L-1 Identity Solutions Reports Third Quarter 2009 Financial Results; Updates 2009 Guidance and Provides Preliminary Expectations for 2010

October 28, 2009 8:00 AM EDT

STAMFORD, Conn.--(BUSINESS WIRE)-- L-1 Identity Solutions, Inc., (NYSE: ID), a leading provider of identity solutions and services, today announced financial results for the third quarter and nine months ended September 30, 2009. The Company also is updating guidance for the remainder of 2009 and is providing preliminary financial results expectations for 2010.

Revenue for the third quarter of 2009 was $172.5 million compared to $154.5 million in the third quarter of 2008, an increase of $18.0 million or 12 percent. Organic growth in the quarter was approximately nine percent, driven by enrollment services, HIIDE(TM), software solutions, and government consulting services. Revenue for the quarter was slightly lower than expectations due to lower revenue from the enterprise access and secure credentialing divisions.

Gross margin for the third quarter of 2009 increased to approximately 32 percent compared to 31 percent in the third quarter of 2008. The increase came primarily from gains in biometric solutions sales offset by an increase in revenues from lower margin enrollment and government consulting services.

Adjusted EBITDA for the third quarter of 2009 increased to $28.3 million from $25.0 million (excluding merger related expenses of $0.9 million for the same period in the prior year), exceeding the high end of the range of the Company's previous expectations for the third quarter of 2009. The increase of $3.3 million, or 13 percent, was a result of contributions from the higher-margin biometrics business. Third quarter 2009 operating expenses as a percentage of revenue decreased to 24 percent compared to 26 percent in the third quarter of 2008. Unlevered free cash flow was $7.8 million, lower than previously expected due to higher capital expenditures from greater than expected new State contract awards in secure credentialing.

The Company reported a third quarter net income of $1.4 million, or $0.02 per diluted share, in line with previous expectations, compared to a net loss of $1.9 million, or ($0.02) per diluted share in the third quarter of 2008, including stock-based compensation and the effect of adopting new accounting standards (see footnote 'Adoption of New Accounting Standards'). Excluding stock-based compensation, the Company reported third quarter net income of $4.6 million, or earnings per share of $0.05. Weighted average diluted shares outstanding were 86.0 million in the third quarter of 2009, compared to 80.0 million in the prior year period.

"Improvements in the biometrics business year-over-year and continued upward trend in enrollment services volume have significantly contributed to our financial performance this year and helped deliver a profitable third quarter to our shareholders," said Robert V. LaPenta, Chairman, President and CEO of L-1 Identity Solutions. "We continue to see increased momentum for national ID, border security, ePassport and other identity-related programs in the U.S. and abroad which we believe positions L-1 well for future growth in 2010 and beyond."

Year to Date Results for the Nine Months Ended September 30, 2009

Revenue for the first nine months of 2009 was $490.8 million compared to $415.4 million for the same period in the prior year, representing an increase of $75.4 million, or 18 percent. Significant growth in enrollment services, as well as strong contributions from the biometrics business and from the acquisition of Digimarc drove increased revenue. The revenue comparison for the first nine months of 2009 vs. the same period in 2008 was impacted by approximately $17.0 million in consumables and printer orders associated with the start-up of the U.S. Passport Card program in 2008, along with significant license revenues.

Gross margin for the first nine months of 2009 was 30 percent, the same as the prior year period in 2008. This is attributable to growth in biometric solutions offset by increased revenues from lower margin enrollment and government consulting services.

Adjusted EBITDA for the first nine months of 2009 was $71.8 million (excluding a $1.7 million charge associated with Registered Traveler recorded in the second quarter of 2009 and acquisition related expenses) compared to $60.2 million for the same period in 2008 (excluding merger related expenses of $0.9 million), representing a 19 percent increase. The increase in Adjusted EBITDA for the first nine months of 2009 reflects organic growth in biometric solutions, enrollment and government consulting services, and the acquisition of Digimarc. Operating expenses as a percent of revenue decreased to 25 percent from 27 percent in the same prior year period due to cost containment measures. Unlevered free cash flow for the nine month period was approximately $30.0 million reflecting higher capital expenditures from greater-than-expected new State contract awards in secure credentialing.

For the first nine months ended September 30, 2009, the Company reported a net loss of $3.7 million, or ($0.04) per diluted share compared to a net loss of $2.0 million, or ($0.03) per diluted share in the first nine months of 2008, including stock-based compensation and the effect of adopting new accounting standards (see footnote 'Adoption of New Accounting Standards'). Excluding stock-based compensation, the Company had net income of $6.2 million, or earnings per share of $0.07. Diluted weighted average shares outstanding increased to 85.3 million from 75.4 million in the prior year.

The Company's backlog at September 30, 2009 was approximately $1.2 billion compared to $1.0 billion on the same date in the year prior. The total contract value including unexercised options is approximately $1.9 billion.

Business Highlights

    --  Enrollment Services revenue growth was 45 percent for the nine month
        period of 2009, compared to the prior year period. The number of
        enrollment centers in operation today is more than 1,000, up from
        approximately 700 in 2008. Growth is coming in part from enhancements to
        existing State contracts where new Agencies now using the service are
        adding significant volume, such as in Texas and New York. Volume also
        has grown in Federal contracts including TWIC and HazPrint. Almost one
        million in revenue came from commercial banking customers; L-1 is also
        now a newly established FINRA channel.
    --  Biometric milestones in the quarter included:
        o L-1 continued to lead in the area of mobile military solutions with
          $15.8 million of new orders received for HIIDE(TM) and PIER(TM) units;
          more than sixty percent of the orders shipped in Q3.
        o A facial recognition-based eGate system is being piloted at the
          Frankfurt International Airport to facilitate self service border
          crossing for ePassport holders.
        o Indoor and outdoor (weatherized and extreme) access control devices
          for the commercial and government market are now available. This
          includes an Extreme PIV-TWIC product being tested for use at ports
          that also is ideal for military bases and airports.
        o Iris technology from L-1 is performing nearly half a billion
          cross-comparisons per second as part of the largest iris recognition
          program in the world in India.
        o A new live scan fingerprint solution, Agile TP, was introduced for
          high-volume civil identification programs; shipments began to a new
          program in Bolivia.
    --  Secure Credentialing was awarded contracts in excess of $278 million in
        the quarter. Highlights include:
        o Global Driver's License (DL) business generated bookings of more than
          $78.0 million, including several U.S. States yet to be announced; L-1
          has successfully secured and retained all of the 16 State DL contracts
          pursued in the first nine months of 2009.
        o New value-added services and solutions were introduced to increase
          efficiencies and customer convenience for DMVs. These include
          automated biometric kiosks, customer service and fraudulent document
          detection trainings, and applicant portals.
        o Incorporation of document authentication, facial recognition and
          testing services such as Autotest and Roadtest generated $5.3 million
          in bookings.
        o The Department of State continued its commitment with L-1 via a recent
          five-year sole source contract award for U.S. Passport Printing valued
          at up to $195.0 million.
    --  Government Consultingservices continued to perform well on all programs
        and the group continues to grow its presence in cyber security and
        counterterrorism technologies.

Forward Looking Financial Expectations

The Company expects revenue for the fourth quarter ending December 31, 2009 of between $180.0 million to $190.0 million, with Adjusted EBITDA of $30.0 million to $35.0 million, unlevered free cash flow of between $20.0 million to $25.0 million, and EPS in the range of $0.04 to $0.06. Earnings per diluted share, exclusive of stock based compensation, are expected to be in the range of $0.08 - $0.10 for the fourth quarter.

L-1 expects revenue for the full-year ending December 31, 2009 of $670.0 million - $680.0 million, down from the previously anticipated range of $700.0 million - $725.0 million. The decrease is attributable to slower implementation of State DMV and facial recognition projects along with lower than expected volume on the TWIC program. The Company expects organic growth to be approximately 20 percent for the second half of 2009 and approximately 11 percent for the year. Full year 2009 Adjusted EBITDA is expected to be within the range of previous expectations at $102.0 million - $107.0 million. EBITDA margins are expected to improve to approximately 16.0 percent for the year. Unlevered free cash flow for full year 2009 is expected to be between $50.0 million - $55.0 million, down from previous expectations of $75.0 million - $85.0 million, primarily due to an increase in capital expenditures to approximately $50.0 million from greater-than-expected new State contract awards in secure credentialing. The Company expects to finish the year with positive earnings, with earnings per diluted share of $0.06 - $0.08, excluding charges relating to Registered Traveler (RT), financing costs and adoption of new accounting standards. Earnings per diluted share, exclusive of stock based compensation, are expected to be in the range of $0.19 - $0.21.

Preliminary expectations for the full year ending December 31, 2010 are revenue of between $750.0 million - $775.0 million, organic growth of 10 - 15 percent,; Adjusted EBITDA of approximately $110.0 million - $120.0 million, and unlevered free cash flow of between $55.0 million and $65.0 million net of capital expenditures of $60.0 million. These expenditures should substantially complete the build out of current and expected State DMV awards which will result in significantly increased cash flow beginning in 2011 and beyond. The Company expects to finish the year with earnings per diluted share of $0.02- $0.09 and earnings per diluted share, exclusive of stock based compensation, of $0.18 - $0.25. While EBITDA is forecasted to increase in 2010, EPS levels will be impacted by higher levels of depreciation expense resulting from increased capital expenditures as previously discussed.

Liquidity and Capital Resources

At the end of Q3 2009, the total principal amount of debt outstanding is $462.9 million which includes $175.0 million of convertible notes, $286.4 million in bank term loans, and $1.5 million in other debt. During the first nine months of 2009, total debt outstanding was reduced by principal payments of $10.5 million and the Company paid approximately $20.0 million in interest. In addition, L-1 incurred capital expenditures of $38.4 million, reflecting investments made in the secure credentialing business for new State contract awards. The Company has an available revolving line of credit of $125.9 million, net of letters of credit of $9.1 million.

Conference Call Information

The Company will host a conference call with the investment community to discuss its operating results and outlook beginning at 11:00 a.m. (ET) today. The conference call will be available live over the Internet at the investor relations section of the L-1 website at www.L1ID.com. To listen to the conference call, please dial (888) 562-3356 using the passcode 32964355. For callers outside the U.S., please dial (973) 582-2700 with the passcode 32964355. A recording of the conference call will be available starting two hours after the completion of the call. To access the replay, please dial (800) 642-1687 and use passcode 32964355. To access the replay from outside the U.S., dial (706) 645-9291 and use passcode 32964355.

About L-1 Identity Solutions

L-1 Identity Solutions, Inc. (NYSE: ID) protects and secures personal identities and assets. Its divisions include Biometrics, Secure Credentialing and Enterprise Access solutions, as well as Enrollment and Government Consulting services. With the trust and confidence in individual identities provided by L-1, international governments, federal and state agencies, law enforcement and commercial businesses can better guard the public against global terrorism, crime and identity theft fostered by fraudulent identity. L-1 Identity Solutions has more than 2,200 employees worldwide and is headquartered in Stamford, CT. For more information, visit www.L1ID.com.

Footnotes and Defined Terms

Adoption of New Accounting Standards

As disclosed in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 21, 2009, the Company adopted the standard "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion" (Including Partial Cash Settlement) effective January 1, 2009. As required by that standard, its provisions were applied retroactively to all prior periods which resulted in an increase of the previously reported net loss for the quarter ended September 30, 2008 from $1.2 million ($0.01) per share to $1.9 million ($0.02) per share and a decrease of the previously reported net income for the nine months ended September 30, 2008 from $0.1 million $0.00 per share to a loss of $2.0 million ($0.03) per share.

Organic Growth

Organic growth represents the increase in revenues in the current period, expressed as a percentage. It excludes businesses acquired in 2008 for both 2008 and 2009.

Adjusted EBITDA

L-1 Identity Solutions uses Adjusted EBITDA as a non-GAAP financial performance measurement. Adjusted EBITDA is calculated by adding back to net income (loss) interest, income taxes, impairments of long-lived assets and goodwill, depreciation, amortization, stock-based compensation expense, including retirement plan contributions settled, or to be settled, in common stock. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. Management believes Adjusted EBITDA is useful to help investors analyze the operating trends of the business and to assess the relative underlying performance of businesses with different capital and tax structures. Management believes that Adjusted EBITDA provides an additional tool for investors to use in comparing L-1 Identity Solutions financial results with other companies that also use Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as impairments of long-lived assets and goodwill, amortization, depreciation and stock-based compensation, as well as non-operating charges for interest and income taxes, investors can evaluate the Company's operations and can compare its results on a more consistent basis to the results of other companies. Management also uses Adjusted EBITDA to evaluate potential acquisitions, establish internal budgets and goals, and evaluate performance of its business units and management.

L-1 Identity Solutions considers Adjusted EBITDA to be an important indicator of the Company's operational strength and performance of its business and a useful measure of the Company's historical and prospective operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it excludes interest income and expense, impairments of long lived assets and goodwill, stock based compensation expense, including retirement plan contributions settled, or to be settled, in common stock and income taxes, all of which impact the Company's profitability, as well as depreciation and amortization related to the use of long term assets which benefit multiple periods. L-1 Identity Solutions believes that these limitations are compensated by providing Adjusted EBITDA only with GAAP net income (loss) and clearly identifying the difference between the two measures. Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) presented in accordance with GAAP. Adjusted EBITDA as defined by the Company may not be comparable with similarly named measures provided by other entities. A reconciliation of Adjusted EBITDA to GAAP net income or loss is included in the enclosed schedule.

Unlevered Free Cash Flow

Unlevered free cash flow represents cash flow from operating activities, plus cash interest expenses and cash income taxes, less capital expenditures. L-1 believes unlevered free cash flow is a useful measure for assessing the company's liquidity, its ability to meet debt service requirements and making acquisitions. Unlevered free cash flow is not necessarily comparable to similar measures used by other entities and is not a substitute for GAAP measures of liquidity such as cash flows from operating activities.

Backlog

L-1's backlog represents sales value of firm orders for products and services not yet delivered and for long term executed contractual arrangements (contracts, subcontracts, and customer commitments), the estimated future sales value of estimated product shipments, transactions processed and services to be provided over the term of the contractual arrangements, including renewal options expected to be exercised. L-1 may not realize the full amount of revenues reflected in backlog because L-1 is subject to the risks that clients may modify or terminate projects and contracts and may decide not to exercise contract options or the estimate of quantities may not materialize.

Forward Looking Statements

This news release contains forward-looking statements that involve risks and uncertainties. Forward-looking statements in this press release and those made from time to time by L-1 Identity Solutions through its senior management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's current views based on management's beliefs and assumptions and information currently available. Forward-looking statements concerning future plans or results are necessarily only estimates, and actual results could differ materially from expectations. Certain factors that could cause or contribute to such differences include, among other things, availability of government funding for L-1's products and solutions, the unpredictable nature of working with federal, state and local government customers, and global financial economic and political conditions. Additional risks and uncertainties are described in the Securities and Exchange Commission filings of L-1 Identity Solutions, including its Form 10-K for the year ended December 31, 2008 and its Form 10-Q for the quarter ended June 30, 2009. L-1 Identity Solutions expressly disclaims any intention or obligation to update any forward-looking statements.

ID-F

L-1 Identity Solutions

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

                For the Quarter Ended Sept. 30,  For the Nine Months Ended Sept.
                                                 30,

                2009         2008                2009         2008

Revenues        $ 172,533    $ 154,464           $ 490,774    $ 415,412

Cost of
revenues:

Cost of           115,508      101,298             336,983      271,088
revenues

Amortization
of acquired       2,032        5,892               6,425        18,070
intangible
assets

Total cost of     117,540      107,190             343,408      289,158
revenues

Gross profit      54,993       47,274              147,366      126,254

Operating
expenses:

Sales and         10,613       10,433              30,222       26,917
marketing

Research and      6,114        6,696               17,679       18,539
development

General and       23,907       22,964              71,248       62,992
administrative

Acquisition
related
expenses and      335          833                 1,429        2,524
amortization
of intangible
assets

Total
operating         40,969       40,926              120,578      110,972
expenses

Operating         14,024       6,348               26,788       15,282
income

Interest          14           71                  117          206
income

Interest
expense:

Contractual       (7,136  )    (6,084  )           (21,365 )    (11,784 )
interest

Amortization
of deferred
financing         (4,546  )    (2,826  )           (10,354 )    (5,951  )
costs, debt
discount and
other

Other
(expense)         (167    )    (294    )           (273    )    (529    )
income, net

Income (loss)
before income     2,189        (2,785  )           (5,087  )    (2,776  )
taxes

(Benefit )
provision for     817          (872    )           (1,428  )    (743    )
income taxes

Net income      $ 1,372      $ (1,913  )         $ (3,659  )  $ (2,033  )
(loss)

Net income
(loss) per
share:

Basic           $ 0.02       $ (0.02   )         $ (0.04   )  $ (0.03   )

Diluted         $ 0.02       $ (0.02   )         $ (0.04   )  $ (0.03   )

Weighted
average shares
outstanding:

Basic             85,901       79,969              85,301       75,397

Diluted           86,007       79,969              85,301       75,397

L-1 Identity Solutions

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

                                            Sept. 30,    Dec. 31,

                                            2009         2008

Assets

Current assets:

Cash and cash equivalents                   $ 11,051     $ 20,449

Accounts receivable, net                      127,679      105,606

Inventory                                     30,156       34,509

Deferred tax asset                            12,425       11,101

Other current assets                          6,929        9,628

Total current assets                          188,240      181,293

Property and equipment, net                   102,968      81,268

Goodwill                                      889,801      890,977

Intangible assets, net                        104,490      108,282

Deferred tax asset                            25,206       23,609

Other assets, net                             17,430       24,392

Total assets                                $ 1,328,135  $ 1,309,821

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable and accrued expenses       $ 125,460    $ 118,109

Current portion of deferred revenue           17,989       16,998

Current maturity of long-term debt            18,228       19,256

Other current liabilities                     6,571        2,559

Total current liabilities                     168,248      156,922

Deferred revenue, net of current portion      4,611        13,323

Long-term debt                                425,839      429,235

Other long-term liabilities                   4,529        1,861

Total liabilities                             603,227      601,341

Total shareholders' equity                    724,908      708,480

Total liabilities and shareholders' equity  $ 1,328,135  $ 1,309,821

L-1 Identity Solutions

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

                                                       For the Nine Months Ended
                                                       Sept. 30,

                                                       2009         2008

Cash Flow from Operating Activities:

Net loss                                               $ (3,659  )  $ (2,033   )

Adjustments to reconcile net loss to net cash
provided by operating activities:

Depreciation and amortization                            27,411       34,372

Stock-based compensation costs                           16,225       10,146

(Benefit) provision for non-cash income taxes            (1,428  )    (779     )

Amortization of deferred financing costs, debt           10,354       5,951
discount and other

Other                                                    1            162

Change in operating assets and liabilities, net of
effects of acquisitions:

Accounts receivable                                      (21,571 )    (7,341   )

Inventory                                                4,137        (7,145   )

Other assets                                             6,435        (7,479   )

Accounts payable, accrued expenses and other             17,614       12,394
liabilities

Deferred revenue                                         (7,773  )    1,343

Net cash provided by operating activities                47,746       39,591

Cash Flow from Investing Activities:

Acquisitions and related costs, net of cash acquired     (3,228  )    (318,110 )

Capital expenditures                                     (38,423 )    (12,871  )

Additions to intangible assets                           (6,151  )    (6,085   )

Increase in restricted cash                              (67     )    (21      )

Net cash used in investing activities                    (47,869 )    (337,087 )

Cash Flow from Financing Activities:

Net borrowings under revolving credit agreement          -            (84,000  )

Debt and equity issuance costs                           (824    )    (13,899  )

Principal (payments) borrowings under term loan          (9,843  )    295,000

Principal payments of other debt                         (631    )    (927     )

Repurchase of common stock                               -            (6,161   )

Proceeds from issuance of preferred stock to             -            15,107
investor

Proceeds from issuance of common stock to investors,     -            103,865
net of issuance costs

Proceeds from issuance of common stock to employees      1,770        2,121

Proceeds from exercise of stock options by employees     53           2,846

Net cash (used in) provided by financing activities      (9,475  )    313,952

Effect of exchange rate changes on cash and cash         200          60
equivalents

Net increase (decrease) in cash and cash equivalents     (9,398  )    16,516

Cash and cash equivalents, beginning of year             20,449       8,203

Cash and cash equivalents, end of period               $ 11,051     $ 24,719

Supplemental Cash Flow Information:

Cash paid for interest                                 $ 19,657     $ 6,318

Cash paid for income taxes                             $ 1,015      $ 1,117

Common stock issued and options assumed in             $ -          $ 36,570
connection with acquisitions

Warrants issued for patent                             $ -          $ 1,305

L-1 Identity Solutions

Reconciliation of Adjusted EBITDA to Net Income (Loss)

(In thousands)

(Unaudited)

Historical    For the Quarter Ended                 For the Nine Months Ended
Periods       Sept. 30,                             Sept. 30,

              2009             2008                 2009              2008

Net income    $ 1,372          $ (1,913          )  $ (3,659       )  $ (2,033 )
(loss)

Interest        11,668           8,839                31,602            17,529
expense, net

Depreciation
and             9,127            14,478               27,411            34,372
amortization

Stock-based
compensation    5,328            3,583                16,225            10,146
expense

Provision
(benefit)       817              (872            )    (1,428       )    (743   )
for income
taxes

Adjusted      $ 28,312         $ 24,115             $ 70,151          $ 59,271
EBITDA

Provision
for
Registered      -                -                    1,183             -
Traveler
(RT)
contract

Merger
related         -                881                  -                 881
expenses

Acquisition
related         26               18                   506               54
costs

Adjusted
EBITDA
excluding     $ 28,338         $ 25,014             $ 71,840          $ 60,206
certain
items

Prospective   Quarter Ending   Year Ending          Full Year Ending
Periods

              Dec. 31, 2009    Dec. 31, 2009        Dec. 31, 2010

Net Income,
excluding
RT,                                                   2,000 -
financing     $ 3,000-6,000    $ 5,000-8,000        $ $8,000
costs and
accounting
changes

Interest
expense,
depreciation
&               25,000           94,000               107,000
amortization
and
stock-based
compensation

Provision
for income      2,000-4,000      3,000-5,000          1,000 -5,000
taxes

Adjusted      $ 30,000-35,000  $ 102,000-107,000    $ 110,000 -
EBITDA                                                $120,000

L-1 Identity Solutions

Unlevered Free Cash Flow

(In thousands)

(Unaudited)

Historical      Quarter Ended        Nine Months Ended
Periods

                Sept. 30, 2009       Sept. 30, 2009

Cash flow from
operating       $ 17,222             $ 47,746
activities

Interest paid,    6,661                19,657
net

Taxes             42                   1,015

Capital           (16,117         )    (38,423         )
expenditures

Unlevered free  $ 7,808              $ 29,995
cash flow

Prospective     Quarter Ending       Year Ending          Year Ending
Periods

                Dec. 31, 2009        Dec. 31, 2009        Dec. 31, 2010

Cash flow from
operating       $ 22,000 - 27,000    $ 70,000 - 75,000    $ 82,000 - $92,000
activities

Interest paid,    9,000                29,000               30,000
net

Taxes             1,000                1,000                3,000

Capital           (12,000         )    (50,000         )    (60,000          )
expenditures

Unlevered free  $ 20,000 - 25,000    $ 50,000 - 55,000    $ 55,000 - 65,000
cash flow

    Source: L-1 Identity Solutions, Inc.

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