Appliance Recycling Centers of America Reports Second Quarter 2016 Operating Results

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Appliance Recycling Centers of America, Inc.

Aug 18, 2016, 09:30 ET

MINNEAPOLIS, Aug. 18, 2016 /PRNewswire/ -- Appliance Recycling Centers of America, Inc. ("ARCA" or the "Company") (NASDAQ: ARCI), a leading provider of appliance recycling and retailing services, today announced results for its financial reporting period ended July 2, 2016.

Revenues for the second quarter ended July 2, 2016 were $24.8 million, down 17.9% compared with the same period in 2015, due to decreased recycling replacement and byproduct revenues. Net loss for the second quarter of 2016 was $2.1 million, or $0.35 loss per diluted share including a one-time change of management expense of $0.7 million and $0.8 million tax provision, compared with net income of $0.6 million, or $0.10 income per diluted share, reported in the second quarter of 2015.

Revenues for the six months ended July 2, 2016, were $50.1 million dollars, down 13.2%, for the same period in 2015. Overall the company reported a net loss for the six months ended July 2, 2016, of $2.6 million, or $0.43 loss per diluted share compared with a loss of $1.1 million or $0.19 loss per diluted share for the same period in 2015.

Second Quarter Highlights

During the second quarter of 2016:

Revenues were down by $5.4 million or 17.9% for the quarter ended July 2, 2016 compared to the same quarter of 2015, primarily the result of the decline in our recycling replacement programs for several large customers.
Gross profit margin was 26.0% for the quarter ended July 2, 2016 compared to 26.1% for the same quarter of 2015, as we worked to improve delivery margins despite the declines of revenues.
Selling, general and administrative expenses were up by $0.3 million as the company had a management change of key leaders during the quarter which added $0.7 million in one-time expense which was offset by additional cost savings throughout the quarter.
There were declines in other byproduct revenues of $1.0 million as a result of the continuation of the depressed levels in the price of scrap steel and other non-ferrous metals. In addition, the company did not have carbon offset revenue as expected in the second quarter. The carbon offset was $0.6 million in revenues in the second quarter of 2015.
Taxes expense of $0.8 million was recorded as we booked a valuation adjustment on a deferred tax asset.
Cash flow from operations resulted in an increase of $2.7 million for the quarter ended July 2, 2016 which was used to reduce our line of credit and debt by $2.6 million for same quarter.

Summary

The quarter was lower than expected as our revenues were down and our receipt of carbon offset revenue was delayed. We recognized $1.6 million in carbon offset revenues in the third quarter of 2016, which would have dramatically changed our second quarter results had we receive the approval a few weeks earlier by the Air Quality Board in California.

Overall, there has been weakness in the scrap and other metal markets in which we sell, but we are adjusting our costs and planning accordingly for the remainder of the year and beyond. We have been successful to amend existing contracts to improve pricing and have been entering into contracts for new business that is less dependent of the recovery of byproduct revenues.

Retail Appliance Segment

ApplianceSmart, Inc., the company's retail segment, posted sales of $16.3 million for the second quarter ended July 2, 2016, a decrease of $1.4 million, or 8.0%, compared with the same period of 2015. The decrease was due to downward price pressure by our competitors causing price compression on our business. ApplianceSmart reported a segment operating loss of $0.5 million for quarter ended July 2, 2016, compared to a zero in the same period of the prior year.

Our overall gross profit margins increased to 26.9% in the quarter ended July 2, 2016 from 26.6% as a result of improved purchasing terms, a favorable product sales mix to categories with higher gross margin rates and increased vendor support. We are continuing to review our retail space requirements and markets in which we are operating to increase the economies of scale of our processing centers to achieve better results.

Recycling Segment

ARCA Recycling, Inc. the company's recycling segment posted revenues of $8.5 million for the second quarter ended July 2, 2016, a decrease of $4.0 million or 32.0%. Appliance replacement revenues decreased $3.7 million as several large customers have delayed or canceled their programs. Byproduct revenues from the sale of raw materials and carbon offsets decreased by $1.1 million for the period ended July 2, 2016 since we did not have a carbon offset sale and the price of scrap was lower in second quarter 2016. The recycling program which gained customers grew by $0.8 million over the same period

Byproduct Revenues

The company's byproduct revenues are included in the segment information above, but we want to highlight the commodity prices of this product line. Byproduct revenue decreased from $3.2 million in the second quarter of 2015 to $2.2 million in the second quarter ended July 2, 2016. The decline in byproduct revenues was primarily due to the lack of carbon offset revenues in the second quarter of fiscal 2016, compared to $0.6 million in the second quarter of fiscal 2015, and declines in revenues of $0.4 million in the second quarter ended July 2, 2016 due to decreased steel and non-ferrous metal pricing. Steel prices remained low for much of 2015 and depressed pricing continued in the first quarter of 2016 but began to pick up a little in the second quarter. They have since retreated in the third quarter creating further challenges in our business which is being assessed.

The company had begun to see steel prices moving in a more favorable direction in April and May with selling prices near $290 per ton in Philadelphia, a level not seen since January 2015; however, they have begun to retreat and currently are around $215 per ton in August.

Liquidity and Capital Resources

Cash and cash equivalents were $2.2 million as of July 2, 2016, compared with $2.0 million as of January 2, 2016. As of July 2, 2016, the company had excess available borrowing capacity under its revolving line of credit of $2.6 million.

About ARCA

ARCA's three business components are uniquely positioned in the industry to work together to provide a full array of appliance-related services. ARCA Advanced Processing, LLC employs advanced technology to refine traditional appliance recycling techniques to achieve optimal revenue-generating and environmental benefits. ARCA is 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. ARCA's regional centers process appliances at end of life to remove environmentally damaging substances and produce material byproducts for recycling for utilities in the U.S. and Canada. Eighteen company-owned stores under the name ApplianceSmart, Inc.® sell new appliances directly to consumers and provide affordable ENERGY STAR® options for energy efficiency appliance replacement programs.

This press release contains statements that are forward-looking statements as defined within the Private Securities Litigation Reform Act of 1995, including statements regarding ARCA's future success. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made, including the risks associated with general economic conditions, competition in the retail and recycling industries and regulatory risks. Other factors that could cause operating and financial results to differ are described in ARCA's periodic reports filed with the Securities and Exchange Commission. Other risks may be detailed from time to time in reports to be filed with the SEC.

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

	July 2, 2016		January 2, 2016
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	2,249	$	1,969
Accounts receivable	6,656		11,536
Inventories	15,932		16,733
Income taxes receivable	242		1,126
Other current assets	1,073		1,350
Deferred income tax assets	1,301		1,657
Total current assets	27,453		34,371
Property and equipment, net	10,566		10,985
Restricted cash	500		500
Other assets	583		596
Deferred income taxes	244		327
Total assets (a)	$	39,346	$	46,779

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	7,427	$	7,019
Accrued expenses	8,241		8,934
Line of credit	7,786		12,668
Current maturities of long-term obligations	2,803		1,251
Total current liabilities	26,257		29,872
Long-term obligations, less current maturities	3,270		4,506
Other noncurrent liabilities	402		357
Total liabilities (a)	29,929		34,735

Commitments and contingencies

Shareholders' equity:
Shareholders' equity	8,953		11,324
Noncontrolling interest	464		720
	9,417		12,044
Total liabilities and shareholders' equity	$	39,346	$	46,779

(a) Assets of ARCA Advanced Processing, LLC (AAP), ARCA's consolidated variable interest entity (VIE), that can only be used to settle obligations of AAP were $8,443 and $8,856 as of July 2, 2016 and January 2, 2016, respectively. Liabilities of AAP for which creditors do not have recourse to the general credit of Appliance Recycling Centers of America, Inc. were $3,414 and $2,838 as of July 2, 2016 and January 2, 2016, respectively.

APPLIANCE RECYCLING CENTERS OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)

	Three Months Ended				Six Months Ended
	July 2, 2016		July 4, 2015		July 2, 2016		July 4, 2015
Revenues:
Retail	$	16,096	$	17,494	$	32,666	$	34,592
Recycling	6,413		9,366		13,349		17,189
Byproduct	2,247		3,304		4,086		5,921
Total revenues	24,756		30,164		50,101		57,702

Costs of revenues	18,320		22,287		37,474		43,957
Gross profit	6,436		7,877		12,627		13,745
Selling, general and administrative expenses	7,529		7,255		14,507		15,123
Operating income (loss)	(1,093)		622		(1,880)		(1,378)

Other income (expense):
Interest expense, net	(304)		(245)		(587)		(566)
Other income (expense), net	(26)		8		94		(141)
Income (loss) before income taxes and noncontrolling interest	(1,423)		385		(2,373)		(2,085)
Provision for (benefit from) income taxes	758		(101)		438		(586)
Net income (loss)	(2,181)		486		(2,811)		(1,499)
Net loss (income) attributable to noncontrolling interest	78		116		257		401
Net income (loss) attributable to controlling interest	$	(2,103)	$	602	$	(2,554)	$	(1,098)

Income (loss) per common share:
Basic	$	(0.35)	$	0.10	$	(0.43)	$	(0.19)
Diluted	$	(0.35)	$	0.10	$	(0.43)	$	(0.19)

Weighted average common shares outstanding:
Basic	5,929		5,801		5,915		5,798
Diluted	5,929		5,802		5,915		5,798