Avalon Holdings Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Avalon operates waste management services and golf and related businesses. Financial amounts below are in millions unless otherwise stated.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net operating revenue | $10.938 | $9.894 |
| Operating loss | $(0.449) | $(0.392) |
| Net loss | $(0.393) | $(0.340) |
| Net loss per share | $(0.10) | $(0.09) |
| Cash provided by operating activities | $0.325 | $0.676 |
| Capital expenditures | $0.109 | $0.182 |
- Revenue increased about 11% year over year, but operating and net losses widened. Operating margin was approximately negative 4.1%, versus negative 4.0%.
- Costs of operations rose to $9.036 million from $8.235 million, mainly alongside higher waste-services revenue and related transportation and disposal costs. SG&A increased to $1.938 million from $1.632 million.
- Cash and cash equivalents were $7.540 million at quarter-end, up from $7.324 million at December 31, 2011. Working capital was $8.1 million, compared with $8.0 million at year-end.
- Total assets were $49.090 million, down from $53.367 million at year-end. Total liabilities were $9.380 million, including $0.228 million of capital lease obligations. The company reported no borrowings under its $1.0 million credit line.
Segment performance and changes
- Waste management services: Revenue was $8.938 million, up from $8.207 million; pretax income increased to $0.723 million from $0.684 million. Brokerage and management revenue benefited from 15% growth in event work and 4% growth in ongoing work. Captive landfill pretax income declined due to weather-related operating costs.
- Golf and related operations: Revenue rose to $2.010 million from $1.695 million, while the pretax loss narrowed to $0.353 million from $0.394 million. Average membership increased to 3,217 from 2,869, with higher dues and food and beverage sales; average dues per member declined slightly.
- Corporate expenses increased to $0.756 million from $0.628 million. Stock-option compensation was $0.153 million versus $0.041 million, after specified share-price thresholds were reached and related options became exercisable.
- Operating cash flow decreased year over year. In Q1 2012, a $4.381 million cash source from lower receivables was largely offset by a $4.024 million reduction in accounts payable.
Outlook, risks and other matters
- Management expects 2012 capital expenditures of $0.5 million to $0.7 million, principally for golf-operation building improvements and equipment. It believes existing working capital, future operating cash flow and borrowing capacity will fund foreseeable needs.
- Management’s waste-services strategy emphasizes customer retention, sales expansion, long-term agreements and selective development. Avalon is exploring potential deep-well disposal opportunities in the Marcellus and Utica shale regions and may consider economically attractive country-club acquisitions; no acquisition agreement was pending.
- Risks include restrictions on waste transportation or disposal, industry consolidation and higher disposal prices that may not be passed through to customers, customer retention and credit risk, dependence of captive landfill operations on one customer, and golf membership and weather-related seasonality. Management said it had not met golf membership goals and could not predict when the golf segment would become profitable.
- Legal and environmental proceedings arise in the ordinary course. Management did not expect uninsured outcomes to materially adversely affect liquidity, financial position or results, but outcomes are uncertain. Potential oil-and-gas lease royalties were not determinable; Avalon received approximately $0.4 million in lease bonus payments in December 2011.
- The tax benefit associated with losses was offset by a valuation allowance against most deferred tax assets. Management reported disclosure controls were effective at a reasonable assurance level and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether the higher waste-services revenue and improved segment pretax results persist, particularly given event-work volatility and the sharp sequential revenue decline from Q4 2011 noted by management.
- Whether golf membership growth and improved segment results can continue despite lower average dues per member, seasonality and the segment’s continuing pretax loss.
- Cash conversion and working-capital movements, including receivable collections, vendor-payment timing and deferred membership revenue.
- Actual 2012 capital spending, any use of the credit facility or other financing, and potential investment needs from disposal-well exploration or acquisitions.
- Developments in environmental or other legal proceedings, waste-industry regulation and disposal pricing, customer credit quality, and the realization of deferred tax assets.