Looking for Cash in Old Refrigerators

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by Debra Fiakas CFA

Appliance Recycling Centers of America (ARCI:  NYSE) is a typical small company, toiling away in seeming obscurity and struggling to get proper valuation of their success.  There is little glamour in old refrigerators and washing machines, but ARCA has figured out how to wring cash from recycling our household appliances.  In the last three fiscal years the company converted 1.6% of sales to operating cash flow.

Unfortunately, things have turned a bit sour in the world of old Frigidaires and tired Maytags.  Last week ARCA reported financial results for the quarter ending September 2015.  The company suffered an operating loss in the quarter.  Sales totaled $28.1 million, resulting in an operating loss of $1.1 million and a net loss of $773,000 or $0.13 per share.  Sales were lower year-over-year due to slower activity in municipal and utility energy efficiency programs.  Weakened pricing of scrap steel and iron have resulted in lower selling prices for metal by-products from the company’s recycling plants.

It is does not appear to be a temporary weakness.  Revenue in the first nine months of 2015 totaled $85.8 million compared to $99.2 million in the same period in the previous year.  This represents a 13.5% decline in sales value, but the operating profits collapsed into a loss of $2.5 million in 2015 from a $3.2 million profit in the previous year.

Of course reported results according to GAAP rules are often deceptive.  Operating cash flows can provide a clear picture on the health of a smaller company.  For ARCA the picture has turned a bit bleak.  After years of being a cash generator, the company has to use $2.1 million in cash to support operations in the first nine months of 2015.  A line of credit was drawn down by $3.2 million to help pay the bills.

The line of credit has come in handy for ARCA over the past few months, but it is also a bit of problem for the company.  The loss in for the year-to-date has put the company crosswise with the credit facility covenants.  Management has pledged to arrange a replacement facility sometime in the next year.

Raising capital through equity is probably not an alternative.  The stock is currently trading well below a dollar a share, representing multiple of sales of 3/100s.  It would be a costly effort to boost cash resources with a sale of common stock.

Although the debt-to-equity ratio is 141.90, net long-term debt is $2.6 million and suggests ARCA’s balance sheet can support more debt.  That pesky line of credit is a problem here as well.  At the end of the most recently reported quarter the outstanding balance was $12.4 million, casting quite long shadow across ARCA’s capital structure.  

It might be better for ARCA to simply tighten its belt by reducing costs.   Economic conditions will eventually cycle around to support higher selling prices and deeper demand.  

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

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