Avalon Holdings Corporation — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2017. Avalon operates waste-management services, including brokerage, captive landfill management and saltwater injection wells, and golf, club and hotel operations. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net operating revenue | $16.4 | $19.1 | $41.6 | $45.8 |
| Operating income (loss) | $0.5 | $0.8 | ($0.3) | $0.2 |
| Net income (loss) | $0.4 | $0.7 | ($0.6) | $0.1 |
| Net income (loss) attributable to Avalon shareholders | $0.5 | $0.8 | ($0.3) | $0.3 |
| Basic and diluted EPS | $0.14 | $0.21 | ($0.07) | $0.08 |
- Q3 revenue declined about 14%, principally because waste-management revenue fell to $10.8 million from $13.6 million. Golf and related revenue was approximately $5.5 million in both periods.
- For the first nine months, waste revenue fell to $27.9 million from $32.6 million, while golf and related revenue rose to $13.7 million from $13.2 million. Lower one-time waste project (“event work”) revenue drove the decline; higher continuous work partly offset it.
- Q3 waste brokerage and management gross margin was about 18%, versus 16% a year earlier; nine-month margin was about 20%, versus 17%. Consolidated operating margin was about 3.2% in Q3 versus 4.3%; for nine months it was negative, about 0.6%, versus positive 0.5%.
- Nine-month operating cash flow was $1.3 million, compared with $1.2 million in 2016. Investing cash outflow was $1.4 million, including $1.5 million of cash capital expenditures; financing cash outflow was $0.6 million. Cash declined $0.7 million to $1.6 million. The MD&A reports $2.2 million of capital expenditures incurred, including equipment acquired under capital leases.
- At September 30, cash was $1.6 million and restricted cash was $2.8 million. Current assets of $14.0 million compared with current liabilities of $14.3 million, a working-capital deficit of approximately $0.3 million.
- Term-loan principal was $11.6 million gross ($11.4 million net of issuance costs); capital-lease obligations totaled about $1.0 million. The term loan bears 5.35% interest and has a December 2026 maturity with a balloon payment. The amended revolving credit facility provides up to $5.0 million through May 2019; none was drawn. Avalon reported compliance with both agreements’ covenants.
Outlook, commentary, risks and unusual items
- Management expects 2017 capital expenditures of $2.5–$3.0 million, principally for continued renovation and expansion of The Avalon Inn, improvements and equipment. It believes operating cash flow will cover foreseeable operating needs and required loan payments; additional financing could be pursued if needed.
- The AWMS #2 saltwater injection well remained suspended, with no well operating revenue. A court-ordered restart was stayed pending the state’s appeal; a hearing occurred September 14, 2017, and Avalon was awaiting judgment. The separate mandamus case seeking compensation or other relief was ongoing.
- Management reported no change in its impairment assessment for the wells, but stated that an impairment charge of up to $3.8 million could result if suspension is deemed other than temporary and the assets are not recoverable.
- Other risks include variable one-time waste projects, customer retention and concentration, dependence of captive landfill revenue on one customer, disposal-price and regulatory changes, environmental or seismic incidents, golf membership and weather volatility, and liquor-license risks. One customer accounted for 10% of waste-segment revenue and 7% of consolidated revenue for the nine-month period.
- Management reported effective disclosure controls as of September 30, 2017, with no material change in internal controls during the quarter. The company maintained a full valuation allowance against most deferred tax assets. It expected no material revenue impact from adopting the new revenue standard in Q1 2018; it expected the new lease standard to result in material right-of-use assets and lease liabilities.
Important facts for investors to verify
- The outcome and timing of the AWMS #2 appeal, restart prospects, and potential well impairment or related legal costs.
- Whether waste-segment revenue can recover from lower event work and whether continuous-work growth and margins persist.
- Cash generation and funding needs for the Avalon Inn project, including actual capital spending versus the stated 2017 range.
- Liquidity, debt service, covenant compliance and availability under the $5.0 million credit facility.
- Golf membership and hotel performance, including member retention, occupancy and seasonal or weather effects.