First Advantage Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. First Advantage provides employment background screening, verification, and related compliance services, reported in Americas and International segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $200.4 | $206.0 | $561.2 | $597.4 |
| Operating income | $23.2 | $25.7 | $52.1 | $65.5 |
| Net income | $10.8 | $17.2 | $22.5 | $44.5 |
| GAAP net income margin | 5.4% | 8.4% | 4.0% | 7.4% |
| Adjusted EBITDA (non-GAAP) | $64.8 | $64.2 | $169.3 | $178.6 |
| Adjusted EBITDA margin (non-GAAP) | 32.3% | 31.2% | 30.2% | 29.9% |
- Revenue and segments: Revenue declined 2.7% in Q3 and 6.1% year to date. Q3 Americas revenue was nearly flat at $176.0 million; International revenue fell to $25.8 million from $31.6 million. Year-to-date Americas revenue declined 3.2%, while International declined 22.5%.
- Profitability and margins: Q3 operating margin was approximately 11.6%, versus 12.5% a year earlier; year-to-date it was approximately 9.3%, versus 11.0%. Adjusted EBITDA increased slightly in Q3 but fell 5.2% year to date. International Adjusted EBITDA margin declined to 17.8% in Q3 from 22.1%, and to 16.3% year to date from 22.4%.
- Per-share results: Q3 diluted GAAP EPS was $0.07 versus $0.11; year-to-date was $0.15 versus $0.29. Adjusted diluted EPS (non-GAAP) was $0.28 versus $0.26 in Q3 and $0.71 versus $0.73 year to date.
- Cash flow: Nine-month operating cash flow was $106.1 million, down from $142.8 million. Investing used $61.9 million, including $41.1 million for the Infinite ID acquisition. Financing used $270.6 million, mainly due to the $217.7 million special dividend and $55.9 million of share repurchases. Cash and cash equivalents fell to $164.9 million from $391.7 million at December 31, 2022.
- Liquidity and debt: Current assets were $349.3 million and current liabilities $94.8 million at September 30. Debt was $564.7 million, with no revolver borrowings and $100.0 million of revolver capacity available. Cash less debt was approximately negative $399.8 million. The term loan matures January 2027. The company reported compliance with its debt covenants.
Changes and drivers
- Management attributed lower revenue principally to weaker hiring demand among existing customers, macroeconomic pressure, the comparison with post-pandemic growth in 2022, and lost accounts. New-customer revenue, cross-selling and upselling partly offset these declines; pricing was described as relatively stable.
- Cost savings and automation helped reduce cost of services, but year-to-date cost of services as a share of revenue rose to 50.9% from 50.4%, partly because of customer mix and third-party data costs.
- Net interest expense rose to $7.6 million in Q3 from $1.7 million and to $20.1 million year to date from $4.0 million, principally due to higher rates on variable-rate debt. Interest income and derivative gains partly offset the increase.
- Q3 SG&A increased 7.8%, including higher share-based compensation following a May 2023 modification of performance awards. Year-to-date SG&A also reflected higher litigation expense, lease impairment, and foreign-exchange losses.
Outlook, risks and unusual items
- No specific quantitative revenue, earnings, or margin guidance is provided in the supplied filing text. Management said it believes cash, operating cash flow, and available revolver capacity are adequate for operational and business needs over the next 12 months, and expressed confidence in the business’s long-term prospects.
- Management cited macroeconomic uncertainty, slower hiring and longer sales cycles as potential pressures on demand, renewals, growth, collections, and results. The business is seasonal; retail and transportation screening activity has historically been strongest in October and November.
- One customer represented approximately 11% of revenue in both Q3 and the first nine months of 2023. Customer contracts generally do not guarantee minimum order volumes.
- The September 1 acquisition of Infinite ID cost $41.1 million. Purchase accounting remained provisional, including valuation of certain working-capital balances, intangibles, and deferred taxes; future adjustments could be material.
- The company recorded a $4.6 million liability for legal matters it considers probable and estimable. It faces potential litigation, including consumer and class-action claims associated with background-screening services.
- The $1.50-per-share special dividend was a one-time distribution, not a stated recurring dividend. The $200 million repurchase authorization was extended through December 31, 2024; $83.6 million remained available at September 30.
Important facts for investors to verify
- Whether hiring demand, particularly in International markets and affected Americas industries, stabilizes or continues to weaken.
- How much operating cash flow and liquidity remain after the special dividend, repurchases, acquisition spending, and debt-service costs.
- The effect of variable interest rates on interest expense and the effectiveness and expiration of the company’s interest-rate derivatives.
- Final Infinite ID purchase accounting and the acquired business’s subsequent contribution to revenue and profitability.
- Developments in litigation, the customer concentration, and any changes to the company’s disclosed risks or outlook.