First Advantage Corporation (FA) — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Results are reported after the January 2020 Silver Lake transaction; 2020 successor and predecessor periods are not directly comparable, so management also presents selected 2020 pro forma comparisons.
Business context
First Advantage provides technology-enabled background screening, verification, monitoring, safety, and compliance services. It performed approximately 93 million screens for more than 33,000 customers in over 200 countries and territories. Most revenue comes from pre-onboarding screening. The Americas generated approximately 84% of FY 2021 revenue; one customer accounted for approximately 10%.
Financial performance
| Metric | FY 2021 | Comparable FY 2020 |
|---|---|---|
| Revenue | $712.3 million | $509.2 million, pro forma |
| Revenue growth | 39.9% | — |
| Operating income (loss) | $63.8 million | $(8.2) million, pro forma |
| Net income (loss) | $16.1 million | $(63.6) million, pro forma |
| Net margin | 2.3% | (12.5)%, pro forma |
| Adjusted EBITDA and margin | $226.3 million; 32% | $146.8 million; 29%, pro forma |
| Adjusted net income | $142.4 million | $65.6 million, pro forma |
| Adjusted diluted EPS | $1.01 | $0.50, pro forma |
Adjusted measures are non-GAAP; the company cautions they should not be viewed in isolation or as substitutes for GAAP results. Cost of services was 49.4% of revenue, versus 51.2% pro forma in 2020, reflecting operating efficiencies, automation, and proprietary data assets; acquisitions’ higher third-party data mix partly offset the improvement. Operating income margin was approximately 9.0%.
- Cash flow: Operating cash flow was $148.7 million. Investing cash outflow was $72.4 million, including $48.9 million for 2021 acquisitions; financing cash inflow was $63.8 million. Cash flow comparisons with 2020 are affected by differing predecessor/successor periods.
- Liquidity: Cash and cash equivalents were $292.6 million; the $100 million revolving facility was undrawn. Management said available cash, revolver capacity, and operating cash flow should meet needs for the next 12 months.
- Debt: Total debt was $564.7 million, with the remaining first-lien term loan due January 2027. The second-lien facility was repaid in the February 2021 refinancing. Debt is variable-rate and LIBOR-linked; the company had an interest-rate collar covering a portion of borrowings.
- Balance sheet: Total assets were $1.89 billion and total liabilities $754.3 million at year-end. Accounts receivable increased to $155.8 million from $111.4 million, which management linked partly to revenue growth and normal customer payment terms.
Material changes and unusual items
- Revenue rose 39.9% versus FY 2020 pro forma: $139.4 million net growth from existing customers, $39.1 million from new customers, and $24.6 million from acquisitions. Management cited recovery in hiring, strength in several customer sectors, and continued upselling and cross-selling; pricing was relatively stable.
- Adjusted EBITDA increased 54.2% versus pro forma 2020, which management attributed to revenue growth, automation, cost efficiencies, and operating leverage.
- Interest expense declined to $25.1 million from $51.7 million pro forma, primarily following refinancing and repayment of the second-lien debt. The company recorded a $13.9 million debt-extinguishment loss in 2021.
- The June 2021 IPO generated $316.5 million of net proceeds for the company; $200 million was used to repay first-lien debt. A November follow-on offering consisted of existing-stockholder sales, and the company received no proceeds from it.
- Three 2021 acquisitions expanded international, healthcare, and higher-education capabilities. Purchase accounting for Corporate Screening was provisional when the filing was issued. A further Form I-9 Compliance acquisition for approximately $19 million closed in January 2022.
- Management reported a $7.9 million liability for probable and estimable legal matters, including a $5.5 million settlement of two California class actions approved in December 2021. A $2.1 million related insurance receivable was recorded; the remaining settlement amount was paid in February 2022.
Outlook, commentary, and risks
The filing provides no numerical revenue or earnings guidance. Management intends to pursue profitable growth through new customer wins, expansion of existing accounts, product development, international growth, and selective acquisitions. It expects operating expenses to rise in dollars to support growth but, over time, decline as a percentage of revenue as the business scales. Management described demand and macroeconomic conditions as improved in 2021, while warning that COVID-19 and its variants could again affect hiring, operations, and access to public records.
- Key risks include privacy, data-protection and consumer-reporting regulation; cybersecurity incidents; dependence on third-party data providers and technology integrations; competition and customer attrition; and sensitivity to hiring volumes and economic conditions.
- Customer contracts generally lack exclusivity and minimum order commitments, so contracted relationships do not guarantee revenue or volume.
- Debt creates interest-rate, refinancing, covenant, and debt-service risks. The filing notes LIBOR transition uncertainty and restrictive credit-agreement covenants.
- Silver Lake owned 58.8% of common stock at December 31, 2021, giving it substantial voting influence. The company has never paid cash dividends.
- The company was an emerging growth company and did not include management’s annual internal-control assessment or auditor attestation in this filing; management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Reconcile GAAP earnings and cash generation with the substantial adjustments in Adjusted EBITDA, Adjusted Net Income, and adjusted EPS.
- Track customer concentration, retention, order volumes, and the impact of contracts without minimum commitments.
- Review debt amortization, variable-rate exposure, covenant headroom, and refinancing or benchmark-rate transition terms.
- Monitor resolution of legal matters, insurance recoveries, and final purchase accounting for acquisitions.
- Assess whether acquisition contributions, international expansion, and post-onboarding products can support growth beyond hiring-driven pre-onboarding screening.
- Consider the effects of Silver Lake’s control, potential future share sales or dilution, and the company’s lack of a dividend history.