Avalon Holdings Corporation — Q3 2013 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2013, compared with the same periods in 2012. Avalon operates waste management services and golf and related businesses. Financial figures below are in thousands of dollars, except per-share amounts.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net operating revenue | $16,386 | $13,230 | $46,788 | $36,777 |
| Operating income (loss) | $401 | $46 | $608 | $(177) |
| Income (loss) before taxes | $451 | $100 | $825 | $17 |
| Net income (loss) | $415 | $87 | $730 | $(32) |
| Diluted earnings (loss) per share | $0.10 | $0.02 | $0.18 | $(0.01) |
| Cash provided by operating activities | — | $1,563 | $821 |
- Revenue grew approximately 24% in Q3 and 27% year to date. Operating income improved in both periods; the nine-month comparison moved from an operating loss to a profit.
- Costs of operations increased to $13.4 million in Q3 and $39.0 million year to date, principally reflecting higher waste-service volumes and related transportation and disposal costs. Selling, general and administrative expense rose to $2.1 million in Q3 and $5.9 million year to date, largely due to sales and management incentives.
- Operating margin was approximately 2.4% in Q3 2013 versus 0.3% in Q3 2012; year-to-date it was approximately 1.3% versus negative 0.5%. Waste brokerage and management gross margin was 17.8% in Q3 (17.4% prior year) but 16.4% year to date (19.2% prior year).
Segments and material changes
- Waste management services: Q3 revenue was $12.5 million, up from $9.6 million; nine-month revenue was $37.1 million, up from $27.6 million. Segment pretax income was $1.1 million in Q3 and $2.9 million year to date, compared with $0.7 million and $2.2 million, respectively, in 2012. Growth included increased one-time project work and $1.3 million of Q3 / $6.2 million of year-to-date managerial, consulting, and clerical services for a single customer; management said this work had lower-than-traditional margins. One-time project revenue was up approximately 101% in Q3 and nearly 53% year to date.
- Golf and related operations: Q3 revenue rose to $3.9 million from $3.7 million, and segment pretax income to $170,000 from $87,000. Nine-month revenue rose to $9.7 million from $9.2 million; the segment recorded $18,000 pretax income versus a $175,000 loss. Average membership increased to 3,696 for Q3 and 3,599 for the nine-month period, from 3,421 and 3,339, respectively.
- Q3 general corporate expense increased to $791,000 from $675,000, primarily due to employee costs and legal expenses. Year-to-date corporate expense was $2.2 million versus $2.0 million.
Liquidity, cash flow, and debt
- At September 30, 2013, cash was $8.6 million, current assets $21.1 million, and current liabilities $11.9 million; working capital was $9.2 million, versus $8.1 million at December 31, 2012. Accounts receivable rose $2.0 million from year-end, principally with higher waste-services revenue.
- Nine-month operating cash flow was $1.6 million, investing cash use $0.8 million (including $0.8 million of capital expenditures), and financing cash use $33,000. Cash increased $730,000 from year-end. Capital lease obligations totaled $466,000, including $55,000 current; no borrowings were outstanding under the credit line.
- Avalon has a $1.0 million unsecured line of credit, unused at quarter-end, with interest at LIBOR plus 1.75% and a 3.25% minimum rate. Management stated that expected operating cash flow, working capital, and borrowing capacity should cover foreseeable operating needs and capital spending.
Outlook, risks, and unusual items
- Management estimated 2013 capital expenditures for existing operations at $1.3–$1.6 million; approximately $1.1 million, including capitalized leases, had been spent in the first nine months.
- Avalon began developing two permitted salt-water injection wells and related facilities, with estimated construction costs of $5 million. In October, its newly formed AWMS Holdings began a private placement to accredited investors; the filing says subscriptions and internal capital provided enough funding to complete the two wells. They were expected to begin operating in January 2014. Avalon may not hold a majority ownership interest, but expects to consolidate the venture because its subsidiary will control and manage operations. Further development depends on business conditions.
- Risks include lower margins on large or nontraditional waste projects, customer concentration and dependence on customer retention, possible limits on interstate waste transport or disposal, disposal-price increases that may not be passed through, customer payment defaults, and dependence of captive landfill operations on one customer. One customer represented 14.2% of consolidated nine-month revenue and about 15% of receivables at quarter-end.
- Golf operations face membership-retention and growth challenges, competition, weather-related seasonality, and liquor-license risk. Management said membership goals had not yet been achieved. Legal and environmental proceedings may result in fines or liabilities, though management did not expect pending matters to have a material adverse effect.
- Income tax provisions were offset by valuation-allowance changes; Avalon maintained an allowance against most deferred tax assets. Management did not expect new tangible-property tax regulations effective in 2014 to materially affect the financial statements. No formal earnings guidance was provided.
Important facts for investors to verify
- Whether waste-service revenue growth, particularly lower-margin customer services and one-time projects, can be sustained without further gross-margin pressure.
- Actual construction costs, private-placement proceeds, ownership economics, consolidation treatment, and the timing and performance of the injection wells.
- Customer concentration, collections, and working-capital needs as accounts receivable and vendor payables change with business volume.
- Golf membership trends, seasonality, and progress toward management’s membership goals.
- Future use of the credit facility, capital-lease obligations, tax valuation allowance, and developments in legal or environmental proceedings.