First Advantage(FA) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) First Advantage reported increased revenues and a widened net loss in Q1 2025, primarily due to the Sterling acquisition and higher interest expenses Condensed Consolidated Balance Sheets As of March 31, 2025, total assets and liabilities slightly decreased, with goodwill and intangible assets remaining significant components of the balance sheet Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 (in thousands) | December 31, 2024 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $171,994 | $168,688 | | Goodwill | $2,128,018 | $2,124,528 | | Intangible assets, net | $955,357 | $987,948 | | Total Assets | $3,871,691 | $3,922,893 | | Long-term debt, net | $2,117,434 | $2,121,289 | | Total Liabilities | $2,592,936 | $2,615,854 | | Total Equity | $1,278,755 | $1,307,039 | Condensed Consolidated Statements of Operations and Comprehensive Loss Q1 2025 revenues more than doubled due to the Sterling acquisition, but a significant increase in interest expense led to a widened net loss Q1 2025 vs Q1 2024 Statement of Operations (in thousands, except per share data) | Metric | Q1 2025 (in thousands) | Q1 2024 (in thousands) | | :--- | :--- | :--- | | Revenues | $354,588 | $169,416 | | Total operating expenses | $346,971 | $170,142 | | Income (Loss) from Operations | $7,617 | $(726) | | Interest expense, net | $46,580 | $3,570 | | Net Loss | $(41,194) | $(2,908) | | Basic and diluted net loss per share | $(0.24) | $(0.02) | Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased in Q1 2025 due to higher interest payments, while investing and financing activities primarily involved capitalized software and debt repayments Q1 2025 vs Q1 2024 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2025 (in thousands) | Q1 2024 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,471 | $38,329 | | Net cash used in investing activities | $(11,076) | $(7,031) | | Net cash (used in) provided by financing activities | $(5,993) | $689 | | Increase in cash, cash equivalents, and restricted cash | $3,308 | $31,659 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail the Sterling acquisition's impact, including significant goodwill, altered debt structure, new segment reporting, and a subsequent debt repayment - The company completed the acquisition of Sterling Check Corp. on October 31, 2024, for a total consideration of approximately $2.2 billion, resulting in the recognition of $1.31 billion in goodwill[42][44] - In Q1 2024, one customer represented approximately 11% of consolidated revenues. In Q1 2025, no single customer accounted for 10% or more of revenues[37] - The company now reports in three segments: First Advantage Americas, First Advantage International, and the new Sterling segment. For Q1 2025, Sterling contributed $187.5 million in total revenues and $48.4 million in Segment Adjusted EBITDA[87][88] - Subsequent to quarter end, on May 7, 2025, the company made a voluntary principal repayment of $15.0 million on its Amended First Lien Credit Facility[94] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2025 revenue growth driven by the Sterling acquisition, offset by existing customer declines, leading to increased expenses and a widened net loss despite Adjusted EBITDA growth Results of Operations Q1 2025 revenues significantly increased due to the Sterling acquisition, but higher cost of services, depreciation, and a surge in interest expense led to a substantial net loss Q1 2025 Revenue Change Drivers (in millions) | Driver | Revenue Impact (in millions) | % of 2024 Revenue | | :--- | :--- | :--- | | Sterling Acquisition | +$187.5 | +110.7% | | New Customers | +$5.1 | +3.0% | | Existing Customers (Net Decrease) | -$7.4 | -4.4% | | Total Increase | +$185.2 | +109.3% | - Cost of services as a percentage of revenue increased from 51.5% to 54.3% year-over-year, impacted by Sterling's higher relative cost of services due to its product and customer mix[128] - Interest expense increased by $43.0 million (1,204.8%) due to an incremental $1.62 billion in term loan principal related to the Sterling Acquisition financing[135][136] Key Operating and Financial Metrics (Non-GAAP) Adjusted EBITDA significantly increased in Q1 2025 due to the Sterling acquisition, though margin compressed, while Adjusted Diluted EPS remained flat despite higher adjusted net income Non-GAAP Financial Metrics (in thousands, except per share data) | Metric | Q1 2025 (in thousands) | Q1 2024 (in thousands) | | :--- | :--- | :--- | | Adjusted EBITDA | $92,112 | $46,558 | | Adjusted EBITDA Margin | 26.0% | 27.5% | | Adjusted Net Income | $30,486 | $24,786 | | Adjusted Diluted Earnings Per Share | $0.17 | $0.17 | Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Line Item | Q1 2025 (in thousands) | Q1 2024 (in thousands) | | :--- | :--- | :--- | | Net loss | $(41,194) | $(2,908) | | Interest expense, net | 46,580 | 3,570 | | Provision (benefit) for income taxes | 2,231 | (1,388) | | Depreciation and amortization | 61,666 | 29,822 | | Share-based compensation | 7,967 | 4,751 | | Transaction and acquisition-related charges | 3,996 | 11,992 | | Integration, restructuring, and other charges | 10,866 | 719 | | Adjusted EBITDA | $92,112 | $46,558 | Liquidity and Capital Resources As of March 31, 2025, the company maintained sufficient liquidity with $172.0 million in cash and a $250.0 million revolving credit facility, supported by a refinanced $2.185 billion term loan - As of March 31, 2025, liquidity consisted of $172.0 million in cash and cash equivalents and $250.0 million available under the revolving credit facility[165] - In connection with the Sterling Acquisition, the company entered into a new credit agreement with a $2.185 billion term loan due 2031 and a $250.0 million revolving credit facility due 2029[168] Quantitative and Qualitative Disclosures About Market Risk The company states that as of March 31, 2025, there have been no material changes in its market risks compared to the disclosures in its 2024 Annual Report - No material change had occurred in the company's market risks as of March 31, 2025, compared with the disclosure in the 2024 Annual Report[180] Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2025, while actively integrating Sterling's operations and control processes - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[182] - The company is in the process of integrating the Sterling operations, control processes, and information systems, and has taken steps to monitor and maintain appropriate internal controls during this integration[183] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course litigation, with an $11.2 million liability recorded for probable and estimable losses as of March 31, 2025 - Information regarding legal proceedings is incorporated by reference from Note 12, which states the company has recorded a liability of $11.2 million for pending matters as of March 31, 2025[185][81] Risk Factors There have been no material changes to the company's risk factors as of March 31, 2025, compared to those disclosed in the 2024 Annual Report - As of March 31, 2025, no material changes had occurred in the company's risk factors compared with the disclosure in its 2024 Annual Report[186] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[187] Other Information President Joelle Smith adopted a Rule 10b5-1 trading plan on February 28, 2025, for the potential sale of up to 69,402 shares of common stock - On February 28, 2025, President Joelle Smith adopted a Rule 10b5-1 trading plan for the sale of up to 69,402 shares of common stock[188] Exhibits The report lists various exhibits filed, including the Sterling merger agreement, corporate governance documents, and officer certifications - Exhibits filed include the Agreement and Plan of Merger with Sterling Check Corp., corporate governance documents, and certifications from the Principal Executive Officer and Principal Financial Officer[190]