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Business Context and Reporting Period

Company: First Advantage Corporation (FADV)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
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 and is controlled by The First American Corporation, which owned approximately 76% of the economic interest and 91% of the voting interest as of year-end 2006.

Key Financial Metrics (Year Ended Dec 31, 2006)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 27% to $817.6 million, driven primarily by acquisitions ($147.2 million) and 4.1% organic growth.
  • Data Services: Revenue surged 62% to $148.7 million, largely due to the Q4 2005 acquisition of a lead generation business.
  • Employer Services: Revenue grew 36% to $195.2 million, fueled by 15 acquisitions in 2005 and 2006.
  • Investigative Services: Revenue increased 71% to $59.2 million following the acquisition of an electronic discovery business.
• Profitability: Net income rose 13% to $66.2 million. Operating income increased 23% to $120.4 million.
  • Unusual Items: The company recognized a $7.0 million pretax gain on the sale of its investment in DealerTrack Holdings, Inc. in Q4 2006.
  • Expenses: Operating expenses increased significantly due to share-based compensation ($10.9 million recorded in 2006 under SFAS 123R), increased infrastructure/security costs, and acquisition-related amortization.
• Debt & Liquidity: The company maintained a $225 million revolving credit facility with $150 million outstanding at year-end. Cash provided by operating activities increased 29% to $93.3 million.

Guidance, Outlook, and Risks

• Strategy: Management intends to continue pursuing strategic acquisitions to enter new markets and consolidate operations to capture synergies. International expansion is a key focus, particularly in employment screening (India, Philippines, Japan, Korea, Australia).
• Seasonality: The business experiences seasonal declines in Q4 and Q1 due to holiday impacts on home buying, hiring, and apartment rentals.
• Key Risks:
  • Control: First American Corporation controls over 97% of voting power, limiting minority shareholder influence.
  • Supplier Dependence: The company relies on third-party data suppliers (including credit bureaus); termination or price increases could materially impact operations.
  • Regulatory & Security: Subject to increasing regulation regarding personal information and faces risks related to data security breaches.
  • Goodwill: The company holds $650.1 million in goodwill; future impairment charges could materially affect earnings.

Investor Verification Checklist

• Acquisition Integration: Verify the realization of synergies and revenue targets from the 11 acquisitions completed in 2006, particularly in the Employer and Data Services segments.
• Share-Based Compensation: Monitor the ongoing impact of SFAS 123R adoption on future earnings, as $10.9 million was expensed in 2006.
• DealerTrack Investment: Track the performance and potential future gains/losses related to the remaining 14% equity interest in DealerTrack Holdings, Inc.
• Related Party Transactions: Review the terms and costs of the services agreement and office leases with First American Corporation, which accounted for significant operating expenses.
• Debt Covenants: Confirm continued compliance with the financial covenants of the $225 million credit facility, specifically the consolidated leverage and fixed charge coverage ratios.