Avalon Holdings Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Avalon operates waste management services and golf, resort and related businesses. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $20.6 | $19.5 | $39.0 | $33.8 |
| Operating income (loss) | $0.1 | $0.6 | $(1.2) | $(0.6) |
| Net income (loss) attributable to Avalon common shareholders | $(0.2) | $0.5 | $(1.8) | $(0.8) |
| Basic and diluted EPS | $(0.04) | $0.12 | $(0.47) | $(0.20) |
| Operating cash flow | Not presented by quarter | $2.5 | $2.1 |
- Q2 revenue increased about 5.6%; first-half revenue increased about 15.3%. Golf and related operations drove the Q2 increase, while both segments contributed to first-half growth.
- Q2 waste revenue declined to $10.3 million from $10.7 million; golf and related revenue rose to $10.3 million from $8.8 million. First-half revenue was $23.0 million for waste and $16.0 million for golf and related operations.
- Despite higher revenue, profitability weakened. Q2 golf and related segment pretax income fell to $0.4 million from $0.6 million. For the first half, that segment recorded a $0.9 million pretax loss versus $0.2 million income a year earlier. Waste segment pretax income was $1.8 million for the first half, compared with $1.7 million.
- Management cited higher labor, product, disposal and transportation costs, increased interest expense, and lower waste-brokerage gross margin. Waste brokerage gross margin was about 20% in Q2 (21% prior year) and 19% for the first half (20% prior year).
Cash flow, liquidity and debt
- First-half operating cash flow was $2.5 million; cash capital expenditures were $2.2 million, versus $3.3 million in the prior-year period. Cash, cash equivalents and restricted cash totaled $12.7 million, including $10.5 million restricted for resort and club renovation projects. Unrestricted cash was $2.2 million.
- At June 30, current assets were $17.3 million and current liabilities $22.1 million, a working-capital deficit of about $4.8 million, compared with $2.8 million at year-end 2022.
- Term debt, net of issuance costs, was $30.0 million; line-of-credit borrowings were $2.2 million, with $2.8 million available on the $5.0 million facility. The line matures July 31, 2024 and bore interest at 8.50%. The term loan carries a 6.00% fixed rate through its seventh anniversary and matures in August 2032 with a final balloon payment. Finance and operating lease liabilities totaled about $1.9 million.
- Interest expense rose to $1.0 million for the first half from $0.6 million; management attributed the increase to higher average debt and interest rates. The company reported compliance with debt covenants at June 30, 2023; the term-loan fixed-charge coverage test begins December 31, 2023.
Outlook, risks and unusual items
- Management expects 2023 capital expenditures of $3.5–$4.5 million, principally for Grand Resort expansion and renovations, Avalon Field Club improvements, buildings and equipment. Management believes operating cash flows should cover operating needs and scheduled debt payments, with the line of credit available if needed.
- Golf and resort activity is seasonal and weather-sensitive. The company also identifies risks from discretionary consumer spending, inflation, wage and commodity costs, competition, customer retention and collection, and limited long-term customer contracts. Two customers represented 14% of consolidated first-half revenue.
- Two saltwater injection wells remain suspended or subject to operating restrictions following seismicity-related regulatory actions. The company reported no revenue from the wells in the periods presented and continued related legal proceedings; it is awaiting judgment in a separate property-rights case. Management does not expect pending proceedings to materially affect liquidity or results, but outcomes remain uncertain.
- Federal and state deferred tax assets are subject to a full valuation allowance for most balances; the company continued to record state tax expense despite losses. Management states that interim results are not necessarily indicative of full-year results.
- The CFO resigned in April 2023; an interim CFO was appointed, followed by the appointment of Michael J. Havalo as CFO and Treasurer effective June 26, 2023.
Most important facts for investors to verify
- Whether the company can improve operating margins and reverse first-half losses as labor, product, disposal and interest costs remain elevated.
- Progress, funding and expected returns from the resort and club renovation program, alongside the $3.5–$4.5 million 2023 capital-expenditure outlook.
- Liquidity and refinancing capacity, particularly the working-capital deficit, line-of-credit maturity in July 2024, and term-loan balloon due in 2032.
- Developments in the injection-well restrictions and litigation, including any effect on operating rights, costs or potential liabilities.
- Customer concentration, membership renewal trends, and the ability to sustain golf and resort revenue amid seasonal and discretionary-spending risks.