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ARCI > SEC Filings for ARCI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for APPLIANCE RECYCLING CENTERS OF AMERICA INC /MN

Form 10-Q for APPLIANCE RECYCLING CENTERS OF AMERICA INC /MN


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking and Cautionary Statements

This quarterly report contains statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Act of 1934, as amended. Any statements contained in this quarterly report that are not purely historical or relate to our future operations, performance and results, and anticipated liquidity are forward looking. These forward-looking statements are based on information available to us on the date of this quarterly report, but are subject to risks and uncertainties, including, but not limited to, those discussed herein. Our actual results could differ materially from those discussed in this quarterly report.

The forward-looking statements contained in this quarterly report, and other written and oral forward-looking statements made by us from time to time, are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Any forward-looking information regarding our operations will be affected primarily by the speed at which individual retail stores reach profitability, the volume of appliance sales, the strength of energy conservation recycling programs and general economic conditions affecting consumer demand for appliances. Any forward-looking information will also be affected by our continued ability to purchase product from our suppliers at acceptable prices, the ability of individual retail stores to meet planned revenue levels, the number of retail stores, costs and expenses being realized at higher than expected levels, our ability to secure an adequate supply of special-buy appliances for resale, the ability to secure appliance recycling and replacement contracts with sponsors of energy efficiency programs, the ability of customers to supply units under their recycling contracts with us, the performance of our consolidated variable interest entity and the continued availability of our current line of credit. Other factors that might cause such a difference include, but are not limited to, those discussed in Item 1A "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2011.

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our operations and financial condition. This discussion should be read with the consolidated financial statements appearing in Item 1.

Overview

We operate two reportable segments: retail and recycling. Our retail segment is comprised of income generated from the sale of appliances through ApplianceSmart® stores and includes a portion of our byproduct revenues from collected appliances. Our recycling segment includes all income generated from collecting, recycling and installing appliances for utilities and other customers and includes a significant portion of our byproduct revenue, which is primarily generated through the recycling of appliances. Our recycling segment also includes all income generated from our agreement with General Electric (GE) acting through its GE Appliances business component. GE sells its recyclable appliances in certain regions of the United States to us and we collect, process and recycle the appliances. These appliances include units manufactured by GE as well as by other manufacturers. The agreement requires that we will only recycle, and will not sell for re-use or resale, the recyclable appliances purchased from GE. We have established regional processing centers in Philadelphia and Louisville to support our agreement with GE. The regional processing center in Philadelphia is operated by ARCA Advanced Processing, LLC (AAP) through a joint venture agreement between ARCA and 4301 Operations, LLC (4301).

Our business components are uniquely positioned in the industry to work together to provide a full array of appliance-related services. ApplianceSmart operates twenty company-owned stores and sells new appliances directly to consumers and provides affordable ENERGY STAR® options for energy efficiency appliance replacement programs. Our twelve regional centers process appliances at end of life to remove environmentally damaging substances and produce material byproducts for recycling for over 200 utilities in the U.S. and Canada. AAP employs advanced technology to refine traditional appliance recycling techniques to achieve optimal revenue-generating and environmental benefits. We are also the exclusive North American distributor for UNTHA Recycling Technology (URT), one of the world's leading manufacturers of technologically advanced refrigerator recycling systems and recycling facilities for electrical household appliances and electronic scrap.

We believe the GE contract and AAP model is the future of appliance recycling and expect to open similar centers throughout the United States. We cannot predict when these centers may open or if the appropriate volumes can be obtained to support the AAP model at future locations.

Our retail segment is similar to many other retailers in that it is seasonal in nature. Historically, the fourth quarter is our weakest quarter in terms of both revenues and earnings. We believe this is primarily because the fourth quarter includes several holidays during which consumers tend to focus less on purchasing major household appliances.


Revenues and earnings in our recycling segment are impacted by seasonal variances, with the both the second and third quarters generally having higher levels of revenues and earnings. During the third quarter of 2012, we experienced an unanticipated decline in energy efficiency program volumes throughout most of our contracts as compared to previous third quarters. We believe this is due to economic uncertainty and tighter budgets at electric utilities. This seasonality is due primarily to our utility customers supporting more marketing and advertising during the spring and summer months. Our customers tend to promote the recycling programs more aggressively during the warmer months because they believe more people want to clean up their garages and basements during that time of the year. However, the addition of the GE agreement and some customers shifting to marketing their appliance recycling programs year-round has helped to mitigate some seasonality.

We monitor specific economic factors such as retail trends, consumer confidence, manufacturing by the major appliance companies, sales of existing homes and mortgage interest rates as key indicators of industry demand, particularly in our retail segment. Competition in the home appliance industry is intense in the four retail markets we serve. This includes competition not only from independent retailers, but also from such major retailers as Sears, Best Buy, The Home Depot and Lowe's. We also closely monitor the metals and various other scrap markets because of the type of components recovered in our recycling process. This includes monitoring the American Metal Market and the regions throughout the U.S. where we have our recycling centers.

Reporting Period. Operating results for the three and nine months ended September 29, 2012 and October 1, 2011 are presented using 13- and 39-week periods, respectively. The results of operations for any interim period are not necessarily indicative of the results for the year.

Results of Operations

The following table sets forth our consolidated financial data as a percentage
of total revenues for the three and nine months ended September 29, 2012 and
October 1, 2011:

                                              Three Months Ended                          Nine Months Ended
                                    September 29, 2012      October 1, 2011     September 29, 2012     October 1, 2011
Revenues:
Retail                                      59.7  %                 52.2 %              63.8  %                57.1 %
Recycling                                   24.2                    31.7                21.0                   27.1
Byproduct                                   16.1                    16.1                15.2                   15.8
Total revenues                             100.0                   100.0               100.0                  100.0
Cost of revenues                            76.8                    71.9                75.0                   70.9
Gross profit                                23.2                    28.1                25.0                   29.1
Selling, general and
administrative expenses                     25.7                    20.0                25.9                   22.3
Operating income (loss)                     (2.5 )                   8.1                (0.9 )                  6.8
Other expense:
Interest expense, net                       (1.0 )                  (0.8 )              (0.9 )                 (0.9 )
Other expense, net                             -                     0.2                   -                      -
Income (loss) before income
taxes and noncontrolling
interest                                    (3.5 )                   7.5                (1.8 )                  5.9
Provision for income taxes                   0.4                     2.8                 0.1                    1.3
Net income (loss)                           (3.9 )                   4.7                (1.9 )                  4.6
Net income attributable to
noncontrolling interest                      0.3                     0.1                   -                   (0.1 )
Net income (loss) attributable
to controlling interest                     (3.6 )%                  4.8 %              (1.9 )%                 4.5 %


For the Three Months Ended September 29, 2012 and October 1, 2011

The following table sets forth the key results of operations by segment for the
three months ended September 29, 2012 and October 1, 2011 (dollars in millions):

                                             Three Months Ended
                                                        October 1,       %
                                 September 29, 2012        2011       Change
Revenues:
Retail                          $           17.6       $     19.2       (8 )%
Recycling                                   11.4             16.7      (32 )%
Total revenues                  $           29.0       $     35.9      (19 )%

Operating income (loss):
Retail                          $           (0.9 )     $      0.2     (550 )%
Recycling                                    0.2              2.9      (93 )%
Unallocated corporate costs                    -             (0.2 )   (100 )%
Total operating income (loss)   $           (0.7 )     $      2.9     (124 )%

Our total revenues of $29.0 million for the third quarter of 2012 decreased $6.9 million or 19% from $35.9 million in the third quarter of 2011. Retail segment revenues decreased $1.6 million or 8% to $17.6 million compared to $19.2 million in the third quarter of 2011. The decrease was primarily related to a decline in same store revenues and partially offset by revenues generated by two new stores that were not operating in the third quarter of 2011. Recycling segment revenues decreased $5.3 million or 32% to $11.4 million compared to $16.7 million in the third quarter of 2011. The decrease in recycling segment revenues is attributed primarily to 32% decline in our energy efficiency program volumes, which had an impact on fees charged and byproduct materials sold. Also the third quarter of 2011 benefited from replacing and recycling over 3,000 additional refrigerators through a replacement contract in California that was not repeated this year.

Our total operating loss of $0.7 million for the third quarter of 2012 decreased $3.6 million compared to total operating income of $2.9 million in the third quarter of 2011. The decline is primarily the result of a downturn in energy efficiency program volumes along with lower sales and profit margins at ApplianceSmart stores.

Revenues. Revenues for the three months ended September 29, 2012 and October 1, 2011 were as follows (dollars in millions):

                             Three Months Ended
             September 29, 2012     October 1, 2011     % Change
Retail      $              17.3    $           18.7       (7 )%
Recycling                   7.0                11.4      (39 )%
Byproduct                   4.7                 5.8      (19 )%
            $              29.0    $           35.9      (19 )%

Retail Revenues. Our retail revenues of $17.3 million for the third quarter of 2012 decreased $1.4 million or 7% from $18.7 million in the third quarter of 2011. The decrease in retail revenues was due primarily to a 14% decrease in same store revenues and partially offset by revenues generated from our two new stores that were not operating during the third quarter of 2011. In October 2012, we closed an under performing store in our Georgia market. We are evaluating other under performing stores with outcomes ranging from expense containment to store closure.

Recycling Revenues. Our recycling revenues of $7.0 million for the third quarter of 2012 decreased $4.4 million or 39% from $11.4 million in the third quarter of 2011. Recycling revenues are comprised of two components:
(1) appliance recycling revenues generated by collecting and recycling appliances for utilities and other sponsors of energy efficiency programs and
(2) replacement program revenues generated by recycling and replacing old appliances with new energy efficient models for programs sponsored by utility companies. Appliance recycling revenues decreased 26% to $4.1 million in the third quarter of 2012 compared to $5.6 million in the third quarter of 2011, due primarily to lower volumes. The number of units driving our appliance recycling revenues was down approximately 28% in the third quarter of 2012 compared to the same quarter of the prior year. Replacement program


revenues decreased 50% to $2.9 million in the third quarter of 2012 compared to $5.8 million in the third quarter of 2011. The replacement program units were down approximately 57% or 5,800 units in the third quarter of 2012 compared to the same quarter of the prior year. The third quarter of 2011 benefited from replacing and recycling over 3,000 additional refrigerators representing approximately $1.5 million in revenues that was not repeated in the third quarter of 2012.

Byproduct Revenues. Our byproduct revenues of $4.7 million for the third quarter of 2012 decreased $1.1 million or 19% from $5.8 million in the third quarter of 2011. The decrease in byproduct revenues was primarily the result of lower volumes generated from energy efficiency and replacement programs and to a lesser extent a decline in scrap metal prices. According to the publication American Metal Market, average third quarter scrap metal prices fell 15% from the second quarter of 2012 and 21% from the third quarter of 2011. During the third quarter of 2012, we did not recognize any carbon offset revenues compared with $0.2 million in the third quarter of 2011. We expect to recognize $0.4 million in carbon offset revenues in the future pending the transfer and verification of the carbon offsets in the California system. We continue to reclaim and store refrigerants and expect to generate carbon offset revenues in the future although the frequency of these transactions will vary based on volume levels and market conditions. Byproduct revenues also include all of the revenues generated by AAP. Revenues from AAP decreased $0.1 million to $2.9 million in the third quarter of 2012 compared to $3.0 million in the third quarter of 2011. The decrease was primarily the result of lower scrap metal prices cited above.

Gross Profit. Our gross profit of $6.7 million in the third quarter of 2012 decreased $3.4 million or 33% compared to $10.1 million in the third quarter of 2011. Gross profit as a percentage of total revenues decreased to 23% for the third quarter of 2012 compared to 28% in the third quarter of 2011. The decline in overall gross profit percentage was due primarily to lower recycling volumes and to a lesser extent lower retail profit margins. Gross profit percentage for the recycling segment decreased to 20% for the third quarter of 2012 compared to 30% for the third quarter of 2011, primarily related to lower volumes from our energy efficiency and replacement programs and price compression within certain contracts. The lower volumes and price compression resulted in higher transportation and processing costs per unit along with lower revenues covering the fixed costs of the regional processing centers. Gross profit percentage for the retail segment was 25% in the third quarter of 2012 compared to 26% in the third quarter of 2011. The decrease was due primarily to a shift in our product
mix. We are selling a higher level of close-out and factory-overrun appliances which typically have a smaller profit margin than special-buy appliances.

Recycling gross profit percentages are typically higher than retail gross profit percentages. However, the decline in energy efficiency program volumes during the third quarter caused our recycling gross profit percentage to fall below our retail gross profit percentage. Our gross profit as a percentage of total revenues for future periods can be affected favorably or unfavorably by numerous factors, including:

1. The mix of retail products we sell.
2. The prices at which we purchase product from the major manufacturers who supply product to us.
3. The volume of appliances we receive through our recycling contracts.
4. The volume and price of byproduct materials.
5. The volume and price of carbon offset sales created by the destruction of ozone-depleting refrigerants.

Selling, General and Administrative Expenses. Our selling, general and administrative ("SG&A") expenses for the third quarter of 2012 increased $0.3 million to $7.5 million compared to $7.2 million for the same period of the prior year. Our SG&A expenses as a percentage of total revenues increased to 26% in the third quarter of 2012 compared to 20% in the third quarter of 2011. Selling expenses increased $0.3 million to $4.9 million or 17% of total revenues in the third quarter of 2012 compared to $4.6 million or 13% of total revenues for the third quarter of 2011. The increase in selling expenses was due primarily to increased retail advertising and expenses related to two new stores not open in the third quarter of 2011. General and administrative expenses of $2.6 million for the third quarter of 2012 were flat compared to the third quarter of the prior year.

Provision for Income Taxes. We recorded a $0.1 million provision for income taxes in the third quarter of 2012 compared to $1.0 million in the third quarter of 2011. The provision recorded for the three months ended September 29, 2012 is related primarily to the expected tax impact of repatriating cash from Canada to the U.S. We are expecting to realize a benefit from carrying back the taxable loss expected to be generated in 2012 and therefore, no additional valuation allowance was recorded for the deferred tax assets as September 29, 2012.

Noncontrolling Interest. Noncontrolling interest represents 4301's share of AAP's net income. Under the AAP joint venture agreement, ARCA and 4301 each have a 50% interest in AAP. AAP reported a net loss of $153,000 for the third quarter of 2012, of which $77,000 represented the loss attributable to noncontrolling interest. AAP reported a net loss of $100,000 for the third quarter of 2011, of which $50,000 represented the loss attributable to noncontrolling interest.


For the nine months ended September 29, 2012 and October 1, 2011

The following table sets forth the key results of operations by segment for the nine months ended September 29, 2012 and October 1, 2011 (dollars in millions):

                                              Nine Months Ended
                                                        October 1,       %
                                 September 29, 2012        2011       Change
Revenues:
Retail                          $           56.9       $     57.6       (1 )%
Recycling                                   30.8             41.1      (25 )%
Total revenues                  $           87.7       $     98.7      (11 )%
Operating income (loss):
Retail                          $           (1.4 )     $      0.5     (380 )%
Recycling                                    0.6              6.5      (91 )%
Unallocated corporate costs                    -             (0.3 )   (100 )%
Total operating income (loss)   $           (0.8 )     $      6.7     (112 )%

Our total revenues of $87.7 million for the nine months ended September 29, 2012 decreased $11.0 million or 11% compared to $98.7 million for the nine months ended October 1, 2011. Retail segment revenues accounted for 65% of total revenues for the nine months ended September 29, 2012 compared to 58% in same period of 2011. Recycling segment revenues and retail segment revenues each include a portion of byproduct revenues. Retail segment revenues of $56.9 million for the nine months ended September 29, 2012 decreased $0.7 million or 1% compared to $57.6 million in the same period of 2011. The decrease was primarily related to a 14% decline in same store revenues and partially offset by revenues generated from our two new stores that were not operating in the nine months ended October 1, 2011. Recycling segment revenues of $30.8 million for the nine months ended September 29, 2012 decreased $10.3 million or 25% compared to $41.1 million in the same period of 2011. The decrease in recycling segment revenues is attributed primarily to 28% decline in our energy efficiency program and replacement program volumes, which had an impact on fees charged and byproduct materials sold. Also the nine months ended October 1, 2011 benefited from replacing and recycling over 6,000 additional refrigerators through a replacement contract in California that was not repeated this year.

Revenues. Revenues for the nine months ended September 29, 2012 and October 1, 2011 were as follows (dollars in millions):

                            Nine Months Ended
                                     October 1,
             September 29, 2012         2011        % Change
Retail      $               56.0    $      56.4       (1 )%
Recycling                   18.4           26.7      (31 )%
Byproduct                   13.3           15.6      (15 )%
            $               87.7    $      98.7      (11 )%

Retail Revenues. Our retail revenues of $56.0 million for the nine months ended September 29, 2012 decreased $0.4 million or 1% compared to $56.4 million for the nine months ended October 1, 2011. Comparable store revenues from ApplianceSmart stores operating during the nine months ended September 29, 2012 and October 1, 2011 declined 5%. The decline in comparable store revenues was partially offset by revenues generated from new two stores not operating during the same nine month period last year.

Recycling Revenues. Our recycling revenues of $18.4 million for the nine months ended September 29, 2012 decreased $8.3 million or 31% compared to $26.7 million in the same period of 2011. Appliance recycling revenues decreased 25% to $10.6 million for the nine months ended September 29, 2012 compared to $14.2 million in the same period of 2011, due primarily to a 26% decline in energy efficiency program volumes. Replacement program revenues decreased 37% to $7.8 million for the nine months ended September 29, 2012 compared to $12.5 million in the same period of 2011. The replacement program units were down 40% or 9,000 units for the nine months ended September 29, 2012 compared to the same period of the prior year. The nine month period ending October 1, 2011 benefited from replacing and recycling over 6,000 additional refrigerators representing approximately $3.0 million in revenues that was not repeated in the same period of 2012.


Byproduct Revenues. Our byproduct revenues of $13.3 million for the nine months ended September 29, 2012 decreased $2.3 million or 15% from $15.6 million in the same period of 2011. The decrease in byproduct revenues was primarily the result lower volumes generated from energy efficiency and replacement programs and to a lesser extent a decline in scrap metal prices. During the nine months ended September 29, 2012, we recognized $0.1 million in carbon offset revenues compared to $0.7 million in the same period of 2011. We continue to reclaim and store refrigerants and expect to generate carbon offset revenues in the future although the frequency of these transactions will vary based on volume levels and market conditions. Byproduct revenues also include all of the revenues generated by AAP. Revenues from AAP increased $0.1 million to $8.4 million for the nine months ended September 29, 2012 compared to $8.3 million in the same period of 2011. The increase was primarily the result of recycling additional units under the GE agreement and partially offset by lower scrap metal prices.

Gross Profit. Our gross profit of $21.9 million for the nine months ended September 29, 2012 decreased $6.8 million or 24% compared to $28.7 million for the nine months ended October 1, 2011. Gross profit as a percentage of total revenues decreased to 25% for the nine months ended September 29, 2012 compared to 29% in the same period of 2011. The gross profit percentage for the recycling segment decreased to 23% for the nine months ended September 29, 2012 compared to 31% in the same period 2011. The decrease is primarily related to lower volumes from our energy efficiency and replacement programs and lower carbon offset sales. The lower volumes resulted in higher transportation and processing costs per unit along with lower revenues covering the fixed costs of the regional processing centers. The gross profit percentage for the retail segment decreased to 26% for the nine months ended September 29, 2012 compared to 28% in the same period of 2011. The decrease was due primarily to a shift in our product mix and cost increases from manufacturers. We are selling a higher level of close-out and factory-overrun appliances which typically have a smaller profit margin than special-buy appliances.

Selling, General and Administrative Expenses. Our selling, general and administrative ("SG&A") expenses of $22.7 million for the nine months ended September 29, 2012 increased $0.7 million or 3% compared to $22.0 million for the nine months ended October 1, 2011. Our SG&A expenses as a percentage of total revenues increased to 26% for the nine months ended September 29, 2012 compared to 22% in the same period of 2011. Selling expenses of $14.6 million for the nine months ended September 29, 2012 increased 4% or $0.6 million compared to $14.0 million in the same period of 2011. The increase in selling expenses was due primarily to $0.8 million of additional expenses to operate two new stores and partially offset by a $0.2 million reduction in advertising expenses. General and administrative expenses of $8.1 million for the nine months ended September 29, 2012 increased 1% or $0.1 million compared to $8.0 million in the same period of 2011. General and administrative expenses for the nine months ended September 29, 2012 included over $250,000 in expenses related to opening a new recycling center in Louisville for GE business and additional call center expenses related to implementing new programs and technology.

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