First Advantage Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. First Advantage provides employment background screening, verification, compliance, and related services. Results are unaudited. Amounts below are in U.S. dollars; financial statement figures are in millions unless indicated.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $175.5 | $189.9 | Down 7.6% |
| Operating income | $11.3 | $17.1 | Down 34.0% |
| Operating margin | 6.4% | 9.0% | Down 2.6 percentage points |
| Net income | $1.9 | $13.0 | Down 85.2% |
| Net income margin | 1.1% | 6.9% | Down 5.8 percentage points |
| Adjusted EBITDA (non-GAAP) | $48.6 | $53.6 | Down 9.4% |
| Adjusted EBITDA margin (non-GAAP) | 27.7% | 28.2% | Down 0.5 percentage points |
| Diluted GAAP earnings per share | $0.01 | $0.09 | Down $0.08 |
| Adjusted diluted EPS (non-GAAP) | $0.19 | $0.22 | Down 13.6% |
| Cash from operating activities | $38.6 | $41.6 | Down $3.0 |
- Revenue by segment: Americas revenue was $152.1 million versus $160.1 million; International revenue was $24.8 million versus $31.7 million, before intersegment eliminations. Approximately 86% of Q1 2023 revenue came from the Americas.
- Expenses and margins: Cost of services fell 5.6% to $91.1 million, but increased to 51.9% of revenue from 50.8%. Product and technology expense declined 8.3% to $12.6 million; selling, general and administrative expense was broadly flat at $28.7 million. Depreciation and amortization was $31.9 million.
- Interest and taxes: Net interest expense was $8.7 million, compared with $0.9 million of net interest income in Q1 2022. The adverse change reflected higher debt interest and $1.9 million of unrealized swap losses, partly offset by $3.8 million of interest income on cash. The effective tax rate was 26.1%, versus 27.5%.
- Cash flow and investment: Investing used $6.1 million, mainly for capitalized software development; Q1 2022 investing used $26.5 million, including the Form I-9 Compliance acquisition. Financing used $24.2 million, primarily reflecting $25.3 million of share repurchases. Cash, cash equivalents, and restricted cash ended at $400.3 million.
- Balance sheet and debt: Cash and cash equivalents were $400.2 million; long-term debt, net of financing costs, was $557.1 million, or approximately $164.6 million of net debt using those balances. The company had no Revolver borrowings and $100.0 million of available capacity. Current assets were $555.5 million and current liabilities $85.0 million. Debt is secured by substantially all assets and carries variable-rate exposure; the term loan is due January 2027. The company reported covenant compliance at quarter-end.
Material changes and drivers
- Revenue fell $14.4 million. Management attributed the decline mainly to lower demand among existing customers ($22.0 million net decrease), including weaker hiring, comparison with post-pandemic growth in 2022, and lost accounts. Upselling and cross-selling added $9.3 million, while new Americas customers contributed $7.6 million.
- International revenue weakness was most pronounced in India and Asia-Pacific, partly offset by European growth. In the Americas, some industry verticals experienced lower hiring activity.
- Adjusted EBITDA declined $5.0 million. Lower revenue and foreign currency effects were partly offset by automation, operating efficiencies, cost actions, and customer growth.
- Operating cash flow decreased $3.0 million; management cited softer hiring activity, partly offset by stronger customer collections and lower receivables.
- Q1 repurchases totaled 1.87 million shares at an average $13.50 per share, for total costs of $25.5 million including associated costs. The authorization was increased to $200 million in February 2023; approximately $114.2 million remained available at March 31.
Outlook, risks, and unusual items
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management said it remained confident in the long-term business and product offering, while noting that economic uncertainty had begun lengthening some sales cycles and could affect hiring plans, demand, renewals, collections, and growth.
- Revenue is exposed to customer hiring volumes and macroeconomic conditions. Customer contracts generally do not guarantee minimum or committed order volumes. The business is seasonal, with historical revenue peaks in October and November; Q1 results should not be assumed to represent the full year.
- Management cites risks including regulation of personal data, cybersecurity and data handling, reliance on third-party data and vendors, competition, international operations, employee retention, debt obligations, and legal exposure. No material changes to the previously disclosed risk factors were reported.
- The company recorded $1.1 million of noncash impairment charges, primarily for exited office space, and less than $0.2 million of write-downs for abandoned equipment. It accrued $4.1 million for litigation matters considered probable and estimable; management says it intends to defend pending matters.
- Effective May 10, 2023, the board modified vesting terms for certain unvested performance-based awards to permit time-based vesting over the fourth through sixth anniversaries of vesting commencement, subject to continued service. Related accounting is to be recorded prospectively beginning in Q2 2023.
Important facts for investors to verify
- Whether hiring demand and customer order volumes stabilize, particularly in International markets and affected Americas industry verticals.
- How variable-rate debt costs and interest-rate derivatives affect future interest expense, cash interest, and earnings.
- The sustainability of adjusted EBITDA and margins, and the reconciliation of non-GAAP measures to GAAP results.
- Cash generation and liquidity after share repurchases, software investment, debt service, and the expected increase in cash taxes as tax attributes are used.
- Developments in litigation exposure and the expense and accounting impact of the performance-award modification.