Ugly Duckling Reports Second Quarter 2002 Results
PHOENIX--Aug. 14, 2002--Ugly Duckling Corporation, the largest used car sales company focused exclusively on the sub-prime market, today reported its second quarter financial results for 2002.The Company reported total revenues of $156.0 million and net earnings of $2.1 million for the three months ended June 30, 2002 and total revenues of $331.1 million and net earnings of $3.5 million for the six months ended June 30, 2002. This compares to total revenues of $140.8 million and net earnings of $1.4 million for the three months ended June 30, 2001 and total revenues of $304.8 million and net earnings of $3.2 million for the six months ended June 30, 2001.
The increase in 2002 revenues was primarily due to a higher unit sales volume combined with an increased average vehicle sales price. In the second quarter of 2002, the Company sold 12,068 units at an average sales price of $9,964 per vehicle, up from 11,607 units at an average sales price of $9,125 in the second quarter of 2001. For the six months ended June 30, 2002, the Company sold 27,368 units at an average sales price of $9,591 per vehicle, up from 26,458 units at an average sales price of $8,924 during the first six months of 2001.
As previously reported, through the Company's analysis of the primary factors that influence loan performance, we determined that a higher cost and better quality vehicle positively affects the gross loan loss rate across all credit grades. We made a decision to upgrade the quality of our vehicle inventory throughout 2001 and have continued to increase the quality of our vehicles during the first six months of 2002. As a result, the average sales price increased 7.5% and the cost of a vehicle increased 11.8% during the first six months of 2002 compared to the same period in 2001. The Company has generally maintained a consistent net profit margin, thereby passing the benefit of the more expensive car on to the customer.
The principal balance of the Company's loan portfolio is $565.4 million at June 30, 2002, up from $514.7 million at December 31, 2001. Loan originations for the second quarter of 2002 totaled $119 million, bringing the total originations for 2002 to $259.8 million. This compares to $103.6 million in originations in the second quarter of 2001 and total originations of $229.6 million in the first six months of 2001. Net interest income, consisting of interest income net of portfolio interest expense, increased to $29.5 million for the three months ended June 30, 2002, compared to $27.4 million for the three months ended June 30, 2001. Net interest income was $56.2 million and $52.7 million for the six months ended June 30, 2002 and 2001, respectively. The increase in net interest income was primarily the result of the growth of our loan portfolio, in conjunction with lower borrowing costs on our warehouse credit facility and in our most recent securitizations.
The Provision for Credit Losses increased to $38.4 million or 32.2% of the total amount financed for the quarter ended June 30, 2002, up from $32.2 million or 31.1% of the total amount financed for the quarter ended June 30, 2001. The Provision for Credit Losses was $83.8 million or 32.2% of the total amount financed, and $71.2 million or 31.0% of the total amount financed for the six months ended June 30, 2002 and 2001, respectively. Company policy is to maintain an Allowance for Credit Losses for all loans in its portfolio to cover estimated net charge-offs for the next 12 months. The Company began to improve the underlying credit quality mix of its originations due to improved credit standards and the introduction of loan grading in 2001. As a result, 2001 and 2002 originations are performing better to date than loans originated in prior periods. Offsetting these improvements are the effects of the recession and the performance of loans originated prior to 2001 that do not have the benefit of the new higher credit standards and are emerging at loss levels higher than previously estimated. The Allowance as a percentage of loan principal was 20.6% and 19.8%, at June 30, 2002 and December 31, 2001, respectively.
Operating expenses decreased to $33.8 million or 21.6% of total revenues in the second quarter of 2002, down from $35.9 million or 25.5% of total revenues in the second quarter of 2001. Operating expenses were $69.3 million or 20.9%, and $73.4 million or 24.1% of total revenues for the six months ended June 30, 2002 and 2001, respectively. The decrease in operating expenses in 2002 was primarily due to numerous cost savings initiatives taken during 2001, including consolidating collection and loan servicing centers by closing two of our four centralized facilities and completing a reduction in work force of primarily corporate staff in the fourth quarter of 2001. In January of 2002, we incurred a $0.8 million charge related to a second reduction in work force to save an additional $1.7 million per annum in salary, wages and benefits.
Greg Sullivan, President and Chief Executive Officer stated, "We are pleased with the Company's results for the first half of 2002. Sales have continued to be stronger than anticipated and overall the loan portfolio has performed well considering the economy and high unemployment rates. The implementation of loan grading in 2001 is having an increasingly positive impact on the Company's loan performance as loans with the benefits of higher credit standards and loan grading make up a larger percentage of our portfolio.
Our Company's liquidity position remains strong and the interest rate environment has positively impacted our cost of borrowings. In July 2002, we renewed a $45 million senior loan facility secured by the Company's retained interests in the residuals from our securitization transactions. In addition, we are scheduled to close our 23rd securitization, consisting of approximately $150.0 million in Class A bonds on August 15, 2002 with an expected 2.99% coupon rate, the lowest rate in our Company's history.
We believe that sales volumes and revenues for the second half of 2002 will continue to exceed 2001 levels, and that the loan portfolio will perform better than prior years. In addition, during this year we have made, and continue to make, various improvements to our business model by repositioning the Company to be the auto dealership of choice for people with less than perfect credit, through providing innovative credit solutions, quality vehicles and outstanding customer service. We believe these changes will have long-term benefits to the Company, including enhancing volume, lowering credit losses and improving profitability. However, they may negatively impact earnings during the remainder of 2002 due to the write-off of certain property and equipment and other related expenses, plus depreciation on an estimated $6.3 million of dealership improvements expected to be made in the third quarter. If the economy slips back into recession, or if the recovery is sluggish, it will negatively impact the loan portfolio, and our liquidity and profitability."
23rd Securitization
On July 30, 2002, the Company priced its 23rd securitization, 2002B, which is scheduled to close on August 15, 2002. The securitization will consist of approximately $211.3 million in principal balances and the issuance of approximately $150.0 million in Class A bonds, including a pre-funded amount of approximately $27.5 million. The coupon rate on the Class A bonds is expected to be 2.99%, the initial deposit into the reserve account is 7.25% and the reserve account maximum will be 11.5%. The Class A bonds are insured by XL Capital Assurance, resulting in AAA by Standard and Poor's and AAA by Moody's ratings.
Headquartered in Phoenix, Arizona, Ugly Duckling Corporation is the largest operator of used car dealerships focused exclusively on the sub-prime market. The Company underwrites, finances and services sub-prime contracts generated at its 76 Ugly Duckling dealerships, located in 11 metropolitan areas in eight states.
This press release includes statements that constitute forward-looking statements within the meaning of the safe harbor provisions of the Private and Securities Litigation Reform Act of 1995. We claim the protection of the safe-harbor for our forward-looking statements. Forward-looking statements are often characterized by the words "may," "anticipates," "believes," "estimates," "projects," "expects" or similar expressions and do not reflect historical facts. Forward-looking statements in this press release relate, among other matters, to: economic conditions, including the impact of a sluggish economy or a recession; anticipated financial results, such as sales, profitability, other revenues and loan portfolios, improvements in underwriting including credit scoring, adequacy of the allowance for credit losses, and improvements in loan performance, including delinquencies and charge offs; the success of cost savings initiatives and restructurings; improvements to the warehouse credit facility; improvements in inventory and inventory mix; continuing to complete securitization transactions, including the closing and terms for our 23rd securitization; and improvements to the business model, including inventory quality, customer service levels and credit solutions provided. Forward looking statements are subject to risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward looking statements, some of which we cannot predict or quantify. Factors that could affect our results and cause or contribute to differences from these forward-looking statements include, but are not limited to: any decline in consumer acceptance of our car sales strategies or marketing campaigns; any inability to finance our operations in light of a tight credit market for the sub-prime industry and our current financial circumstances; any deterioration in the used car finance industry or increased competition in the used car sales and finance industry; any inability to monitor and improve our underwriting and collection processes; any changes in estimates and assumptions in, and the ongoing adequacy of, our allowance for credit losses; any inability to continue to reduce operating expenses as a percentage of sales; increases in interest rates; generally maintaining liquidity levels and cash flows sufficient to fund our ongoing operations; the failure to efficiently and profitably manage acquisitions and/or new car dealerships; adverse economic conditions; any material litigation against us or material, unexpected developments in existing litigation; and any new or revised accounting, tax or legal guidance that adversely affect used car sales or financing and developments with respect to the going private transaction. Forward-looking statements speak only as of the date the statement was made. Future events and actual results could differ materially from the forward-looking statements. When considering each forward-looking statement, you should keep in mind the risk factors and cautionary statements found throughout this press release as well as those contained in our Annual Report on Form 10-K and our other filings with the SEC. We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information, future events, or for any other reason. References to Ugly Duckling Corporation as the largest operator of used car dealerships focusing exclusively on the sub-prime market is management's belief based upon the knowledge of the industry and not on any current independent third party study.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2002 and 2001
(In thousands, except cars sold numbers)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------
2002 2001 2002 2001
---------------------------------------
Cars Sold 12,068 11,607 27,368 26,458
=======================================
Total Revenues $155,986 $140,819 $331,050 $304,849
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Sales of Used Cars $120,247 $105,919 $262,481 $236,105
Less:
Cost of Used Cars Sold 71,337 60,639 154,354 133,480
Provision for Credit
Losses 38,395 32,210 83,762 71,230
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10,515 13,070 24,365 31,395
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Other Income (Expense):
Interest Income 35,739 34,900 68,569 68,744
Portfolio Interest Expense (6,251) (7,492) (12,394) (16,011)
---------------------------------------
Net Interest Income 29,488 27,408 56,175 52,733
---------------------------------------
Income before Operating
Expenses 40,003 40,478 80,540 84,128
Operating Expenses:
Selling and Marketing 6,137 6,235 13,750 13,861
General and Administrative 25,561 27,217 51,343 54,655
Depreciation and Amortization 2,058 2,435 4,166 4,842
---------------------------------------
Operating Expenses 33,756 35,887 69,259 73,358
---------------------------------------
Income before Other
Interest Expense 6,247 4,591 11,281 10,770
Other Interest Expense 2,328 2,862 4,634 5,953
---------------------------------------
Earnings before Income Taxes 3,919 1,729 6,647 4,817
Income Taxes 1,791 709 3,149 1,975
---------------------------------------
Earnings before Extraordinary
Item 2,128 1,020 3,498 2,842
Extraordinary Item -- Gain on
early extinguishment of
debt, net - 344 - 344
---------------------------------------
Net Earnings $ 2,128 $ 1,364 $ 3,498 $ 3,186
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UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Operating Expenses and Related Information
(In thousands, except dealerships open, per car sold,
and per loans serviced amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------
2002 2001 2002 2001
------- ------- ------- -------
Retail Operations:
Selling and Marketing $ 6,137 $ 6,235 $13,750 $13,861
General and
Administrative 12,996 14,855 26,445 29,513
Depreciation and
Amortization 1,090 1,363 2,201 2,689
------- ------- ------- -------
Retail Expense $20,223 $22,453 $42,396 $46,063
======= ======= ======= =======
Per Car Sold:
Selling and Marketing $ 509 $ 537 $ 502 $ 524
General and
Administrative 1,077 1,280 966 1,115
Depreciation and
Amortization 90 117 80 102
------- ------- ------- -------
Total $ 1,676 $ 1,934 $ 1,548 $ 1,741
======= ======== ======= =======
As % of Sales of Used Cars:
Selling and Marketing 5.1% 5.9% 5.2% 5.9%
General and
Administrative 10.8% 14.0% 10.1% 12.5%
Depreciation and
Amortization 0.9% 1.3% 0.8% 1.1%
------- ------- ------- -------
Total 16.8% 21.2% 16.1% 19.5%
======= ======= ======= =======
Portfolio Expense:
General and
Administrative $ 7,095 $ 7,359 $13,637 $15,367
Depreciation and
Amortization 240 232 492 496
------- ------- ------- -------
Portfolio Expense $ 7,335 $ 7,591 $14,129 $15,863
======= ======= ======= =======
Average Expense per
Month per Loan Serviced $ 28.55 $ 29.25 $ 27.79 $ 30.37
======= ======== ======= =======
Annualized Expense as %
of End of Period
Principal Balances 5.2% 5.8% 5.0% 6.0%
======= ======= ======= =======
Corporate Expense:
General and
Administrative $ 5,470 $ 5,003 $11,261 $ 9,775
Depreciation and
Amortization 728 840 1,473 1,657
------- ------- ------- -------
Corporate Expense $ 6,198 $ 5,843 $12,734 $11,432
------- ------- ------- -------
Per Car Sold $ 514 $ 503 $ 465 $ 432
======= ======= ======= =======
As % of Total Revenues 4.0% 4.1% 3.8% 3.8%
======= ======= ======= =======
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
June 30, December 31,
2002 2001
------------------------
ASSETS
Cash and Cash Equivalents $ 10,003 $ 8,572
Finance Receivables, Net 531,928 495,254
Note Receivable from Related Party 12,000 12,000
Inventory 38,148 58,618
Property and Equipment, Net 30,331 37,739
Goodwill 11,569 11,569
Other Assets 10,972 20,006
Net Assets of Discontinued Operations - 3,899
------------------------
$ 644,951 $ 647,657
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable $ 3,955 $ 2,850
Accrued Expenses and Other Liabilities 41,863 38,250
Notes Payable - Portfolio 398,640 377,305
Other Notes Payable 25,690 52,510
Subordinated Notes Payable 25,813 31,259
------------------------
Total Liabilities 495,961 502,174
------------------------
Stockholders' Equity:
Preferred Stock $.001 par value,
10,000,000 shares authorized,
none issued and outstanding - -
Common Stock $.001 par value,
100,000,000 shares authorized,
100 and 18,774,000 issued,
respectively, and 100 and
12,275,000 outstanding, respectively - 19
Additional Paid-in Capital 133,418 173,741
Retained Earnings 15,572 12,074
Treasury Stock, at cost - (40,351)
------------------------
Total Stockholders' Equity 148,990 145,483
------------------------
$ 644,951 $ 647,657
========================
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Finance Receivables and Allowance for Credit Losses Information
(In thousands)
(Unaudited)
June 30, December 31,
2002 2001
----------------------------------
Contractually Scheduled Payments $ 774,680 $ 694,572
Unearned Finance Charges (209,298) (179,873)
----------------------------------
Principal Balances, net 565,382 514,699
Accrued Interest 5,857 5,824
Loan Origination Costs 7,360 6,635
----------------------------------
Loan Receivables 578,599 527,158
Investments Held in Trust 69,529 69,996
----------------------------------
Finance Receivables 648,128 597,154
Allowance for Credit Losses (116,200) (101,900)
----------------------------------
Finance Receivables, net $ 531,928 $ 495,254
==================================
Three Months Ended Six Months Ended
June 30, June 30,
Allowance Activity: 2002 2001 2002 2001
----------------------------------------
Balance, Beginning of Period $107,600 $102,000 $101,900 $ 99,700
Provision for Credit Losses 38,395 32,210 83,762 71,230
Other Allowance Activity - (48) - (6)
Net Charge Offs (29,795) (32,573) (69,462) (69,335)
----------------------------------------
Balance, End of Period $116,200 $101,589 $116,200 $101,589
========================================
Charge off Activity:
Principal Balances $(36,029) $(41,605) $(83,060) $(88,761)
Recoveries, Net 6,234 9,032 13,598 19,426
----------------------------------------
Net Charge Offs $(29,795) $(32,573) $(69,462) $(69,335)
========================================
June 30, June 30, December 31,
Days Delinquent: 2002 2001 2001
-----------------------------------
Current 70.3% 70.2% 64.5%
1-30 Days 23.1% 23.0% 26.2%
31-60 Days 3.9% 4.1% 5.6%
61-90 Days 2.7% 2.7% 3.7%
-----------------------------------
Total Portfolio 100.0% 100.0% 100.0%
===================================