Sterling Check Corp. (STER) is a leading global provider of technology-enabled background and identity verification services, offering comprehensive solutions to help organizations make informed hiring decisions and maintain a safe and compliant workforce. With over 45 years of industry experience, the company has established itself as a trusted partner for clients across diverse sectors, navigating the complexities of an ever-changing employment landscape.

Business Overview and History

Sterling Check Corp. was founded in 1975 and has since grown to become a dominant player in the background screening and identity verification industry. The company's origins trace back to a small business in New York, focused on providing criminal record checks and employment verification services. Over the decades, Sterling has strategically expanded its service offerings and geographic reach, leveraging both organic growth and strategic acquisitions.

In the early years, Sterling focused on delivering high-quality criminal background checks and identity verification services to its clients. The company built a reputation for accuracy, compliance, and customer service, which allowed it to steadily expand its customer base across various industries.

A significant milestone in Sterling's history was its investment in innovative technology during the early 2000s. The company developed proprietary automation and fulfillment capabilities that enabled faster turnaround times and greater efficiency. This technological edge allowed Sterling to differentiate itself in the market and solidify its position as a trusted partner to its clients.

In 2020, Sterling faced a significant challenge when the COVID-19 pandemic disrupted hiring practices globally. As businesses grappled with economic uncertainty, Sterling's transaction volumes declined. However, the company's diversified product portfolio and strong client relationships helped it weather the storm. Sterling quickly adapted its service delivery model to a virtual-first approach, allowing it to continue supporting its clients' evolving needs.

In 2021, the company underwent a transformative event, completing its initial public offering and listing on the NASDAQ exchange. This milestone provided Sterling with the resources and platform to accelerate its growth initiatives and solidify its position as an industry leader.

Today, Sterling serves a diverse global client base, processing over 103 million searches annually for more than 50,000 clients, including nearly 60% of the Fortune 100 and over 50% of the Fortune 500. The company's commitment to innovation, compliance, and customer-centric service has been instrumental in its success over the past four decades.

Financial Snapshot

Sterling's financial performance has demonstrated resilience amidst the challenges posed by the COVID-19 pandemic and broader macroeconomic uncertainties. For the fiscal year ended December 31, 2023, the company reported total revenue of $719.64 million, a modest decline from the prior year's $766.78 million. However, the company's adjusted EBITDA margin remained strong at 16.5%, showcasing its ability to maintain operational efficiency and profitability.

In the most recent quarter (Q2 2024), Sterling reported revenue of $200.53 million, representing a 5.3% increase year-over-year. However, the company experienced a net loss of $6.23 million for the quarter, primarily driven by higher third-party vendor costs, an increase in income tax provision, and higher selling, general, and administrative costs related to the pending merger with First Advantage.

For the fiscal year 2023, Sterling generated operating cash flow of $96.86 million and free cash flow of $76.50 million. In the most recent quarter (Q2 2024), operating cash flow was $16.49 million, with free cash flow of $10.76 million.

Liquidity

The company's balance sheet remains healthy, with a current ratio of 1.60 as of June 30, 2024, and a debt-to-equity ratio of 0.76, indicating a sound financial position to support its growth initiatives. Sterling's cash balance stood at $74.18 million as of June 30, 2024. The company also has access to $129.50 million under its $400 million revolving credit facility, providing additional financial flexibility.

Diversified Service Offerings and Global Reach

Sterling's comprehensive suite of services spans identity verification, criminal background screening, credential verification, drug and health screening, employee onboarding, and ongoing risk monitoring. This diverse portfolio caters to the evolving needs of clients across a wide range of industries, including healthcare, financial services, technology, retail, and more.

The company's global footprint extends to over 240 countries and territories, enabling it to serve a diverse client base with localized expertise and compliance capabilities. This global reach has been further strengthened through strategic acquisitions, such as the recent acquisition of Vault Workforce Screening, which expanded Sterling's network of collection sites and enhanced its drug and health screening services.

Sterling's operations are primarily focused in the United States, which accounted for approximately 73% of revenue in 2023. The remaining 27% came from international markets, with Canada, Australia, and India being the largest contributors outside the U.S.

Product Segments

Sterling's services are divided into several key product segments:

1. Identity Verification and Background Checks: This segment includes identity verification services using technologies like fingerprinting, facial recognition, and ID validation. It also covers criminal background checks at county, state, and federal levels across more than 240 countries and territories. Additional services include credit checks, civil checks, motor vehicle registration confirmation, and social media checks.

2. Credential Verification: Sterling offers thorough employment and education verification services, as well as licensing and certification verification, powered by its proprietary fulfillment engine.

3. Drug and Health Screening: The company provides comprehensive drug and health screening services through a network of approximately 20,000 collection sites, supporting the Substance Abuse and Mental Health Services Administration in the U.S.

4. Onboarding: This segment includes custom onboarding forms such as I-9 and eVerify employment eligibility, tax withholding forms, and Equal Employment Opportunity disclosure forms, with built-in compliance and dynamic validation.

5. Post-Hire Monitoring: Sterling offers continuous screening services to allow for greater mobility and safety for remote, onsite, and contingent jobs, as well as to ensure prompt risk warnings on any changes to an employee's profile.

Navigating Macroeconomic Challenges

Sterling has demonstrated its ability to navigate the dynamic macroeconomic environment, characterized by ongoing inflationary pressures and concerns about a potential economic downturn. The company's cost optimization initiatives, such as Project Nucleus and its virtual-first strategy, have helped mitigate the impact of these challenges, enabling it to maintain profitability and operational efficiency.

During the six months ended June 30, 2024, Sterling experienced a decline in its organic constant currency revenue of 2.8%, primarily driven by lower hiring volumes among its existing clients. However, the company's inorganic growth, supported by recent acquisitions, helped offset this trend, with total revenue increasing by 4.6% year-over-year.

Positioned for Continued Growth

Sterling's strategic focus on innovation, technology, and client-centric solutions positions the company for continued growth. The company's investments in its proprietary technology platform and cloud-based infrastructure have enhanced its operational capabilities, enabling it to deliver seamless and efficient services to its clients.

Furthermore, Sterling's disciplined approach to mergers and acquisitions has reinforced its competitive advantage, allowing it to expand its service offerings, geographic reach, and client base. The recent acquisition of Vault Workforce Screening is a testament to this strategy, as it strengthens the company's presence in the drug and health screening segment.

Looking ahead, Sterling remains committed to capitalizing on the growing demand for comprehensive background and identity verification services, driven by evolving regulatory requirements, increased emphasis on workplace safety, and the need for effective risk management solutions. The background screening industry is expected to grow at a CAGR of 7-9% over the next 5 years, providing a favorable backdrop for Sterling's growth initiatives.

Recent Developments

In February 2024, Sterling entered into a definitive merger agreement to be acquired by First Advantage Corporation. This strategic move is expected to create a leading global provider of tech-enabled risk management and identity solutions, combining the strengths and capabilities of both organizations.

Conclusion

Sterling Check Corp. has established itself as a trusted partner in the background screening and identity verification industry, navigating the complexities of the evolving workforce landscape. With its diverse service offerings, global reach, and strategic investments in technology and growth initiatives, the company is well-positioned to continue delivering value to its clients and shareholders. As Sterling moves forward with its pending merger with First Advantage, it stands poised to further strengthen its market position and capitalize on the growing demand for comprehensive risk management solutions in an increasingly complex global business environment.