Business Context and Reporting Period
Company: First Advantage Corporation (FADV)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: A global risk mitigation and business solutions provider operating in six segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative & Litigation Support Services. First American Corporation owns approximately 82% of the capital stock.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2006 | 9 Months Ended Sep 30, 2006 |
|---|---|---|
| Total Revenue | $212,036 | $611,507 |
| Net Income | $18,624 | $48,006 |
| Operating Income | $34,106 | $94,584 |
| Gross Margin | $136,585 (64.4%) | $393,802 (64.4%) |
| Operating Margin | 17.2% | 16.5% |
| Cash & Equivalents | $31,116 | $31,116 |
| Operating Cash Flow (9mo) | N/A | $61,903 |
| Total Debt (Long-term + Current) | $215,381 | $215,381 |
| Goodwill | $649,452 | $649,452 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 24.8% for the quarter and 29.0% for the nine months compared to 2005. Acquisitions accounted for the majority of this growth ($36.1M in Q3; $118.3M in YTD), with organic growth rates of 3.1% (Q3) and 4.0% (YTD).
- Profitability: Net income rose 16.2% for the quarter and 13.7% for the nine months. Operating income increased 21.4% (Q3) and 22.9% (YTD).
- Accounting Change: Adoption of SFAS No. 123R (Share-Based Payment) reduced net income by $1.8 million ($0.03/share) in Q3 and $6.2 million ($0.11/share) for the nine months ended September 30, 2006.
- Segment Performance:
- Employer Services: Significant revenue growth driven by nine acquisitions in 2006.
- Investigative & Litigation: Operating margin improved from 4.3% to 18.6% (Q3) due to higher-margin electronic discovery services from 2005 acquisitions.
- Lender Services: Operating margin increased to 33.1% despite a decline in the broader mortgage market, aided by market share gains.
- Debt: Total debt remained relatively stable at $215.4 million, with a $225 million credit facility available. The company was in compliance with all financial covenants.
Guidance, Outlook, and Risks
- Acquisition Strategy: Management continues to pursue acquisitions to achieve economies of scale and enter new markets. Approximately $25.7 million in contingent consideration is expected to be recorded in the next 12 months.
- Subsequent Event: In October 2006, DealerTrack (in which First Advantage holds a minority interest) completed a follow-on stock offering. First Advantage expects to recognize a pretax investment gain of approximately $7.2 million in Q4 2006.
- Liquidity: Management believes cash flow from operations and available credit lines are sufficient to fund operations, capital expenditures, and debt service. However, material adverse changes in operating results could require additional capital.
- Risks:
- Legal Proceedings: Pending class action lawsuits in New York and California regarding tenant report accuracy under Fair Credit Reporting Acts. Management does not believe these will have a material adverse effect.
- Market Risk: Exposure to variable interest rates on $183 million of debt; a 100 basis point rate increase would result in $1.8 million in additional annual interest.
- Regulatory: Changes in government regulations and data privacy laws could impact operations.
Investor Verification Checklist
- Acquisition Integration: Verify the realization of synergies and revenue growth from the nine acquisitions completed in 2006, particularly within the Employer Services segment.
- Share-Based Compensation Impact: Monitor the ongoing impact of SFAS 123R adoption on future earnings per share and cash flow.
- Contingent Consideration: Track the $25.7 million in estimated future earn-out payments and their potential impact on cash flow.
- DealerTrack Investment: Confirm the recognition of the $7.2 million investment gain in Q4 2006 following DealerTrack's stock offering.
- Legal Exposure: Review updates on the pending class action lawsuits regarding tenant screening accuracy to assess potential liability.