Avalon Holdings Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Avalon operates waste management services and golf and related businesses, including the Avalon Inn hotel acquired in August 2014. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net operating revenues | $13.955 | $13.016 | $24.655 | $22.999 |
| Operating loss | $(0.214) | $(0.201) | $(1.493) | $(0.960) |
| Loss before income taxes | $(0.120) | $(0.116) | $(1.332) | $(0.808) |
| Consolidated net loss | $(0.137) | $(0.138) | $(1.356) | $(0.838) |
| Net loss attributable to Avalon common shareholders | $(0.005) | $(0.088) | $(1.045) | $(0.787) |
| Loss per share attributable to Avalon common shareholders | $(0.00) | $(0.03) | $(0.27) | $(0.21) |
Revenue increased approximately 7% in both the quarter and first half. Operating losses widened in the first half; operating margins were approximately (1.5)% for Q2 and (6.1)% for the first half. The filing does not present a consolidated gross-margin figure. Waste brokerage gross margin declined to approximately 17% in both Q2 and the first half, from 20% and 19%, respectively.
- Segments: Q2 waste-management revenue was $9.8 million, up approximately 5%, but pretax segment income declined to $0.4 million from $0.7 million. Golf and related revenue rose to $4.2 million from $3.7 million; the segment moved to $0.1 million pretax income from a $0.2 million loss. For the first half, waste revenue was $18.1 million and pretax income $0.6 million, versus $17.2 million and $1.2 million; golf revenue was $6.5 million and its pretax loss was $0.5 million, versus $5.8 million and a $0.7 million loss.
- Cash flow and investment: First-half operating cash flow was $0.356 million, compared with $0.471 million in 2014. Investing cash use was $5.135 million, principally reflecting capital expenditures; the cash-flow statement reports $5.135 million of capex, while MD&A says $5.6 million was incurred and $5.1 million paid. Financing provided $2.772 million. Cash fell to $2.322 million from $4.329 million.
- Liquidity and debt: Working capital was $1.0 million, down from $4.0 million at year-end. Current assets were $13.721 million and current liabilities $12.689 million. The new $9 million secured revolving credit facility expires June 30, 2016; borrowings were $6.6 million, with $2.4 million available. The June 30 rate was 3.50%; Avalon reported compliance with covenants. Capital-lease obligations totaled $0.363 million, in addition to the revolver.
- Balance sheet: Total assets were $61.383 million, versus $57.844 million at December 31, 2014. Accounts receivable rose to $9.857 million and accounts payable to $7.619 million. Deferred membership revenues increased to $3.152 million from $2.256 million.
Material changes and management commentary
- Q2 revenue growth reflected increases in both segments, including $0.5 million of Avalon Inn revenue. The Inn contributed $0.5 million of Q2 revenue and a pretax loss below $0.1 million; first-half contribution was $0.7 million revenue and approximately $0.3 million pretax loss. Renovation limited rentable rooms.
- Waste brokerage growth came largely from one-time event work, which management says can fluctuate significantly; continuous-work revenue and gross margins declined. Higher costs and the injection-well suspension/legal expense weighed on waste segment earnings.
- The company expected 2015 capital expenditures of $8–$10 million, principally for the Avalon Inn renovation and expansion, building improvements, and equipment. Management believed operating cash flow would meet foreseeable operating needs, while identifying refinancing, additional borrowing, or equity issuance as potential funding alternatives if needed.
- The Avalon Inn acquisition purchase-price allocation remained preliminary at June 30, 2015. Asset values may be adjusted; approximately $0.8 million was reclassified from other intangible assets to property and equipment based on an updated preliminary valuation.
Risks, contingencies, and unusual items
- A seismic event led Ohio regulators to suspend both saltwater injection wells in September 2014. AWMS #1 resumed operation after the suspension order was lifted; AWMS #2 remained suspended pending the outcome of Avalon’s appeal, heard in March 2015. The company reported awaiting judgment. If unsuccessful, Avalon said it would assess impairment of the wells. The wells generated $0.2 million of first-half revenue and incurred a $0.6 million pretax loss, including legal costs.
- Management identified risks from environmental or seismic events, evolving regulation, competition and pricing in saltwater disposal, customer concentration in captive landfill management, customer retention and payment defaults, and restrictions on interstate waste transport. Golf operations face membership, weather, seasonality, competition, and liquor-license risks; the company had not attained its membership goals.
- Routine legal and regulatory matters, including environmental proceedings, were not expected by management to create material adverse uninsured liabilities. The company maintained a valuation allowance against most deferred tax assets; the reported income-tax provision related to state tax on waste operations.
- Market-rate sensitivity was described as limited: a 1% rate increase was estimated to raise annual interest expense by less than $0.1 million at the reported debt level. Disclosure controls were judged effective at a reasonable-assurance level, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Current status and likely resolution of the AWMS #2 appeal, the operating outlook for both wells, and any potential impairment or additional compliance costs.
- Remaining Avalon Inn renovation spending, room availability and path to profitability; confirm the final purchase-price allocation and any resulting adjustments.
- Cash generation, working-capital needs, and access to the $2.4 million of reported revolver availability, including covenant terms and the June 2016 maturity.
- Sustainability and margins of waste event work, customer retention and concentration exposures, and progress toward golf-club membership goals.
- Reconcile capital expenditures incurred versus paid as described in MD&A and the cash-flow statement; assess the planned $8–$10 million annual program against liquidity.