HIRERIGHT HOLDINGS CORPORATION You should read the following discussion of the financial condition and results of operations together with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements as disclosed in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission ("SEC") onMarch 21, 2022 ("Annual Report"). 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 under "Cautionary Note Regarding Forward-Looking Statements."
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. You can often identify forward-looking statements by the fact that they do not relate strictly to historical or current facts, 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 net income, earnings per share, adjusted diluted earnings per share, and cash flow; strategic objectives; 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. Forward-looking statements are not guarantees. They reflect our current expectations 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. Factors that could affect the outcome of the forward-looking statements include, among other things, the impacts, direct and indirect, of the COVID19 pandemic on our business, our personnel and vendors, and the overall economy; our ability to maintain our professional reputation and brand name; our vulnerability to adverse economic conditions, including without limitation inflation and recession, which could increase our costs and suppress labor market activity; the aggressive competition we face; our heavy reliance on information management systems, vendors, and information sources that may not 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 alleged discriminatory impacts and adverse social consequences, and other evolving regulations and cross-border data transfer restrictions may limit the use of our services and adversely affect our business; social, political, regulatory and legal risks in markets where we operate; the impact of foreign currency exchange rate fluctuations; unfavorable tax law changes and tax authority rulings; any impairment of our goodwill, other intangible assets and other long-lived assets; our ability to execute and integrate future acquisitions; our ability to access additional credit or other sources of financing; and the increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted cyber-related attacks that could pose a risk to our systems, networks, solutions, services and data. For more information on the business risks we face and factors that could affect the outcome of forward-looking statements, refer to our Annual Report on Form 10-K filed with theSEC onMarch 21, 2022 , in particular the sections of that document entitled "Risk Factors," "Forward-Looking Statements," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and 26 -------------------------------------------------------------------------------- other filings we make from time to time with theSEC . We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 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 theSEC 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 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 .
Factors Affecting Our Results of Operations
Economic Conditions
Our business is impacted by the overall economic environment and total
employment and hiring. The rapidly changing dynamics of the global workforce are
creating increased complexity and regulatory scrutiny for employers, bolstering
the importance of the solutions we deliver. We have recently 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.
Multiple shifts in social norms and labor force dynamics are currently underway,
including increasingly mobile and globalized workforces and growing demand for
remote working arrangements. The growth of the gig economy has been a major
force driving increasing contributions from temporary, flexible and on-demand
labor. Pandemic dynamics and remote work technology have enabled an expansion of
job opportunities for workers and a broader candidate pool for employers.
Employment dynamics in the remote work and gig economy result in high rates of
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--------------------------------------------------------------------------------workforce churn and a distinctive, loosely associated labor force which generates new and increased demands for background screening and compliance services.
Background screening is also gaining broader adoption outside the
Despite the revenue growth we have experienced during the first half of 2022, less favorable economic conditions, such as an actual or anticipated recession and its effects on labor markets, could prevent this growth trend from continuing in the second half of the year. Additionally, in response to high inflation rates, theFederal Reserve has begun raising interest rates and has indicated that it foresees further interest rate increases throughout the year and into next year. Higher interest rates imposed by theFederal Reserve to address inflation will increase our interest expense. The Company has benefited from its tax assets which reduce income tax expense. The Company is reviewing the valuation allowance of its deferred tax assets due to continued improvement in financial performance. A reduction in the valuation allowance would result in a material decrease to income tax expense in the period the release is recorded. Although the exact timing and reversal amount are unknown at this time, the Company may conclude that a significant portion of the valuation allowance be released contingent upon the earning level it achieves in 2022 as well as its projected income in future periods.
2022 Developments
OnJune 3, 2022 , the Company entered into an amendment to its First Lien Term Loan Facility, as defined below under "Liquidity and Capital Resources", ("Amended First Lien Term Loan Facility") with the lenders party thereto andBank of America, N.A . as administrative agent. The Amended First Lien Term Loan Facility amended the Company's revolving credit facility ("Amended Revolving Credit Facility") to increase the aggregate commitments under the facility from$100.0 million to$145.0 million and extend the maturity date fromJuly 12, 2023 to the earlier ofJune 3, 2027 or 91 days prior to the maturity of the First Lien Term Loan Facility. The interest rate benchmark applicable to the Amended Revolving Credit Facility was converted from the London Interbank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR"). EffectiveFebruary 18, 2022 , the Company terminated the Interest Rate Swap Agreements, as defined below, prior to their stated termination dates. In connection with the termination of the Interest Rate Swap Agreements, the Company made a payment of$18.4 million to the swap counterparties. Following these terminations,$21.5 million of unrealized gains related to the terminated Interest Rate Swap Agreements included in accumulated other comprehensive income on the condensed consolidated balance sheet will be reclassified to earnings as reductions to interest expense throughDecember 31, 2023 . See "Liquidity and Capital Resources - Interest Rate Swaps" below for additional information.
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 29% of revenues for both the three and six months endedJune 30, 2022 and 28% of revenues for both the three and six months endedJune 30, 2021 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, financial services, business and consumer services, manufacturing, education, retail and not-for-profit. None of the Company's customers individually accounted for greater than 3% and 4% of 28 -------------------------------------------------------------------------------- revenue during the three and six months endedJune 30, 2022 and 2021, respectively. Technology, healthcare, and financial services customers represent the largest contributors to revenue. Revenues for the three and six months endedJune 30, 2022 , from these customers increased 30% and 34%, respectively, over the prior year periods. Expenses Cost of services (excluding depreciation and amortization) consists 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, principally resulting from the acquisition of GIS in 2018. Other expenses consist of interest expense relating to our credit facilities and interest rate swap agreements, gains and losses on asset disposal, and foreign exchange gains and losses. The majority of our receivables and payables are denominated inU.S. dollars, but we also earn revenue, pay expenses, own assets and incur liabilities in countries using currencies other than theU.S. dollar, including the Euro, the British pound, the Polish zloty, the Australian dollar, the Canadian dollar, theSingapore dollar, the Mexican peso, Japanese yen, and the Indian rupee, among others. 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,
Results of Operations
Comparison of Results of Operations for the three and six months ended
The following tables present operating results for the three and six months
ended
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Three Months Ended June 30,
2022 2021
(in thousands, except percent of revenues)
Revenues $ 222,292 100.0 % $ 176,984 100.0 %
Expenses
Cost of services (exclusive of depreciation and amortization below) 119,990 54.0 % 98,317 55.6 % Selling, general and administrative 54,387 24.5 % 43,215 24.4 % Depreciation and amortization 18,049 8.1 % 18,239 10.3 % Total expenses 192,426 86.6 % 159,771 90.3 % Operating income 29,866 13.4 % 17,213 9.7 % Other expenses Interest expense 4,957 2.2 % 18,207 10.3 % Other expense, net 33 - % 912 0.5 % Total other expenses, net 4,990 2.2 % 19,119 10.8 % Income (loss) before income taxes 24,876 11.2 % (1,906) (1.1) % Income tax expense 430 0.2 % 1,733 1.0 % Net income (loss)$ 24,446 11.0 %$ (3,639) (2.1) % Six Months Ended June 30, 2022 2021 (in thousands, except percent of revenues) Revenues$ 421,003 100.0 %$ 326,541 100.0 %
Expenses
Cost of services (exclusive of depreciation and amortization below) 232,393 55.2 % 184,504 56.5 % Selling, general and administrative 102,654 24.4 % 82,609 25.3 % Depreciation and amortization 36,110 8.6 % 36,482 11.2 % Total expenses 371,157 88.2 % 303,595 93.0 % Operating income 49,846 11.8 % 22,946 7.0 % Other expenses Interest expense 12,514 3.0 % 36,156 11.1 % Other expense, net 74 - % 103 - % Total other expenses, net 12,588 3.0 % 36,259 11.1 % Income (loss) before income taxes 37,258 8.8 % (13,313) (4.1) % Income tax expense 1,248 0.3 % 2,305 0.7 % Net income (loss)$ 36,010 8.6 %$ (15,618) (4.8) % Revenues Revenues for the three months endedJune 30, 2022 increased to$222.3 million , an increase of$45.3 million , or 25.6%, from the prior-year period, primarily driven by higher order volume and higher average order values 30 -------------------------------------------------------------------------------- associated with existing customers and sales to new customers.. Revenues from international andUnited States regions increased by$3.5 million , or 25.8%, and by$41.8 million , or 25.6%, respectively, during the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 . For the same reasons noted above, revenues for the six months endedJune 30, 2022 increased to$421.0 million , an increase of$94.5 million , or 28.9%, from prior-year period. Revenues from international andUnited States regions increased by$8.1 million , or 33.6%, and by$86.3 million , or 28.6%, respectively, during the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 .
Cost of Services (exclusive of depreciation and amortization)
Cost of services for the three months endedJune 30, 2022 increased to$120.0 million , an increase of$21.7 million , or 22.0%, from the prior-year period, primarily due to higher volumes and increased incentive compensation and fringe benefit programs to keep up with market conditions. Cost of services as a percent of revenues decreased to 54.0% for the three months endedJune 30, 2022 , compared to 55.6% for the three months endedJune 30, 2021 , primarily driven by lower average labor costs per background screen as a result of process improvements associated with our ongoing technology initiatives as well as an increase in the use of offshore labor. For the same reasons noted above, cost of services for the six months endedJune 30, 2022 increased to$232.4 million , an increase of$47.9 million , or 26.0%, from the prior-year period, and cost of services as a percent of revenues decreased to 55.2% for the six months endedJune 30, 2022 , compared to 56.5% for the six months endedJune 30, 2021 .
Selling, General and Administrative
Selling, general and administrative expenses ("SG&A") for the three months ended
June 30, 2022 increased $11.2 million to $54.4 million primarily due to
increases in personnel costs of $8.9 million . Of the $8.9 million increase in
personnel costs, $3.6 million was related to stock-based compensation and $2.9
million was related to increased incentive compensation and fringe benefit
programs. SG&A as a percent of revenues for the three months ended June 30, 2022
increased slightly to 24.5% from 24.4% for the three months ended June 30, 2021 .
SG&A expenses for the six months ended June 30, 2022 increased $20.0 million to
$102.7 million primarily due to increases in personnel costs of $15.7 million ,
and the addition of public company costs of $3.1 million . Of the $15.7 million
increase in personnel costs, $5.4 million was related to stock-based
compensation and $5.1 million was related to increased incentive compensation
and fringe benefit programs. SG&A as a percent of revenues for the six months
ended June 30, 2022 declined to 24.4% from 25.3% for the six months ended June
30, 2021 .
The increases in personnel costs in both periods were attributable to responses
to increases in market compensation rates, the increased use of stock-based
compensation following our initial public offering in November 2021 , and
staffing to support growth. Our initial public offering also drove the addition
of public company costs including incremental audit, accounting and legal fees
as well premiums for increased insurance coverage, which were not present in the
2021 periods but which will continue. The increases in SG&A expenses were
partially offset in each period by decreases in various other costs, including a
reduction of facility expenses resulting from exiting unused office space during
2021.
Interest Expense
Interest expense decreased by $13.3 million to $5.0 million for the three months
ended June 30, 2022 , and by $23.6 million to $12.5 million for the six months
ended June 30, 2022 . The decreases in both periods were primarily due to a
reduction in outstanding indebtedness under our credit facilities as a result of
voluntary principal prepayments using IPO proceeds during the fourth quarter of
2021, and scheduled principal repayments. Interest expense for the three and six
months ended June 30, 2021 includes $4.1 million and $8.2 million , respectively,
related to a second lien senior secured term loan facility which was repaid on
November 3, 2021 . Additionally, reclassifications from accumulated other
comprehensive income on the condensed consolidated balance sheet of
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unrealized gains related to the terminated Interest Rate Swap Agreements,
reduced interest expense by $4.1 million and $6.3 million during the three and
six months ended June 30, 2022 , respectively. The decreases for both the three
and six months ended June 30, 2022 were partially offset by increased interest
expense of $1.2 million associated with rising interest rates during those
periods.
Income Tax Expense
The effective tax rate for the three months endedJune 30, 2022 , was 1.7% compared to 90.9% for the three months endedJune 30, 2021 . The effective tax rate for the six months endedJune 30, 2022 , was 3.3% compared to 17.3% for the six months endedJune 30, 2021 . The effective tax rate for the three and six month periods endedJune 30, 2022 , compared to the prior year periods, changed primarily due to the revaluation of deferred taxes in theUnited Kingdom in 2021. The effective tax rate for the three and six months endedJune 30, 2022 , differs from the Federal statutory rate of 21% primarily due to valuation allowances, state taxes, andU.S. tax on foreign operations. The effective tax rate for the three months endedJune 30, 2021 , differs from the Federal statutory rate of 21% primarily due to valuation allowances, state taxes, andU.S. tax on foreign operations. The effective tax rate for the six months endedJune 30, 2021 , differs from the Federal statutory rate of 21% primarily due to the revaluation of deferred taxes in theUnited Kingdom .
Non-GAAP Financial Measures
We believe that the presentation of our non-GAAP financial measures 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 interest expense, income taxes, depreciation and amortization expense, stock-based compensation, realized and unrealized gain (loss) on foreign exchange, merger integration expenses, amortization of cloud computing software costs, 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
•Viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
The following table reconciles our non-GAAP financial measure of Adjusted EBITDA
to net income (loss), our most directly comparable financial measures calculated
and presented in accordance with GAAP, for the periods presented.
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Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands)
Net income (loss) $ 24,446 $ (3,639) $ 36,010 $ (15,618)
Income tax expense 430 1,733 1,248 2,305
Interest expense 4,957 18,207 12,514 36,156
Depreciation and amortization 18,049 18,239 36,110 36,482
EBITDA 47,882 34,540 85,882 59,325
Stock-based compensation 4,511 829 7,305 1,652
Realized and unrealized loss on foreign exchange 64 910 (15) 101
Merger integration expenses (1) - 169 205 981
Amortization of cloud computing software costs
(2) 315 - 466 -
Other items (3) 903 1,978 1,558 3,224
Adjusted EBITDA $ 53,675 $ 38,426 $ 95,401 $ 65,283 (1)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
(2)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. This expense is not included in depreciation and amortization above. (3)Other items include (i) costs of$0.4 million and$1.3 million associated with the implementation of a company-wide enterprise resource planning ("ERP") system during the three and six months endedJune 30, 2022 , respectively, (ii)$0.6 million of severance costs during the three and six months endedJune 30, 2022 , and (iii)$0.3 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities during the six months endedJune 30, 2022 , partially offset by a reduction in previously accrued legal settlement expense of$0.6 million during the six months endedJune 30, 2022 due to a more favorable outcome than originally anticipated in a claim outside the ordinary course of business. Other items for the three and six months endedJune 30, 2021 are related to the preparation of the Company's initial public offering during 2021.
Adjusted Net Income and Adjusted Diluted Earnings Per Share
In addition to Adjusted EBITDA, management believes that Adjusted Net Income 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 as net income (loss) adjusted
for amortization of acquired intangible assets, stock-based compensation,
realized and unrealized gain (loss) on foreign exchange, merger integration
expenses, amortization of cloud computing software costs, 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, to which we apply an adjusted effective 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
adjusted 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.
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The following table reconciles our non-GAAP financial measure of Adjusted Net
Income to net income (loss), our most directly comparable financial measure
calculated and presented in accordance with GAAP, for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(in thousands)
Net income (loss) $ 24,446 $ (3,639) $ 36,010 $ (15,618)
Income tax expense 430 1,733 1,248 2,305
Income (loss) before income taxes 24,876 (1,906) 37,258 (13,313)
Amortization of acquired intangible assets 15,477 15,645 30,982 31,292
Interest expense swap adjustments (1) (4,082) - (6,263) -
Interest expense discounts (2) 938 1,047 1,759 2,082
Stock-based compensation 4,511 829 7,305 1,652
Realized and unrealized loss on foreign
exchange 64 910 (15) 101
Merger integration expenses (3) - 169 205 981
Amortization of cloud computing software
costs (4) 315 - 466 -
Other items (5) 903 1,978 1,558 3,224
Adjusted income before income taxes 43,002 18,672 73,255 26,019
Adjusted income taxes (6) (174) 1,569 265 1,870
Adjusted Net Income $ 43,176 $ 17,103 $ 72,990 $ 24,149 The following table sets forth the calculation of Adjusted Diluted Earnings Per Share for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Diluted net income (loss) per share $ 0.31 $
(0.06)
0.01 0.03 0.02 0.04
Amortization of acquired intangible assets 0.19 0.28 0.39 0.55
Interest expense swap adjustments (1) (0.05) - (0.08) -
Interest expense discounts (2) 0.01 0.02 0.02 0.03
Stock-based compensation 0.06 0.01 0.09 0.03
Realized and unrealized loss on foreign
exchange - 0.02 - -
Merger integration expenses (3) - - - 0.02
Amortization of cloud computing software
costs (4) - - 0.01 -
Other items (5) 0.01 0.03 0.02 0.05
Adjusted income taxes (6) - (0.03) - (0.03)
Adjusted Diluted Earnings Per Share $ 0.54 $
0.30
Weighted average number of shares outstanding - diluted 79,478,094 57,168,291 79,443,173 57,168,291
(1)Interest expense swap adjustments consist of amortization of unrealized gains
on the terminated Interest Rate Swap Agreements, which will be recognized
through
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--------------------------------------------------------------------------------(2)Interest expense discounts consist of amortization of original issue discount and debt issuance costs.
(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)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. This expense is not included in depreciation and amortization above. (5)Other items include (i) costs of$0.4 million and$1.3 million associated with the implementation of a company-wide ERP system during the three and six months endedJune 30, 2022 , respectively, (ii)$0.6 million of severance costs during the three and six months endedJune 30, 2022 , and (iii)$0.3 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities during the six months endedJune 30, 2022 , partially offset by a reduction in previously accrued legal settlement expense of$0.6 million during the six months endedJune 30, 2022 due to a more favorable outcome than originally anticipated in a claim outside the ordinary course of business. Other items for the three and six months endedJune 30, 2021 are related to the preparation of the Company's initial public offering during 2021.
(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 for the periods presented.
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 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 ("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 and other
tax attributes, for which the Company recognized an estimated total liability of
$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 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 cash and cash equivalents as of June 30, 2022 was $118.4 million .
As of June 30, 2022 , cash held in foreign jurisdictions was approximately $15.9
million and is primarily related to international operations.
Restricted cash as of June 30, 2022 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 in April 2018 .
Debt
The Company currently has two long-term debt arrangements as described below. Total principal outstanding on our debt was$703.7 million as ofJune 30, 2022 and$707.9 million as ofDecember 31, 2021 . 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 Amended First Lien Term Loan Facility 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 35 -------------------------------------------------------------------------------- (excluding for this purpose up to$15.0 million of undrawn letters of credit). The Company was in compliance with the covenants under the Amended First Lien Facilities for the three and six months endedJune 30, 2022 .
At
•The Amended First Lien Term Loan Facility, a first lien senior secured term loan facility, bearing interest payable monthly at a LIBOR variable rate (1.67% atJune 30, 2022 ) + 3.75%, maturing onJuly 12, 2025 . •The Amended Revolver Credit Facility, a first lien senior secured revolving credit facility in an aggregate principal amount of up to$145.0 million , including a$40.0 million letter of credit sub-facility, bearing interest monthly at a SOFR variable rate (1.67% atJune 30, 2022 ) + 2.5% (subject to adjustment pursuant to a leverage-based pricing grid) and maturing onJune 3, 2027 or, if earlier, 91 days prior to the maturity of the Company's term loans under the Amended First Lien Term Loan Facility. As ofJune 30, 2022 , the Amended Revolving Credit Facility accrued interest at one-month SOFR plus 2.50% based on the current leverage-based pricing grid. The Company had$143.7 million in available borrowing capacity under the Amended Revolving Credit Facility, after utilizing$1.3 million for letters of credit as ofJune 30, 2022 . As ofJune 30, 2022 , the Company had purchase obligations of approximately$44.8 million with various parties, of which approximately$38.5 million is expected to be paid within one year. Our obligations as ofJune 30, 2022 , have increased from$21.7 million as ofDecember 31, 2021 , due to the extension of a service agreement with one of the Company's current vendors. 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 capital expenditures, we plan to invest approximately$45 to$50 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 Amended Revolving Credit Facility, will be sufficient to meet operating requirements as well as the obligations under the TRA 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. 36 --------------------------------------------------------------------------------
Cash Flow Analysis
Comparison of Cash Flows for the six months ended
The following table sets forth a summary of our condensed consolidated cash
flows for the six months ended
Six Months Ended June 30,
2022 2021
(in thousands)
Net cash provided by (used in) operating activities $ 35,866 $ (347)
Net cash used in investing activities (8,180) (6,758)
Net cash used in financing activities (22,962) (4,175)
Net increase (decrease) in cash, cash equivalents and restricted
cash $ 4,724 $ (11,280)
Operating Activities
Cash provided by (used in) 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 $35.9 million for the six
months ended June 30, 2022 compared to cash used in operating activities of $0.3
million for the six months ended June 30, 2021 . The increase in cash provided by
operating activities was due primarily to net income for the current period
compared to a net loss for the prior year period, partly offset by higher use of
cash for working capital as well as our expenditures related to our cloud
computing platform modernization and automation efforts.
Investing Activities
Cash used in investing activities was approximately$8.2 million during the six months endedJune 30, 2022 , compared to approximately$6.8 million during the six months endedJune 30, 2021 . The increase was due primarily to increases in capitalized software development costs compared to the prior period, partly offset by a decrease of purchases of property and equipment.
Financing Activities
Cash used in financing activities was approximately$23.0 million for the six months endedJune 30, 2022 compared to cash used in financing activities of approximately$4.2 million during the six months endedJune 30, 2021 . The increase was due primarily to the$18.4 million payment related to the termination of the Interest Rate Swap Agreements, as defined below; mandatory repayments on our debt facilities was$4.2 million in the six months endedJune 30, 2022 , and in the six months endedJune 30, 2021 .
Interest Rate Swaps
EffectiveDecember 31, 2018 , the Company had entered into interest rate swap agreements with a total notional amount of$700.0 million ("Interest Rate Swap Agreements"). The Interest Rate Swap Agreements were designed to provide predictability against changes in the interest rates on the Company's debt, as the Interest Rate Swap Agreements converted a portion of the variable interest rate on the Company's debt to a fixed rate. The Interest Rate Swap Agreements were originally scheduled to expire onDecember 31, 2023 . OnSeptember 26, 2019 , the Company modified the terms of the Interest Rate Swap Agreements with the then existing counterparties to change the LIBOR reference period to one month. The notional amount and maturities of the Interest Rate Swap Agreements remained unchanged. The Company elected hedge accounting treatment at that time. To ensure the effectiveness of the Interest Rate Swap Agreements, the Company elected the one-month 37 -------------------------------------------------------------------------------- LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the Interest Rate Swap Agreement as of each reset date. The reset dates and other critical terms on the term loans perfectly matched with the interest rate cap reset dates and other critical terms throughFebruary 18, 2022 , the date the Interest Rate Swap Agreements were terminated, and during the three and six months endedJune 30, 2021 . AtJune 30, 2022 andDecember 31, 2021 , the effective portion of the Interest Rate Swap Agreements was included on the condensed consolidated balance sheets in accumulated other comprehensive income. EffectiveFebruary 18, 2022 , the Company terminated the Interest Rate Swap Agreements. In connection with the termination of the Interest Rate Swap Agreements, the Company made a payment of$18.4 million to the swap counterparties. Following these terminations,$21.5 million of unrealized gains related to the terminated Interest Rate Swap Agreements included in accumulated other comprehensive income will be reclassified to earnings as reductions to interest expense throughDecember 31, 2023 .
Off-Balance Sheet Arrangements
As of
Recently Issued Accounting Pronouncements
See Note 2 - Recently Issued Accounting Pronouncements for further information on recently adopted accounting pronouncements and those not yet adopted.
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