On March 24th, 2011, AutoChina (AUTC) was scheduled to announce its long awaited audited financials and fourth quarter results. On February 15, 2011, the company issued a press release that stated (emphasis mine):
We look forward to…announcing our fully audited 2010 fourth quarter and year-end financial results next month.
It is now five weeks later and there is still no audited financials.
In its earnings announcement released on March 24th, it buried a paragraph in the very end of the press release that stated
The Company anticipates filing [audited financials] before June 30, 2011.
Shockingly, management provided NO EXPLANATION in its press release or conference call regarding why they pushed back the completion of the audit by up to three months and did not provide color if they were having a disagreement with their auditor or if there were issues that could result in a restatement or worse. Recall a number of reports, including one from me, cast doubt on the company's financials and possibility for restatement.
For the fourth quarter, AUTC announced $0.54 of earnings as a 10.7% tax rate provided a significant benefit to earnings. AutoChina reported a 25.4% tax rate for the first nine months of 2010. More importantly, they provided 2011 guidance that was inexplicable at best. Management guided to 20,000 originations, $900 million to $950 million in revenues and $52 million to $57 million of net income in 2011. The revenue was more than analysts expected but the net income was below expectations.
To originate 20,000 new leases, I estimate AutoChina needs $608 million of funding ($38,000 times 20% down). In the past, management stated they thought China banks could support a debt to equity ratio of 2 times at the company. With $230 million of equity, this equates to $460 million of total debt capacity. With $253 million of debt already on the books, this means AutoChina only has $200 million of current capacity if they get to their max debt leverage.
On its conference call, management provided little color on how they can possibly fund this level of originations, only stating that:
Unfortunately I cannot talk about specifics because it is non-public information.
Keep in mind this was a public conference call! Management did not provide color on what assumptions they included in the guidance for funding or cost of funds. One possibility is that management is planning to issue large amounts of equity to help fund its growth. If its adds $400 million of debt to its balance sheet, the company would need roughly $330 million of equity at 2 times leverage, or an additional $100 million of equity.
In the first article, I stated that "Many Questions (And Risks) Remain" at AutoChina. The company's accounting and funding were the two issues that created most of the risk. Last week's earnings announcement only provided more questions (and potential risks) for investors.