Income Tax Receivable Agreement
In connection with the Company’s IPO during the fourth quarter of 2021, the Company entered into the TRA, which provides for the payment by the Company over a period of approximately 12 years to pre-IPO equityholders or their permitted transferees of 85% of the benefits, if any, that the Company and its subsidiaries realize, or are deemed to realize (calculated using certain assumptions) in U.S. federal, state, and local income tax savings as a result of the utilization (or deemed utilization) of certain existing tax attributes. Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2025 fiscal year. Actual tax benefits realized by the Company may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including assumptions relating to state and local income taxes, to calculate tax benefits. The Company will record an estimated total liability of approximately $209.9 million and a reduction to Additional paid-in capital of approximately $209.9 million in connection with the TRA during the fourth quarter of 2021 on its condensed consolidated balance sheets.
Employee Stock Purchase Plan
On October 18, 2021, the Company’s stockholders adopted the Company’s Employee Stock Purchase Plan (the “ESPP”), which became effective on October 28, 2021. The Company initially reserved 1,587,810 shares of common stock for future issuance under the ESPP, subject to an annual increase on the first day of each calendar year, beginning on January 1, 2022 and ending on and including January 1, 2031. The annual increase is equal to the least of (i) 1% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year, (ii) 1,587,810 shares of common stock, and (iii) such smaller number of shares as determined by the board of directors. No offering periods under the ESPP had been initiated as of September 30, 2021.
Omnibus Incentive plan
On October 18, 2021, the Company’s stockholders adopted the Company’s 2021 Omnibus Incentive Plan (the “Omnibus Incentive Plan”). The Omnibus Incentive Plan was approved by the Company’s stockholders on October 18, 2021 and became effective on October 15, 2021. Upon the adoption of the Omnibus Incentive Plan, the Company will not grant further awards under the Equity Plan. The Omnibus Incentive Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock-based awards, other cash-based awards or any combination of the foregoing to eligible employees, consultants, directors, and officers. The Omnibus Incentive Plan has a term of 10 years. Pursuant to the Omnibus Incentive Plan, the Company has reserved an aggregate of 7,939,051 shares of the Company’s common stock for issuance of awards to be granted thereunder, subject to an annual increase equal to the lesser of (a) 4% of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our board of directors. No more than 7,939,051 shares of the Company’s common stock may be issued pursuant to the exercise of incentive stock options granted under the Omnibus Incentive Plan.
HireRight Holdings Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
IPO Equity GrantsThe components of the restructuring charges (including professional service fees) are as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2024 | | 2023 | | |
| | (in thousands) |
Severance and benefits (1) | | $ | 1,039 | | | $ | 4,386 | | | |
Accelerated expense on abandoned right-of-use assets (2) | | 317 | | | 1,482 | | | |
Professional fees (3) | | 742 | | | 4,006 | | | |
Other (4) | | 42 | | | — | | | |
| Total restructuring charges | | $ | 2,140 | | | 9,874 | | | |
(1)Charges of $0.2 million and $1.7 million recorded in cost of services (exclusive of depreciation and amortization) for the three months ended March 31, 2024 and 2023 respectively. Charges of $0.8 million and $2.7 million recorded in selling, general and administrative expenses for the three months ended March 31, 2024 and 2023 respectively.
(2)Charges for accelerated expense and additional costs associated with abandoned right-of-use assets recorded in selling, general and administrative expenses.
(3)Professional service fees consist of consulting costs related to the execution of the Company’s global restructuring plan to improve the Company’s cost structure, operating efficiency, and redesign and right size the organization. These charges are recorded in selling, general and administrative expenses.
(4)Other charges recorded in selling, general and administrative expenses.
The following table provides the components of and changes in the Company’s restructuring and related charges, included in accrued salaries and payroll and accrued expenses and other current liabilities on the condensed consolidated balance sheets:
| | | | | | | | |
| | March 31, 2024 |
| | (in thousands) |
| Balance at December 31, 2023 | | $ | 3,438 | |
Charges incurred (1) | | 1,823 | |
| Payments | | (2,279) | |
| Balance at March 31, 2024 | | $ | 2,982 | |
In October 2021, the Company's board of directors granted 1,035,986 equity awards to certain named executive officers under the Omnibus Incentive Plan. The total dollar amount of equity awards granted(1)Includes $1.0 million in charges for employee severance and benefits related to the named executive officers was $9,250,000, $4,625,000workforce reduction, $0.5 million of which was granted in the formremains unpaid as of options to purchase shares of the Company’s common stock and $4,625,000 of which was granted in the form of Restricted Stock Units (“RSUs”) covering shares of the Company’s common stock. The options will vest with respect to 25% of the underlying shares on the first anniversary of their grant date, and with respect to the remaining 75% of the underlying shares in 12 equal quarterly installments thereafter.The RSUs will vest in four installments, each with respect to 25% of the underlying shares, on November 15, 2022, November 15, 2023, November 15, 2024, and November 15, 2025. Each equity award is subject to the terms and conditions of the Omnibus Incentive Plan and an award agreement with the applicable grantee.
In addition to the awards to certain named executive officers, the Company granted equity awards to approximately 106 employees in senior leadership positions.These awards are structured like the executive officer awards, except that some individuals’ awards will be divided 75% RSUs and 25% options. The aggregate equity awards issued consisted of 436,375 RSUs and 1,142,308 options to purchase shares of the Company’s common stock. Further, the Company granted equity awards to the Company’s eight non-employee directors.The aggregate of the non-employee director awards granted was 34,736 equity awards, entirely in the form of RSUs. The equity awards for the Company’s 8 non-employee directors shall, subject to continued service, vest on the first anniversary of the date of their issuance, or if earlier, upon (but effective immediately prior to) the occurrence of a change in control as defined in the governing plan, or the annual meeting of stockholders next following the grant of such annual equity awards.
Revolving Credit Facility
On November 5, 2021, the Company repaid the $10.0 million outstanding principal amount on the Revolving Credit Facility.
Legal Settlement Payment
On November 15, 2021, the Company paid $11.2 million of the $12.1 million legal settlement agreement discussed in Note 13 — Legal Proceedings and expects to pay the balance by the end of 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of theour financial condition and results of operations for HireRight together with our condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements for the fiscal year ended December 31, 2023, as disclosed in the Company’s prospectus, dated October 28, 2021,Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) in accordance with Rule 424(b) of the Securities Act on November 1, 2021 (the “Prospectus”) in connection with our initial public offeringMarch 12, 2024 (“IPO”Annual Report”). See The statements in the following discussion and analysis regarding expectations about our future performance, liquidity and capital resources and any other non-historical statements in this discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those described immediately below.
Initial Public Offering below for additional information.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and related statements by the Company contain forward-looking statements within the meaning of the federal securities laws that are subject to risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business.laws. You can often identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may includefacts, or by their use of words such as “anticipate,” “estimate,” “expect,” “project,” “forecast,” “plan,” “intend,” “believe,” “seek,” “could,” “targets,” “potential,” “may,” “will,” “should,” “can have,” “likely,” “continue,” and other terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements may include, but are not limited to, statements concerning our anticipated financial performance, including, without limitation, revenue, profitability, net income (loss), adjusted EBITDA, adjusted EBITDA margin, adjusted net income, earnings per unit,share, adjusted diluted earnings per share, and cash flow; strategic objectives;objectives including our restructuring and related margin-improvement initiative and the Merger Agreement with Principal Stockholders described below under “2024 Developments”; investments in our business, including development of our technology and introduction of new offerings; sales growth and customer relationships; our competitive differentiation; our market share and leadership position in the industry; market conditions, trends, and opportunities; future operational performance; pending or threatened claims or regulatory proceedings; and factors that could affect these and other aspects of our business. These
Forward-looking statements are not guarantees of future performance; theyguarantees. They reflect our current viewsexpectations and projections with respect to future events and are based on assumptions and estimates and subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. These risks
Factors that could affect the outcome of the forward-looking statements include, among other things, our vulnerability to adverse economic conditions, including without limitation inflation and recession, which could increase our costs and suppress labor market activity and our revenue; the following, as well as other risksmarket uncertainty and uncertainties not listed herepotential disruption resulting from geopolitical tensions and armed conflicts of potentially significant scope; the aggressive competition we face; our heavy reliance on information management systems, vendors, and information sources that may be importantnot perform as we expect; the significant risk of liability we face in the services we perform; the fact that data security, data privacy and data protection laws, emerging restrictions on background reporting due to you.
•We have no assurance of future business from anyalleged discriminatory impacts and adverse social consequences, and other evolving regulations and cross-border data transfer restrictions may increase our costs, limit the use or value of our customers;
•We rely upon third parties for the data we need to deliver our services;
•We rely upon third parties to fulfill our service obligations to our customers;
•We rely upon third parties for integration with many of our customers;
•Third parties are the sole available source for some of the dataservices and services upon which we rely;
•We intend to rely, in part, on acquisitions to help grow our business, and such acquisitions may not produce the benefits we expect or may adversely affect or disrupt our business;
•We must attract, motivate, train, and retain the management, technical, market-facing, and operational personnel we need to enable the success and growth of our business;
•COVID-19 has had, and may continue to have, a materially adverse effect on our business;
•Forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business may not grow at similar rates, if at all;
•Our operating results may fluctuate significantly, be difficult to predict, and fall below analysts' and investors' expectations;
•Significant governmental regulation exposes us to substantial costs and liabilities and can limit our business opportunities;
•Current or potential legal proceedings could subject us to significant monetary damages or restrictions on our ability to do business;
•Credit reporting laws that regulatemaintain our business impose significant operational requirementsprofessional reputation and liability risks;
•Domesticbrand name; social, political, regulatory and international data privacy laws impose significant operational requirementslegal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; unfavorable tax law changes and liability risks;
•We can incur significant liability for information that we omit in background reports;
•We may be subject to and in violation of state private investigator licensing laws and regulations;
•We are subject to government regulations concerning our employees, including wage-hour laws and taxes;
•We may be subject to intellectual property rights claims by third parties;
•Our contractual indemnities, limitations of liability, and insurance may not adequately protect us;
•Liabilities we incur in the coursetax authority rulings; any impairment of our business may be uninsurable, or insurance may be very expensive and limited in scope;
•Security breaches and improper use of information may negatively impact our business and harm our reputation;
•System failures could delay and disrupt our services, cause harm to our business and reputation and result in a loss of customers;
•If we fail to upgrade, enhance and expand our technology and services to meet customer needs and preferences, the demand for our services may materially diminish;
•Our technology development operations are centered in Estonia, exposing us to risks that may be difficult to manage;
•If we are unable to protect our proprietary technologygoodwill, other intangible assets and other intellectual property rights, it may reducelong-lived assets; our ability to compete for businessexecute and we may experience reduced revenue and incur costly litigation to protect our rights;
•Changes to the availability and permissible uses of consumer data may reduce the demand for our services;
•We operate in an intensely competitive market and we may not be able to develop and maintain competitive advantages necessary to support our growth and profitability;
•Growth will require us to improve our operating capabilities;
•Our business is vulnerable to economic downturns;
•If we do not introduce successful new products, services and analytical capabilities in a timely manner, or if the market does not adopt our new services, our competitiveness and operating results will suffer;
•Our existing indebtedness could adversely affect our business and growth prospects;
•The terms and conditions of our credit agreements restrict our current andintegrate future operations, particularlyacquisitions; our ability to respondaccess additional credit or other sources of financing; the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to changes orour systems, networks, solutions, services and data; with respect to take certain actions;
•Weour restructuring and related margin-improvement initiative, the risk that our cost savings may be offset by the need for increased investment in the business to maintain our competitive position and achieve our growth objectives; and with respect to the Merger Agreement with the Principal Stockholders described below, the risk that the required approval of the Transaction by a majority of the unaffiliated stockholders might not be able to generate sufficient cash flow to service all of our indebtedness,obtained. For more information on the business risks we face and may be forced to take other actions to satisfy our obligations under such indebtedness, including refinancing such indebtedness, which may not be successful;
•Inability to obtain financing could limit our ability to conduct necessary operating activities and make strategic investments;
•Failure to successfully execute our international plans will adversely affect our growth and operating results;
•Operating in multiple countries requires us to comply with different legal and regulatory requirements;
•We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets;
•Fluctuations in the exchange rates of foreign currencies could result in currency transaction losses;
•Investment funds managed by General Atlantic and investment funds managed by Stone Point (together, the “Principal Stockholders”) control us, and their interests may conflict with ours or yours in the future;
•We are an “emerging growth company,” and we expect to elect to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors;
•The requirements of being a public company strain our resources and distract our management, which could make it difficult to manage our business;
•Failure to maintain effective internal controls over financial reporting could cause our investors to lose confidence in us and adversely affect the market price of our common stock. If our internal control over financial reporting is not effective, we may not be able to accurately report our financial results or prevent fraud;
•We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
•Provisions of our corporate governance documents could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management;
•Our certificate of incorporation limits the forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;
•We will be required to pay certain pre-IPO owners or their transferees for certain tax benefits over a period of approximately 12 years pursuant to the income tax receivable agreement (the “TRA”), which amounts to an estimated total liability of approximately $209.9 million. Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2025 fiscal year;
•We will not be reimbursed for any payments made to certain pre-IPO owners (or their transferees or assignees) under the TRA in the event that any tax benefits are disallowed;
•In certain cases, payments under the TRA to certain pre-IPO owners or their transferees may be accelerated or significantly exceed any actual benefits we realize in respect of the tax attributes subject to the TRA;
•We may have exposure to greater than anticipated tax liabilities and may be affected by changes in tax laws or interpretations;
•The multinational nature of our business can expose us to unexpected tax consequences, which may be adverse;
•We may be subject to examinations of our tax returns by the IRS or other tax authorities, and an adverse outcome could have a material adverse effect on our business;
•An active, liquid trading market for our common stock may not develop, which may constrain the market price of our common stock and limit your ability to sell your shares;
•Our operating results and stock price may be volatile, and the market price of our common stock may drop below the price you pay;
•Future sales of substantial amounts of our common stock, or the possibility that such sales could occur, could adversely affect the market price of our common stock;
•You may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it;
•Our stock price and trading volume could decline due to the action or inaction of securities or industry analysts;
•Our equity-based compensation and acquisition practices expose our stockholders to dilution;
•We could be negatively affected by actions of activist stockholders;
•We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock.
All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (SEC) and public communications. We discuss many of these risks and additional factors that could cause actual results to differ materially from those anticipated by ouraffect the outcome of forward-looking statements, underrefer to our Annual Report, in particular the headings "Risk Factors"sections of that document entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements and "Management'sRisk Factors Summary,” and “Management's Discussion and Analysis of Financial Condition and Results of Operations,"” and elsewhere in the Prospectus, this Quarterly Report on Form 10-Q, and in other filings we have made and will make from time to time with the Securities and Exchange Commission. These forward-looking statements represent our estimates and assumptions only as of the date made. Unless required by federal securities laws, we assumeSEC. We undertake no obligation to update publicly any of these forward-looking statements, whether as a result of new information, future events or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Without limiting the foregoing, any guidance we may provide will generally be given only in connection with quarterly and annual earnings announcements, without interim updates, and we may appear at industry conferences or make other public statements without disclosing material nonpublic information in our possession. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.
Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed or will file with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Business Overview
HireRight Holdings Corporation (“HireRight” or the “Company”) is a leading global provider of technology-driven workforce risk management and compliance solutions. We provide comprehensive background screening, verification, identification, monitoring, and drug and health screening services for more than 40,000approximately 37,000 customers across the globe. We offer our services via a unified global software and data platform that tightly integrates into our customers’ human capital management (“HCM”) systems enabling highly effective and efficient workflows for workforce hiring, onboarding, and monitoring. In 2020,2023, we
delivered reports on screened over 2026 million job applicants, employees and contractors for our customers and processed over 8095 million screens.
HireRight GIS Group Holdings LLC (“HGGH”), was formed in July 2018 through the combination of two groups of companies, the HireRight Group and the GIS Group (“GIS”), each of which includes a number of wholly owned subsidiaries that conduct the Company’s business within the United States of America ( the “U.S.”), as well as countries outside the U.S. Since July 2018, the combined group of companies and their subsidiaries have operated as a unified operating company providing background screens globally, predominantly under the HireRight brand.
On October 15, 2021, HGGH converted into a Delaware corporation and changed its name to HireRight Holdings Corporation (“HireRight” or the “Company”). In conjunction with the conversion, all of HGGH’s outstanding equity interests were converted into shares of common stock of HireRight Holdings Corporation. The foregoing conversion and related transactions are referred to herein as the “Corporate Conversion”. The Corporate Conversion did not affect the assets and liabilities of HGGH, which became the assets and liabilities of HireRight Holdings Corporation.
Initial Public Offering
On November 2, 2021, the Company completed its IPO in which the Company issued and sold 22,222,222 shares of its common stock, $0.001 par value per share at an offering price of $19.00 per share. The Company received net proceeds of $393.5 million, after deducting underwriting discounts and commissions of $23.2 million and other offering costs payable by the Company of approximately $5.5 million. The Company granted the underwriters an option for a period of 30 days to purchase up to an additional 3,333,333 shares of common stock at $19.00 per share less discounts and commissions. The underwriters have until November 27, 2021 to exercise their option to purchase additional shares.
Use of Proceeds
On November 3, 2021, the Company used approximately $215.0 million of the net proceeds from the IPO to repay, in full, indebtedness under the Second Lien Term Loan Facility. In addition, the Company recorded a $3.4 million write off of unamortized deferred financing fees and unamortized original issue discounts related to the repayment of debt under the Second Lien Term Loan Facility. The Company plans to use approximately $100.0 million of proceeds of the IPO to repay, in part, the First Lien Term Loan Facility and no longer expects to incur swap breakage fees of approximately $4.2 million.
Factors Affecting Our Results of Operations
Economic Conditions
Our business is impacted by the overall economic environment and COVID-19
total employment and hiring. The global COVID-19 pandemic has caused significant disruption to the global economy and, in particular, the labor market. There is considerable uncertainty regarding the extent of the impact and the durationrapidly changing dynamics of the global COVID-19 pandemic. The future impactworkforce are increasing complexity and regulatory scrutiny for employers, bolstering the importance of COVID-19the solutions we deliver. We have benefited from key demand drivers, which increase the need for more flexible, comprehensive screening and hiring solutions in the current environment. Our customers are a diverse set of organizations, from large-scale multinational businesses to small and medium businesses across a broad range of industries, including transportation, healthcare, technology, financial services, business and consumer services, manufacturing, education, retail, and not-for-profit. Hiring requirements and regulatory considerations can vary significantly across the different types of customers, geographies and industry sectors we serve, creating demand for the extensive institutional knowledge we have developed from our decades of experience.
There continues to be uncertainty around near-term macroeconomic conditions. This uncertainty stems from inflation, declining customer confidence, volatile energy prices, changing interest rates, and geopolitical concerns including armed conflicts of potentially significant scope. Each of these drivers has its own adverse impact. Inflation puts pressure on our operationalsuppliers, resulting in increased data costs, and financial performance will dependalso increases our employment and other expenses. A sustained recession would have an adverse impact on the effect onglobal hiring market and therefore the demand for our customersservices. Slowing demand for our services will adversely affect our future results. Additionally rising interest rates will lead directly to higher interest expense. Although the majority of our cost of services is variable in nature and vendors,will move in tandem with revenue increases or decreases, there can be no assurance that we can reduce our cost of services in proportion to changes in revenue.
2024 Developments
Merger Agreement with Principal Stockholders
On December 11, 2023, the Company announced the receipt of a non-binding proposal from General Atlantic, L.P. and Stone Point Capital LLC and their respective affiliated funds (collectively, the “Principal Stockholders”) to acquire all of which continue to be uncertain at this time. Our financial results and prospectsthe Company’s outstanding shares of common stock that are largely dependent onnot already owned by the number of hires and the total level of employment. UnemploymentPrincipal Stockholders for $12.75 in our primary market, the US, reached nearly 15% during the peakcash per share. The Principal Stockholders collectively owned approximately 75.2% of the 2020 pandemicCompany’s outstanding common stock as of the date of issuance of these condensed consolidated financial statements.
On February 15, 2024, the Company entered into an Agreement and monthly hiring slowed to less than 4 million in April 2020 accordingPlan of Merger (the “Merger Agreement”) with Hearts Parent, LLC, a Delaware limited liability company (“Parent”) and Hearts Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation (the “Merger”). If the Merger is completed, at the effective time of the Merger, each share of HireRight’s common stock, par value $0.001 per share (the ‘‘Company Common Stock’’), issued and outstanding immediately prior to the Bureau of Labor Statistics.
Our results of operations for the three and nine months ended September 30, 2021 show a significant increase from the prior year period, due to improvement in the global employment market. The peakeffective time of the pandemic impact occurred during AprilMerger, other than shares owned by the Principal Stockholders and May of 2020, and we begancertain other shares excluded pursuant to see a steady recovery in the second halfterms of the year. The weakness experienced in the first half of 2020Merger Agreement, shall be cancelled and the associated recovery largely impacted all industries we serve. We are a highly diversified business with no industry representing more than 15% of our total revenue. Transportation, healthcareextinguished and technology customersautomatically converted into and shall thereafter represent the largest contributorsright to revenue. Transportationreceive an amount in cash equal to $14.35 per share of Company Common Stock, payable to
the holder thereof, without interest, subject to and healthcare annual revenues declined in conjunctionaccordance with overall revenue declines while technology showedthe terms and conditions of the Merger Agreement (the “Transaction”). Upon completion of the Transaction, the Company will become a private company and will no longer be required to file periodic and other reports with the U.S. Securities and Exchange Commission (the ‘‘SEC’’) with respect to the Company Common Stock. A special committee of independent and disinterested members of the Company’s board of directors (the “Company Board”) unanimously adopted resolutions recommending that the Company Board approve the Merger Agreement and the transactions contemplated thereby and recommend that the Company’s Stockholders approve and adopt the Merger Agreement. Thereafter, the Company Board unanimously approved the Merger Agreement and resolved to recommend that the stockholders of the Company adopt the Merger Agreement.
The Merger Agreement contains certain customary termination rights, including, without limitation, a right for either party to terminate if the Transaction is not completed by 11:59 p.m. Eastern time on August 15, 2024. Termination under specified circumstances will require the Company to pay the Parent a termination fee of $30 million or Parent to pay the Company a termination fee of $65 million, plus in either case enforcement costs not to exceed $2 million.
On March 21, 2024, the Company filed with the SEC its Schedule 14A including a preliminary proxy statement related to the above transaction in anticipation of solicitation of a stockholder vote to adopt and approve the Merger Agreement. On April 22, 2024 and May 6, 2024, the Company filed with the SEC Amendment No. 1 and Amendment No. 2, respectively, to the Schedule 14A and preliminary proxy statement.
The Consummation of the Merger is subject to various conditions, including but not limited growth largely drivento affirmative vote to adopt the Merger Agreement by (i) the holders of a majority of all of the outstanding shares of Company Common Stock and (ii) the holders of a majority of the outstanding shares of Company Common Stock not held by (a) the Principal Stockholders or certain of their affiliates, (b) Company’s officers (within the meaning of Rule 16a-1(f) of the Exchange Act), or (c) those members of the Company Board who are not members of the special committee.
There can be no assurance that the Merger Agreement or any related transaction will be consummated, or as to the terms of any such transaction.
Global Restructuring Plan
In the first quarter of 2023, the Company began a global restructuring plan intended to improve the Company’s cost structure, operating efficiency, and profitability in response to ongoing uncertain macroeconomic conditions. The plan, which involves a reduction in force, offshoring of certain functions, and other measures designed to reduce cost and compensate for reduced order volumes, was initiated in the first quarter of 2023. During the three months ended March 31, 2024, the Company recognized restructuring charges of $1.4 million, primarily for employee severance and benefits in connection with the workforce reduction, accelerated rent expense on abandoned right-of-use assets, and other restructuring charges. In addition, of two larger customersthe Company incurred professional service fees during the year.
In responsethree months ended March 31, 2024, of $0.7 million, for consulting costs related to the pandemic, in early 2020,execution of the Company’s global restructuring plan. As of March 31, 2024, the global restructuring plan was substantially completed. We estimate annualized gross savings of approximately $50.0 million under the global restructuring plan. However, we implemented additional operational processesmay not be able to monitor customer salesfully realize the cost savings and collections, taking precautionary measures to ensure sufficient liquidity and adjusting operations to ensure business continuity, including borrowing $50 million against our $100 million revolving credit facility, of which $40 million was repaid by December 31, 2020. Since April 2020, substantially all of our employees have been workingbenefits anticipated from home. To the extent we are operating from our facilities, we have implemented protocols reflecting the recommendations published by the U.S. Centers for Disease Control, the World Health Organization and country, state and local governments.global restructuring plan.
Key Components of Our Results from Operations
Revenues
The Company generates revenues from background screening and related compliance services delivered in online reports. Our customers place orders for our services and reports either individually or through batch ordering. Each report is accounted for as a single order which is then typically consolidated and billed to our customers on a monthly basis. Approximately 29% and 30%27% of revenues for each of the ninethree months ended September 30, 2021March 31, 2024 and 2020,2023 respectively, were generated from the Company’s top 50 customers, which consist of large U.S. and multinational
companies across diversified industries such as transportation, healthcare, technology, business and consumer services, financial services, manufacturing, education, retail, gig economy, and not-for-profit. None of the Company’s customers individually accounted for greater than 5% and 6%10% of revenues duringfor each of the ninethree months ended September 30, 2021March 31, 2024, and 2020,2023, respectively.
Healthcare, technology, financial services, and transportation customers represent the largest contributors to revenues. Revenues consist of service revenues and surcharge revenues. Service revenues represent fees charged tofrom these customers for performing screening and compliance services. Surcharge revenues consist of fees charged to customers for obtaining data required to fulfill the Company’s performance obligationsthree months ended March 31, 2024, increased 2% from federal, state and local jurisdictions as well as fees chargedthe prior year period, led by certain commercial data wholesalers. These fees are predominantly charged to the Company’s customers at cost. Revenue is recognized when the Company satisfies its obligation to complete the service and delivers the screening report to the customer. The Company relies on service revenue to generate cashincreases in order volumes from operations. Furthermore, only service revenue impacts the operating income or loss as surcharge revenue is predominantly offset by corresponding expenses recognized in costtechnology companies.
Expenses
Cost of services (excluding depreciation and amortization) on theconsists of data acquisition costs, medical laboratory and collection fees, personnel-related costs for operations, customer service and customer onboarding functions, as well as other direct costs incurred to fulfill our services. Approximately 80% of cost of services is variable in nature.
Selling, general and administrative expenses consist of personnel-related costs for sales, technology, administrative and corporate management functions in addition to costs for third-party technology, professional and consulting services, advertising, and facilities expenses. Selling, general and administrative expenses also include amortization of capitalized cloud computing software costs.
Depreciation and amortization expenses consist of depreciation of property and equipment, as well as amortization of purchased and developed software and other intangible assets.
Other expenses consist of interest expense relating to our credit facilities and interest rate swap agreements, foreign exchange gains and losses, as well as other expenses. On our condensed consolidated statementstatements of operations.operations, interest expense is netted with interest income, which is derived primarily from cash and cash equivalent balances held in interest-bearing accounts. The majority of our receivables and payables are denominated in U.S. dollars, but we also earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including the Euro, the British pound, the Polish zloty, the Australian dollar, the Canadian dollar, the Singapore dollar, the Mexican peso, the Japanese yen, and the Indian rupee, among others. Therefore, increases or decreases in the value of the U.S. dollar against these currencies could result in realized and unrealized gains and losses in foreign exchange. However, to the extent we earn revenues in currencies other than the U.S. dollar, we generally pay a corresponding amount of expenses in such currency and therefore the cumulative impact of these foreign exchange fluctuations is not generally deemed material to our financial performance.
Income tax expense (benefit) consists of international, U.S. federal, state and local income taxes based on income in multiple jurisdictions for our subsidiaries.
Results of Operations
Comparison of Results of Operations for the three and nine months ended September 30, 2021March 31, 2024 and 20202023
The following table presentstables present operating results for the three and nine months ended September 30, 2021March 31, 2024 and 2020.2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) |
| Revenues | $ | 204,981 | | | $ | 130,674 | | | $ | 531,522 | | | $ | 390,121 | |
| | | | | | | |
| Expenses | | | | | | | |
| Cost of services (exclusive of depreciation and amortization below) | 111,328 | | | 69,683 | | | 295,832 | | | 215,143 | |
| Selling, general and administrative | 47,652 | | | 48,347 | | | 130,261 | | | 128,583 | |
| Depreciation and amortization | 19,531 | | | 19,808 | | | 56,013 | | | 58,283 | |
| Total expenses | 178,511 | | | 137,838 | | | 482,106 | | | 402,009 | |
| Operating income (loss) | 26,470 | | | (7,164) | | | 49,416 | | | (11,888) | |
| | | | | | | |
| Other expenses | | | | | | | |
| Interest expense | 18,518 | | | 18,597 | | | 54,674 | | | 56,930 | |
| Other expense (income), net | 22 | | | (185) | | | 125 | | | 628 | |
| Total other expense | 18,540 | | | 18,412 | | | 54,799 | | | 57,558 | |
| Income (loss) before income taxes | 7,930 | | | (25,576) | | | (5,383) | | | (69,446) | |
| Income tax expense | 649 | | | 1,466 | | | 2,954 | | | 3,490 | |
| Net income (loss) | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) |
| Revenues | | | |
| Service revenues | $ | 152,332 | | | $ | 98,587 | | | $ | 395,624 | | | $ | 294,175 | |
| Surcharge revenues | 52,649 | | | 32,087 | | | 135,898 | | | 95,946 | |
| Total revenues | $ | 204,981 | | | $ | 130,674 | | | $ | 531,522 | | | $ | 390,121 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| (in thousands, except percent of revenues) |
| Revenues | $ | 173,202 | | | 100.0 | % | | $ | 175,447 | | | 100.0 | % |
| | | | | | | |
| Expenses | | | | | | | |
| Cost of services (exclusive of depreciation and amortization below) | 91,638 | | | 52.9 | % | | 98,451 | | | 56.1 | % |
| Selling, general and administrative | 54,734 | | | 31.6 | % | | 59,726 | | | 34.0 | % |
| Depreciation and amortization | 19,173 | | | 11.1 | % | | 18,417 | | | 10.5 | % |
| Total expenses | 165,545 | | | 95.6 | % | | 176,594 | | | 100.7 | % |
| Operating income (loss) | 7,657 | | | 4.4 | % | | (1,147) | | | (0.7) | % |
| | | | | | | |
| Other expenses | | | | | | | |
| Interest expense, net | 17,726 | | | 10.2 | % | | 12,402 | | | 7.1 | % |
| Other expense, net | 6 | | | — | % | | 306 | | | 0.2 | % |
| Total other expenses | 17,732 | | | 10.2 | % | | 12,708 | | | 7.2 | % |
| Loss before income taxes | (10,075) | | | (5.8) | % | | (13,855) | | | (7.9) | % |
| Income tax benefit | (6,533) | | | (3.8) | % | | (5,944) | | | (3.4) | % |
| Net loss | $ | (3,542) | | | (2.0) | % | | $ | (7,911) | | | (4.5) | % |
| Less: Net loss attributable to noncontrolling interest | (271) | | | (0.2) | % | | — | | | — | % |
| Net loss attributable to HireRight Holdings Corporation | $ | (3,271) | | | (1.9) | % | | $ | (7,911) | | | (4.5) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Revenues
Three months ended
Total revenues increased by $74.3 million, or 56.9%, to $205.0 million,Revenues for the three months ended September 30, 2021March 31, 2024 decreased to $173.2 million, a decrease of $2.2 million, or 1.3%, from the prior year period, primarily driven by lower order volumes. While no specific vertical experienced a significant order volume decline, the aggregate decline was $13.0 million, partially offset by significant improvement in our technology vertical, which increased $8.6 million compared to the three months ended September 30, 2020. We continuedMarch 31, 2023. Revenues of $2.2 million related to seeour acquisition of Digital Technology Identity Services also offset the decrease in total revenues.
From a recoverygeographical perspective, revenues from international regions decreased by $0.6 million, or 4.2%, and revenues from the impactUnited States decreased by $1.7 million, or 1.0%, during the three months ended March 31, 2024, compared to the three months ended March 31, 2023.
Cost of COVID-19, with strengthening client volumes surpassingServices (exclusive of depreciation and amortization)
Cost of services for the COVID-impactedthree months ended March 31, 2024 decreased to $91.6 million, a decrease of $6.8 million, or 6.9%, from the prior year period. The increase in total revenues was broad-basedperiod, primarily across existing customers, while new business revenue, as defined below, increased from $9.4 milliondue to $10.9 million, driven by sales to a recently acquired large customer. Service revenueslower order volumes, decreased use of contract labor,
increased $53.7 million, or 54.5%, and surcharge revenues increased $20.6 million, or 64.1%, compared to the three months ended September 30, 2020. Revenues from international and domestic regions increased by $8.2 million, or 106.1% and by $66.1 million, or 53.8%, respectively, during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Both service and surcharge revenue increases were primarily volume driven. Also contributing to the increases in surcharge revenues were increases in data supplierlower average labor costs which are charged to our customers in the form of increased surcharges.
Nine months ended
Total revenues increased by $141.4 million, or 36.2%, to $531.5 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily due to increases in volume, which surpassed the COVID-impacted prior year period. Revenues from international and domestic regions increased $13.8 million, or 52.4% and by $127.6 million, or 35.1%, respectively, during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Service revenues increased $101.4 million, or 34.5%, and surcharge revenues increased $40.0 million, or 41.6% compared to the prior year period. While growth was primarily volume driven, a portion of the increase in surcharge revenues was due to data supplier cost increases, which are charged to our customers in the form of increased surcharges.
Cost of Services (exclusive of depreciation and amortization below)
Three months ended
Cost of services increased $41.6 million, or 59.8%, to $111.3 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to higher client order volumes over the COVID- impacted prior year period.per background screen. Cost of services as a percent of revenue increasedrevenues decreased to 54.3%52.9% for the three months ended September 30, 2021March 31, 2024, compared to 53.3%56.1% for the three months ended September 30, 2020March 31, 2023, primarily driven by increased third-party data costs.
Nine months ended
Costusage of services increased $80.7 million, or 37.5%, to $295.8 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to higher volumesoffshore labor as well as lower cost of contract labor and to a lesser extent, increased data costs. Cost of serviceslower average labor costs per background screen as a percentresult of revenue increased slightly to 55.7% for the nine months ended September 30, 2021 compared to 55.1% for the nine months ended September 30, 2020 primarily driven by increased third-party data costs.process improvements associated with our technology initiatives.
Selling, General and Administrative
Three months ended
Selling, general and administrative expenses (“SG&A”) decreased $0.7 million, or 1.4% to $47.7 million, for the three months ended September 30, 2021March 31, 2024 decreased $5.0 million to $54.7 million, or 8.4%, compared to the prior year period primarily due to a decrease in personnel related expenses of $4.3 million, primarily attributable to higher employee severance and employee benefits related to our global restructuring plan in the prior year period. Consulting costs associated with the global restructuring plan decreased $3.3 million compared to the prior year period. Other decreases included reductions in advertising costs, facility related costs, and various other costs, amounting to $2.1 million. These decreases were offset by increases in professional services fees and legal fees of $2.7 million and $1.8 million, respectively, primarily related to the Merger Agreement. SG&A as a percent of revenues for the three months ended March 31, 2024 decreased to 31.6% from 34.0% for the three months ended March 31, 2023, primarily due to the impact of the global restructuring plan.
Interest Expense
Interest expense for the three months ended March 31, 2024, increased $5.3 million, to $17.7 million, or 42.9%, compared to the comparable prior year period. The increase in interest expense was primarily due to rising interest rates on our variable rate term loan facility and carrying a higher average balance during the three months ended March 31, 2024, which increased interest expense by $1.6 million and $1.2 million, respectively, in the three months ended March 31, 2024 compared to the comparable prior year period. Reclassifications from accumulated other comprehensive loss on the condensed consolidated balance sheet of unrealized gains related to our terminated interest rate swap agreements reduce interest expense and such unrealized gains were fully reclassified by December 31, 2023. The reclassifications to reduce interest expense, during the three months ended March 31, 2023, were $2.5 million, which resulted in an increase in interest expense when compared to the three months ended September 30, 2020. The decrease was driven by reductions in legal settlement fees of $12.1 million and $1.9 million of other merger integration expenses during thethree months ended September 30, 2021 compared to the three months ended September 30, 2020. These decreases were mostly offset by increases in personnel costs associated with incentive compensation and fringe benefit programs of $5.5 million and investments associated with incremental technology and product resources, which amounted to $3.5 million. In addition, various other and indirect expenses increased $4.3 million during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, which included $1.5 million of higher technology costs and $0.9 million associated with marketing programs to support increased business volumes.
Nine months ended
SG&A increased $1.7 million, or 1.3%, to $130.3 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to increases in personnel costs and other indirect costs, amounting to $19.2 million and $5.8 million, respectively, for the reasons noted above. These increases were partially offset by a reduction in legal settlement fees and merger integration and employee severance expenses of $12.1 million and $8.9 million, respectively. Various other costs accounted for $2.3 million of the offsetting decreases in SG&A for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Depreciation and Amortization
Three months ended
Depreciation and amortization expense decreased $0.3 million, or 1.4% to $19.5 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The decrease was primarily due to certain computer equipment assets reaching the end of their useful lives in the prior year.
Nine months ended
Depreciation and amortization expense decreased $2.3 million, or 3.9%, to $56.0 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease was primarily due to certain computer equipment assets reaching the end of their useful lives in the prior year.
Interest Expense
Three months ended
Interest expense, net decreased $0.1 million, or 0.4% to $18.5 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The decrease was primarily due to lower outstanding balance due to scheduled principal repayments on the First Lien Term Loan Facility, as defined below, and lower outstanding balance on the Revolving Credit Facility, as defined below. As of September 30, 2021, the balance on the Revolving Credit Facility was $10.0 million compared to $30.0 million as of September 30, 2020.
Nine months ended
Interest expense, net decreased $2.3 million, or 4.0%, to $54.7 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease was primarily due to lower outstanding balance due to scheduled principal repayments on the First Lien Term Loan Facility, and lower outstanding balance on the Revolving Credit Facility.March 31, 2024.
Income Tax Expense (Benefit)
Three months ended
Income tax expense decreased $0.8 million, or 55.7%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 primarily due to revaluation of deferred taxes in the United Kingdom during the third quarter of 2020. Income tax expense for the three months ended September 30, 2021 and 2020 was $0.6 million and $1.5 million, respectively. The effective tax rate for the three months ended September 30, 2021March 31, 2024, was 64.8% compared to 42.9% for the three months ended March 31, 2023. The increase in effective tax rate for the three months ended March 31, 2024, compared to the prior year period, was primarily due to the mix of pretax book losses and income in various jurisdictions, state taxes, non-deductible stock-based compensation expense, and U.S. tax on foreign operations.
The effective tax rate for the three months ended March 31, 2024, differs from the Federalfederal statutory rate of 21% primarily due to valuation allowancesstate taxes, non-deductible stock-based compensation expense, and state taxes.U.S. tax on foreign operations. The
effective tax rate for the three months ended September 30, 2020March 31, 2023, differs from the Federalfederal statutory rate of 21% primarily due to revaluation of deferredstate taxes in the United Kingdom, valuation allowances, and state taxes.
Nine months ended
Income tax expense decreased $0.5 million, or 15.4%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily due to revaluation of deferred taxes in the United Kingdom and valuation allowances. Income tax expense for the nine months ended September 30, 2021 and 2020 was $3.0 million and $3.5 million, respectively. The effective tax rate for the nine months ended September 30, 2021 differs from the Federal statutory rate of 21% primarily due to revaluation of deferred taxes in the United Kingdom, valuation allowances, and state taxes. The rate for the nine months ended September 30, 2020 differs from the Federal statutory rate of 21% primarily due to revaluation of deferred taxes in the United Kingdom, valuation allowances, and state taxes.non-deductible stock-based compensation expense.
Non-GAAP Financial Measures and Key Metrics
We believe that the presentation of our Non-GAAPnon-GAAP financial measures and key metrics provides information useful to investors in assessing our financial condition and results of operations. These measures should not be considered an alternative to net income (loss) or any other measure of financial performance or liquidity presented in accordance with GAAP.accounting principles generally accepted in the United States (“GAAP”). These measures have important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable
GAAP measures. Additionally, because they may be defined differently byto the extent that other companies in our industry our definitionsdefine similar non-GAAP measures differently than we do, the utility of those measures for comparison purposes may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.limited.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA represents, as applicable for the period, net income (loss) attributable to HireRight Holdings Corporation before provision forincome (loss) attributable to noncontrolling interest, interest expense, income taxes, interest expense and depreciation and amortization expense, equity-basedstock-based compensation, realized and unrealized gain (loss) on foreign exchange, merger integration expenses,restructuring charges, amortization of cloud computing software costs, legal settlement costs or insurance recoveries deemed by management to be outside the normal course of business, and other items management believes are not representative of the Company’s core operations. Adjusted EBITDA Margin is adefined as Adjusted EBITDA divided by revenues for the period. Adjusted EBITDA and Adjusted EBITDA Margin are supplemental financial measuremeasures that management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:assess our:
•our operatingOperating performance as compared to other publicly traded companies without regard to capital structure or historical cost basis;
•our abilityAbility to generate cash flow;
•our abilityAbility to incur and service debt and fund capital expenditures; and
•the viabilityViability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Adjusted EBITDA Service Margin
Adjusted EBITDA Service Margin is calculated as Adjusted EBITDA as a percentage of service revenue. Because we are able to charge our customers for direct access to certain data suppliers and we generally do not mark up those charges, we focus on the management of Adjusted EBITDA as a percentage of service revenue, as we believe this non-GAAP measure more accurately reflects the management of our controllable costs and profitability.
The following table reconciles our non-GAAP financial measure of Adjusted EBITDA and Adjusted EBITDA Service Margin to net income (loss), our most directly comparable financial measures calculated and presented in accordance with GAAP.GAAP, for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except percent) |
| Net income (loss) | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | |
| Income tax expense | 649 | | | 1,466 | | | 2,954 | | | 3,490 | |
| Interest expense | 18,518 | | | 18,597 | | | 54,674 | | | 56,930 | |
| Depreciation and amortization | 19,531 | | | 19,808 | | | 56,013 | | | 58,283 | |
| EBITDA | 45,979 | | | 12,829 | | | 105,304 | | | 45,767 | |
| Equity-based compensation | 841 | | | 880 | | | 2,493 | | | 2,570 | |
| Realized and unrealized gain (loss) on foreign exchange | 24 | | | (185) | | | 125 | | | 628 | |
| Merger integration expenses (1) | 193 | | | 2,138 | | | 1,174 | | | 9,255 | |
| | | | | | | |
Technology investments (2) | 1,690 | | | — | | | 1,690 | | | — | |
| Other items (3) | 2,895 | | | 12,380 | | | 6,659 | | | 14,676 | |
| Adjusted EBITDA | $ | 51,622 | | | $ | 28,042 | | | $ | 117,445 | | | $ | 72,896 | |
| Service Revenue | $ | 152,332 | | | $ | 98,587 | | | $ | 395,624 | | | $ | 294,175 | |
Net income (loss) service margin (4) | 4.8 | % | | 27.4 | % | | 2.1 | % | | 24.8 | % |
Adjusted EBITDA service margin (5) | 33.9 | % | | 28.4 | % | | 29.7 | % | | 24.8 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2024 | | 2023 | | | | |
| (in thousands, except percents) |
| Net loss | $ | (3,542) | | | $ | (7,911) | | | | |
| Loss attributable to noncontrolling interest | 271 | | — | | | | | |
| Net loss attributable to HireRight Holdings Corporation | (3,271) | | (7,911) | | | | |
| Income tax benefit | (6,533) | | (5,944) | | | | |
| Interest expense, net | 17,726 | | 12,402 | | | | |
| Depreciation and amortization | 19,173 | | 18,417 | | | | |
| EBITDA | 27,095 | | 16,964 | | | | |
| Stock-based compensation | 3,552 | | 3,828 | | | | |
| Realized and unrealized loss on foreign exchange | 119 | | 307 | | | | |
| | | | | | | |
Restructuring charges (1) | 2,140 | | 9,874 | | | | |
Amortization of cloud computing software costs (2) | 1,733 | | 1,571 | | | | |
Other items (3) | 5,673 | | 497 | | | | |
| Adjusted EBITDA | $ | 40,312 | | $ | 33,041 | | | | |
Net income (loss) margin attributable to HireRight Holdings Corporation(4) | (1.9)% | | (4.5)% | | | | |
| Adjusted EBITDA margin | 23.3% | | 18.8% | | | | |
(1)Merger integration expenses consistRestructuring charges represent costs incurred in connection with the Company’s global restructuring plan. Costs incurred in connection with the plan during the three months ended March 31, 2024 primarily include: (i) $1.0 million of information technology (“IT”)severance and benefits related costs including personnel expenses,to impacted employees, (ii) $0.7 million of professional and service fees associatedrelated to the execution of our cost savings initiatives, and (iii) $0.3 million related to the abandonment of certain of our leased facilities. Restructuring charges incurred in connection with the integrationplan during the three months ended March 31, 2023 include: (i) $4.4 million of customers severance
and operationsbenefits related to impacted employees, (ii) $4.0 million of GIS, which commenced in July 2018professional service fees related to the execution of our cost savings initiatives, and was substantially completed by(iii) $1.4 million related to the endabandonment of 2020.certain of our leased facilities.
(2)Technology investments represent discovery phaseAmortization of cloud computing software costs associatedconsists of expense recognized in selling, general and administrative expenses for capitalized implementation costs for cloud computing IT systems incurred in connection with the build outour platform and implementation of various technologiesfulfillment technology initiatives that will be usedare intended to achieve greater operational efficiencies. This expense is not included in depreciation and amortization above.
(3)Other items include (i) exit costs associated with one of our facilities duringfor the three months ended September 30, 2021, (ii) costsMarch 31, 2024 consist primarily of (i) professional services fees of $5.3 million related to the preparation of the Company’s initial public offering during 2021, (iii) $12.1Merger Agreement, and (ii) $0.4 million of legal settlement costs inprofessional services fees not related to core operations. Other items for the three and nine months ended September 30, 2020 associated with a single litigation matterMarch 31, 2023 consist of professional service fees not related to a predecessor entity of the Company for a claim dating back to 2009 (for additional information see Note 13 to the accompanying condensed consolidated financial statements for additional information), and (iv) $0.3 million and $2.5 million of severance costs incurred in connection with reducing our employee headcount in an effort to right-size our business in response to COVID-19 during the three and nine months ended September 30, 2020, respectively.core operations.
(4)Net income (loss) service margin is calculated asattributable to HireRight represents net income (loss) as a percentage of service revenue.
(5)Adjusted EBITDA service margin is calculated as Adjusted EBITDA as a percentage of service revenue.
Adjusted Net Income (Loss)
In addition to Adjusted EBITDA, management believes that Adjusted Net Income (Loss) is a strong indicator of our overall operating performance and is useful to our management and investors as a measure of comparative operating performance from period to period. We define Adjusted Net Income (Loss) as net income (loss) attributable to HireRight Holdings Corporation adjusted for equity-basedincome (loss) attributable to noncontrolling interest, amortization of acquired intangible assets, loss on modification and extinguishment of debt, stock-based compensation, realized and unrealized gain (loss) on foreign exchange, merger integration expenses,restructuring charges, amortization of cloud computing software costs, legal settlement costs or insurance recoveries deemed by management to be outside the normal course of business, and other items management believes are not representative of the Company’s core operations, to which we apply an adjusted effectivea blended statutory tax rate. See the footnotes to the table below for a description of certain of these adjustments. We define Adjusted Diluted Earnings Per Share as Adjusted Net Income divided by the weighted average number of shares outstanding (diluted) for the applicable period. We believe Adjusted Diluted Earnings Per Share is useful to investors and analysts because it enables them to better evaluate per share operating performance across reporting periods and to compare our performance to that of our peer companies.
The following table sets forth a reconciliationreconciles our non-GAAP financial measure of Adjusted Net Income to net income (loss) to Adjusted Net Income (Loss), our most directly comparable financial measure calculated and presented in accordance with GAAP, for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) |
Net income (loss) | $ | 7,281 | | | $ | (27,042) | | | $ | (8,337) | | | $ | (72,936) | |
| Income tax expense | 649 | | | 1,466 | | | 2,954 | | | 3,490 | |
| Income (loss) before income taxes | 7,930 | | | (25,576) | | | (5,383) | | | (69,446) | |
| Equity-based compensation | 841 | | | 880 | | | 2,493 | | | 2,570 | |
| Realized and unrealized gain (loss) on foreign exchange | 24 | | | (185) | | | 125 | | | 628 | |
Merger integration expenses(1) | 193 | | | 2,138 | | | 1,174 | | | 9,255 | |
| | | | | | | |
Technology investments (2) | 1,690 | | | — | | | 1,690 | | | — | |
Other items (3) | 2,895 | | | 12,380 | | | 6,659 | | | 14,676 | |
| Adjusted income (loss) before income taxes | 13,573 | | | (10,363) | | | 6,758 | | | (42,317) | |
Adjusted income taxes (4) | 360 | | | 732 | | | 1,619 | | | 2,063 | |
| Adjusted Net Income (Loss) | $ | 13,213 | | | $ | (11,095) | | | $ | 5,139 | | | $ | (44,380) | |
(1)Merger integration expenses consist primarily of IT related costs including personnel expenses, professional and service fees associated with the integration of GIS, as discussed in footnote 1 to the immediately preceding table, which commenced in July 2018 and was substantially completed by the end of 2020.
(2)Technology investments represent discovery phase costs associated with the build out and implementation of various technologies that will be used to achieve greater operational efficiencies.
(3)Other items include (i) exit costs associated with one of our facilities during the three months ended September 30, 2021, (ii) costs related to the preparation of the Company’s initial public offering during 2021, (iii) $12.1 million of legal settlement costs in the three and nine months ended September 30, 2020 associated with a single litigation matter related to a predecessor entity of the Company for a claim dating back to 2009 (for additional information see Note 13 to the accompanying condensed consolidated financial statements for additional information), and (iv) $0.3 million and $2.5 million of severance costs incurred in connection with reducing our employee headcount in an effort to right-size our business in response to COVID-19 during the three and nine months ended September 30, 2020, respectively.
(4)An adjusted effective income tax rate has been determined for each period presented by applying the statutory income tax rate and the provision for deferred income taxes to the pre-tax adjustments, which was used to compute Adjusted Net Income (Loss) for the periods presented.
Key Metrics
The key metrics used to help us evaluate our business, identify trends and formulate business plans and strategy are set forth in the table below and described in the following text:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except percent) |
| | | | | | | |
| New business revenue | $ | 10,873 | | | $ | 9,354 | | | $ | 24,117 | | | $ | 23,075 | |
We measure net revenue retention on a year-to-date basis. Net revenue retention for the nine months ended September 30, 2021 and 2020 was 133.8% and 75.7%, respectively. | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2024 | | 2023 | | | | |
| (in thousands) |
| Net loss | $ | (3,542) | | | $ | (7,911) | | | | | |
| Loss attributable to noncontrolling interest | 271 | | | — | | | | | |
| Net loss attributable to HireRight Holdings Corporation | (3,271) | | | (7,911) | | | | | |
| Income tax benefit | (6,533) | | | (5,944) | | | | | |
| Amortization of acquired intangible assets | 15,883 | | | 15,394 | | | | | |
Interest expense swap adjustments (1) | — | | | (2,527) | | | | | |
Interest expense discounts (2) | 473 | | | 803 | | | | | |
| Stock-based compensation | 3,552 | | | 3,828 | | | | | |
| Realized and unrealized loss on foreign exchange | 119 | | | 307 | | | | | |
Restructuring charges (3) | 2,140 | | | 9,874 | | | | | |
| | | | | | | |
Amortization of cloud computing software costs (4) | 1,733 | | | 1,571 | | | | | |
Other items (5) | 5,673 | | | 497 | | | | | |
| Adjusted income before income taxes | 19,769 | | | 15,892 | | | | | |
Adjusted income taxes (6) | 5,140 | | | 4,132 | | | | | |
| Adjusted Net Income | $ | 14,629 | | | $ | 11,760 | | | | | |
Net Revenue Retention
The following table sets forth the calculation of Adjusted Diluted Earnings Per Share for the periods presented:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2024 | | 2023 | | | | |
| | | | | |
| Diluted net loss per share | $ | (0.05) | | | $ | (0.10) | | | | | |
| Loss attributable to noncontrolling interest | — | | | — | | | | | |
| Diluted net loss per share attributable to HireRight Holdings Corporation | (0.05) | | | (0.10) | | | | | |
| Income tax benefit | (0.10) | | | (0.08) | | | | | |
| Amortization of acquired intangible assets | 0.24 | | | 0.20 | | | | | |
Interest expense swap adjustments (1) | — | | | (0.03) | | | | | |
Interest expense discounts (2) | 0.01 | | | 0.01 | | | | | |
| Stock-based compensation | 0.05 | | | 0.05 | | | | | |
| Realized and unrealized loss on foreign exchange | — | | | — | | | | | |
Restructuring charges (3) | 0.03 | | | 0.13 | | | | | |
Amortization of cloud computing software costs (4) | 0.03 | | | 0.02 | | | | | |
Other items (5) | 0.09 | | | 0.01 | | | | | |
| Adjusted income before income taxes | 0.30 | | | 0.21 | | | | | |
Adjusted income taxes (6) | (0.08) | | | (0.06) | | | | | |
| Adjusted Diluted Earnings Per Share | $ | 0.22 | | | $ | 0.15 | | | | | |
| | | | | | | |
| Weighted average number of shares outstanding - diluted | 67,351,727 | | 77,285,116 | | | | |
| | | | | | | |
| | | | | | | |
We generally have long standing relationships
(1)Interest expense swap adjustments consist of amortization of unrealized gains on our terminated interest rate swap agreements, which were recognized through December 2023 as a reduction in interest expense.
(2)Interest expense discounts consist of amortization of original issue discount and debt issuance costs.
(3)Restructuring charges represent costs incurred in connection with the Company’s global restructuring plan. Costs incurred in connection with the plan during the three months ended March 31, 2024 primarily include: (i) $1.0 million of severance and benefits related to impacted employees, (ii) $0.7 million of professional service fees related to the execution of our cost savings initiatives, and (iii) $0.3 million related to the abandonment of certain of our leased facilities. Restructuring charges incurred in connection with the plan during the three months ended March 31, 2023 include: (i) $4.4 million of severance and benefits related to impacted employees, (ii) $4.0 million of professional service fees related to the execution of our cost savings initiatives, and (iii) $1.4 million related to the abandonment of certain of our leased facilities.
(4)Amortization of cloud computing software costs consists of expense recognized in selling, general and administrative expenses for capitalized implementation costs for cloud computing IT systems incurred in connection with our customers as evidenced byplatform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies. This expense is not included in depreciation and amortization above.
(5)Other items for the nine-year average tenurethree months ended March 31, 2024 consist primarily of our enterprise customers. The revenue from these customers is highly reoccurring in nature. In addition, our ability(i) professional services fees of $5.3 million related to cross sellthe Merger Agreement, and expand our(ii) $0.4 million of professional services with our existing customers is an important componentfees not related to core operations. Other items for the three months ended March 31, 2023 consist of our growth strategy. We measure the success of our customer retention and expansion through net revenue retention particularly among our top 1,250 customers who represent approximately 70% of our total revenue. Net revenue retention is a measure of our abilityprofessional service fees not related to retain and grow business from our customer base. It is calculated as the total revenue derived in the current fiscal period by our top 1,250 customers, divided by the total revenue derived in the prior fiscal period from the same 1,250 customerscore operations.
(6)Adjusted income taxes are based on the prior fiscal period revenue composition. The 1,250 customers used for this metric may vary from period to period, as defined by the revenue composition of the period immediately preceding the presented fiscal year. Net revenue retention increasedtax laws in the 2021 periods as general client ordering patterns showedjurisdictions in which the Company operates and exclude the impact of net operating losses and valuation allowances to calculate a significant volumenon-GAAP blended statutory rate of 26% for the three months ended March 31, 2024 and product mix improvement over2023. Adjusted income taxes for the COVID impacted priorthree months ended March 31, 2023 have been updated to conform to the current year quarter and year to date periods.methodology.
In addition to expanding revenue with our existing customer base, adding new customers to our portfolio is an important driver of growth. New business revenue is a measure of our ability to establish new sources of business from customers outside of our existing base of business. New business represents revenue recognized under a new customer contract during the first year of the contract term. We have a sales and sales support staff in nine countries focused on expanding our reach and penetration into new markets and regions. Although new contracts are typically three years in duration, new business revenue is determined over the first year of the contract. Continuing to grow this important metric is critical to the success of our business. New business revenue increased in the three and nine months ended September 30, 2021 compared to the prior year period due to
volume and product mix improvement over the COVID impacted prior year quarter and year to date periods.
Liquidity and Capital Resources
General
Our primary sources of liquidity and capital resources are cash generated from our operating activities, cash on hand, and borrowings under our long-term debt arrangements. Income taxes are currentlyhave historically not been a significant use of funds but after the benefits of our net operating loss (“NOL”) carryforwards are fully recognized, could become a material use of funds, depending on our future profitability and future tax rate. Additionally, as a result of the income tax receivable agreement (“TRA”) we entered into in connection with the IPO, we will be required to pay certain pre-IPO ownersequityholders or their transferees 85% of the benefits, if any, that the Company and its subsidiaries realize, or are deemed to realize in income tax savings due to our utilization of the NOLs and other tax attributes, for certain tax benefits over a period of approximately 12 years pursuant towhich the TRA, which amounts toCompany recognized an estimated total liability of approximately $209.9 million.$183.9 million, including a current portion of $21.2 million, as of March 31, 2024. Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2025 fiscal year.2030. Annual payments on the TRA began in the first quarter of 2024. These payments will result in cash outflows of amounts we would otherwise have retained in the form of tax savings from the application of the NOLs and other tax attributes.
Unrestricted cashCash and cash equivalents as of September 30, 2021 totaled $19.7March 31, 2024 was $77.3 million. As of September 30, 2021,March 31, 2024, cash held in foreign jurisdictions was approximately $4.7$16.6 million and is primarily related to international operations.
Debt
The Company currently has two long-term debt arrangements:
Restricted cash of $5.0•The Second Amended First Lien Term Loan Facility, a first lien senior secured term loan facility, bearing interest payable monthly at a Secured Overnight Financing Rate (“SOFR”) variable rate (5.33% at March 31, 2024) + 4.00%, maturing on September 30, 2030. Total principal outstanding balance on our debt was $746.3 million as of September 30, 2021 consistsMarch 31, 2024 and $750.0 million as of $1.1December 31, 2023.
•The Second Amended Revolver Credit Facility, a first lien senior secured revolving credit facility in an aggregate principal amount of up to $160.0 million, heldincluding a $40.0 million letter of credit sub-facility, bearing interest monthly at a SOFR variable rate (5.32% at March 31, 2024) + 2.5% (subject to adjustment pursuant to a leverage-based pricing grid) and maturing on June 3, 2027 or, if earlier, 91 days prior to the maturity of the Company’s term loans under the Second Amended First Lien Term Loan Facility. The Company had $158.7 million in escrowavailable borrowing capacity under the Amended Revolving Credit Facility, after utilizing $1.3 million for letters of credit as of March 31, 2024.
The Second Amended First Lien Term Loan Facility includes a springing financial maintenance covenant for the benefit of former investorsthe revolving lenders thereunder, which requires us to maintain a specified first lien leverage ratio as of the last day of any fiscal quarter on which greater than 35% of the revolving commitments are drawn (excluding for this purpose up to $15.0 million of undrawn letters of credit). The Company was not subject to this covenant as of March 31, 2024, as outstanding loans and letters of credit under the Second Amended Revolving Credit Facility did not exceed 35% of the total commitments under the facility.
The Company’s obligations under the Second Amended First Lien Facilities are guaranteed, jointly and severally, on a senior secured first-priority basis, by substantially all of the Company’s domestic wholly-owned material subsidiaries, as defined in a subsidiarythe agreement, and are secured by first-priority security interests in substantially all of the assets of the Company pursuantand its domestic wholly-owned material subsidiaries, subject to the terms of its divestiture of a former affiliate in April 2018, and the remainder is related to prior restructurings from predecessor entities.
The Company proactively drew down $50.0 million under its Revolving Credit Facility, during the quarter ended March 31, 2020 in preparation for the impact of the COVID-19 pandemic. The Company repaid $20.0 million on the Revolving Credit Facility during each of the second and third quarters of the year ended December 31, 2020. The Company had $10.0 million outstanding under the Revolving Credit Facility and $88.2 million of availability remained as of September 30, 2021. On November 5, 2021, the Company repaid the $10.0 million outstanding principal amount on the Revolving Credit Facility.certain permitted
liens and exceptions. Collateral includes all outstanding equity interests in whatever form of the borrower and each restricted subsidiary that is owned by any credit party.
Operating Commitments
As of September 30, 2021March 31, 2024, the Company had purchase obligations of approximately $27.2 million withto various parties of which approximately $21.7$38.7 million is expected to be paid within one year. These purchase commitments are associated with agreements that are enforceable and legally binding. They arein the aggregate, primarily commitments to purchase data and other screening services in the ordinary course of business withbusiness. These purchase obligations have varying expiration terms through 2023.2025, and approximately $12.0 million of the total is expected to be paid within one year.
In addition to our regular investment in capital expenditures, we plan to invest $40-$45 million in a capital expenditure program through the end of fiscal year 2023 to continue to enhance our operating systems and technologies to improve operational efficiency. We expect that cash flow from operations and current cash balances, together with available borrowings under the Second Amended Revolving Credit Facility, will be sufficient to meet operating requirements as well as the obligations under the TRA as discussed below, through the next twelve months. Although we believe we have adequate sources of liquidity over the long term, cash available from operations could be affected by any general economic downturn or any decline or adverse changes in our business such as a loss of customers, market and or competitive pressures, unanticipated liabilities, or other significant changes in business environment. Additional future financing may be necessary to fund our operations, and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all.
Debt
Effective with the combination of the HireRight and GIS groups of companies on July 12, 2018, the Company has three long-term debt arrangements as described below. Collateral includes all outstanding equity interests in whatever form of the borrower and each restricted subsidiary that is directly owned by or on behalf of any credit party. The credit agreement has a restrictive covenant for leverage ratios. The Company was in compliance with the covenants under the credit agreement for the three and nine months ended September 30, 2021. Accordingly, the amount payable under the credit agreement is classified as long-term debt in the accompanying condensed consolidated balance sheet.
At September 30, 2021, we had the following long-term debt arrangements:
•a first lien senior secured term loan facility, in an aggregate principal amount of $835.0 million, bearing interest payable monthly at a London Interbank Offered Rate (“LIBOR”) variable rate (0.08% at September 30, 2021) + 3.75%, due July 12, 2025 (the “First Lien Term Loan Facility”).
•a first lien senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million, including a $40.0 million letter of credit sub-facility, bearing interest monthly at 3.5% and maturing on July 12, 2023 (the “Revolving Credit Facility”).
•a second lien senior secured term loan facility, in an aggregate principal amount of $215.0 million, bearing interest payable monthly at a LIBOR variable rate (0.08% at September 30, 2021) + 7.25%, due July 12, 2026 (the “Second Lien Term Loan Facility”).
The Company used $215.0 million of the proceeds from the IPO to repay, in full, the Second Lien Term Loan Facility. The Company plans to use approximately $100.0 million of proceeds of the IPO to repay, in part, the First Lien Term Loan Facility and no longer expects to incur swap breakage fees of approximately $4.2 million.
Cash Flow
The following table sets forth a summary ofsummarizes our condensed consolidated cash flows for the ninethree months ended September 30, 2021March 31, 2024 and 2020:2023:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| (in thousands) |
| Net cash provided by operating activities | $ | 19,043 | | | $ | 7,721 | |
| Net cash used in investing activities | (9,983) | | | (9,276) | |
| Net cash (used in) provided by financing activities | (7,503) | | | 2,335 | |
| Net increase in cash, cash equivalents and restricted cash | $ | 1,557 | | | $ | 780 | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| (in thousands) |
| Net cash used in operating activities | $ | (9,229) | | | $ | (5,015) | |
| Net cash used in investing activities | (5,547) | | | (4,611) | |
| Net cash used in financing activities | (30,919) | | | (26,672) | |
| Net decrease in cash, cash equivalents and restricted cash | $ | (45,695) | | | $ | (36,298) | |
Operating Activities
Cash provided byused in operating activities reflects net income (loss)loss adjusted for certain non-cash items and changes in operating assets and liabilities. Total cash provided byCash used in operating activities was $19.0$9.2 million for the ninethree months ended September 30, 2021March 31, 2024 compared to cash provided of $7.7$5.0 million for the ninethree months ended September 30, 2020.March 31, 2023. The increase in cash flows provided byused in operating activities was primarily due primarily to a lower net losshigher costs associated with the Merger Agreement. The increase in cash used in operating activities was partly offset by a higher usenet loss of cash from working capital$3.5 million for the current period compared to net loss of $7.9 million for the prior year period.
Investing Activities
Cash used in investing activities was approximately $10.0$5.5 million during the ninethree months ended September 30, 2021,March 31, 2024, compared to approximately $9.3$4.6 million during the ninethree months ended September 30, 2020.March 31, 2023. The increase was due primarily to an increase of $2.0 million in cash used for purchases of property and equipment, as the company made fewer purchases in the prior year period in connection with its costs savings initiatives. The increase in cash used in investing activities was due primarily to slight increases in purchases of property and equipment and capitalized software development costs compared to the prior period.
Financing Activities
Cash used in financing activities was approximately $7.5 million for the nine months ended September 30, 2021 compared to cash providedpartly offset by financing activities of approximately $2.3 million during the nine months ended September 30, 2020. The change in cash used in financing activities is due primarily to the Company’s draw down of $50.0 million on the Revolving Credit Facility in the same period last year. We had net repayments on our debt facilities of $6.3 million in the nine months ended September 30, 2021 compared to net borrowings of $3.7 million in the nine months ended September 30, 2020.
Financing and Financing Capacity
Total principal outstanding on our debt was $1.0 billion as of September 30, 2021 and $1.0 billion as of December 31, 2020.
Income Tax Receivable Agreement
In connection with the Company’s IPO during the fourth quarter of 2021, we entered into the TRA with our pre-IPO equityholders or their permitted transferees that will provide for the payment by us over a period of approximately 12 years to our pre-IPO equityholders or their permitted transferees of 85% of the benefits, if any, that we and our subsidiaries realize, or are deemed to realize (calculated using certain assumptions) in U.S. federal,decrease
state, and localin Other investing of $1.0 million compared to the prior year period during which we purchased an investment in an unconsolidated entity.
Financing Activities
Cash used in financing activities was $30.9 million for the three months ended March 31, 2024 compared to $26.7 million during the three months ended March 31, 2023. The increase in cash used was due primarily to making the first payment on our income tax savings as a resultreceivable agreement of $27.2 million in February 2024, partially offset by repurchases of our common stock under share repurchase programs of $24.6 million in the utilization (or deemed utilization) of certain existing tax attributes. Basedprior year period. We also repaid $3.8 million on our current taxable income estimates, we expect to repay the majority of this obligation by the end of our 2025 fiscal year. Actual tax benefits realized by us may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including assumptions relating to state and local income taxes, to calculate tax benefits. The Company will record an estimated total liability of approximately $209.9 million and a reduction to Additional paid-in capital of approximately $209.9 million in connection with the TRAdebt during the fourth quarterthree months ended March 31, 2024, compared to repayments of 2021 on its condensed consolidated balance sheets.$2.1 million during the period year period.
Off-Balance Sheet Arrangements
As of September 30, 2021,March 31, 2024, we did not have anyhad no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, other than operating leases, primarilyS-K.
Recently Issued Accounting Pronouncements
See “Part I, Item 1. Financial Statements (unaudited) - Note 2 — Recently Issued Accounting Pronouncements” of this Quarterly Report on Form 10-Q for our leased facilities.further information on recently adopted accounting pronouncements and those not yet adopted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impactto our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changesinterest rate risk, potential foreign exchange risk and potential increases in inflation. We do not hold financial instruments for trading purposes.
Interest Rate Risk
We are exposed to changes in interest rates as a result of the outstanding balance under the Second Amended First Lien Term Loan Facility, as well as any borrowings under the Second Amended Revolving Credit Facility. Our primary exposure is an increase in SOFR, which would increase the interest rate we pay on the outstanding principal balance of our financing activities used to fund business operations. Primary exposures include movements in LIBOR.debt. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. To minimize this risk, we have entered intoAny increases in our outstanding indebtedness will amplify the effects of increased interest rate swap agreements to hedge our risk to changes in LIBOR.rates.
As of September 30, 2021,March 31, 2024, the outstanding balancesprincipal balance of $746.3 million on our credit agreements werethe Second Amended First Lien Term Loan Facility was subject to variable interest rates. We repaid $215.0 million of the amount outstanding under our Second Lien Term Loan Facility usingBased upon a portion of the proceeds from the IPO.
The Financial Conduct Authoritysensitivity analysis, a hypothetical 1% change in the United Kingdom intends to phase out LIBOR by the end of 2021. We have negotiated terms in consideration of this discontinuation and do not expect that the discontinuation of the LIBOR rate, including any legal or regulatory changes made in response to its future phase out, will have a material impactinterest rates on our liquidity or results of operations.debt outstanding would change our annual interest expense by approximately $7.5 million.
Foreign Currency Exchange Risk
The significant majority of our revenue is denominated in U.S. dollars,dollars; however, we do earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including among others,the Euro, the British pound, the Polish zloty, the Australian dollar, the Canadian dollar, the Euro, the Polish Zloty, the Singapore dollar, the Mexican peso, the Japanese yen, and the Indian rupee.rupee, among others. Because our condensed consolidated financial statements are presented in U.S. dollars, we must translate revenue, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against majorother currencies will affect our operating revenues, operating incomestatements of operations and the value of balance sheet items denominated in foreign currencies. We generally do not mitigate the risks associated with fluctuating
exchange rates however, because we generallytypically incur expenses and generate revenue in these currencies and the cumulative impact of these foreign exchange fluctuations are not deemed material to our financial performance.
Inflation Risk
The inflation rate has recently been falling by some measures after reaching a nearly three decade high in 2022, but interest rates remain high and may continue to increase our operating costs and our interest expense. We also expect our labor costs to continue to increase as the growing competition for labor has a greater impact on our business. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. However, we may not be able to raise our pricing sufficiently to offset our increased costs, for competitive reasons or because some of our customer agreements fix the prices we may charge for some period of time and/or limit permissible price increases. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.Item 4. Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, Act)as amended (the “Exchange Act”)) as of September 30, 2021.March 31, 2024. Based on the evaluation, of the design and operation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2021 due to certain material weaknesses in our internal control over financial reporting as described below. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the financial statements for the periods covered by and included in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to claims, investigations, audits, and enforcement proceedings by private plaintiffs, third parties the Company does business with, and federal, state and foreign authorities charged with overseeing the enforcement of laws and regulations that govern the Company’s business. In the U.S., most of these matters arise under the federal Fair Credit Reporting Act and various state and local laws focused on privacy and the conduct and content of background reports. In addition to claims related to privacy and background checks, the Company is also subject to other claims and proceedings arising in the ordinary course of its business, including without limitation claims for indemnity by customers and vendors, employment-related claims, and claims for alleged taxes owed, infringement of intellectual property rights, and breach of contract. The Company and its subsidiaries are not party to any pending legal proceedings that the Company believes to be material except as set forth below.material.
Item 1A. Risk Factors
