AUTC Autochina International Limited (MM)

AutoChina International Limited (“AutoChina” or the “Company”) (NASDAQ: AUTC), China’s largest commercial vehicle sales, servicing, leasing, and support network, today reported unaudited financial results for its first quarter ended March 31, 2011.

Q1 2011 Financial Highlights

• Total revenues of $136.2 million, a 12.8% increase from $120.7 million in the prior-year period
• Improvement across all margins—gross margin up 4 percentage points to 17.1%, operating margin up 2.7 percentage points to 9.5%, and net margin up 2.2 percentage points to 7.3%, from the prior-year period
• Net income of $10.0 million, or $0.50 per diluted share, compared to net income of $6.2 million, or $0.33 per diluted share, in the prior-year period
• Adjusted EBITDA of $18.2 million, a 45.9% increase year over year

Operational Highlights

• 2,559 commercial vehicles were financed in the first quarter of 2011, which has historically been the Company’s slowest seasonal quarter due to the Chinese New Year holiday, compared to 2,506 in the prior-year period
• Total number of commercial vehicle sales and leasing branches increased from 180 at March 31, 2010, to 318 at March 31, 2011, and 333 at May 31, 2011
• Eight lease defaults during the three-month period on a total loan portfolio of 21,727 commercial vehicles at March 31, 2011
• Company launches used commercial vehicle sale-leaseback program

Guidance for 2011

• Company reiterates its expectation of leasing approximately 20,000 vehicles in 2011 and operating at least 500 stores by the end of 2011
• Company reiterates its revenue guidance of between $900 million and $950 million and net income guidance of between $52 million and $57 million for the year ending December 31, 2011
• Company expects continued improvement in gross margin as finance and insurance revenues increase as a percentage of total revenues in each quarter

Market Overview

Mr. Yong Hui Li, Chairman and CEO of AutoChina, stated, “We were pleased to achieve double-digit growth on the top and bottom line during the first quarter, which is historically the Company’s slowest period due to seasonality caused by the Chinese New Year holiday. Since the latter half of 2010, we have seen demand in the heavy-truck market normalize from its previously high growth levels. In 2010, heavy truck sales in China rose by roughly 60% when compared to heavy truck sales in 2009. We feel this was an extraordinary jump over the historical growth in the market, driven in part by the effects of the government's stimulus program. However, we are still seeing steady growth in our sector. According to China Automotive Review, sales of heavy-duty trucks, including chassis and semi-tractor trailers, in the first quarter of 2011 totaled 299,436 units, up 8.4% from the first quarter of 2010. We believe that China’s continuing economic development will keep driving demand for commercial vehicles in the long term.”

Operational Review

AutoChina’s commercial vehicle sales, servicing, leasing and support business recorded 2,559 lease-to-own loans (“leases”) in the three months ended March 31, 2011, compared to 2,506 for the three months ended March 31, 2010.

The Company had a total of 21,727 leases outstanding as of March 31, 2011. During the quarter, 8 vehicles experienced default or were lost due to accidents. Since inception and through March 31, 2011, a total of 68 vehicles have experienced defaults or were lost due to accidents out of over 23,000 total vehicles leased.

During the 2011 first quarter, AutoChina’s value-added services (diesel, tire, and insurance financing) programs, which were launched in early 2010, continued to expand. As of March 31, 2011, over 80 tire outlets and over 60 fueling stations were participating in the program. Revenues from value-added services totaled $1.1 million during the quarter.

During the first quarter of 2011, the Company established a total of 18 additional commercial vehicle sales, servicing, leasing and support centers in Anhui, Guangxi, Jilin, Shaanxi, Shandong, Shanxi, and Yunnan provinces, bringing the total number of locations to 318 as of March 31, 2011. Three of these new stores were opened in provinces (Jilin, Guangxi, and Yunnan) in which the company did not previously have operations. The Company expects to operate at least 500 locations by the end of 2011.

Mr. Li continued, “During the 2011 first quarter, we continued our expansion into the far northern and southern regions of China, opening store branches in the Jilin, Yunnan, and Guangxi provinces where AutoChina did not previously have a presence. As we expand our store footprint in China, we continue to expect significant overall growth in our business, as new stores and market expansion are the primary drivers behind AutoChina’s sales.”

2011 First Quarter Financial Review

• The Company reported revenues for the 2011 first quarter of $136.2 million, a 12.8% increase from $120.7 million in the first quarter of 2010. The Company reported $116.6 million in commercial vehicle revenues; $19.6 million, or 14.4% of revenues, in finance and insurance revenues; with no revenues from agency services rendered to related parties.
• Gross margin increased to 17.1% for the three months ended March 31, 2011, from 13.1% for the prior-year period. The increase was largely due to a higher number of outstanding leases, which, in turn, increased the contribution from finance and insurance income throughout the term of the loans provided to AutoChina’s customers. As a result, finance and insurance revenues have increased as a percentage of revenues for the past five quarters. The Company’s additional financing services, specifically the higher-margin tire and diesel financing services, also contributed to the increased margin.
• The Company reported net income for the first quarter of 2011 of $10.0 million, or $0.50 per diluted share based on 20.1 million weighted average diluted shares outstanding, a 60.1% increase from net income of $6.2 million, or $0.33 per diluted share based on 18.7 million diluted shares outstanding, in the prior-year period.
• Adjusted EBITDA for the quarter ended March 31, 2011, increased to $18.2 million from $12.5 million in the prior-year period. A table reconciling Adjusted EBITDA to net income can be found at the end of this press release.

Balance Sheet Highlights

At March 31, 2011, AutoChina’s cash and cash equivalents (not including restricted cash) were $86.1 million, working capital was $132.1 million, total debt was $324.1 million (including due to affiliates), and stockholders’ equity was $242.0 million, compared to $30.9 million, $128.2 million, $253.5 million, and $229.9 million, respectively, at December 31, 2010.

Lease Securitization Program and Bank Financing

Since November 2010, AutoChina has begun securitizing a portion of its commercial vehicle leases through a partnership with CITIC Trust Co. Ltd. Under this lease securitization program, up to RMB60 million, or $9.1 million, of AutoChina’s commercial truck leases will be securitized and sold to investors each month through CITIC Trust.

As of March 31, 2011, the Company had short-term borrowings of $156.1 million, including $117.5 million in loans from various Chinese banks and $38.6 million in lease securitization borrowings. In addition, the Company also had long-term borrowings of $42.7 million from a Chinese bank. The Company’s total borrowings have a blended interest rate of 6.88% per annum.

Company Launches Used Commercial Vehicle Sale-Leaseback Program

In September 2010, AutoChina began market trials leasing used commercial vehicles. Since then the Company has formalized its used commercial vehicles leasing program, which leverages its existing business model and store network. AutoChina provides this valuable service to both former and new AutoChina customers, allowing them to place the vehicles that they own outright into a sale-leaseback program. The resulting lease is structured similarly to those that AutoChina provides to customers purchasing new heavy trucks. Customers in the sale-leaseback program also have access to all of AutoChina’s value-added services. AutoChina evaluates applicants of this new program with its existing strict credit procedures and implements highly conservative loan-to-values (LTVs) to further mitigate its risk exposure.

Mr. Li concluded, “We continue to focus on methods to further evolve our business. We feel that our existing store network and financing structure can be easily scaled and adapted to other areas, namely used commercial trucks through a sale-leaseback program. This program will allow new and existing AutoChina customers who need to generate funding quickly to pay the sale-leaseback over time and better manage their cash flow. We also expect to conduct certain smaller-scale testing trials in the coming weeks, applying our financing program and services to other asset classes where there is a need, such as cement mixers, cranes, other construction equipment, or even large-scale medical equipment. We believe that this added option will prove valuable to a new customer base, and we look forward to keeping shareholders apprised of our progress.”

Outlook for 2011

AutoChina reiterates its previously announced financial guidance for 2011. The Company believes revenue from its commercial vehicle sales, servicing, leasing and support business will be between $900 million and $950 million and net income between $52 million and $57 million.

     

Estimated Financial Results

(unaudited) ($ in millions)

For the year ended For the year ended December 31, 2011 December 31, 2010 Percent Gain Total Revenue $900 - $950 $622.1 44.7% - 52.7% Net Income $52 - $57 $37.5 38.7% - 52.0%  

Conference Call Information

AutoChina’s CFO, Jason Wang, will discuss these results in a conference call (with accompanying presentation) later this morning (June 6, 2011) at 10:00 a.m. Eastern Time. The dial-in numbers are:

(877) 407-8033 (U.S.)(201) 689-8033 (International)

The call will also be simultaneously broadcast over the Internet. To listen to the live webcast, please go to the Company’s investor relations site, http://www.autochinaintl.com, or click the below conference call link: http://www.investorcalendar.com/IC/CEPage.asp?ID=164283. The Company will also have an accompanying slide presentation available in PDF format 30 minutes prior to the conference call at the “Investor Relations” section of the AutoChina website.

Additional Information Available in Filing on Form 6-K

Additional information with respect to the Company, including more detailed information with respect to the Company’s March 31, 2011, financial statements, will be available on Form 6-K, which the Company will file with the Securities and Exchange Commission today (June 6, 2011) and will be available without charge at www.sec.gov.

About AutoChina International Limited

AutoChina International Limited is China’s largest one-stop commercial vehicle sales, servicing, leasing and support network. AutoChina’s operating subsidiary was founded in 2005 by Chairman and CEO, Yong Hui Li, a nationally recognized entrepreneur in China. The Company owns and operates 333 commercial vehicle financing centers in China; and primarily provides sales-type, lease-to-own loans for local customers. The Company’s website is http://www.autochinaintl.com.

Safe Harbor Statement

This press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about the Company. Forward-looking statements are statements that are not historical facts. Such forward-looking statements, based upon the current beliefs and expectations of the Company's management, are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. The following factors, among others, could cause actual results to meaningfully differ from those set forth in the forward-looking statements:

• Continued compliance with government regulations;
• Changing legislation or regulatory environments;
• Requirements or changes affecting the businesses in which the Company is engaged;
• Industry trends, including factors affecting supply and demand;
• Labor and personnel relations;
• Credit risks affecting the Company's revenue and profitability;
• Changes in the “commercial vehicle” or “heavy truck” industry;
• The Company’s ability to effectively manage its growth, including implementing effective controls and procedures and attracting and retaining key management and personnel;
• Changing interpretations of generally accepted accounting principles;
• General economic conditions; and
• Other relevant risks detailed in the Company’s filings with the Securities and Exchange Commission.

The information set forth herein should be read in light of such risks. The Company does not assume any obligation to update the information contained in this press release.

 

AUTOCHINA INTERNATIONAL LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands except share and per share data)

  Three months ended March 31,   2011 2010   Revenues Commercial vehicles

$

116,642 $   110,498 Finance and insurance 19,591 9,607 Agency revenue, related parties   —     627 Total revenues   136,233     120,732   Cost of sales Commercial vehicles 32,130 24,578 Commercial vehicles, related parties   80,868     80,303 Total   112,998     104,881   Gross profit   23,235     15,851   Operating expenses Selling and marketing 1,746 1,215 General and administrative 5,149 3,224 Interest expense 3,323 1,612 Interest expense - related parties 643 1,646 Other income, net   (600 )     (121 ) Total operating expenses   10,261     7,576   Income from operations 12,974 8,275   Other income (expense), net Interest income   23     413   Income from operations before income taxes 12,997 8,688   Income tax provision   2,999     2,442   Net income

$

9,998 $   6,246  

Earnings (loss) per share

Basic

$

0.51

$

 

0.43

Diluted

$

0.50

$

 

0.33

 

Weighted average shares outstanding

Basic

 

19,615,766

   

14,614,434

Diluted

 

20,121,712

   

18,702,904

     

AUTOCHINA INTERNATIONAL LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share data)

  March 31, December 31, 2011 2010 (unaudited) (unaudited) ASSETS Current assets Cash and cash equivalents $ 86,088 $ 30,931 Accounts receivable, net of provision for doubtful debts of $1,740 and $1,464, respectively 26,311 22,101 Inventories 1,079 1,412 Deposits for inventories 970 1,003 Prepaid expenses and other current assets 12,850 17,113 Prepaid expenses, related parties 9 604 Current maturities of net investment in sales-type leases, net of provision for doubtful debts of $735 and $281, respectively 305,757 282,108 Deferred income tax assets   1,174   618 Total current assets 434,238 355,890   Property, equipment and leasehold improvements, net 2,818 2,669 Deferred income tax assets 420 64 Net investment in sales-type leases, net of current maturities   150,081   142,005   Total assets $ 587,557 $ 500,628   LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Short-term borrowings $ 156,076 $ 117,485 Accounts payable 1,284 911 Accounts payable, related parties 57,467 16,202 Other payables and accrued liabilities 9,586 7,425 Due to affiliates 67,813 77,295 Customer deposits 2,287 1,198 Income tax payable 4,611 7,147 Deferred income tax liabilities   3,026   — Total current liabilities 302,150 227,663   Long term debt Deferred income tax liabilities 397 614 Other long-term liabilities 286 — Long-term borrowings   42,706   42,485 Total liabilities   345,539   270,762  

Commitment and Contingency

Shareholders’ equity Preferred shares, $0.001 par value authorized - 1,000,000 shares; issued - none — —

Ordinary shares - $0.001 par value authorized - 50,000,000 shares; issued and outstanding – 19,615,766 shares and 19,615,766 shares at March 31, 2011 and December 31, 2010, respectively

20 20 Additional paid-in capital 170,809 169,842 Retained earnings 62,435 52,437 Accumulated other comprehensive income   8,754   7,567 Total shareholders’ equity   242,018   229,866   Total liabilities and shareholders’ equity $ 587,557 $ 500,628    

AUTOCHINA INTERNATIONAL LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

  Three months ended March 31, 2011     2010 Cash flow from operating activities:   Net income $ 9,998 $ 6,246   Adjustments to reconcile net income attributable to shareholders to net cash used in operating activities: Depreciation and amortization 306 215 Provision for bad debts 730 206 Deferred income taxes 1,889 1,748 Stock-based compensation expenses 967 735   Changes in operating assets and liabilities, net of acquisitions and divestitures: Accounts receivable (4,354) (369 ) Note receivable — (1,120 ) Net investment in sales-type leases (29,577) (54,831 ) Inventories 339 (465 ) Deposits for inventories 38 9,276 Prepaid expense and other current assets (4,666) (532 ) Trade notes payable — (12,450 ) Accounts payable 367 (961 ) Other long-term liabilities 285 — Other payable and accrued liabilities 2,113 541 Customers deposits 1,078 1,720 Income tax payable   (2,562)   (179 )   Net cash used in operating activities   (23,049)   (50,220 )   Cash flow from investing activities:   Purchase of property, equipment and leasehold improvements (440) (319 ) Increase in restricted cash — (2,664 ) Decrease in security deposits   9,000   —   Net cash provided by (used in) investing activities   8,560   (2,983 )    

AUTOCHINA INTERNATIONAL LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) – Continued

(in thousands)

  Three months ended March 31,   2011     2010 Cash flow from financing activities:   Proceeds from borrowings 73,198 50,982 Repayments of borrowings (35,388) (8,788 ) Proceeds from affiliates 61,570 — Repayment to affiliates (71,414) (9,479 ) Proceeds from accounts payable, related parties 80,857 2,281 Repayment to accounts payable, related parties (39,258) — Issue of shares on exercise of warrants — 10,296 Issue of shares for cash, net of offering costs of $3,680   —   66,320   Net cash provided by financing activities   69,565   111,612   Net cash provided by operating, financing and investing activities   55,076   58,409   Effect of foreign currency translation on cash   81   (7 )   Net increase in cash and cash equivalents 55,157 58,402   Cash and cash equivalents, beginning of the period   30,931   36,768   Cash and cash equivalents, end of the period   86,088   95,170   Supplemental disclosure of cash flow information: Interest paid $ 2,453 $ 3,665 Income taxes paid $ 3,639 $ 3,380  

A reconciliation of Adjusted EBITDA to net income is provided below:

  Three months ended March 31, 2011   2010 (Table in 000s) Net income $ 9,998 $ 6,246 Interest expenses 3,966 3,258 Interest income (23) (413) Income tax provision 2,999 2,442 Stock-based compensation 967 735 Depreciation and amortization 306 215 Adjusted EBITDA $ 18,213 $ 12,483  

USE OF NON-GAAP MEASURES

AutoChina defines Adjusted EBITDA as net income before interest expense, income taxes, depreciation and amortization, as well as certain other adjustments, including stock-based compensation and accretion of stock repurchase obligations. Adjusted EBITDA excludes certain financial information that would be included in net income (loss), the most directly comparable GAAP financial measure. Users of this financial information should consider the type of material events and transactions that are excluded from Adjusted EBITDA, and the material limitations of Adjusted EBITDA, such as: Adjusted EBITDA does not include net interest expense, but because AutoChina has borrowed money to finance its operations, interest expense is a necessary and ongoing part of its costs and has assisted AutoChina in generating revenue; Adjusted EBITDA does not include taxes, although payment of taxes is a necessary and ongoing part of AutoChina’s operations; and Adjusted EBITDA does not include depreciation and amortization expense, but because AutoChina uses capital assets to generate revenue, depreciation and amortization expense is a necessary element of its cost structure. Therefore, Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, as determined in accordance with GAAP, since it omits the impact of these expenses incurred by AutoChina.

AutoChina believes that the presentation of this non-GAAP financial measure is warranted and useful to its shareholders because it provides an additional analytical tool for understanding the Company’s financial performance by excluding certain items that may obscure trends in the core operating performance of the Company’s business. Using Adjusted EBITDA also facilitates management's internal comparisons to AutoChina's historical performance and liquidity. AutoChina computes Adjusted EBITDA using the same consistent method from quarter to quarter. The accompanying table has more details on the reconciliations between GAAP financial measures that are most directly comparable to Non-GAAP financial measures.