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| AWX > SEC Filings for AWX > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
The following discussion provides information which management believes is relevant to an assessment and understanding of the operations and financial condition of Avalon Holdings Corporation and its subsidiaries. As used in this report, the term "Avalon" means Avalon Holdings Corporation and its wholly owned subsidiaries, taken as a whole, unless the context indicates otherwise.
Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical in nature are intended to be, and are hereby identified as, 'forward looking statements'. Avalon cautions readers that forward looking statements, including, without limitation, those relating to Avalon's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements, due to risks and factors identified herein and from time to time in Avalon's reports filed with the Securities and Exchange Commission.
Liquidity and Capital Resources
For the first nine months of 2008, Avalon utilized existing cash and cash provided from operations to fund capital expenditures and meet operating needs.
Avalon's aggregate capital expenditures in 2008 are expected to be in the range of $2.3 million to $2.6 million. Such expenditures will principally relate to the construction costs of renovating and building additional banquet and recreational facilities for the golf and related operations. During the first nine months of 2008, capital expenditures for Avalon totaled approximately $2.3 million which was principally related to such construction costs.
Avalon entered into a long-term agreement with Squaw Creek Country Club to lease
and operate its golf course and related facilities. The lease, which commenced
November 1, 2003, has an initial term of ten (10) years with four
(4) consecutive ten (10) year renewal term options unilaterally exercisable by
Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and
make leasehold improvements of $150,000 per year. Amounts expended by Avalon for
leasehold improvements during a given year in excess of $150,000 will be carried
forward and applied to future leasehold improvement obligations. Avalon has made
approximately $7.1 million of leasehold improvements as of September 30, 2008.
Based upon the amount of leasehold improvements already made and leasehold
improvements anticipated to be made in the future, Avalon expects to exercise
all of its renewal options.
Working capital was $4.8 million at September 30, 2008 compared with $5.3 million at December 31, 2007. The decrease in working capital is primarily due to utilizing cash for the construction and renovation of the golf and related operations facilities and an increase in accounts payable of the waste management services segment, partially offset by an increase in accounts receivable of the waste management services segment.
The increase in accounts receivable at September 30, 2008 compared with December 31, 2007 is primarily due to higher net operating revenues of the waste management services segment in the third quarter of 2008 compared with the fourth quarter of 2007. The waste management services segment recorded net operating revenues of $11.0 million in the third quarter of 2008 compared with $8.9 million in the fourth quarter of 2007.
The increase in other current assets at September 30, 2008 compared with December 31, 2007 is primarily due to an increase in inventories of the golf and related operations.
The increase in accounts payable at September 30, 2008 compared with December 31, 2007 is primarily a result of increased payables due disposal facilities and transporters used by the waste brokerage and management services business. Such increase is the result of the timing of payments to disposal facilities and transporters in the ordinary course of business.
The increase in other liabilities and accrued expenses at September 30, 2008 compared with December 31, 2007 is primarily due to an increase in deferred revenues relating to membership dues of the golf and related operations segment. Such deferred revenues increased from $1.9 million at December 31, 2007 to $2.1 million at September 30, 2008.
At September 30, 2007, working capital was $6.7 million compared with $13.7 million at December 31, 2006. The decrease was primarily due to utilizing cash for the construction and renovation of the Sharon Country Club, an increase in accounts payable relating to such construction and an increase in other liabilities and accrued expenses due to an increase in deferred revenues relating to membership dues of the golf and related operations segment. The decrease was partially off set by an increase in accounts receivable of the golf and related operations segment as a result of an increase in the membership of the Avalon Golf and Country Club.
Management believes that anticipated cash provided from future operations, existing working capital, as well as Avalon's ability to incur indebtedness, will be, for the foreseeable future, sufficient to meet operating requirements and fund capital expenditure programs.
Several private country clubs in the northeast Ohio area are experiencing economic difficulties. Avalon believes some of these clubs may represent an attractive investment opportunity and is giving consideration to the possibility of acquiring one or more additional golf courses. Avalon will continue to consider acquisitions that make economic sense. Such potential acquisitions could be financed by existing working capital, secured or unsecured debt, issuance of common stock, or issuance of a security with characteristics of both debt and equity, any of which could impact liquidity in the future.
Results of Operations
Overall performance
Net operating revenues in the third quarter of 2008 increased to $14.3 million compared with $12.1 million in the prior year's third quarter. The increase is primarily the result of higher net operating revenues of the waste management services segment and, to a lesser extent, an increase in the net operating revenues of the golf and related operations segment. Costs of operations increased to $12.0 million in the third quarter of 2008 compared with $10.2 million in the prior year's third quarter. The increase is primarily the result of an increase in transportation and disposal costs, which vary directly with the higher net operating revenues of the waste brokerage and management services business. Consolidated selling, general and administrative expenses increased to $1.8 million in the third quarter of 2008 compared with $1.5 million in the third quarter of 2007 primarily due to higher payroll and employee costs. Avalon recorded income from continuing operations of $482,000 or $.13 per share, in the third quarter of 2008 compared with $547,000 or $.14 per share, in the third quarter of 2007.
For the first nine months of 2008, net operating revenues increased to $36.3 million compared with $35.0 million for the first nine months of 2007. The increase is primarily the result of higher net operating revenues of the golf and related operations segment, partially offset by a slight decrease in the net operating revenues of the waste management services segment. Costs of operations were $30.7 million for the first nine months of 2008 compared with $29.3 million for the first nine months of 2007. The increase is primarily the result of increased costs of the golf and related operations segment as a result of increased net operating revenues. Consolidated selling, general and administrative expenses increased to $5.1 million for the first nine months of 2008 compared with $4.9 million for the first nine months of 2007. Avalon recorded income from continuing operations of $.7 million or $.18 per share, for the first nine months of 2008 compared with $1.1 million or $.30 per share, for the prior year period.
Performance in the Third Quarter of 2008 compared with the Third Quarter of 2007
Segment performance
Segment performance should be read in conjunction with Note 7 to the Condensed Consolidated Financial Statements.
Net operating revenues of the waste management services segment increased to $11.0 million in the third quarter of 2008 compared with $9.6 million in the third quarter of the prior year. For the third quarter of 2008, net operating revenues of the waste brokerage and management services were $10.5 million compared with $8.9 million in the third quarter of 2007, while the net operating revenues of the captive landfill management operations were $.5 million in the third quarter of 2008 compared with $.7 million in the third quarter of 2007. The increase in the net operating revenues of the waste brokerage and management services was primarily due to an increase of $1.4 million in event work and an increase of $.2 million in continuous or ongoing work during the third quarter of 2008 compared with the prior year quarter. Event work is defined as bid projects under contract that occurs on a one-time basis over a short period of time. Such work can fluctuate significantly from quarter to quarter. The decrease in net operating revenues of the captive landfill operations was primarily the result of a $.1 million decrease in the volume of waste disposed and a $.1 million decrease in the sales of steel construction mats. The volume of waste disposed at the captive landfill is entirely dependent upon the
amount of waste generated by the owner of the landfill for whom Avalon manages the facility. Net operating revenues of the steel construction mats have been negatively impacted by the high cost of steel and will probably continue to be adversely impacted as long as the steel prices remain high.
Income from continuing operations before taxes for the waste management services segment increased to $1.0 million in the third quarter of 2008 compared with $.9 million in the third quarter of the prior year. Income from continuing operations before taxes of the waste brokerage and management services was $.9 million for the third quarter of 2008 compared with $.8 million for the third quarter of 2007. Gross margins improved to 19.4% in the third quarter of 2008 compared with 17.9% in the prior year quarter. In the third quarter of 2007, income from continuing operations before taxes of the waste management and brokerage services benefited from the recovery of a customer accounts receivable previously written off in the amount of $.1 million. Income from continuing operations before taxes of the captive landfill operations was $.1 million in the third quarter of 2008 compared with $.2 million in the third quarter of 2007. The decrease was primarily as a result of the decrease in the volume of waste disposed and a decrease in the sales of construction mats.
Net operating revenues of the golf and related operations were $3.3 million in the third quarter of 2008 compared with $2.6 million in the third quarter of the prior year. The increase in net operating revenues is primarily due to an increase in green fees, cart rentals, locker fees, and food and beverage sales as a result of the dining and banquet facilities of the Avalon Country Club at Sharon being completely operational during the third quarter of 2008. During the third quarter of 2007, the dining and banquet facilities were closed for construction and renovation. In addition, membership dues were higher as a result of an increase in the average number of members in the third quarter of 2008 compared with the third quarter of the prior year. In the third quarter of 2008, the average number of members was 2,697 compared with 2,150 in the third quarter of 2007. Although net operating revenues increased, income from continuing operations before taxes decreased to $.1 million in the third quarter of 2008 compared with $.2 million in the third quarter of 2007. The decrease is primarily due to the additional operating costs and increased depreciation expense associated with the Avalon Country Club at Sharon. In addition, although net operating revenues from green fees increased in total in the third quarter of 2008 compared with the prior year quarter, the overall average play per course declined when considering the fact that Avalon had three golf courses available for play in the third quarter of 2008 compared with only two golf courses for most of the third quarter of 2007. As a result, costs associated with operating the golf courses were higher as a percentage of net operating revenues in the third quarter of 2008 compared with the third quarter of 2007.
Interest income
Interest income was $7,000 in the third quarter of 2008 compared with $94,000 in the third quarter of 2007. The decrease is primarily the result of lower average cash and cash equivalents invested during the third quarter of 2008 compared with the third quarter of the prior year.
General corporate expenses
General corporate expenses were $.5 million in the third quarter of 2008 compared with $.6 million in the third quarter of 2007. The lower general corporate expenses were the result of decreases in various expense items.
Net income
Avalon recorded net income of $.5 million in both the third quarter of 2008 and 2007. Excluding the minor effect of the state income tax provisions, Avalon's overall effective tax rate was 0% in the third quarter of 2008 and 2007. The overall effective tax rate is different than statutory rates primarily due to a change in the valuation allowance. Avalon's income tax provision on income from continuing operations before taxes was offset by a decrease in the valuation allowance due to the use of its net operating losses. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.
Performance in the first nine months of 2008 compared with the first nine months of 2007
Segment performance
Segment performance should be read in conjunction with Note 7 to the Condensed Consolidated Financial Statements.
Net operating revenues of the waste management services segment decreased to $28.8 million in the first nine months of 2008 compared with $29.2 million in the first nine months of the prior year. For the first nine months of 2008, the net operating revenues of the waste brokerage and management services were $27.0 million compared with $27.4 million for the first nine months of the prior year and the net operating revenues of the captive landfill management operations were $1.8 million for both the first nine months of 2008 and 2007. The decrease in the net operating revenues of the waste brokerage and management services was primarily due to a decrease of $.6 million in event work, partially offset by an increase of $.2 million in continuous work. Due to the decline in the economy, some of the waste brokerage and management services' customers have or intend to reduce or curtail their operations, which, in turn, could reduce the amount of waste generated. In addition, some customers may postpone cleanup projects or other event type work. If there is a significant reduction in the amount of waste generated or a significant decline in event work, the financial results of the waste management services segment could be adversely affected.
Income from continuing operations before taxes for the waste management services segment decreased to $2.7 million for the first nine months of 2008 compared with $2.8 million for the first nine months of the prior year. Income from continuing operations before taxes of the waste brokerage and management services was $2.3 million for both the nine months ended September 30, 2008 and 2007. Although net operating revenues decreased, average gross margins increased to 19.3% for the first nine months 2008 compared with 18.5% for the prior year period. For the nine months ended September 30, 2007, income from continuing operations before taxes of the waste management and brokerage services benefited from the recovery of a customer accounts receivable previously written off in the amount of $.1 million. Income from continuing operations before taxes of the captive landfill operations was $.4 million for the nine months ended September 30, 2008 compared with $.5 million for the nine months ended September 30, 2007. The decrease was primarily as a result of increased operating expenses, including higher fuel and equipment costs.
Net operating revenues of the golf and related operations segment were $7.5 million in the first nine months of 2008 compared with $5.9 million in the first nine months of the prior year. The golf courses, which are located in northeast Ohio and western Pennsylvania, were unavailable for play during the first three months of 2008 and 2007 due to adverse weather conditions. The dining and banquet facilities at the Avalon Country Club at Sharon were opened in March 2008. These facilities were closed for construction and renovation during the first nine months of 2007. The increase in net operating revenues is primarily due to an increase in membership dues as a result of a higher average number of members during the first nine months of 2008 compared with the first nine months of 2007 and increased cart rentals, green fees, merchandise, and food and beverage sales. The average number of members during the first nine months of 2008 was 2,557 compared with 1,977 for the first nine months of 2007. Avalon is continually using different marketing strategies to attract new members, such as local television advertising and various membership promotions. Avalon has not experienced a decline in memberships, however, due to the state of the economy, retaining members and attracting new members is becoming more difficult. A significant decline in members could adversely impact the financial results of the golf and related operations segment.
The golf and related operations segment incurred a loss from continuing operations before taxes of $.2 million in both the first nine months of 2008 and 2007. The Sharon facility incurred significantly higher expenses in the first two months of 2008 while the facility was being prepared for opening compared with the first two months of 2007 when the facility was closed. In addition, the first nine months of 2007 include a one-time expense for the settlement of an employment contract dispute. Excluding the aforementioned expenses and despite higher net operating revenues, income from continuing operations before taxes improved only slightly in the first nine months of 2008 compared with the prior year period primarily because of higher operating costs and increased depreciation expense of the Avalon Country Club at Sharon. Additionally, although net operating revenues from green fees and cart rentals increased in total for the first nine months of 2008 compared with the prior year, the overall average play per course declined when considering the fact that Avalon had three golf courses available for play in 2008 compared with only two golf courses for most of 2007. As a result, costs associated with operating the golf courses were higher as a percentage of net operating revenues in 2008 compared with the 2007.
Interest income
Interest income was $44,000 in the first nine months of 2008 compared with $379,000 in the first nine months of 2007. The decrease is primarily the result of a lower amount of average cash and cash equivalents invested during the first nine months of 2008 compared with the first nine months of the prior year.
General corporate expenses
General corporate expenses were $1.9 million in the first nine months of 2008 compared with $1.8 million in the first nine months of 2007. The higher general corporate expenses were the result of increases in various expenses.
Net income
Avalon recorded net income of $.7 million in the first nine months of 2008 compared with net income of $1.3 million in the first nine months of the prior year. Excluding the minor effect of state income tax provisions, Avalon's overall effective tax rate was 0% for the first nine months of 2008 and 2007. The overall effective tax rate is different than statutory rates primarily due to a change in the valuation allowance. Avalon's income tax provision on income from continuing operations before taxes was offset by a decrease in the valuation allowance due to the use of its net operating losses. A valuation allowance is provided when it is more likely than not that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.
Trends and Uncertainties
In the ordinary course of conducting its business, Avalon becomes involved in lawsuits, administrative proceedings and governmental investigations, including those relating to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, management assesses the probability of loss and accrues a liability as appropriate. Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, will have a material adverse effect on its liquidity, financial position or results of operations.
The Board of Directors of Avalon has explored the possibility of delisting
Avalon's common stock by reducing the number of shareholders of record below
300, thereby eliminating the requirements for compliance with the Sarbanes-Oxley
Act (the "Act"). Avalon believes compliance with the requirements of the Act
could be very costly. However, as a result of the Securities and Exchange
Commission's ("SEC") decision to extend the compliance deadline under
Section 404 of the Act ("SOX 404") for small public companies, the Board of
Directors has decided not to pursue delisting at this time, but intends to
review the situation again as future developments warrant.
The federal government and numerous state and local governmental bodies are continuing to consider legislation or regulations to either restrict or impede the disposal and/or transportation of waste. A portion of Avalon's waste brokerage and management services revenues is derived from the disposal and/or transportation of out-of-state waste. Any law or regulation restricting or impeding the transportation of waste or the acceptance of out-of-state waste for disposal could have a negative effect on Avalon.
Avalon's waste brokerage and management services business obtains and retains customers by providing services and identifying cost-efficient disposal options unique to a customer's needs. Consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and may cause disposal pricing to increase. In addition, consolidation has had the effect of reducing the number of competitors offering disposal alternatives which may adversely impact the future financial performance of Avalon's waste brokerage and management services business.
A significant portion of Avalon's business is generated from waste brokerage and management services provided to customers and is not subject to long-term contracts. In light of current economic, regulatory and competitive conditions, there can be no assurance that Avalon's current customers will continue to transact business with Avalon at historical levels. Failure by Avalon to retain its current customers or to replace lost business could adversely impact the future financial performance of Avalon.
Avalon's captive landfill management business is dependent upon a single customer as its sole source of revenue. If the captive landfill management business is unable to retain this customer, Avalon's future financial performance could be adversely impacted.
Economic challenges throughout the industries served by Avalon have resulted in payment defaults by customers. While Avalon continuously endeavors to limit customer credit risks, customer-specific financial downturns are not controllable by management. Significant customer payment defaults would have a material adverse impact upon Avalon's future financial performance.
The Avalon Golf and Country Club has golf courses and clubhouses at each of its three facilities. The Squaw Creek and Sharon facilities each have a swimming pool, a fitness center and dining and banquet facilities. The Squaw Creek facility also has tennis courts. During the first quarter of 2008, Avalon opened the dining and banquet facilities and fitness center at the Sharon club. The Avalon Golf and Country Club competes with many public courses and country clubs in the area. Although the golf courses continue to be available to the general public, the primary source of revenues is derived from the members of the Avalon Golf and Country Club. Avalon believes that the combination of the three facilities will result in a significant increase in the number of members of the Avalon Golf and Country Club. Although there has been a continual increase in the number of members of the Avalon Golf and Country Club, as of September 30, 2008, Avalon has not attained its membership goals. There can be no assurance as to when such increased membership will be attained and when the golf and related operations will ultimately become profitable. Failure by Avalon to attain increased membership could adversely affect the future financial performance of Avalon.
All three of Avalon's golf course operations currently hold liquor licenses for their respective facilities. If, for some reason, any one of these facilities were to lose its liquor license, the financial performance of the golf and related operations would be adversely affected.
Avalon's operations are somewhat seasonal in nature since a significant portion of those operations are primarily conducted in selected northeastern and midwestern states. Additionally, Avalon's golf courses are located in northeast Ohio and western Pennsylvania and are significantly dependent upon weather conditions during the golf season. As a result, Avalon's financial performance is adversely affected by adverse weather conditions.
Management is currently evaluating Avalon's strategic direction for the future. While there are no specific transactions under negotiation or pending at this time, Avalon does not necessarily intend to limit itself in the future to lines of business which it has historically conducted.
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