First Advantage Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. First Advantage provides workforce background screening, verification, safety, and compliance services. Its reportable segments are Americas and International.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $201.6 million | $174.8 million | $391.4 million | $306.9 million |
| Operating income | $22.8 million | $17.3 million | $39.9 million | $14.1 million |
| Net income (loss) | $14.2 million | $3.8 million | $27.2 million | ($15.6 million) |
| GAAP net income (loss) margin | 7.1% | 2.2% | 7.0% | (5.1%) |
| Adjusted EBITDA (non-GAAP) | $60.8 million | $56.3 million | $114.4 million | $92.9 million |
| Adjusted EBITDA margin (non-GAAP) | 30.2% | 32.2% | 29.2% | 30.3% |
| Diluted EPS | $0.09 | $0.03 | $0.18 | ($0.12) |
Revenue increased 15.3% in Q2 and 27.5% year to date. Management attributed growth to existing and new customers, favorable hiring trends, and acquisitions. Pricing was described as relatively stable. For the six-month period, Americas revenue was $330.7 million and International revenue was $64.8 million, before eliminations.
Cost of services rose faster than revenue: it was 49.8% of revenue in Q2 versus 48.5% a year earlier, and 50.3% year to date versus 49.1%. Management cited third-party data costs, order mix, and acquisitions, partly offset by automation and operating efficiencies. Adjusted EBITDA grew, but its margin declined year over year in both comparisons. Q2 adjusted net income was $38.0 million and adjusted diluted EPS was $0.25; six-month figures were $71.5 million and $0.47, respectively.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $352.3 million at June 30, 2022, compared with $292.6 million at December 31, 2021.
- Six-month operating cash flow was $96.4 million, up from $56.1 million. Investing cash outflow was $34.4 million, including the Form I-9 acquisition and technology investment. Financing cash flow was $0.2 million provided.
- Long-term debt was $564.7 million principal, or $555.7 million net of deferred financing costs. The $100 million revolver was undrawn, leaving $100 million available. The term loan matures January 2027; its rate is floating, based on LIBOR plus a margin.
- The company said cash, operating cash flow, and revolver availability should be adequate for operational and business needs over the next 12 months. It also noted that future financing, if needed, may not be available on acceptable terms.
Changes, outlook, and notable items
- Compared with 2021, profitability improved, supported by higher revenue and lower reported interest expense. The six-month comparison also reflects the prior-year $13.9 million debt-extinguishment loss. Q2 and six-month 2022 interest expense benefited from unrealized interest-rate swap gains of $2.1 million and $7.4 million, respectively; rising rates partly offset savings from debt reductions and refinancing.
- No specific revenue or earnings guidance was provided. Management cited continued investment in technology, sales, and customer support, and expects SG&A to rise in the short term partly due to public-company costs; over time, it expects SG&A and operating expenses to decline as a percentage of revenue as the business scales.
- The Form I-9 Compliance acquisition became effective January 1, 2022, for approximately $19.8 million cash consideration. Purchase accounting remained provisional, including goodwill and deferred taxes, and may be adjusted.
- On August 2, 2022, after quarter-end, the board authorized up to $50 million of share repurchases through August 2, 2023, funded with existing cash. Repurchases are discretionary.
- Litigation reserves were $3.6 million at June 30, down from $7.9 million at year-end. The company paid $5.5 million to settle a previously agreed case and received a $2.2 million insurance recovery. It warns that privacy-related litigation may be costly.
- Management identified risks including regulation and data privacy/security, dependence on third-party data providers, customer hiring volumes and macroeconomic conditions, competition, integration and technology disruptions, indebtedness and interest-rate exposure, and seasonality. COVID-19 and related uncertainty may adversely affect results. The company reported effective disclosure controls and no material change in internal control during the quarter.
Key facts for investors to verify
- How much of revenue growth is sustainable existing-customer growth versus acquisitions and new-customer wins.
- Whether third-party data costs and acquisition mix continue to pressure service costs and adjusted EBITDA margins.
- The contribution of interest-rate swap fair-value gains to reported interest expense, and the company’s exposure to further rate increases.
- Final purchase accounting for Form I-9 Compliance and the effect of any adjustments.
- Cash needs and debt capacity alongside the planned share repurchases, and developments in litigation and other privacy-related contingencies.