Insurance Auto Auctions Announces Second Quarter Results
SCHAUMBURG, Ill., July 26- Insurance Auto Auctions, Inc.,a provider of automotive salvage and claims processing services in the United States, today reported higher net earnings from operations, excluding business transformation costs, for the quarter ended June 30, 2002. The Company recorded net earnings from operations, excluding business transformation costs, of $2.9 million, or $0.23 per diluted share, versus $2.3 million, or $0.19 per diluted share for the same quarter a year ago. Net earnings for the second quarter of 2002, including business transformation costs, were $1.4 million, or $0.11 per diluted share.
Revenues for the quarter decreased 20.8 percent to $59.8 million compared with $75.5 million in the second quarter of 2001. The decline in revenues was primarily due to the Company's continued shift away from vehicles sold under the purchase agreement method. The purchase agreement method accounted for 9.0 percent of the total vehicles sold this quarter versus 20.5 percent for the same quarter a year ago. Under the purchase agreement method, the entire purchase price of the vehicle is recorded as revenue, compared to the lower- risk, consignment fee-based arrangements, where only the fees collected on the sale of a vehicle are recorded as revenue. Fee income in the second quarter rose 10.6 percent to $42.7 million versus $38.6 million in the second quarter of last year. This change in contract mix, along with increased volumes, contributed to the significant growth in fee income for the quarter. Gross vehicle sales proceeds for the second quarter of 2002 were $196.0 million, up $24.4 million or 14.2 percent from the same quarter last year.
Excluding the impact of business transformation costs and the amortization of goodwill, earnings from operations for the quarter totaled $5.0 million compared to $4.8 million last year. The Company no longer amortizes goodwill arising from business acquisitions. The effect on the current quarter was a reduction in amortization expense of approximately $1.0 million. Interest expense includes a $0.5 million non-cash charge to recognize the cost of the interest rate swap on the Company's unused credit facility.
Continued Focus on Strategic Initiatives
Tom O'Brien, Chief Executive Officer, said, "We remained focused on executing our stated strategic initiatives during the quarter while maintaining the strong level of service our customers have come to expect. During the quarter, purchase agreement contracts represented less than seven percent of new business and less than ten percent of sales overall. Although our top-line results on a year-over-year basis have declined because of this transition, we firmly believe our revenue stream is less risky and more predictable than it was a year ago."
The new operating procedures developed as part of the business process re- engineering project were implemented in all of the remaining branches during the second quarter. These new "best practices" have been adopted to standardize operations and build operational efficiencies, and have been embraced by IAA's employees. Synergetics will continue to work with the organization during the third quarter to transition the project to IAA's operational audit group and set up an ongoing methodology to ensure that the continuous improvement process becomes a core competency.
O'Brien added, "The new system initiative is still on target. Since the beginning of April, we have conducted comprehensive testing of the new system cooperatively with SEI and our internal training team. It has been tested in a branch environment and is now up and running in our Appleton, Wisconsin branch. We remain extremely excited with the look, feel and capabilities of this new system. Furthermore, data conversion and installation of the second branch is underway, and we are on schedule to have the new system rolled out to the remaining branches during the third and fourth quarters of this year."
"Regarding expansion, we are clearly focused on the business process re- engineering and new system initiatives to provide a solid infrastructure for future growth. We added a branch in Duluth, Minnesota in the second quarter and recently announced an acquisition in Springfield, Missouri. Both branches are consistent with IAA's strategy of leveraging the Company's existing sales and operations expertise to provide better service to both new and existing customers."
O'Brien concluded, "We are pleased to report a second consecutive quarter of solid earnings and cash flow. We are encouraged with our progress to this point, and expect to continue seeing the economic benefits of our efforts regarding these new initiatives over the next two years. The second half of the year is an important time for our business, as we expect to complete both the integration of the new system as well the training and knowledge transfer of the new business processes. Furthermore, we expect the third and fourth quarters to reflect continued improvement relative to the prior year, and we look forward to keeping both our customers and shareholders apprised of our progress in the quarters ahead."
Quarterly Conference Call
The Company previously announced that it will hold its second quarter 2002 results conference call on Friday, July 26 at 11:00 a.m. Eastern Time. To participate by phone, please dial 877-307-4802 and ask to be connected to the Insurance Auto Auctions earnings conference call. Investors may also access the call over the Internet at www.streetevents.com or by visiting IAA's Web site at www.iaai.com . A replay will be available until midnight EST on August 2, 2002. To listen to the replay, please dial 800-642-1687 and enter conference reservation code 4857682 when prompted.
About Insurance Auto Auctions, Inc.
Insurance Auto Auctions, Inc., founded in 1982, a leader in automotive total loss and specialty salvage services in the United States, provides insurance companies with cost-effective, turnkey solutions to process and sell total-loss and recovered-theft vehicles. The Company currently has 65 sites across the United States.
Safe Harbor Statement
This press release contains forward-looking information that is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed, or implied by such forward- looking information. In some cases, you can identify forward looking statements by our use of words such as "may, will, should, anticipates, believes, expects, plans, future, intends, could, estimate, predict, projects, targeting, potential or contingent," the negative of these terms or other similar expressions. The Company's actual results could differ materially from those discussed or implied herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the Company's annual report on Form 10-K for the fiscal year ended December 30, 2001 or subsequent quarterly reports. Among these risks are: accelerated departure from conducting business pursuant to the purchase agreement method of sale, which departure could adversely affect the Company's client base; the ability to successfully renegotiate existing purchase agreement contracts; fluctuations in the actual cash value of salvage vehicles; the quality and quantity of inventory available from suppliers; the ability to pass through increased towing costs; that vehicle processing time will improve; that the Company's towing business will reach forecasted levels of profitability; legislative or regulatory acts; changes in the market value of salvage; competition; the availability of suitable acquisition candidates and greenfield opportunities; the ability to bring new facilities to expected earnings targets; the dependence on key insurance company suppliers; the ability of the Company and its outside consultants to successfully implement standardized key processes throughout the Company's operations as well as the ability to successfully complete the re-design of the Company's information systems, both in a timely manner and according to costs and operational specifications; and the level of energy and labor costs.
Additional information about Insurance Auto Auctions, Inc. is available on
the World Wide Web at www.iaai.com .
INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (dollars in thousands except per share amounts) Three Month Periods Six Month Periods Ended Ended June 30, July 1, June 30, July 1, 2002 2001 2002 2001 (Unaudited) (Unaudited) Revenues: Vehicle sales $17,059 $36,942 $44,810 $77,159 Fee income 42,691 38,572 84,160 76,199 59,750 75,514 128,970 153,358 Cost of sales: Vehicle cost 14,802 34,727 40,859 71,919 Branch cost 33,001 28,896 64,193 58,040 47,803 63,623 105,052 129,959 Gross profit 11,947 11,891 23,918 23,399 Operating expense: Selling, general and administration 6,870 6,965 13,982 14,121 Amortization of intangible assets 67 1,005 134 2,011 Business transformation costs 2,237 84 4,186 84 Special charges - - - 6,047 Earnings from operations 2,773 3,837 5,616 1,136 Other (income) expense: Interest expense 476 456 724 912 Interest income (82) (315) (139) (683) Earnings before income taxes 2,379 3,696 5,031 907 Provision for income taxes 1,023 1,525 2,163 381 Net earnings $1,356 $2,171 $2,868 $526 Earnings per share: Basic $ .11 $ .18 $ .23 $ .04 Diluted $ .11 $ .18 $ .23 $ .04 Weighted average shares outstanding: Basic 12,226 11,792 12,212 11,761 Effect of dilutive securities - stock options 357 148 305 208 Diluted 12,583 11,940 12,517 11,969 Other data Gross proceeds $196,016 $171,632 $391,152 $343,454 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (dollars in thousands except per share amounts) June 30, December 30, 2002 2001 ASSETS (Unaudited) Current assets: Cash and cash equivalents $18,649 $24,467 Accounts receivable, net 43,319 54,674 Inventories 9,129 13,505 Short-term investments - 2,131 Other current assets 3,302 4,165 Total current assets 74,399 98,942 Property and equipment, net 43,614 39,240 Deferred income taxes 7,686 7,827 Investments in marketable securities - 512 Intangible assets, net 1,483 1,617 Goodwill, net 129,603 129,522 Other assets 135 544 $256,920 $278,204 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $33,039 $41,451 Accrued liabilities 10,922 10,920 Accrued special charges 1,025 1,245 Obligations under capital leases 782 - Current installments of long-term debt 42 20,040 Total current liabilities 45,810 73,656 Deferred income taxes 13,436 12,172 Other liabilities 3,484 3,279 Obligation under capital leases 1,455 - Long-term debt, excluding current installments 81 103 Total liabilities 64,266 89,210 Shareholders' equity: Preferred stock, par value of $.001 per share Authorized 5,000,000 shares; none issued - - Common stock, par value of $.001 per share Authorized 20,000,000 shares; issued and outstanding 12,232,459 and 12,162,290 shares as of June 30, 2002 and December 30, 2001, respectively 12 12 Additional paid-in capital 143,476 142,575 Accumulated other comprehensive income (loss) (109) - Retained earnings 49,275 46,407 Total shareholders' equity 192,654 188,994 $256,920 $278,204 INSURANCE AUTO AUCTIONS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (dollars in thousands) Six Months Ended June 30, July 1, 2002 2001 (Unaudited) Cash flows from operating activities: Net earnings (loss) $2,868 $526 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 4,275 4,975 Loss (gain) on disposal of fixed assets 34 (388) Loss on change in fair market value of derivative 472 - Special charges - 6,047 Changes in assets and liabilities (net of effects of acquired companies): (Increase) decrease in: Accounts receivable, net 11,355 2,756 Inventories 4,376 (4,525) Other current assets 863 (1,387) Other assets 438 52 Increase (decrease) in: Accounts payable (8,412) 952 Accrued liabilities (588) (3,006) Deferred income taxes, net 1,405 549 Total adjustments 14,218 6,025 Net cash provided by operating activities 17,086 6,551 Cash flows from investing activities: Capital expenditures (6,601) (9,025) Investments, net 2,643 3,188 Proceeds from disposal of fixed assets 175 1,416 Payments made in connection with acquired companies, net of cash acquired - (105) Net cash used in investing activities (3,783) (4,526) Cash flows from financing activities: Proceeds from issuance of common stock 901 2,931 Principal payments on long-term debt (20,022) (19) Net cash (used) provided by financing activities (19,121) 2,912 Net decrease in cash and cash equivalents (5,818) 4,937 Cash and cash equivalents at beginning of period 24,467 30,938 Cash and cash equivalents at end of period $ 18,649 $ 35,875 Supplemental disclosures of cash flow information: Cash paid or refund during the period for: Interest $1,077 $860 Income taxes paid 1,735 $7 Income taxes refunded $2,250 $-