Business Context and Reporting Period
Company: First Advantage Corporation (FADV)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
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 and Litigation Support Services. First American Corporation owns approximately 81% of the capital stock.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Total Revenue | $219,413 | $656,472 |
| Service Revenue | $205,306 | $614,546 |
| Net Income | $18,953 | $48,543 |
| Diluted EPS | $0.32 | $0.82 |
| Operating Income | $34,552 | $90,840 |
| Operating Margin | 16.8% | 14.8% |
| Cash from Operations (9mo) | $89,800 | |
| Cash and Equivalents (Sep 30, 2007) | $33,674 | |
| Total Debt (Long-term + Current) | $170,816 |
Material Changes vs. Prior Period
- Revenue Growth: Service revenue increased 3.4% for the quarter and 7.5% for the nine months compared to 2006. Organic growth was 1.7% (quarter) and 3.6% (nine months).
- Operating Income: Operating income increased slightly ($0.4M) for the quarter but decreased $3.7M for the nine months compared to the prior year.
- Segment Performance:
- Lender Services: Revenue declined significantly due to the downturn in the mortgage lending industry.
- Investigative & Litigation Support: Revenue surged 95.6% for the quarter, driven by international growth.
- Employer Services: Revenue grew 10.5% for the quarter, aided by acquisitions and organic growth in tax and background screening.
- Unusual Items: The company recorded $8.0 million in compensation expense in Q1 2007 related to the former CEO's transition agreement (severance and accelerated equity vesting). This reduced nine-month net income by $4.7 million (8 cents per diluted share).
Guidance, Outlook, and Risks
- Subsequent Events (October 2007):
- Sold US Search business for $26.5 million cash, resulting in a pre-tax gain of ~$21.1 million.
- Sold 2.875 million shares of DealerTrack Holdings, Inc., resulting in a pre-tax gain of ~$97.7 million ($0.96 per diluted share). The company will retain a ~6% stake and switch to cost method accounting.
- Liquidity: The company maintains a $225 million secured credit facility with $90 million available as of September 30, 2007. Management believes cash flow and credit lines are sufficient to fund operations and debt obligations.
- Risks:
- Continued volatility in the mortgage lending industry affecting Lender and Data Services segments.
- Three pending class-action lawsuits in California regarding tenant reporting accuracy (Company does not anticipate material adverse effect).
- Execution risks related to acquisitions and integration.
Investor Verification Checklist
- CEO Transition Costs: Verify the full impact of the $8.0 million one-time expense on Q1 2007 results and confirm no further severance obligations remain.
- Subsequent Gains: Confirm the timing and tax implications of the $21.1 million (US Search) and $97.7 million (DealerTrack) gains to be recognized in Q4 2007.
- Mortgage Exposure: Assess the sustainability of revenue declines in the Lender Services segment given the ongoing housing market downturn.
- Debt Covenants: Review the $225 million credit facility terms to ensure compliance with financial covenants, particularly given the high leverage relative to cash flow.
- Acquisition Integration: Evaluate the performance of recent acquisitions in the Employer Services segment to ensure they meet projected synergies.