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AWX > SEC Filings for AWX > Form 10-Q on 10-Nov-2011All Recent SEC Filings

Show all filings for AVALON HOLDINGS CORP

Form 10-Q for AVALON HOLDINGS CORP


10-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 2011, Avalon utilized existing cash and cash provided from operations to fund capital expenditures and meet operating needs.

Avalon's aggregate capital expenditures in 2011 are expected to be in the range of $1.4 million to $1.6 million. Such expenditures will principally relate to building improvements, expanding and resurfacing the patio area surrounding the pool at the Squaw Creek facility and equipment purchases. During the first nine months of 2011, capital expenditures for Avalon totaled approximately $1.3 million which principally related to such items.

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. Based upon the amount of leasehold improvements already made, Avalon expects to exercise all of its renewal options.

Working capital was $6.9 million at September 30, 2011 and $6.6 million at December 31, 2010.

The increase in accounts receivable of $4.0 million at September 30, 2011 compared with December 31, 2010 is primarily due to a significant increase in net operating revenues of the waste management services segment in the third quarter of 2011 compared with the fourth quarter of 2010. The waste management services segment recorded net operating revenues of $12.3 million in the third quarter of 2011 compared with $9.2 million in the fourth quarter of 2010.


Accounts receivable of the golf and related operations segment also increased, but to a lesser extent, due to higher net operating revenues in the third quarter of 2011 compared with the fourth quarter of 2010.

The increase in other current assets at September 30, 2011 compared with December 31, 2010 is primarily a result of higher inventories of the golf and related operations segment.

The increase in accounts payable at September 30, 2011 compared with December 31, 2010 is primarily due to an increase in amounts due disposal facilities and transportation carriers of the waste brokerage and management services business as a result of higher net operating revenues in the third quarter of 2011 compared with the fourth quarter of 2010 and the timing of payments to vendors in the ordinary course of business.

The increase in accrued payroll and other compensation at September 30, 2011 compared with December 31, 2010 is primarily due to an increase in accrued bonus incentives of the waste management services segment and other accrued bonuses. At December 31, 2010, there were no other accrued bonuses, except those relating to the waste management services segment, because such bonuses were paid prior to yearend.

The increase in deferred revenues at September 30, 2011 compared with December 31, 2010 is primarily due to an increase in deferred revenues relating to membership dues of the golf and related operations segment.

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.

Growth Strategy: Our growth strategy for the waste management services segment will focus on increasing revenue, gaining market share and enhancing shareholder value through internal growth. Although we are a waste management services company, we do not own any landfills or provide waste collection services. However, because of our many relationships with various disposal facilities and transporters, we are able to be more flexible and provide alternative solutions to a customer's waste disposal or recycling needs. We intend to capitalize on our management and sales staff which has extensive experience in all aspects of the waste business. As such, we intend to manage our internal growth as follows:

Sales and Marketing Activities. We will focus on retaining existing customers and obtaining new business through our well-managed sales and marketing activities. We seek to manage our sales and marketing activities to enable us to capitalize on our position in many of the markets in which we operate. We provide a tailored program to all of our customers in response to their particular needs. We accomplish this by centralizing services to effectively manage their needs, such as minimizing their procurement costs.

We currently have a number of professional sales and marketing employees in the field who are compensated using a commission structure that is focused on generating high levels of quality revenue. For the most part, these employees directly solicit business from existing and prospective customers. We emphasize our rate and cost structures when we train new and existing sales personnel. We intend to hire additional qualified professional sales personnel to expand into different geographical areas.


Long-Term Agreements. We seek to obtain long-term agreements with all of our customers. By obtaining such long-term agreements, we will have the opportunity to grow our revenue base at the same rate as the underlying revenue growth of these customers. We believe this positions us to minimize revenue deterioration and experience internal growth rates that are generally higher than our industry's overall growth rate. Additionally, we believe that by securing a base of long-term recurring revenue, we are better able to protect our market position from competition and our business may be less susceptible to downturns in economic conditions.

Development Activities. We will seek to identify opportunities to further position us as an integrated service provider in markets where we provide services. In addition, we will continue to utilize the extensive experience of our management and sales staff to bid on significant one-time projects and those that require special expertise. Where appropriate, we may seek to obtain permits that would provide vertically integrated waste services or expand the service offerings or leverage our existing volumes with current vendors to provide for long term, cost competitive strategic positioning within our existing markets.

Due to the increased activity of oil and gas drilling in the Marcellus Shale and Utica Shale regions, Avalon is exploring and researching the possibility of drilling deep waste water disposal wells for the disposal of the brine waters from such drilling and, as such, has purchased options on a number of properties for this purpose.

For the golf and related operations, 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. While Avalon has not entered into any pending agreements for acquisitions, it may do so at any time and will continue to consider acquisitions that make economic sense. Such potential acquisitions could be financed by existing working capital, utilizing its line of credit, 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 2011 increased to $15.8 million from $11.8 million in the prior year's third quarter. The increase is primarily the result of a significant increase in the net operating revenues of the waste management services segment. Costs of operations increased to $13.3 million in the third quarter of 2011 compared with $9.6 million in the prior year's third quarter. This increase is primarily due to the increased net operating revenues of the waste management services segment, which resulted in higher 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 third quarter of 2011 and 2010. Consolidated selling, general and administrative expenses increased to $1.9 million in the third quarter of 2011 compared with $1.8 million in the third quarter of 2010 primarily due to an increase in the sales and management incentive bonuses of the waste management services segment. Avalon recorded net income of $.3 million or $.08 per share in the third quarter of 2011 compared with a net loss of $2,000 in the third quarter of 2010 or basically breakeven on a per share basis.


For the first nine months of 2011, net operating revenues increased to $37.1 million compared with $32.2 million for the first nine months of 2010. The increase is primarily the result of significantly higher net operating revenues of the waste management services segment. Costs of operations were $30.9 million for the first nine months of 2011 compared with $26.4 million for the first nine months of 2010. This increase is primarily due to the increased net operating revenues of the waste management services segment, which resulted in higher transportation and disposal costs, as these costs vary directly with the associated net operating revenues. Fixed costs relating to depreciation and amortization expense were $1.3 million for both the first nine months of 2011 and 2010. Consolidated selling, general and administrative expenses were $5.2 million for both the first nine months of 2011 and 2010. Avalon recorded net income of $41,000, or $.01 per share, for the first nine months of 2011 compared with a net loss of $.6 million, or $.16 per share, for the first nine months of 2010.

Performance in the Third Quarter of 2011 compared with the Third Quarter of 2010

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 approximately 41% to $12.3 million in the third quarter of 2011 compared with $8.7 million in the third quarter of the prior year. For the third quarter of 2011, net operating revenues of the waste brokerage and management services business were $11.7 million compared with $8.0 million in the third quarter of 2010, while the net operating revenues of the captive landfill management operations were $.6 million in the third quarter of 2011 compared with $.7 million in the third quarter of 2010. The increase in the net operating revenues of the waste brokerage and management services business was due to an increase of 56% in event work or one-time projects and a 33% increase in continuous work. The increase in event work was primarily due to a substantial amount of work performed on three significant projects in the third quarter of 2011. Event 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 increase in the net operating revenues in continuous work is primarily the result of our customers increasing their production or operations, which, in turn, increased the amount of waste generated that needed to be disposed of. The decrease in net operating revenues of the captive landfill operations was primarily due to no sales of construction mats in the third quarter of 2011 compared with the prior year third quarter.

As a result of the higher net operating revenues, income before taxes for the waste management services segment increased to $.9 million in the third quarter of 2011 compared with $.7 million in the third quarter of the prior year. Income before taxes of the waste brokerage and management services business was $.8 million for the third quarter of 2011 compared with $.6 million for the third quarter of 2010. The average gross profit percentage of the waste brokerage and management services business decreased to 15.8% in the third quarter of 2011 compared with 18.4% in the third quarter of the prior year. The decrease was primarily due to significantly lower gross margins of the three significant event work projects mentioned previously. Because of the competitiveness in the bidding process for large event work, lower gross margins were needed to win the bid for these projects. Income before taxes of the captive landfill operations was $.1 million in both the third quarter of 2011 and 2010.


Avalon's golf and related operations segment consists primarily of golf courses, clubhouses which provide dining and banquet facilities, recreational 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 $3.6 million in the third quarter of 2011 compared with $3.1 million in the third quarter of 2010. Net operating revenues from golfing activities, food and beverage sales, spa services and membership dues all increased during in the third quarter of 2011 compared with the prior year quarter. The average number of members during the third quarter of 2011 increased to 3,134 compared with 2,830 in the prior year's third quarter. Although the membership increased, due to the mix between social and golf members and promotional membership programs to attract new members, net operating revenues from membership dues did not increase proportionately as the average membership dues per member declined. 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/or various membership promotions. However, due to the state of the economy, retaining members and attracting new members has been 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 recorded income before taxes of $35,000 for the third quarter of 2011 compared with approximately $72,000 in the third quarter of 2010. The decrease in income before taxes is primarily due to higher employee costs and increased advertising and membership promotional expenses.

Interest income

Interest income was $1,000 in the third quarter of 2011 compared with $5,000 in the third quarter of 2010. The decrease is primarily the result of lower average investment rates.

General corporate expenses

General corporate expenses were $.6 million in the third quarter of 2011 compared with $.7 million in the third quarter of 2010. The decrease is primarily the result of a decrease in employee costs and less compensation expense related to stock options.

Net income

Avalon recorded net income of $.3 million in the third quarter of 2011 compared with a net loss of $2,000 in the third quarter of 2010. Excluding the effect of the state income tax provisions which related entirely to the waste management segment, Avalon's overall effective tax rate was 0% in the third quarter of 2011 and 2010. 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 before taxes was offset by an increase 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 2011 compared with the first nine months of 2010

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 approximately 17% to $28.9 million in the first nine months of 2011 compared with $24.7 million in the first nine months of the prior year. For the first nine months of 2011, net operating revenues of the waste brokerage and management services business were $27.0 million compared with $22.7 million for the first nine months of 2010, while the net operating revenues of the captive landfill management operations was $1.9 million in the first nine months of 2011 compared with $2.0 million for the same period in 2010. The increase in net operating revenues of the waste brokerage and management services business was primarily the result of a 38% increase in net operating revenues relating to continuous work. The increase in the net operating revenues in continuous work is primarily the result of our customers increasing their production or operations, which, in turn, increased the amount of waste generated that needed to be disposed of. The decrease in net operating revenues of the captive landfill management operations in the first nine months of 2011 compared with the first nine months of 2010 was primarily the result of no sales of construction mats in 2011compared with $.3 million for the first nine months of 2010.The decrease in the sales of construction mats is primarily the result of significantly higher steel prices, making the mats too expensive to be competitive with alternative products. The decrease in net operating revenues of the captive landfill was partially offset by an increase in the amount of waste disposed of at the landfill. The amount of waste disposed of at the landfill is entirely dependent upon the amount of waste generated by the owner of the landfill for whom Avalon manages the facility.

Income before taxes for the waste management services segment increased to $2.3 million in the first nine months of 2011 compared with $1.9 million in the first nine months of the prior year. The increase is primarily due to the significant increase in net operating revenues of the waste brokerage and management services business. Income before taxes of the waste brokerage and management services business was $1.9 million for the first nine months of 2011 compared with $1.5 million for the first nine months of 2010. Overall gross profit percentage of the waste brokerage and management services business declined to 17.8% for the first nine months of 2011 compared with 18.8% for the first nine months of the prior year. The decrease was primarily attributable to lower gross margins of the event work performed during the third quarter of 2011. Income before taxes of the captive landfill operations was $.4 million in both the first nine months of 2011 and 2010.

Net operating revenues of the golf and related operations segment increased to $8.3 million in the first nine months of 2011 compared with $7.5 million in the first nine months of the prior year. Due to adverse weather conditions, net operating revenues relating to the golf courses, which are located in northeast Ohio and western Pennsylvania, were minimal during the first three months of 2011 and 2010. Net operating revenues from food and beverage sales, spa services and membership dues all increased during the first nine months of 2011 compared with the first nine months of the prior year. The average number of members during the first nine months of 2011 increased to 2,988 compared with 2,790 in the prior year's first nine months. Although the membership increased, due to the mix between social and golf members and promotional membership programs to attract new members, net operating revenues from membership dues did not increase proportionately as the average membership dues per member declined. 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/or various membership promotions. However, due to the state of the economy, retaining members and attracting new members has been 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 for the first nine months of 2011 compared with a loss before taxes of $.4 million for the first nine months of 2010. The increase in loss before taxes is primarily due to higher employee costs and increased advertising and membership promotional expenses.

Interest income

Interest income was $4,000 in the first nine months of 2011 compared with $21,000 in the first nine months of 2010. The decrease is primarily the result of a lower average investment rates.

Other income, net

Other income, net was $297,000 in the first nine months of 2011 compared with $163,000 in the first nine months of 2010. The increase was primarily attributable to the sale of an asset during the second quarter of 2011 in which Avalon recognized a gain of $.1 million.

General corporate expenses

General corporate expenses were $1.9 million in the first nine months of 2011 compared with $2.1 million in the first nine months of 2010. The decrease is primarily the result of a decrease in employee costs.

Net income

Avalon recorded net income of $41,000 in the first nine months of 2011 compared with a net loss of $.6 million in the first nine months of the prior year. Excluding the effect of state income tax provisions which related entirely to the waste management segment, Avalon's overall effective tax rate was 0% for the first nine months of 2011 and 2010. The overall effective tax rate is different than statutory rates primarily due to a change in the valuation allowance. The income tax provision for the first nine months of 2011 and the income tax benefit for the first nine months of 2010 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. 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 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. Avalon's waste brokerage and management services business may not be able to pass these price increases onto some of its customers, which, in turn, may adversely impact Avalon's future financial performance.

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. 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 for use by the general public, the primary source of revenues will be generated by the members of the Avalon Golf and Country Club. Avalon believes that the combination of these three facilities will result in additional memberships in the Avalon Golf and Country Club. Due to the state of the economy, the ability to retain current members and attract new members . . .

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