First Advantage Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparison is with Q1 2023. First Advantage provides background screening, identity, verification, and compliance services. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $169.4 | $175.5 | Down 3.5% |
| Operating income (loss) | $(0.7) | $11.3 | Down $12.0 |
| Net income (loss) | $(2.9) | $1.9 | Down $4.8 |
| Net margin | (1.7)% | 1.1% | Lower |
| Adjusted EBITDA (non-GAAP) | $46.6 | $48.6 | Down 4.1% |
| Adjusted EBITDA margin (non-GAAP) | 27.5% | 27.7% | Down 0.2 percentage points |
| Operating cash flow | $38.3 | $38.6 | Down $0.3 |
- Cost of services fell 4.2% to $87.2 million; as a share of revenue it improved to 51.5% from 51.9%, with management citing automation, efficiencies, and cost actions.
- Selling, general, and administrative expense rose 41.8% to $40.7 million, mainly reflecting $11.1 million of Sterling transaction-related professional and legal fees, higher share-based compensation, and litigation expense.
- Interest expense, net was $3.6 million versus $8.7 million. The decline primarily reflected approximately $7.0 million of unrealized gains on interest-rate swaps; higher facility interest expense partly offset the benefit.
- Adjusted net income was $24.8 million versus $28.4 million, and adjusted diluted EPS was $0.17 versus $0.19. These are non-GAAP measures that exclude specified costs and other items; they should be considered alongside GAAP results.
- Investing cash outflow was $7.0 million, including $6.1 million of capitalized software development costs. Financing cash inflow was $0.7 million, compared with $24.2 million of outflow in Q1 2023, when the company repurchased shares.
- At March 31, cash and cash equivalents were $245.4 million, total debt was $564.7 million, and the $100.0 million revolving facility was undrawn. Net debt, calculated as debt less cash and cash equivalents, was approximately $319.3 million. Management said available cash, revolver capacity, and operating cash flows should meet needs for the next 12 months.
Material changes and business drivers
- Revenue declined by $6.1 million. Existing-customer revenue fell $17.8 million, primarily due to weaker demand among macroeconomically affected customers, particularly internationally, and lost accounts. Upselling and cross-selling contributed $7.7 million; new customers contributed $8.9 million; Infinite ID contributed $2.8 million. Pricing was relatively stable.
- Americas revenue was $149.1 million versus $152.1 million; International revenue was $22.0 million versus $24.8 million. Segment Adjusted EBITDA was $43.7 million in Americas and $2.9 million internationally, compared with $44.7 million and $3.9 million, respectively.
- One customer represented approximately 11% of consolidated revenue in Q1 2024; no customer represented 10% or more in Q1 2023. No customer represented 10% or more of receivables in the periods presented.
- Cash and cash equivalents increased from $213.8 million at December 31, 2023 to $245.4 million at March 31, 2024. Long-term debt, net of financing costs, was $558.9 million at quarter-end.
Outlook, transaction, risks, and contingencies
- Sterling acquisition: The February 28, 2024 cash-and-stock agreement valued Sterling at approximately $2.2 billion. Closing remains subject to customary conditions, including Sterling stockholder approval, antitrust and foreign-investment clearances, and effectiveness of First Advantage’s registration statement. A commitment letter provides for up to $1.820 billion of incremental term loans and $150 million of incremental revolving commitments, subject to its terms. The company suspended share repurchases in connection with the agreement.
- Management cited ongoing macroeconomic uncertainty and modest hiring activity as pressures on demand, revenue, and customer activity, while expressing confidence in the long-term business and its ability to execute. The filing gives no specific revenue, earnings, or margin guidance.
- Seasonality affects hiring-related volumes; historically, revenues are strongest in October and November, with certain customers also increasing hiring in Q2. The company says future seasonal patterns may change.
- Reported litigation liabilities were $4.7 million at March 31, 2024, down from $5.2 million at year-end, for matters assessed as probable and estimable. The company says it intends to defend pending matters or seek indemnification as appropriate.
- Key disclosed risks include hiring and macroeconomic sensitivity, regulation and data privacy, cybersecurity, reliance on third-party data and vendors, competition, international operations, and leverage. The filing reported no material changes to previously disclosed risk factors or market risks. Management concluded disclosure controls were effective at a reasonable assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Progress, financing terms, required approvals, and closing conditions for the Sterling acquisition; also assess the effect of the transaction’s funding on leverage and future interest costs.
- Whether existing-customer demand and international revenues stabilize, and whether new-customer wins and cross-selling offset customer declines.
- The sustainability of reported profitability and cash generation, including the impact of swap fair-value movements and the substantial adjustments used in non-GAAP measures.
- Customer concentration, litigation developments, and exposure to data-security, privacy, and regulatory risks.
- Repurchase suspension and remaining authorization: approximately $119.5 million had been repurchased through May 3, 2024; purchases were suspended following the merger agreement.