First Advantage Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. First Advantage provides workforce background screening, verification, safety, and compliance services. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $189.9 million | $132.1 million | +43.8% |
| Operating income (loss) | $17.1 million | $(3.2) million | Improved |
| Net income (loss) | $13.0 million | $(19.4) million | Improved |
| GAAP diluted EPS | $0.09 | $(0.15) | Improved |
| Adjusted EBITDA (non-GAAP) | $53.6 million | $36.6 million | +46.5% |
| Adjusted EBITDA margin (non-GAAP) | 28.2% | 27.7% | +0.5 percentage points |
| Adjusted net income / adjusted diluted EPS (non-GAAP) | $33.5 million / $0.22 | $20.5 million / $0.16 | +63.4% / +37.5% |
Operating margin was approximately 9.0%, versus approximately (2.4%) a year earlier; GAAP net margin was 6.9%, versus (14.7%). Cost of services rose to $96.4 million from $65.9 million and increased to 50.8% of revenue from 49.9%, reflecting higher third-party data costs, customer and acquisition mix, and added operations staffing. Management cited automation and operating efficiencies as partial offsets.
Revenue growth reflected $33.9 million of net growth from existing customers, $9.1 million from new customers, and $14.8 million from acquisitions. Americas revenue was $160.1 million versus $116.5 million; International revenue was $31.7 million versus $16.6 million, before intersegment eliminations. Management cited strong demand in essential retail, e-commerce, transportation and home delivery, technology, business and financial services, and staffing.
Cash flow, debt, and liquidity
- Operating cash flow was $41.6 million, up from $23.7 million. Investing cash use was $26.5 million, including $19.1 million for the Form I-9 Compliance acquisition; financing cash use was $0.04 million. Cash, cash equivalents, and restricted cash totaled $307.9 million at quarter-end.
- Cash and cash equivalents were $307.7 million; total debt principal was $564.7 million, reported net of financing costs at $555.3 million. The $100 million revolver was undrawn. Management said cash, available revolver capacity, and operating cash flows should meet operational and business needs for the next 12 months.
- Current assets were $477.7 million and current liabilities were $100.4 million. The term loan matures January 2027 and is secured by substantially all assets of the borrower and certain subsidiaries. The company reported compliance with its debt covenants.
Material changes, outlook, and risks
- Acquisition: The company acquired Form I-9 Compliance, effective January 1, for approximately $19.8 million cash consideration. Purchase accounting remained provisional, including goodwill and deferred taxes, and could be adjusted materially. The acquired business’s results were not material in the quarter.
- Interest and unusual items: Net interest was income of $0.9 million, compared with expense of $6.7 million in Q1 2021. The 2022 figure included a $5.3 million unrealized gain on interest rate swaps amid rate volatility; the prior-year period included a $13.9 million debt-extinguishment loss. These items affect comparability.
- Leases: Adoption of ASC 842 on January 1, 2022 added operating lease right-of-use assets and liabilities; the company reported a material balance-sheet impact but no material effect on earnings or cash flow.
- Legal matters: Accrued litigation liabilities were $2.5 million at March 31, down from $7.9 million at year-end. The company paid $5.5 million to settle a case and received a $2.2 million insurance recovery during the quarter. It expects to defend or seek indemnification in pending matters; outcomes remain uncertain.
- Management outlook: The filing provides no specific quantified full-year revenue or earnings guidance. Management expects operating expenses to rise in absolute dollars to support growth, but anticipates gradual declines in expenses as a percentage of revenue over time. It noted anticipated near-term increases in public-company reporting and compliance costs. The company describes seasonal hiring patterns, generally with stronger retail and transportation activity before the holiday season, and cautions that seasonality may change.
- Principal risks: COVID-19 and macroeconomic uncertainty, including hiring volumes and inflation; privacy, data-security, cyberattack, and regulatory exposure; reliance on third-party data providers and vendors; litigation and potential liability; technology or service interruptions; competition; acquisition integration and execution; debt and refinancing risks; international operations; and customer contracts without committed volumes. The filing reported no material change in risk factors from its 2021 Form 10-K.
Most important facts for investors to verify
- How much of revenue and Adjusted EBITDA growth is recurring organic growth versus acquisitions, new customers, and changes in customer or product mix.
- Whether third-party data costs and service costs as a percentage of revenue stabilize, and whether automation continues to offset cost pressure.
- The final purchase-price allocation for Form I-9 Compliance and any resulting goodwill, deferred-tax, or earnings adjustments.
- The sustainability of operating cash flow and liquidity, including debt service, acquisition spending, and the effect of interest-rate changes and swap valuations.
- Developments in litigation and privacy, data-protection, and cybersecurity exposures, including whether recorded reserves remain adequate.