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First Advantage Corporation (FADV) - 10-Q Summary

Business Context and Reporting Period

Reporting Period: Quarterly report for the period ended June 30, 2009.

Business Overview: First Advantage is a global risk mitigation and business solutions provider operating in five segments: Credit Services, Data Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services. The company is majority-owned (approx. 80%) by First American Corporation.

Significant Event: On June 29, 2009, the Company received an unsolicited proposal from First American to acquire all outstanding shares not owned by First American at a fixed exchange ratio of 0.5375 shares of First American common stock for each share of FADV common stock. This proposal is under consideration by a Special Committee of the Board.

Key Financial Metrics (Six Months Ended June 30, 2009)

Material Changes vs. Prior Period

• Revenue Decline: Total service revenue decreased 4.3% to $354.7 million (vs. $370.7 million in 2008) due to economic downturns affecting hiring (Employer Services) and credit markets (Credit Services). This was partially offset by a 128% increase in Data Services revenue driven by lead generation.
• Profitability Pressure: Operating income decreased 20.3% to $40.8 million (vs. $51.2 million in 2008). Operating margin declined from 13.8% to 11.5%.
• Cost Reductions: Salaries and benefits decreased $28.1 million (21.7%) due to strategic employee reductions and lower 401(k) match expenses. Other operating expenses decreased $7.8 million.
• Segment Performance:
  • Credit Services: Operating income increased 14.1% to $32.3 million despite revenue declines, driven by cost efficiencies.
  • Investigative & Litigation: Operating income plummeted 91.8% to $1.4 million due to a 54% revenue drop in high-margin electronic discovery.
  • Employer Services: Operating income fell 66.3% to $2.2 million as revenue dropped 29% due to higher unemployment.
• Cash Flow Improvement: Operating cash flow turned positive at $37.2 million, a significant improvement from a $2.5 million outflow in the prior year, largely due to a $56.9 million tax payment in 2008 related to a prior asset sale.

Outlook, Risks, and Management Commentary

• Economic Outlook: Management expects continued weakness in real estate, mortgage, and transportation markets, which will negatively impact Credit and Data Services. Higher unemployment rates are expected to continue suppressing Employer Services volumes.
• Strategic Focus: Management is prioritizing expense reductions, operating efficiencies, and market share growth to counteract macroeconomic headwinds.
• Goodwill Impairment Risk: The filing notes that due to economic uncertainty, there is a risk that future goodwill impairment tests (scheduled for Q4 2009) may result in material charges if forecasted revenue or margin growth is not achieved.
• Liquidity: The company maintains $60.5 million in cash and $195.1 million in available credit. Management believes current resources are sufficient for the next 12 months, though raising additional capital may be difficult in the current environment.

Investor Verification Checklist

• Acquisition Proposal Status: Monitor the progress of the unsolicited acquisition proposal from First American Corporation and the Special Committee's decision.
• Goodwill Valuation: Review Q4 2009 results for potential goodwill impairment charges given the economic downturn and revenue declines in key segments.
• Segment Mix Shift: Analyze the sustainability of the revenue growth in Data Services (lead generation) versus the structural decline in Employer Services and Investigative Services.
• Debt Covenants: Verify continued compliance with the $225 million Secured Credit Facility covenants, particularly as operating income fluctuates.
• Bad Debt Trends: Monitor the increase in bad debt expense within the Data Services segment, which contributed to margin compression.