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-K on 14-Mar-2014All Recent SEC Filings

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

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


14-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data." Certain information contained in the discussion and analysis set forth below and elsewhere in this annual report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risk and uncertainties. In evaluating such statements, you should specifically consider the various factors identified in this annual report that could cause results to differ materially from those expressed in such forward-looking statements, including matters set forth in "Item 1A. Risk Factors."

Overview

We operate two reportable segments: recycling and retail. 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


Table of Contents

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 ("RPCs") in Philadelphia and Louisville to support our agreement with GE. The RPC in Philadelphia is operated by ARCA Advanced Processing, LLC ("AAP") through a joint venture agreement between ARCA and 4301 Operations, LLC ("4301"). Our retail segment is comprised of income generated from the sale of appliances through ApplianceSmart® stores and includes a small portion of our byproduct revenues from collected appliances.

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 STAR® options for energy efficiency appliance replacement programs. Our eleven RPCs process appliances at end of life to remove environmentally damaging substances and produce byproducts for sale in North America. 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 are 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.

Revenues and earnings in our recycling segment are impacted by seasonal variances, with 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 three 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 STAR® appliances for energy efficiency programs sponsored by utilities.

3. Income generated through the processing of recyclable appliances purchased at our RPCs by selling the raw material separated during the recycling process.

Over the last twelve months, recycling-only programs continue to report declining revenues and volumes, while we have experienced growing revenues and volumes from our appliance 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 STAR® appliances.

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.

We derive revenues from the sale of carbon offsets created by the destruction of ozone-depleting CFCs captured at our ARCA and AAP regional processing centers. We expect to create carbon offsets and derive revenues in the future through California's market, but cannot predict the amount or frequency of carbon offset sales. Carbon offset sales are dependent on market conditions, including demand and acceptable market prices.

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. We report on a 52- or 53-week fiscal year. Our 2013 fiscal year ("2013") ended on December 28, 2013, and included 52 weeks. Our 2012 fiscal year ("2012") ended on December 29, 2012, and included 52 weeks.


Table of Contents

Results of Operations

The following table sets forth our consolidated financial data as a percentage of total revenues for fiscal years 2013 and 2012:

                                                               2013       2012
Revenues:
Retail                                                         53.1 %    62.4  %
Recycling                                                      32.7      22.1
Byproduct                                                      14.2      15.5
Total revenues                                                100.0     100.0
Cost of revenues                                               73.8      74.3
Gross profit                                                   26.2      25.7
Selling, general and administrative expenses                   22.7      27.5
Impairment charge                                                 -       0.9
Operating income (loss)                                         3.5      (2.7 )
Other income (expense):
Interest expense, net                                          (0.9 )    (1.0 )
Other income (expense), net                                    (0.1 )       -
Income (loss) before income taxes and noncontrolling interest   2.5      (3.7 )
Provision for (benefit of) income taxes                        (0.3 )     0.1
Net income (loss)                                               2.8      (3.8 )
Net loss (income) attributable to noncontrolling interest      (0.2 )     0.5
Net income (loss) attributable to controlling interest          2.6 %    (3.3 )%

The following table sets forth the key results of operations by segment for fiscal years 2013 and 2012 (dollars in millions):

                                2013        2012       % Change
Revenues:
Retail                        $  69.7     $  72.3        (3.7 )%
Recycling                        59.4        41.9        41.9  %
Total revenues                $ 129.1     $ 114.2        13.0  %
Operating income (loss):
Retail                        $  (1.1 )   $  (2.7 )      59.8  %
Recycling                         6.3        (0.2 )   2,701.7  %
Unallocated corporate costs      (0.6 )      (0.3 )     (86.6 )%
Total operating income (loss) $   4.6     $  (3.2 )     243.8  %

Our total revenues of $129.1 million for 2013 increased $14.9 million, or 13%, from $114.2 million in 2012. The change in revenues was attributed primarily to the following factors:

Recycling Segment.
• Appliance replacement program revenues increased by $18.3 million compared with the prior year.

• Recycling-only program revenues declined $1.4 million compared with the prior year.

• Byproduct revenues included $0.6 million in carbon offset sales compared with $0.2 million in the prior year.

• AAP revenues, excluding carbon offsets increased by $0.2 million compared with the prior year.

Retail Segment.
• Same-store sales declined by $0.2 million compared with the prior year.

• The full-year impact of one new store only operating for the last five months of 2012 was $1.6 million.

• The impact of closing three stores that operated during 2012 but not 2013 was $4.0 million. We closed two stores during the fourth quarter of 2012 and one store during the second quarter of 2013.


Table of Contents

Recycling segment revenues accounted for 46% of total revenues in 2013 compared with 37% in 2012. Recycling segment revenues and retail segment revenues each include a portion of byproduct revenues. In both 2013 and 2012, the recycling segment accounted for approximately 94% of byproduct revenues. The increase in replacement program revenues impacted the overall mix of revenues between the recycling and retail segments in 2013 compared with 2012. Future revenues and related earnings from appliance replacement programs are uncertain and may fluctuate significantly from year to year. Factors impacting future appliance replacement program revenues and earnings include the type and scope of energy efficiency programs approved by regulatory agencies, competitive bidding, contract changes, non-renewals and early cancellations.

Our operating income of $4.6 million for 2013 increased $7.8 million, or 244%, compared with an operating loss of $(3.2) million in 2012. The change in operating income (loss) was attributed to several factors, including:

Recycling Segment.
• The impact of higher appliance replacement volumes and better pricing for recyclable appliances by AAP resulted in a $4.1 million improvement in gross profit during 2013.

• A goodwill impairment charge of $1.1 million was recorded in 2012 and not in 2013.

• Operating expenses in 2013 declined by $0.9 million compared with 2012.

• Carbon offset revenues in 2013 increased by $0.4 million compared with 2012.

Retail Segment.
• Operating expenses declined by $1.5 million compared with 2012.

• Gross profit increased by $0.1 million compared with 2012.

Unallocated corporate costs increased by $0.3 million compared with 2012. In 2013, we modified the estimate used to allocate certain corporate costs, and as a result, approximately $0.6 million of corporate services were not allocated to the retail and recycling segments during fiscal year 2013. The impact of the change in estimate to the retail and recycling segments during 2013 was $0.4 million and $0.2 million, respectively.

Revenues. Revenues for the fiscal years of 2013 and 2012 were as follows (dollars in millions):

            2013       2012     % Change
Retail    $  68.6    $  71.2      (3.8 )%
Recycling    42.2       25.3      66.9  %
Byproduct    18.3       17.7       3.4  %
          $ 129.1    $ 114.2      13.0  %

Retail Revenues. Our retail revenues of $68.6 million for 2013 decreased $2.7 million, or 3.8%, from $71.2 million in 2012. The decrease in revenues was due primarily to the impact of closing three stores that were operating in 2012 and was partially offset by the impact of a new store that was not operating for the entire year of 2012. The store closures represented a $4.0 million revenue decline and new store sales represented a $1.6 million revenue increase in 2013 compared with 2012. Same-store appliance revenues from ApplianceSmart stores operating during the entire fiscal years of 2013 and 2012 declined 0.2% compared with 2012. Our same-store revenues include contract sales, which increased by $2.8 million and typically generate smaller profit margins. We continue to evaluate strategies for addressing our underperforming stores, from right-sizing showroom space to closure.

The table below illustrates our retail revenues by quarter for fiscal years 2013 and 2012 (dollars in millions):

           2013      2012     % Change
Quarter 1 $ 18.1    $ 19.7      (8.6 )%
Quarter 2   17.8      19.0      (6.1 )%
Quarter 3   17.0      17.3      (1.6 )%
Quarter 4   15.7      15.2       3.0  %
          $ 68.6    $ 71.2      (3.8 )%

Our stores carry a wide range of innovative and affordable appliances such as close-outs, factory overruns, discontinued models and other special-buy appliances, including out-of-carton merchandise. All of these appliances are new.


Table of Contents

We continue to purchase the majority of our appliances from Whirlpool, GE, Electrolux and Samsung. We have no minimum purchase requirements with any of these manufacturers. We believe purchases from these manufacturers will provide an adequate supply of high-quality appliances for our retail stores; however, there is a risk that one or more of these sources could be curtailed or lost.

Recycling Revenues. Our recycling revenues of $42.2 million for 2013 increased $16.9 million, or 66.9%, from $25.3 million in 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) appliance replacement revenues generated by recycling and replacing old appliances with new energy efficient models for programs sponsored by utility companies. Appliance recycling revenues decreased 10% to $12.2 million in 2013 compared with $13.6 million in 2012, due primarily to lower volumes and price compression within certain contracts. The number of units driving our appliance recycling revenues declined 5% and the average revenue per unit declined by $5 compared with 2012. Appliance replacement revenues increased 157% to $30.0 million in 2013 compared with $11.7 million in 2012, due primarily to higher volumes and the mix of appliance replacements. Future appliance recycling and appliance replacement revenues are uncertain and may fluctuate significantly from period to period. We aggressively pursue new appliance recycling and replacement contracts along with renewing our current contracts throughout North America but cannot predict if we will be successful in signing new contracts or renewing existing contracts.

The table below illustrates our recycling revenues by quarter for fiscal years 2013 and 2012 (dollars in millions):

           2013      2012     % Change
Quarter 1 $  8.3    $  5.3       57.6 %
Quarter 2   10.3       6.2       66.8 %
Quarter 3   11.8       7.0       68.3 %
Quarter 4   11.8       6.8       72.4 %
          $ 42.2    $ 25.3       66.9 %

Byproduct Revenues. Our byproduct revenues of $18.3 million for 2013 increased $0.6 million or 3.4% from $17.7 million in 2012. The increase in byproduct revenues was primarily the result of the following factors:

• Revenues related to carbon offset sales increased $0.4 million to $0.6 million in 2013 compared with 2012.

• Byproduct revenues include all revenues generated by AAP. AAP revenues, excluding $0.4 million in carbon offset sales mentioned above, increased $0.2 million in 2013 to $11.4 million compared with 2012. The increase was due primarily to an 8% increase in recyclable appliances that was partially offset by a 5% decline in average steel scrap prices per gross ton.

We cannot predict byproduct material prices and results can vary significantly from period to period. We expect to generate higher carbon offset revenues in 2014 than 2013, but cannot predict the amount or frequency of carbon offset sales. Carbon offset sales are dependent on market conditions, including demand and acceptable market prices.

The table below illustrates our byproduct revenues by quarter for fiscal years 2013 and 2012 (dollars in millions):

           2013      2012     % Change
Quarter 1 $  4.1    $  4.4      (8.1 )%
Quarter 2    4.2       4.4      (5.0 )%
Quarter 3    4.7       4.4       6.3  %
Quarter 4    5.3       4.5      20.1  %
          $ 18.3    $ 17.7       3.4  %

Total 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 facility costs and certain other costs not directly related to the production of recycled materials within the recycling segment. Our gross profit of $33.9 million in 2013 increased $4.6 million, or 15.5%, compared with $29.3 million in 2012. Gross profit as a percentage of total revenues increased to 26.2% in 2013 compared with 25.7% in 2012.


Table of Contents

Our gross profit 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 appliance manufacturers who supply product to us.
3.The prices at which we can purchase recyclable appliances for processing at our RPCs.
4. The volume of appliances we receive through our recycling contracts.

5. The volume and price of byproduct materials.

6. The volume and price of carbon offset sales created by the destruction of ozone-depleting refrigerants.

Retail Segment Gross Profit. Gross profit increased to $18.6 million in 2013 compared with $18.5 million in 2012. Gross profit as a percentage of related revenues increased to 26.7% in 2013 compared with 25.5% in 2012. The year-over-year increase was due primarily to a shift in sales mix and reversing a noncash inventory charge. In 2013, our product sales consisted of 67% new (in-the-box) product compared with 71% new (in-the-box) product in 2012. New (in-the-box) product typically has lower profit margins than special buy (out-of-the-box) product. In 2012, we recorded a $0.6 million noncash inventory charge related to aged inventory. In 2013, we reversed $0.5 million of the noncash inventory charge recorded in 2012 due to selling the aged inventory.

Recycling Segment Gross Profit. Gross profit increased to $15.3 million in 2013 compared with $10.8 million in 2012. Gross profit as a percentage of related revenues was 25.7% in 2013 compared with 25.9% in 2012. The increase in gross profit was driven primarily by the following factors:

• Increase in appliance replacement volumes, which partially offset a decline in appliance recycling volumes and price compression; the net impact was a gross profit increase of $3.7 million.

• Increase in carbon offset revenues of $0.4 million.

• Increase in AAP gross profit of $0.4 million due primarily to lower acquisition costs of recyclable appliances and improved labor efficiency.

Selling, General and Administrative Expenses. Our selling, general and administrative ("SG&A") expenses of $29.3 million for 2013 decreased $2.2 million or 6.9% compared with $31.5 million in 2012. Our SG&A expenses as a percentage of total revenues decreased to 22.7% in 2013 compared with 27.5% in 2012.

Selling expenses decreased $1.7 million to $17.2 million in 2013 compared with $18.9 million in 2012. The decrease in selling expenses was due primarily to the closing of three ApplianceSmart stores that were operating in 2012. We closed two stores during the fourth quarter of 2012 and one store during the second quarter of 2013. Store occupancy expenses and store operating expenses declined by $0.7 million and $1.0 million, respectively.

General and administrative expenses decreased $0.5 million to $12.1 million in 2013 compared with $12.6 million in 2012. The decrease in general and administrative expenses was due primarily to lower corporate expenses. During 2013, we completed several restructuring activities, including the elimination of 19 employee positions. The position eliminations generated an annualized savings of $0.8 million. This was partially offset by accruing employee bonuses in 2013 and hiring a Chief Operating Officer and President of ARCA Recycling, Inc. in July 2013.

Impairment Charge. We recorded a $1.1 million impairment charge in the fourth quarter of 2012. AAP concluded, as a result of its goodwill impairment test, that a full impairment of its goodwill was appropriate in accordance with Financial Accounting Standards Board Accounting Standards Codification No. 350-20.

Provision for (Benefit of) Income Taxes. For 2013, we recorded a benefit from income taxes of $(0.3) million. As of December 29, 2012, we recorded a full valuation allowance against the majority of our U.S. deferred tax assets due to the uncertainty of their realization. During the fourth quarter of 2013, we concluded, based on the assessment of all available evidence, including previous three-year cumulative income and estimates of future profitability, that it was more-likely-than-not that we would be able to realize the majority of our deferred tax assets in the future and recorded a $1.2 million noncash reversal of our deferred tax asset valuation allowance. We maintained a valuation allowance of $0.6 million against our state net operating loss carryforward, foreign tax credits and capital loss carryforward deferred tax assets. During fiscal year 2013, we also utilized $0.4 million in net operating loss deferred tax assets that were offset by a full valuation allowance due to the uncertainty of future realization as of December 29, 2012. In fiscal year 2013, we recorded a $1.3 million tax provision related to taxable income primarily from our U.S. operations, which partially offset the $1.6 million reduction in our deferred tax asset valuation allowance.

For 2012, we recorded a provision for income taxes of $0.1 million. The tax provision recorded in 2012 was primarily related to the tax effect of the cumulative undistributed earnings from our Canadian subsidiary as it was determined that our investment in Canada is no longer permanent in duration. In 2012, we recognized a net deferred tax liability of $0.1 million consisting of a


Table of Contents

deferred liability of $1.0 million for undistributed earnings and a deferred tax asset of $0.9 million for foreign tax credits related to the undistributed earnings. In 2012, we recorded a valuation allowance of $1.2 million primarily against the NOLs generated during 2012 as it was determined at the time to be more-likely-than-not that we would not recognize the benefit of the net loss incurred in 2012.

Noncontrolling Interest. Noncontrolling interest represents 4301's share of AAP's net (income) loss. Under the AAP joint venture agreement, ARCA and 4301 each have a 50% interest in AAP. AAP reported a net income of $0.6 million for 2013, that included an increase in carbon offset revenues of $0.4 million, of which $0.3 million represented the income attributable to noncontrolling interest. AAP reported a net loss of $1.2 million, that included a goodwill impairment charge of $1.1 million for 2012, of which $0.6 million represented the loss attributable to noncontrolling interest.

Liquidity and Capital Resources

Summary. Cash and cash equivalents as of December 28, 2013, were $1.9 million compared with $3.2 million as of December 29, 2012. Net working capital, the excess of current assets over current liabilities, increased to $10.6 million as of December 28, 2013 compared with $7.6 million as of December 29, 2012. The increase was primarily the result of higher receivables due to the increase in appliance replacement volumes. The increase in receivables was partially offset by lower appliance inventories and other current assets along with an increase in payables.

The following table summarizes our cash flows for the fiscal years ended December 28, 2013 and December 29, 2012 (in millions):

                                                         2013       2012
Total cash and cash equivalents provided by (used in):
Operating activities                                   $  1.8     $  0.5
Investing activities                                     (1.0 )     (0.8 )
Financing activities                                     (1.8 )     (1.0 )
Effect of exchange rates on cash and cash equivalents    (0.2 )      0.1
Decrease in cash and cash equivalents                  $ (1.2 )   $ (1.2 )

Operating Activities. Our net cash provided by operating activities was $1.8 million in 2013 compared with $0.5 million in 2012. The increase in net cash provided by operating activities for the year ended December 28, 2013, was related primarily to our net income, offset by cash used by accounts receivables.

Investing Activities. Our net cash used in investing activities was $1.0 million in 2013 compared with $0.8 million in 2012. Net cash used in investing activities for the year ended December 28, 2013, was related primarily to the purchase of property and equipment and establishing a restricted cash reserve for our bankcard processor. Net cash used in investing activities for the year ended December 29, 2012, was related entirely to the purchase of property and equipment.

Financing Activities. Our net cash used in financing activities was $1.8 million in 2013 compared with cash used in financing activities of $1.0 million in 2012. Net cash used in financing activities for the years ended December 28, 2013, and December 29, 2012, was related primarily to payments on our long-term borrowings and revolving line of credit.

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 . . .

  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
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.