First Advantage(FA) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents First Advantage Corporation's unaudited Q1 2023 financial statements, showing decreased revenues, net income, and equity from share repurchases Condensed Consolidated Balance Sheets Total assets decreased to $1.85 billion from $1.89 billion, with total liabilities falling to $740.3 million and total equity to $1.11 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $555,474 | $566,195 | | Goodwill | $793,293 | $793,080 | | TOTAL ASSETS | $1,847,663 | $1,885,825 | | Total current liabilities | $84,960 | $100,786 | | Long-term debt, net | $557,111 | $556,649 | | Total liabilities | $740,336 | $759,207 | | Total equity | $1,107,327 | $1,126,618 | Condensed Consolidated Statements of Operations and Comprehensive Income Revenues decreased to $175.5 million from $189.9 million, with net income significantly declining to $1.9 million and diluted EPS to $0.01 Q1 2023 vs Q1 2022 Statement of Operations (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Revenues | $175,520 | $189,881 | | Income from Operations | $11,287 | $17,098 | | Net Income | $1,925 | $13,013 | | Diluted net income per share | $0.01 | $0.09 | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased to $38.6 million, investing cash use fell to $6.1 million, and financing cash use increased to $24.2 million due to share repurchases Q1 2023 vs Q1 2022 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $38,599 | $41,583 | | Net cash used in investing activities | $(6,083) | $(26,472) | | Net cash used in financing activities | $(24,163) | $(40) | | Increase in cash | $8,500 | $15,129 | Condensed Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity decreased to $1.107 billion, primarily due to $25.5 million in common stock repurchases - Share repurchases of common stock amounted to a $25.5 million reduction in accumulated deficit during the first quarter of 2023[15] - Net income of $1.9 million and share-based compensation of $2.1 million partially offset the reduction in equity[15] Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, business operations, and financial items, including background screening services, debt, share repurchases, and segment reporting - The company provides background check and compliance services categorized as pre-onboarding, post-onboarding, and adjacent products[19][20][21] - The Board of Directors authorized a share repurchase program, which was increased to $200.0 million in February 2023. As of March 31, 2023, $114.2 million remained available for repurchase[65][67] Segment Adjusted EBITDA (in thousands) | Segment | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Americas | $44,656 | $46,819 | | International | $3,904 | $6,781 | | Total | $48,560 | $53,600 | - The company has a $564.7 million outstanding term loan under its First Lien Credit Facility as of March 31, 2023, with no outstanding borrowings under its $100.0 million revolver[44] - A liability of $4.1 million was recorded as of March 31, 2023, for litigation matters where a loss is considered probable and estimable[72] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial condition, detailing a 7.6% revenue decline to $175.5 million and a 9.4% Adjusted EBITDA decrease Results of Operations Q1 2023 revenues decreased 7.6% to $175.5 million, operating income fell to $11.3 million, and net income dropped to $1.9 million Q1 2023 vs Q1 2022 Results of Operations (in thousands) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Revenues | $175,520 | $189,881 | | Cost of services | $91,061 | $96,431 | | Income from operations | $11,287 | $17,098 | | Interest expense, net | $8,681 | $(850) | | Net income | $1,925 | $13,013 | - The decrease in revenues was primarily driven by a $22.0 million net decrease in existing customer revenues due to reduced demand from macro-economic events, partially offset by $9.3 million from upselling/cross-selling and $7.6 million from new customers[109] - Net interest expense increased by $9.5 million, primarily due to higher interest rates on the First Lien Credit Facility and $1.9 million of unrealized losses on interest rate swaps[117][118] Key Operating and Financial Metrics (Non-GAAP) Non-GAAP metrics declined, with Adjusted EBITDA falling 9.4% to $48.6 million and Adjusted Diluted EPS decreasing to $0.19 Non-GAAP Financial Metrics (in thousands, except percentages/per share) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Adjusted EBITDA | $48,560 | $53,600 | | Adjusted EBITDA Margin | 27.7% | 28.2% | | Adjusted Net Income | $28,364 | $33,497 | | Adjusted Diluted EPS | $0.19 | $0.22 | Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income | $1,925 | $13,013 | | Interest, Taxes, D&A | $41,228 | $38,119 | | Share-based compensation | $2,058 | $1,859 | | Other adjustments | $3,349 | $609 | | Adjusted EBITDA | $48,560 | $53,600 | Liquidity and Capital Resources The company maintains strong liquidity with $400.2 million cash and $100.0 million undrawn revolver, increasing share repurchase authorization to $200.0 million - The company has primary liquidity requirements for working capital, capital expenditures, and strategic investments[145] - As of March 31, 2023, the company had $400.2 million in cash and cash equivalents and $100.0 million available under its revolving credit facility[146] - The Board of Directors increased the share repurchase program to $200.0 million, effective February 28, 2023. Through May 4, 2023, the company had repurchased $97.4 million of shares under the program[148] Cash Flow Analysis Operating cash flow decreased to $38.6 million, investing cash use fell to $6.1 million, and financing cash use increased to $24.2 million Cash Flow Summary (in thousands) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $38,599 | $41,583 | | Net cash used in investing activities | $(6,083) | $(26,472) | | Net cash used in financing activities | $(24,163) | $(40) | - The decrease in operating cash flow was impacted by more modest hiring activity and softness internationally[159] - The decrease in investing cash use was driven by the absence of acquisitions in Q1 2023, compared to a $19.1 million acquisition in Q1 2022[160] - Financing activities in Q1 2023 were primarily driven by $25.3 million in share repurchases under the company's program[161] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risks were reported as of March 31, 2023, compared to the prior Annual Report on Form 10-K - No material change had occurred in the company's market risks as of March 31, 2023, compared with the disclosure in the Annual Report on Form 10-K filed on February 28, 2023[163] Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the end of the period, the company's disclosure controls and procedures were effective at a reasonable assurance level[165] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[166] PART II. OTHER INFORMATION Legal Proceedings The company recorded a $4.1 million liability for probable and estimable legal matters as of March 31, 2023 - The company has recorded a liability of $4.1 million at March 31, 2023, for legal matters where a loss is both probable and estimable[72][168] Risk Factors No material changes to the company's risk factors were reported as of March 31, 2023 - No material changes had occurred in the company's risk factors as of March 31, 2023[169] Unregistered Sales of Equity Securities and Use of Proceeds No material change in IPO proceeds use; 1,871,691 shares repurchased at $13.50 average price in Q1 2023 Issuer Purchases of Equity Securities (Q1 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 2023 | 641,061 | $13.15 | | Feb 2023 | 525,603 | $13.71 | | Mar 2023 | 705,027 | $13.66 | | Total | 1,871,691 | $13.50 | - The Board of Directors increased the total authorized amount under the Repurchase Program to $200.0 million. As of March 31, 2023, $114.2 million remained available for repurchase[171] Other Information The Board modified vesting terms for unvested performance-based equity awards, allowing time-based vesting on anniversaries - The company modified vesting terms for unearned performance-based awards, allowing them to vest based on time over the fourth, fifth, and sixth anniversaries of the vesting commencement date, subject to continued service[173] - An equity grant was authorized for the EVP, General Counsel, and Corporate Secretary, Bret T. Jardine, with a fair value of $150,000, effective May 10, 2023[176] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and officer certifications - The report includes exhibits such as corporate governance documents, compensatory arrangements, and certifications by the Principal Executive Officer and Principal Financial Officer[177]