L-1 Identity Solutions Reports Second Quarter and Six Month 2010 Financial Results

STAMFORD, Conn. - L-1 Identity Solutions, Inc., a leading supplier of identity solutions and services, today announced financial results for the second quarter and six months ended June 30, 2010.

Revenue was $164.1 million in Q2 2010, compared to $168.1 million in the second quarter of 2009. Second quarter revenues were impacted by lower U.S. Passport Cards. Full year U.S. Passport Card revenues are expected to be realized in the second half of 2010 as shipments are made against orders, the majority of which have already been received. Lower comparable sales from the biometric division in Q2 2010 were impacted by a large shipment of HIIDEs™ in Q2 2009, partially offset by approximately $5.0 million in a follow-on order from an existing U.S. government customer for additional Automated Biometric Identification System (ABIS) license capacity. Services revenue was slightly higher when compared to the prior year primarily due to intelligence-related business.

Gross margin in the second quarter of 2010 was 28 percent compared to 29 percent for the second quarter of 2009. Margins in the second half of 2010 are expected to increase to 30 percent resulting mainly from an anticipated increase in solution sales in the second half of 2010.

Adjusted EBITDA for Q2 2010 grew due to lower operating expenses and was $25.4 million, excluding $2.3 million in strategic alternative-related expenses, acquisition-related expenses and severance costs. This compared to Q2 2009 Adjusted EBITDA of $24.3 million (excluding $1.4 million associated with Registered Traveler (RT), acquisition-related expenses and severance costs).

Operating cash flow for the quarter was $11.3 million and was used to fund capital expenditures of $13.4 million as L-1 nears completion of the build-out of funded Department of Motor Vehicle (DMV) contracts.

L-1 reported a Q2 2010 net loss of $2.7 million, or ($0.03) per diluted share that includes approximately $2.3 million in strategic alternative-related expenses, acquisition-related expenses and severance costs. This compared to a net loss of $1.2 million, or ($0.01) per diluted share in the second quarter of 2009. Weighted average diluted shares outstanding were 87.6 million in the second quarter of 2010 compared to 85.5 million in the prior year period. Excluding stock based compensation, earnings per diluted share were $0.01 for the second quarter of 2010.

Year-to-Date Results for the Six Months Ended June 30, 2010
Revenue for the first six months of 2010 was $312.3 million compared with $318.2 million for the same period in the prior year. Services segment revenue was up, driven by enrollment services contracts in key States and growth from new and existing government intelligence contracts. This was offset by lower solutions revenue primarily from the Department of State (DoS) U.S. Passport Card program and fewer HIIDE shipments in comparison to the first six months of 2009 as mentioned above.

Gross margin for the first six months of 2010 was 28 percent, compared to 29 percent in the same period in 2009, reflecting the impact of an increased revenue contribution from services compared to solutions.
Adjusted EBITDA for the first six months of 2010 was $42.2 million compared to $43.6 million for the same period in 2009, driven by the aforementioned margin reduction. Operating expenses remained at 25 percent of revenues, consistent with the first six months of 2009. Operating cash flow for the first six months of 2010 was $11.7 million.

For the six months ended June 30, 2010, the Company reported a net loss of $10.3 million, or ($0.12) per diluted share that includes approximately $2.7 million in strategic alternative-related expenses, acquisition-related expenses and severance costs. This compared to a net loss of $5.0 million or ($0.06) per diluted share in the six months of 2009. Weighted average shares outstanding increased to 87.2 million from 85.0 million in the prior year. Excluding stock based compensation, earnings per diluted share were ($0.02) for the first six months of 2010.

Backlog at the end of the first half of 2010 remained unchanged from the prior quarter at over $1.3 billion, up from $1.1 billion at the end of the first half of 2009.

The first half financial results reflect approximately $20.0 million of anticipated new business awards moving into the second half of 2010 including secure credentialing contracts in Africa and international biometric solution contracts, some of which materialized in July 2010. In addition, approximately $10.0 million of anticipated revenues from existing customers were not converted in the quarter, including a portion of a follow-on order from an existing U.S. government customer for additional ABIS license capacity and U.S. Passport Card sales, all of which are expected to convert to revenue in the second half of the year.

“We continued to closely manage costs while continuing to invest in critical R&D and make capital expenditures and have maintained EBITDA despite the fact that revenues have shifted to the second half of the year,” said Robert V. LaPenta, Chairman, President and CEO of L-1 Identity Solutions. “We are confident in our ability to meet our second half objectives due to our strong backlog and impressive pipeline of new opportunities across all business segments with approximately $1.2 billion in new business proposals pending award including international enrollments, Federal credentials, information technology services for the Federal government and new commercial authentication business.”

Business Highlights

The biometrics division had momentum across Federal, State and international markets.

• L-1 opened its first operation in India to support an award as one of the Biometric Solution Providers (BSPs) to India’s Unique Identification Number (UID) program, or AADHAAR.
• The acquisition of Retica was completed in Q2 and already the products are delivering strategic value, included as key offerings in several international bids and proposals, including UID.
• The division shipped over $1.0 million Agile TP™ (finger-based) and Mobile Eyes™ (iris-based) biometric devices into India in the second quarter of 2010.
• HIIDE 5 and a new middleware application were introduced in early July, representing several industry firsts that set a new standard for speed and efficiency and an expansion of the addressable market for HIIDE. A new finger vein access control device was introduced that generated new orders in less than 90 days after its introduction and new sales of the ruggedized outdoor Transportation Worker Identification Credential (TWIC) reader were booked in the first half.
• L-1 iris and face algorithms continue to receive top marks in independent testing. Recent National Institute of Standards and Technology (NIST) IREX (Iris Exchange) tests showed that the L-1 algorithm produced the best accuracy of all 10 iris vendor participants averaged over all test databases at the most demanding operating point. In recent NIST MBE testing for face, L-1’s FaceIt® technology was shown to be unparalleled in the ability to scale accuracy to large databases under real-world operating requirements.
• L-1 received a follow-on order from an existing U.S. government customer for additional ABIS license capacity.
• State and local solutions business is gaining momentum, with second quarter bookings for biometric solutions the largest it has been in several quarters.

Year-to-date secure credentialing contracts awarded totaled $132.5 million, of which $120.0 million came from State Driver’s License (DL) extensions and contract wins. Other highlights included:

• Eight end-to-end DL systems went live in the first half of 2010, in addition to the seven additional enterprise solutions consisting of auto exam and road testing, facial recognition and self-service kiosks.
• State DL business in the first half was driven primarily by sales of infrastructure, automated testing and screening, facial recognition, document authentication and kiosk solutions as States look to improve the security of the processes, while increasing efficiencies and improving the customer experience.
• Of note is a five year contract extension valued at $56.9 million by the Florida Department of Highway Safety and Motor Vehicles to modernize the currently installed secure driver’s license solution. This includes updating the hardware platforms, servers and workstations and migrating the State’s legacy applications and databases to the latest Windows operating system. L-1 expects to produce in excess of 28 million licenses for Floridians over the term of the contract. L-1’s efforts with Florida to enhance current security features and the State’s driver’s license solution positioned the customer for a Homeland Security Award by the Coalition for a Secure Driver’s License (CSDL) on July 19, 2010. Florida is one of 11 States authorized by the Department of Homeland Security to affix the "gold star" on its driver's licenses and IDs, denoting compliance with the 18 interim benchmark regulations of Public Law 109-13.

The enrollment services division continues to pursue various international opportunities and is actively marketing L-1 services globally. At the Federal level, there is an upward trend in the Transportation Security Authority (TSA) Hazardous Materials Endorsement (HazPrint) program. Existing State contracts had strong growth, such as in New York and Indiana that are up approximately $4.6 million over Q2 2009 revenue. The Broward County school badging program went live in the second quarter, the first example of a combined background check and badge implementation for L-1 enrollment services in education. L-1 expects to see additional State growth from adoption by new groups, such as elder care and handgun permits.

Government consulting services momentum included:

• SpecTal Intelligence Services and McClendon Engineering and Analytics won two critical prime contract recompetes with an estimated total contract value of $52 million over the term. SpecTal Intelligence Services had significant growth driven by a 40 percent increase in manpower requirements so far this year related to a critical, large-scale Homeland Security program, of which half was added in the first half of 2010. Additionally, the business had solid growth in linguistic support and training services.
• In the first half, Advanced Concepts Information Technology Solutions was awarded new contracts, or received extensions of existing contracts, worth an aggregate of $23.6 million. The period of performance of these awards ranged from four months for certain bridge vehicles to five years. This includes a not-yet-announced five year task order from the U.S. Coast Guard for Communications Station Automation System (CSAS) support.

Forward Looking Financial Expectations

L-1 expects revenue for the full-year ending December 31, 2010 of $715.0 million - $725.0 million (representing organic growth in excess of 10 percent) vs. previous estimates of $740.0 million - $760.0 million. The reduction is primarily associated with Federal and international program delays. Adjusted EBITDA guidance remains unchanged at $110.0 million - $120.0 million, despite the expected decline in revenue due to a more favorable sales mix. Operating cash flow is expected to ramp in the second half of the year to $67.0 million - $82.0 million as cash earnings increase. Unlevered free cash flow is expected to be $45.0 million - $55.0 million for the full year, revised down from $55.0 million - $65.0 million due to increased working capital requirements. Capital expenditures are expected to be in the range of $55.0 million - $60.0 million for 2010.

To meet 2010 revenue expectations of $715.0 million - $725.0 million, the Company needs incremental revenue of approximately $100.0 million above the first half results of $312.3 million. This amount is expected to be derived from increased U.S. Passport and Passport Card demand as previously mentioned, Federal sales of HIIDEs and PIERs, additional growth in intelligence and enrollment services. The Company also anticipates that secure credentialing sales are expected to begin to ramp as recently awarded DL programs with higher per-card rates move into production.

 Liquidity and Capital Resources

At the end of Q2 2010, the principal debt outstanding was $481.4 million which includes $175.0 million of convertible notes, $273.4 in bank term loans, $32.0 in net borrowings under the revolver and $1.0 million in other debt. Total debt outstanding reflects principal payments of $24.3 million and the Company paid approximately $15.2 million in interest for the first six months of 2010. In addition, L-1 paid $25.0 million in capital expenditures during the first half of 2010 primarily for new awards of State driver’s license contracts. The Company has an available credit revolver of $95.0 million net of borrowings and letters of credit subject to continuing compliance with debt covenants. The Company expects to pay fees and costs in connection with the strategic alternative review in the second half of 2010. L-1 amended the Credit Agreement effective March 31, 2010, increasing the maximum Consolidated Leverage Ratio from 3.00:1.00 to 3.85:1.00 and reducing the minimum Consolidated Debt Service Coverage Ratio from 2.25:1.00 to 1.65:1.00 for the measurement periods ended March 31, 2010 and June 30, 2010. At June 30, 2010, the Company’s consolidated debt service coverage ratio was 2.12:1.00 and the consolidated leverage ratio was 3.21:1.00. Accordingly, the Company was in compliance with the amended covenants at June 30, 2010. If on or prior to August 31, 2010 the Company enters into a definitive agreement to sell the Company, the amended covenant ratios will remain in place through December 30, 2010, including the measurement period ending on September 30, 2010. If a definitive agreement is not executed on or prior to August 31, 2010, the pre-amendment covenant ratios remain in effect for the measurement period ending September 30, 2010 and thereafter. If a sale transaction does not occur, the Company expects to refinance its debt on a long term basis, but the Company may be required to amend its credit agreement pending completion of the ongoing strategic review process to remain in compliance with the covenants.

Strategic Alternatives

L-1 and its financial advisors are engaged in discussions with interested parties as part of the previously announced strategic alternative process. Additional comments regarding status will be provided during today’s conference call.

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 http://ir.l1id.com/. To listen to the conference call, please dial (888) 562-3356 (888) 562-3356 using the passcode 85797798. For callers outside the U.S., please dial (973) 582-2700 (973) 582-2700 with the passcode 85797798. 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 (800) 642-1687, or (706) 645-9291 (706) 645-9291 outside the U.S., using passcode 85797798.

About L-1 Identity Solutions
L-1 Identity Solutions, Inc. (NYSE: ID) protects and secures personal identities and assets. Its divisions include Biometrics / Enterprise Access and Secure Credentialing 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.

Contacts

L-1 Identity Solutions
Doni Fordyce, 203-504-1109 203-504-1109
dfordyce@L1ID.com