First Advantage Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. First Advantage provides background screening, verification, safety, and compliance services across the workforce lifecycle. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $206.0 | $192.9 | $597.4 | $499.8 |
| Operating income | $25.7 | $24.4 | $65.5 | $38.5 |
| Net income | $17.2 | $16.3 | $44.5 | $0.7 |
| Net income margin | 8.4% | 8.4% | 7.4% | 0.1% |
| Adjusted EBITDA (non-GAAP) | $64.2 | $63.9 | $178.6 | $156.9 |
| Adjusted EBITDA margin (non-GAAP) | 31.2% | 33.2% | 29.9% | 31.4% |
| Operating cash flow | Not stated for quarter | $142.8 | $83.9 |
- Revenue increased 6.8% year over year in Q3 and 19.5% year over year for the first nine months. Nine-month diluted GAAP EPS was $0.29 versus $0.00; Q3 diluted EPS was $0.11 in both periods.
- Cost of services rose faster than revenue: 10.8% in Q3 and 22.9% for the nine-month period. It represented 50.6% and 50.4% of revenue, respectively, compared with 48.8% and 49.0% a year earlier.
- At September 30, cash and cash equivalents were $390.3; total debt was $564.7, net of which cash was approximately $174.4. The company also had $100.0 available on its revolving credit facility, with no revolver borrowings outstanding. Debt matures in January 2027.
- Nine-month investing cash outflow was $40.5, including $19.1 for the Form I-9 Compliance acquisition, $16.3 in capitalized software development, and $6.0 in property and equipment purchases. Financing cash outflow was $0.8.
- Current assets were $571.5 and current liabilities $101.6. The filing states management believes cash, revolver availability, and operating cash flows are adequate for needs over the next 12 months.
Material changes versus prior comparable periods
- Q3 revenue growth was driven by new customers and acquisitions, partly offset by lower existing-customer revenue, particularly in International markets affected by currency movements and macroeconomic conditions. Nine-month growth reflected existing-customer strength, new customers, and acquisitions.
- Americas revenue increased to $176.1 in Q3 from $159.0; International revenue decreased to $31.6 from $35.6. For nine months, Americas revenue was $506.8 versus $421.8 and International revenue was $96.4 versus $82.2.
- Q3 Adjusted EBITDA was nearly flat, up 0.4%, while its margin fell 2.0 percentage points. Management cited third-party data costs, lower-margin mix and acquisition revenue, currency effects, and investment spending; automation and operating efficiencies partly offset these pressures.
- Nine-month GAAP net income improved substantially from $0.7 to $44.5. Comparability is affected by the prior-year $13.9 debt-extinguishment loss and lower prior-year operating income; Q3 2022 also benefited from a $4.0 unrealized interest-rate derivative gain. Nine-month 2022 interest expense was $4.0 versus $21.9 in 2021.
- Operating cash flow increased by $59.0, which the company attributed to revenue growth and improved customer collections. The company acquired Form I-9 Compliance, effective January 1, 2022, for approximately $19.8 in cash consideration.
Outlook, risks, and unusual items
- The filing provides no quantified revenue, earnings, or margin guidance. Management expressed confidence in the long-term business and strategy, while noting sustained economic uncertainty could weaken demand, new business, renewals, collections, and growth.
- Seasonality is relevant: hiring-related revenue has historically been strongest in October and November, particularly in retail and transportation, and may be weaker after the holiday period. Management cautioned future patterns may change.
- Risks discussed include macroeconomic and hiring-volume fluctuations, inflation and interest rates, foreign currency movements, privacy and data-security regulation, cyber incidents, reliance on third-party data providers and vendors, litigation, competition, and indebtedness. Management reported no material change in risk factors from its 2021 Form 10-K.
- Legal matters arise in the ordinary course, including consumer claims related to screening services. Accrued litigation liabilities were $4.0 at September 30, 2022; the company said it intends to defend or seek indemnification where appropriate. It paid $5.5 to settle a matter in February 2022 and received $2.2 in insurance recovery in March.
- The company adopted lease accounting standard ASC 842 on January 1, 2022, recording operating lease right-of-use assets of $12.7 and lease liabilities of $15.0 at adoption; management said the adoption materially affected the balance sheet but not materially the income statement or cash flow.
- The board authorized a $50.0 share repurchase program in August 2022. On November 8, after quarter-end, it increased the authorization to $150.0 and extended it through December 31, 2023. Purchases through November 4 totaled $21.6.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether weaker Q3 International revenue and foreign-exchange pressure persist, and how hiring trends evolve across customer industries.
- Whether higher third-party data costs and lower-margin mix continue to compress cost-of-services and Adjusted EBITDA margins.
- How much reported earnings and interest expense depend on non-cash derivative fair-value gains, and the company’s exposure to rising interest rates.
- Cash generation, debt repayment capacity, covenant terms, and the use of cash for acquisitions and the expanded repurchase program.
- Potential outcomes and additional costs from screening-related litigation, alongside evolving privacy, data-security, and regulatory requirements.