Avalon Holdings Corporation — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011. Avalon operates waste management services and golf and related businesses, primarily in the United States. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net operating revenues | $15.835 | $11.789 | $37.104 | $32.170 |
| Operating income (loss) | $0.276 | $(0.043) | $(0.202) | $(0.750) |
| Income (loss) before taxes | $0.328 | $0.006 | $0.089 | $(0.576) |
| Net income (loss) | $0.304 | $(0.002) | $0.041 | $(0.598) |
| Basic and diluted EPS | $0.08 | Approximately $0 | $0.01 | $(0.16) |
- Q3 revenue increased 34% year over year; nine-month revenue increased 15%. The filing attributes the growth primarily to waste management services.
- Operating margin was approximately 1.7% in Q3 2011 versus negative 0.4% in Q3 2010; for the first nine months it was negative 0.5% versus negative 2.3%.
- Q3 costs of operations rose to $13.267 million from $9.581 million, broadly tracking higher waste revenue and associated transportation and disposal costs. Nine-month SG&A was $5.2 million, essentially unchanged year over year.
- Waste management segment pretax income was $0.901 million in Q3 and $2.275 million for nine months. Golf and related operations earned $0.035 million in Q3 but recorded a $0.473 million nine-month pretax loss.
- Nine-month operating cash flow was $1.402 million, compared with $0.216 million in 2010. Investing activities used $0.959 million, including $1.320 million of capital expenditures and $0.361 million of asset-sale proceeds. Cash increased $0.443 million to $6.008 million.
- At September 30, cash was $6.008 million, current assets $19.251 million, and current liabilities $12.305 million; working capital was $6.9 million. Accounts receivable increased $4.0 million from year-end, principally with higher waste revenue.
- Avalon reported no borrowings under its credit line and no debt outstanding. Capital-lease obligations totaled approximately $0.229 million. Its unsecured line of credit was reduced from $3.5 million to $1.0 million in April 2011.
Material changes and management commentary
- Q3 waste-management revenue increased 41% to $12.3 million, including a 56% increase in one-time event work and 33% growth in continuous work. Three significant projects contributed to event growth, but their lower margins reduced brokerage-service gross margin to 15.8% from 18.4%.
- Golf-segment Q3 revenue rose to $3.6 million from $3.1 million, and average membership increased to 3,134 from 2,830. Lower average dues per member, higher employee costs, and increased advertising and promotions constrained results. Management said membership goals had not been reached and profitability timing was uncertain.
- Nine-month results included a $0.1 million gain on an asset sale; total other income was $0.297 million versus $0.163 million in the prior-year period.
- Management expected 2011 capital expenditures of $1.4 million to $1.6 million, mainly for building improvements, pool-area work at Squaw Creek, and equipment. It said cash, operating cash flow, working capital, and borrowing capacity should be sufficient for foreseeable operating and capital needs.
- In October 2011, Avalon signed a proposed five-year lease for about 200 acres to an energy company for oil and gas drilling. The company had 30 days to execute; if completed, Avalon expected an initial bonus payment exceeding $0.4 million.
Outlook, risks, and contingencies
- Growth plans emphasize internal expansion in waste services through sales, long-term customer agreements, and development opportunities. Avalon was also exploring deep wastewater-disposal wells in the Marcellus and Utica Shale regions and considering possible country-club acquisitions; no acquisition agreement was pending.
- Key risks include competition and disposal-cost increases that may not be passed to customers; a substantial portion of waste business is not under long-term contracts. One customer accounted for 9% of consolidated nine-month revenue, and the captive landfill operation depends on a single customer.
- Customer defaults, restrictions on interstate waste transport or disposal, and environmental proceedings could affect results. Management stated it did not expect uninsured liabilities from pending proceedings to materially harm liquidity, financial position, or results.
- Golf results are exposed to economic conditions, membership retention, weather, seasonality, and liquor-license risks. Management noted that economic conditions made attracting and retaining members difficult.
- The company maintained a valuation allowance against most deferred tax assets until realization is considered evident. Interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether revenue growth—particularly one-time event work—continues, and whether waste-service margins recover from the lower-margin Q3 projects.
- Cash collection and working-capital trends, given the sharp rise in receivables and payables, and the extent to which operating cash flow is repeatable.
- Execution of the proposed energy-company lease and receipt of the conditional bonus payment.
- Progress toward golf membership goals and sustained profitability, plus the impact of seasonal weather and promotional pricing.
- Customer concentration, the captive landfill’s single-customer dependence, and any material developments in environmental or other legal proceedings.