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Letter to the Editor

Insurance Auto Auctions Announces First Quarter Results

Insurance Auto Auctions, Inc., a provider of automotive salvage and claims processing services in the United States, has reported higher net earnings for the quarter ended March 31, 2002. The Company recorded net earnings of $1.5 million, or $0.12 per diluted share, versus a net loss of $1.6 million, or $0.14 per diluted share, for the same quarter a year ago. Net earnings for the first quarter of 2002, excluding business transformation costs, were $2.6 million, or $0.21 per diluted share.

Revenues for the quarter decreased 11.1 percent to $69.2 million compared with $77.8 million in the first 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 12.7 percent of the total vehicles sold this quarter versus 20.6 percent for the same quarter last year and 15.9 percent for the fourth quarter of 2001. 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 car are recorded as revenue. This change in contract mix along with increased volumes contributed to the significant growth in fee income for the quarter. Fee income in the first quarter rose 10.2 percent to $41.5 million versus $37.6 million in the first quarter of last year.

Gross profit for the quarter increased 4.4 percent to $12.0 million from $11.5 million for the same quarter a year ago. Earnings from operations for the quarter totaled $2.8 million compared to a loss from operations of $2.7 million for last year's first quarter.

Tom O'Brien, Chief Executive Officer, said, "We are pleased with our first quarter results from both an earnings and a cash flow perspective. More importantly, we had a double digit unit volume increase compared with the first quarter of 2001, reversing the trend from the back half of last year. This momentum has continued and, as a result, we expect to have a positive second quarter as well. Most importantly, we have remained focused on executing our strategic initiatives, which we expect will make IAA a stronger and more efficient organization throughout."

Insurance Auto Auctions also announced that it adopted the provisions of Financial Accounting Standards Board (FASB) No. 142 regarding goodwill amortization. As such, the company no longer amortizes goodwill arising from business acquisitions. The effect on the current quarter was a reduction of amortization expense by approximately $1.0 million.

"During the quarter we continued to execute on the major strategic initiatives that we have put in place," said O'Brien. "We've remained committed to exiting the purchase agreement method of sale, which fell to 12.7 percent of all vehicles sold during the quarter. As reported earlier, new assignments of vehicles under the purchase agreement method are running at less than 7.0 percent of total assignments in. As a result, we have begun to see a positive impact on our financial results and a more predictable revenue stream."

O'Brien continued, "The new operating procedure model, which was developed with the help of Synergetics, was rolled out in approximately half of the branch offices during the first quarter, and the remaining branches should be implemented by the end of the second quarter. Our employees' reaction to the new processes has been extremely positive, and we are starting to see the financial benefits from adopting these new 'best practices'. We expect to see additional cost savings as the year progresses."

The enterprise-wide systems redesign project through SEI is on schedule, and the new system should be installed in the first branch in June of this year. The company expects to roll out the new system to the remaining branches during the second half of the year.

In terms of strategic expansion, the Company announced the opening of a new branch operation in Oklahoma City, Oklahoma in March 2002. The 20-acre facility will serve the entire state of Oklahoma and will leverage existing operations. This location builds on IAA's strong presence in Texas and will serve to broaden the Company's reach to new and existing customers in the area.

O'Brien concluded, "This quarter was solid on all fronts -- from the ability of our business to generate solid margins and cash flows, to the continued execution of our strategic initiatives that we expect will make IAA a more efficient organization from top to bottom. We look forward to updating both our customers and investors on our progress throughout the upcoming quarters."

©2002 Collision Repair Industry INSIGHT
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