Avalon Holdings Corporation — Q2 2014 Form 10-Q
Business context and reporting period. This filing covers the three and six months ended June 30, 2014. Avalon operates waste management services and golf and related businesses. Amounts below are in thousands of dollars, except per-share figures and where noted.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net operating revenues | $13,016 | $15,733 | $22,999 | $30,402 |
| Operating income (loss) | $(201) | $396 | $(960) | $207 |
| Income (loss) before taxes | $(116) | $489 | $(808) | $374 |
| Net income (loss) | $(138) | $459 | $(838) | $315 |
| Net income (loss) attributable to Avalon common shareholders | $(88) | $459 | $(787) | $315 |
| Basic loss per share attributable to common shareholders | $(0.03) | $0.12 | $(0.21) | $0.08 |
- Q2 revenue declined about 17% year over year; first-half revenue declined about 24%. Management attributed the decline mainly to lower waste management services revenue.
- Waste management services revenue was $9.3 million in Q2, down from $12.1 million; the segment earned $682,000 before taxes versus $979,000. Brokerage and management services gross margin improved to 19.7% from 16.4%.
- Golf and related operations revenue was approximately $3.7 million in Q2 in both years, but the segment moved to a $155,000 pretax loss from $153,000 income. For the first half, revenue rose to $5.9 million from $5.8 million while the segment’s pretax loss widened to $653,000 from $152,000.
- Operating cash flow was $471,000 for the first half, down from $1.069 million. Capital expenditures were $3.537 million, resulting in $3.523 million of net investing cash outflow. Cash fell to $7.137 million from $9.798 million at year-end.
- Working capital was $6.4 million at June 30, versus $9.5 million at December 31, 2013. Total current assets were $17.621 million and current liabilities $11.224 million.
- At June 30, Avalon had no borrowings under its credit line. Capital lease obligations totaled $420,000, including $57,000 current. On July 22, the unsecured credit line was increased from $1 million to $5 million; Avalon borrowed $2.9 million on August 1.
Material changes and notable items
- Waste brokerage and management revenue fell as event work and services for one customer declined. First-half revenue from that customer’s managerial, consulting and clerical services decreased to $2.0 million from $4.9 million. The company noted these services carry lower gross margins than traditional work.
- Avalon began operating two salt water injection wells during Q2. The wells generated $200,000 of first-half revenue but incurred a $100,000 pretax loss; related depreciation was $100,000. First-half capital spending included $3.0 million for the wells and facilities.
- On August 1, after quarter-end, Avalon acquired the Magnuson Grand Hotel and adjoining tennis center for $3.1 million cash, assumed certain leases and received some rental payment relief. The acquisition was funded in part with the $2.9 million credit-line borrowing; hotel renovation costs had not yet been determined.
- Avalon’s interest in AWMS Holdings, which owns the injection-well operations, was approximately 49% at June 30. Avalon consolidates AWMS because it has managerial control. Private placement proceeds and Avalon contributions funded construction.
Outlook, risks and contingencies
- Management expected 2014 capital expenditures of $4.0–$4.5 million, principally for completing the injection wells and facilities, golf-related building improvements and equipment. Hotel renovation spending was undetermined.
- Management stated that cash from future operations, existing working capital and borrowing capacity should be sufficient for foreseeable operating needs and capital programs. The expanded credit facility has a LIBOR plus 2.70% borrowing rate, a 0.25% nonuse fee, annual renewal and financial and other covenants.
- Management cited waste-disposal and transportation regulation, industry consolidation and disposal-cost increases, customer retention and payment defaults, dependence of the captive landfill on one customer, and golf membership, weather, seasonality and operating costs as risks. Avalon had not attained its golf membership goals and gave no assurance when the golf business would become profitable.
- Avalon is involved in ordinary-course litigation and proceedings, including environmental matters. Management did not believe uninsured liabilities from pending matters would materially adversely affect liquidity, financial position or results, while noting outcomes cannot be predicted with certainty.
- The company maintained a valuation allowance against most deferred tax assets; this affected reported tax results. Management said the interim results are not necessarily indicative of full-year results.
Investor facts to verify
- Whether waste brokerage revenue and event work recover, and whether the customer-related service decline continues.
- Injection-well utilization, profitability, remaining construction needs and Avalon’s funding or ownership obligations for AWMS.
- The hotel acquisition’s final lease terms, renovation spending, operating contribution and effect on credit-line usage and covenants.
- Whether golf membership growth and cost control can improve segment results despite weather and seasonal exposure.