First Advantage Corporation — Q3 2021 Form 10-Q
Business context and reporting period
First Advantage provides technology-enabled background screening, verification, safety, and compliance services. It filed for the quarter ended September 30, 2021. The company completed its IPO in June 2021 and reports as a single operating segment. Comparisons involving 2020 require care: Silver Lake’s January 2020 acquisition created “Predecessor” and “Successor” accounting periods that are not directly comparable; management provides pro forma 2020 figures for certain nine-month comparisons.
Financial performance and liquidity
- Revenue: Q3 revenue was $192.9 million, up 41.0% from $136.8 million a year earlier. For the first nine months, revenue was $499.8 million, up 41.7% from $352.6 million on a pro forma 2020 basis.
- Drivers: Management attributed growth to recovering hiring demand, existing-customer growth and cross-selling, new customers, and the March UK screening-business acquisition. Q3 included $8.8 million from that acquisition; nine-month revenue included $15.9 million. Pricing was described as relatively stable.
- Profitability: Q3 operating income was $24.4 million and net income was $16.3 million, versus a $3.5 million net loss in Q3 2020. Q3 GAAP net margin was 8.4%, versus negative 2.5%. Nine-month net income was $0.7 million; management’s pro forma comparison showed a $59.7 million improvement over the prior-year period.
- Non-GAAP measures: Q3 Adjusted EBITDA was $63.9 million, up 48%, with a 33% margin versus 32% a year earlier. Nine-month Adjusted EBITDA was $156.9 million, up 54% from $102.2 million pro forma. Q3 Adjusted Net Income was $42.2 million and Adjusted Diluted EPS was $0.28; nine-month amounts were $95.9 million and $0.69, respectively. These are company-defined non-GAAP measures.
- Costs and margins: Cost of services was 48.8% of revenue in Q3 versus 49.3% a year earlier, and 49.0% for the first nine months versus 49.6% pro forma. Management cited operating efficiencies, proprietary data, and automation. SG&A and product/technology costs rose, including expenses associated with becoming a public company and technology investment.
- Cash flow: Nine-month operating cash flow was $83.9 million; investing cash outflow was $25.0 million, including the UK acquisition and technology and equipment investment; financing cash inflow was $64.4 million, primarily reflecting the IPO and debt transactions. Accounts receivable increased, partly reflecting strong late-quarter revenue growth.
- Cash, debt, and liquidity: At September 30, cash and cash equivalents were $275.5 million. Debt principal was $564.7 million, all first-lien term debt; the company had no revolver borrowings and $100.0 million of revolver capacity available. Net long-term debt carrying value was $554.4 million after financing costs. Management said available cash, revolver capacity, and operating cash flow should meet needs for the next 12 months.
Material changes and significant items
- The IPO generated $316.5 million in net proceeds for the company; $200.0 million was used to repay first-lien debt, with the balance intended for general corporate purposes. Existing shareholders also sold shares in the offering.
- In February 2021, the company refinanced its first-lien facility, repaid the second-lien facility, and recorded a $13.9 million loss on debt extinguishment. The IPO-related debt repayment also caused $3.7 million of accelerated financing-cost amortization in interest expense. Q3 interest expense declined 59.6% year over year to $4.7 million.
- The March 2021 UK acquisition cost approximately $7.6 million. Subsequent to quarter-end, the company agreed to acquire Corporate Screening Services and MultiLatin Advisors for a combined approximate purchase price of $41.2 million, subject to customary closing conditions and adjustments.
- The company recorded an $8.1 million liability for litigation matters, including $6.3 million for two coordinated California class actions pending final court approval of a settlement. It also recorded a $2.2 million related insurance recoverable asset.
Outlook, commentary, and risks
The filing provides no specific financial guidance. Management described demand as strong across several customer sectors and said operating expenses may rise in absolute dollars to support growth, while expressing the expectation that expenses could decline as a percentage of revenue over time. Management also noted seasonality, with revenue generally stronger in the second half, and uncertainty about how COVID-19 and economic conditions may affect hiring volumes.
Risks highlighted include changing hiring demand and macroeconomic conditions; COVID-19 impacts; privacy, data-security, and regulatory exposure; reliance on third-party data providers and vendors; technology outages; litigation; competition; indebtedness and covenant restrictions; international operations; and Silver Lake’s control. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter. No material change in disclosed risk factors was reported.
Most important facts for investors to verify
- Assess the quality and durability of revenue growth, including the contribution from recovering customer volumes, new customers, cross-selling, and the UK acquisition.
- Review Adjusted EBITDA, Adjusted Net Income, and Adjusted EPS reconciliations and the company’s non-GAAP definitions alongside GAAP results.
- Track receivables, operating cash conversion, and the effect of continued technology investment and acquisitions on cash needs.
- Confirm debt balances, interest-rate exposure, required repayments, and covenant terms; the company’s debt bears variable-rate interest and is partly covered by an interest-rate collar.
- Monitor the California settlement approval and other litigation, as well as completion and integration of the announced acquisitions.