AI Financial Corporation

Total third-quarter revenue was $33.6 million, up $100,000 year over year. Quarterly EBITDA was $1.4 million. Net earnings were $556,000, or $0.09 per diluted share, down from $1.1 million, or $0.20 per diluted share, last year; management said the EPS decline was driven by a higher effective tax rate and lower ApplianceSmart margins. Recycling revenues were $12.2 million, up $400,000 year over year, while byproduct revenues were $4.7 million, consistent with last year. ApplianceSmart sales were $16.7 million, down 2%, and its operating loss was $595,000 versus $163,000 a year ago. For guidance, management said it does not expect carbon offset revenue in the remainder of 2014 and anticipates $500,000 to $600,000 in carbon offset revenues in 2015. Mark Eisenschenk also said a utility agreed to fund another $4 million under a contract through the end of Q4 2014.

Mark Eisenschenk emphasized that the company is in a transition period, with him settling into the CEO role after Jack Cameron’s long tenure. He highlighted strategic priorities: improving operational efficiency, growing each business line, pursuing strategic opportunities, and strengthening employee performance. He also pointed to several growth catalysts, including new recycling facilities in Missouri, Illinois, and Oregon, a new recycling contract in Kentucky, continued appliance replacement programs, and the potential benefit from the Electrolux/GE Appliances transaction.

Jeff Cammerrer said the quarter showed quarter-over-quarter revenue growth and positive earnings, but results were mixed underneath the headline numbers. He explained that net earnings fell because last year’s tax rate benefited from net operating losses and because ApplianceSmart had lower profit margins, including higher inbound freight costs for recyclable appliances, extra labor tied to sales promotions, and a 300-basis-point margin decline in unboxed merchandise. He also noted that the recycling division, including AAP, generated $1.9 million of operating profit, down $300,000, and that the company does not expect any carbon offset revenue in the rest of 2014 because the California market had been on hold.

There was no analyst Q&A, as the operator indicated no questions at the end of the call. The closest thing to investor concern on the call was the California sales and use tax examination, which management said could lead to material taxes, penalties, and interest, although the situation had not changed materially since August. Management also addressed the lost carbon offset revenue in 2014 and said the market may reopen enough to support $500,000 to $600,000 in 2015.