Insurance Auto Auctions Reports Q2 Results

Illinois-based Insurance Auto Auctions, Inc. a provider of automotive salvage and claims processing services in the United States, 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, CEO, noted, “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.”

“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.”