Avalon Holdings Corporation — Q2 2013 Form 10-Q
Business and period. Avalon operates waste management services and golf and related businesses. This unaudited filing covers the three and six months ended June 30, 2013, compared with the same 2012 periods. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net operating revenues | $15.733 | $12.609 | $30.402 | $23.547 |
| Operating income (loss) | $0.396 | $0.226 | $0.207 | $(0.223) |
| Income (loss) before taxes | $0.489 | $0.293 | $0.374 | $(0.083) |
| Net income (loss) | $0.459 | $0.274 | $0.315 | $(0.119) |
| Diluted EPS | $0.11 | $0.07 | $0.08 | $(0.03) |
- Revenue increased about 25% in Q2 and 29% for the first half. Growth was primarily in waste management services; operating costs also rose with the related transportation and disposal activity.
- Q2 operating margin was approximately 2.5%, versus 1.8% a year earlier; first-half operating margin was approximately 0.7%, versus a loss in the prior-year period. These percentages are calculated from reported figures.
- Waste management segment revenue was $12.1 million in Q2, up from $9.1 million; golf and related revenue was $3.7 million, up from $3.5 million. First-half segment pretax income was $1.9 million for waste management and a $0.2 million loss for golf and related operations.
- Waste brokerage and management gross margin declined to 16.4% in Q2 from 20.5%, and to 15.6% for the first half from 20.1%. Avalon attributed pressure to lower-margin customer service work and competitive bidding on one-time projects.
- First-half net cash from operations was $1.069 million, compared with $0.342 million in 2012. Capital expenditures were $0.390 million versus $0.708 million. Cash increased to $8.567 million from $7.888 million at year-end.
- At June 30, current assets were $20.833 million and current liabilities $12.008 million; working capital was $8.8 million, versus $8.1 million at December 31, 2012. Total assets were $52.664 million and shareholders’ equity $40.232 million.
- Avalon reported no borrowings under its $1.0 million unsecured credit line and stated it had no debt outstanding. Capital lease obligations totaled $0.479 million, including $0.055 million current; the company recorded $0.280 million of new lease obligations during the first half.
Changes, outlook, and risks
- First-half results turned profitable from a prior-year loss. Higher waste brokerage revenue was partly offset by lower gross margins; golf revenue improved with increased membership, though the golf segment remained loss-making for the half.
- One customer accounted for approximately 17.4% of consolidated first-half revenue and 18.5% of accounts receivable at June 30. A single customer’s managerial, consulting, and clerical work generated $2.5 million of Q2 revenue and $4.9 million for the first half, with margins below Avalon’s traditional waste services.
- Management expected 2013 capital expenditures of $0.7 million to $1.0 million; approximately $0.4 million had been spent in the first half. Management believed operating cash, working capital, and borrowing capacity would be sufficient for foreseeable operating needs and capital spending.
- On July 18, 2013, after quarter-end, Ohio issued permits for two salt-water injection wells. Avalon was reviewing installation requirements and costs; the filing provides no clear project cost or timing commitment. No acquisition agreement was pending, though management said it would continue considering opportunities.
- Risks include customer concentration and defaults, limited long-term contracting in waste brokerage, possible regulatory restrictions on waste transportation or disposal, higher disposal costs that may not be passed through, dependence of the captive landfill on one customer, and seasonal/weather-sensitive golf operations. Avalon had not attained its golf membership goals and gave no assurance when they would be met or when the segment would become profitable.
- Management stated that pending legal and environmental proceedings were not expected to have a material adverse effect, while noting outcomes cannot be predicted. The filing also says the company maintains a valuation allowance against most deferred tax assets; reported tax expense or benefit was affected by changes in that allowance.
Facts investors should verify
- Whether the higher waste revenue can be sustained without further deterioration in brokerage gross margins, and the duration and economics of the large customer work.
- Collection of the concentrated accounts receivable balance and the customer’s ongoing contribution to revenue.
- Actual capital spending, costs and development progress for the permitted injection wells, and any resulting funding needs.
- Golf membership trends, weather effects, and progress toward segment profitability.
- Potential impacts of waste regulation, disposal-price increases, customer payment defaults, and legal or environmental contingencies.