Avalon Holdings Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Dollar amounts below are in millions unless stated otherwise. Avalon operates waste management services and golf, resort, hotel and related businesses.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net operating revenue | $19.5 | $16.4 | $33.8 | $31.5 |
| Operating income (loss) | $0.6 | $0.03 | $(0.6) | $(0.1) |
| Net income (loss) attributable to Avalon common shareholders | $0.5 | $0.7 | $(0.8) | $1.5 |
| Basic and diluted earnings (loss) per share | $0.12 | $0.19 | $(0.20) | $0.37 |
- Q2 revenue increased about 19%; first-half revenue increased about 7%. Q2 operating margin was approximately 3.0%, versus 0.2% a year earlier; the first-half operating margin was approximately negative 1.7%, versus negative 0.4%.
- Q2 revenue growth came from both segments: waste management revenue was $10.7 million, up from $8.7 million, and golf and related revenue was $8.8 million, up from $7.7 million. First-half growth was led by golf and related operations ($13.8 million versus $11.7 million); waste management revenue was $20.1 million versus $19.8 million.
- Q2 waste brokerage and management gross margin improved to about 21% from 20%; first-half margin declined to about 20% from 21%. Golf-related operating costs rose with increased activity, higher product costs and wage increases.
- Cash provided by operations was $2.1 million in the first half, compared with $1.7 million in 2021. Investing used $3.3 million, primarily for capital expenditures, versus $1.8 million used in 2021. Cash and cash equivalents ended June at $3.3 million; restricted project cash had been fully used.
- At June 30, current assets were $17.4 million and current liabilities $22.0 million, a working-capital deficit of approximately $4.6 million. The filing attributes the deficit increase from $2.1 million at year-end mainly to deferred membership dues, accounts payable and accrued payroll.
- Term debt was $20.3 million gross ($19.9 million net of issuance costs), including $1.2 million current; no borrowings were outstanding on the $5.0 million line of credit. Finance-lease obligations were $0.6 million and operating-lease obligations $1.4 million. Avalon reported compliance with its debt covenants at June 30.
Material changes and unusual items
- First-half common-shareholder results shifted from $1.5 million income in 2021 to a $0.8 million loss in 2022. The 2021 comparison included a $2.0 million gain from forgiveness of Paycheck Protection Program loans; no such gain was recorded in 2022.
- Q2 common-shareholder income was $0.5 million, down from $0.7 million. The 2021 quarter included $0.9 million of PPP loan forgiveness. Lower 2022 corporate expenses partly offset higher golf-related costs and the absence of that gain.
- Capital expenditures incurred in the first half were $4.4 million, of which $3.3 million was paid during the period. Management expects full-year 2022 capital expenditures of $6.0–$7.5 million, principally for renovations and expansion at The Grand Resort and Avalon Field Club at New Castle.
- Subsequent to quarter-end, on August 5, 2022, Avalon entered into a $31.0 million term loan, using $20.2 million to refinance the prior term loan and depositing about $10.4 million into a project fund for renovations and expansion. The new loan bears a fixed 6.00% rate initially, has a 2032 maturity with a balloon payment, and includes a 1.20 fixed-charge coverage covenant. Separately, the line-of-credit maturity was extended to July 31, 2024.
Management commentary, outlook and risks
- Management expects operating cash flows to cover operating needs and required term-loan payments; it says the line of credit is available if additional funding is needed. This outlook should be weighed against the working-capital deficit and planned capital spending.
- Waste revenue benefited from increased continuous and event work in Q2; event projects can vary substantially. Golf and related revenue benefited from higher resort occupancy and room rates, membership dues rates and salon/spa activity. Labor, food and other product costs pressured golf-segment profitability.
- Avalon’s two saltwater injection wells generated no operating revenue in the periods presented. The AWMS #2 well is subject to restart conditions, including a seismicity threshold; following an adverse June 30, 2022 commission decision, Avalon appealed to the Franklin County Court of Common Pleas on August 3. Separate litigation concerning alleged regulatory taking was awaiting judgment.
- Other disclosed risks include seasonal and weather-sensitive golf operations, membership retention and failure to meet membership goals, reliance on a single customer for captive-landfill management, customer credit and contract retention, disposal and transportation costs, labor availability and wages, inflation, regulation, and possible renewed COVID-related disruption. Management stated that pending legal matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- In April 2022, a court found MintBroker liable in Avalon’s short-swing trading case; damages remained to be determined, and collectability is not assured. Management reported disclosure controls were effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Performance and cash generation after the August refinancing, including the new loan’s payment schedule, balloon obligation, interest cost and covenant headroom.
- Whether planned renovation spending stays within the $6.0–$7.5 million estimate and how projects are funded after project-fund cash was exhausted at quarter-end.
- Working-capital and liquidity trends, including membership renewals, deferred dues, construction payables and collection of receivables.
- Golf membership levels, room occupancy and pricing, and the ability to offset wage and operating-cost inflation.
- Developments in the injection-well appeals and regulatory restrictions, and any resulting operating, legal or environmental costs.
- Recovery, if any, in the MintBroker matter; the filing does not provide a clear estimate of damages or collectible proceeds.