|
|
|||||
The Company estimates that approximately $27 million of derivative losses included in Accumulated other comprehensive loss as of June 30, 2021 will be reclassified into earnings over the next twelve months. This estimated amount will change as a result of the Company’s Business Combination Agreement completed on July 2, 2021 (see Note 17 – “Subsequent Events”).
13. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into three levels based on reliability, as follows:
| • | Level 1 – observable inputs such as quoted prices in active markets for identical assets and liabilities; |
| • | Level 2 – inputs other than quoted prices for identical assets in active markets that are observable either directly or indirectly; and |
| • | Level 3 – unobservable inputs in which there is little or no market data which requires the use of valuation techniques and the development of assumptions. |
The Company’s financial assets measured at fair value on a recurring basis are as follows (in millions):
| June 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets |
||||||||||||||||
| Interest rate swaps |
$ | — | $ | 6 | $ | — | $ | 6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets recorded at fair value |
$ | — | $ | 6 | $ | — | $ | 6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Interest rate swaps |
$ | — | $ | 30 | $ | — | $ | 30 | ||||||||
| Contingent consideration liability |
— | — | 29 | 29 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities recorded at fair value |
$ | — | $ | 30 | $ | 29 | $ | 59 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
21
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities |
||||||||||||||||
| Interest rate swaps |
$ | — | $ | 47 | $ | — | $ | 47 | ||||||||
| Contingent consideration liability |
— | — | 26 | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities recorded at fair value |
$ | — | $ | 47 | $ | 26 | $ | 73 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The valuations of the derivatives intended to mitigate our interest rate risk are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves, interest rate volatility, or spot and forward exchange rates, and reflects the contractual terms of these instruments, including the period to maturity. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential non-performance risk.
The contingent consideration liabilities relate to acquisitions completed during the years ended December 31, 2020 and 2018, and are included in Other current liabilities and Other liabilities on the Condensed Consolidated Balance Sheets. The fair value of these liabilities is determined using a discounted cash flow analysis. Changes in the fair value of the liabilities are included in Other expense (income), net in the Condensed Consolidated Statements of Comprehensive Income (Loss). Significant unobservable inputs are used in the assessment of fair value, including assumptions regarding discount rates and probability assessments based on the likelihood of reaching the various targets set out in the acquisition agreements. The following table summarizes the changes in deferred contingent consideration liabilities (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Beginning balance |
$ | 28 | $ | 22 | $ | 26 | $ | 22 | ||||||||
| Acquisitions |
— | — | 2 | — | ||||||||||||
| Accretion of contingent consideration |
1 | — | 1 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending Balance |
$ | 29 | $ | 22 | $ | 29 | $ | 22 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s financial liabilities not measured at fair value on a recurring basis are as follows (in millions):
| June 30, 2021 | December 31, 2020 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| Liabilities |
||||||||||||||||
| Current portion of long term debt, net |
$ | 37 | $ | 37 | $ | 37 | $ | 37 | ||||||||
| Long term debt, net |
4,035 | 4,070 | 4,041 | 4,090 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 4,072 | $ | 4,107 | $ | 4,078 | $ | 4,127 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The carrying value of the Term Loan and Senior notes include the outstanding principal balances, less any unamortized discount or premium. The carrying value of the Term Loan approximates fair value as it bears interest at variable rates and we believe our credit risk is consistent with when the debt originated. The outstanding balances under the Senior Notes have fixed interest rates and the fair value is classified as Level 2 within the fair value hierarchy and corroborated by observable market data (see Note 8 “Debt”).
The carrying amounts of Cash and cash equivalents, Receivables, net and Accounts payable and accrued liabilities approximate their fair values due to the short-term maturities of these instruments.
During the six months ended June 30, 2021 there were no transfers in or out of the Level 1, Level 2 or Level 3 classifications.
14. Restructuring and Integration
During the third quarter of 2019, management initiated a restructuring and integration plan (“the Plan”) following the completion of the Hodges acquisition and in anticipation of the NGA HR acquisition, which was completed on November 1, 2019. The Plan is intended to integrate and streamline operations across the Company and is expected to generate cost reductions related to position eliminations and facility and system rationalizations. The Company expects to incur costs related to severance, contract and lease exits and other related costs. The Company expects these restructuring and integration activities and related expenses to affect continuing operations through the first quarter of 2022.
22
The Plan is expected to result in cumulative costs of approximately $135 million through the end of the plan, consisting of approximately $80 million in severance and related benefits, and approximately $55 million in other costs, including technology realization, lease consolidation costs, advisory and consulting fees. The Plan is expected to generate annual cost savings of approximately $196 million by 2022.
From the inception of the Plan through June 30, 2021, the Company has incurred total expenses of $100 million. These charges are recorded in Cost of services, exclusive of depreciation and amortization and Selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income (Loss).
The following table summarizes restructuring costs by type that have been incurred through June 30, 2021 and are estimated to be incurred through the end of the Plan. Estimated costs by type may be revised in future periods as these assumptions are updated:
| Three Months Ended | Six Months Ended | Estimated | Estimated | |||||||||||||||||
| June 30, | June 30, | Inception to | Remaining | Total | ||||||||||||||||
| 2021 | 2021 | Date | Costs | Cost(1) | ||||||||||||||||
| Employer Solutions |
||||||||||||||||||||
| Severance and Related Benefits |
$ | 1 | $ | 6 | $ | 45 | $ | 22 | $ | 67 | ||||||||||
| Other Restructuring Costs(2) |
1 | 2 | 42 | 6 | 48 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Employer Solutions |
$ | 2 | $ | 8 | $ | 87 | $ | 28 | $ | 115 | ||||||||||
| Professional Services |
||||||||||||||||||||
| Severance and Related Benefits |
$ | — | $ | 1 | $ | 8 | $ | 5 | $ | 13 | ||||||||||
| Other Restructuring Costs(2) |
— | — | 5 | 2 | 7 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Professional Services |
$ | — | $ | 1 | $ | 13 | $ | 7 | $ | 20 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Restructuring Costs |
$ | 2 | $ | 9 | $ | 100 | $ | 35 | $ | 135 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | Actual costs, when incurred, may vary due to changes in the assumptions built into the Plan. Significant assumptions that may change when plans are finalized and implemented include, but are not limited to, changes in severance calculations, changes in the assumptions underlying sublease loss calculations due to changing market conditions, and changes in the overall analysis that might cause the Company to add or cancel component initiatives. |
| (2) | Other costs associated with the Plan primarily include consulting and legal fees and lease consolidation. |
As of June 30, 2021, approximately $6 million of the restructuring liability is unpaid and is recorded in Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets.
| Severance and Related Benefits |
Other Restructuring Costs |
Total | ||||||||||
| Accrued restructuring liability as of December 31, 2020 |
$ | 12 | $ | 3 | $ | 15 | ||||||
| Restructuring charges |
7 | 2 | 9 | |||||||||
| Cash payments |
(13 | ) | (5 | ) | (18 | ) | ||||||
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| Accrued restructuring liability as of June 30, 2021 |
$ | 6 | $ | — | $ | 6 | ||||||
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15. Employee Benefits
Defined Contribution Savings Plans
Certain of the Company’s employees participate in a defined contribution savings plan sponsored by the Company. For the three and six months ended June 30, 2021 and 2020, expenses were $15 million, $31 million, $12 million and $29 million, respectively. Expenses were recognized in Cost of services, exclusive of depreciation and amortization and Selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income (Loss).
23
16. Commitments and Contingencies
Legal
The Company is subject to various claims, tax assessments, lawsuits, and proceedings that arise in the ordinary course of business relating to the delivery of our services and the effectiveness of our technologies. The damages claimed in these matters are or may be substantial. Accruals for any exposures, and related insurance or other receivables, when applicable, are included on the Condensed Consolidated Balance Sheets and have been recognized in Selling, general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income (Loss) to the extent that losses are deemed probable and are reasonably estimable. These amounts are adjusted from time to time as developments warrant. Management believes that the reserves established are appropriate based on the facts currently known. The reserves recorded at June 30, 2021 and December 31, 2020 were not significant.
Guarantees and Indemnifications
The Company provides a variety of service performance guarantees and indemnifications to its clients. The maximum potential amount of future payments represents the notional amounts that could become payable under the guarantees and indemnifications if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or other methods. These notional amounts may bear no relationship to the future payments that may be made, if any, for these guarantees and indemnifications.
To date the Company has not been required to make any payment under any client arrangement as described above. The Company has assessed the current status of performance risk related to the client arrangements with performance guarantees and believes that any potential payments would be immaterial to the Condensed Consolidated Financial Statements.
Purchase Obligations
The Company’s expected cash outflow for non-cancellable purchase obligations related to purchases of information technology assets and services is $11 million, $26 million, $26 million, $27 million, $9 million, and $7 million, for the remainder of 2021 and the years ended 2022, 2023, 2024, 2025, and thereafter, respectively.
Service Obligations
On September 1, 2018, the Company executed an agreement to form a strategic partnership with Wipro, a leading global information technology, consulting and business process services company.
The Company’s expected cash outflow for non-cancellable service obligations related to our strategic partnership with Wipro is $67 million, $141 million, $147 million, $154 million, $162 million and $502 million for the remainder of 2021 and the years ended 2022, 2023, 2024, 2025 and thereafter, respectively.
The Company may terminate its arrangement with Wipro for cause or for the Company’s convenience. In the case of a termination for convenience, the Company would be required to pay a termination fee, including certain of Wipro’s unamortized costs, plus 25% of any remaining portion of the minimum level of services the Company agreed to purchase from Wipro over the course of 10 years.
17. Subsequent Events
Business Combination
On July 2, 2021 (the “Closing Date”), the Company completed its previously announced business combination transaction (as amended and restated as of April 29, 2021) (the “Business Combination Agreement”) with Foley Trasimene Acquisition Corp (“FTAC”), its wholly owned subsidiary Alight, Inc. (“Alight”), and certain other parties thereto. On the Closing Date, pursuant to the Business Combination Agreement, among other things, (i) Foley Trasimene became a subsidiary of Alight, (ii) the combined company is now organized in an “Up-C” structure.
Pursuant to the terms of the Business Combination Agreement, the shares of FTAC’s outstanding Class A common stock and Class B common stock were automatically converted into shares of Alight Class A common stock on a one-for-one basis for an aggregate of 142,586,199 shares of Alight Class A common stock. Additionally, each FTAC warrant that was outstanding, each of which entitled the holder thereof to purchase one share of FTAC Class A Common Stock at a price of $11.50 per share was automatically and irrevocably modified and exchanged for a warrant to purchase the same number of share(s) of Alight Class A common stock on the same terms.
24
The aggregate consideration payable in the Business Combination to the holders of units of Tempo Holding Company, LLC (n/k/a Alight Holding Company, LLC or “Alight Holdings”) was: (i) approximately $1.0 billion in cash, (ii) a number of shares of Alight Class A Common Stock and Class A Units of Alight Holdings (together with an equal number of shares of Class V common stock) in the aggregate equal to 226,663,750, (iii) a number of shares of Alight Class B-1 common stock and Class B-1 Units of Alight Holdings (“Class B-1 Units”) in the aggregate equal to 7,500,000 (iv) a number of shares of Alight Class B-2 common stock and Class B-2 Units of Alight Holdings (“Class B-2 Units”) in the aggregate equal to 7,500,000 and (v) repayment of non-extended Term Loan and Senior Unsecured Notes of approximately $1.8 billion.
Based on a total purchase price of $5.7 billion, the preliminary allocation of the fair value of the business combination will record approximately $4.0 billion each for both goodwill and identifiable intangible assets. In addition, we do not expect material changes from the working capital amounts presented in the Company’s Condensed Consolidated Balance Sheets as of June 30, 2021. We expect to reflect the preliminary purchase price accounting in our third quarter Consolidated Financial Statements and will finalize over the measurement period of up to one year.
On July 29, 2021, the Company entered into a definitive agreement to acquire the Aon Retiree Health Exchange business from Aon plc. The business combination is expected to be completed during the fourth quarter of 2021 and remains subject to regulatory approvals and other customary closing conditions.
Events and transactions occurring through the date of issuance of the financial statements have been evaluated by management and, when appropriate, recognized or disclosed in the financial statements or notes to the Condensed Consolidated Financial Statements.
25
Exhibit 99.2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements of Tempo Holdings for the fiscal years ended December 31, 2020, 2019 and 2018, including the notes thereto, which are incorporated by reference in the Current Report on Form 8-K filed by Alight, Inc. on July 12, 2021 (the “Super 8-K”) and are referred to in this section as our “Consolidated Financial Statements.”
In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the section entitled “Forward-Looking Statements” in the Super 8-K and the section entitled “Risk Factors” incorporated by reference in the Super 8-K.
BUSINESS
Overview
Tempo Holding Company, LLC (“Holdco,” the “Company,” “we,” “us” or “our”) was formed under the laws of the State of Delaware on March 7, 2017. Holdco is owned by Tempo Management, LLC and certain investment funds affiliated with The Blackstone Group L.P. (“Blackstone”) and other co-investors (collectively, the “Initial Investors”). Holdco is a holding company which conducts substantially all of its business operations through a 100% owned subsidiary, Tempo Acquisition, LLC.
Tempo Acquisition, LLC was formed under the laws of the State of Delaware on February 6, 2017. On February 9, 2017, Tempo Acquisition, LLC, entered into a purchase agreement (“the Purchase Agreement”) with Aon plc (“Aon”) whereby the Company agreed to purchase all of the outstanding equity interest in certain technology-enabled human resources solutions of Aon, plus certain related assets, for a purchase price of $4.3 billion in cash payable at closing, subject to customary adjustments set forth in the Purchase Agreement plus the assumption of certain liabilities (together the “Separation”). The Separation was completed on May 1, 2017.
On July 2, 2021 (the “Closing Date”), the Company completed its previously announced business combination transaction (as amended and restated as of April 29, 2021) (the “Business Combination Agreement”) with Foley Trasimene Acquisition Corp, its wholly owned subsidiary Alight, Inc. (“Alight”), and certain other parties thereto. On the Closing Date, pursuant to the Business Combination Agreement, among other things, (i) Foley Trasimene became a subsidiary of Alight, (ii) the combined company is now organized in an “Up-C” structure. (see Note 17 – “Subsequent Events”)
We are a leading cloud-based provider of integrated digital human capital and business solutions. We have an unwavering belief that a company’s success starts with its people, and our solutions connect human insights with technology. Leveraging artificial intelligence (“AI”) and data analytics, we provide an integrated, personalized experience for employees using technology-driven solutions that unlock value for employers. Our mission-critical solutions enable employees to enrich their health, wealth and wellbeing which helps global organizations achieve a high-performance culture. We have 15,000 dedicated colleagues serving more than 30 million employees and family members.
Principal Services and Segments
During the third quarter of 2020, we realigned our Solutions segment into two separate segments: Employer Solutions and Professional Services. We currently report our results of operations in three segments: Employer Solutions, Professional Services and Hosted Business. Employer Solutions, Professional Services and Hosted Business accounted for approximately 85%, 14% and 1% of consolidated revenue for both the three and six months ended June 30, 2021, respectively, and approximately 83%, 14% and 3% and 84%, 13% and 3% of consolidated revenue for the three and six months ended June 30, 2020, respectively.
2
Employer Solutions
Employer Solutions are driven by our digital, software and AI-led capabilities and spans total employee wellbeing and engagement, including integrated benefits administration, healthcare navigation, financial health, employee wellness and payroll. These solutions are designed to support employers in effectively managing their workforce through a seamless, integrated platform. We leverage data across all interactions and activities to improve the consumer experience, reduce operational costs and better inform management processes and decision-making. In addition, employees benefit from an integrated portal and user experience, coupled with a full-service client care center, helping them manage the full life cycle of their health, wealth and careers.
Professional Services
Professional Services includes our project-based cloud deployment and consulting offerings that provide expertise with both human capital and financial platforms. Specifically, this includes cloud advisory and deployment, and optimization services for cloud platforms such as Workday, SAP SuccessFactors, Oracle, and Cornerstone OnDemand.
Hosted Business
Our Hosted Business delivers core HR and payroll services on hosted human capital management platforms, including Oracle. These services include ongoing application hosting and management of on-premise human capital management software. Our Hosted client contracts typically have five to seven year terms that include a recurring revenue model primarily based on a contracted fee charged per participant per period (e.g., monthly or annually, as applicable).
In 2014, we stopped actively pursuing new clients in our Hosted Business and instead chose to focus our strategic efforts and resources on enhancing our suite of payroll & cloud solutions to help clients realize the benefits of cloud-based solutions. While we have successfully migrated a significant number of our Hosted clients to cloud-based solutions, we continue to support a number of active Hosted clients under agreements that are scheduled to expire by 2023. Accordingly, while we will continue to perform our existing Hosted Business agreements, we do not intend to renew such agreements or enter into any new Hosted Business agreements.
Revenue and Compensation
Revenues are principally derived from fees paid by clients for services. Payment terms are consistent with current industry practice.
Technology
We deliver our solutions through a set of proprietary and partner technologies, a well-developed network of providers and a structured approach to instill and sustain enterprise-wide practices of excellence. With this in mind, there are four layers to our technology strategy, all reinforced with a critical security framework:
| • | Omnichannel customer experience layer that drives a personalized approach for customers. |
| • | AI and analytics layer that uses data from our transactional systems, combined with client and third-party data to drive insights for clients. |
| • | Core transaction layer that powers our health, wealth and payroll systems. |
| • | Infrastructure layer to provide security, stability and performance across our application landscape. |
Seasonality
Due to buying patterns and delivery of certain products in the markets we serve, particularly given the timing of annual benefits enrollment, our revenues tend to be higher in the third and fourth quarters of each year.
Licensing and Regulation
Our business activities are subject to licensing requirements and extensive regulation under the laws of countries in which we operate, including United States (“U.S.”) federal and state laws. See the discussion contained in the “Risk Factors” section incorporated by reference in our Super 8-K for information regarding how actions by regulatory authorities or changes in legislation and regulation in the jurisdictions in which we operate may have an adverse effect on our business.
Clients
We serve a broad range of clients, including Fortune 500 companies and mid-market businesses, and seek to establish high-quality, strong, long-term relationships with our clients. We proactively solicit client feedback through ongoing surveys and client councils held throughout the year, and we use this critical feedback to enhance our client services and correct course when necessary. Through these surveys, we have learned that clients value the strength and depth of our relationships, scale and breadth of our solutions and our commitment to innovation and continuous improvement.
Competition
The markets for our solutions are competitive, rapidly evolving and fragmented. Our business faces competition from other global and national companies. The market for our solutions is subject to change as a result of economic, regulatory and legislative changes, technological developments, shifting client needs and increased competition from established and new competitors.
We do not believe there is any single competitor with the breadth of our solutions, and thus our competitors vary for each of our solutions. Our traditional competitors include: Accenture, Accolade, ADP, American Well, Aon, Benefitfocus, bswift, Businessolver, Collaborative Solutions, Conduent, Deloitte, DXC Technology, eHealth, Empower, Fidelity, GoHealth, Grand Rounds, Health Advocate, HealthEquity, IBM, Intecrowd, Mercer, OneSource, Paychex, PWC, Quantum Health, SD Worx, TCS, Teladoc, Vanguard, Voya, Willis Towers Watson, and Workday.
We compete primarily on the basis of product and service quality, technology, breadth of offerings, ease of use and accessibility of technology, data protection, innovation, trust and reliability, price, and reputation.
EXECUTIVE SUMMARY OF FINANCIAL RESULTS
The following table sets forth our historical results of operations for the periods indicated below:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Revenue |
$ | 672 | $ | 647 | $ | 1,361 | $ | 1,340 | ||||||||
| Cost of services, exclusive of depreciation and amortization |
436 | 444 | 888 | 906 | ||||||||||||
| Depreciation and amortization |
19 | 16 | 38 | 29 | ||||||||||||
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| Gross Profit |
217 | 187 | 435 | 405 | ||||||||||||
| Operating Expenses |
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| Selling, general and administrative |
105 | 112 | 222 | 236 | ||||||||||||
| Depreciation and intangible amortization |
56 | 57 | 111 | 113 | ||||||||||||
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| Total operating expenses |
161 | 169 | 333 | 349 | ||||||||||||
| Operating Income |
56 | 18 | 102 | 56 | ||||||||||||
| Interest expense |
61 | 53 | 123 | 111 | ||||||||||||
| Other expense (income), net |
1 | (5 | ) | 9 | (4 | ) | ||||||||||
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| Loss Before Income Tax Benefit |
(6 | ) | (30 | ) | (30 | ) | (51 | ) | ||||||||
| Income tax benefit |
(2 | ) | (5 | ) | (5 | ) | (5 | ) | ||||||||
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| Net Loss |
$ | (4 | ) | $ | (25 | ) | $ | (25 | ) | $ | (46 | ) | ||||
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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. Substantially all 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.
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.
Interest Expense
Interest expense primarily includes interest expense related to our outstanding debt.
Other Expense (income), net
Other expense (income), net includes non-operating expenses and income including realized currency translation.
Non-GAAP Financial Measures
The presentation of non-GAAP financial measures is used to enhance our investors’ and lenders’ 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 and executive compensation 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.
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 us and our investors and lenders to provide useful supplemental information that enables a better comparison of our performance across periods. Adjusted EBITDA provides visibility to the underlying operating performance by excluding the impact of certain items, including interest expense, income taxes, depreciation of fixed assets, amortization of intangible assets, share-based compensation, expenses related to restructuring and integration plan, expenses related to transformation initiatives, and other adjustments, because management does not believe these expenses are representative of our core earnings. Additionally, Adjusted EBITDA less Capital Expenditures is a non-GAAP measure that is used by us, our investors and our lenders to evaluate our core operating performance.
Adjusted EBITDA has limitations as an analytical tool, and this measure 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:
| • | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs or contractual commitments; |
| • | Adjusted EBITDA does not reflect our interest expense or the cash requirements to service interest or principal payments on our indebtedness; |
| • | Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; |
| • | Adjusted EBITDA 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 Adjusted EBITDA does not reflect any cash requirements for such replacements; and |
| • | other companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure. |
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 to Net Loss is as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net Loss |
$ | (4 | ) | $ | (25 | ) | $ | (25 | ) | $ | (46 | ) | ||||
| Interest expense |
61 | 53 | 123 | 111 | ||||||||||||
| Income tax benefit |
(2 | ) | (5 | ) | (5 | ) | (5 | ) | ||||||||
| Depreciation |
25 | 23 | 49 | 42 | ||||||||||||
| Intangible amortization |
50 | 50 | 100 | 100 | ||||||||||||
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| EBITDA |
130 | 96 | 242 | 202 | ||||||||||||
| Share-based compensation |
3 | 2 | 5 | 4 | ||||||||||||
| Non-recurring professional expenses(1) |
9 | — | 18 | — | ||||||||||||
| Transformation initiatives(2) |
— | 8 | — | 11 | ||||||||||||
| Restructuring |
2 | 22 | 9 | 47 | ||||||||||||
| Other(3) |
1 | 8 | 4 | 20 | ||||||||||||
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| Adjusted EBITDA |
$ | 145 | $ | 136 | $ | 278 | $ | 284 | ||||||||
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| (1) | Non-recurring professional expenses primarily includes external advisor costs related to the Company’s Business Combination Agreement completed on July 2, 2021 (see Note 17 – “Subsequent Events”). |
| (2) | Transformation initiatives in fiscal year 2020 includes expenses related to enhancing our data center. |
| (3) | Other primarily includes long-term incentive expenses and expenses related to acquisitions in fiscal year 2020. |
A reconciliation of Adjusted EBITDA less Capital Expenditures to Cash provided by operating activities is as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Cash provided by operating activities |
$ | 19 | $ | 34 | $ | 58 | $ | 20 | ||||||||
| Interest expense |
61 | 53 | 123 | 111 | ||||||||||||
| Income tax benefit |
(2 | ) | (5 | ) | (5 | ) | (5 | ) | ||||||||
| Capital expenditures |
(28 | ) | (22 | ) | (55 | ) | (47 | ) | ||||||||
| Financing fee amortization and other non-cash items |
(4 | ) | (3 | ) | (10 | ) | (11 | ) | ||||||||
| Noncash lease expense |
(6 | ) | (8 | ) | (10 | ) | (16 | ) | ||||||||
| Non-recurring professional expenses |
9 | — | 18 | — | ||||||||||||
| Transformation initiatives |
— | 8 | — | 11 | ||||||||||||
| Restructuring |
2 | 22 | 9 | 47 | ||||||||||||
| Other |
1 | 8 | 4 | 20 | ||||||||||||
| Change in operating assets and liabilities |
65 | 27 | 91 | 107 | ||||||||||||
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| Adjusted EBITDA less Capital Expenditures |
$ | 117 | $ | 114 | $ | 223 | $ | 237 | ||||||||
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Results of Operations for The Three Months Ended June 30, 2021 Compared to The Three Months Ended June 30, 2020
Revenue
Revenues were $672 million for the three months ended June 30, 2021 as compared to $647 million for the prior year period. The increase of $25 million reflects growth of 5% in our Employer Solutions segment and 3% in our Professional Services segment, partially offset by, a decline of 39% in our Hosted Business segment. During the third quarter of 2020, we began measuring 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, Business Process as a Service (“BPaaS”) Solutions. These products capitalize on our robust data combined with artificial intelligence & analytics to deliver greater employee engagement and employer outcomes. BPaaS products and services span across both the Employer Solutions and Professional Services segments and for the three months ended June 30, 2021, we recorded BPaaS revenue of $94 million which represents growth of 19% compared to the prior year period. In addition, we also consider bookings, defined as total contract value for 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. For the three months ended June 30, 2021, total bookings and BPaaS bookings of $435 million and $240 million, respectively, represent growth of 14% and 287%, respectively, compared to the prior year period.
Recurring revenues increased by $25 million, or 5%, from $533 million to $558 million and are related to growth in both Employer Solutions and Professional Services, partially offset by a decline in the Hosted Business. Project revenues remained flat at $114 million, related to a growth in Employer Solutions, offset by a decline in Professional Services.
Cost of Services, exclusive of Depreciation and Amortization
Cost of services, exclusive of depreciation and amortization decreased $8 million, or 2%, for the three months ended June 30, 2021 as compared to the prior year period. The decrease was primarily driven by $6 million of lower costs in the Hosted business as clients transition to cloud-based services and lower expenses related to productivity initiatives, including the impact of lower restructuring and integration related costs, partially offset by increases in costs associated with the growth in current and future revenues.
Selling, General and Administrative
Selling, general and administrative expenses decreased $7 million, or 6%, for the three months ended June 30, 2021 as compared to the prior year period. The decrease was primarily driven by lower expenses related to productivity initiatives, including the impact of lower restructuring and integration related costs, partially offset by non-recurring professional expenses related to costs incurred in relation to the Company’s Business Combination Agreement completed in the third quarter of 2021 and higher costs related to investments in commercial functions.
Interest Expense
Interest expense increased $8 million, or 15%, for the three months ended June 30, 2021 as compared to the prior year period. The increase was primarily due to incremental interest associated with the additional unsecured and secured senior notes issued in the second half of 2020. See Note 8 “Debt” for further information.
Loss before Income Tax Benefit
Loss before income tax benefit was $6 million for the three months ended June 30, 2021, a decrease of $24 million compared to $30 million for the three months ended June 30, 2020, due to the drivers identified above.
Income Tax Benefit
Income tax benefit was $2 million for the three months ended June 30, 2021, as compared to $5 million in the prior year period. The effective tax rate for the three months ended June 30, 2021 was approximately (34)% and 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.
Results of Operations for The Six Months Ended June 30, 2021 Compared to The Six Months Ended June 30, 2020
Revenue
Revenues were $1,361 million for the six months ended June 30, 2021 as compared to $1,340 million for the prior year period. The increase of $21 million reflects growth of 3% in our Employer Solutions segment and 3% in our Professional Services segment, partially offset by a decline of 50% in our Hosted Business segment. During the third quarter of 2020, we began measuring 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 artificial intelligence & analytics to deliver greater employee engagement and employer outcomes. BPaaS products and services span across both the Employer Solutions and Professional Services segments and for the six months ended June 30, 2021, we recorded BPaaS revenue of $187 million which represents growth of 17% compared to the prior year period. In addition, we also consider bookings, defined as total contract value for 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. For the six months ended June 30, 2021, total bookings and BPaaS bookings of $762 million and $280 million, respectively, represent growth of 14% and 268%, respectively, compared to the prior year period.
Recurring revenues increased by $20 million, or 2%, from $1,110 million to $1,130 million and are related to growth in both Employer Solutions and Professional Services, partially offset by a decline in the Hosted Business. Project revenues increased by $1 million, or less than 1%, from $230 million to $231 million and are related to growth in Employer Solutions, partially offset by a decline in Professional Services.
Cost of Services, exclusive of Depreciation and Amortization
Cost of services, exclusive of depreciation and amortization decreased $18 million, or 2%, for the six months ended June 30, 2021 as compared to the prior year period. The decrease was primarily driven by $12 million of lower costs in the Hosted business as clients transition to cloud-based services and lower expenses related to productivity initiatives, including the impact of lower restructuring and integration related costs, partially offset increases in costs associated with the growth in current and future revenues.
Selling, General and Administrative
Selling, general and administrative expenses decreased $14 million, or 6%, for the six months ended June 30, 2021 as compared to the prior year period. The decrease was primarily driven by lower expenses related to productivity initiatives, including the impact of lower restructuring and integration related costs, partially offset by non-recurring professional expenses related to costs incurred in relation to the Company’s Business Combination Agreement completed in the third quarter of 2021 and higher costs related to investments in commercial functions.
Interest Expense
Interest expense increased $12 million, or 11%, for the six months ended June 30, 2021 as compared to the prior year period. The increase was primarily due to incremental interest associated with the additional unsecured and secured senior notes issued in the second half of 2020, partially offset by lower interest expense on our Term Loan due to movement in market rates. See Note 8 “Debt” for further information.
Loss before Income Tax Benefit
Loss before income tax benefit was $30 million for the six months ended June 30, 2021, a decrease of $21 million compared to $51 million for the six months ended June 30, 2020, due to the drivers identified above.
Income Tax Benefit
Income tax benefit was $5 million for the six months ended June 30, 2021, as compared to $5 million in the prior year period. The effective tax rate for the six months ended June 30, 2021 was approximately (17)% and was primarily driven by foreign and state income taxes payable in jurisdictions where the Company had operations that generated operating income. See Note 7 “Income Taxes” for further information.
Segment Revenue and Adjusted EBITDA
Employer Solutions Results
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| ($ in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Employer Solutions Revenue |
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| Recurring revenue |
$ | 516 | $ | 489 | $ | 1,049 | $ | 1,018 | ||||||||
| Project revenue |
53 | 51 | 107 | 101 | ||||||||||||
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| Total Employer Solutions Revenue |
$ | 569 | $ | 540 | $ | 1,156 | $ | 1,119 | ||||||||
| Employer Solutions Gross Profit |
$ | 191 | $ | 160 | $ | 392 | $ | 353 | ||||||||
| Employer Solutions Gross Profit Margin |
34 | % | 30 | % | 34 | % | 32 | % | ||||||||
| Employer Solutions Adjusted EBITDA |
$ | 138 | $ | 127 | $ | 274 | $ | 269 | ||||||||
| Employer Solutions Adjusted EBITDA Margin |
24 | % | 24 | % | 24 | % | 24 | % | ||||||||
Employer Solutions Segment Results of Operations for The Three Months Ended June 30, 2021 Compared to The Three Months Ended June 30, 2020
Employer Solutions Revenue
Employer Solutions total revenues were $569 million for the three months ended June 30, 2021 as compared to $540 million for the prior year period. The overall increase of $29 million was due to an increase of recurring revenues of $27 million, or 6%, from $489 million to $516 million as a result of Net Commercial Activity and transitions from our Hosted Business to cloud-based services, and an increase in project revenues of $2 million, or 4%, from $51 million to $53 million.
Employer Solutions Gross Profit
Employer Solutions Gross Profit was $191 million for the three months ended June 30, 2021, as compared to $160 million for the prior year period. The increase of $31 million, or 19%, was primarily due to revenue growth as discussed above and lower expenses related to productivity initiatives, including the impact of lower restructuring and integration related costs, partially offset by increases in costs associated with growth of current and future revenues.
Employer Solutions Adjusted EBITDA
Employer Solutions Adjusted EBITDA was $138 million for the three months ended June 30, 2021, as compared to $127 million for the prior year period. The increase of $11 million was primarily due to revenue growth offset by increases in costs associated with growth of current and future revenues, including investments in our commercial functions and technology.
Employer Solutions Segment Results of Operations for The Six Months Ended June 30, 2021 Compared to The Six Months Ended June 30, 2020
Employer Solutions Revenue
Employer Solutions total revenues were $1,156 million for the six months ended June 30, 2021 as compared to $1,119 million for the prior year period. The overall increase of $37 million was due to an increase of recurring revenues of $31 million, or 3%, from $1,018 million to $1,049 million as a result of Net Commercial Activity and transitions from our Hosted Business to cloud-based services, and an increase in project revenues of $6 million, or 6%, from $101 million to $107 million.
Employer Solutions Gross Profit
Employer Solutions Gross Profit was $392 million for the six months ended June 30, 2021, as compared to $353 million for the prior year period. The increase of $39 million, or 11%, was primarily due to revenue growth as discussed above and lower expenses related to productivity initiatives, including the impact of lower restructuring and integration related costs, partially offset by increases in costs associated with growth of current and future revenues.
Employer Solutions Adjusted EBITDA
Employer Solutions Adjusted EBITDA was $274 million for the six months ended June 30, 2021, as compared to $269 million for the prior year period. The increase of $5 million was primarily due to revenue growth offset by increases in costs associated with growth of current and future revenues, including investments in our commercial functions and technology.
Professional Services Results
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| ($ in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Professional Services Revenue |
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| Recurring revenue |
$ | 31 | $ | 26 | $ | 60 | $ | 50 | ||||||||
| Project revenue |
61 | 63 | 124 | 129 | ||||||||||||
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| Total Professional Services Revenue |
$ | 92 | $ | 89 | $ | 184 | $ | 179 | ||||||||
| Professional Services Gross Profit |
$ | 26 | $ | 26 | $ | 46 | $ | 47 | ||||||||
| Professional Services Gross Profit Margin |
28 | % | 29 | % | 25 | % | 26 | % | ||||||||
| Professional Services Adjusted EBITDA |
$ | 7 | $ | 9 | $ | 7 | $ | 11 | ||||||||
| Professional Services Adjusted EBITDA Margin |
8 | % | 10 | % | 4 | % | 6 | % | ||||||||
Professional Services Segment Results of Operations for The Three Months Ended June 30, 2021 Compared to The Three Months Ended June 30, 2020
Professional Services Revenue
Professional Services total revenues were $92 million for the three months ended June 30, 2021 as compared to $89 million for the prior year period. The overall increase of $3 million was due to an increase of recurring revenues of $5 million, or 19%, from $26 million to $31 million as a result of increases in Net Commercial Activity, partially offset by a decrease in project revenues of $2 million, or 3%, from $63 million to $61 million.
Professional Services Gross Profit
Professional Services Gross Profit was $26 million for both the three months ended June 30, 2021 and the prior year period The revenue growth as discussed above was offset by increases in costs associated with growth of current and future revenues.
Professional Services Adjusted EBITDA
Professional Services Adjusted EBITDA was $7 million for the three months ended June 30, 2021, as compared to $9 million for the prior year period. The decrease of $2 million was primarily due to increases in costs associated with growth of current and future revenues, including investments in our commercial functions, which outpaced revenue growth as discussed above.
Professional Services Segment Results of Operations for The Six Months Ended June 30, 2021 Compared to The Six Months Ended June 30, 2020
Professional Services Revenue
Professional Services total revenues were $184 million for the six months ended June 30, 2021 as compared to $179 million for the prior year period. The overall increase of $5 million was due to an increase of recurring revenues of $10 million, or 20%, from $50 million to $60 million as a result of increases in Net Commercial Activity, partially offset by a decrease in project revenues of $5 million, or 4%, from $129 million to $124 million.
Professional Services Gross Profit
Professional Services Gross Profit was $46 million for the six months ended June 30, 2021, as compared to $47 million for the prior year period. The decrease of $1 million, or 2%, was primarily due to revenue growth as discussed above, partially offset by increases in costs associated with growth of current and future revenues.
Professional Services Adjusted EBITDA
Professional Services Adjusted EBITDA was $7 million for the six months ended June 30, 2021, as compared to $11 million for the prior year period. The decrease of $4 million was primarily due to increases in costs associated with growth of current and future revenues, including investments in our commercial functions, which outpaced revenue growth as discussed above.
Hosted Business Results
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| ($ in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Hosted Business Revenue |
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| Recurring revenue |
$ | 11 | $ | 18 | $ | 21 | $ | 42 | ||||||||
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| Total Hosted Business Revenue |
11 | 18 | $ | 21 | $ | 42 | ||||||||||
| Hosted Business Gross Profit |
$ | — | $ | 1 | $ | (3 | ) | $ | 5 | |||||||
| Hosted Business Gross Profit Margin |
0 | % | 6 | % | -14 | % | 12 | % | ||||||||
| Hosted Business Adjusted EBITDA |
$ | — | $ | — | $ | (3 | ) | $ | 4 | |||||||
| Hosted Business Adjusted EBITDA Margin |
0 | % | 0 | % | -14 | % | 10 | % | ||||||||
Hosted Business Segment Results of Operations for the Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
Hosted Business Revenue
Hosted Business revenues were $11 million for the three months ended June 30, 2021 as compared to $18 million for the prior year period. The decrease of $7 million was due to transitions from our Hosted Business to cloud-based services.
Hosted Business Gross Profit
Hosted Business Gross Profit was immaterial for the three months ended June 30, 2021, as compared to $1 million for the prior year period. The decrease of $1 million was primarily due to transitions from our Hosted Business to cloud-based services.
Hosted Business Adjusted EBITDA
Hosted Business Adjusted EBITDA was immaterial for both the three months ended June 30, 2021 and the prior year period. This is driven by a decrease in revenue during the period from the continued transition from our Hosted Business to cloud-based services, offset by a decrease in costs during the period.
Hosted Business Segment Results of Operations for the Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
Hosted Business Revenue
Hosted Business revenues were $21 million for the six months ended June 30, 2021 as compared to $42 million for the prior year period. The decrease of $21 million was due to transitions from our Hosted Business to cloud-based services.
Hosted Business Gross Profit
Hosted Business Gross Profit was ($3) million for the six months ended June 30, 2021, as compared to $5 million for the prior year period. The decrease of $8 million was primarily due to transitions from our Hosted Business to cloud-based services.
Hosted Business Adjusted EBITDA
Hosted Business Adjusted EBITDA was ($3) million for the six months ended June 30, 2021 as compared to $4 million for the prior year period. The decrease of $7 million was driven by a decrease in revenue during the period from the continued transition from our Hosted Business to cloud-based services, which outpaced a decrease in costs during the period.
LIQUIDITY AND FINANCIAL CONDITION
Liquidity
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.
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, and anticipated working capital requirements for the foreseeable future. We believe our liquidity position at June 30, 2021 remains strong and as we continue to operate in a period of uncertain economic conditions related to COVID-19 we will continue to closely monitor and proactively manage our liquidity as economic conditions change.
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 Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020, 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.
| Six Months Ended | ||||||||
| June 30, | ||||||||
| (in millions) | 2021 | 2020 | ||||||
| Cash provided by operating activities |
$ | 58 | $ | 20 | ||||
| Cash used for investing activities |
(55 | ) | (44 | ) | ||||
| Cash (used for) provided by financing activities |
(64 | ) | 308 | |||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash |
— | (3 | ) | |||||
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| Net (decrease) increase in cash, cash equivalents and restricted cash |
(61 | ) | 281 | |||||
| Cash, cash equivalents, and restricted cash at end of period |
$ | 1,475 | $ | 1,266 | ||||
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Operating Activities
Net cash provided by operating activities increased $38 million to $58 million for the six months ended June 30, 2021 from $20 million for the prior year period, driven by decreases in net loss and working capital requirements.
Investing Activities
Cash used for investing activities for the six months ended June 30, 2021 was $55 million, driven by capital expenditures.
Cash used for investing activities for the six months ended June 30, 2020 was $44 million. The primary driver of the cash flow used for investing activities was $47 million of capital expenditures.
Financing Activities
Cash used for financing activities for the 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, payments for settlements related to interest rate swaps of $14 million, unit repurchases of $2 million, and payments for contingent consideration of $1 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 provided by financing activities for the six months ended June 30, 2020 was $308 million. The primary drivers of the cash provided by financing activities were bank borrowings of $401 million, offset by loan repayments of $111 million, finance lease payments of $11 million, payments for settlements related to interest rate swaps of $7 million, financing fees related to borrowings $4 million, unit repurchases of $3 million and payments for contingent consideration of $1 million. Net cash flows from financing activities also changed due to a net increase in the cash flow from client funds obligations of $46 million, primarily due to timing of client funding and subsequent disbursement of payments.
Cash, Cash Equivalents and Fiduciary Assets
At June 30, 2021, our cash and cash equivalents were $460 million, a decrease of $46 million from December 31, 2020. Of the total balances of cash and cash equivalents as of June 30, 2021 and December 31, 2020, 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 Condensed Consolidated Balance Sheets, the amount we report for Fiduciary assets and Fiduciary liabilities are equal. Our Fiduciary assets included cash of $1,015 million and $1,030 million at June 30, 2021 and December 31, 2020, 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 incorporated by reference in our Super 8-K.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table reflects a summary of obligations and commitments outstanding as of June 30, 2021:
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| (in millions) | Total | 1 year(1) | years | years | 5 years | |||||||||||||||
| Contractual cash obligations: |
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| Debt(2)(3) |
$ | 4,137 | $ | 24 | $ | 52 | $ | 2,184 | $ | 1,877 | ||||||||||
| Operating Leases |
230 | 23 | 83 | 62 | 62 | |||||||||||||||
| Finance Leases |
77 | 10 | 48 | 19 | — | |||||||||||||||
| Purchase obligations(4) |
106 | 11 | 52 | 36 | 7 | |||||||||||||||
| Service obligations(5) |
1,173 | 67 | 288 | 316 | 502 | |||||||||||||||
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| Total |
$ | 5,723 | $ | 135 | $ | 523 | $ | 2,617 | $ | 2,448 | ||||||||||
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| (1) | The amounts presented as of June 30, 2021 for less than 1 year reflect the obligations and commitments outstanding for the remainder of 2021. |
| (2) | Interest incurred on amounts we borrow is based on relative borrowing levels, fluctuations in the variable interest rates and the spread we pay over those interest rates. As such, we are unable to quantify our future obligations relating to interest and therefore no amounts have been included in the above table. |
| (3) | Financing fees have been excluded from the debt obligation as these amounts do not represent the future cash obligation for the related debt. |
| (4) | Purchase obligations consist primarily of purchases of information technology assets and services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. |
| (5) | Service obligations include non-cancellable service obligations to our strategic partnership with Wipro. 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 June 30, 2021, we estimate that the termination charges would have been at least $386 million. |
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to our critical accounting policies and estimates from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Alight—Critical Accounting Policies” incorporated by reference in our Super 8-K.
NEW ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements may be relevant to our operations but have not yet been adopted are outlined in Note 2 “Accounting Policies and Practices” within the Consolidated Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to potential fluctuations in earnings, cash flows, and the fair values of certain of our assets and liabilities due to changes in interest rates. To manage the risk from this exposure, we enter into a variety of hedging arrangements. We do not enter into derivatives or financial instruments for trading or speculative purposes. We are not subject to significant foreign exchange rate risk.
A discussion of our accounting policies for hedging activities is outlined in Note 2 “Accounting Policies and Practices” within the Consolidated Financial Statements.
LEGAL PROCEEDINGS
We are a party to a variety of legal proceedings that arise in the normal course of our business. While the results of these legal proceedings cannot be predicted with certainty, we believe that the final outcome of these proceedings will not have a material adverse effect, individually or in the aggregate, on our results of operations or financial condition.
RISK FACTORS
There have been no material changes to the risk factors previously disclosed the “Risk Factors” section incorporated by reference in our Super 8-K.