Avalon Holdings Corporation — Q3 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Avalon operates waste management services and golf, country club, hotel and related businesses. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $16.625 | $18.018 | $44.095 | $51.051 |
| Operating income | $1.019 | $0.345 | $0.240 | $0.396 |
| Net income (loss) attributable to Avalon shareholders | $0.781 | $0.144 | $(0.467) | $(0.015) |
| Basic and diluted earnings (loss) per share | $0.20 | $0.04 | $(0.12) | $(0.00) |
| Cash provided by operating activities | Not presented by quarter | $1.787 | $3.099 |
Q3 operating margin was approximately 6.1%, versus 1.9% a year earlier; nine-month operating margin was approximately 0.5%, versus 0.8%. Nine-month operating cash flow less cash capital expenditures of $3.207 million was approximately negative $1.420 million.
At September 30, 2020, cash and cash equivalents were $4.667 million and restricted cash was $4.246 million. Current assets of $16.071 million were below current liabilities of $18.122 million, a working capital deficit of approximately $2.051 million. Net debt carrying value was $24.594 million, including $2.765 million of Paycheck Protection Program (PPP) loans; the $5.0 million revolving credit facility was undrawn. Finance and operating lease liabilities totaled $2.245 million. Total assets were $78.027 million and shareholders’ equity was $36.464 million.
Material changes versus prior comparable periods
- Q3 revenue declined 7.7%, chiefly as waste management revenue fell to $9.326 million from $11.572 million. Golf and related operations revenue rose to $7.299 million from $6.446 million, and Avalon’s shareholder net income increased to $0.781 million from $0.144 million.
- For the first nine months, revenue fell 13.6%, and Avalon’s shareholder loss widened to $0.467 million from $0.015 million. Waste management revenue decreased to $29.547 million from $35.908 million; golf and related revenue decreased to $14.548 million from $15.143 million.
- Q3 waste brokerage continuous and project/event work were both lower. Golf results improved, with higher food and beverage, room rental, and greens-fee revenue; the golf segment reported pretax income of $1.018 million versus $0.100 million.
- Nine-month operating cash flow fell to $1.787 million from $3.099 million. Cash capital expenditures paid were lower at $3.207 million versus $5.689 million. Interest expense increased to $0.913 million from $0.600 million, despite a lower average borrowing rate.
- Cash and cash equivalents rose from $1.446 million at year-end 2019, while restricted cash fell from $7.185 million to $4.246 million, reflecting project-fund use. Accounts receivable and accounts payable also declined.
Outlook, management commentary, risks and unusual items
- Management said COVID-19 adversely affected results and cash flows. Restrictions reduced restaurant, banquet, hotel, fitness, salon and spa activity, and weakened waste brokerage work. Some operations reopened under restrictions in late May and June; management could not determine when demand or pricing would return to pre-pandemic levels. Further restrictions could harm results and liquidity.
- Management expected 2020 capital expenditures of $4.5 million to $5.0 million, principally for continued renovation and expansion of The Grand Resort, funded from the restricted project fund. Management believed expected operating cash flow would cover operating needs and required term-loan payments, with the existing credit line available if needed.
- Avalon received approximately $2.8 million of PPP loans and had applied for forgiveness. The loans remained recorded as debt at September 30; forgiveness was not assured, and any unforgiven amount would be repayable.
- The $23.0 million term loan bears fixed interest at 5.00% until its fifth anniversary, then resets subject to a 7.35% cap. It matures December 20, 2029, with a balloon payment; required annual fixed-charge coverage is at least 1.20. Avalon reported compliance at quarter-end. The revolving credit line’s maturity was extended to July 31, 2022.
- Both saltwater injection wells remained suspended, with no operating revenue. In October 2020, a court dismissed Avalon’s mandamus complaint seeking restart orders. Separately, the Ohio Supreme Court ruled for Avalon in September 2020 in a property-rights matter and remanded it for trial. Restart and litigation outcomes remain uncertain.
- Other disclosed risks include customer credit and collections, competition and disposal pricing, the absence of long-term contracts for a significant portion of waste business, dependence of captive landfill revenue on one customer, golf membership retention, seasonality and weather, environmental regulation, and debt covenant or refinancing risk. Management stated pending legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- The filing provided no specific earnings or revenue guidance. It reported no significant fixed contractual commitments for construction projects at quarter-end.
Important facts for investors to verify
- Status and amount of PPP loan forgiveness, and repayment terms for any unforgiven balance.
- Operating cash generation, working capital needs, access to the undrawn credit line, and progress against the December 2020 fixed-charge coverage test.
- COVID-19 restrictions and demand trends across waste brokerage, lodging, dining, events and club operations, including whether capital spending remains within the stated range.
- Developments in the suspended injection-well proceedings and the remanded property-rights case, including any potential financial exposure or restart prospects.
- Whether golf membership levels, hotel occupancy and waste brokerage volumes recover sufficiently to sustain profitability and debt service.