Avalon Holdings Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited; amounts below are in millions of dollars unless noted.
Business context and results
Avalon operates waste brokerage and management services, captive landfill management and golf, hospitality, fitness and related businesses in the northeastern and midwestern United States. Waste services generated about 69% of Q2 revenue and 71% of first-half revenue.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $16.705 | $14.577 | $28.221 | $25.279 |
| Operating income (loss) | $0.596 | $0.109 | ($0.188) | ($0.792) |
| Net income (loss) attributable to Avalon shareholders | $0.623 | $0.121 | ($0.176) | ($0.805) |
| Basic and diluted earnings (loss) per share | $0.16 | $0.03 | ($0.05) | ($0.21) |
| Cash provided by operating activities | — | $2.165 | $0.718 |
Q2 revenue rose about 15% year over year, led by waste services, while golf and related revenue was slightly higher. Operating margin was approximately 3.6% in Q2 versus 0.7% a year earlier; first-half operating margin was approximately negative 0.7% versus negative 3.1%. The first-half parent-company loss narrowed substantially from 2017.
Financial position and liquidity
- At June 30, cash and cash equivalents were $2.409 million and restricted cash was $1.326 million. Cash, cash equivalents and restricted cash combined were $3.735 million, down $0.116 million from year-end.
- Current assets were $15.878 million and current liabilities $16.015 million, a working-capital deficit of about $0.137 million. Accounts receivable were $11.046 million; accounts payable were $9.131 million.
- Long-term debt had a gross principal balance of $11.185 million ($11.022 million net of debt issuance costs); capital-lease obligations totaled $1.072 million. The term loan carries a fixed 5.35% rate and matures in December 2026, with a balloon payment at maturity. The company reported compliance with loan covenants.
- A new $5 million line of credit, maturing May 2020, was entered into in May; no amounts were drawn at quarter-end. Borrowings above $1 million are subject to a borrowing base. Its rate was 5.00% at June 30 and rose to 5.25% effective July 1.
- First-half investing cash outflow was $1.923 million, including $1.269 million for the Boardman Tennis Center acquisition. Financing cash outflow was $0.358 million.
Changes, outlook and material matters
- Waste-services revenue increased to $11.510 million in Q2 from $9.490 million. Management attributed growth to increased continuous customer work, one-time event projects and consulting services. Waste brokerage and management gross margin was about 21% for the first half, unchanged year over year.
- Golf and related operations revenue was $5.195 million in Q2 versus $5.087 million. Higher hotel occupancy and room rates helped; food, beverage and merchandise sales and average membership counts were lower. First-half golf and related operations broke even before taxes, compared with a $0.376 million loss in 2017.
- The company acquired the Boardman Tennis Center facility in March for approximately $1.3 million and began renovations to create a multipurpose recreation and fitness center. Management expects 2018 capital expenditures of $2 million to $3 million, primarily for renovations and equipment, funded from project-fund cash and operations.
- Management believes cash from future operations should be sufficient for operating needs and required term-loan payments for the foreseeable future. It noted that additional financing actions could be considered if business conditions require funds for capital expenditures. No earnings or revenue guidance was provided.
- On July 31, 2018, after quarter-end, an Ohio appeals court reinstated the prior decision keeping the company’s AWMS #2 saltwater injection well suspended. The company is evaluating further legal options. The wells had no operating revenue during the periods presented; management disclosed a potential impairment charge of up to $3.5 million if the assets are ultimately not recoverable. The company’s separate mandamus proceeding was stayed pending the appeal ruling.
- Other risks include waste-disposal regulation and pricing, customer retention and payment risk, dependence of captive landfill revenue on one customer, golf membership and weather seasonality, and environmental or seismic events. Management did not expect pending proceedings to materially adversely affect the company, but outcomes remain uncertain.
- The company adopted the new revenue-recognition standard in January 2018 with no material effect on revenue recognition. It expects adoption of the new lease standard to result in material right-of-use assets and lease liabilities. Tax accounting for the 2017 Tax Act remained subject to refinement, with completion expected by year-end.
Important facts for investors to verify
- Whether growth in waste brokerage revenue, particularly variable one-time event work, continues and converts to cash; first-half receivables and accounts payable both increased.
- The status of the AWMS #2 appeal and mandamus litigation, whether operations can resume, and the recoverability of the reported well assets.
- Progress, remaining cost and expected benefits of the Avalon Inn and Boardman Athletic Club renovations, including actual capital spending versus the $2 million to $3 million estimate.
- Liquidity under the working-capital deficit, actual availability and borrowing-base terms of the new credit line, and compliance with debt covenants.
- Membership retention, hotel occupancy and golf-season performance, as well as the eventual balance-sheet effect of the new lease standard.