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Recent Accounting Pronouncements (Policies)
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6 Months Ended |
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Jun. 30, 2012
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| Recent Accounting Pronouncements |
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| Nature of Business and Basis of Presentation |
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Nature of Business and Basis of Presentation
Appliance Recycling Centers of America, Inc. and subsidiaries (“we,” the “Company” or “ARCA”) are in the business of providing turnkey appliance recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. We also sell new major household appliances through a chain of Company-owned stores under the name ApplianceSmart®. In addition, we have a 50% interest in a joint venture operating under the name ARCA Advanced Processing, LLC (“AAP”), which recycles appliances from twelve states in the Northeast and Mid-Atlantic regions of the United States for General Electric Company (“GE”) acting through its GE Appliances business component. These appliances include units manufactured by GE as well as by other manufacturers.
The accompanying consolidated financial statements of the Company are unaudited and have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial information and Article 8 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, normal and recurring adjustments and accruals considered necessary for a fair presentation for the periods indicated have been included. Operating results for the three-month and six-month periods ended June 30, 2012 and July 2, 2011 are presented using 13-week and 26-week periods, respectively. The results of operations for any interim period are not necessarily indicative of the results for the year.
These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2012.
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| Principles of consolidation |
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Principles of consolidation: The consolidated financial statements include the accounts of Appliance Recycling Centers of America, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
ApplianceSmart, Inc., a Minnesota corporation, is a wholly-owned subsidiary that was formed through a corporate reorganization in July 2011 to hold our business of selling new major household appliances through a chain of Company-owned retail stores. ARCA Canada Inc., a Canadian corporation, is a wholly-owned subsidiary that was formed in September 2006 to provide turnkey recycling services for electric utility energy efficiency programs. ARCA California, Inc., a California corporation, is a wholly-owned subsidiary that was formed in November 1991 to provide turnkey recycling services for electric utility efficiency programs. The operating results of our wholly-owned subsidiaries are consolidated in our financial statements.
AAP is a joint venture that was formed in October 2009 between ARCA and 4301 Operations, LLC (“4301”) to support ARCA’s agreement, as amended, with GE acting through its GE Appliances business component. Both ARCA and 4301 have a 50% interest in AAP. GE sells its recyclable appliances generated from twelve states in the Northeast and Mid-Atlantic regions of the United States to ARCA, which collects, processes and recycles the appliances. These appliances include units manufactured by GE as well as by other manufacturers. The agreement requires that ARCA will only recycle, and will not sell for re-use or resale, the recyclable appliances purchased from GE. AAP established a regional processing center in Philadelphia, Pennsylvania, at which the recyclable appliances are processed. The term of the agreement is for six years from the first date of appliance collection, which was March 31, 2010. AAP commenced operations in February 2010 and has the exclusive rights to service the GE agreement as a subcontractor for ARCA. The financial position and results of operations of AAP are consolidated in our financial statements based on our conclusion that AAP is a variable interest entity and because we have the ability to significantly influence the economic performance of the entity through our contractual agreement with GE.
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| Fair value of financial instruments |
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Fair value of financial instruments: The following methods and assumptions are used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents, accounts receivable and accounts payable: Due to their nature and short-term maturities, the carrying amounts approximate fair value.
Short- and long-term debt: The fair value of short- and long-term debt approximates carrying value and has been estimated based on discounted cash flows using interest rates being offered for similar debt having the same or similar remaining maturities and collateral requirements.
No separate comparison of fair values versus carrying values is presented for the aforementioned financial instruments since their fair values are not significantly different than their balance sheet carrying amounts. In addition, the aggregate fair values of the financial instruments would not represent the underlying value of our Company.
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| Recent Accounting Pronouncements |
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Recent Accounting Pronouncements
Presentation of Comprehensive Income
In June 2011, the FASB issued an Accounting Standards Update (“ASU”) related to the presentation of comprehensive income. This ASU amends the FASB Accounting Standards Codification (“Codification”) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This ASU is effective for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a material effect on our results of operations, financial position or cash flows.
Testing for Goodwill Impairment
In September 2011, the FASB issued an ASU that permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This ASU is effective for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on our consolidated results of operations, financial position, or cash flows.
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| Trade receivables |
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Trade receivables: We carry unsecured trade receivables at the original invoice amount less an estimate made for doubtful accounts based on a monthly review of all outstanding amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. We write off trade receivables when we deem them uncollectible. We record recoveries of trade receivables previously written off when we receive them. We consider a trade receivable to be past due if any portion of the receivable balance is outstanding for more than ninety days. We do not charge interest on past due receivables. Our management considers the allowance for doubtful accounts of $33 and $18 to be adequate to cover any exposure to loss at June 30, 2012 and December 31, 2011, respectively.
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| Inventories |
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Inventories: Inventories, consisting principally of appliances, are stated at the lower of cost, determined on a specific identification basis, or market and consist of:
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June 30,
2012
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December 31,
2011
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Appliances held for resale
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$
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20,657
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$
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18,291
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Processed metals from recycled appliances held for resale
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538
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250
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Less provision for inventory obsolescence
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(83
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)
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(85
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)
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$
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21,112
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$
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18,456
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We provide estimated provisions for the obsolescence of our appliance inventories, including adjustments to market, based on various factors, including the age of such inventory and our management’s assessment of the need for such provisions. We look at historical inventory agings and margin analysis in determining our provision estimate. A revised cost basis is used once a provision for obsolescence is recorded.
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| Property and equipment |
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Property and equipment: Property and equipment consists of the following:
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June 30,
2012
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December 31,
2011
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Land
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$
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1,140
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$
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1,140
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Buildings and improvements
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3,393
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3,303
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Equipment (including computer software)
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19,951
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19,472
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Projects under construction
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96
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35
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24,580
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23,950
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Less accumulated depreciation and amortization
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(11,966
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)
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(11,415
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)
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$
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12,614
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$
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12,535
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| Software development costs |
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Software development costs: We capitalize software developed for internal use and are amortizing such costs over their estimated useful lives of three to five years. Costs capitalized were $36 and $47 for the three months ended June 30, 2012 and July 2, 2011, respectively. Costs capitalized were $85 and $76 for the six months ended June 30, 2012 and July 2, 2011, respectively.
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| Product warranty |
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Product warranty: We provide a warranty for the replacement or repair of certain defective units which varies based on the product sold. Our standard warranty policy requires us to repair or replace certain defective units at no cost to our customers. We estimate the costs that may be incurred under our warranty and record an accrual in the amount of such costs at the time we recognize product revenue. Factors that affect our warranty accrual for covered units include the number of units sold, historical and anticipated rates of warranty claims on these units, and the cost of such claims. We periodically assess the adequacy of our recorded warranty accrual and adjust the amounts as necessary.
Changes in our warranty accrual are as follows:
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Three Months Ended
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Six Months Ended
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June 30,
2012
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July 2,
2011
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June 30,
2012
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July 2,
2011
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Beginning Balance
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$
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66
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$
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37
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$
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71
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$
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36
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Standard accrual based on units sold
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12
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36
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24
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51
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Actual costs incurred
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(4
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)
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(4
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)
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(8
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)
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(8
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)
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Periodic accrual adjustments
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(13
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)
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(10
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)
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(26
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)
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(20
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)
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Ending Balance
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$
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61
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$
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59
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$
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61
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$
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59
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| Share-based compensation |
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Share-based compensation: We recognize share-based compensation expense on a straight-line basis over the vesting period for all share-based awards granted. We use the Black-Scholes option pricing model to determine the fair value of awards at the grant date. We calculate the expected volatility for stock awards using historical volatility. We estimate a 0%-5% forfeiture rate for stock awards issued to all employees and members of the Board of Directors, but will continue to review these estimates in future periods. The risk-free rates for the expected terms of the stock awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life represents the period that the stock awards are expected to be outstanding. The expected dividend yield is zero as we have not paid or declared any cash dividends on our Common Stock. Based on these valuations, we recognized share-based compensation expense of $32 and $114 for the three months ended June 30, 2012 and July 2, 2011, respectively, and $68 and $213 for the six months ended June 30, 2012 and July 2, 2011, respectively. We estimate that the remaining expense for fiscal 2012 will be approximately $80 based on the value of stock awards outstanding as of June 30, 2012. This estimate does not include any expense for additional awards that may be granted and vest during 2012.
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| Comprehensive income (loss) |
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Comprehensive income (loss): Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to shareholders’ equity. Our other comprehensive income (loss) is comprised of foreign currency translation adjustments.
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| Basic and diluted income per share |
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Basic and diluted income (loss) per share: Basic income per common share is computed based on the weighted average number of common shares outstanding. Diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of Common Stock include unexercised stock options and warrants. Basic per share amounts are computed, generally, by dividing net income (loss) attributable to controlling interest by the weighted average number of common shares outstanding. Diluted per share amounts assume the conversion, exercise or issuance of all potential Common Stock instruments unless their effect is anti-dilutive, thereby reducing the loss or increasing the income per common share. In calculating diluted weighted average shares and per share amounts, we included stock options and warrants with exercise prices below average market prices, for the respective reporting periods in which they were dilutive, using the treasury stock method. We calculated the number of additional shares by assuming the outstanding stock options were exercised and that the proceeds from such exercises were used to acquire Common Stock at the average market price during the quarter. For the three and six months ended June 30, 2012, we excluded 798 and 790, respectively, options and warrants from the diluted weighted average share outstanding calculation as the effect of these options and warrants is anti-dilutive due to the net loss incurred. For the three and six months ended July 2, 2011, we excluded 232 and 251, respectively, options and warrants from the diluted weighted average share outstanding calculation as the effect of these options and warrants is anti-dilutive.
A reconciliation of the denominator in the basic and diluted income or loss per share is as follows:
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Three Months Ended
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Six Months Ended
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|
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June 30,
2012
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July 2,
2011
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June 30,
2012
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July 2,
2011
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Numerator:
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|
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Net income (loss) attributable to controlling interest
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$
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(641
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)
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$
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2,028
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$
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(707
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)
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$
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2,702
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|
|
|
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|
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Denominator:
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Weighted average shares outstanding — basic
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5,555
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5,493
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|
5,546
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|
5,493
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Employee stock options
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|
—
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|
117
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|
—
|
|
101
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|
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Stock warrants
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|
—
|
|
210
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|
—
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|
207
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|
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Weighted average shares outstanding - diluted
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5,555
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|
5,820
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5,546
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|
5,801
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|
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|
|
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Income (loss) per share:
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|
|
|
|
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|
|
|
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Basic
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$
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(0.12
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)
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$
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0.37
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$
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(0.13
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)
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$
|
0.49
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Diluted
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$
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(0.12
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)
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$
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0.35
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$
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(0.13
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)
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$
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0.47
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|
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