FA

Business Context and Reporting Period

Company: First Advantage Corporation (FADV)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: First Advantage is a global provider of risk mitigation and business solutions, operating through six segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services. The company is controlled by The First American Corporation, which owns approximately 75% of the economic interest and 90% of the voting interest as of year-end 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 5.7% to $842.9 million, driven by acquisitions ($24.4 million) and organic growth (2.6%).
• Profitability Surge: Net income more than doubled to $138.1 million, primarily due to a one-time pretax gain of $97.4 million from the sale of DealerTrack Holdings, Inc. shares and a $20.4 million gain from the sale of the US Search business (discontinued operations).
• Operating Income Decline: Operating income from continuing operations decreased slightly to $117.6 million (from $119.4 million) due to a downturn in the mortgage industry affecting the Lender Services segment and weakness in the Data Services lead generation business.
• Debt Reduction: Long-term debt decreased significantly from $179.5 million to $14.4 million. Proceeds from the DealerTrack stock sale ($128.1 million) were used to pay down debt.
• Segment Performance:
  • Lender Services: Revenue decreased 14% due to the mortgage market decline.
  • Investigative & Litigation Support: Revenue increased 67% driven by growth in electronic discovery services.
  • Employer Services: Revenue increased 19% due to acquisitions and international expansion.

Guidance, Outlook, and Risks

Management Commentary: Management expects continued weakness in the real estate and mortgage markets, impacting Lender Services and certain Data Services businesses. The company plans to focus on expense reductions and operating efficiencies in these segments while continuing to pursue strategic acquisitions and international expansion.

Key Risks and Contingencies:

• Control Structure: First American Corporation controls over 98% of voting power, potentially influencing decisions to the detriment of minority shareholders.
• Supplier Dependence: The company relies on third-party data suppliers (including credit bureaus) and government entities. Termination of these relationships or price increases could materially harm operations.
• Goodwill Impairment: The company holds $695.7 million in goodwill. While no impairment was recorded in 2007, future economic downturns could trigger impairment charges.
• Regulatory Environment: Operations are subject to various federal and state regulations regarding data privacy (e.g., FCRA, Gramm-Leach-Bliley Act), which could increase compliance costs.
• Seasonality: Business volumes typically decline in Q1 and Q4 due to holiday seasons and weather impacts on hiring and rental activity.

Investor Verification Checklist

• One-Time Gains: Verify the sustainability of earnings by excluding the $97.4 million DealerTrack gain and $20.4 million US Search sale gain from net income analysis.
• Mortgage Exposure: Assess the impact of the ongoing mortgage industry downturn on the Lender Services segment, which saw a 14% revenue drop.
• Debt Covenants: Confirm continued compliance with the $225 million revolving credit facility covenants, though the facility was unutilized at year-end.
• Related Party Transactions: Review the extent of service fees and rent paid to First American Corporation ($9.7 million in operating expenses and $2.0 million in rent).
• Goodwill Valuation: Monitor the $695.7 million goodwill balance for potential future impairment given the economic environment.