Avalon Holdings Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Amounts below are in U.S. dollars. Avalon provides waste management and related services and operates golf, country club and hotel businesses.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $14.6m | $15.6m | $25.3m | $26.6m |
| Operating income (loss) | $0.1m | $0.4m | $(0.8)m | $(0.6)m |
| Net income (loss) attributable to Avalon shareholders | $0.1m | $0.4m | $(0.8)m | $(0.5)m |
| Basic and diluted earnings (loss) per share | $0.03 | $0.11 | $(0.21) | $(0.13) |
| Operating cash flow | Not separately presented for Q2 | $0.7m | $1.0m |
Q2 operating margin was approximately 0.7%, versus 2.4% a year earlier; first-half operating margin was approximately negative 3.1%, versus negative 2.3%. Consolidated net income in Q2 was $9,000, while $121,000 was attributable to Avalon shareholders because $112,000 of loss was attributed to the non-controlling interest.
First-half capital expenditures paid to vendors were $1.0m; investing cash outflow was $0.9m. Cash and cash equivalents fell to $1.7m from $2.3m at year-end 2016. Restricted cash was a further $2.8m, designated for the Avalon Inn project.
Financial position and liquidity
At June 30, 2017, total assets were $66.0m, current assets $12.9m and current liabilities $13.6m, producing a $0.7m working capital deficit. Management attributed the deterioration from $0.2m of positive working capital at December 31, 2016 mainly to lower cash and receivables and higher deferred membership revenue.
Long-term debt, net of issuance costs, was $11.6m, with $0.5m current; capital lease obligations totaled approximately $1.1m. The $12.0m term loan carries a 5.35% fixed rate through its fifth anniversary and matures in December 2026 with a balloon payment. A $5.0m revolving line of credit, amended in April 2017 and maturing in May 2019, had no borrowings outstanding. Avalon reported compliance with debt covenants. First-half cash interest paid was $0.3m.
Changes versus prior period
- Q2 revenue declined 7%; first-half revenue declined 5%. Waste management revenue fell 12% in Q2 and 10% for the six months, while golf and related revenue rose 4% and 8%, respectively.
- Lower one-time waste “event work” drove much of the waste segment revenue decline. Higher-margin continuous brokerage work partly offset the decline; the brokerage business gross margin increased to 20% in Q2 from 17%, and to 21% for the first half from 18%.
- Higher hotel room, food and beverage, and membership revenue supported golf-segment growth. However, golf and related operations recorded a first-half pretax loss of $0.4m, versus $0.1m a year earlier, reflecting increased payroll and depreciation.
- Shareholder-attributable earnings fell in Q2, and the first-half shareholder-attributable loss widened. Higher depreciation, SG&A and interest expense weighed on results; first-half interest expense was $0.4m versus $0.2m.
Outlook, risks and unusual items
- Management expects 2017 capital expenditures of $3m–$4m, principally for the Avalon Inn renovation and expansion, building improvements and equipment. It believes future operating cash flow will cover foreseeable operating needs and required term-loan payments; additional financing could be pursued if needed.
- AWMS #2 saltwater injection operations remained suspended. A court-ordered restart was stayed pending the state’s appeal, with a hearing scheduled for September 2017. Neither injection well generated revenue in the periods reported. Avalon disclosed a potential impairment charge of up to $4.0m if the wells cannot resume operations and their carrying value is not recoverable.
- Avalon is pursuing a separate mandamus action seeking procedures to determine damages for an alleged regulatory taking; the state sought dismissal. The company says it intends to pursue the case. Management did not expect pending legal matters, individually or collectively, to materially harm liquidity, financial position or results, but outcomes are uncertain.
- Other disclosed risks include customer retention and concentration, disposal-price increases and waste-transport regulation, dependence of captive landfill revenue on one customer, seasonal and weather-sensitive golf operations, and potential environmental or seismic events.
- The company had not completed its assessment of the new revenue-recognition standard, which it planned to adopt in Q1 2018; it preliminarily expected no fundamental change to its policies or systems. It expects the new lease standard to result in material right-of-use assets and lease liabilities.
Key facts for investors to verify
- Whether the injection-well appeal permits AWMS #2 to restart, and whether revised circumstances require an impairment assessment.
- Progress, spending and remaining funding needs for the Avalon Inn renovation against the $3m–$4m annual capital-expenditure outlook and restricted project cash.
- Liquidity and covenant headroom given the working capital deficit, low unrestricted cash and debt service requirements.
- Whether recurring waste-management revenue can offset volatility in event work, and whether major customers and membership levels remain stable.
- Final effects and transition method for adoption of the revenue and lease accounting standards.