First Advantage Corporation: Q3 2008 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008. First Advantage Corporation is a global risk mitigation and business solutions provider operating in six segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services. The company is an accelerated filer and is majority-owned (approx. 80%) by First American Corporation. During the period, the company executed a streamlining initiative, selling its Investigative Services (FAIS) and Credit Management Solutions (CMSI) businesses, which are now reported as discontinued operations.
Key Financial Metrics
| Metric | Q3 2008 (3 Months) | Q3 2007 (3 Months) | YTD 2008 (9 Months) | YTD 2007 (9 Months) |
|---|---|---|---|---|
| Total Revenue | $188.3 million | $208.6 million | $586.1 million | $624.0 million |
| Service Revenue | $174.7 million | $194.7 million | $545.3 million | $582.5 million |
| Net Income | $12.6 million | $19.0 million | $38.3 million | $48.5 million |
| Diluted EPS | $0.21 | $0.32 | $0.64 | $0.82 |
| Operating Income | $21.7 million | $34.2 million | $72.9 million | $90.1 million |
| Operating Margin | 12.4% | 17.6% | 13.4% | 15.5% |
| Cash & Equivalents | $45.5 million | $33.7 million (YTD end) | Balance Sheet: $45.5 million (Sep 30, 2008) | |
| Long-Term Debt | $50.5 million (Total) | Includes $225M credit facility; $10.5M current portion. |
Material Changes vs. Prior Period
- Revenue Decline: Service revenue decreased 10.3% in Q3 and 6.4% YTD compared to 2007. This was driven by a downturn in the mortgage industry (Lender Services), reduced auto sales (Dealer Services), and higher unemployment affecting hiring volumes (Employer Services). Acquisitions added $4.8 million (Q3) and $15.5 million (YTD) to revenue, partially offsetting organic declines.
- Profitability Pressure: Operating income fell 36.5% in Q3 and 19.1% YTD. Margins contracted due to lower transaction volumes and increased costs in certain segments.
- Impairment Charges: The company recorded a $1.3 million impairment loss in Q3 2008 related to the write-off of identifiable intangible assets in the Dealer Services segment due to challenging credit markets.
- Discontinued Operations: The sale of FAIS and CMSI resulted in a pre-tax charge of approximately $5.5 million in discontinued operations during 2008 to reflect net proceeds. Prior year results for these units have been reclassified.
- CEO Transition Impact: The prior year (2007) included an $8.0 million compensation expense related to the former CEO's transition agreement, which artificially depressed 2007 comparables.
Outlook, Risks, and Management Commentary
- Market Conditions: Management expects continued weakness in real estate and mortgage markets to impact Lender Services and Data Services. Higher unemployment rates are negatively impacting Employer Services volumes.
- Strategic Focus: Management is prioritizing expense reductions, operating efficiencies, and increasing market share to counteract macroeconomic headwinds.
- Liquidity: The company maintains $45.5 million in cash and has $189.8 million available under its $225 million secured credit facility. Management believes operating cash flow will meet needs for the next 12 months.
- Goodwill Risk: With $753.1 million in goodwill, the company notes that significant market volatility increases the exposure to potential future impairment charges, with annual testing scheduled for the fourth quarter.
- Legal Proceedings: No material adverse effects are anticipated from pending litigation.
Investor Verification Checklist
- Goodwill Valuation: Verify the assumptions used in the upcoming Q4 goodwill impairment test given the $753 million balance and current market volatility.
- Segment Exposure: Assess the specific sensitivity of the Lender Services and Dealer Services segments to further deterioration in the mortgage and automotive credit markets.
- Cash Flow Sustainability: Monitor the significant cash outflow for income taxes ($75.7 million YTD) and its impact on liquidity relative to the $45.5 million cash balance.
- Discontinued Operations: Confirm the final net proceeds and tax implications of the FAIS and CMSI divestitures.
- Debt Covenants: Review the company's compliance status with its $225 million credit facility covenants, particularly if operating income continues to decline.