Results of Operations:
Avalon’s primary business segment, the waste management services segment, provides hazardous and non-hazardous waste brokerage and management services and captive landfill management services. The golf and related operations segment includes the operation of golf courses and related facilities and a travel agency.
Performance in 2008 compared with 2007:
Overall Performance:
The increase in net operating revenues is primarily the result of higher net operating revenues of the golf and related operations segment and to a lesser extent, increased net operating revenues of the waste management services segment. Costs of operations increased to $41.5 million in 2008 compared with $38.2 million in 2007. The increase in costs of operations is primarily the result of increased expenses of the golf and related operations segment as a result of the Sharon facility becoming fully operational in March 2008. In addition, transportation and disposal costs of the waste management services segment, increased due to the higher net operating revenues. Such costs vary directly with net operating revenues. Consolidated selling, general and administrative expenses increased to $7.0 million in 2008 compared with $6.3 million in 2007. The increase is primarily the result of increased employee expenses of the waste management services segment. Avalon recorded income from continuing operations of $.7 million in 2008 compared with income from continuing operations of $1.3 million in 2007.
Segment Performance:
Net operating revenues of the waste management services segment increased to $39.4 million in 2008 compared with $38.1 million in 2007. Net operating revenues of the waste brokerage and management services increased to $36.9 million in 2008 from $35.6 million in 2007. The net operating revenues of the captive landfill management operations were $2.5 million in both 2008 and 2007. The increase in net operating revenues of the waste brokerage and management services was primarily due to a $1.1 million increase in event work and an increase of $.2 million in continuous or ongoing work in 2008 compared with the prior year. Event work is defined as bid projects under contracts that occur on a one-time basis over a short period of time. Such work can fluctuate significantly from year to year. Due to the state of the economy, many customers that generate continuous waste are curtailing their operations. As a result, less waste is being generated, which, in turn, could negatively impact the financial results of the waste brokerage and management services business.
Income from continuing operations before taxes of the waste management services segment was $3.6 million in 2008 and compared with $3.7 million in 2007. The decrease is primarily due to higher operating expenses of the captive landfill operations in 2008 which had income from continuing operations before taxes of $.6 million in 2008 and $.7 million in 2007. Even though net operating revenues of the waste brokerage and management services increased and gross profit margins increased to 19.2% in 2008 from 18.6% in 2007, income from continuing operations before taxes was $3.0 million in both 2008 and 2007. In comparing the year 2008 with 2007, the waste brokerage and management services business incurred higher employee costs, increased selling expenses and an increase in its provision for doubtful accounts.
Net operating revenues of the golf and related operations segment were $9.6 million in 2008 compared with $7.4 million in 2007. 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 in 2007. Although the golf courses continue to be available to the general public, the primary source of revenues arises from members of the Avalon Golf and Country Club. During 2008, the average number of members was 2,589 compared with 2,036 in 2007. The increase in net operating revenues is primarily due to the increase in membership dues as a result of a higher average number of members during 2008 compared with 2007 and increased food and beverage sales as a result of the Sharon facility being open for ten months in 2008. 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 new 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 from continuing operations before taxes of $.4 million in 2008 compared with a loss from continuing operations before taxes of $.3 million in 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 year 2007 includes a one-time settlement of an employment contract dispute. Excluding the aforementioned expenses and despite higher net operating revenues, income form continuing operations before taxes declined slightly in 2008 compared with 2007 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 were slightly higher in 2008 compared with the prior year, the overall average play per golf course declined when considering the fact that Avalon had three golf courses available for play in 2008 compared with only two 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 2007.
Interest Income:
Interest income was $49,000 in 2008 compared with $435,000 in 2007. The decrease is primarily the result of a decrease in the average amount of cash invested during 2008 compared with 2007.
General Corporate Expenses:
General corporate expenses were $2.5 million in 2008 compared with $2.3 million in 2007. The increase is primarily due to increased accounting expenses and employee costs.
Net Income:
Excluding the minor effect of state income tax provisions, Avalon’s overall effective tax rate was 0% for 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 income taxes was offset by a decrease in the valuation allowance due to the use of its net operating losses. A valuation allowance has been provided when it is more likely than not that the deferred tax assets relating to certain federal and state loss carry forwards 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.
