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Insurance Auto Auctions Announces Second Quarter Results

SCHAUMBURG, Ill., July 25 -- Insurance Auto Auctions, Inc. , a leading provider of automotive salvage and claims processing services in the United States, today reported lower net earnings for the quarter ended June 29, 2003. The Company recorded net earnings of $1.3 million, or $0.11 per diluted share, versus net earnings of $1.4 million, or $0.11 per diluted share, for the same quarter a year ago.

Revenues for the quarter were $53.3 million compared with $59.8 million in the second quarter of 2002. 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 6 percent of the total vehicles sold this quarter versus 9 percent for the same quarter one year earlier. 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 the vehicle are recorded as revenue. Fee income in the second quarter increased to $43.1 million versus $42.7 million in the second quarter of last year.

Tom O'Brien, Chief Executive Officer, said, "As we discussed in our July 15th press release, our second quarter revenue and volumes were down compared to those in the year ago quarter on a same-store basis, consistent with industry-wide trends. Our earnings results were negatively impacted by the lower volumes and higher costs that we incurred due to a number of new branch additions, as well as greater-than-expected business transformation costs associated with the new system rollout. Even with these short-term negative impacts on profitability, however, we were still able to match last year's second quarter earnings results primarily because of our business process re- engineering initiative we completed a year ago."

"Our primary goal at this time is implementing the new enterprise-wide IT system in a manner that does not disrupt our operations or negatively impact our customer relationships," said O'Brien. "Although this cautious implementation strategy has taken longer and required more labor than we originally anticipated, we believe it gives us the best opportunity to avoid business disruptions and maintain these customer relationships over the long term. Going forward, we will continue to place the highest emphasis on the long-term benefits of the system and the ultimate impact it should have on our customers."

O'Brien continued, "In addition to maintaining a strong, cautious discipline when rolling out the new system, we have decided to shift our immediate focus to the conversion of the expansion markets before we complete the rollout in our final two major markets. We have chosen to complete these smaller branches first in order to enhance customer relationships, eliminate our need to support diverse systems and to minimize the impact of the system rollout on the two remaining major markets."

The Company also continued its expansion strategy during the second quarter, acquiring new facilities in Wichita, Kansas, Wilmington, North Carolina and Orlando, Florida, all of which leverage existing operations. In addition, IAA acquired the Mountain States Salvage Pool in Salt Lake City, Utah, which represents the penetration of a new market opportunity. The total cost of adding these four new markets was less than $6 million. IAA has added a total of eight new facilities so far this year, although management expects expansion activity to decline significantly in the second half of the year.

Commenting on full-year expectations, O'Brien said, "As we outlined recently, our internal forecast now calls for net earnings of $0.50 per diluted share, after business transformation costs, for the full-year 2003. This estimate takes into account additional business transformation costs as well as higher anticipated costs associated with opening our recently acquired facilities. Other factors affecting this estimate include industry trends that are pointing to slightly lower volumes for the remainder of the year and, due to the later-than-anticipated completion of the new system, its positive financial impact in 2003 will be lower than we originally forecasted."

O'Brien concluded, "To summarize, despite the short-term delays associated with the new system rollout, we remain extremely confident in the overall future of IAA. Our long-term plan of making IAA a stronger, more efficient organization throughout and deploying capital in ways that provide the best return for our shareholders has not changed. The impact of our previously completed strategic initiatives, including the new business processes and the exit of the purchase agreement method of sale, continues to have lasting effects on the profitability of our business. Furthermore, the cost effective acquisitions we have completed so far this year have been strategically located and should help drive future growth. Both our customers and our employees are excited about the benefits our new system will ultimately bring, with these benefits already being witnessed in many of the branches in which it has been fully operational. Finally, we look forward to updating our shareholders on the progress of this initiative as we move forward."

Quarterly Conference Call

The Company previously announced that it will hold its second quarter 2003 results conference call on Friday, July 25 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 the Company's Web site at www.iaai.com . A replay will be available until midnight EDT on August 2, 2003. To listen to the replay, please dial 800-642-1687 and enter conference reservation code 1726605 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 74 sites across the United States.

Safe Harbor Statement

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 29,  June 30,   June 29,  June 30,
                                      2003      2002       2003      2002
                                       (Unaudited)           (Unaudited)

  Revenues:
    Vehicle sales                   $10,192   $17,059    $23,496   $44,810
    Fee income                       43,146    42,691     85,882    84,160
                                     53,338    59,750    109,378   128,970
  Cost of sales:
    Vehicle cost                      9,425    14,802     21,196    40,859
    Branch cost                      32,845    33,001     65,809    64,193
                                     42,270    47,803     87,005   105,052
      Gross profit                   11,068    11,947     22,373    23,918

  Operating expense:
    Selling, general and
     administrative                   7,509     6,937     14,677    14,116
    Business transformation costs       921     2,237      1,718     4,186

    Earnings from operations          2,638     2,773      5,978     5,616

  Other (income) expense:
    Interest expense                    503       476        558       724
    Other income                        (43)      (82)      (122)     (139)

    Earnings before income taxes      2,178     2,379      5,542     5,031

  Provision for income taxes            898     1,023      2,286     2,163

      Net earnings                   $1,280    $1,356     $3,256    $2,868

  Earnings per share:
    Basic                             $ .11     $ .11      $ .28     $ .23
    Diluted                           $ .11     $ .11      $ .27     $ .23

  Weighted average shares outstanding:
    Basic                            11,517    12,226     11,784    12,212
    Effect of dilutive securities
     - stock options                     60       357         77       305
    Diluted                          11,577    12,583     11,861    12,517

                        INSURANCE AUTO AUCTIONS, INC.
                               AND SUBSIDIARIES

                    Condensed Consolidated Balance Sheets
               (dollars in thousands except per share amounts)

                                                   June 29,    December 29,
                                                     2003           2002
  ASSETS                                         (Unaudited)

  Current assets:
    Cash and cash equivalents                      $28,507        $10,027
    Accounts receivable, net                        40,249         45,594
    Inventories                                     10,175         11,158
    Other current assets                             2,671          3,571
      Total current assets                          81,602         70,350

  Property and equipment, net                       55,709         49,342
  Deferred income taxes                              8,592          7,663
  Intangible assets, net                             2,178          1,710
  Goodwill, net                                    135,335        130,474
  Other assets                                         144            111
                                                  $283,560       $259,650

  LIABILITIES AND SHAREHOLDERS' EQUITY

  Current liabilities:
    Accounts payable                               $25,320        $28,656
    Accrued liabilities                             14,679         15,312
    Obligations under capital leases                 4,785          2,552
    Current installments of long-term debt           7,545             43
    Income taxes                                       864              -
      Total current liabilities                     53,193         46,563

  Deferred income taxes                             16,283         14,835
  Other liabilities                                  2,724          2,736
  Obligation under capital leases                    1,306          1,355
  Long-term debt, excluding current installments    20,661             59
      Total liabilities                             94,167         65,548

  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, 11,499,919
     shares issued and 12,307,128 outstanding as
     of June 29, 2003 and 12,292,599 shares issued
     and outstanding as of December 29, 2002            12             12
    Additional paid-in capital                     144,648        144,420
    Treasury stock, 807,209 shares                  (8,012)             -
    Accumulated other comprehensive income (loss)     (926)          (745)
    Retained earnings                               53,671         50,415
      Total shareholders' equity                   189,393        194,102
                                                  $283,560       $259,650

                        INSURANCE AUTO AUCTIONS, INC.
                               AND SUBSIDIARIES
               Condensed Consolidated Statements of Cash Flows
                            (dollars in thousands)
                                                      Six Months Ended
                                                   June 29,       June 30,
                                                     2003           2002
                                                         (Unaudited)
  Cash flows from operating activities:
  Net earnings                                      $3,256         $2,868
  Adjustments to reconcile net earnings to
   net cash provided by operating activities:
    Depreciation and amortization                    4,870          4,275
    (Loss) gain on disposal of fixed assets            (31)            34
    Loss (gain) on change in fair market value
     of derivative financial instrument               (307)           472
    Changes in assets and liabilities (excluding
     effects of acquired companies):
    (Increase) decrease in:
      Accounts receivable, net                       7,370         11,355
      Inventories                                      985          4,376
      Other current assets                             917            863
      Other assets                                    (754)           438
    Increase (decrease) in:
      Accounts payable                              (3,336)        (8,412)
      Accrued liabilities                             (684)          (588)
      Income taxes, net                              1,383          1,405
        Total adjustments                           10,412         14,218
    Net cash provided by operating activities       13,669         17,086

  Cash flows from investing activities:
    Capital expenditures                            (6,498)        (6,601)
    Investments, net                                     -          2,643
    Proceeds from sale of investments                    -            175
    Proceeds from disposal of property and
     equipment                                          44              -
    Payments made in connection with
     acquisitions, net of cash acquired             (7,863)             -
      Net cash used in investing activities        (14,317)        (3,783)

  Cash flows from financing activities:
    Proceeds from issuance of common stock             227            901
    Proceeds from term loan                         30,000              -
    Purchase of treasury stock                      (8,012)             -
    Principal payments on long-term debt            (1,896)       (20,022)
    Principal payments - capital leases             (1,191)             -
  Net cash provided (used) by financing
   activities                                       19,128        (19,121)

  Net increase (decrease) in cash and
   cash equivalents                                 18,480         (5,818)

  Cash and cash equivalents at beginning
   of period                                        10,027         24,467

  Cash and cash equivalents at end of period       $28,507        $18,649

  Supplemental disclosures of cash flow
   information:
    Cash paid or refunded during the period for:
      Interest                                        $647         $1,077
      Income taxes paid                               $797         $1,735
      Income taxes refunded                         $1,250         $2,250
    Non-cash financing activities:
      Property and equipment additions resulting
       from capital leases                          $3,375             $-