Avalon Holdings Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Amounts are in thousands of dollars unless stated otherwise. Avalon operates waste management services and golf, hospitality, recreation and related businesses, primarily in the northeastern and midwestern United States.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net operating revenue | $11,516 | $10,702 |
| Operating loss | $(784) | $(901) |
| Loss before income taxes | $(895) | $(999) |
| Net loss | $(914) | $(1,019) |
| Net loss attributable to Avalon common shareholders | $(799), or $(0.21) per share | $(926), or $(0.24) per share |
| Cash provided by (used in) operating activities | $770 | $(581) |
- Revenue increased 7.6% year over year, driven by waste management services, up to $8,458 from $7,613. Golf and related revenue was $3,058 versus $3,089.
- Operating loss narrowed by $117; operating margin was approximately negative 6.8%, compared with negative 8.4%. Management attributed the improved consolidated loss chiefly to higher waste revenue, lower golf operating costs and improved hotel occupancy and room rates. Higher waste costs, largely variable with revenue, and increased legal and professional expenses partly offset those improvements.
- Waste management segment pretax income was $547, versus $543. Golf and related operations reduced its pretax loss to $381 from $597. Corporate expenses rose to $904 from $783.
- Operating cash flow improved by $1,351 year over year. The filing attributes significant operating cash-flow movements to working-capital changes, including collections of receivables and payments of accounts payable.
Financial position and liquidity
- At March 31, 2018, cash and cash equivalents were $1,612; restricted cash was $1,326, for combined cash and restricted cash of $2,938. Combined cash was $3,851 at year-end 2017.
- Current assets were $12,099 and current liabilities $12,725, a working capital deficit of approximately $626. The deficit was approximately $197 at December 31, 2017.
- Net long-term debt, including current portion, was $11,158; capital lease obligations totaled $1,066. The $12 million term loan carries a fixed 5.35% rate until its fifth anniversary, has a December 2026 maturity and a final balloon payment. Avalon reported covenant compliance. No amount was drawn on its $5 million revolving credit line, which matures May 31, 2019, subject to possible extension.
- Investing cash outflow was $1,541, including $1,269 for the Boardman facility acquisition; financing cash outflow was $142. Reported capital expenditures were $272.
Material changes, outlook and risks
- Boardman acquisition: Avalon paid approximately $1.3 million in March for the Boardman Tennis Center, renamed The Avalon Athletic Club at Boardman. Renovation into a multipurpose recreation and fitness center was planned to begin in Q2 2018. The company expects to fund the project and other 2018 capital needs with project-fund cash and operating cash; estimated 2018 capital expenditures are $3 million to $4 million.
- Management outlook: Management believes anticipated operating cash flow will be sufficient, for the foreseeable future, to meet operating needs and required term-loan payments. This is not quantified earnings guidance. Management says additional financing or equity actions could be considered if business conditions require more capital.
- Injection-well suspension and litigation: Operations at the AWMS #2 saltwater injection well remained suspended pending an appellate decision; the company also had a separate claim seeking a process to determine damages, with trial scheduled for Q2 2018. The wells generated no revenue in either comparison quarter. Avalon reported a $3.6 million carrying value for the wells at March 31 and warned that an impairment charge up to that amount could result if the suspension proves other than temporary and the assets are not recoverable.
- Other risks: Waste revenues face customer-retention, disposal-price, regulatory and customer-credit risks; captive landfill management depends on one customer. Golf and related operations face membership, weather, seasonality and competition risks. Management says it has not attained its membership goals and gives no timeline for the segment to become profitable. Environmental and other proceedings may result in fines, penalties or judgments; management does not expect pending matters to have a material adverse effect, but outcomes are uncertain.
- Taxes and accounting: Avalon maintained a full valuation allowance against federal deferred tax assets and was still estimating the full Tax Act impact, which it expected to finalize by year-end. Adoption of the new revenue standard did not materially change revenue recognition. Avalon expects adoption of the new lease standard to produce material right-of-use assets and lease liabilities.
- Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the AWMS #2 suspension is lifted, the outcome of related proceedings, and the recoverability of the well assets.
- Whether the Boardman renovation stays within the planned capital budget and generates sufficient membership and activity revenue.
- Whether operating cash flow and working capital can support the $3 million–$4 million 2018 capital plan alongside scheduled debt service.
- Trends in waste brokerage margins, customer retention and disposal costs, and in country-club membership and hotel performance.
- The final Tax Act accounting and the balance-sheet effect of lease-standard adoption.