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| AWX > SEC Filings for AWX > Form 10-Q on 11-Aug-2009 | All Recent SEC Filings |
11-Aug-2009
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 six months of 2009, Avalon utilized existing cash and cash provided from operations to fund capital expenditures and meet operating needs.
Avalon's aggregate capital expenditures in 2009 are expected to be in the range of $.2 million to $.5 million. Such expenditures will principally relate to equipment purchases and building improvements for the golf and related operations. During the first six months of 2009, capital expenditures for Avalon totaled approximately $.1 million which was principally related to such building improvements.
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 $7.3 million of leasehold improvements as of June 30, 2009. 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 $5.1 million at June 30, 2009 and $5.0 million at December 31, 2008.
The decrease in accounts receivable at June 30, 2009 compared with December 31, 2008 is primarily due to lower net operating revenues of the waste management services segment in the second quarter of 2009 compared with the fourth quarter of 2008, partially offset by a small increase in accounts receivable of the golf and related operations segment. The waste management services segment recorded net operating revenues of $5.6 million in the second quarter of 2009 compared with $10.6 million in the fourth quarter of 2008.
The decrease in accounts payable at June 30, 2009 compared with December 31, 2008 is primarily a result of decreased payables due disposal facilities and transporters used by the waste brokerage and management services business as a result of lower net operating revenues in the second quarter of 2009 compared with the fourth quarter of 2008 and the timing of payments to such vendors in the ordinary course of business.
The decrease in accrued payroll and other compensation is primarily due to the payment of bonus incentives of the waste brokerage and management services business which were accrued at December 31, 2008, partially offset by the accrual for such bonus incentives in the first six months of 2009.
The decrease in other accrued taxes at June 30, 2009 compared with December 31, 2008 is primarily due to the payment of accrued real estate taxes during the second quarter of 2009.
The increase in other liabilities and accrued expenses at June 30, 2009 compared with December 31, 2008 is primarily due to an increase in deferred revenues relating to membership dues of the golf and related operations segment. The deferred revenues relating to membership dues increased to $2.2 million at June 30, 2009 compared with $2.0 million at December 31, 2008.
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 second quarter of 2009 decreased to $8.4 million from $11.7 million in the prior year's second quarter. The decrease is primarily the result of a significant decrease in the net operating revenues of the waste management services segment. Costs of operations decreased to $6.8 million in the second quarter of 2009 compared with $9.5 million in the prior year's second quarter. The decrease is primarily due to the decrease in net operating revenues of the waste management services segment, which resulted in lower transportation and disposal costs, as these costs vary directly with the associated net operating revenues. Fixed costs relating to depreciation and amortization expense were $.4 million in both the second quarter of 2009 and 2008. Consolidated selling, general and administrative expenses declined to $1.5 million in the second quarter of 2009 compared with $1.7 million in the second quarter of 2008 primarily due to a decrease in sales and management bonus incentives of the waste management services segment. Avalon recorded a net loss of $.3 million, or $.07 per share, in the second quarter of 2009 compared with net income of $.3 million or $.07 per share, in the second quarter of 2008.
For the first six months of 2009, net operating revenues decreased to $17.2 million compared with $22.1 million for the first six months of 2008. The decrease is primarily the result of a significant decrease in the net operating revenues of the waste management services segment, partially offset by a slight increase in net operating revenues of the golf and related operations segment. Costs of operations were $14.1 million for the first six months of 2009 compared with $18.0 million for the first six months of 2008. The decrease is primarily due to the decline in net operating revenues of the waste management services segment, which resulted in lower transportation and disposal costs as these costs vary directly with the associated net operating revenues. Fixed costs relating to depreciation and amortization expense were $.8 million for the first six months of 2009 and $.7 million for the same period in 2008. Consolidated selling, general and administrative expenses declined to $3.1 million for the first six months of 2009 compared with $3.3 million for the first six months of 2008 primarily due to a decrease in sales and management bonus incentives of the waste management services segment. Avalon recorded a net loss of $.7 million, or $.18 per share, for the first six months of 2009 compared with net income of $.2 million, or $.05 per share, for the first six months of 2008.
Performance in the Second Quarter of 2009 compared with the Second Quarter of 2008
Segment performance
Segment performance should be read in conjunction with Note 6 to the Condensed Consolidated Financial Statements.
Net operating revenues of the waste management services segment decreased approximately 37% to $5.6 million in the second quarter of 2009 compared with $8.9 million in the second quarter of the prior year. For the second quarter of 2009, net operating revenues of the waste brokerage and management services business were $5.1 million compared with $8.3 million in the second quarter of 2008, while the net operating revenues of the captive landfill management operations were $.5 million in the second quarter of 2009 compared with $.6 million in the second quarter of 2008. The decrease in the net operating revenues of the waste brokerage and management services business was primarily due to a decrease of 42% in continuous or ongoing work, and a 29% decrease in event work. The decreased continuous work was primarily the result of a slowdown in the economy which negatively affected the production and manufacturing of the industrial customers. The decrease in event work was due to a decline in the number of projects won in the second quarter of 2009 compared with the second quarter of 2008. Such work is defined as bid projects under contract that occurs on a one-time basis over a short period of time and can fluctuate significantly from quarter to quarter. The decrease in net operating revenues of the captive landfill operations was primarily the result of a decrease in the volume of waste disposed of at the captive landfill. The volume of waste disposed of 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.
Due to the significant decline in net operating revenues, income before taxes for the waste management services segment decreased to $.4 million in the second quarter of 2009 compared with $.9 million in the second quarter of the prior year. Income before taxes of the
waste brokerage and management services business was $.3 million for the second quarter of 2009 compared with $.7 million for the second quarter of 2008. Income before taxes of the captive landfill operations decreased to $.1 million in the second quarter of 2009 compared with $.2 million in the second quarter of 2008.
Avalon's golf and related operations segment consists primarily of golf courses, clubhouses which provide dining and banquet facilities, and a travel agency. Although the golf courses will continue to be available to the general public, the primary source of revenues will arise from members of the Avalon Golf and Country Club. Net operating revenues for the golf and related operations were $2.8 million in both the second quarter of 2009 and second quarter of the prior year. The average number of members during the second quarter of 2009 increased to 2,614 compared with 2,580 in the prior year's second quarter. The ability to attract and retain members is very important to the success of the golf and related operations segment. Avalon is continually using different marketing strategies to attract and retain members, such as local television advertising and various membership promotions. 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 before taxes of $.1 million in the second quarter of 2009 compared with a loss before taxes of $8,000 in the second quarter of the prior year. The increased loss before taxes is primarily due to increased advertising and depreciation expenses and higher operating costs.
Interest income
Interest income was $11,000 in the second quarter of 2009 compared with $8,000 in the second quarter of 2008. The increase is primarily the result of higher average cash and cash equivalents invested during the second quarter of 2009 compared with the second quarter of the prior year, partially offset by lower average investment rates.
General corporate expenses
General corporate expenses were $.5 million in the second quarter of 2009 compared with $.7 million in the second quarter of 2008. The lower general corporate expenses were the result of decreases in various expense items.
Net income
Avalon recorded a net loss of $.3 million in the second quarter of 2009 compared with net income of $.3 million in the second quarter of 2008. Excluding the minor effect of the state income tax provisions, Avalon's overall effective tax rate was 0% in the second quarter of 2009 and 2008. The income tax benefit for the second quarter of 2009 and the income tax provision for the second quarter of 2008 were offset by a change in the valuation allowance. The overall effective tax rate is different than statutory rates primarily due to a change in the valuation allowance. 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 six months of 2009 compared with the first six months of 2008
Segment performance
Segment performance should be read in conjunction with Note 6 to the Condensed Consolidated Financial Statements.
Net operating revenues of the waste management services segment decreased to $12.9 million in the first six months of 2009 compared with $17.9 million in the first six months of the prior year. For the first six months of 2009, net operating revenues of the waste brokerage and management services business were $11.8 million compared with $16.6 million for the first six months of 2008, while the net operating revenues of the captive landfill management operations were $1.1 million in the for the first six months of 2009 compared with $1.3 million for the same period in 2008. The decrease in net operating revenues of the waste brokerage and management services business in the first six months of 2009 compared with the first six months of 2008 was primarily the result of a 37% decline in continuous or ongoing work and a 12% decline in event work. The decrease in continuous work is primarily the result of a slowdown in the economy which negatively affected the production and manufacturing of the industrial customers. The decrease in event work was due to a decline in the number of projects won for the first six months of 2009 compared with the same period in 2008. Net operating revenues of the captive landfill management operations decreased in the first six months of 2009 compared with the first six months of 2008 primarily as a result of a decrease in the amount of waste disposed of at the landfill and a decrease in additional work performed on miscellaneous projects. Income from operations before taxes for the waste management services segment decreased to $1.0 million in the first six months of 2009 compared with $1.7 million in the first six months of the prior year. The decrease is primarily a result of the significant decrease in net operating revenues of the waste brokerage and management services business.
Net operating revenues of the golf and related operations segment increased to $4.4 million in the first six months of 2009 compared with $4.2 million in the first six 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 2009 and 2008 due to adverse weather conditions. The dining and banquet facilities at Sharon were closed during the first two months of 2008 for renovation. The increase in net operating revenues is primarily due to a slight increase in membership dues and an increase in food and beverage sales as a result of the dining and banquet facilities at the Sharon club being open for the entire six months of 2009. The average number of members during the first six months of 2009 increased to 2,623 compared with 2,489 in the prior year's first six months. Although the average number of members increased, due to the mix between social and golf members, net operating revenues from membership dues increased only slightly. The ability to attract and retain members is very important to the success of the golf and related operations segment. Avalon is continually using different marketing strategies to attract and retain members, such as local television advertising and various membership promotions. 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 before taxes of $.5 million in the first six months of 2009 compared with a loss before taxes of $.2 million in the first six months of the prior year. The increased loss before taxes is primarily due to higher employee costs and increased advertising, depreciation and utility expenses.
Interest income
Interest income was $14,000 in the first six months of 2009 compared with $37,000 in the first six months of 2008. The decrease is primarily due to lower average investment rates during the first six months of 2009 compared with the first six months of 2008.
General corporate expenses
General corporate expenses were $1.2 million in the first six months of 2009 compared with $1.3 million in the first six months of 2008. The decrease is a result of decreases in various expense items.
Net income
Avalon recorded a net loss of $.7 million in the first six months of 2009 compared with net income of $.2 million in the first six months of the prior year. Avalon's overall effective tax rate, excluding the effect of some minor state income tax provisions, was 0% in both the first six months of 2009 and 2008. The income tax benefit for the first six months of 2009 and the income tax provision for the first six months of 2008 were offset by a change in the valuation allowance. 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. The overall effective tax rate differs from statutory rates primarily due to the change in the valuation allowance.
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 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. Two of the Club's facilities, Squaw Creek and Sharon, each have a swimming pool, a fitness center and dining and banquet facilities. The Squaw Creek facility also has tennis courts. 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. However, due to the state of the economy, retaining members and attracting new members has become more difficult. Although Avalon has been able to increase the number of members of the Avalon Golf and Country Club year-to-year, as of June 30, 2009, Avalon has not attained its membership goals. A significant decline in members could adversely impact the financial results of the golf and related operations segment. 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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