Avalon Holdings Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparative periods are the corresponding 2011 periods. Avalon operates waste management services and golf and related businesses. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net operating revenues | $13.230 | $15.835 | $36.777 | $37.104 |
| Operating income (loss) | $0.046 | $0.276 | $(0.177) | $(0.202) |
| Net income (loss) | $0.087 | $0.304 | $(0.032) | $0.041 |
| Basic and diluted EPS | $0.02 | $0.08 | $(0.01) | $0.01 |
- Q3 operating margin was approximately 0.3%, compared with 1.7% in Q3 2011. The nine-month operating loss narrowed to $0.177 million from $0.202 million.
- For the first nine months, cash from operations was $0.821 million, down from $1.402 million. Capital expenditures were $1.309 million, resulting in cash flow after capital expenditures of approximately negative $0.488 million. Cash declined $0.448 million to $6.876 million.
- At September 30, 2012, current assets were $17.935 million and current liabilities $9.802 million; working capital was $8.1 million, versus $8.0 million at year-end 2011. Total assets were $50.153 million and shareholders’ equity $40.124 million.
- Avalon reported no debt outstanding. Capital lease obligations totaled $0.228 million, of which $0.001 million was current. Its $1 million unsecured credit line was unused.
Material changes and segment performance
- Q3 revenue fell 16% year over year, primarily because waste management revenue declined 22% to $9.561 million. Nine-month revenue decreased less than 1%.
- Waste segment Q3 pretax income declined to $0.680 million from $0.901 million; nine-month pretax income was $2.203 million versus $2.275 million. Lower one-time project (“event work”) revenue was partly offset by growth in continuous work. Waste brokerage gross margin rose to 17.4% in Q3 from 15.8%, and to 19.2% for nine months from 17.8%.
- Golf and related operations revenue rose to $3.695 million in Q3 from $3.582 million and to $9.228 million for nine months from $8.275 million. Average membership increased to 3,421 in Q3 from 3,134 and to 3,339 for nine months from 2,988. The segment’s nine-month pretax loss narrowed to $0.175 million from $0.473 million.
- Nine-month SG&A increased to $5.534 million from $5.200 million, partly due to employee costs and accelerated stock-option compensation. Option compensation was $0.206 million versus $0.145 million; recognition accelerated after the stock price reached specified vesting thresholds in Q1.
Outlook, risks, and unusual items
- Management expected 2012 capital expenditures of $1.4–$1.6 million, principally for golf-related building and land improvements and equipment; $1.309 million had been spent through September. Management believed existing working capital, future operating cash flow, and borrowing capacity would be sufficient for foreseeable operating needs and capital spending. No earnings or revenue guidance was provided.
- Avalon had applied for permits to drill two deep wastewater disposal wells in Ohio and was awaiting an ODNR public meeting after publishing notice in August 2012. Management also said it may consider golf-club acquisitions, but none were pending.
- Risks include fluctuating and noncontracted waste brokerage work, customer retention and credit defaults, disposal-price increases and restrictions on waste transport, and reliance of the captive landfill operation on one customer. A customer represented 12% of waste-segment external revenue and 9% of consolidated revenue for the nine-month period.
- Golf operations face membership, competition, weather, seasonality, and liquor-license risks. Avalon said it had increased membership but had not met membership goals and could not predict when the golf business would become profitable.
- Ordinary-course legal and environmental proceedings may result in fines or penalties; management did not expect uninsured liabilities to materially affect the company. Most deferred tax assets remained subject to a valuation allowance. Management reported disclosure controls effective at a reasonable-assurance level and no material quarterly change in internal controls.
Important facts for investors to verify
- Whether waste brokerage revenue and event-work activity recover, and whether improved gross margins persist.
- Progress on the Ohio disposal-well permits, including public-meeting and approval outcomes.
- Golf membership growth, profitability, and the effect of seasonal weather on cash generation.
- Customer concentration, customer payment risk, and any material legal or environmental developments.
- Actual full-year capital spending and liquidity, given nine-month operating cash flow was below capital expenditures.