First Advantage Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report; it does not provide a standalone fourth-quarter financial summary. First Advantage provides employment background screening, identity, verification, and related compliance services. It completed approximately 100 million screens for more than 30,000 customers in over 200 countries and territories. About 87% of revenue came from the Americas.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $763.8 million | $810.0 million | Down 5.7% |
| Operating income | $81.5 million | $94.3 million | Down 13.5% |
| Operating margin | 10.7% | 11.6% | Down about 0.9 percentage points |
| Net income | $37.3 million | $64.6 million | Down 42.3% |
| Net income margin | 4.9% | 8.0% | Down 3.1 percentage points |
| Diluted EPS | $0.26 | $0.43 | Down 39.5% |
| Adjusted EBITDA (non-GAAP) | $237.6 million | $248.9 million | Down 4.6% |
| Adjusted EBITDA margin (non-GAAP) | 31.1% | 30.7% | Up 0.4 percentage points |
| Operating cash flow | $162.8 million | $212.8 million | Down $50.0 million |
Revenue by segment: Americas revenue was $673.1 million, down from $694.9 million; International revenue was $96.8 million, down from $122.6 million, before intersegment eliminations. Management attributed the decline mainly to lower existing-customer demand, reduced hiring, the fading of post-pandemic growth seen in early 2022, lost accounts, and weakness in India and APAC. New customers contributed $35.1 million and the Infinite ID acquisition contributed $2.9 million; upselling and cross-selling added $36.9 million. Pricing was relatively stable.
Costs and earnings drivers: Cost of services declined 5.4% to $386.8 million, broadly in line with revenue; it rose slightly as a share of revenue, to 50.6% from 50.5%. Operating expenses totaled $682.2 million. Net interest expense increased to $33.0 million from $9.2 million, reflecting higher borrowing costs and interest-rate volatility, partly offset by $13.4 million of interest income. FY2023 share-based compensation was $15.3 million, including approximately $6.6 million of incremental expense from an award-vesting modification.
Other non-GAAP measure: Adjusted net income was $145.8 million versus $156.5 million, and adjusted diluted EPS was $1.00 versus $1.03. These company-defined measures exclude specified items and are not substitutes for GAAP results.
Financial position, liquidity, and capital allocation
- At December 31, 2023, cash and cash equivalents were $213.8 million, compared with $391.7 million a year earlier. The company also reported $100 million available under its revolving credit facility and no revolver borrowings.
- Total debt outstanding was $564.7 million, with the first-lien term loan due January 31, 2027. The balance-sheet carrying value, net of deferred financing costs, was $558.5 million. The facility uses a variable rate based on SOFR; the company reported compliance with its debt covenants.
- Cash from operations was $162.8 million; investing activities used $66.8 million, including $41.1 million for Infinite ID; financing activities used $273.6 million. Financing outflows included a $217.7 million special dividend and $59.0 million of share repurchases.
- Management said cash, operating cash flow, and revolver availability should meet operational and business needs over the next 12 months. This assessment does not include assurance regarding future results or acquisition financing.
- The board authorized a one-time $1.50-per-share dividend, paid in August 2023. As of February 23, 2024, cumulative repurchases under the program were 9.0 million shares for $119.5 million; repurchases are to be suspended in connection with the Sterling transaction.
Material developments, outlook, and risks
Sterling acquisition: On February 28, 2024, after the fiscal year-end, First Advantage agreed to acquire Sterling Check Corp. in a cash-and-stock transaction valuing Sterling at approximately $2.2 billion. Financing commitments include a $1.820 billion incremental term loan and $150 million of incremental revolving commitments, subject to conditions. Closing requires, among other matters, Sterling stockholder approval, regulatory clearances, and an effective Form S-4 registration statement. The deal is not completed, and the filing warns that it may be delayed or fail to close; integration and realizing expected benefits also pose risks.
Management commentary and outlook: Management cited continuing macroeconomic uncertainty and lower hiring activity, while expressing confidence in the business’s long-term health, product offering, and strategy. The filing does not provide numerical FY2024 revenue or earnings guidance. Management expects income taxes to become a more significant use of cash after fully using its remaining U.S. federal NOL carryforwards in 2023. It also expects continued investment in technology, automation, and growth.
- Demand is sensitive to customer hiring levels and economic conditions; contracts generally lack minimum volume commitments, and customers may reduce or end usage.
- Privacy, consumer-reporting, data-security, and other regulation can raise compliance costs, constrain services, or lead to investigations, litigation, penalties, and reputational damage. Cybersecurity incidents, third-party data or service disruptions, and system outages are also key risks.
- Competition, customer concentration, seasonality, foreign exchange movements, and variable-rate debt may affect results. One customer generated approximately 12% of FY2023 revenue and represented 17% of year-end net accounts receivable.
- Accrued legal liabilities were $5.2 million at year-end for matters management considered probable and estimable. The filing describes ordinary-course litigation and states the company intends to defend pending matters; outcomes remain uncertain.
- The company recorded no goodwill impairment in 2023. It reported effective disclosure controls and internal control over financial reporting, with unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the Sterling acquisition closes, its final financing terms, any share issuance or dilution, regulatory conditions, and expected integration costs and benefits.
- Whether hiring and existing-customer demand recover, particularly in Americas industry verticals and the International business, and whether new-customer wins and cross-selling offset attrition.
- Cash conversion and liquidity after the special dividend and repurchases, along with debt-service costs, SOFR exposure, and the impact of acquisition borrowing if the deal closes.
- The composition and repeatability of adjusted EBITDA and adjusted earnings, including excluded compensation, transaction, restructuring, and other charges.
- Developments in the significant customer relationship, accrued litigation matters, privacy or cybersecurity events, and the company’s regulatory compliance obligations.