First Advantage Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. First Advantage provides global background screening and related workforce, safety, and compliance services. Results are labeled “Successor” after Silver Lake’s January 2020 acquisition; predecessor and successor periods are not directly comparable. Six-month comparisons below use the company’s pro forma 2020 figures where noted.
Financial performance and position
- Revenue: Q2 revenue was $174.8 million, up 66.5% from $105.0 million in Q2 2020. First-half revenue was $306.9 million, up 42.2% from $215.8 million for first-half 2020 on a pro forma basis.
- Profit and margins: Q2 net income was $3.8 million ($0.03 per diluted share), versus a $16.4 million loss a year earlier; net margin was 2.2%, compared with negative 15.6%. First-half net loss was $15.6 million, versus a pro forma loss of $57.3 million; first-half net margin was negative 5.1%, compared with negative 26.6% pro forma.
- Adjusted results (non-GAAP): Q2 Adjusted EBITDA was $56.3 million, or 32% of revenue, compared with $31.7 million and 30%. First-half Adjusted EBITDA was $92.9 million, or 30%, up 58% from $58.9 million and 27% pro forma. Adjusted net income was $33.2 million for Q2 and $53.7 million for the first half; Adjusted diluted EPS was $0.25 and $0.40, respectively.
- Operating costs: Cost of services was 48.5% of Q2 revenue versus 49.9%; first-half cost of services was 49.1% versus 50.7% pro forma. Management attributed improved leverage to operating efficiencies and robotic process automation. Product and technology and selling, general, and administrative expenses rose with investments, growth-related compensation, and IPO costs.
- Cash flow: First-half operating cash flow was $56.1 million, investing cash outflow was $19.0 million, and financing cash inflow was $67.9 million. Cash and cash equivalents were $257.1 million at June 30, 2021, up from $152.8 million at year-end. Receivables increased amid strong revenue growth.
- Debt and liquidity: Debt principal was $564.7 million at June 30, with $553.968 million reported net of financing costs. The company had no revolver borrowings and $100 million of revolving capacity available. Management said cash, revolver availability, and operating cash flows should cover needs for the next 12 months.
- Other balance-sheet items: Total assets were $1.842 billion and total liabilities $742.4 million. Goodwill was $774.6 million; trade name and customer lists totaled $490.2 million net.
Material changes and unusual items
- IPO: Completed June 25 at $15 per share. The company issued 22.9 million shares and received $316.5 million net proceeds; selling stockholders sold another 6.5 million shares. The company used $200 million of proceeds to repay first-lien debt and intended to use the balance for general corporate purposes.
- Debt refinancing: In February, the company refinanced its first-lien loan at a lower margin and repaid its $145 million second-lien loan. In connection with refinancing, it recorded a $13.9 million debt-extinguishment loss. The IPO debt repayment also led to $3.7 million of accelerated financing-cost amortization included in interest expense. First-half interest expense fell 45.3% versus the pro forma prior period.
- Acquisition: A UK background-screening business was acquired March 31 for approximately $7.6 million, contributing $7.1 million of Q2 and first-half revenue. The purchase-price allocation included $3.1 million of goodwill.
- Revenue drivers: Management cited recovery in hiring after the pandemic-affected 2020 quarter, strength among existing customers, new customer wins, cross-selling, and the UK acquisition. Pricing was relatively stable. Revenue growth was particularly strong in essential retail, e-commerce, transportation, and home delivery.
- Seasonality and outlook: The company historically sees its highest revenue in Q4, with hiring patterns varying by industry. Management expected continued strong demand and believed economic recovery would support hiring in 2021, while noting uncertainty around COVID-19’s duration and effects. The filing provides no quantified financial guidance.
Risks, contingencies, and controls
- Risks include COVID-19 and changing hiring volumes; privacy, data security, cyberattacks, and regulation; reliance on third-party data providers and technology integrations; outages and cloud migration; substantial indebtedness; and Silver Lake’s control and potential conflicts of interest.
- The company recorded $8.6 million of liabilities for litigation matters considered probable and estimable. Two coordinated California class actions had a settlement agreed, pending final court approval; the recorded settlement and related fees were $6.3 million, with a $2.2 million insurance recoverable asset.
- No material off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective at a reasonable assurance level; no material change in internal control was reported. The company said risk factors and market risks had not materially changed from its IPO registration statement.
Most important facts for investors to verify
- Whether post-pandemic hiring volumes and customer demand remain strong, especially in concentrated high-growth verticals and internationally.
- Whether operating leverage, automation gains, and Adjusted EBITDA margins persist as hiring, data, technology, and public-company costs evolve.
- Debt repayment pace, interest-rate exposure under the LIBOR-based facility, covenant compliance, and use of remaining IPO proceeds.
- Actual cash conversion and working-capital needs as receivables rise with revenue; management’s liquidity assessment assumes continued operating performance.
- Final outcomes and insurance recoveries for litigation, and the impact of privacy, data-security, regulatory, and COVID-related risks.
- Comparability of reported periods: 2020 includes predecessor/successor accounting differences, while pro forma figures are non-GAAP-style comparative information and exclude synergies.