Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AWX > SEC Filings for AWX > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for AVALON HOLDINGS CORP

Form 10-Q for AVALON HOLDINGS CORP


13-Nov-2012

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 2012, Avalon utilized existing cash and cash provided from operations to fund capital expenditures and meet operating needs.

Avalon's aggregate capital expenditures in 2012 are expected to be in the range of $1.4 million to $1.6 million. Such expenditures will principally relate to building and land improvements and equipment purchases for the golf and related operations. During the first nine months of 2012, capital expenditures for Avalon totaled approximately $1.3 million, which principally related to building and land improvements for the golf and related operations.

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 $8.1 million at September 30, 2012 and $8.0 million at December 31, 2011.

The decrease in accounts receivable at September 30, 2012 compared with December 31, 2011 is primarily due to lower net operating revenues of the waste management services segment in the third quarter of 2012 compared with the fourth quarter of 2011, partially offset by an increase in accounts receivable of the golf and related operations segment. The waste management services segment recorded net operating revenues of $9.6 million in the third quarter of 2012 compared with $14.6 million in the fourth quarter of 2011.

The increase in other current assets at September 30, 2012 compared with December 31, 2011 is primarily a result of higher inventories of the golf and related operations segment.

The decrease in accounts payable at September 30, 2012 compared with December 31, 2011 is primarily due to a decrease in amounts owed disposal facilities and transportation carriers as a result of lower net operating revenues of the waste brokerage and management services business in the third quarter of 2012 compared with the fourth quarter of 2011 and the timing of payments to vendors in the ordinary course of business.


The increase in deferred revenues at September 30, 2012 compared with December 31, 2011 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.

Pricing Activities. We seek to secure price increases necessary to offset increased costs, and when possible, to increase prices to improve our operating margins.

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 increase of oil and gas drilling in the Marcellus Shale and Utica Shale regions located in northeast Ohio and western Pennsylvania, Avalon has purchased options on a number of properties for the purpose of drilling deep waste water disposal wells for the disposal of the brine waters from the oil and gas drilling. Avalon has submitted two applications for permits to the Ohio Department of Natural Resources (the "ODNR") to drill deep waste water disposal wells. The ODNR has reviewed the permits and authorized Avalon to publish a public notice of the permit applications to drill. Avalon published the public notice in August 2012 and is currently waiting on the ODNR to hold a public meeting.

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 2012 decreased to $13.2 million from $15.8 million in the prior year's third quarter. The decrease is primarily the result of a 22% decrease in the net operating revenues of the waste management services segment. Costs of operations decreased to $11 million in the third quarter of 2012 compared with $13.3 million in the prior year's third quarter. The decrease is primarily due to the decrease in net operating revenues of the waste management services segment, which resulted in less 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 2012 and 2011. Consolidated selling, general and administrative expenses decreased to $1.8 million in the third quarter of 2012 compared with $1.9 million in the third quarter of 2011 primarily due to a decrease in the sales and management incentive bonuses of the waste management services segment. Avalon recorded net income of $.1 million or $.02 per share in the third quarter of 2012 compared with net income of $.3 million or $.08 per share in the third quarter of 2011.


For the first nine months of 2012, net operating revenues were $36.8 million compared with $37.1 million for the first nine months of 2011. The decrease is primarily the result of a decline in net operating revenues of the waste management services segment. Costs of operations were $30.2 million for the first nine months of 2012 compared with $30.9 million for the first nine months of 2011. The decrease is primarily due to the decrease in net operating revenues of the waste management services segment, which resulted in less transportation and disposal costs, as these costs vary directly with the associated net operating revenues. Fixed costs relating to depreciation and amortization expense were $1.2 million for the first nine months of 2012 compared with $1.3 million for the first nine months of 2011. Consolidated selling, general and administrative expenses were $5.5 million for the first nine months of 2012 compared with $5.2 million for the first nine months of 2011 primarily due to increased compensation costs relating to stock options and increased employee costs. Avalon incurred a net loss of $32,000, or $.01 per share, for the first nine months of 2012 compared with net income of $41,000, or $.01 per share, for the first nine months of 2011.

Performance in the Third Quarter of 2012 compared with the Third Quarter of 2011

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 approximately 22% to $9.6 million in the third quarter of 2012 from $12.3 million in the third quarter of the prior year. For the third quarter of 2012, net operating revenues of the waste brokerage and management services business were $9.1 million compared with $11.7 million in the third quarter of 2011, while the net operating revenues of the captive landfill management operations were $.5 million in the third quarter of 2012 compared with $.6 million in the third quarter of 2011. The decrease in the net operating revenues of the waste brokerage and management services business was primarily due to a decrease of approximately 58% in event work or one-time projects, partially offset by an increase of 27% in continuous work. The net operating revenues for event work in the third quarter of 2011 were substantially higher due to three significant projects which started in the third quarter and continued into the fourth quarter. 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 from continuous work is primarily the result of our customers increasing their production or operations, which, in turn, increased the amount of waste that needed to be disposed of. The net operating revenues of the captive landfill operations decreased due to lower volumes of waste generated by the owner of the landfill for whom Avalon manages the facility.

As a result of the decrease in net operating revenues, income before taxes of the waste management services segment decreased to $.7 million in the third quarter of 2012 from $.9 million in the third quarter of the prior year. Income before taxes of the waste brokerage and management services business was $.6 million for the third quarter of 2012 compared with $.8 million for the third quarter of 2011. While the net operating revenues of the waste brokerage and management services business were significantly lower, the average gross profit percentage increased to 17.4% in the third quarter of 2012 compared with 15.8% in the third quarter of the prior year. The lower gross margin percentage in the third quarter of 2011 was primarily due to substantially lower gross margins on 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 2012 and 2011.


Avalon's golf and related operations segment consists primarily of golf courses, clubhouses which provide dining and banquet facilities, recreational activities, spa services and a travel agency. Although the golf courses will continue to be available for use by the general public, the primary source of revenues for golf will be generated by the members of the Avalon Golf and Country Club. The average number of members during the third quarter of 2012 increased to 3,421 compared with 3,134 in the prior year's third quarter. Net operating revenues for the golf and related operations were $3.7 million in the third quarter of 2012 compared with $3.6 million in the third quarter of the prior year. The higher net operating revenues were primarily attributed to the increase in the number of members, which resulted in higher net operating revenues from membership dues, green fees, cart rentals and merchandise sales. Hot and dry weather conditions also contributed to the increase in golf related revenues. Income before taxes of the golf and related operations segment was $.1 million in the third quarter of 2012 compared with $35,000 in the third quarter of 2011. The improvement was primarily the result of higher net operating revenues due to the increase in the number of members.

General corporate expenses

General corporate expenses were $.7 million in the third quarter of 2012 compared with $.6 million in the third quarter of 2011. The increase is primarily the result of a higher employee related expenses.

Net income

Avalon recorded net income of $.1 million in the third quarter of 2012 compared with $.3 million in the third quarter of 2011. 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 2012 and 2011. 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 2012 compared with the first nine months of 2011

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 $27.6 million in the first nine months of 2012 from $28.9 million in the first nine months of the prior year. For the first nine months of 2012, net operating revenues of the waste brokerage and management services business were $25.8 million compared with $27.0 million for the first nine months of 2011, while the net operating revenues of the captive landfill management operations were $1.8 million in the first nine months of 2012 compared with $1.9 million for the same period in 2011. The decrease in net operating revenues of the waste brokerage and management services business was primarily the result of a 26% decrease in net operating revenues relating to event work, partially offset by an increase of 9% in continuous work. The net operating revenues for event work in the first nine months of 2011 were substantially higher due to the three significant projects which started in the third 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, increase the amount of waste needed to be disposed of. The net operating revenues of the captive landfill operations decreased due to lower volumes of waste generated by the owner of the landfill for whom Avalon manages the facility.


Income before taxes for the waste management services segment decreased to $2.2 million in the first nine months of 2012 compared with $2.3 million in the first nine months of the prior year. Income before taxes of the waste brokerage and management services business was $1.9 million for the both the first nine months of 2012 and 2011. While the net operating revenues of the waste brokerage and management services business were lower in the first nine months of 2012 compared with the first nine months of 2011, the average gross profit percentage increased to 19.2% in 2012 from 17.8% in 2011. The reduction in the average gross margin percentage for the first nine months of 2011 was primarily due to substantially lower gross margins on 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 $.3 million in the first nine months of 2012 compared with $.4 million in the first nine months of 2011. The decrease was primarily due to lower volumes of waste generated by the owner of the landfill.

Avalon's golf and related operations segment consists primarily of golf courses, clubhouses which provide dining and banquet facilities, recreational facilities, spa services and a travel agency. Although the golf courses will continue to be available for use by the general public, the primary source of revenues for golf will be generated by the members of the Avalon Golf and Country Club. The average number of members during the first nine months of 2012 increased to 3,339 compared with 2,988 in the prior year's first nine months. Net operating revenues of the golf and related operations segment were $9.2 million in the first nine months of 2012 compared with $8.3 million in the first nine months of 2011. 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 2012 and 2011. The higher net operating revenues for the first nine months of 2012 were primarily attributed to the increase in the number of members, which resulted in an increase in the net operating revenues from membership dues, greens fees, cart rentals, food and beverage sales and merchandise sales. Hot and dry weather conditions during the second and third quarters of 2012 also contributed to the increase in golf related revenues and increased use of the club facilities by the members. The golf and related operations segment incurred a loss before taxes of $.2 million for the nine months ended September 30, 2012 compared with a loss before taxes of $.5 million for the nine months ended September 30, 2011. The improvement was primarily the result of higher net operating revenues due to the increase in the number of members.

Interest income

Interest income was $2,000 in the first nine months of 2012 compared with $4,000 in the first nine months of 2011. The decrease is primarily the result of a lower average investment rates.


Other income, net

Other income, net was $.2 million in the first nine months of 2012 compared with $.3 million in the first nine months of 2011. In 2011, other income included the sale of an asset in which Avalon recognized a gain of $.1 million.

General corporate expenses

General corporate expenses were $2.0 million in the first nine months of 2012 compared with $1.9 million in the first nine months of 2011. The increase is primarily due to higher employee related costs and increased compensation costs. Compensation costs were $.2 million for the first nine months of 2012 compared with $.1 million for the first nine months of 2011. The increase in compensation costs was due to the Avalon Holdings Corporation common stock price reaching certain predetermined vesting prices in the first quarter of 2012. As such, certain vested stock options became exercisable and the remaining compensation expense relating to those exercisable options was recognized in the first quarter of 2012.

Net income

Avalon incurred a net loss of $32,000 in the first nine months of 2012 compared with net income of $41,000 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 2012 and 2011. 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 2012 and 2011 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 has been difficult. Although Avalon has been able to retain and increase the number of members of the Avalon Golf and Country Club, as of September 30, 2012, Avalon has not attained its membership goals. There can be no assurance as to when such goals will be attained and when the golf and related operations will ultimately become profitable. Avalon is continually using different marketing strategies to attract new members, such as local television advertising and various membership promotions. A significant decline in members could adversely affect the future financial performance of Avalon.

All three of Avalon's golf course operations currently hold liquor licenses for . . .

  Add AWX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AWX - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.