Avalon Holdings Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement figures are in thousands unless noted. Avalon provides waste management and brokerage services, including management of a captive landfill, and operates golf and related facilities.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $11.375 million | $12.051 million | $21.269 million | $20.381 million |
| Operating income (loss) | $(86) | $(64) | $(478) | $(707) |
| Net income (loss) | $77 | $(12) | $(263) | $(596) |
| Basic earnings (loss) per share | $0.02 | $(0.01) | $(0.07) | $(0.16) |
Q2 revenue fell about 5.6% year over year, while six-month revenue rose about 4.4%. Operating margins were approximately negative 0.8% for Q2 and negative 2.2% for the first half; net margins were approximately 0.7% and negative 1.2%, respectively. Q2 pretax income included $177,000 of other income, including a $106,000 gain on an asset sale.
For the first half, operating cash flow was $1.269 million, compared with cash used of $26,000 in 2010. Capital expenditures were $1.024 million, and cash increased $600,000 to $6.165 million. At June 30, current assets were $15.091 million and current liabilities $8.731 million, for working capital of approximately $6.36 million. Total capital-lease obligations were $229,000. Avalon reported no credit-line borrowings; its unsecured line was reduced from $3.5 million to $1 million in April 2011.
Segment results and changes
- Waste management: Q2 segment revenue declined to $8.402 million from $9.294 million and pretax income fell to $690,000 from $798,000. The brokerage business had fewer one-time projects, partly offset by growth in ongoing work; captive landfill revenue was flat. For the first half, segment revenue increased to $16.609 million from $15.971 million and pretax income rose to $1.374 million from $1.261 million, mainly due to ongoing industrial work.
- Golf and related operations: Q2 revenue rose to $2.998 million from $2.776 million; the segment recorded a $114,000 pretax loss versus a $98,000 loss. First-half revenue increased to $4.693 million from $4.440 million, while the pretax loss was essentially unchanged at $508,000. Average membership increased in both comparative periods, but dues revenue rose only slightly because of membership mix.
- Lower Q2 waste revenue reduced transportation and disposal costs. SG&A declined in both the quarter and first half. First-half net loss narrowed to $263,000 from $596,000.
Outlook, liquidity, and risks
- Management expected 2011 capital expenditures of $1.2 million to $1.5 million, principally for building improvements, Squaw Creek pool-area work, and equipment. It stated that operating cash flow, working capital, and borrowing capacity should be sufficient for foreseeable operating needs and capital spending.
- No specific revenue or earnings forecast was provided. Management described plans to pursue internal growth in waste services through sales, pricing, long-term customer agreements, and new service opportunities. It may consider country-club acquisitions, but reported no pending acquisition agreement.
- Risks include fluctuating one-time waste projects, customer retention and credit defaults, possible restrictions on waste transportation or disposal, rising disposal costs that may not be passed through, and reliance of the captive landfill operation on one customer. One customer represented 11% of consolidated first-half revenue.
- Golf operations remain unprofitable and are exposed to membership retention, economic conditions, competition, weather, and liquor-license risks. Avalon had not met its membership goals and gave no assurance as to when the golf business would become profitable.
- Ordinary-course legal and environmental proceedings could result in fines or judgments; management did not believe uninsured outcomes would materially harm the company. Most deferred tax assets remained subject to a valuation allowance.
- Stock options outstanding were 760,000; none were exercisable because required share-price thresholds had not been met. The filing reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether waste brokerage revenue and ongoing work can offset the decline and volatility in one-time projects, and how much revenue depends on major customers.
- Whether golf membership gains translate into higher dues and sustained profitability, and whether planned capital spending stays within the stated range.
- The availability and terms of the reduced $1 million credit line, lease obligations, and cash generation relative to future capital needs.
- Potential effects of waste-industry regulation, disposal-cost increases, customer defaults, environmental proceedings, and the valuation allowance on future results.