Avalon Holdings Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Avalon operates waste management services and golf and related businesses, including country clubs and The Avalon Inn. Financial amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net operating revenues | $15.642 | $13.955 | $26.641 | $24.655 |
| Operating income (loss) | $0.370 | $(0.214) | $(0.606) | $(1.493) |
| Income (loss) before taxes | $0.367 | $(0.120) | $(0.624) | $(1.332) |
| Net income (loss) attributable to Avalon common shareholders | $0.421 | $(0.005) | $(0.487) | $(1.045) |
| Basic and diluted earnings (loss) per share | $0.11 | $0.00 loss | $(0.13) | $(0.27) |
| Net cash provided by operating activities | Not separately presented | $0.964 | $0.356 |
Q2 revenue rose 12% year over year; first-half revenue increased 8%. Operating margin, calculated as operating income divided by revenue, was approximately 2.4% in Q2 2016 versus negative 1.5% in Q2 2015; for the first half it was negative 2.3% versus negative 6.1%. Costs of operations were $12.688 million in Q2 and $22.111 million for the first half. Interest expense was $0.092 million in Q2 and $0.179 million for the first half.
Cash and cash equivalents were $1.910 million at June 30, 2016, compared with $1.814 million at year-end 2015. First-half investing cash outflow was $1.863 million, principally capital expenditures; financing activities provided $0.995 million. Accounts receivable was $11.273 million. Working capital was a deficit of approximately $8.7 million, versus positive working capital of $0.6 million at December 31, 2015.
Total assets were $64.761 million and total equity was $41.112 million at June 30. The $9.0 million revolving credit facility was fully drawn and classified as current; its rate was 3.75%, and it matures March 31, 2017, with a conditional 90-day extension option. Capital lease obligations totaled $0.371 million. The facility is secured by business assets; Avalon reported covenant compliance at quarter-end.
Changes, segments, and management commentary
- Waste management: Q2 segment revenue increased about 10% to $10.756 million; first-half revenue rose about 5% to $19.032 million. Q2 growth benefited from event work, while continuous-work and management-services revenue declined. First-half event-work revenue was $7.8 million versus $6.2 million. Brokerage gross margin was 17% in Q2 in both years, and 18% for the first half of 2016 versus 17% in 2015.
- Golf and related operations: Q2 revenue increased about 17% to $4.897 million; first-half revenue rose about 17% to $7.636 million. Avalon Inn revenue improved to $1.1 million in Q2 and $1.8 million for the first half, reflecting higher room revenue and food and beverage sales. The segment had first-half pretax loss of $0.140 million, improved from $0.454 million loss.
- Common-shareholder results improved to Q2 profit of $0.421 million from near breakeven loss; first-half loss narrowed to $0.487 million from $1.045 million. Consolidated net income was $0.340 million for Q2, while the non-controlling interest was allocated a loss of $0.081 million, explaining the higher common-shareholder income.
- Membership averaged 4,648 in Q2 and 4,511 in the first half, up from 3,923 and 3,876, respectively. Membership dues per member were affected by a greater mix of lower-priced social memberships and promotional programs. Deferred membership revenue rose to $3.697 million from $2.401 million at year-end.
- Management expects 2016 capital expenditures of $2.5–$3.0 million, principally for continued Avalon Inn renovation and expansion, building improvements, and equipment. First-half capital expenditures incurred were $2.0 million. Management anticipates refinancing the fully drawn credit facility before maturity, but states refinancing is not assured. No specific revenue or earnings guidance was provided.
Risks, contingencies, and notable items
- Both saltwater injection wells were temporarily suspended following a 2014 seismic event. AWMS #2 remains suspended, and Avalon also suspended AWMS #1 pending a favorable ruling. The company reported no well revenue in the first half of 2016 and continues its appeal. The appellate court reversed a lower court procedural ruling in May 2016, but the operating suspension remains in effect.
- Management reported no change to its assessment that the wells’ carrying value was recoverable at June 30, 2016. If the suspension is deemed other than temporary and the assets are not recoverable, a potential impairment charge could be up to $4.5 million.
- The fully utilized credit line and working-capital deficit create refinancing and liquidity risk. The company says operating cash flows are expected to meet requirements but notes it cannot guarantee refinancing or alternative financing success.
- Other identified risks include waste-disposal regulation and pricing, customer retention and payment defaults, dependence of captive landfill operations on one customer, evolving injection-well regulation and environmental/seismic events, golf membership retention, liquor-license loss, and seasonal/weather-related business variability. Management did not expect pending legal matters to have a material adverse effect, but outcomes are uncertain.
- Management stated disclosure controls were effective at a reasonable assurance level and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and terms of refinancing the $9.0 million fully drawn facility before its March 31, 2017 maturity, including any extension and covenant requirements.
- Status of regulatory and appeal proceedings for both injection wells, potential restart timing, and whether impairment indicators emerge.
- Whether event-work revenue growth is repeatable, given its one-time and potentially variable nature, and the trend in continuous-work sales.
- Avalon Inn renovation spending, operating performance, and the company’s ability to convert higher membership and hotel activity into sustained profitability and cash flow.
- Working-capital movements, particularly receivables, payables, deferred membership revenue, and their implications for near-term liquidity.