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JI

JanOne Inc. (JAN)·Q1 2016 Earnings Summary

Executive Summary

  • Q1 2016 revenue declined to $25.345M with diluted EPS of $(0.08); year-over-year revenue fell 8.0% and EPS improved from $(0.29), while sequential revenue slipped 2.5% and EPS improved from $(0.14) .
  • Gross profit increased to $6.191M and gross margin expanded to 24.4% from 21.3% YoY on better retail mix and higher recycling processing fees, despite lower byproduct revenues and no carbon offset revenue recognized in the quarter .
  • Recycling-only program revenues increased YoY, but appliance replacement program revenues decreased 25.3% on lower volumes; byproduct revenues fell 30.8% on weak commodity pricing and timing of carbon offsets .
  • Potential near-term catalysts: expected recognition of ~$1.9M carbon offset revenue in Q2 (deferred in Q1), additional ~$0.9M carbon offsets targeted by year-end, scrap steel price recovery, and multiple new utility contracts; offset by a one-time ~$0.6M SG&A charge in Q2 for CEO transition and California sales tax exposure (best estimate ~$4.1M including interest) .

What Went Well and What Went Wrong

What Went Well

  • Gross margin improved to 24.4% (vs 21.3% YoY) with retail margin gains and higher recycling processing fees; retail operating income turned positive ($0.05M) versus a loss last year .
  • Recycling-only program revenues increased YoY and segment operating loss narrowed on expense reduction and pricing actions, despite commodity headwinds .
  • Management signed “a number of new contracts” in 2016 and cited ~$1.7–$1.9M of carbon offset revenue expected to benefit early 2016/recognized in Q2, plus ~$0.9M more by year-end: “We anticipate that we will experience an increase in appliance recycling revenues… We recently received notification of the issuance of offset credits… approximately $1.7 million in revenue the first quarter of 2016… further revenue… $0.9 million.” .

What Went Wrong

  • Total revenue decreased 8.1% YoY; appliance replacement program revenues declined 25.3% to $4.0M, and byproduct revenues dropped $0.8M on weaker scrap steel/nonferrous prices and lack of carbon offset revenue in Q1 .
  • AAP (Philadelphia JV) posted a net loss of $0.358M in Q1 (vs $0.570M loss last year), and consolidated recycling segment remained loss-making despite improvement .
  • Ongoing California sales and use tax examination with best estimate assessment of ~$4.1M (≈$2.5M net of tax benefit) and active legal matters increase uncertainty; revolving credit facility covenants remain a constraint despite renewal .

Financial Results

Consolidated P&L and EPS vs Prior Periods and YoY

Metric (USD)Q1 2015Q4 2015Q1 2016
Revenue ($M)$27.538 $26.008 $25.345
Gross Profit ($M)$5.868 $5.481 $6.191
SG&A ($M)$7.868 $7.099 $6.978
Operating Income (Loss) ($M)$(2.000) $(1.618) $(0.787)
Net Income (Loss), Controlling Interest ($M)$(1.700) $(0.846) $(0.451)
Diluted EPS ($)$(0.29) $(0.14) $(0.08)

Revenue Components

Revenue Component ($M)Q1 2015Q4 2015Q1 2016
Retail$17.098 $14.792 $16.570
Recycling$7.823 $9.161 $6.936
Byproduct$2.617 $2.055 $1.839
Total$27.538 $26.008 $25.345

Segment Breakdown (reportable segments)

SegmentQ1 2015 Revenue ($M)Q1 2016 Revenue ($M)Q1 2015 Op. Inc (Loss) ($M)Q1 2016 Op. Inc (Loss) ($M)
Retail$17.220 $16.649 $(0.616) $0.050
Recycling$10.318 $8.696 $(1.177) $(0.763)
Unallocated Corporate——$(0.207) $(0.074)
Total$27.538 $25.345 $(2.000) $(0.787)

KPIs

KPIQ1 2015Q4 2015Q1 2016
Gross Margin %21.3% N/A24.4%
SG&A % of Revenue28.6% N/A27.6%
Cash & Equivalents ($M)$3.558 $1.969 $2.323
Line of Credit Outstanding ($M)$9.104 $12.668 $10.412
Available Borrowing Capacity ($M)$5.1 (as of 7/4/15) $1.382 (as of 1/2/16) $1.564 (as of 4/2/16)
Working Capital ($M)$7.0 (as of 7/4/15) $4.5 (as of 1/2/16) $3.0 (as of 4/2/16)
Deferred Revenue ($M)N/AN/A$2.114
AAP Net Loss ($M)$(0.570) N/A$(0.358)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent Guidance/CommentaryChange
Carbon Offset Revenue RecognitionQ2 2016Not provided~$1.878M ROCs sold in March; revenue and ~$0.165M related costs deferred in Q1, expected to be recognized in Q2 upon CARB approval New event (recognition expected in Q2)
Additional Carbon OffsetsFY 2016Not provided~+$0.9M expected by year-end 2016 from refrigerant destruction New opportunity
SG&A (One-time CEO Charge)Q2 2016Not providedOne-time charge of approximately $0.6M in Q2 due to CEO appointment/compensation New cost headwind
Recycling Program Volumes2H 2016Not providedVolumes expected to increase as utilities lag efficiency goals; multiple new contracts signed, minimal Q1 impact due to later program starts Positive trajectory
Commodity Pricing (Scrap Steel/Nonferrous)Near-termNot providedNoted slight recovery in April–May; improvement expected to aid byproduct revenues Improving environment

Earnings Call Themes & Trends

(No Q1 2016 earnings call transcript was found; themes drawn from press releases and MD&A.)

TopicQ-2 (Q3 2015) MentionsQ-1 (Q4 2015) MentionsCurrent Period (Q1 2016)Trend
Carbon Offset ProgramPlanned ~$1.6M offsets in early 2016; no Q3 recognition Signs of commodity recovery; no offsets cited for Q4 ~$1.9M ROCs sold in March; recognition expected Q2; ~+$0.9M more in 2016 Increasing contribution (timing shift to Q2)
Commodity Prices (Scrap Steel/Nonferrous)Significant declines driving byproduct revenue drop Continued weakness through Jan 2016; macro factors cited Slight recovery noted in April–May Improving from trough
Energy Efficiency Programs (Volumes/Pricing)Lower volumes; recovery in deliveries to normal in May 2015 Lower utility program volumes; competitor Jaco in receivership; ARCA pursuing pricing improvements Recycling-only revenues up; replacement program revenues down 25.3%; new contracts signed Mixed: shift toward recycling-only; replacement volumes weak
Retail Margin/MixMargins improved (27.4% vs 24.9%) despite competitive landscape Retail sales down partly due to extra week in prior year; occupancy cost actions Retail operating income positive; mix/margin improvements Improving margins; operating leverage emerging
Liquidity/Credit Facility/CovenantsNot in compliance after Q1; renewal needed Renewed $15M line in Jan 2016; working capital $4.5M $10.412M LOC outstanding; $1.564M availability; in covenant compliance Stabilized post-renewal
Legal/Regulatory—California BOE audit; estimate ~$4.1M assessment California BOE ~$4.1M estimate reiterated; multiple legal matters ongoing Ongoing risk
AAP JV PerformanceByproduct revenue declines; continuing losses Commodity pressure reduced AAP revenues AAP net loss $(0.358)M; assets/liabilities disclosed Losses narrowing but persist

Management Commentary

  • “We have entered into a number of new contracts already in 2016 and anticipate that we will experience an increase in appliance recycling revenues… We are taking steps to model our business to reduce our reliance on the pricing of the commodities that we sell.” — Tony Isaac, Interim CEO .
  • “We recently received notification of the issuance of offset credits… approximately $1.7 million in revenue the first quarter of 2016… another destruction project… in the amount of $0.9 million.” — Tony Isaac .
  • MD&A highlights: retail gross profit up $0.3M on mix/margin improvements; recycling gross profit up $0.2M on higher processing fees; byproduct revenue down on commodity weakness and lack of carbon offsets in Q1 .

Q&A Highlights

  • No Q1 2016 earnings call transcript or Q&A session was located for JAN; therefore, no analyst Q&A highlights or guidance clarifications can be provided from a call [List search returned none].

Estimates Context

  • Wall Street consensus (S&P Global) for Q1 2016 EPS and revenue was unavailable due to missing CIQ mapping for JAN; therefore, estimate comparisons cannot be provided at this time. Values retrieved from S&P Global were unavailable due to mapping limitations.

Key Takeaways for Investors

  • Sequential and YoY EPS improvement driven by margin gains and cost actions despite revenue declines; retail operating income turned positive and recycling losses narrowed .
  • Expect Q2 uplift from ~$1.9M carbon offset revenue recognition (deferred in Q1) with potential additional ~$0.9M by year-end; monitor CARB approval timing .
  • Commodity price recovery in scrap steel/nonferrous could support byproduct revenues; sensitivity to metal markets remains high .
  • New utility contracts and higher recycling processing fees support a pivot toward recycling-only programs; replacement program volumes remain a headwind .
  • Watch Q2 SG&A for one-time ~$0.6M CEO transition cost; adjust near-term EBIT/EPS expectations accordingly .
  • Legal/regulatory overhang: California BOE assessment best estimate ~$4.1M including interest; maintain caution on potential cash impact and timeline .
  • Liquidity adequate but tight: $10.412M LOC outstanding, $1.564M availability, working capital $3.0M; covenant compliance achieved; replacement facility risk if line not renewed by Jan 31, 2017 .

Additional Source Documents Reviewed

  • 8-K 2.02 press release (Q4 and FY2015 results, filed April 1, 2016) .
  • Prior quarters’ 8-K 2.02 press releases: Q3 2015 (Nov 19, 2015) and Q2 2015 (Aug 12, 2015) .
  • Q1 2016 Form 10-Q (filed May 17, 2016) for detailed financials and MD&A .