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ChoicePoint reports Q4 loss; SEC probe completed

24 January 2008  |  1963 views  |  0 Source: ChoicePoint

For the fourth quarter of 2007, ChoicePoint (NYSE: CPS) reported consolidated service revenue from continuing operations of $233.9 million, compared to $232.5 million for the fourth quarter of 2006.

Total revenue from continuing operations was $239.3 million in the fourth quarter of 2007, compared to $238.7 million for the fourth quarter of 2006. Diluted earnings (loss) per share from continuing operations ("EPS") for the fourth quarter of 2007 was ($0.39), compared to $0.41 for the fourth quarter of 2006. Excluding the other operating charges detailed in the table below, EPS would have increased 11 percent to $0.39 for the fourth quarter of 2007, compared to $0.35 for the same period of 2006. Prior to reclassifying the software portion of our Government Services segment to discontinued operations, EPS excluding other operating charges would have been $0.41 for the fourth quarter of 2007, compared to $0.38 for the same period of 2006.

The following table provides a reconciliation of EPS excluding other operating charges to EPS calculated in accordance with generally accepted accounting principles ("GAAP") for the fourth quarter of 2007 and 2006:

In December 2007, the Company decided to divest the software portion of its Government Services segment. Based upon indicative purchase price ranges received from prospective purchasers, the Company estimates that net proceeds to be received from the disposal of this business will exceed the carrying value. While a transaction has not yet been consummated and the Company has no definitive agreements to sell the business, the Company has met the criteria to classify this business in discontinued operations. In connection with the decision, the Company has combined the remaining components of its Government Services segment with its Financial and Professional Services Segment. This newly formed segment has been renamed the Business Services Segment and now includes virtually all of the Company's businesses involved in the sale of non-FCRA regulated public information to customers in all markets, including banking, professional services and government. Prior period results have been reclassified to conform to this prform to this presentation.

During the fourth quarter of 2007, as part of its annual evaluation of the carrying value of its reporting units, the Company recorded a non-cash charge of $86.0 million ($53.4 million after tax benefit) to reduce the carrying value of goodwill and other assets in its Marketing Services segment to reflect the estimated fair value of this business. The decline in revenue from our customers primarily in the sub-prime mortgage lending market, together with our assessment that this market will likely remain depressed for at least the near term, were the primary reasons for recording the adjustment to the carrying value of this reporting unit.

Cash Flow and Balance Sheet Highlights -- Fourth Quarter
  • Cash flows from operating activities of continuing operations were $46.4 million for the three months ended December 31, 2007, compared to $44.8 million for the three months ended December 31, 2006. With $12.4 million in capital expenditures during the fourth quarter of 2007 and $10.5 million during the same period in 2006, net free cash flow from continuing operations (cash flows from operating activities of continuing operations less capital expenditures) for the quarter ended December 31, 2007 was $34.0 million, compared to $34.3 million for the quarter ended December 31, 2006. Cash flows from operating activities of continuing operations were $218.7 million for the twelve months ended December 31, 2007, compared to $200.7 million for the twelve months ended December 31, 2006. The improved cash flow results for the twelve months ended December 31, 2007 compared to the same period in 2006 primarily reflect lower federal tax payments in 2007.
  • During the fourth quarter, the Company repurchased 4.0 million shares of its common stock at an average cost of $37.45 per share for an aggregate of $151.3 million. During the year ended December 31, 2007, the Company repurchased 11.2 million shares of its common stock at an average cost of $38.50 per share for an aggregate of $429.6 million, leaving $42.5 million authorized in the Company's buyback program as of December 31, 2007. Since the approval of the Company's buyback program on July 26, 2005, a total of 25.5 million shares have been repurchased at an average cost of $38.56 per share for an aggregate of $982.5 million, representing the repurchase of approximately 28 percent of the shares that were outstanding at the commencement of the buyback program.
  • Net debt (total debt of $610.0 million less cash and cash equivalents of $20.2 million) at December 31, 2007, increased by $112.3 million from September 30, 2007 to $589.8 million, with an average effective interest rate of 5.4 percent, as the Company utilized its borrowing capacity and cash flow from operations to repurchase shares and fund capital expenditures. The remaining debt capacity at December 31, 2007 under our committed financing lines was $105 million, prior to the new financing discussed below.
  • On January 14, 2008, ChoicePoint Inc. entered into a $300 million five-year unsecured Term Loan Credit Agreement (the "Credit Agreement"). Amounts borrowed under the Credit Agreement were used to partially repay amounts outstanding under the Company's existing Revolving Credit Agreement dated October 25, 2006.


Completion of SEC Investigation and Agreement in Class-Action Litigation

On January 22, 2008, the Company announced that the staff of the U.S. Securities and Exchange Commission (the "SEC") has notified the Company that the staff had completed its investigation regarding possible identity theft, trading in ChoicePoint stock by its Chief Executive Officer and Chief Operating Officer and related matters without recommending any enforcement action by the SEC.

Separately, ChoicePoint entered into a Letter of Understanding, subject to notification of the class, court approval and certain other conditions, through which it and a group of shareholders will settle a class-action lawsuit filed against the Company and certain of its officers, stemming from the previously disclosed fraudulent data access incident in 2005. Neither the Company nor any of the other defendants admitted to any liability.

Under the terms of the Letter of Understanding, ChoicePoint would pay $10 million to the plaintiffs, subject to court approval. The Company anticipates that the settlement as outlined in the Letter of Understanding will have no effect on the Company's financial results as the Company had previously reserved funds to pay for the portion of the settlement amount not covered by insurance.

Financial Highlights -- Fourth Quarter
  • Fourth quarter service revenue from continuing operations increased 0.6 percent to $233.9 million in 2007 from $232.5 million in 2006. Internal revenue (service revenue less revenue from acquisitions) from continuing operations in the fourth quarter of 2007 declined 0.3 percent from the fourth quarter of 2006. Continued strong internal revenue growth of 10.7 percent in the Insurance Services segment was offset by declines in other segments primarily due to macroeconomic conditions faced by our customers that directly impact these segments.
  • Operating income (loss) from continuing operations for the fourth quarter of 2007 was ($35.5 million), compared to $56.8 million for the same period of 2006. Income from continuing operations for the three months ended December 31, 2007 was reduced by other operating charges of $87.8 million ($54.5 million net of taxes) consisting of the following:
    • Charges of $86.0 million ($53.4 million net of taxes) for asset impairments primarily related to our Marketing Services segment discussed above; and
    • Charges of $1.8 million ($1.1 million net of taxes) consisting primarily of severance, as well as lease abandonment, other asset impairments, and third party expenses related to the previously disclosed fraudulent data access.
  • Operating income from continuing operations for the quarter ended December 31, 2006 included an other operating benefit of $7.2 million ($4.6 million net of taxes) consisting of the following:
    • A benefit of $10.6 million ($6.8 million net of taxes) related to the reversal of estimated future selling costs associated with the Company's decision to retain its marketing services business; and
    • Charges of $3.4 million ($2.2 million net of taxes) for lease abandonment, impairment and related charges associated with the consolidation of facilities, and third party expenses related to the previously disclosed fraudulent data access.


Excluding these charges, operating income from continuing operations would have been $52.3 million and $49.6 million for the fourth quarter of 2007 and 2006, respectively.
  • The Company's effective tax rate for continuing operations in the fourth quarter of 2007 was 37.9 percent, compared to 35.7 percent for the fourth quarter of 2006. The Company's effective tax rate for continuing operations for the twelve months ended December 31, 2007 was 39.9 percent, compared to 38.9 percent for the same period of 2006.
  • Interest expense was $7.7 million for the fourth quarter of 2007, an increase of $1.6 million from the fourth quarter of 2006, due to higher average debt outstanding, which is primarily associated with the Company's share repurchase program.


Operational Highlights

Insurance Services
  • Total revenue and internal revenue increased 10.7 percent to $125.9 million in the fourth quarter of 2007, compared to $113.7 million in the same period of the prior year, led by approximately 29 percent internal revenue growth in our claims and fraud analytics business and nearly 10 percent internal revenue growth in both our data services business and our software business.
  • Operating income increased 11.7 percent in Insurance Services to $65.2 million for the fourth quarter of 2007, compared with $58.4 million for the fourth quarter of 2006. Operating profit margin improved to 51.8% for the fourth quarter of 2007, compared to 51.4% in the fourth quarter of 2006. This increase is primarily due to changes in product mix.


Screening and Authentication Services
  • Total revenue and internal revenue both decreased by 3.9 percent in the fourth quarter of 2007 to $61.0 million, compared to $63.5 million in the fourth quarter of 2006. Double-digit internal revenue growth from our occupational health and Bridger businesses and strong growth from VitalChek was offset by continued negative internal revenue growth in our employment-related screening business, due primarily to reduced hiring levels by our customers, primarily in the retail sector, and to a lesser extent, the pricing impact of a long-term agreement with a major customer.
  • Operating income in Screening and Authentication Services was $10.6 million for the fourth quarter of 2007, compared to $12.4 million in the same period of the prior year. Operating profit margin declined to 17.4% for the fourth quarter of 2007, compared to 19.5% in the fourth quarter of 2006. This decrease is primarily due to the impact of the revenue decrease discussed above.


Business Services
  • Total revenue decreased by 5.3 percent to $33.9 million in the fourth quarter of 2007 from $35.7 million in the fourth quarter of 2006. These results include the impact of our Charles Jones joint venture, which was effective July 1, 2007. Excluding the impact of the Charles Jones joint venture, internal revenue declined 11.0 percent during the fourth quarter of 2007, as compared to the same period of the prior year, as we experienced declining revenues, particularly from our on-demand business due diligence products.
  • Operating income in the Business Services segment was $0.8 million for the fourth quarter of 2007, compared to $0.7 million for the same period of 2006. Operating profit margin was 2.4% for the fourth quarter of 2007 compared to 1.8% in the fourth quarter of 2006, as improved margins in our public records business offset declines in the Charles Jones and BIS business units.


Marketing Services
  • Fourth quarter total revenue for Marketing Services (which includes all of the Company's revenue from reimbursable expenses) declined 28 percent to $18.6 million in 2007 from $25.7 million in 2006. Marketing Services' service revenue for the fourth quarter of 2007 declined 33 percent to $13.1 million from $19.6 million in the fourth quarter of 2006, primarily due to reductions in spending by our customers in the sub-prime mortgage lending and financial services markets, which was the primary driver behind the previously discussed impairment charge of $86.0 million ($53.4 million after tax) associated with this segment.
  • Marketing Services operating results were essentially break-even in the fourth quarter of 2007 excluding the impairment charge, compared with operating income of $3.5 million for the same period of 2006. The operating profit margin decline from 17.7% in the fourth quarter of 2006 to break-even in the fourth quarter of 2007 was due to the revenue decrease from 2006 to 2007.


Corporate and Shared Expenses
  • For the fourth quarter of 2007, corporate and shared expenses were $19.6 million, or 8.4 percent of consolidated service revenue, compared to $19.2 million, or 8.3 percent of service revenue, in the fourth quarter of 2006. For the twelve months ended December 31, corporate and shared expenses were $69.4 million, or 7.2 percent of service revenue in 2007, compared to $64.0 million, or 6.8 percent of service revenue in 2006. For additional information on corporate and shared expenses, please refer to the table at the end of this release.
  • The Company recorded stock-based compensation expense of $4.7 million ($3.6 million net of taxes) during the fourth quarter of 2007. Approximately $0.6 million of stock-based compensation expense is included in cost of revenue, with the remaining $4.1 million of stock-based compensation expense included in selling, general and administrative expenses. These amounts include restricted stock expense of $2.3 million ($1.5 million net of taxes), and stock option expense of $2.4 million ($2.1 million net of taxes). The Company recorded $6.1 million ($4.7 million net of taxes) of stock-based compensation expense in the fourth quarter of 2006, which includes restricted stock expense of $2.1 million ($1.3 million net of taxes) and stock option expense of $4.0 million ($3.4 million net of taxes).


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