Avalon Holdings Corporation — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Avalon operates waste management services and golf and related businesses.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net operating revenue | $9.983 million | $14.669 million | Down 32% |
| Costs of operations | $8.514 million | $12.554 million | Down 32% |
| Operating loss | $759,000 | $189,000 | Loss widened |
| Net loss attributable to Avalon | $699,000 | $144,000 | Loss widened |
| Loss per share | $0.18 | $0.04 | Loss widened |
| Cash used in operating activities | $849,000 | $199,000 | Use increased |
| Capital expenditures paid | $1.972 million | $69,000 | Higher investment |
Cash and cash equivalents were $7.331 million at March 31, down from $9.798 million at year-end. Working capital was $6.8 million, versus $9.5 million at December 31, 2013. Current assets were $16.728 million and current liabilities $9.967 million. Avalon reported no borrowings on its $1 million unsecured credit line; capital lease obligations totaled $433,000, including $57,000 current. The filing describes no other debt outstanding.
Consolidated operating margin was approximately negative 7.6%, compared with negative 1.3% in Q1 2013. Waste brokerage and management gross margin improved to 18.0% from 14.9%, mainly because lower-revenue, lower-margin managerial and consulting work represented a smaller share of sales. No consolidated gross-margin figure is separately reported.
Segments and material changes
- Waste management services: Revenue fell 38% to $7.830 million from $12.563 million; pretax income declined to $508,000 from $889,000. Waste brokerage and management revenue was $7.3 million versus $12.0 million. Management attributed the decline mainly to severe winter weather: event-work revenue fell about 52% and continuous-work revenue 19%. Captive landfill revenue also declined on lower disposal volumes.
- Golf and related operations: Revenue edged up to $2.172 million from $2.117 million, while the pretax loss widened to $498,000 from $305,000. Average membership increased to 3,690 from 3,447. Cold weather increased employee and utility costs.
- General corporate expenses were approximately $710,000, broadly unchanged. Interest expense was $5,000 in both periods. The effective tax rate was approximately 0%, as the tax benefit on losses was offset by an increased valuation allowance.
Liquidity, outlook, and risks
Cash use and the decline in working capital primarily reflected investment in two saltwater injection wells and related facilities. Avalon reported $2.9 million of capital expenditures incurred in Q1, of which $2.0 million had been paid; $906,000 of capital expenditures remained in accounts payable at March 31. Total 2014 capital expenditures were expected to be $3.5–$4.5 million, principally for the wells, facility completion, building improvements, and equipment.
AWMS Holdings had received $3.4 million from a private placement expected to raise $3.5 million; Avalon owned approximately 47% but consolidated the subsidiary due to managerial control. The wells began accepting a limited amount of brine water in April 2014 while facility construction continued. Management said operating cash, working capital, and credit availability should fund foreseeable operating needs and capital programs; additional well projects, if pursued, could require further private placements.
Key risks include weather-driven seasonality; customer retention and the lack of long-term contracts for much of the waste business; dependence of the captive landfill on one customer; disposal-price competition and possible regulatory restrictions on waste transportation; and the startup, competitive, regulatory, and environmental risks of saltwater disposal wells, including contamination or seismic events. Management did not expect pending legal matters to have a material adverse effect, but outcomes are uncertain. No specific earnings or revenue guidance was provided.
Investor facts to verify
- Whether waste-management revenue and margins recover from the weather-related decline, and how much revenue is recurring versus event-based.
- Remaining well-construction costs, completion timing, funding needs, and commercial utilization following the limited April 2014 start.
- Liquidity after planned capital expenditures, including the $906,000 of capital spending in accounts payable and the terms or availability of the credit line.
- Whether golf membership growth can translate into profitability, given continued losses and management’s statement that membership goals have not been met.
- Exposure to the captive landfill’s single customer, customer concentration in receivables, and developments in environmental regulation or well-operation risks.