Sterling Check Corp. (NASDAQ: STER) (“Sterling” or “the Company”) a
leading global provider of technology-enabled background and
identity verification services, today announced financial results
for the first quarter ended March 31, 2024.
First Quarter
2024 Highlights
All results compared to prior-year period.
-
Revenues increased 3.8% year-over-year to $186.0 million. Organic
constant currency revenue decreased 4.9% and inorganic revenue
growth was 8.7%. Organic revenue growth included growth of 11%
year-over-year from the combination of new business, up/cross-sell,
and customer attrition, offset by a 16% decline year-over-year in
our base business.
-
GAAP net (loss) income decreased year-over-year to a loss of $(8.0)
million, or $(0.09) per diluted share, compared to GAAP net income
of $0.6 million, or $0.01 per diluted share, for the prior year
period.
-
Adjusted EBITDA decreased 15.5% year-over-year to $38.5 million.
Adjusted EBITDA Margin decreased 470 bps year-over-year to 20.7%.
Margin contraction was driven by increased volume from M&A
activity at lower margins and higher third-party vendor costs as a
percentage of revenue, partially offset by lower costs driven by
our cost optimization efforts. The increase in third party vendor
costs was driven by the combination of organic revenue growth in
certain lower-margin product categories and revenue declines within
our higher-margin base business.
-
Adjusted Net Income decreased 25.2% year-over-year to $17.4
million. Adjusted Earnings Per Share—diluted decreased 20.8%
year-over-year to $0.19 per diluted share.
Organic constant currency revenue growth (decline),
Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and
Adjusted Earnings Per Share—diluted are non-GAAP measures. Please
see the schedules accompanying this earnings release for a
reconciliation of these measures to their most directly comparable
GAAP measures, as applicable.
Josh Peirez, Sterling CEO, said, “In the first
quarter, Sterling started off the year with solid year-over-year
revenue growth of approximately 4% including strong organic revenue
trends within the revenue drivers in our control. We were
particularly pleased to report year-over-year growth of 11% from
the combination of new business, up/cross-sell, and customer
attrition, well ahead of our 7-8% combined long-term target from
those drivers. Our unrelenting focus on product innovation,
customer service, and technology excellence continues to resonate
with prospective and existing clients, and we remain in execution
mode following our exciting February announcement of a combination
with First Advantage. We were also proud of our inorganic revenue
trends in the quarter, with both A-Check and Vault contributing at
healthy levels to our top line growth as we march ahead with the
synergistic deal integrations. At the same time, the hiring market
backdrop remains challenging and drove year-over-year base business
revenue declines, a dynamic we expect to moderate over the course
of the year.
“These top line factors had a dampening effect on
our profitability during the first quarter. Specifically, our
margins were impacted year-over-year by lower-margin inorganic
revenue growth, particularly the Vault deal. Margins were also
affected by the mix of our organic revenue growth including base
revenue declines within higher-margin verticals and up-sell
activity in certain lower-margin product categories. We expect
margins to improve over the course of the year as we anticipate
realizing additional synergies from M&A and improvement in base
business. We also remain focused on our cost optimization efforts
and saw margin benefits this quarter from our continued efforts to
build a more streamlined, efficient cost structure throughout
Sterling that will result in improved operational flexibility,
profitability, and cash generation.”
First Quarter
2024 Results
|
Three Months Ended March 31, |
|
|
(in thousands, except per share data and
percentages) |
|
2024 |
|
|
|
2023 |
|
|
Change |
Revenues |
$ |
185,999 |
|
|
$ |
179,274 |
|
|
3.8 |
% |
Net (loss) income |
$ |
(7,955 |
) |
|
$ |
591 |
|
|
(1,446.0 |
)% |
Net (loss) income margin |
(4.3 |
)% |
|
|
0.3 |
% |
|
(460) bps |
Net (loss) income per share—diluted |
$ |
(0.09 |
) |
|
$ |
0.01 |
|
|
(1,000.0 |
)% |
Adjusted EBITDA(1) |
$ |
38,510 |
|
|
$ |
45,555 |
|
|
(15.5 |
)% |
Adjusted EBITDA Margin(1) |
|
20.7 |
% |
|
|
25.4 |
% |
|
(470) bps |
Adjusted Net Income(1) |
$ |
17,411 |
|
|
$ |
23,286 |
|
|
(25.2 |
)% |
Adjusted Earnings Per Share—diluted(1) |
$ |
0.19 |
|
|
$ |
0.24 |
|
|
(20.8) |
% |
|
_______________________(1) Adjusted EBITDA,
Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Earnings
Per Share—diluted are non-GAAP measures. Please see the schedules
accompanying this earnings release for a reconciliation of these
measures to their most directly comparable GAAP measures.
Revenue for the first quarter of 2024 was $186.0
million, an increase of $6.7 million, or 3.8%, compared to $179.3
million for the first quarter of 2023. The revenue increase for the
first quarter of 2024 included a 4.9% organic constant currency
revenue decline, offset by 8.7% inorganic revenue growth from the
acquisitions of Socrates and A-Check.
Balance Sheet and Cash Flow
As of March 31, 2024, cash and cash
equivalents were $67.0 million and total debt was $559.2 million,
compared to cash and cash equivalents of $54.2 million and total
debt of $498.0 million as of December 31, 2023, reflecting a
revolving credit facility drawdown of $65.0 million for the
acquisition of Vault Workforce Screening (“Vault”). Sterling ended
the first quarter of 2024 with a net leverage ratio of 2.8x net
debt to Adjusted EBITDA. As of March 31, 2024, available
borrowings under Sterling’s revolving credit facility, net of
letters of credit outstanding, were $128.8 million.
For the three months ended March 31, 2024,
Sterling generated net cash provided by operations of $3.7 million,
compared to $11.3 million for the prior year period. Capital
expenditures for the three months ended March 31, 2024 totaled
$5.6 million, compared to $4.3 million for the prior year period.
For the three months ended March 31, 2024, Sterling had $(1.9)
million of Free Cash Flow, compared to $7.0 million of Free Cash
Flow for the prior year period. The decrease in Free Cash Flow
compared to the prior year period was primarily driven by lower
operating income and higher cash taxes paid.
In January 2024, Sterling acquired Vault for an
aggregate purchase price of approximately $76.1 million.The
purchase price was funded through a combination of revolving credit
facility drawdown of $65.0 million and cash on hand, as well as an
initial contingent consideration of $2.8 million recorded at fair
value.
Free Cash Flow is a non-GAAP measure. Please see
the schedule accompanying this earnings release for a
reconciliation of Free Cash Flow to net cash provided by
operations, its most directly comparable GAAP measure.
Conference Call
On February 28, 2024, the Company entered into a
definitive agreement to combine with First Advantage Corporation, a
Delaware corporation (“First Advantage”). In light of the pending
merger with First Advantage, Sterling will not be hosting an
earnings conference call to review its first quarter ended
March 31, 2024.
Forward-Looking Statements
This release contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and it is
intended that all forward-looking statements that we make will be
subject to the safe harbor protections created thereby.
Forward-looking statements can be identified by forward-looking
terminology such as “aim,” “anticipate,” “believe,” “continue,”
“could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,”
“potential,” “predict,” “projection,” “seek,” “should,” “will” or
“would,” or the negative thereof or other variations thereon or
comparable terminology. In particular, statements that address
market trends or projections about the future, and statements
regarding Sterling’s expectations, beliefs, plans, strategies,
objectives, prospects or assumptions, or statements regarding
future events or performance, including those related to our
pending merger with First Advantage, contained in this release are
forward-looking statements. Sterling has based these
forward-looking statements on current expectations, assumptions,
estimates and projections. Such forward-looking statements are only
predictions and involve known and unknown risks and uncertainties,
many of which are beyond Sterling’s control. Important factors
relating to the proposed merger with First Advantage could also
cause actual future events to differ materially from the
forward-looking statements in this release, including but not
limited to: (i) the risk that the proposed merger may not be
completed in a timely manner or at all, (ii) the failure to satisfy
the conditions to the consummation of the proposed merger,
including the receipt of certain governmental and regulatory
approvals and clearances, (iii) the occurrence of any event, change
or other circumstance that could give rise to the termination of
the Merger Agreement, (iv) the effect of the announcement or
pendency of the proposed merger on Sterling’s business
relationships, operating results, and business generally, (v) risks
that the proposed merger disrupts current plans and operations of
Sterling or First Advantage and creates potential difficulties in
Sterling employee retention as a result of the proposed merger,
(vi) risks related to diverting management’s attention from
Sterling’s ongoing business operations, (vii) unexpected costs,
charges or expenses resulting from the proposed merger, (viii)
certain restrictions during the pendency of the proposed merger
that may impact Sterling’s ability to pursue certain business
opportunities or strategic transactions and (ix) the outcome of any
legal proceedings that may be instituted against First Advantage or
against Sterling related to the Merger Agreement or the proposed
merger. These and other important factors, including those
discussed more fully elsewhere in this release and in Sterling’s
filings with the Securities and Exchange Commission, particularly
Sterling’s most recently filed Annual Report on Form 10-K, may
cause actual results, performance or achievements to differ
materially from those expressed or implied by these forward-looking
statements, or could affect Sterling’s share price. The
forward-looking statements contained in this release are not
guarantees of future performance and actual results of operations,
financial condition, and liquidity, and the development of the
industry in which Sterling operates, may differ materially from the
forward-looking statements contained in this release. Any
forward-looking statement made in this release speaks only as of
the date of such statement. Except as required by law, Sterling
does not undertake any obligation to update or revise, or to
publicly announce any update or revision to, any of the
forward-looking statements, whether as a result of new information,
future events or otherwise, after the date of this release.
Non-GAAP Financial Information
This release contains “non-GAAP financial
measures,” which are financial measures that are not calculated and
presented in accordance with accounting principles generally
accepted in the United States of America (“GAAP”).
Specifically, Sterling makes use of the non-GAAP
financial measures “organic constant currency revenue growth
(decline)”, “Adjusted EBITDA,” “Adjusted EBITDA Margin,” “Adjusted
Net Income,” “Adjusted Earnings Per Share” and “Free Cash Flow” to
assess the performance of its business.
Organic constant currency revenue growth (decline)
is calculated by adjusting for inorganic revenue growth (decline),
which is defined as the impact to revenue growth (decline) in the
current period from merger and acquisition (“M&A”) activity
that has occurred over the past twelve months, and converting the
current period revenue at foreign currency exchange rates
consistent with the prior period. For the three months ended
March 31, 2024, we have provided the impact of revenue from
the acquisitions of Vault (acquired during the first quarter of
2024) as well as A-Check Global (“A-Check”) (acquired during the
first quarter of 2023), and for the three months ended
March 31, 2023, we have provided the impact of revenue from
the acquisition of Socrates Limited and its affiliates (“Socrates”)
(acquired in January 2023) as well as A-Check. We present organic
constant currency revenue growth (decline) because we believe it
assists investors and analysts in comparing our operating
performance across reporting periods on a consistent basis by
excluding items that we do not believe are indicative of our core
operating performance; however, it has limitations as an analytical
tool, and you should not consider such a measure either in
isolation or as a substitute for analyzing our results as reported
under GAAP. In particular, organic constant currency revenue growth
(decline) does not reflect M&A activity or the impact of
foreign currency exchange rate fluctuations.
Adjusted EBITDA is defined as net income (loss)
adjusted for provision (benefit) for income taxes, interest
expense, depreciation and amortization, stock-based compensation,
transaction expenses related to the IPO, one-time public company
transition expenses and costs associated with financing
transactions, M&A activity, optimization and restructuring,
technology transformation costs, foreign currency (gains) and
losses and other costs affecting comparability. Adjusted EBITDA
Margin is defined as Adjusted EBITDA divided by revenue for the
applicable period. We present Adjusted EBITDA and Adjusted EBITDA
Margin because we believe they assist investors and analysts in
comparing our operating performance across reporting periods on a
consistent basis by excluding items that we do not believe are
indicative of our core operating performance. Management and our
board of directors use Adjusted EBITDA and Adjusted EBITDA Margin
to evaluate the factors and trends affecting our business to assess
our financial performance and in preparing and approving our annual
budget and believe they are helpful in highlighting trends in our
core operating performance. Further, our executive incentive
compensation is based in part on components of Adjusted EBITDA.
Adjusted EBITDA and Adjusted EBITDA Margin have limitations as
analytical tools and should not be considered in isolation or as
substitutes for our results as reported under GAAP. Adjusted EBITDA
excludes items that can have a significant effect on our profit or
loss and should, therefore, be considered only in conjunction with
net income (loss) for the period. Because not all companies use
identical calculations, these measures may not be comparable to
other similarly titled measures of other companies.
Adjusted Net Income is a non-GAAP profitability
measure. Adjusted Net Income is defined as net income (loss)
adjusted for amortization of acquired intangible assets,
stock-based compensation, transaction expenses related to the IPO,
one-time public company transition expenses and costs associated
with financing transactions, M&A activity, optimization and
restructuring, technology transformation costs, and certain other
costs affecting comparability, adjusted for the applicable tax
rate. Adjusted Earnings Per Share is defined as Adjusted Net Income
divided by diluted weighted average shares for the applicable
period. We present Adjusted Net Income and Adjusted Earnings Per
Share because we believe they assist investors and analysts in
comparing our operating performance across reporting periods on a
consistent basis by excluding certain material non-cash items and
unusual items that we do not expect to continue at the same level
in the future. Our management believes that the inclusion of
supplementary adjustments to net income (loss) applied in
presenting Adjusted Net Income provide additional information to
investors about certain material non-cash items and about items
that we do not expect to continue at the same level in the future.
Adjusted Net Income and Adjusted Earnings Per Share have
limitations as analytical tools, and you should not consider such
measures either in isolation or as substitutes for analyzing our
results as reported under GAAP.
Free Cash Flow is defined as Net Cash provided by
(used in) Operating Activities minus purchases of property and
equipment and purchases of intangible assets and capitalized
software. We present Free Cash Flow because we believe it provides
cash available for strategic measures, after making necessary
capital investments in property and equipment to support ongoing
business operations, and provides investors with the same measures
that management uses as the basis for making resource allocation
decisions. Free Cash Flow has limitations as an analytical tool,
and you should not consider such measure either in isolation or as
a substitute for analyzing our results as reported under GAAP.
About Sterling
Sterling—a leading provider of background and
identity services—offers background and identity verification to
help over 50,000 clients create people-first cultures built on
foundations of trust and safety. Sterling’s tech-enabled services
help organizations across all industries establish great
environments for their workers, partners, and customers. With
operations around the world, Sterling conducted more than 103
million searches in the twelve months ended December 31,
2023.
Contacts
InvestorsJudah SokelIR@sterlingcheck.com
MediaAngela
StelleAngela.Stelle@sterlingcheck.com
|
CONSOLIDATED FINANCIAL STATEMENTS STERLING
CHECK CORP.UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS |
|
|
Three Months EndedMarch 31, |
(in thousands, except share and per share
data) |
|
2024 |
|
|
|
2023 |
|
REVENUES |
$ |
185,999 |
|
|
$ |
179,274 |
|
OPERATING EXPENSES: |
|
|
|
Cost of revenues (exclusive of depreciation and amortization
below) |
|
104,041 |
|
|
|
94,754 |
|
Corporate technology and production systems |
|
13,214 |
|
|
|
11,952 |
|
Selling, general and administrative |
|
59,890 |
|
|
|
47,451 |
|
Depreciation and amortization |
|
15,770 |
|
|
|
15,122 |
|
Impairments and disposals of long-lived assets |
|
168 |
|
|
|
106 |
|
Total operating expenses |
|
193,083 |
|
|
|
169,385 |
|
OPERATING (LOSS) INCOME |
|
(7,084 |
) |
|
|
9,889 |
|
OTHER EXPENSE (INCOME): |
|
|
|
Interest expense, net |
|
10,312 |
|
|
|
8,608 |
|
Other income |
|
(423 |
) |
|
|
(412 |
) |
Total other expense, net |
|
9,889 |
|
|
|
8,196 |
|
(LOSS) INCOME BEFORE INCOME
TAXES |
|
(16,973 |
) |
|
|
1,693 |
|
Income tax (benefit) provision |
|
(9,018 |
) |
|
|
1,102 |
|
NET (LOSS) INCOME |
$ |
(7,955 |
) |
|
$ |
591 |
|
Unrealized gain (loss) on hedged transactions, net of tax expense
(benefit) of $1,041, and $(1,815), respectively |
|
3,020 |
|
|
|
(5,159 |
) |
Foreign currency translation adjustments, net of tax expense of $0,
and $0, respectively |
|
(2,251 |
) |
|
|
682 |
|
Total other comprehensive income (loss) |
|
769 |
|
|
|
(4,477 |
) |
COMPREHENSIVE LOSS |
$ |
(7,186 |
) |
|
$ |
(3,886 |
) |
Net (loss) income per share
attributable to stockholders |
|
|
|
Basic |
$ |
(0.09 |
) |
|
$ |
0.01 |
|
Diluted |
$ |
(0.09 |
) |
|
$ |
0.01 |
|
Weighted average number of
shares outstanding |
|
|
|
Basic |
|
90,274,094 |
|
|
|
92,877,506 |
|
Diluted |
|
90,274,094 |
|
|
|
95,350,342 |
|
|
|
STERLING CHECK CORP.UNAUDITED CONDENSED
CONSOLIDATED BALANCE SHEETS |
|
(in thousands, except share and par value
amounts) |
March 31,2024 |
|
December 31,2023 |
ASSETS |
|
|
|
CURRENT ASSETS: |
|
|
|
Cash and cash equivalents |
$ |
66,979 |
|
|
$ |
54,224 |
|
Accounts receivable (net of allowance for credit losses of $2,933
and $2,816 at March 31, 2024 and December 31, 2023,
respectively) |
|
157,392 |
|
|
|
142,179 |
|
Insurance receivable |
|
2,895 |
|
|
|
2,937 |
|
Prepaid expenses |
|
11,382 |
|
|
|
9,651 |
|
Other current assets |
|
17,276 |
|
|
|
15,800 |
|
Total current assets |
|
255,924 |
|
|
|
224,791 |
|
Property and equipment,
net |
|
7,329 |
|
|
|
7,695 |
|
Goodwill |
|
902,862 |
|
|
|
879,408 |
|
Intangible assets, net |
|
264,558 |
|
|
|
230,212 |
|
Deferred tax assets |
|
4,748 |
|
|
|
4,818 |
|
Operating leases right-of-use
asset |
|
5,872 |
|
|
|
6,452 |
|
Other noncurrent assets,
net |
|
9,733 |
|
|
|
10,067 |
|
TOTAL ASSETS |
$ |
1,451,026 |
|
|
$ |
1,363,443 |
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY |
|
|
|
CURRENT LIABILITIES: |
|
|
|
Accounts payable |
$ |
47,486 |
|
|
$ |
38,879 |
|
Litigation settlement obligation |
|
5,224 |
|
|
|
5,279 |
|
Accrued expenses |
|
73,605 |
|
|
|
63,987 |
|
Current portion of long-term debt |
|
15,000 |
|
|
|
15,000 |
|
Operating leases liability, current portion |
|
3,879 |
|
|
|
4,219 |
|
Income tax payable, current portion |
|
3,523 |
|
|
|
8,933 |
|
Other current liabilities |
|
17,832 |
|
|
|
11,839 |
|
Total current liabilities |
|
166,549 |
|
|
|
148,136 |
|
Long-term debt, net |
|
541,242 |
|
|
|
479,788 |
|
Deferred tax liabilities |
|
900 |
|
|
|
14,239 |
|
Long-term operating leases
liability, net of current portion |
|
6,606 |
|
|
|
7,278 |
|
Other liabilities |
|
7,717 |
|
|
|
12,058 |
|
Total liabilities |
|
723,014 |
|
|
|
661,499 |
|
COMMITMENTS AND
CONTINGENCIES |
|
|
|
STOCKHOLDERS’ EQUITY: |
|
|
|
Preferred stock ($0.01 par value; 100,000,000 shares authorized; no
shares issued or outstanding) |
|
— |
|
|
|
— |
|
Common stock ($0.01 par value; 1,000,000,000 shares authorized;
105,320,343 shares issued and 97,811,676 shares outstanding at
March 31, 2024; 99,966,158 shares issued and 93,194,403 shares
outstanding at December 31, 2023) |
|
156 |
|
|
|
98 |
|
Additional paid-in capital |
|
1,027,214 |
|
|
|
983,283 |
|
Common stock held in treasury (7,508,667 and 6,771,755 shares at
March 31, 2024 and December 31, 2023, respectively) |
|
(99,653 |
) |
|
|
(88,918 |
) |
Accumulated deficit |
|
(194,519 |
) |
|
|
(186,564 |
) |
Accumulated other comprehensive loss |
|
(5,186 |
) |
|
|
(5,955 |
) |
Total stockholders’ equity |
|
728,012 |
|
|
|
701,944 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ |
1,451,026 |
|
|
$ |
1,363,443 |
|
|
|
STERLING CHECK CORP.UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
Three Months EndedMarch 31, |
(in thousands) |
|
2024 |
|
|
|
2023 |
|
CASH FLOWS FROM OPERATING
ACTIVITIES |
|
|
|
Net (loss) income |
$ |
(7,955 |
) |
|
$ |
591 |
|
Adjustments to reconcile net
(loss) income to net cash provided by operations |
|
|
|
Depreciation and amortization |
|
15,770 |
|
|
|
15,122 |
|
Deferred income taxes |
|
(14,306 |
) |
|
|
209 |
|
Stock-based compensation |
|
9,342 |
|
|
|
8,043 |
|
Impairments and disposals of long-lived assets |
|
168 |
|
|
|
106 |
|
Provision for bad debts |
|
240 |
|
|
|
244 |
|
Amortization of financing fees |
|
269 |
|
|
|
269 |
|
Amortization of debt discount |
|
204 |
|
|
|
194 |
|
Deferred rent |
|
(428 |
) |
|
|
39 |
|
Unrealized translation gain on investment in foreign
subsidiaries |
|
18 |
|
|
|
135 |
|
Change in fair value of contingent consideration, net |
|
4,000 |
|
|
|
— |
|
Interest rate swap settlements |
|
— |
|
|
|
23 |
|
Changes in operating assets and liabilities, net of
acquisitions |
|
|
|
Accounts receivable |
|
(7,285 |
) |
|
|
(3,414 |
) |
Insurance receivable |
|
41 |
|
|
|
— |
|
Prepaid expenses |
|
(1,276 |
) |
|
|
2,844 |
|
Other assets |
|
(1,200 |
) |
|
|
(2,534 |
) |
Accounts payable |
|
7,149 |
|
|
|
3,716 |
|
Litigation settlement obligation |
|
(55 |
) |
|
|
315 |
|
Accrued expenses |
|
6,723 |
|
|
|
(12,256 |
) |
Other liabilities |
|
(7,745 |
) |
|
|
(2,364 |
) |
Net cash provided by operations |
|
3,674 |
|
|
|
11,282 |
|
CASH FLOWS FROM INVESTING
ACTIVITIES |
|
|
|
Purchases of property and equipment |
|
(673 |
) |
|
|
(140 |
) |
Purchases of intangible assets and capitalized software |
|
(4,947 |
) |
|
|
(4,120 |
) |
Acquisitions, net of cash acquired |
|
(70,479 |
) |
|
|
(48,802 |
) |
Proceeds from disposition of property and equipment |
|
— |
|
|
|
7 |
|
Net cash used in investing activities |
|
(76,099 |
) |
|
|
(53,055 |
) |
CASH FLOWS FROM FINANCING
ACTIVITIES |
|
|
|
Proceeds from exercise of employee stock options |
|
53,629 |
|
|
|
— |
|
Cash paid for tax withholding on exercise of employee stock
options |
|
(19,172 |
) |
|
|
— |
|
Proceeds from employee stock purchase plan |
|
695 |
|
|
|
— |
|
Repurchases of common stock |
|
(6,832 |
) |
|
|
(7,711 |
) |
Cash paid for tax withholding on vesting of restricted shares |
|
(3,903 |
) |
|
|
(487 |
) |
Payments of long-term debt |
|
(3,750 |
) |
|
|
(1,875 |
) |
Borrowings on revolving credit facility |
|
65,000 |
|
|
|
— |
|
Payment of contingent consideration for acquisition |
|
— |
|
|
|
(305 |
) |
Net cash provided by (used in) financing activities |
|
85,667 |
|
|
|
(10,378 |
) |
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH EQUIVALENTS |
|
(487 |
) |
|
|
20 |
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
12,755 |
|
|
|
(52,131 |
) |
CASH AND CASH EQUIVALENTS |
|
|
|
Beginning of period |
|
54,224 |
|
|
|
103,095 |
|
Cash and cash equivalents at
end of period |
$ |
66,979 |
|
|
$ |
50,964 |
|
|
RECONCILIATION OF CONSOLIDATED NON-GAAP
FINANCIAL MEASURES
The following table reconciles revenue growth
(decline), the most directly comparable GAAP measure, to organic
constant currency revenue decline for the three months ended
March 31, 2024 and 2023. For the three months ended
March 31, 2024, we have provided the impact of revenue from
the acquisitions of Vault and A-Check. For the three months ended
March 31, 2023, we have provided the impact of revenue from the
acquisitions of Socrates and A-Check.
|
Three Months EndedMarch 31, |
|
2024 |
|
2023 |
Reported revenue growth (decline) |
3.8 |
% |
|
(6.6) |
% |
Inorganic revenue growth(1) |
8.7 |
% |
|
1.5 |
% |
Impact from foreign currency exchange(2) |
— |
% |
|
(1.0) |
% |
Organic constant currency revenue decline |
(4.9) |
% |
|
(7.1) |
% |
|
_______________________(1) Impact to revenue growth
(decline) in the current period from M&A activity that has
occurred over the past twelve months.
(2) Impact to revenue growth (decline) in the
current period from fluctuations in foreign currency exchange
rates.
The following table reconciles net (loss) income,
the most directly comparable GAAP measure, to Adjusted EBITDA for
the periods presented:
|
Three Months EndedMarch 31, |
(dollars in thousands) |
|
2024 |
|
|
|
2023 |
|
Net (loss) income |
$ |
(7,955 |
) |
|
$ |
591 |
|
Income tax (benefit)
provision |
|
(9,018 |
) |
|
|
1,102 |
|
Interest expense, net |
|
10,312 |
|
|
|
8,608 |
|
Depreciation and amortization |
|
15,770 |
|
|
|
15,122 |
|
Stock-based compensation |
|
9,342 |
|
|
|
8,043 |
|
Transaction expenses(1) |
|
16,988 |
|
|
|
5,126 |
|
Restructuring(2) |
|
3,201 |
|
|
|
3,273 |
|
Technology transformation(3) |
|
375 |
|
|
|
3,233 |
|
Other(4) |
|
(505 |
) |
|
|
457 |
|
Adjusted EBITDA |
$ |
38,510 |
|
|
$ |
45,555 |
|
Adjusted EBITDA Margin |
|
20.7 |
% |
|
|
25.4 |
% |
|
_______________________(1) Consists of transaction
expenses related to M&A, associated earn-outs, one-time public
company transition expenses and ancillary non-recurring public
company expenses and fees associated with financing transactions.
For the three months ended March 31, 2024, costs consisted of $10.3
million of transaction costs and professional fees to support the
merger with First Advantage, $4.0 million due to an out-of-period
adjustment to the earn-out liability for the EBI acquisition, and
the remaining $2.7 million related to M&A activity for the
acquisitions of Vault, A-Check, and Socrates. For the three months
ended March 31, 2023, costs consisted primarily of $2.7 million of
M&A related costs for the acquisitions of Socrates and A-Check,
$1.1 million of M&A costs for the EBI acquisition primarily due
to the acceleration of contract costs related to completion of the
EBI platform migration and $1.3 million of registration statement
costs, one-time public company transition expenses and expenses
related to executing our interest rate swap.
(2) Consists of restructuring-related costs,
including executive recruiting and severance charges, and lease
termination costs and disposal of fixed assets related to our real
estate consolidation efforts. Beginning in 2020, we began executing
a virtual-first strategy, closing offices and reducing office space
globally. In 2022, we began executing on a restructuring program to
realign senior leadership and functions with the goal of elevating
our go-to-market strategy and accelerating our technology and
product innovation. At the end of 2022, we also launched Project
Nucleus which we expect to drive meaningful cost savings and
efficiency gains in our cost of revenues. For the three months
ended March 31, 2024, costs include $3.0 million of
restructuring-related charges and $0.2 million of fixed asset
disposals in connection with office closures. For the three months
ended March 31, 2023, costs consisted of $2.9 million of
restructuring-related charges and $0.3 million of real estate
consolidation costs.
(3) Includes costs related to technology
modernization, as well as costs related to decommissioning of
on-premise production systems and redundant fulfillment systems of
acquired companies and the migration to our platform. We believe
that these costs are discrete and non-recurring in nature, as they
relate to a one-time restructuring and decommissioning of our
on-premise production systems and corporate technological
infrastructure and the move to a managed service provider,
decommissioning redundant fulfillment systems and modernizing
internal functional systems. As such, they are not normal,
recurring operating expenses and are not reflective of ongoing
trends in the cost of doing business. The significant majority of
these are related to the last two phases of Project Ignite, a
three-phase strategic investment initiative launched in 2019 to
create an enterprise-class global platform, with the remainder
related to an investment made to modernize internal functional
systems in preparation for our public company infrastructure. Phase
two of Project Ignite was completed in 2022 and phase three of
Project Ignite was completed in the first quarter of 2023. For the
three months ended March 31, 2024, $0.4 million related to
decommissioning of the redundant production and fulfillment systems
of A-Check, the redundant fulfillment systems of Socrates, the
redundant production systems of Vault and integrating the
fulfillment systems of Vault with Sterling to enhance the delivery
of drug and health services. For the three months ended March 31,
2023, investment related to Project Ignite was approximately $3.1
million. The remaining $0.1 million for the three months ended
March 31, 2023 relates to costs for decommissioning of the
on-premise production system and decommissioning of the redundant
fulfillment system of EBI and migrating onto our platform.
(4) Consists of gains or losses on foreign currency
transactions and impairment of capitalized software.
The following table presents the calculation of net
(loss) income margin and Adjusted EBITDA Margin for the periods
presented:
|
Three Months EndedMarch 31, |
(dollars in thousands) |
|
2024 |
|
|
|
2023 |
|
Net (loss) income |
$ |
(7,955 |
) |
|
$ |
591 |
|
Adjusted EBITDA |
$ |
38,510 |
|
|
$ |
45,555 |
|
Revenues |
$ |
185,999 |
|
|
$ |
179,274 |
|
Net (loss) income Margin |
(4.3 |
)% |
|
|
0.3 |
% |
Adjusted EBITDA Margin |
|
20.7 |
% |
|
|
25.4 |
% |
|
The following table reconciles net (loss) income,
the most directly comparable GAAP measure, to Adjusted Net Income
and Adjusted Earnings Per Share for the periods presented:
|
Three Months EndedMarch 31, |
(in thousands, except per share amounts) |
|
2024 |
|
|
|
2023 |
|
Net (loss) income |
$ |
(7,955 |
) |
|
$ |
591 |
|
Income tax (benefit)
provision |
|
(9,018 |
) |
|
|
1,102 |
|
Income (Loss) before income
taxes |
|
(16,973 |
) |
|
|
1,693 |
|
Amortization of acquired
intangible assets |
|
10,631 |
|
|
|
10,061 |
|
Stock-based compensation |
|
9,342 |
|
|
|
8,043 |
|
Transaction expenses(1) |
|
16,988 |
|
|
|
5,126 |
|
Restructuring(2) |
|
3,201 |
|
|
|
3,273 |
|
Technology
transformation(3) |
|
375 |
|
|
|
3,233 |
|
Other(4) |
|
(505 |
) |
|
|
457 |
|
Adjusted Net Income before
income tax effect |
|
23,059 |
|
|
|
31,886 |
|
Income tax effect(5) |
|
5,648 |
|
|
|
8,600 |
|
Adjusted Net Income |
$ |
17,411 |
|
|
$ |
23,286 |
|
Net (loss) income per
share—basic |
$ |
(0.09 |
) |
|
$ |
0.01 |
|
Net (loss) income per
share—diluted |
$ |
(0.09 |
) |
|
$ |
0.01 |
|
Adjusted Earnings Per
Share—basic |
$ |
0.19 |
|
|
$ |
0.25 |
|
Adjusted Earnings Per
Share—diluted |
$ |
0.19 |
|
|
$ |
0.24 |
|
|
_______________________(1) Consists of transaction
expenses related to M&A, associated earn-outs, one-time public
company transition expenses and ancillary non-recurring public
company expenses and fees associated with financing
transactions.
(2) Consists of restructuring-related costs,
including executive recruiting and severance charges, and lease
termination costs and disposal of fixed assets related to our real
estate consolidation efforts. Beginning in 2020, we began executing
a virtual-first strategy, closing offices and reducing office space
globally. In 2022, we began executing on a restructuring program to
realign senior leadership and functions with the goal of elevating
our go-to-market strategy and accelerating our technology and
product innovation. At the end of 2022, we also launched Project
Nucleus which we expect to drive meaningful cost savings and
efficiency gains in our cost of revenues.
(3) Includes costs related to technology
modernization, as well as costs related to decommissioning of
on-premise production systems and redundant fulfillment systems of
acquired companies and the migration to our platform. We believe
that these costs are discrete and non-recurring in nature, as they
relate to a one-time restructuring and decommissioning of our
on-premise production systems and corporate technological
infrastructure and the move to a managed service provider,
decommissioning redundant fulfillment systems and modernizing
internal functional systems. As such, they are not normal,
recurring operating expenses and are not reflective of ongoing
trends in the cost of doing business. The significant majority of
these are related to the last two phases of Project Ignite, a
three-phase strategic investment initiative launched in 2019 to
create an enterprise-class global platform, with the remainder
related to an investment made to modernize internal functional
systems in preparation for our public company infrastructure. Phase
two of Project Ignite was completed in 2022 and phase three of
Project Ignite was completed in the first quarter of 2023.
(4) Consists of gains or losses on foreign currency
transactions and impairment of capitalized software.
(5) Normalized effective tax rates of 24.5% and
27.0% have been used to compute Adjusted Net Income for the three
months ended March 31, 2024 and 2023, respectively. As of
December 31, 2023, we had net operating loss carryforwards of
approximately $15.7 million for federal income tax purposes and
deferred tax assets of approximately $5.6 million related to state
and foreign income tax loss carryforwards available to reduce
future income subject to income taxes. The amount of actual cash
taxes we pay for federal, state, and foreign income taxes differs
significantly from the effective income tax rate computed in
accordance with US GAAP, and from the normalized rate shown
above.
The following table reconciles net (loss) income
per share, the most directly comparable GAAP measure, to Adjusted
Earnings Per Share for the periods presented:
|
Three Months EndedMarch 31, |
(in thousands, except share and per share
amounts) |
|
2024 |
|
|
|
2023 |
|
Net (loss) income |
$ |
(7,955 |
) |
|
$ |
591 |
|
Weighted average number of
shares outstanding—basic |
|
90,274,094 |
|
|
|
92,877,506 |
|
Weighted average number of
shares outstanding—diluted |
|
90,274,094 |
|
|
|
95,350,342 |
|
Net (loss) income per
share—basic |
$ |
(0.09 |
) |
|
$ |
0.01 |
|
Net (loss) income per
share—diluted |
$ |
(0.09 |
) |
|
$ |
0.01 |
|
|
|
|
|
Adjusted Net Income |
$ |
17,411 |
|
|
$ |
23,286 |
|
Weighted average number of
shares outstanding—basic |
|
90,274,094 |
|
|
|
92,877,506 |
|
Weighted average number of
shares outstanding—diluted |
|
93,399,394 |
|
|
|
95,350,342 |
|
Adjusted Earnings Per
Share—basic |
$ |
0.19 |
|
|
$ |
0.25 |
|
Adjusted Earnings Per
Share—diluted |
$ |
0.19 |
|
|
$ |
0.24 |
|
|
The following table presents the calculation of
Adjusted Diluted Earnings Per Share for the periods presented:
|
Three Months EndedMarch 31, |
|
|
2024 |
|
|
|
2023 |
|
Net (loss) income per
share—diluted |
$ |
(0.09 |
) |
|
$ |
0.01 |
|
Adjusted Net Income
adjustments per share |
|
|
|
Income tax (benefit) provision |
|
(0.10 |
) |
|
|
0.01 |
|
Amortization of acquired intangible assets |
|
0.12 |
|
|
|
0.11 |
|
Stock-based compensation |
|
0.10 |
|
|
|
0.08 |
|
Transaction expenses(1) |
|
0.18 |
|
|
|
0.05 |
|
Restructuring(2) |
|
0.04 |
|
|
|
0.03 |
|
Technology transformation(3) |
|
0.00 |
|
|
|
0.03 |
|
Other(4) |
|
0.00 |
|
|
|
0.00 |
|
Income tax effect(5) |
|
(0.06 |
) |
|
|
(0.09 |
) |
Adjusted Earnings Per Share—diluted |
$ |
0.19 |
|
|
$ |
0.24 |
|
Weighted average number of
shares outstanding used in computation of Adjusted Diluted Earnings
Per Share: |
|
|
|
Weighted average number of
shares outstanding—diluted (GAAP) |
|
90,274,094 |
|
|
|
95,350,342 |
|
Options not included in
weighted average number of shares outstanding—diluted (GAAP) (using
treasury stock method) |
|
3,125,300 |
|
|
|
— |
|
Weighted average number of
shares outstanding—diluted (non-GAAP) (using treasury stock
method) |
|
93,399,394 |
|
|
|
95,350,342 |
|
|
_______________________(1) Consists of transaction
expenses related to M&A, associated earn-outs, one-time public
company transition expenses and ancillary non-recurring public
company expenses and fees associated with financing
transactions.
(2) Consists of restructuring-related costs,
including executive recruiting and severance charges, and lease
termination costs and disposal of fixed assets related to our real
estate consolidation efforts. Beginning in 2020, we began executing
a virtual-first strategy, closing offices and reducing office space
globally. In 2022, we began executing on a restructuring program to
realign senior leadership and functions with the goal of elevating
our go-to-market strategy and accelerating our technology and
product innovation. At the end of 2022, we also launched Project
Nucleus which we expect to drive meaningful cost savings and
efficiency gains in our cost of revenues.
(3) Includes costs related to technology
modernization, as well as costs related to decommissioning of
on-premise production systems and redundant fulfillment systems of
acquired companies and the migration to our platform. We believe
that these costs are discrete and non-recurring in nature, as they
relate to a one-time restructuring and decommissioning of our
on-premise production systems and corporate technological
infrastructure and the move to a managed service provider,
decommissioning redundant fulfillment systems and modernizing
internal functional systems. As such, they are not normal,
recurring operating expenses and are not reflective of ongoing
trends in the cost of doing business. The significant majority of
these are related to the last two phases of Project Ignite, a
three-phase strategic investment initiative launched in 2019 to
create an enterprise-class global platform, with the remainder
related to an investment made to modernize internal functional
systems in preparation for our public company infrastructure. Phase
two of Project Ignite was completed in 2022 and phase three of
Project Ignite was completed in the first quarter of 2023.
(4) Consists of gains or losses on foreign currency
transactions and impairment of capitalized software.
(5) Normalized effective tax rates of 24.5% and
27.0% have been used to compute Adjusted Net Income for the three
months ended March 31, 2024 and 2023, respectively. As of
December 31, 2023, we had net operating loss carryforwards of
approximately $15.7 million for federal income tax purposes and
deferred tax assets of approximately $5.6 million related to state
and foreign income tax loss carryforwards available to reduce
future income subject to income taxes. The amount of actual cash
taxes we pay for federal, state, and foreign income taxes differs
significantly from the effective income tax rate computed in
accordance with US GAAP, and from the normalized rate shown
above.
For further detail, see the footnotes to Part I.
Item 2. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Non-GAAP Financial Measures” in
our Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2024.
The following table reconciles net cash flow
provided by operations, the most directly comparable GAAP measure,
to Free Cash Flow for the periods presented:
|
Three Months EndedMarch 31,
2024 |
(in thousands) |
|
2024 |
|
|
|
2023 |
|
Net cash provided by
operations |
$ |
3,674 |
|
|
$ |
11,282 |
|
Purchases of intangible assets
and capitalized software |
|
(4,947 |
) |
|
|
(4,120 |
) |
Purchases of property and
equipment |
|
(673 |
) |
|
|
(140 |
) |
Free Cash Flow |
$ |
(1,946 |
) |
|
$ |
7,022 |
|
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