FA

Business Context and Reporting Period

Company: First Advantage Corporation (FADV)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
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 was formed in 2003 via a merger between The First American Corporation's screening technology division and US SEARCH.com Inc. As of December 31, 2005, The First American Corporation owned approximately 77% of the economic interest and 98% of the voting interest.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 24.6% to $643.7 million. Acquisitions accounted for $86.1 million of the increase, while organic growth contributed $37.9 million (8.6%).
• Segment Performance:
  • Lender Services: Revenue rose to $168.3 million (26% of total), driven by acquisitions and increased transaction volume.
  • Data Services: Revenue increased to $131.1 million, primarily due to acquisitions in late 2004 and 2005.
  • Dealer Services: Revenue grew to $98.4 million, largely due to the acquisition of an automotive lead generation business.
  • Employer Services: Revenue reached $154.4 million, with acquisitions accounting for $24.2 million of the growth.
• Acquisition Activity: The company completed 15 acquisitions in 2005. A significant transaction was the September 2005 acquisition of First American's Credit Information Group (CIG) Business, recorded at historical cost as a common control transaction.
• One-Time Items: 2005 results included $3.2 million in nondeductible merger costs, $2.0 million in relocation costs, and $0.6 million in branding costs. Conversely, a $9.5 million pre-tax gain was recognized from the sale of DealerTrack stock following its IPO.
• Debt Structure: Long-term debt increased significantly to $220.6 million (including current portion) due to a new $225 million revolving credit facility established in September 2005 to fund acquisitions and refinance prior debt.

Guidance, Outlook, Risks, and Contingencies

• Strategic Outlook: Management intends to continue pursuing strategic acquisitions to enter new markets and consolidate operations to capture synergies. International expansion is a key focus, with new offices in India and the Philippines.
• Key Risks:
  • Control: First American Corporation controls over 98% of voting power, limiting influence by other stockholders.
  • Supplier Dependence: The business relies heavily on data from third-party suppliers (e.g., credit bureaus). Termination of these relationships or price increases could materially harm operations.
  • Regulatory Environment: Subject to various federal and state regulations regarding personal information (e.g., Fair Credit Reporting Act). Increased regulation could raise compliance costs.
  • Security: Risks related to the electronic transmission of confidential information and potential data breaches.
  • Goodwill Impairment: With $606 million in goodwill, future impairment charges could materially affect earnings.
• Contingencies: The company is involved in routine litigation, including class action lawsuits regarding tenant report accuracy. Management does not believe these will have a material adverse effect. The company also faces potential liability related to the nature of its services which may not be fully covered by insurance.
• Dividends: The company does not anticipate paying dividends in the foreseeable future, intending to retain earnings for growth.

Investor Verification Checklist

• Acquisition Integration: Verify the successful integration of the 15 companies acquired in 2005, particularly the CIG Business, to ensure anticipated synergies are realized.
• Supplier Relationships: Monitor the stability and pricing of data supply agreements with major credit bureaus and government agencies.
• Debt Covenants: Confirm continued compliance with the financial covenants of the new $225 million credit facility (leverage and fixed charge coverage ratios).
• Goodwill Valuation: Review the annual goodwill impairment testing process, given the significant increase in goodwill to over $600 million.
• Related Party Transactions: Scrutinize the ongoing services agreements and financial flows between First Advantage and its controlling shareholder, First American Corporation.
• Regulatory Compliance: Assess the impact of evolving privacy laws and regulations on the company's data services and screening operations.