Depreciation
and amortization was flat when compared to the third quarter of
2008. Depreciation and amortization was 7.0% of service revenue in
the third quarter of 2009 compared to 6.2% in the same period of
2008.
The
consolidated operating margin was 11.8% for the three months ended September 30,
2009, compared to 12.4% for the same period in 2008. Income from
operations was $18.4 million for the three months ended September 30, 2009
compared to $21.7 million for the same period in 2008. The decrease of $3.3
million is comprised of an increase in Corporate expenses of $1.5 million, a
decrease in operating income of $5.0 million in Investigative and Litigation
Support Services, $0.1 million in Data Services, and $2.7 million at Employer
Services offset by increases in operating income of $5.4 million in Credit
Services, and $0.6 million in Multifamily Services.
Credit
Services Segment
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Service
revenue was $191.6 million for the nine months ended September 30, 2009, a
decrease of $11.1 million compared to service revenue of $202.7 million for the
nine months ended September 30, 2008. A decrease in revenue at the
dealer services division resulted in an overall decrease in service revenue,
which is partially offset by an increase in revenue from the mortgage credit and
consumer credit divisions. The challenging credit markets and overall
economy continues to affect our credit reporting businesses compared to the nine
months ended September 30, 2008.
Gross
margin was $105.3 million for the nine months ended September 30, 2009, a
decrease of $5.3 million compared to gross margin of $110.6 million in the same
period of 2008. The decline in gross margin is primarily due to the
overall decrease in revenue and revenue mix compared to prior year. Gross margin
was 55.0% for the nine months ended September 30, 2009 as compared to 54.6% for
the nine months ended September 30, 2008.
Salaries
and benefits decreased by $8.5 million. Salaries and benefits were
19.0% of service revenue in the nine months ended September 30, 2009 compared to
22.2% during the same period in 2008. Salaries and benefits expense
decreased due to operational efficiencies and reduced staffing.
Facilities
and telecommunication expenses decreased $1.4 million. Facilities and
telecommunication expense were 2.7% and 3.2% of service revenue in the nine
months ended September 30, 2009 and 2008, respectively. The expense
decrease is due to the office consolidations.
Other
operating expenses decreased by $3.1 million. Other operating expenses were 7.5%
of service revenue in the nine months ended September 30, 2009 compared to 8.6%
for the same period of 2008. The decrease is due to a decline in lease
expense, marketing expense, bad debt expense, office expenses and travel
expense, offset by an increase in temporary labor and professional service
fees.
Depreciation
and amortization was flat when compared to the nine months ended
2008. Depreciation and amortization was 2.3% of service revenue in
the third quarter of 2009 compared to 2.2% in the same period of
2008.
Income from
operations was $44.8 million for the nine months ended September 30, 2009
compared to $35.4 million in the same period of 2008. The operating margin
percentage increased from 17.4% to 23.4% primarily due operational efficiencies
gained related to the segment’s cost reduction measures in 2008 the $1.7
million impairment loss recorded in 2008.
Data
Services Segment
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Total
service revenue was $113.5 million for the nine months ended September 30, 2009,
an increase of $53.1 million compared to service revenue of $60.4 million in the
same period of 2008. This segment has experienced a significant
increase in service revenue primarily due to the lead generation business,
offset by reduced volumes in the specialty credit and transportation businesses
as a result of the overall economic downturn.
Gross
margin was $44.7 million for the nine months ended September 30, 2009, an
increase of $3.7 million compared to gross margin of $41.0 million in the same
period of 2008. Gross margin as a percentage of service revenue was
39.4% for the nine months ended September 30, 2009 as compared to 67.8% for the
nine months ended September 30, 2008. The decrease in the gross
margin as a percentage of service revenue is primarily due to the revenue
mix. The lead generation’s eAdvertising business has lower
margins.
Salaries
and benefits decreased by $0.3 million. Salaries and benefits
were 12.9% of service revenue in the nine months ended September 30, 2009
compared to 24.6% of service revenue in the same period of 2008. The
decrease in expense is related to the reduction in staffing as compared to the
same period in 2008.
Facilities
and telecommunication expenses decreased $0.2 million. Facilities and
telecommunication expenses were 1.5% of service revenue in the nine months
ended September 30, 2009 compared to 3.2% of service revenue in the same period
of 2008.
Other
operating expenses increased by $4.2 million. Other operating expenses were 8.4%
of service revenue for the nine months ended September 30, 2009 and 8.9% in the
same period of 2008. The expense increase is primarily due to the increase in
bad debt expense at the lead generation business.
Depreciation
and amortization decreased by $0.2 million. Depreciation and amortization was
6.5% of service revenue in the nine months ended September 30, 2009 compared to
12.6% in the same period of 2008.
The
operating margin percentage decreased from 18.6% to 10.0% primarily due to the
revenue mix of the businesses in the nine months ended September 30, 2009
compared to the same period in 2008.
Income
from operations was $11.4 million for the nine months ended September 30, 2009,
an increase of $0.2 million compared to $11.2 million in the nine months ended
September 30, 2008. The increase is primarily driven by the
lead generation business where revenue has increased, offset by increased cost
of service and operating expenses.
Employer
Services Segment
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Total
service revenue was $119.4 million for the nine months ended September 30, 2009,
a decrease of $44.0 million compared to service revenue of $163.4 million in the
same period of 2008. The decrease was a result of the
decline in hiring in the United States and abroad. The recession
has caused increased unemployment, which directly affects this
segment.
Salaries
and benefits decreased by $10.2 million. Salaries and benefits were
41.0% of service revenue in the nine months ended September 30, 2009 compared to
36.2% in the same period of 2008. The decrease in expense is a direct
effect of office consolidations and the reduction in staffing, offset by an
increase in expense related to moving technology personnel from Corporate to
Employer Services.
Facilities
and telecommunication expenses decreased by $1.1 million. Facilities
and telecommunication expenses were 5.2% and 4.5% of service revenue in the nine
months ended September 30, 2009 and 2008, respectively. The
expense decrease is a direct effect of office consolidations.
Other
operating expenses decreased by $13.2 million. Other operating expenses were
13.1% and 17.7% of service revenue in the nine months ended September 30, 2009
and 2008, respectively. The expense decrease in other operating
expenses is primarily due to moving technology personnel from Corporate to
Employer Services which increased costs allocated out of Employer services, a
decrease in temporary labor, a decrease in bad debt expense and decreased
foreign currency losses.
Depreciation
and amortization increased by $1.4 million. Depreciation and amortization was
9.3% of service revenue in the nine months ended September 30, 2009 compared to
5.9% in the same period of 2008. The increase is primarily due to the
rollout of internally developed software and the accelerated depreciation on
software related to outsourcing certain services in our drug screening
division.
The
operating margin percentage decreased from 8.0% to 5.1% primarily due to the
decline in service revenue.
Income
from operations was $6.1 million for the nine months ended September 30, 2009, a
decrease of $7.0 million compared to income from operations of $13.1 million in
the same period of 2008. The decrease is due to the decline in
service revenue, offset by a 22.2% decrease in operating
expenses.
Multifamily
Services Segment
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Total
service revenue was $57.5 million for the nine months ended September 30, 2009,
a decrease of $0.5 million compared to service revenue of $58.0 million in the
same period of 2009. The decrease is primarily due to a decline in
revenue related to the current economic conditions.
Salaries
and benefits cost decreased $1.7 million. Salaries and benefits were
31.7% of service revenue for the nine months ended September 30, 2009 compared
to 34.4% of service revenue in the same period of 2008. The expense
decrease is primarily due to a reduction in employees.
Facilities
and telecommunication expenses decreased $0.4
million. Facilities and telecommunication expenses were 3.9% of
service revenue in the nine months ended September 30, 2009 and 4.6% in the same
period of 2008. The expense decrease is a direct effect of
office consolidations.
Other
operating expenses decreased $1.0 million. Other operating
expenses were 12.0% of service revenue in the nine months ended September 30,
2009 compared to 13.7% in the same period of 2008. The decrease is
due to reduced leased equipment, marketing and travel expenses.
Depreciation
and amortization increased $0.3 million. Depreciation and
amortization was 7.9% of service revenue in the nine months ended September 30,
2009 compared to 7.3% in the same period of 2008.
The
operating margin percentage increased from 31.0% to 35.7% primarily due to
management’s cost containment initiatives. Income from operations was
$20.5 million in the nine months ended September 30, 2009 compared to income
from operations of $18.0 million in the same period of 2008.
Investigative
and Litigation Services Segment
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Total
service revenue was $30.2 million for the nine months ended September 30, 2009,
a decrease of $33.1 million compared to service revenue of $63.3 million in the
same period of 2008. The decrease is primarily due to the diminished
case activity level in the Litigation Support Services division.
Salaries
and benefits decreased by $8.3 million. Salaries and benefits were
56.3% of service revenue in the nine months ended September 30, 2009 compared to
40.0% in the same period of 2008. The expense decrease is mainly due
to the decline of compensation related to revenue and
profitability.
Facilities
and telecommunication expenses decreased $0.2 million. Facilities and
telecommunication expenses were 6.6% of service revenue in the nine months ended
September 30, 2009 and 3.5% in the first quarter of 2008.
Other
operating expenses decreased by $3.4 million. Other operating expenses were
16.3% of service revenue in the nine months September 30, 2009 and 13.2% for the
same period of 2008. The decrease in expense is primarily due to a
reduction in bad debt expense, travel expenses and professional
fees.
Depreciation
and amortization decreased $0.3 million. Depreciation and
amortization was 7.2% of service revenue in the nine months ended September 30,
2009 compared to 3.9% in the same period of 2008.
The
operating margin percentage decreased from 37.0% to 9.1%. Income from
operations was $2.8 million for the nine months ended September 30, 2009
compared to $23.4 million for the same period of 2008. The
decrease in margin is primarily due to the revenue decrease on the higher margin
electronic discovery business.
Corporate
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Corporate
costs and expenses represent primarily compensation and benefits for senior
management, administrative staff, and their related expenses in addition to an
administrative fee paid to First American. The Corporate expenses
were $26.4 million in the nine months ended September 30, 2009 compared to
expenses of $28.2 million in the same period of 2008. The expense
decrease is due to moving technology personnel from Corporate to Employer
Services, decreases in compensation and benefit expenses, and travel
expenses. The decrease is offset by $1.6 million in legal expenses
recorded in the current quarter related to the Offer and related
litigation.
Consolidated
Results
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Consolidated
service revenue for the nine months ended September 30, 2009 was $510.7 million,
a decrease of $34.6 million compared to service revenue of $545.3 million in the
same period in 2008. The decrease in service revenue is directly related to the
downturn in domestic and international hiring, the decline in the mortgage
industry, weakness in the credit markets, and overall economic slowdown,
partially offset by an increase in the Data Services segment.
Salaries
and benefits decreased $37.3 million. Salaries and benefits were
29.6% of service revenue for the nine months ended September 30, 2009 and 34.6%
for the same period in 2008. The decrease is primarily due to strategic
reductions in employees, office consolidations, a decline of compensation
related to revenue and profitability, and a reduction in the 401(k) match
expense.
Facilities and
telecommunication decreased by $3.8 million compared to the same period in 2008.
Facilities and telecommunication expenses were 4.0% of service revenue in the
nine months ended September 30, 2009 and 4.4% in the same period of
2008. The decrease is primarily due to savings related to office
consolidations.
Other
operating expenses decreased by $9.2 million compared to the same period in
2008. Other operating expenses were 11.0% and 12.0% of service
revenue for the nine months ended September 30, 2009 and 2008,
respectively. The decrease in expense is due to office consolidations
and cost reduction measures. This is offset by an increase in bad
debt expense at the Data Services segment and $1.6 million in legal expenses
recorded related to the Offer and related litigation.
Depreciation
and amortization increased by $1.1 million due to fixed asset additions and the
roll out of internally developed software, offset by certain fixed assets and
intangibles becoming fully depreciated.
The
consolidated operating margin was 11.6% for the nine months ended September 30,
2009, compared to 13.4% for the same period in 2008. Income from
operations was $59.2 million for the nine months ended September 30, 2009
compared to $72.9 million for the same period in 2008. The decrease of $13.7
million is comprised of a decrease in operating income of $20.6 million in
Investigative and Litigation Support Services, and $7.0 million at Employer
Services offset by increases in operating income of $9.4 million in Credit
Services, $0.2 million in Data Services, $2.5 million in Multifamily Services
and a decrease of Corporate expenses of $1.8 million.
Critical
Accounting Estimates
Critical
accounting policies are those policies used in the preparation of the Company’s
financial statements that require management to make estimates and judgments
that affect the reported amounts of certain assets, liabilities, revenues,
expenses and related disclosure of contingencies. A summary of these policies
can be found in Management’s Discussion and Analysis in the Company’s Annual
Report on Form 10-K for year ended December 31, 2008.
Liquidity
and Capital Resources
Overview
The
Company’s principal sources of capital include, but are not limited to, existing
cash balances, operating cash flows and borrowing under its Secured Credit
Facility (see Note 6 to the Consolidated Financial Statements). The
Company’s short-term and long-term liquidity depends primarily upon its level of
net income, working capital management (accounts receivable, accounts payable
and accrued expenses), capital expenditures and bank borrowings. The
Company believes that, based on current forecasts and anticipated market
conditions, sufficient operating cash flow will be generated to meet all
operating needs, to make planned capital expenditures, scheduled debt payments,
and tax obligations for the next twelve months. Any material variance
of operating results could require us to seek other funding alternatives
including raising additional capital, which may be difficult in the current
economic conditions.
In
previous years, First Advantage sought to acquire other businesses as part of
its growth strategy. The Company will continue to evaluate acquisitions in order
to achieve economies of scale, expand market share and enter new
markets.
While
uncertainties within the Company’s industry exist, management is not aware of
any trends or events likely to have a material adverse effect on liquidity or
the accompanying financial statements. Management expects continued weakness in
the real estate and mortgage markets to continue impacting the Company’s Credit
Services segment and the transportation and specialty credit businesses in the
Data Services segment. In addition, the effect of the issues in the
real estate and related credit markets and other macroeconomic matters has
resulted in higher unemployment rates negatively impacting the volumes in the
Employer Services segment. Given this outlook, management is focusing
on expense reductions, operating efficiencies, and increasing market share
throughout the Company.
Statements of Cash
Flows
The
Company’s primary source of liquidity is cash flow from operations and amounts
available under credit lines the Company has established with a
bank. As of September 30, 2009, cash and cash equivalents were $57.8
million.
Net cash
provided by operating activities of continuing operations was $57.0 million and
$33.0 million in the nine months ended September 30, 2009 and 2008,
respectively. Cash provided by operating activities of continuing
operations increased by $24.0 million when comparing the nine months ended
September 30, 2009 and the same period in 2008. Income from
continuing operations was $34.8 million in the nine months ended September 30,
2009 compared to $41.9 million for the same period in 2008. The increase in cash
provided by operating activities was primarily due to the first quarter 2008
income tax payments of $56.9 million related to the sale of DealerTrack
shares.
Cash used
in investing activities of continuing operations was $36.1 million and $78.4
million for the nine months ended September 30, 2009 and 2008, respectively. In
the nine months ended September 30, 2009, net cash in the amount of $19.5
million was used for earnout provisions from prior year acquisitions, compared
to $51.2 million in the same period of 2008. Purchases of property and equipment
were $14.5 million in the nine months ended September 30, 2009 compared to $24.3
million in the same period of 2008.
Cash used
in financing activities of continuing operations was $16.5 million for the nine
months ended September 30, 2009, compared to cash provided by financing
activities of continuing operations of $12.4 million for the nine months ended
September 30, 2008. In the nine months ended September 30, 2009,
proceeds from existing credit facilities were $50.9 million compared to $100.3
million in the same period of 2008. Repayment of debt was $62.3 million in the
nine months ended September 30, 2009 and $85.5 million in the same period of
2008. Cash used to acquire noncontrolling interest in a consolidated
subsidiary was $5.9 million and $8.0 million for the nine months ended September
30, 2009 and 2008, respectively. In addition, $1.1 million was distributed
to noncontrolling interests in the nine months ended September 30,
2008.
Debt
and Capital
In 2005,
the Company executed a revolving credit agreement with a bank syndication (the
“Credit Agreement”). Borrowings available under the Credit Agreement
total up to $225 million. The Credit Agreement includes a $10 million
sub-facility for the issuance of letters of credit and up to a $5 million swing
loan facility. The credit facility maturity date is September 28,
2010. The Credit Agreement is collateralized by the stock and accounts
receivable of the Company’s subsidiaries.
At
September 30, 2009, the Company had available lines of credit of $209.7 million,
and was in compliance with the financial covenants of its loan agreements. In
the event that the First American Offer is accepted and consummated with a
merger, this may be determined to be an "Event of Default," under the terms of
the Credit Agreement.
First
Advantage filed a Registration Statement with the Securities and Exchange
Commission for the issuance of up to 5.0 million shares of our Class A common
stock, par value $.001 per share, from time to time as full or partial
consideration for the acquisition of businesses, assets or securities of other
business entities. The Registration Statement was declared effective
on January 9, 2006. A total of 1,338,631 shares were issued for
acquisitions as of September 30, 2009.
Contractual
Obligations and Commercial Commitments
The
following is a schedule of long-term contractual commitments, as of September
30, 2009, over the periods in which they are expected to be paid.
(In
thousands)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
Minimum
contract purchase commitments
|
|
$
|
1,019
|
|
|
$
|
2,653
|
|
|
$
|
897
|
|
|
$
|
41
|
|
|
$
|
41
|
|
|
$
|
26
|
|
|
$
|
4,677
|
|
Advertising
commitments
|
|
|
105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
Operating
leases
|
|
|
3,670
|
|
|
|
12,576
|
|
|
|
8,931
|
|
|
|
7,024
|
|
|
|
6,958
|
|
|
|
14,907
|
|
|
|
54,066
|
|
Debt
and capital leases
|
|
|
2,359
|
|
|
|
18,420
|
|
|
|
492
|
|
|
|
72
|
|
|
|
78
|
|
|
|
53
|
|
|
|
21,474
|
|
Interest
payments related to debt (1)
|
|
|
197
|
|
|
|
231
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
432
|
|
Total
(2)
|
|
$
|
7,350
|
|
|
$
|
33,880
|
|
|
$
|
10,324
|
|
|
$
|
7,137
|
|
|
$
|
7,077
|
|
|
$
|
14,986
|
|
|
$
|
80,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Estimated interest payments are calculated assuming current interest rates over minimum maturity periods specified in debt agreements.
(2) Excludes tax liability of $4.9 million due to uncertainty of payment period.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
There have
been no material changes in the Company’s risk since filing its Form 10-K for
the year ended December 31, 2008.
Item
4. Controls and Procedures
The Company’s
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), after
evaluating the effectiveness of the Company’s disclosure controls and
procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended, have concluded that, as of the end of the fiscal quarter covered by
this report on Form 10-Q, the Company’s disclosure controls and procedures were
effective to provide reasonable
assurances
that information required to be disclosed in the reports filed or submitted
under such Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and such information is accumulated and communicated to management, including
the CEO and CFO, as appropriate, to allow timely decisions regarding
disclosures.
There was no
change in the Company’s internal control over financial reporting during the
quarter ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item 1.
|
Legal
Proceedings
|
On July 2,
2009, Norfolk County Retirement System filed a Verified Class Action Complaint
in the Court of Chancery of the State of Delaware against First American, First
Advantage and Parker S. Kennedy. Norfolk County Retirement System contends that
as a result of the June 26, 2009 offer, the defendants breached their fiduciary
duties to the minority public stockholders of First Advantage. The plaintiff
seeks, among other things, to enjoin the consummation or closing of the
Offer.
In
addition, First Advantage’s subsidiaries are involved in litigation from time to
time in the ordinary course of their businesses. The Company does not believe
that the outcome of any pending or threatened litigation involving these
entities will have a material adverse effect on our financial position,
operating results or cash flows.
There
have been no material changes from the risk factors previously disclosed in the
Company’s Form 10-K for Fiscal Year Ending December 31, 2008.
Item 2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None
Item 3.
|
Defaults
Upon Senior Securities
|
None
It
em 4.
|
Submission
of Matters to a Vote of Security
Holders
|
None
It
em 5.
|
Other
Information
|
None
See
Exhibit Index.
SI
GNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FIRST
ADVANTAGE CORPORATION
(Registrant)
|
|
|
|
|
|
|
Date:
October 29, 2009
|
By:
|
/s/
ANAND NALLATHAMBI
|
|
|
|
Name:
Anand Nallathambi
|
|
|
|
Title:
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
October 29,
2009
|
By:
|
/s/
JOHN LAMSON
|
|
|
|
Name:
John Lamson
|
|
|
|
Title:
Chief Financial Officer
|
|
|
|
|
|
EXHIBIT
INDEX
Exhibit
No. Description
|
10.1
|
Third
Amended and Restated Services Agreement between The First American
Corporation and First Advantage Corporation, effective January 1,
2009.
|
|
31.1
|
Certification
pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2
|
Certification
pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certifications
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certifications
pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|