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HireRight Reports First Quarter 2023 Results

– Maintaining Full-Year Outlook –

– Repurchased 2.3 Million Shares of Common Stock –

HireRight Holdings Corporation (NYSE: HRT) ("HireRight" or the "Company"), a leading provider of background screening services, today announced financial results for its first quarter ended March 31, 2023.

First Quarter 2023 Highlights:

  • Revenues of $175.4 million
  • Net loss of $7.9 million
  • Adjusted EBITDA of $33.0 million
  • Net loss per share of $0.10
  • Adjusted diluted earnings per share of $0.18

“Our first quarter demonstrated continued progress on our technology and margin initiatives, placing us ahead of schedule in achieving our 2023 margin target despite the soft demand environment” said HireRight President and CEO Guy Abramo. “I am also pleased to highlight we have made two recent strategic investments; one to deliver leading I-9 solutions for our customers and another to bolster our presence in the very important Latin American market. Lastly, we continue to express confidence in the opportunities ahead through ongoing share repurchases as part of our strategic plan to enhance long-term shareholder value.”

Liquidity and Capital Resources

The Company had over $270 million of capital available at March 31, 2023, consisting of $127.4 million of cash and $143.7 million of available borrowing capacity under its Revolving Credit Facility. Through May 2, 2023, the Company has repurchased 5.8 million shares of common stock for approximately $63.5 million under the share repurchase program announced on November 13, 2022.

Cash used in operating activities was $5.0 million for first quarter 2023, compared to cash used of $2.0 million for the same period in 2022.

Full-Year Outlook

Based on current expectations, HireRight is maintaining the Company's initial full-year 2023 outlook as set forth in the table below:

 

Estimated Low

 

Estimated High

 

(in thousands, except per share data)

Revenues

$

720,000

 

$

745,000

Adjusted EBITDA (1)

$

165,000

 

$

175,000

Adjusted Net Income (1)

$

100,000

 

$

110,000

Adjusted Diluted EPS (1)

$

1.30

 

$

1.43

(1)

A reconciliation of the guidance for the Non-GAAP financial measures of Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS in the table above cannot be provided without unreasonable effort because of the inherent difficulty of accurately forecasting the occurrence and financial impact of the various adjusting items necessary for such reconciliation that have not yet occurred, are out of our control, or cannot be reasonably predicted. For the same reasons, the Company is unable to assess the probable significance of the unavailable information, which could have a material impact on the Company's future Non-GAAP financial measures.

 

Webcast and Conference Call

Management will discuss first quarter results on a webcast at 2 p.m. (PT) / 5 p.m. (ET) today, Tuesday, May 9, 2023. 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 1-877-704-4453 or 1-201-389-0920.

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 Tuesday, May 16, 2023 by dialing 1-844-512-2921 or 1-412-317-6671 and entering passcode 13737147.

About HireRight

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 approximately 38,000 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 systems enabling highly effective and efficient workflows for workforce hiring, onboarding, and monitoring. In 2022, we screened over 24 million job applicants, employees and contractors for our customers and processed over 107 million screens. 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 that 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 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 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, to the extent that other companies in our industry, define similar non-GAAP measures differently than we do, the utility of those measures for comparison purposes may be limited.

The non-GAAP financial measures presented in this earnings release and/or included in management’s commentary on the earnings call described above, are Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Diluted Earnings Per Share. 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 and Adjusted EBITDA Margin

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, restructuring charges, 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 Margin is defined as Adjusted EBITDA divided by revenues for the period. Adjusted EBITDA and Adjusted EBITDA margin are supplemental financial measures 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 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, restructuring charges, 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 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.

Safe Harbor Statement

This press release and management's comments on the first quarter earnings call mentioned above 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 EBITDA margin, adjusted net income, earnings per share ("EPS"), 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, our vulnerability to adverse economic conditions, including without limitation, inflation and recession, which could increase our costs and suppress labor market activity and our revenue; the aggressive competition we face; failure to implement successfully our ongoing technology improvement and cost reduction initiatives; 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 increase our costs, limit the use or value of our services and adversely affect our business; our ability to maintain our professional reputation and brand name; the impacts, direct and indirect, of the pandemics or other calamitous events on our business, our personnel and vendors, and the overall economy; 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 the SEC on March 9, 2023, 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 other filings we make from time to time with the SEC. 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 Sheets (Unaudited)

 
 

March 31,

 

December 31,

 

2023

 

2022

 

(in thousands, except share, and per share data)

Assets

 

 

 

Current assets

 

 

 

Cash and cash equivalents

$

127,410

 

 

$

162,092

 

Restricted cash

 

 

 

 

1,310

 

Accounts receivable, net of allowance for credit losses of $5,365 and $5,812 at March 31, 2023 and December 31, 2022, respectively

 

134,306

 

 

 

136,656

 

Prepaid expenses and other current assets

 

20,208

 

 

 

18,745

 

Total current assets

 

281,924

 

 

 

318,803

 

Property and equipment, net

 

8,374

 

 

 

9,045

 

Right-of-use assets, net

 

6,921

 

 

 

8,423

 

Intangible assets, net

 

318,057

 

 

 

331,598

 

Goodwill

 

811,338

 

 

 

809,463

 

Cloud computing software, net

 

39,785

 

 

 

35,230

 

Deferred tax assets

 

80,612

 

 

 

74,236

 

Other non-current assets

 

20,583

 

 

 

18,949

 

Total assets

$

1,567,594

 

 

$

1,605,747

 

Liabilities and Stockholders’ Equity

 

 

 

Current liabilities

 

 

 

Accounts payable

$

9,442

 

 

$

11,571

 

Accrued expenses and other current liabilities

 

102,923

 

 

 

75,208

 

Accrued salaries and payroll

 

26,085

 

 

 

31,075

 

Debt, current portion

 

8,350

 

 

 

8,350

 

Total current liabilities

 

146,800

 

 

 

126,204

 

Debt, long-term portion

 

681,853

 

 

 

683,206

 

Tax receivable agreement liability, long-term portion

 

183,504

 

 

 

210,543

 

Deferred tax liabilities

 

5,617

 

 

 

5,748

 

Other non-current liabilities

 

10,845

 

 

 

11,728

 

Total liabilities

 

1,028,619

 

 

 

1,037,429

 

Commitments and contingent liabilities (Note 12)

 

 

 

Preferred stock, $0.001 par value, authorized 100,000,000 shares; none issued and outstanding as of March 31, 2023 and December 31, 2022

 

 

 

 

 

Common stock, $0.001 par value, authorized 1,000,000,000 shares; 79,665,328 and 79,660,397 shares issued, and 75,874,099 and 78,131,568 shares outstanding as of March 31, 2023 and December 31, 2022, respectively

 

80

 

 

 

80

 

Additional paid-in capital

 

809,627

 

 

 

805,799

 

Treasury stock, at cost; 3,791,229 and 1,528,829 shares repurchased at March 31, 2023 and December 31, 2022, respectively

 

(42,337

)

 

 

(16,827

)

Accumulated deficit

 

(223,701

)

 

 

(215,790

)

Accumulated other comprehensive loss

 

(4,694

)

 

 

(4,944

)

Total stockholders’ equity

 

538,975

 

 

 

568,318

 

Total liabilities and stockholders’ equity

$

1,567,594

 

 

$

1,605,747

 

 

HireRight Holdings Corporation

Condensed Consolidated Statements of Operations (Unaudited)

 

Three Months Ended

 

March 31,

 

2023

 

2022

 

(in thousands, except share and per share data)

Revenues

$

175,447

 

 

$

198,711

 

 

 

 

Expenses

 

 

 

Cost of services (exclusive of depreciation and amortization below)

 

98,451

 

 

 

112,403

Selling, general and administrative

 

59,726

 

 

 

48,267

Depreciation and amortization

 

18,417

 

 

 

18,061

Total expenses

 

176,594

 

 

 

178,731

Operating income (loss)

 

(1,147

)

 

 

19,980

 

 

 

 

Other expenses

 

 

 

Interest expense, net

 

12,402

 

 

 

7,557

Other expense, net

 

306

 

 

 

41

Total other expenses

 

12,708

 

 

 

7,598

Income (loss) before income taxes

 

(13,855

)

 

 

12,382

Income tax expense (benefit)

 

(5,944

)

 

 

818

Net income (loss)

$

(7,911

)

 

$

11,564

 

 

 

 

Net income (loss) per share:

 

 

 

Basic

$

(0.10

)

 

$

0.15

Diluted

$

(0.10

)

 

$

0.15

Weighted average shares outstanding:

 

 

 

Basic

 

77,285,116

 

 

 

79,392,937

Diluted

 

77,285,116

 

 

 

79,392,937

 

HireRight Holdings Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

Three Months Ended March 31,

 

2023

 

2022

 

(in thousands)

Cash flows from operating activities

 

 

 

Net income (loss)

$

(7,911

)

 

$

11,564

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

Depreciation and amortization

 

18,417

 

 

 

18,061

 

Deferred income taxes

 

(6,590

)

 

 

205

 

Amortization of debt issuance costs

 

803

 

 

 

821

 

Amortization of contract assets

 

1,212

 

 

 

1,091

 

Amortization of right-of-use assets

 

2,384

 

 

 

686

 

Amortization of unrealized gains on terminated interest rate swap agreements

 

(2,527

)

 

 

(2,181

)

Amortization of cloud computing software costs

 

1,571

 

 

 

151

 

Stock-based compensation

 

3,828

 

 

 

2,794

 

Other non-cash charges, net

 

(383

)

 

 

496

 

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

 

2,838

 

 

 

(29,852

)

Prepaid expenses and other current assets

 

(1,465

)

 

 

4,115

 

Cloud computing software

 

(6,125

)

 

 

(8,548

)

Other non-current assets

 

(1,893

)

 

 

(1,411

)

Accounts payable

 

(1,804

)

 

 

(7,095

)

Accrued expenses and other current liabilities

 

(771

)

 

 

14,920

 

Accrued salaries and payroll

 

(5,140

)

 

 

(6,240

)

Operating lease liabilities, net

 

(1,284

)

 

 

(1,068

)

Other non-current liabilities

 

(175

)

 

 

(524

)

Net cash used in operating activities

 

(5,015

)

 

 

(2,015

)

Cash flows from investing activities

 

 

 

Purchases of property and equipment

 

(693

)

 

 

(1,867

)

Capitalized software development

 

(2,918

)

 

 

(2,662

)

Other investing

 

(1,000

)

 

 

 

Net cash used in investing activities

 

(4,611

)

 

 

(4,529

)

Cash flows from financing activities

 

 

 

Repayments of debt

 

(2,088

)

 

 

(2,088

)

Payments for termination of interest rate swap agreements

 

 

 

 

(18,445

)

Repurchase of common stock

 

(24,584

)

 

 

 

Net cash used in financing activities

 

(26,672

)

 

 

(20,533

)

Net decrease in cash, cash equivalents and restricted cash

 

(36,298

)

 

 

(27,077

)

Effect of exchange rates

 

306

 

 

 

(420

)

Cash, cash equivalents and restricted cash

 

 

 

Beginning of year

 

163,402

 

 

 

116,214

 

End of period

$

127,410

 

 

$

88,717

 

Cash paid for

 

 

 

Interest

$

15,221

 

 

$

8,772

 

Income taxes

$

639

 

 

$

902

 

Supplemental schedule of non-cash activities

 

 

 

Unpaid property and equipment and capitalized software purchases

$

821

 

 

$

561

 

 
 

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

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.

 

Three Months Ended

 

March 31,

 

2023

 

2022

 

(in thousands, except percents)

Net income (loss)

$

(7,911

)

 

$

11,564

 

Income tax (benefit) expense

 

(5,944

)

 

 

818

 

Interest expense, net

 

12,402

 

 

 

7,557

 

Depreciation and amortization

 

18,417

 

 

 

18,061

 

EBITDA

 

16,964

 

 

 

38,000

 

Stock-based compensation

 

3,828

 

 

 

2,794

 

Realized and unrealized gain (loss) on foreign exchange

 

307

 

 

 

(79

)

Restructuring charges (1)

 

9,874

 

 

 

 

Amortization of cloud computing software costs (2)

 

1,571

 

 

 

151

 

Other items (3)

 

497

 

 

 

860

 

Adjusted EBITDA

$

33,041

 

 

$

41,726

 

Net income (loss) margin (4)

 

(4.5

)%

 

 

5.8

%

Adjusted EBITDA margin

 

18.8

%

 

 

21.0

%

(1)

Restructuring charges represent costs incurred in connection with the Company’s global restructuring plan. Costs incurred in connection with the plan include: (i) $4.4 million of severance and benefits related to impacted employees, (ii) $4.0 million of professional service fees related to the execution of our cost savings initiatives, and (iii) $1.4 million related to the abandonment of certain of our leased facilities.

 
(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 incurred in connection with our platform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies. This expense is not included in depreciation and amortization above.

 
(3)

Other items for the three months ended March 31, 2023 comprise professional services fees not related to core operations. Other items for the three months ended March 31, 2022 include (i) costs of $0.9 million associated with the implementation of a company-wide ERP system, (ii) $0.3 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities, (iii) $0.2 million of information technology related costs including personnel expenses and professional service fees associated with the integration of customers and operations of an entity with which the Company merged, and (iv) a partial offset of these costs by a reduction in previously accrued legal settlement expense of $0.6 million during the three months ended March 31, 2022 due to a more favorable outcome than originally anticipated in a claim outside the ordinary course of business.

 
(4)

Net income (loss) margin represents net income (loss) divided by revenues for the period.

 

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

 

March 31,

 

2023

 

2022

 

(in thousands)

Net income (loss)

$

(7,911

)

 

$

11,564

 

Income tax (benefit) expense

 

(5,944

)

 

 

818

 

Income (loss) before income taxes

 

(13,855

)

 

 

12,382

 

Amortization of acquired intangible assets

 

15,394

 

 

 

15,505

 

Interest expense swap adjustments (1)

 

(2,527

)

 

 

(2,181

)

Interest expense discounts (2)

 

803

 

 

 

821

 

Stock-based compensation

 

3,828

 

 

 

2,794

 

Realized and unrealized gain (loss) on foreign exchange

 

307

 

 

 

(79

)

Restructuring charges (3)

 

9,874

 

 

 

 

Amortization of cloud computing software costs (4)

 

1,571

 

 

 

151

 

Other items (5)

 

497

 

 

 

860

 

Adjusted income before income taxes

 

15,892

 

 

 

30,253

 

Adjusted income taxes (6)

 

2,346

 

 

 

439

 

Adjusted Net Income

$

13,546

 

 

$

29,814

 

 
 

The following table sets forth the calculation of Adjusted Diluted Earnings Per Share for the periods presented.

 

Three Months Ended

 

March 31,

 

2023

 

2022

Diluted net income (loss) per share

$

(0.10

)

 

$

0.15

 

Income tax (benefit) expense

 

(0.08

)

 

 

0.01

 

Amortization of acquired intangible assets

 

0.20

 

 

 

0.19

 

Interest expense swap adjustments (1)

 

(0.03

)

 

 

(0.03

)

Interest expense discounts (2)

 

0.01

 

 

 

0.01

 

Stock-based compensation

 

0.05

 

 

 

0.04

 

Realized and unrealized gain (loss) on foreign exchange

 

 

 

 

 

Restructuring charges (3)

 

0.13

 

 

 

 

Amortization of cloud computing software costs (4)

 

0.02

 

 

 

 

Other items (5)

 

0.01

 

 

 

0.01

 

Adjusted income taxes (6)

 

(0.03

)

 

 

(0.01

)

Adjusted Diluted Earnings Per Share

$

0.18

 

 

$

0.37

 

 

 

 

 

Weighted average number of shares outstanding - diluted

 

77,285,116

 

 

 

79,392,937

 

(1)

Interest expense swap adjustments consist of amortization of unrealized gains on our terminated interest rate swap agreements, which will be recognized through December 2023 as a reduction in interest expense.

 
(2)

Interest expense discounts consist of amortization of original issue discount and debt issuance costs.

 
(3)

Restructuring charges represent costs incurred in connection with the Company’s global restructuring plan. Costs incurred in connection with the plan include: (i) $4.4 million of severance and benefits related to impacted employees, (ii) $4.0 million of professional service fees related to the execution of our cost savings initiatives, and (iii) $1.4 million related to the abandonment of certain of our leased facilities,

 

(4)

Amortization of cloud computing software costs consists of expense recognized in selling, general and administrative expenses for capitalized implementation costs for cloud computing IT systems incurred in connection with our platform and fulfillment technology initiatives that are intended to achieve greater operational efficiencies. This expense is not included in depreciation and amortization above.

 
(5)

Other items for the three months ended March 31, 2023 comprise professional services fees not related to core operations. Other items for the three months ended March 31, 2022 include (i) costs of $0.9 million associated with the implementation of a company-wide ERP system, (ii) $0.3 million related to loss on disposal of assets and exit costs associated with one of our short-term leased facilities, (iii) $0.2 million of information technology related costs including personnel expenses and professional service fees associated with the integration of customers and operations of an entity with which the Company merged, and (iv) a partial offset of these costs by a reduction in previously accrued legal settlement expense of $0.6 million during the three months ended March 31, 2022 due to a more favorable outcome than originally anticipated in a claim outside the ordinary course of business.

 
(6)

The tax effect of each adjustment is determined based on the tax laws and valuation allowance status of the jurisdiction to which the adjustment relates. An adjusted effective income tax rate has been determined for each period presented by applying the statutory income tax rate, net of applicable adjustments for valuation allowances, which was used to compute Adjusted Net Income for the periods presented. Due to the existence of a U.S. tax valuation allowance, the tax impact of the pre-tax adjustments for the three months ended March 31, 2022 is immaterial. During the year ended December 31, 2022, the Company determined sufficient positive evidence existed to reverse the Company’s valuation allowance attributable to the deferred tax assets associated with the Company’s operations in the U.S. There is no change to the manner by which the tax effect of each adjustment is determined as a result of the reversal of the valuation allowance.

 

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