HireRight Reports Third Quarter 2021 Results | Financial Buzz

HireRight Reports Third Quarter 2021 Results

HireRight Holdings Corporation (the “Company”) (NYSE: HRT) (“HireRight” or the “Company”), a leading provider of background screening services, today announced financial results for its third quarter ended September 30, 2021.

Third Quarter 2021 Highlights:

  • Revenues of $205.0 million for Q3 2021 increased 57%, from $130.7 million in Q3 2020
  • Operating income of $26.5 million for Q3 2021, compared to operating loss of $7.2 million for Q3 2020
  • Net income of $7.3 million for Q3 2021, up from net loss of $27.0 million for Q3 2020
  • Adjusted EBITDA of $51.6 million for Q3 2021, up from $28.0 million for Q3 2020

“We continued to see increasing strength and demand from our end markets as the global economy recovers from the pandemic. That strength combined with new wins has led us to the highest revenue quarter in the Company’s history, demonstrating our attractive position in an industry with global secular growth drivers,” said HireRight President and CEO Guy Abramo. “Looking ahead, we’re excited at the opportunities to capitalize on our growing pipeline and the rising demand in labor markets. With our recent IPO, our entire team is energized and squarely aligned on execution and delivering long-term shareholder value.”

Revenues

Total revenues were $205.0 million for the three months ended September 30, 2021, compared to $130.7 million for the three months ended September 30, 2020. Service revenues increased $53.7 million, or 54.5%, to $152.3 million, and revenues from surcharge fees increased $20.6 million, or 64.1%, to $52.6 million. Revenues from international locations more than doubled and increased by $8.2 million to $15.9 million while revenue from domestic locations increased by 53.8% to $189.1 million compared to the three months ended September 30, 2020.

Cost of Services (exclusive of depreciation and amortization)

Cost of services was $111.3 million for the three months ended September 30, 2021 compared to $69.7 million for the three months ended September 30, 2020, primarily due to higher client order volumes over the COVID-impacted prior year period. Cost of services as a percent of revenue increased to 54.3% for the three months ended September 30, 2021 compared to 53.3% for the three months ended September 30, 2020.

Selling, General and Administrative

Selling, general and administrative expenses (“SG&A”) improved by 1.4%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to a reduction in costs, including legal settlement fees and merger integration expenses, which were substantially completed by December 31, 2020. These decreases were mostly offset by increases in personnel costs associated with incentive compensation and fringe benefit programs and investments associated with incremental technology and product resources.

Liquidity and Capital Resources

Subsequent to September 30, 2021, the Company utilized part of the $393.5 million net proceeds from its recent IPO for repayment, in full, of its $215.0 million second lien loan. The Company had a $10.0 million outstanding balance on its revolving credit facility and there remained $88.2 million of availability as of September 30, 2021. The Company plans to use approximately $100.0 million of proceeds of the IPO to repay, in part, the First Lien Term Loan Facility and no longer expects to incur swap breakage fees of approximately $4.2 million.

Unrestricted cash and cash equivalents as of September 30, 2021, totaled $19.7 million.

The Company generated $19.0 million of cash from operations for the nine months ended September 30, 2021, compared to cash from operations of $7.7 million for the nine months ended September 30, 2020.

Full-Year Outlook

Based on current Company expectations and economic conditions, HireRight is providing full-year 2021 outlook including revenue in a range of $713.0 million to $716.0 million and Adjusted EBITDA in a range of $157.0 million to $160.0 million.

Webcast and Conference Call

Management will discuss third quarter 2021 results on a webcast at 2 p.m. (PT) / 5 p.m. (ET) today, Thursday, November 18, 2021. The webcast, along with the related presentation materials, may be accessed via HireRight’s investor relations website page at ir.hireright.com under “News and Events”. To listen by phone, please dial 1-855-327-6837 or 1-631-891-4304.

The webcast replay, along with the related presentation materials, can be accessed via HireRight’s investor relations website page at ir.hireright.com under “News and Events”, and will be available for 90 days. A replay of the call will also be available until midnight, December 30, 2021 by dialing 1-844-512-2921 or 1-412-317-6671 and entering passcode 10016015.

About HireRight

HireRight provides comprehensive background screening, verification, identification, monitoring, and drug and health screening services for more than 40,000 customers across the globe. HireRight offers services via a unified global software and data platform that tightly integrates into their customers’ human capital management systems enabling highly effective and efficient workflows for workforce hiring, onboarding, and monitoring. In 2020, HireRight screened over 20 million job applicants, employees and contractors for its customers. For more information, visit www.HireRight.com or contact InvestorRelations@HireRight.com.

Non-GAAP Financial Measures

To supplement the financial results presented in accordance with generally accepted accounting principles in the United States (“GAAP”), HireRight presents certain non-GAAP financial measures. A “non-GAAP financial measure” is a numerical measure of a company’s financial performance that excludes amounts that are included in the most directly comparable measure calculated and presented in accordance with GAAP or includes amounts that are excluded from the most directly comparable measure calculated and presented in accordance with GAAP in the statements of operations, balance sheets or statements of cash flow of the Company.

We believe that our non-GAAP financial measures and key metrics provide information useful to investors in assessing our financial condition and results of operations. These measures should not be considered an alternative to net income or any other measure of financial performance or liquidity presented in accordance with 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, our non-GAAP financial measures may be defined differently than similar measures used by other companies in our industry, thereby diminishing their utility for comparison purposes.

The non-GAAP financial measures presented in this earnings release are adjusted EBITDA, adjusted EBITDA service margin, and adjusted net income (loss). Reconciliations of these non-GAAP financial measures to the most directly comparable measures calculated and presented in accordance with GAAP are provided as schedules attached to this release.

Adjusted EBITDA

Adjusted EBITDA represents, as applicable for the period, net income (loss) before provision for income taxes, interest expense, depreciation and amortization expense, equity-based compensation, realized and unrealized gain (loss) on foreign exchange, merger integration expenses, legal settlement costs 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.

Adjusted EBITDA Service Margin

Adjusted EBITDA Service Margin is calculated as Adjusted EBITDA as a percentage of service revenue. Because we are able to charge our customers for direct access to certain data suppliers and we generally do not mark up those charges, we focus on the management of Adjusted EBITDA as a percentage of service revenue, as we believe this non-GAAP measure more accurately reflects the management of our controllable costs and profitability.

Adjusted Net Income (Loss)

In addition to Adjusted EBITDA and Adjusted EBITDA Service Margin, 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 equity-based compensation, realized and unrealized gain (loss) on foreign exchange, merger integration expenses, legal settlement costs outside the normal course of business, and other items, to which we apply an adjusted effective tax rate. See the footnotes to the table below for a description of certain of these adjustments.

Safe Harbor Statement

This press release and management’s comments on the third quarter results conference call mentioned above include forward-looking statements, including statements related to management’s outlook for 2021 revenue and Adjusted EBITDA. The forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions. Forward-looking statements may be identified by the use of words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in the forward-looking statements. Factors that may affect the outcome of the forward-looking statements include, among other things, the impacts, direct and indirect, of the COVID-19 pandemic on our business, our consultants and employees, and the overall economy; our ability to maintain our professional reputation and brand name; the fact that our net revenue may be affected by adverse economic conditions; the aggressive competition we face; our heavy reliance on information management systems; the significant risk of liability we face in the services we perform; the fact that data security, data privacy and data protection laws 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; 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 factors that could affect the outcome of forward-looking statements, refer to our Registration Statement on Form S-1 filed with the SEC, as declared effective on October 28, 2021, 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.” We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

HireRight Holdings Corporation

Condensed Consolidated Balance Sheet (Unaudited)

 

 

September 30,

 

December 31,

 

2021

 

2020

 

(in thousands, except unit amounts)

Assets

 

 

 

Current assets

 

 

 

Cash and cash equivalents

$

19,656

 

 

$

19,077

 

Restricted cash

4,982

 

 

4,982

 

Accounts receivable, net of allowance for doubtful accounts of $4,277 and $3,919 at September 30, 2021 and December 31, 2020, respectively

151,801

 

 

107,800

 

Prepaid expenses and other current assets

21,992

 

 

18,221

 

Total current assets

198,431

 

 

150,080

 

Property and equipment, net

14,457

 

 

17,486

 

Intangible assets, net

403,862

 

 

448,816

 

Goodwill

819,639

 

 

820,032

 

Other non-current assets

18,258

 

 

17,238

 

Total assets

$

1,454,647

 

 

$

1,453,652

 

Liabilities and Members’ Equity

 

 

 

Current liabilities

 

 

 

Accounts payable

$

10,053

 

 

$

24,608

 

Accrued expenses and other current liabilities

76,488

 

 

56,809

 

Accrued salaries and payroll

29,319

 

 

23,125

 

Derivative instruments, current

18,772

 

 

18,258

 

Debt, current portion

8,350

 

 

8,350

 

Total current liabilities

142,982

 

 

131,150

 

Debt, long-term portion

1,009,936

 

 

1,013,397

 

Derivative instruments, long-term

19,097

 

 

35,317

 

Deferred taxes

15,164

 

 

13,567

 

Other non-current liabilities

3,052

 

 

3,334

 

Total liabilities

1,190,231

 

 

1,196,765

 

Commitments and contingencies

 

 

 

Class A Units – 57,168,291 units issued and outstanding at September 30, 2021 and December 31, 2020

590,711

 

 

590,711

 

Additional paid-in capital

17,853

 

 

15,360

 

Accumulated deficit

(347,398

)

 

(339,061

)

Accumulated other comprehensive income (loss)

3,250

 

 

(10,123

)

Total members’ equity

264,416

 

 

256,887

 

Total liabilities and members’ equity

$

1,454,647

 

 

$

1,453,652

 

 

HireRight Holdings Corporation

Condensed Consolidated Statements of Operations (Unaudited)

 

 

Three Months Ended

September 30,

 

2021

 

2020

 

(in thousands, except units and per unit amounts)

Revenues

$

204,981

 

 

$

130,674

 

 

 

 

 

Expenses

 

 

 

Cost of services (exclusive of depreciation and amortization below)

111,328

 

 

69,683

 

Selling, general and administrative

47,652

 

 

48,347

 

Depreciation and amortization

19,531

 

 

19,808

 

Total expenses

178,511

 

 

137,838

 

Operating income (loss)

26,470

 

 

(7,164

)

 

 

 

 

Other expenses

 

 

 

Interest expense

18,518

 

 

18,597

 

Other expense (income), net

22

 

 

(185

)

Total other expense

18,540

 

 

18,412

 

Income (loss) before income taxes

7,930

 

 

(25,576

)

Income tax expense

649

 

 

1,466

 

Net income (loss)

$

7,281

 

 

$

(27,042

)

 

 

 

 

Net income (loss) per unit:

 

 

 

Basic

$

0.13

 

 

$

(0.47

)

Diluted

$

0.13

 

 

$

(0.47

)

Weighted average units outstanding:

 

 

 

Basic

57,168,291

 

57,168,291

Diluted

57,199,204

 

57,168,291

 

HireRight Holdings Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

Nine Months Ended September 30,

 

2021

 

2020

 

(in thousands)

Cash flows from operating activities

 

 

 

Net loss

$

(8,337

)

 

$

(72,936

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

Depreciation and amortization

56,013

 

 

58,283

 

Deferred income taxes

1,933

 

 

2,601

 

Amortization of debt issuance costs

3,139

 

 

3,012

 

Amortization of contract assets

2,782

 

 

2,159

 

Equity-based compensation

2,493

 

 

2,570

 

Other non-cash charges, net

(541

)

 

1,457

 

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

(44,715

)

 

3,229

 

Prepaid expenses and other current assets

(2,327

)

 

2,471

 

Other non-current assets

(4,157

)

 

(3,275

)

Accounts payable

(13,736

)

 

(7,932

)

Accrued expenses and other current liabilities

19,676

 

 

14,241

 

Accrued salaries and payroll

6,194

 

 

1,504

 

Other non-current liabilities

626

 

 

337

 

Net cash provided by operating activities

19,043

 

 

7,721

 

Cash flows from investing activities

 

 

 

Purchases of property and equipment

(5,092

)

 

(4,156

)

Capitalized software development

(4,891

)

 

(5,024

)

Cash paid for acquisitions, net of cash acquired

 

 

(96

)

Net cash used in investing activities

(9,983

)

 

(9,276

)

Cash flows from financing activities

 

 

 

Repayments of debt

(6,263

)

 

(6,263

)

Borrowings on line of credit

30,000

 

 

50,000

 

Repayments on line of credit

(30,000

)

 

(40,000

)

Payment of holdbacks

 

 

(1,000

)

Payment of capital lease obligations

 

 

(402

)

Other financing

(1,240

)

 

 

Net cash (used in) provided by financing activities

(7,503

)

 

2,335

 

Net increase in cash, cash equivalents and restricted cash

1,557

 

 

780

 

Effect of exchange rates

(978

)

 

(642

)

Cash, cash equivalents and restricted cash

 

 

 

Beginning of period

24,059

 

 

21,180

 

End of period

$

24,638

 

 

$

21,318

 

Cash paid for

 

 

 

Interest

$

51,355

 

 

$

36,279

 

Income taxes

787

 

 

(21

)

Supplemental schedule of non-cash operating activities

 

 

 

Unpaid deferred offering costs

$

2,975

 

 

$

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

Unpaid property and equipment and capitalized software purchases

$

468

 

 

$

433

 

Reconciliation of GAAP Measures to Non-GAAP Measures (Unaudited)

The following table reconciles our non-GAAP financial measure of Adjusted EBITDA and Adjusted EBITDA Service Margin to our most directly comparable financial measures calculated and presented in accordance with GAAP.

 

Three Months Ended

September 30,

 

2021

 

2020

 

(in thousands, except percent)

Net income (loss)

$

7,281

 

 

$

(27,042

)

Income tax expense

649

 

 

1,466

 

Interest expense

18,518

 

 

18,597

 

Depreciation and amortization

19,531

 

 

19,808

 

EBITDA

45,979

 

 

12,829

 

Equity-based compensation

841

 

 

880

 

Realized and unrealized gain (loss) on foreign exchange

24

 

 

(185

)

Merger integration expenses (1)

193

 

 

2,138

 

Technology investments (2)

1,690

 

 

 

Other items (3)

2,895

 

 

12,380

 

Adjusted EBITDA

$

51,622

 

 

$

28,042

 

Service Revenue

$

152,332

 

 

$

98,587

 

Net income (loss) service margin (4)

4.8

%

 

27.4

%

Adjusted EBITDA service margin (5)

33.9

%

 

28.4

%

(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 General Information Solutions LLC (“GIS”) into HireRight, LLC following the combination of the parent companies of GIS and HireRight, LLC in July 2018. The integration was substantially completed by the end of 2020.

 

(2)

Technology investments represent discovery phase costs associated with the build out and implementation of various technologies that will be used to achieve greater operational efficiencies.

 

(3)

Other items include (i) exit costs associated with one of our facilities during the three months ended September 30, 2021, (ii) costs related to the preparation of the Company’s initial public offering during 2021, (iii) $12.1 million of legal settlement costs associated with a single litigation matter related to a predecessor entity of the Company for a claim dating back to 2009, and (iv) $0.3 million of severance costs incurred in connection with reducing our employee headcount in an effort to right-size our business in response to COVID-19 during the quarter ended September 30, 2020.

 

(4)

Net income (loss) service margin is calculated as net income (loss) as a percentage of service revenue.

 

(5)

Adjusted EBITDA service margin is calculated as Adjusted EBITDA as a percentage of service revenue.

The following table sets forth a reconciliation of net loss to Adjusted Net Income (Loss) for the periods presented:

 

Three Months Ended

September 30,

 

2021

 

2020

 

(in thousands)

Net income (loss)

$

7,281

 

 

$

(27,042

)

Income tax expense

649

 

 

1,466

 

Income (loss) before income taxes

7,930

 

 

(25,576

)

Equity-based compensation

841

 

 

880

 

Realized and unrealized gain (loss) on foreign exchange

24

 

 

(185

)

Merger integration expenses(1)

193

 

 

2,138

 

Technology investments (2)

1,690

 

 

 

Other items (3)

2,895

 

 

12,380

 

Adjusted income (loss) before income taxes

13,573

 

 

(10,363

)

Adjusted income taxes (4)

360

 

 

732

 

Adjusted Net Income (Loss)

$

13,213

 

 

$

(11,095

)

(1)

Merger integration expenses consist primarily of IT related costs including personnel expenses, professional and service fees associated with the integration of GIS, as discussed in footnote 1 to the immediately preceding table, which commenced in July 2018 and was substantially completed by the end of 2020.

 

(2)

Technology investments represent discovery phase costs associated with the build out and implementation of various technologies that will be used to achieve greater operational efficiencies.

 

(3)

Other items include (i) exit costs associated with one of our facilities during the quarter ended September 30, 2021, (ii) costs related to the preparation of the Company’s public offering during 2021, (iii) $12.1 million of legal settlement costs associated with a single litigation matter related to a predecessor entity of the Company for a claim dating back to 2009, and (iv) $0.3 million of severance costs incurred in connection with reducing our employee headcount in an effort to right-size our business in response to COVID-19 during the quarter ended September 30, 2020.

 

(4)

An adjusted effective income tax rate has been determined for each period presented by applying the statutory income tax rates and the provision for deferred income taxes to the pre-tax adjustments, which was used to compute Adjusted Net Income (Loss) for the periods presented.

Key Metrics

The key metrics used to help us evaluate our business, identify trends and formulate business plans and strategy are set forth in the table below and as described in the following text:

 

Three Months Ended September 30,

 

 

2021

 

2020

 

 

(in thousands, except percent)

New business revenue

$

10,873

 

 

$

9,354

 

 

We measure net revenue retention on a year-to-date basis. Net revenue retention for the nine months ended September 30, 2021 and 2020 was 133.8% and 75.7%, respectively.

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 70% of our total revenue. Net revenue retention is a measure of our ability to retain and grow business from our customer base. It is calculated as the total revenue derived in the current fiscal period by our top 1,250 customers, divided by the total revenue derived in the prior fiscal period from the same 1,250 customers based on the prior fiscal period revenue composition. The 1,250 customers used for this metric may vary from period to period, as defined by the revenue composition of the period immediately preceding the presented fiscal year. Net revenue retention increased in the 2021 period as general client ordering patterns showed a significant volume and product mix improvement over the COVID impacted prior year quarter.

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 customer contract during the first year of the contract term. We have a sales and sales support staff in nine countries focused on expanding our reach and penetration into new markets and regions. Although new contracts are typically three years in duration, new business revenue is determined over the first year of the contract. Continuing to grow this important metric is critical to the success of our business. New business revenue increased in the three months ended September 30, 2021 compared to the prior year period due to volume and product mix improvement over the COVID impacted prior year quarter.

Contacts

Investors:

InvestorRelations@HireRight.com

+1 949-528-1000

Media:

Monica.Soladay@HireRight.com

Opt-into our eNewsletter NOW! For the Latest Trending Financial News Topics in Cannabis, Tech, Biotechs, Precious Metals, Energy, Renewable Energy and much more!