You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. 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 under "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements and Risk Factors Summary."
Business Overview
HireRight 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 40,000 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 2021, we screened over 29 million job applicants, employees and contractors for our customers and processed over 110 million screens.HireRight GIS Group Holdings LLC ("HGGH"), was formed inJuly 2018 in connection with the combination of two groups of companies: theHireRight Group and the General Information Services ("GIS") Group, each of which includes a number of wholly-owned subsidiaries that conduct the Company's business inthe United States , as well as other countries. SinceJuly 2018 , the combined group of companies and their subsidiaries have operated as a unified operating company providing screening and compliance services, predominantly under the HireRight brand. OnOctober 15, 2021 , HGGH converted into aDelaware corporation and changed its name toHireRight 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 ofHireRight 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 ofHireRight Holdings Corporation .
Initial Public Offering
OnNovember 2, 2021 , the Company completed its initial public offering ("IPO"), in which the Company issued and sold 22,222,222 shares of its common stock. The shares began trading on theNew York Stock Exchange onOctober 29, 2021 under the symbol "HRT". The shares were sold at an IPO price of$19.00 per share for 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 . OnNovember 30, 2021 , 2,424 shares were issued and sold pursuant to the partial exercise of the underwriters' option to purchase additional shares for net proceeds of an immaterial amount.
Use of Proceeds
OnNovember 3, 2021 , the Company used$215.0 million of the net proceeds from the IPO to repay, in full, indebtedness under the Company's second lien senior secured term loan facility (the "Second Lien Term Loan Facility"). OnNovember 30, 2021 , the Company used$100.0 million of net proceeds of the IPO to repay, in part, the First Lien Term Loan Facility, as defined below. The Company recognized a loss on debt extinguishment of$5.2 million to write off unamortized debt discounts and unamortized deferred financing fees and record other related expenses in its consolidated statements of operations for the year endedDecember 31, 2021 as a result of these debt repayments. 58 --------------------------------------------------------------------------------
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) inU.S. federal, state, and local income tax savings as a result of the utilization (or deemed utilization) of certain existing tax attributes. We estimate our total obligations under the TRA to be approximately$210.6 million . Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of 2030. See "Item 8. Financial Statements and Supplementary Data - Note 17 - Income Taxes" for additional information on the TRA.
Factors Affecting Our Results of Operations
Economic Conditions and COVID-19
Our results of operations for the year endedDecember 31, 2021 show a significant increase from the prior year period, due to improvement in the global employment market. We recognized the highest revenue quarter in our history in the third quarter of 2021 at$205.0 million demonstrating our attractive position in an industry with global secular growth drivers. Revenues for the fourth quarter of 2021 decreased slightly to$198.5 million but showed significant improvement compared to revenue of$150.1 million for the fourth quarter of 2020. The global COVID-19 pandemic has caused significant disruption to the global economy and, in particular, the labor market. There continues to be considerable uncertainty regarding the extent of the impact and the duration of the global COVID-19 pandemic. The future impact of COVID-19 on our operational and financial performance will depend on its effect on our customers and vendors. Our financial results and prospects largely depend on hiring activity and the total level of employment. The peak of the pandemic impact on the Company occurred during April and May of 2020; however, we began to see a steady recovery in the second half of 2020. As we recovered from the pandemic, the global labor market also began to adapt and recover. Total revenues increased 35% during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 indicating improvements in our business from the pandemic impacted prior period. The weakness experienced in 2020 and the associated recovery largely impacted all industries we serve. We are a highly diversified business with no industry representing more than 19% of our total revenue for all periods presented. Financial services, healthcare, and technology customers represent the largest contributors to revenue. Financial services, healthcare, and technology revenues for the year endedDecember 31, 2021 increased 48% over the prior year period, consistent with overall revenue increases.
Key Components of Our Results from Operations
Revenues
The Company generates revenues from background screening and 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 30%, 31%, and 27% of revenues for the years endedDecember 31, 2021 , 2020, and 2019 respectively, were generated from the Company's top 50 customers, which consist of largeU.S. and multinational companies across diversified industries such as transportation, healthcare, technology, business and consumer services, financial services, manufacturing, education, retail and not-for-profit. None of the Company's customers individually accounted for greater than 5%, of revenue during the year endedDecember 31, 2021 or 7% of revenues during the years endedDecember 31, 2020 and 2019. Revenues consist of service revenues and surcharge revenues. Service revenues represent fees charged to 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 obligations from federal, state and local jurisdictions as well as fees charged by certain commercial data providers. These fees are generally charged to the 59 -------------------------------------------------------------------------------- Company's customers at initial 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 revenues to generate cash from operations. Furthermore, only service revenues impact the operating income or loss as surcharge revenues are predominantly offset by corresponding expenses recognized in cost of services (excluding depreciation and amortization) on the consolidated statement of operations.
Expenses
Cost of services (excluding depreciation and amortization) consists of data acquisition costs, medical laboratory and collection fees, direct labor from operations, customer service and customer onboarding costs, 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 employees in addition to costs for third party technology, professional and consulting services, advertising and facilities expenses.
Depreciation and amortization expenses consist of depreciation of property and equipment, as well as amortization of purchased and developed software and other intangible assets, principally resulting from the acquisition of GIS in 2018. Other expenses consist of interest expense relating to our credit facility, including the loss on early extinguishment of debt, loss on asset disposal, and foreign exchange gains and losses. The significant majority of our receivables and payables are denominated inU.S. dollars, however, we also earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than theU.S. dollar, including among others, the British pound, the Australian dollar, the Canadian dollar, the Euro, the Polish Zloty, theSingapore dollar and the Indian rupee. Therefore, increases or decreases in the value of theU.S. dollar against other currencies could result in realized and unrealized gains and losses in foreign exchange. However, to the extent we earn revenue in currencies other than theU.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 deemed material to our financial performance.
Income tax expense consists of international,
60 --------------------------------------------------------------------------------
Results of Operations
Comparison of Results of Operations for the Year EndedDecember 31, 2021 versus the Year EndedDecember 31, 2020 and the Year EndedDecember 31, 2020 versus the Year EndedDecember 31, 2019 The following table presents operating results for the years endedDecember 31, 2021 , 2020 and 2019. Year Ended December 31, 2021 2020 2019 (in thousands) Revenues$ 730,056 $ 540,224 $ 647,554 Expenses Cost of services (exclusive of depreciation and amortization below) 406,671 301,845 356,591 Selling, general and administrative 188,298 173,579 173,185 Depreciation and amortization 78,357 76,932 78,051 Total expenses 673,326 552,356 607,827 Operating income (loss) 56,730 (12,132) 39,727 Other expenses Interest expense 74,815 75,118 81,036 Change in fair value of derivative instruments - - 26,393 Other expense, net 532 889 1,841 Total other expense 75,347 76,007 109,270 Loss before income taxes (18,617) (88,139) (69,543) Income tax expense 2,686 3,938 920 Net loss$ (21,303) $ (92,077) $ (70,463) Net loss per share: Basic$ (0.35) $ (1.61) $ (1.23) Diluted$ (0.35) $ (1.61) $ (1.23) Weighted average shares outstanding: Basic 60,821,472 57,168,291 57,168,291 Diluted 60,821,472 57,168,291 57,168,291 Revenues Total revenues increased$189.8 million , or 35.1%, to$730.1 million , for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to recovery from the COVID-19 pandemic which caused order volumes to surpass the COVID-impacted prior year period. Revenues from international and domestic regions increased$19.7 million , or 55.9%, and$170.1 million , or 33.7%, respectively, during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Revenues decreased by$107.3 million , or 16.6%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily due to the impact of COVID-19, which caused a decline in the volume of orders for our services. Unemployment in our primary market,the United States , reached nearly 15% during the peak of the 2020 pandemic and hiring slowed to less than 4 million per month inApril 2020 . Order volumes at the peak of the pandemic were more than 40% lower compared to the prior year and finished the year approximately 10% lower than 2019. These lower order volumes largely impacted all industries we serve. We have a highly diversified customer base, with no industry representing more than 15% of our total revenue and no single customer 61 -------------------------------------------------------------------------------- representing more than 7% of revenues. Transportation, healthcare and technology customers represent the largest contributors to revenue at nearly 40%. Transportation and healthcare annual revenues declined in conjunction with overall revenue declines while technology customers in aggregate showed limited growth largely driven by the addition of two larger customers during the year. International revenue experienced a larger decline thanthe United States with revenue declining approximately 20%. Service revenue decreased$95.0 million , or 19.0%, and surcharge revenue decreased$12.3 million , or 8.3%. The smaller decline in surcharge revenue resulted from increased pricing on lower volumes from two of our larger data suppliers. Both of these data providers' cost increases were passed on to our customers in the form of increased surcharges, and these price increases partially offset reduction in surcharge revenue resulting from decreased order volumes.
Cost of Services (exclusive of depreciation and amortization below)
Cost of services increased$104.8 million , or 34.7%, to$406.7 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to higher volumes and, to a lesser extent, increased data costs. Cost of services as a percent of revenue decreased slightly to 55.7% for the year endedDecember 31, 2021 compared to 55.9% for the year endedDecember 31, 2020 . Cost of services decreased$54.7 million , or 15.4%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 primarily as a result of a decline in the volume of orders for our services due to the impact of COVID-19 during 2020, partially offset by increased prices from certain data suppliers.
Selling, General and Administrative
Selling, general and administrative expenses ("SG&A") increased$14.7 million , or 8.5%, to$188.3 million , for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 due to higher personnel costs, facility exit costs, technology related costs, and IPO related costs; partially offset by lower legal settlement fees, merger integration expenses, and various other costs. Increases included personnel costs of$22.2 million and costs associated with the exit from certain of our leased facilities of$10.2 million . Exit from leased facilities was driven by lower office utilization due to ongoing COVID-related work from home protocols. Of the$22.2 million increase in personnel costs,$12.5 million was due to increases in incentive compensation and fringe benefit programs associated with headcount increases to handle increased order volumes, wage inflation, retention in competitive labor markets, and improved performance under bonus plans, and$8.6 million was related to investments in personnel associated with incremental technology and product resources. Increases in IPO preparation related costs amounted to$5.0 million . and discovery phase costs associated with various technology initiatives and an information technology project implementation increased$5.0 million . These increases were partially offset by a reduction in legal settlement fees and merger integration and employee severance expenses of$11.1 million and$12.0 million , respectively. Various other costs accounted for$4.6 million of the offsetting decreases in SG&A for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . SG&A increased$0.4 million , or 0.2%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 primarily due to an increase in legal settlement costs and employee severance and retention expenses, partially offset by a decrease in merger integration related expenses. Legal settlements and associated legal fees increased$15.8 million during the year endedDecember 31, 2020 primarily due to an accrual of$12.1 million for the settlement associated with the Action described in "Item 8. Financial Statements and Supplementary Data - Note 15 - Legal Proceedings." Employee severance and retention related expenses increased approximately$3.2 million during the year endedDecember 31, 2020 . Offsetting these expenses were decreases in merger integration expenses, which consist largely of technology costs, which declined nearly$15.0 million during the year endedDecember 31, 2020 due to completion of much of the integration work during the year endedDecember 31, 2019 . Also offsetting the increases in SG&A were decreases in various other costs amounting to approximately$3.6 million . 62 --------------------------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense increased$1.4 million , or 1.9%, to$78.4 million , for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily due to the acceleration of depreciation expense for reductions in the estimated useful lives of certain facilities we exited during the year endedDecember 31, 2021 . The increase was partially offset by decreases in depreciation and amortization expense related to certain computer equipment assets reaching the end of their useful lives in the prior year. Depreciation and amortization expense decreased$1.1 million , or 1.4%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease was primarily due to higher depreciation expense incurred in 2019 related to assets that are still being used by the Company, but reached the end of their useful lives during 2020. The decrease was partially offset by increases in depreciation and amortization expense related to additions of property and equipment and intangibles during the year endedDecember 31, 2020 .
Interest Expense
Interest expense, net decreased$0.3 million , or 0.4%, to$74.8 million , for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The decrease was primarily due to lower outstanding debt balances, due to repayments using IPO proceeds and scheduled principal repayments. OnNovember 3, 2021 , the Company repaid in full the Second Lien Term Loan Facility, with a principal balance of$215.0 million , using proceeds of the IPO. Interest expense incurred on the Second Lien Term Loan Facility that was paid in full was approximately$13.5 million . OnNovember 30, 2021 , the Company used$100.0 million of proceeds of the IPO to repay, in part, the First Lien Term Loan Facility, as defined below. Interest expense incurred on the pay-down of$100.0 million of the First Lien Term Loan was approximately$3.6 million during the year endedDecember 31, 2021 . The decrease in interest expense was partially offset by an increase in interest expense of$5.2 million to write off unamortized debt discounts and unamortized deferred financing fees and other expenses as a result of these debt repayments. Interest expense decreased$5.9 million , or 7.3%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease was primarily due to the establishment of hedge accounting treatment for our interest rate swap and the elimination of the mark to market adjustment on the swap in the consolidated statement of operations as discussed below under "Change in Fair Value of Derivative Instruments." Interest expense during the year endedDecember 31, 2020 included$16.0 million that was reclassified into earnings as a result of hedge accounting on our interest rate swaps compared to$1.9 million reclassified during the year endedDecember 31, 2019 .
Change in Fair Value of Derivative Instruments
There was no change in fair value of derivative instruments for either of the
years ended
There was no expense for change in fair value of derivative instruments for the year endedDecember 31, 2020 compared to an expense for change in fair value of derivative instruments of$26.4 million for the year endedDecember 31, 2019 . The change in fair value of derivative instruments directly relates to the mark to market expense associated with the interest rate swap entered into during 2018. OnSeptember 26, 2019 , the Company entered into an amended interest rate swap agreement electing hedge accounting treatment for accounting for the effects of the swap agreement.
Income Tax Expense
Income tax expense decreased$1.3 million , or 31.8%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to changes in tax rate and valuation allowances. Income tax expense for the years endedDecember 31, 2021 and 2020 was$2.7 million and$3.9 million , respectively. Our effective tax rate for the year endedDecember 31, 2021 was 14.4% compared to 4.5% for the year endedDecember 31, 2020 . The change in the effective tax rate was primarily impacted byU.S. tax on foreign operations and changes in 63
-------------------------------------------------------------------------------- valuation allowances. The effective tax rate for the year endedDecember 31, 2021 differs from the Federal statutory rate of 21% primarily due toU.S. tax on foreign operations, non-deductible IPO costs, and changes in tax rate. Income tax expense increased$3.0 million , or 328.0%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 primarily due to changes in valuation allowance, revaluation of deferred tax assets and liabilities due to enacted rate changes and state taxes. The effective tax rate for the year endedDecember 31, 2020 was 4.5%, compared to 1.4% during the year endedDecember 31, 2019 . The effective tax rate for the year endedDecember 31, 2020 differs from the Federal statutory rate of 21% primarily due to change in valuation allowances and state taxes.
Non-GAAP Financial Measures and Key Metrics
We believe that the presentation of our Non-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 accounting principles generally accepted inthe 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 by other companies in our industry, our definitions may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. Adjusted EBITDA Adjusted EBITDA represents, as applicable for the period, net income (loss) before provision for income taxes, interest expense and depreciation and amortization expense, equity-based compensation, realized and unrealized gain (loss) on foreign exchange, change in fair value of derivative instruments, merger integration expenses, legal settlement costs 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 is a supplemental financial measure that management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess our:
•operating performance as compared to other publicly traded companies without regard to capital structure or historical cost basis;
•ability to generate cash flow;
•ability to incur and service debt and fund capital expenditures; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
64 -------------------------------------------------------------------------------- The following table reconciles our non-GAAP financial measure of Adjusted EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP. Year Ended December 31, 2021 2020 2019 (in thousands) Net loss$ (21,303) $ (92,077) $ (70,463) Income tax expense 2,686 3,938 920 Interest expense 74,815 75,118 81,036 Depreciation and amortization 78,357 76,932 78,051 EBITDA 134,555 63,911 89,544 Equity-based compensation 4,528 3,218 3,390 Realized and unrealized gain on foreign exchange 424 889 1,841 Change in fair value of derivative instruments (1) - - 26,393 Merger integration expenses (2) 551 10,055 24,960 Technology investments (3) 3,567 - - Other items (4) 16,572 14,855 - Adjusted EBITDA$ 160,197 $ 92,928 $ 146,128 (1)Change in fair value of derivative instruments is the charge to net loss resulting from our interest rate swaps. There is no comparable adjustment for the years endedDecember 31, 2021 and 2020 as a result of our application of hedge accounting treatment following an amendment to the swap agreements onSeptember 26, 2019 . See "Interest Expense" and "Change in Fair Value of Derivative Instruments" within our Management Discussion and Analysis for further discussion of our interest rate swap agreements.
(2)Merger integration expenses consist primarily of information technology
("IT") related costs including personnel expenses, professional and service fees
associated with the integration of customers and operations of GIS, which
commenced in
(3)Technology investments represent discovery phase costs associated with various technology initiatives that are intended to achieve greater operational efficiencies.
(4)Other items include (i) exit costs of$10.2 million associated with certain of our leased facilities during the year endedDecember 31, 2021 , (ii) costs of$5.0 million related to the preparation of the Company's initial public offering during 2021, (iii)$12.1 million of legal settlement costs in the year endedDecember 31, 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 "Item 8. Financial Statements and Supplementary Data - Note 15 - Legal Proceedings"), and (iv)$2.5 million of severance costs incurred in connection with reducing our employee headcount to right-size our business in response to COVID-19 during the year endedDecember 31, 2020 .
Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) Per Share
In addition to Adjusted EBITDA, management believes that Adjusted Net Income (Loss) is a strong indicator of our overall operating performance and is useful to our management and investors as a measure of comparative operating performance from period to period. We define Adjusted Net Income (Loss) as net income (loss) adjusted for amortization of acquired intangible assets, equity-based compensation, realized and unrealized gain (loss) on foreign exchange, change in fair value of derivative instruments, merger integration expenses, legal settlement costs deemed by management to be outside the normal course of business, and other items, to which we apply an adjusted effective tax rate. Beginning with the fourth quarter of the year endedDecember 31, 2021 , we have incorporated the amortization of acquired intangibles in our definition of Adjusted Net Income (Loss), as it provides for a more direct comparison to our peers. See the footnotes to the table below for a description of certain of these adjustments. We define Adjusted Diluted Earnings (Loss) Per Share as Adjusted Net Income (Loss) divided by adjusted weighted average number of shares outstanding (diluted) for the applicable period. We believe Adjusted Diluted Earnings (Loss) Per Share is useful to investors and analysts because it enables them to better evaluate per share operating performance across reporting periods and to compare our performance to that of our peer companies. 65 --------------------------------------------------------------------------------
The following table sets forth a reconciliation of net income (loss) to Adjusted Net Income (Loss) for the periods presented:
Year Ended December 31, 2021 2020 2019 (in thousands) Net loss$ (21,303) $ (92,077) $ (70,463) Income tax expense 2,686 3,938 920 Loss before income taxes (18,617) (88,139) (69,543) Amortization of acquired intangible assets 63,059 62,094 61,859 Loss on extinguishment of debt (1) 5,170 - - Equity-based compensation 4,528 3,218 3,390 Realized and unrealized gain on foreign exchange 424 889 1,841 Change in fair value of derivative instruments (2) - - 26,393 Merger integration expenses (3) 551 10,055 24,960 Technology investments (4) 3,567 - - Other items (5) 17,029 14,855 - Adjusted income before income taxes 75,711 2,972 48,900 Adjusted income taxes (6) 401 3,855 907 Adjusted Net Income (Loss)$ 75,310 $ (883) $ 47,993
The following table sets forth the calculation of Adjusted Diluted Earnings Per Share for the periods presented.
Year Ended December 31, 2021 2020 2019 Diluted net loss per share$ (0.35) $ (1.61) $ (1.23) Income tax (benefit) expense 0.04 0.07 0.02 Amortization of acquired intangible assets 1.04 1.08 1.07 Loss on extinguishment of debt (1) 0.09 - - Equity-based compensation 0.07 0.06 0.06 Realized and unrealized gain on foreign exchange 0.01 0.02 0.03 Change in fair value of derivative instruments (2) - - 0.46 Merger integration expenses (3) 0.01 0.17 0.44 Technology investments (4) 0.06 - - Other items (5) 0.28 0.26 - Adjusted income taxes (6) (0.01) (0.07) (0.02) Adjusted Diluted Earnings (Loss) Per Share$ 1.24
Weighted average number of shares outstanding - diluted 60,821,472
57,168,291 57,168,291
Options and restricted stock units not included in weighted average number of diluted shares outstanding
- - -
Adjusted weighted average diluted number of shares outstanding
60,821,472 57,168,291 57,168,291 (1)Loss on extinguishment of debt is related to the write off of unamortized deferred financing fees and unamortized original issue discounts in conjunction with the repayment of the principal on our second lien term loan facility and partial repayment of our first lien term loan facility. 66 -------------------------------------------------------------------------------- (2) Change in fair value of derivative instruments is the charge to net loss resulting from our interest rate swaps. There is no comparable adjustment for the years endedDecember 31, 2021 and 2020 as a result of our application of hedge accounting treatment following an amendment to the swap agreements onSeptember 26, 2019 . See "Interest Expense" and "Change in Fair Value of Derivative Instruments" within our Management Discussion and Analysis for further discussion of our interest rate swap agreements.
(3) Merger integration expenses consist primarily of information technology
("IT") related costs including personnel expenses, professional and service fees
associated with the integration of customers and operations of GIS, which
commenced in
(4) Technology investments represent discovery phase costs associated with various technology initiatives that are intended to achieve greater operational efficiencies.
(5) Other items include (i) exit costs of$10.2 million associated with certain of our leased facilities during the year endedDecember 31, 2021 , (ii) costs of$5.0 million related to the preparation of the Company's initial public offering during 2021, (iii)$12.1 million of legal settlement costs in the year endedDecember 31, 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 "Item 8. Financial Statements and Supplementary Data - Note 15 - Legal Proceedings"), and (iv)$2.5 million of severance costs incurred in connection with reducing our employee headcount to right-size our business in response to COVID-19 during the year endedDecember 31, 2020 .
(6) 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 tables below and described in the following text:
Year Ended December 31, 2021 2020 2019 (in thousands, except percent)
Net revenue retention 136.3 % 83.4 % 97.4 %
New business revenue
Net Revenue Retention
We generally have long standing relationships with our customers as evidenced by the nine-year average tenure of our enterprise customers. The revenue from these customers is highly reoccurring in nature. In addition, our ability to cross sell and expand our services with our existing customers is an important component 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 78% of our total revenue. It is calculated as the total revenue derived in the current fiscal period from our top 1,250 customers, as defined by the revenue composition of the period immediately preceding the presented fiscal year, divided by the total revenue derived in the prior fiscal period from the same 1,250 customers. 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 increased in the year endedDecember 31, 2021 as general client ordering patterns showed a significant volume and product mix improvement over the COVID impacted prior year.
New Business Revenue
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 67 -------------------------------------------------------------------------------- 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 year endedDecember 31, 2021 due to volume and product mix improvement over the COVID impacted prior year.
Liquidity and Capital Resources
General
In connection with the IPO, 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 . See "- Business Overview - Use of Proceeds" for information on the use of proceeds received in connection with the IPO. 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 have 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 (the "TRA") we entered into in connection with the IPO, we will be required to pay certain pre-IPO equityholders 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, which amounts to an estimated total liability of approximately$210.6 million . Based on our current taxable income estimates, we expect to repay the majority of this obligation by the end of 2030. These payments will result in cash payment of amounts we would otherwise have retained in the form of tax savings from the application of the NOLs. See "Item 8. Financial Statements and Supplementary Data - Note 17 - Income Taxes" for additional information on the TRA.
Unrestricted cash and cash equivalents as of
Restricted cash of$5.2 million as ofDecember 31, 2021 consists of$1.1 million held in escrow for the benefit of former investors in a subsidiary of the Company pursuant to the terms of its divestiture of a former affiliate inApril 2018 ,$0.2 million related to international operations, and the remainder is related to prior restructurings from predecessor entities. The Company did not have an outstanding balance under the Revolving Credit Facility and$98.2 million of availability remained as ofDecember 31, 2021 . During the year endedDecember 31, 2020 , the Company proactively drew down$50.0 million under its Revolving Credit Facility as a precaution due to the uncertain impact of the COVID-19 pandemic. We repaid this borrowing in full during 2020. As ofDecember 31, 2021 , the Company had purchase obligations of approximately$21.7 million with various parties, of which approximately$21.1 million is expected to be paid within one year. These purchase commitments are associated with agreements that are enforceable and legally binding. They are primarily commitments to purchase data and other screening services in the ordinary course of business with varying expiration terms through 2023. In addition to our regular investment in capital expenditures, we plan to invest approximately$45 to$50 million in a capital expenditure program through the end of fiscal year 2024 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 Revolving Credit Facility, will be sufficient to meet operating requirements as well as the obligations under the TRA, as discussed above, through the next twelve months. Although we believe we have adequate sources of liquidity over the long term, cash available from 68 -------------------------------------------------------------------------------- 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 The Company currently has two 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 any credit party. The First Lien Credit Agreement includes a financial maintenance covenant for the benefit of the revolving lenders thereunder, which requires us to maintain a maximum 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 in compliance with the covenants under the First Lien Term Credit Agreement for the three and twelve months endedDecember 31, 2021 . Accordingly, the amount payable under the credit agreement is classified as long-term debt in the accompanying consolidated balance sheet.
At
•a first lien senior secured term loan facility, in an aggregate original principal amount of$835.0 million , bearing interest payable monthly at aLondon Interbank Offered Rate ("LIBOR") variable rate (0.10% atDecember 31, 2021 ) + 3.75%, dueJuly 12, 2025 (the "First Lien Term Loan Facility"). As ofDecember 31, 2021 , the outstanding balance on the First Lien Term Loan Facility was$707.9 million , before adjustments for unamortized discount and debt issuance costs. •a first lien senior secured revolving credit facility, in an aggregate original principal amount of up to$100.0 million , including a$40.0 million letter of credit sub-facility, bearing interest monthly at a LIBOR variable rate (0.10% atDecember 31, 2021 ) + 3.5% and maturing onJuly 12, 2023 (the "Revolving Credit Facility"). As ofDecember 31, 2021 , the Company had approximately$98.2 million in available borrowing capacity under the Revolving Credit Facility, after utilizing approximately$1.8 million for letters of credit. InNovember 2021 , the Company used$215.0 million of the proceeds from the IPO to repay, in full, its former Second Lien Term Loan Facility, which bore interest payable monthly at a LIBOR variable rate + 7.25% and was dueJuly 12, 2026 . Additionally, the Company used approximately$100.0 million of proceeds of the IPO to repay, in part, the First Lien Term Loan Facility.
Cash Flow Analysis
Comparison of Cash Flows for the year endedDecember 31, 2021 versus the year endedDecember 31, 2020 and the year endedDecember 31, 2020 versus the year endedDecember 31, 2019
The following table summarizes our consolidated cash flows for the years ended
Year Ended December 31, 2021 2020 2019 (in thousands)
Net cash provided by operating activities
(14,037) (12,206) (21,720) Net cash provided by (used in) financing activities 59,987 (984) (16,881) Net increase (decrease) in cash, cash equivalents and restricted cash$ 93,424 $ 3,236 $ (16,571) 69
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Operating Activities
Cash provided by operating activities reflects net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities. Cash provided by operating activities was$47.5 million for the year endedDecember 31, 2021 compared to cash provided of$16.4 million for the year endedDecember 31, 2020 . The increase was due primarily to a lower net loss partly offset by a higher use of cash from working capital compared to the prior period.
Cash provided by operating activities was
Investing Activities
Cash used in investing activities was approximately$14.0 million during the year endedDecember 31, 2021 , compared to approximately$12.2 million during the year endedDecember 31, 2020 . The increase was due primarily to slight increases in purchases of property and equipment and capitalized software development costs compared to the prior period. Cash used in investing activities was approximately$12.2 million during the year endedDecember 31, 2020 , compared to approximately$21.7 million during the year endedDecember 31, 2019 . The decrease was due primarily to lack of acquisition activity in 2020. We paid approximately$7.3 million related to two acquisitions during the year endedDecember 31, 2019 compared to$0.1 million during the year endedDecember 31, 2020 . Also contributing to the decrease were decreases of$1.0 million and$1.3 million related to capital expenditures and capitalized software, respectively.
Financing Activities
Cash provided by financing activities was approximately$60.0 million for the year endedDecember 31, 2021 compared to cash used in financing activities of approximately$1.0 million during the year endedDecember 31, 2020 . The increase is due to the$393.5 million net proceeds from our IPO, partially offset by net repayments on our debt facilities of$333.4 million in the year endedDecember 31, 2021 compared to net borrowings of$1.7 million in the year endedDecember 31, 2020 . Cash used in financing activities was approximately$1.0 million for the year endedDecember 31, 2020 compared to cash used of approximately$16.9 million during the year endedDecember 31, 2019 . We received net proceeds from our debt facilities of$1.7 million in 2020 compared to repayments of$13.4 million in 2019. Payment of additional liabilities related to our acquisition activity amounted to$1.2 million during the year endedDecember 31, 2020 , compared to$3.0 million during the year endedDecember 31, 2019 .
Financing and Financing Capacity
Total principal outstanding on our debt was
Interest Rate Swaps
During the year endedDecember 31, 2018 , the Company entered into interest rate swap agreements with an original aggregate notional amount of$700.0 million with an effective date ofDecember 31, 2018 . These interest rate swap agreements fix the variable interest rate on a portion of the debt facility. These agreements were not designated as a cash flow hedge and, accordingly, were reflected at their fair value in the consolidated balance sheet with both realized and unrealized gains and losses reflected in the consolidated statements of operations. The interest rate swap agreements expire onDecember 31, 2023 . OnSeptember 26, 2019 , the Company modified the terms of the three existing swap agreements (the "Swap Agreements") with the then existing counterparties amending the terms of the original agreements to change the LIBOR reference period to one month and additionally elect hedge 70 -------------------------------------------------------------------------------- accounting treatment. The maturities of the interest rate swap agreements remain atDecember 31, 2023 . The fair value of the swap liability is recorded in other current liabilities and other non-current liabilities to reflect its short-term portions of$16.7 million and$18.3 million atDecember 31, 2021 andDecember 31, 2020 , respectively, and long-term portions of$11.4 million and$35.3 million atDecember 31, 2021 andDecember 31, 2020 , respectively. During the years endedDecember 31, 2021 and 2020, the Swap Agreements had no hedge ineffectiveness. To ensure the effectiveness of the Swap Agreements, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the Swap Agreements as of each reset date. The reset dates and other critical terms on the term loans perfectly match with the interest rate swap reset dates and other critical terms during the years endedDecember 31, 2021 and 2020. At bothDecember 31, 2021 and 2020, the effective portion of the Swap Agreements was included on the balance sheet in accumulated other comprehensive loss.
On
JOBS Act
We qualify as an "emerging growth company" pursuant to the provisions of the JOBS Act. For as long as we are an "emerging growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory "say-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation. In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We intend to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. As described under "Item 8. Financial Statements and Supplementary Data - Note 2 - Recently Issued Accounting Pronouncements" sections "Recently Issued Accounting Pronouncements Adopted" and "Recently Issued Accounting Pronouncements Not Yet Adopted," we early adopted certain accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies. We expect to use the extended transition period for other new or revised accounting standards during the period in which we remain an emerging growth company.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations, outside of discussions regarding non-GAAP financial measures, is based on the consolidated financial statements, which have been prepared in accordance with GAAP.
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
The Company uses such estimates, judgments and assumptions when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, customer rebates, impairment assessments and charges,
71 -------------------------------------------------------------------------------- recoverability of long-lived assets, deferred tax assets, uncertain tax positions, income tax expense, liabilities under the TRA, derivative instruments, fair value of debt, equity-based compensation expense, useful lives assigned to long-lived assets, and the stand alone selling price of each distinct performance obligation for revenue recognition purposes. Results and outcomes could differ materially from these estimates, judgments and assumptions due to risks and uncertainties. We evaluate our assumptions and estimates on an on-going basis. An accounting policy is considered to be critical if it is important to our results of operations, financial condition, and cash flows, and requires significant judgment and estimates on the part of management in its application. Our estimates are often based on historical experience, complex judgments, assessments of probability, and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. We believe that the following discussion represents those accounting policies that are the most critical to the reporting of our financial condition and results of operations. For a discussion of our significant accounting policies, see "Item 8. Financial Statements and Supplementary Data - Note 1 - Organization, Basis of Presentation and Consolidation, and Significant Accounting Policies."
Accounts Receivable and Allowance for Doubtful Accounts
We make ongoing estimates related to the collectability of our accounts receivable. We maintain an allowance for estimated losses resulting from our assessment of uncollectible accounts and record accounts receivable at net realizable value. Our estimates are based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting our customer base, significant non-recurring events, and historical write-off experience. In addition, specific provisions are recorded for individual receivables when we determine a customer will not meet its financial obligations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates and we may experience changes in the amount of reserves we recognize for accounts receivable that we deem uncollectible. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine that a smaller or larger reserve is appropriate, we would record a credit or a charge, respectively, to selling, general and administrative expenses in our consolidated statements of operations in the period in which we made such a determination.
See "Item 8. Financial Statements and Supplementary Data - Note 16 - Revenues" for an analysis of the activity in our reserve for uncollectible accounts receivable.
Valuation of Long-lived Assets including
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, estimated replacement costs and future expected cash flows from acquired users, acquired technology, acquired patents, and trade names from a market participant perspective, useful lives, and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas goodwill is not amortized. We review goodwill for impairment at least annually or more frequently if events or changes in circumstances would more likely than not reduce the fair value of our single reporting unit below its carrying value. During the years endedDecember 31, 2021 , 2020, and 2019 no impairment of goodwill was recorded. The Company has one reporting unit and it is not currently at risk of failing the qualitative impairment test. Long-lived assets, including property and equipment and intangible assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The 72 -------------------------------------------------------------------------------- evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. No impairments of intangibles were recorded for the years endedDecember 31, 2021 , 2020, and 2019. The useful lives of our long-lived assets including property and equipment and finite-lived intangible assets are determined by management when those assets are initially recognized and are routinely reviewed for the remaining estimated useful lives. The current estimate of useful lives represents our best estimate based on current facts and circumstances but may differ from the actual useful lives due to changes in future circumstances such as changes to our business operations, changes in the planned use of assets, and technological advancements. When we change the estimated useful life assumption for any such asset, the remaining carrying amount of the asset is accounted for prospectively and depreciated or amortized over the remaining estimated useful life. Historically changes in useful lives have not resulted in material changes to our depreciation and amortization expense.
Fair Value Measurements of Our Debt
Our outstanding debt instruments are recorded at their carrying values in the consolidated balance sheets, which may differ from their respective fair values. For disclosure purposes, the fair values of our First Lien Term Loan Facilities and our Second Lien Term Loan Facilities are calculated based on quoted prices for similar instruments in active markets or identical instruments in markets that are not actively traded (Level 2 fair value inputs). The fair value of the Revolving Credit Facility approximates carrying value, based upon the short-term duration of the interest rate periods currently available to us. Judgment is required to evaluate the fair value of our debt.
Derivatives and Hedging Activities
We hold derivative instruments in the form of interest rate swaps as part of our overall strategy to manage the level of exposure to the risk of fluctuations in interest rates. These interest rate swap agreements fix the variable interest rate on a portion of our debt. OnSeptember 26, 2019 , we modified the terms of the 2019 Interest Rate Swap Agreement to change the LIBOR reference period to one month to ensure the effectiveness of the 2019 Interest Rate Swap Agreement. We elected hedge accounting treatment at that time. See "-Interest Rate Swaps" above for additional discussion of the interest rate swaps. We recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive (loss) income and reclassified into interest expense in the same period or periods during which the hedged debt affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings. Judgment is required to evaluate the fair value of derivative instruments and assess their effectiveness. No hedge ineffectiveness was recorded in the years endedDecember 31, 2021 and 2020.
The results of derivative activities are recorded in cash flows from operating activities on the consolidated statements of cash flows.
Loss Contingencies
We are involved in legal proceedings, claims, and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business. Additionally, we are required to comply with various legal and regulatory obligations around the world. The requirements for complying with these obligations may be uncertain and subject to interpretation and enforcement by regulatory and other authorities, and any failure to comply with such obligations could eventually lead to asserted legal or regulatory action. We evaluate these asserted and unasserted matters on a regular basis and accrue a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine there is a reasonable possibility that we may 73
-------------------------------------------------------------------------------- incur a loss and the loss or range of loss can be estimated, we disclose the possible loss in the accompanying notes to the consolidated financial statements to the extent material. We review the developments in our contingencies that could affect the amount of the provisions that have been previously recorded, and the matters and related reasonably possible losses disclosed. We make adjustments to our provisions and changes to our disclosures accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Significant judgment is required to determine the probability of loss and the estimated amount of loss, including when and if the probability and estimate has changed for asserted and unasserted matters. The ultimate outcome of these matters, such as whether the likelihood of loss is remote, reasonably possible, or probable or if and when the reasonably possible range of loss is estimable, is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management's estimates of losses, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected. See "Item 8. Financial Statements and Supplementary Data - Note 14 - Commitments and Contingent Liabilities, Note 15 - Legal Proceedings and Note 17 - Income Taxes" for additional information regarding these contingencies.
Revenue Recognition
In accordance with Accounting Standards Codification 606, "Revenue from Contracts with Customers," we recognize revenue when a performance obligation has been fulfilled and the customer receives and consumes the benefits of the services delivered. The Company's revenues are primarily derived from contracts to provide services. In order to recognize revenue, we note that the Company must identify the performance obligations, determine the transaction price, and allocate the contract considerations to the performance obligation utilizing the standalone selling price ("SSP") of each performance obligation. Our revenue is derived by delivering services to our customer, as the customer simultaneously receives and consumes the benefits of the services delivered.
If at the outset of an arrangement, we determine that collectibility is not reasonably assured, revenue is deferred until the earlier of when collectibility becomes probable or the receipt of payment from the customer.
Each performance obligation within a contract must be considered separately to ensure that appropriate accounting is applied for the services provided to our customers. These considerations include assessing the price at which the service is sold compared to its SSP, concluding when the service will be delivered, and evaluating collectability. Generally, customers contract with us to provide services that are highly interrelated and not separately identifiable. Therefore, the customers' entire order is accounted for as one performance obligation. Certain costs incurred prior to the satisfaction of a performance obligation are capitalized as contract implementation costs and are amortized on a systematic basis consistent with the pattern of transfer of the related services. These costs generally consist of labor costs directly relating to the implementation and setup of the contract.
See "Item 8. Financial Statements and Supplementary Data - Note 16 - Revenues" for further information on revenue.
Income Taxes
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. We provide for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The impact of an uncertain tax position that is more likely than not to be sustained upon examination by the relevant taxing authority must be recognized at the largest amount that is more likely than not to 74
-------------------------------------------------------------------------------- be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest expense is recognized on the full amount of deferred benefits for uncertain tax positions. While the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. We recognize interest and penalties related to unrecognized tax benefits within Income tax expense in the consolidated statements of operations. We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income or benefit in prior carryback years (if permitted) and the availability of tax planning strategies. A valuation allowance is required unless management determines that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset. We determine the amount of undistributed earnings that will be indefinitely reinvested in our non-U.S. operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of ourU.S. and foreign subsidiaries. Foreign withholding taxes have not been provided on cumulative undistributed foreign earnings of the non-U.S. subsidiaries as ofDecember 31, 2021 and 2020, which are considered to be indefinitely reinvested outside of theU.S.
See "Item 8. Financial Statements and Supplementary Data - Note 17 - Income Taxes" for further information related to income taxes.
Recent Accounting Pronouncements
See "Item 8. Financial Statements and Supplementary Data - Note 2 - Recently Issued Accounting Pronouncements" for further information on recently adopted accounting pronouncements and those not yet adopted.
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