Avalon Holdings Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Avalon operates waste-management services and golf, resort and related businesses. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $25.7 | $21.3 | $59.5 | $52.8 |
| Operating income | $1.5 | $1.0 | $0.9 | $0.9 |
| Net income attributable to Avalon common shareholders | $1.2 | $1.0 | $0.4 | $2.4 |
| Basic EPS | $0.30 | $0.25 | $0.10 | $0.63 |
| Operating cash flow | Not separately provided for the quarter | $1.4 | $2.1 |
- Q3 revenue rose about 21%; nine-month revenue rose about 13%. Waste-management revenue increased to $15.0 million in Q3 and $35.1 million year to date. Golf and related revenue increased to $10.7 million and $24.5 million, respectively.
- Q3 operating margin was approximately 5.9%, versus 4.9% a year earlier; nine-month operating margin was approximately 1.6% in both periods.
- Q3 growth in waste services included higher continuous and event-project work; event work can vary considerably between periods. Resort and club revenue benefited from higher hotel occupancy and room rates, increased business activity, and higher membership dues.
- Q3 common-shareholder earnings improved, while nine-month earnings declined. The 2021 comparison included a $2.0 million gain from forgiveness of Paycheck Protection Program loans; no comparable gain was recorded in 2022.
- In the golf segment, nine-month pretax income fell to $1.0 million from $3.2 million, reflecting higher employee and product costs and the prior-year debt-forgiveness gain. Waste segment pretax income increased to $3.1 million from $2.5 million.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $1.5 million, and restricted cash was $10.4 million. Restricted funds are loan proceeds reserved for renovations and expansion at The Grand Resort and Avalon Field Club at New Castle.
- Nine-month operating cash flow was $1.4 million; capital expenditures paid were $5.2 million. Cash, cash equivalents and restricted cash together increased by $6.9 million, primarily reflecting net financing cash inflows.
- Working capital remained in deficit, at approximately $2.0 million versus $2.1 million at year-end 2021.
- The August 2022 $31.0 million term loan refinanced the prior term loan and funded a restricted project account. The new loan carries a 6.00% fixed rate for seven years, then resets subject to an 8.50% cap, and has a final balloon payment due in August 2032. The reported net term-loan balance was $30.4 million; an additional $0.95 million was outstanding on the line of credit.
- The $5.0 million line of credit matures July 2024 and bore 6.50% interest at quarter-end. The company reported compliance with its debt covenants. The term loan and line of credit each require a fixed-charge coverage ratio of at least 1.20, tested annually.
Outlook, risks and unusual matters
- Management expected full-year 2022 capital expenditures of $6.0–$6.5 million, mainly for resort and clubhouse renovations and equipment. Management said expected operating cash generation should cover operating needs and required term-loan payments; it may also use the line of credit if needed.
- Management cited inflation, elevated commodity and labor costs, rising interest rates, potential recession and reduced discretionary spending as risks; it expected commodity costs to remain elevated into 2023. COVID-19-related demand uncertainty and possible future restrictions were also noted.
- Waste brokerage revenue depends in part on event projects and customers without long-term contracts. The captive landfill operation relies on a single customer. Golf and resort performance depends on retaining and attracting members and is seasonal and weather-sensitive.
- Both saltwater injection wells had no operating revenue in the periods presented while operations were suspended. The company continues legal and regulatory challenges concerning restart conditions for AWMS #2; the Ohio Oil and Gas Commission ruled for the regulator in September 2022, and the company reported an appeal was proceeding. A separate case seeking damages related to the well suspension was awaiting judgment.
- The company reported no material expected adverse effect from ordinary-course legal proceedings, but noted outcomes are uncertain. In a separate case, a court had found MintBroker liable under Section 16(b); damages remained to be determined and might not be collectible.
- Management stated disclosure controls and procedures were effective at a reasonable assurance level and reported no material quarterly change in internal controls over financial reporting.
Investor verification priorities
- Review the new term loan’s amortization, balloon payment, prepayment penalties, collateral and covenant tests, and whether planned project spending produces adequate returns.
- Monitor unrestricted cash, working-capital deficit, receivable collection and the concentration of waste-segment receivables; three customers represented about 34% of consolidated receivables at quarter-end.
- Assess whether event-project revenue and higher waste-service volumes are sustainable, and whether labor, disposal, fuel and other cost increases pressure margins.
- Track golf-club membership levels, resort occupancy and renovation progress, including the timing and funding of remaining capital expenditures.
- Follow the injection-well regulatory and court proceedings, including possible restart restrictions and any related financial exposure or recovery.