Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ARCI > SEC Filings for ARCI > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for APPLIANCE RECYCLING CENTERS OF AMERICA INC /MN | Request a Trial to NEW EDGAR Online Pro

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


9-May-2013

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 individual retail stores 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 29, 2012.

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 ApplianceSmartŪ stores and includes a small 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 eighteen company-owned stores, sells new appliances directly to consumers and provides affordable ENERGY STARŪ options for energy efficiency appliance replacement programs. Our eleven regional centers process appliances at end of life to remove environmentally damaging substances and produce material byproducts for recycling for over 150 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.


Table of Contents

Revenues and earnings in our recycling segment are impacted by seasonal variances, with both the second and third quarters generally having higher levels of revenues and earnings. 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. Our recycling segment typically operates two types of programs:
1. Fees charged for collecting and recycling appliances for utilities and other sponsors of energy efficiency programs.

2. Fees charged for recycling and replacing old appliances with new ENERGY STARŪ appliances for energy efficiency programs sponsored by electric and gas utilities.

Over the last twelve months recycling-only programs continue to report declining revenues and volumes, while we've experienced strong revenues and volumes from our replacement programs. We believe factors impacting this shift include a declining number of pre-1993 refrigerators eligible for recycling programs and a greater emphasis by utilities on promoting ENERGY STARŪ appliances.

We derive revenues from the sale of carbon offsets created by the destruction of ozone-depleting CFCs generated at our ARCA and AAP recycling centers. Through the three months ended March 30, 2013, we did not recognize any carbon offset revenues. In 2012, we sold carbon offsets on the voluntary market and recognized $0.1 million in revenues compared with $1.2 million in 2011. The decline in 2012 and 2013 is due to uncertainty regarding California's nascent carbon market; we elected to delay the destruction and sale of the majority of our accumulated CFCs until this market stabilized. In January 2013, the California Superior Court rejected a major challenge to California's cap-and-trade program for reducing greenhouse gases; other legal challenges are still pending. In April 2013, California's Air Resources Board approved linking the state's program with a similar program in Quebec beginning in 2014, which we consider an important step toward a more efficient, liquid market. We cannot predict the impact of any legal cases nor future market expansion, but we believe there is growing momentum in the carbon offset market. In the future, we believe it will become easier and more profitable to monetize our existing and future inventory of carbon offsets created by the destruction of CFCs. We expect to create carbon offsets throughout 2013 and derive revenues through California's market in the second half of 2013.

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 months ended March 30, 2013 and March 31, 2012 are presented using 13-week periods, respectively. The results of operations for any interim period are not necessarily indicative of the results for the year.


Table of Contents

Results of Operations

The following table sets forth our consolidated financial data as a percentage
of total revenues for the three months ended March 30, 2013 and March 31, 2012:

                                                               Three Months Ended
                                                          March 30,         March 31,
                                                             2013              2012
Revenues:
Retail                                                         59.3 %            67.1  %
Recycling                                                      27.3              17.9
Byproduct                                                      13.4              15.0
Total revenues                                                100.0             100.0
Cost of revenues                                               74.0              73.0
Gross profit                                                   26.0              27.0
Selling, general and administrative expenses                   24.6              26.7
Operating income                                                1.4               0.3
Other income (expense):
Interest expense, net                                          (0.9 )            (0.9 )
Other income (expense), net                                       -               0.1
Income (loss) before income taxes and noncontrolling
interest                                                        0.5              (0.5 )
Benefit of income taxes                                           -              (0.3 )
Net income (loss)                                               0.5              (0.2 )
Net loss attributable to noncontrolling interest                0.2                 -

Net income (loss) attributable to controlling interest 0.7 % (0.2 )%

For the Three Months Ended March 30, 2013 and March 31, 2012

The following table sets forth the key results of operations by segment for the
three months ended March 30, 2013 and March 31, 2012 (dollars in millions):

                                     Three Months Ended
                             March 30,     March 31,        %
                               2013          2012        Change
Revenues:
Retail                      $    18.3     $    20.1         (9 )%
Recycling                        12.1           9.3         29  %
Total revenues              $    30.4     $    29.4          3  %

Operating income (loss):
Retail                           (0.2 )         0.1       (278 )%
Recycling                         0.8          (0.0 )    2,240  %
Unallocated corporate costs      (0.2 )         0.0     (1,076 )%
Total operating income            0.4           0.1        406  %

Our total revenues of $30.4 million for the first quarter of 2013 increased $1.0 million or 3% from $29.4 million in the first quarter of 2012. The increase in revenues was attributed to our recycling segment. Replacement program revenues increased by $3.8 million compared with the prior year, which was partially offset by a decline in recycling-only revenues of $0.8 million and a 7% decline in ApplianceSmart same-store sales. Retail segment revenues accounted for 60% of total revenues in the first quarter of 2013 compared with 68% in the same period of 2012. Recycling segment revenues and retail segment revenues each include a portion of byproduct revenues. The recycling segment accounts for approximately 95% of the byproduct revenues. The increase


Table of Contents

in replacement program revenues impacted the overall mix of revenues between the retail and recycling segments for the first quarter of 2013 compared with same period of 2012.

Our total operating income of $0.4 million for the first quarter of 2013 increased $0.3 million compared with $0.1 million in the first quarter of 2012. The increase was related primarily to the increase in replacement revenues and improvement in our ApplianceSmart gross margin. These factors were partially offset by a decline in AAP's gross margin, including lower steel scrap prices, and higher transportation costs in our recycling segment.

Revenues. Revenues for the three months ended March 30, 2013 and March 31, 2012 were as follows (dollars in millions):

Three Months Ended

           March 30,      March 31,
              2013           2012       % Change
Retail    $      18.0    $      19.7      (9 )%
Recycling         8.3            5.3      58  %
Byproduct         4.1            4.4      (8 )%
          $      30.4    $      29.4       3  %

Retail Revenues. Our retail revenues of $18.0 million for the first quarter of 2013 decreased $1.7 million or 9% from $19.7 million in the first quarter of 2012. The decrease in retail revenues was due primarily to a 7% decrease in same-store sales along with the closure of two under performing stores in October and December of 2012. We believe the factors leading to the decline in same-store sales included a delay in the 2012 income tax refunds and negative impact of shifting the Easter holiday into the first quarter of 2013. We are developing strategies for other underperforming stores and stores with leases that expire in the current year with a range of outcomes from right-sizing the showroom space to closure. We expect to close one store in May as a result of not renewing the lease.

Recycling Revenues. Our recycling revenues of $8.3 million for the first quarter of 2013 increased $3.0 million or 58% from $5.3 million in the first quarter of 2012. 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 25% to $2.2 million in the first quarter of 2013 compared with $3.0 million in the first quarter of 2012, due primarily to lower volumes and price compression within certain contracts. The number of units driving our appliance recycling revenues declined 18% and the average revenue per unit declined by $7 compared with the same quarter last year. Replacement program revenues increased 169% to $6.1 million in the first quarter of 2013 compared with $2.3 million in the first quarter of 2012, due primarily to higher volumes and the mix of washer and refrigerator replacements. Replacement program units increased 119% and we experienced a higher mix of washer replacements compared with the same quarter last year. Washer replacements generate a higher revenue per unit compared with refrigerator replacements and as a result the average revenue per unit under our replacement programs increased by $96.

Byproduct Revenues. Our byproduct revenues of $4.1 million for the first quarter of 2013 decreased $0.3 million or 8% from $4.4 million in the first quarter of 2012. The decrease in byproduct revenues was primarily the result of a 4% decline in our overall recycling and replacement units and a decline in steel scrap prices generating revenues at AAP. Byproduct revenues include all of the revenues generated by AAP. AAP revenues of $2.6 million decreased $0.1 million compared with the first quarter of 2012, due primarily to a decline in average steel scrap prices of 14% per gross ton compared with the same period last year. During the first quarter of 2013, we did not recognize any carbon offset revenues. ARCA, combined with AAP, expects to recognize approximately $0.8 million in carbon offset revenues later in 2013 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.

Gross Profit. During the first quarter of 2013, we reclassified certain revenues, cost of revenues and sales, general and administrative expenses due to further industry analysis and conformed the 2012 presentation. The reclassification is related primarily to facilities costs and certain other costs not directly related to the production of recycled materials within the recycling segment. Our gross profit of $7.9 million in the first quarter of 2013 was flat compared with the first quarter of 2012. Gross profit as a percentage of total revenues decreased to 26% for the first quarter of 2013 compared with 27% in the first quarter of 2012. The decline in overall gross profit percentage was due primarily to lower byproduct revenues, including the decline in steel scrap prices generating AAP revenues described above. Gross profit percentage for the recycling segment decreased to 24% for the first quarter of 2013 compared with 27% for the first quarter of 2012. Gross profit percentage for the retail segment increased to 28% for the first


Table of Contents

quarter of 2013 compared with 27% for the first quarter of 2012. The increase for the retail segment was due primarily to a shift in product mix to higher margin producing out-of-carton appliances.

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 that 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 first quarter of 2013 decreased $0.4 million to $7.5 million compared with $7.9 million for the same period of the prior year. Our SG&A expenses as a percentage of total revenues decreased to 25% in the first quarter of 2013 compared with 27% in the first quarter of 2012. Selling expenses decreased $0.1 million to $4.6 million or 15% of total revenues in the first quarter of 2013 compared with $4.7 million or 16% of total revenues for the first quarter of 2012. The decrease in selling expenses was due primarily to closing the two ApplianceSmart stores mentioned previously. General and administrative expenses decreased $0.3 million to $2.9 million for the first quarter of 2013 compared with $3.2 million in the first quarter of the prior year. The decrease was due primarily to lower administrative expenses within our recycling segment. During the first quarter of 2013, we completed several restructuring activities including the elimination of 19 employees. The position eliminations will generate an annualized savings of approximately $0.8 million but were offset in the first quarter due to recognizing one-time related restructuring charges.

Interest expense, net: In connection with our amended Credit Agreement with PNC Bank, National Association, we project that the interest rate on our line of credit will increase by 300 basis points and 100 basis points on our term loan. We have the ability to reduce the interest rates if we meet certain interest rate reduction criteria starting January 31, 2014 in the amended Credit Agreement. See the "Liquidity and Capital Resources" section for more detail.

Provision for Income Taxes. We did not record a provision for (benefit of) income taxes in the first quarter of 2013. We estimate that we will be able to use available net operating losses (NOLs) to offset taxes related to our projected full-year taxable income. Due to uncertainties regarding the realization of deferred tax assets related to the 2013 utilization of NOLs, we are continuing to carry a full valuation allowance against the NOL deferred tax assets.

Noncontrolling Interest. Noncontrolling interest represents 4301's share of AAP's net loss. Under the AAP joint venture agreement, ARCA and 4301 each have a 50% interest in AAP. AAP reported a net loss of $110,000 for the first quarter of 2013, of which $55,000 represented the loss attributable to noncontrolling interest.

Liquidity and Capital Resources

Summary. Cash and cash equivalents as of March 30, 2013 were $3.9 million compared with $3.2 million as of December 29, 2012. Working capital, the excess of current assets over current liabilities, decreased to $7.1 million as of March 30, 2013 compared with $7.6 million as of December 29, 2012. The decline was primarily the result of an increase in accrued liabilities and the net impact of lower appliance inventory and a reduced line of credit balance.

The following table summarizes our cash flows for the three months ended March 30, 2013 and March 31, 2012 (in millions):

                                                                     Three Months Ended
                                                            March 30, 2013       March 31, 2012
Total cash and cash equivalents provided by (used in):
Operating activities                                       $          4.3       $          1.8
Investing activities                                                 (0.5 )               (0.4 )
Financing activities                                                 (3.0 )               (1.9 )
Effect of exchange rates on cash and cash equivalents                (0.1 )                0.1
Increase (decrease) in cash and cash equivalents           $          0.7       $         (0.4 )


Table of Contents

Operating Activities. Our net cash provided by operating activities was $4.3 million for the three months ended March 30, 2013 compared with $1.8 million for the three months ended March 31, 2012. The change in operating cash was primarily the result of generating cash by lowering our appliance inventory.

Investing Activities. Our net cash used in investing activities was $0.5 million for the three months ended March 30, 2013 compared with $0.4 million for the three months ended March 31, 2012. Net cash used in investing activities for the three months ended March 30, 2013 was related primarily to an increase in restricted cash as a result of a reserve required by our credit card processor. The net cash used in investing activities for the three months ended March 31, 2012 was due entirely to the purchase of property and equipment.

Financing Activities. Our net cash used in financing activities was $3.0 million for the three months ended March 30, 2013 compared with $1.9 million for the three months ended March 31, 2012. Net cash used in financing activities for both the three month periods ended March 31, 2013 and March 31, 2012 was related primarily to net payments under our line of credit and the repayment of long-term debt obligations.

Sources of Liquidity. Our principal sources of liquidity are cash from operations and borrowings under our revolving line of credit. Our principal liquidity requirements consist of long-term debt obligations, capital expenditures and working capital. Our total capital requirements for the next twelve months will depend upon, among other things, the number and size of ApplianceSmart stores operating during the period, the recycling volumes generated from recycling contracts during the period and our needs related to AAP. Currently, we have 18 ApplianceSmart stores and 11 recycling centers, including AAP, in operation.

We believe, based on the anticipated sales per retail store, the anticipated revenues from our recycling contracts and our anticipated gross profit, that our cash balance, anticipated funds generated from operations and our revolving line of credit will be sufficient to finance our operations, long-term debt obligations and capital expenditures through at least the next twelve months. We may also need additional capital to finance our operations if our revenues are lower than anticipated, our expenses are higher than anticipated or we pursue new opportunities. Sources of additional financing, if needed in the future, may include further debt financing or the sale of equity (Common or Preferred Stock) or other financing opportunities. There can be no assurance that such additional sources of financing will be available on terms satisfactory to us or permitted by our Credit Agreement.

Outstanding Indebtedness. On January 24, 2011, we entered into a Revolving Credit, Term Loan and Security Agreement, as amended, ("Credit Agreement") with PNC Bank, National Association ("PNC") that provides us with a $15.0 million revolving line of credit. The Credit Agreement has a stated maturity date of January 24, 2016, if not renewed. The Credit Agreement is collateralized by a security interest in substantially all of our assets and PNC is also secured by an inventory repurchase agreement with Whirlpool Corporation for Whirlpool purchases only. We also issued a $750,000 letter of credit in favor of Whirlpool Corporation. The Credit Agreement requires starting with the fiscal quarter ending December 28, 2013 and continuing at the end of each quarter thereafter, that we meet a minimum fixed charge coverage ratio of 1.10 to 1.00, measured on a trailing twelve-month basis. The Credit Agreement limits investments we can purchase, the amount of other debt and leases we can incur, the amount of loans we can issue to our affiliates and the amount we can spend on fixed assets along with prohibiting the payment of dividends. The interest rate on the revolving line of credit is PNC Base Rate plus 2.75%. If certain interest rate reduction conditions are met starting January 31, 2014, the rate will change to PNC Base Rate plus 1.75%, or 1-, 2- or 3-month PNC LIBOR Rate plus 2.75%. The PNC Base Rate shall mean, for any day, a fluctuating per annum rate of interest equal to the highest of (i) the interest rate per annum announced from time to time by PNC at its prime rate, (ii) the Federal Funds Open Rate plus 0.5%, and (iii) the one-month LIBOR rate plus 100 basis points (1%). As of March 30, 2013, the outstanding balance under the Credit Agreement was $7.8 million with a weighted average interest rate of 6.00%, which included . . .

  Add ARCI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ARCI - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.