Avalon Holdings Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; financial statements are unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Business context
Avalon operates waste management services, including brokerage and captive landfill management, and golf and related businesses, including three golf courses and The Avalon Inn. Its saltwater injection wells were not operating during the periods presented because of regulatory suspensions.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net operating revenue | $19.1 | $14.6 | $45.8 | $39.2 |
| Operating income (loss) | $0.8 | $0.4 | $0.2 | $(1.1) |
| Net income (loss) | $0.7 | $0.4 | $0.1 | $(0.9) |
| Net income (loss) attributable to Avalon shareholders | $0.8 | $0.5 | $0.3 | $(0.5) |
| Basic and diluted earnings (loss) per share | $0.21 | $0.14 | $0.08 | $(0.14) |
- Operating margin was approximately 4.3% in Q3 2016 versus 2.9% in Q3 2015; for the nine-month periods it was approximately 0.5% versus negative 2.7%.
- Q3 revenue grew about 31%; nine-month revenue grew about 17%. Waste management generated $13.6 million of Q3 revenue and $32.6 million for nine months; golf and related operations generated $5.6 million and $13.2 million, respectively.
- Operating cash flow was $1.2 million for the first nine months, compared with $0.6 million in 2015. Capital expenditures were $2.4 million, versus $6.8 million. Cash declined $0.2 million to $1.6 million.
- At September 30, total assets were $66.8 million and equity was $41.9 million. Working capital was negative $7.8 million, versus positive $0.6 million at December 31, 2015.
- The $9.0 million revolving credit facility was fully drawn and classified as current; the rate was 3.75%, and maturity was March 31, 2017, with a possible 90-day extension subject to conditions. Capital lease obligations totaled approximately $0.4 million. The company reported compliance with debt covenants.
Material changes and drivers
- Q3 waste segment revenue rose about 40%, mainly from one-time event projects: $7.9 million versus $2.6 million a year earlier. Continuous-work revenue declined, and management, consulting and clerical revenue also fell. Management cautioned that event work can fluctuate significantly.
- Q3 golf and related revenue increased about 13%, principally as The Avalon Inn generated $1.4 million versus $0.7 million. Higher hotel occupancy and room rates and more club members supported results.
- For the nine months, Avalon moved from a $0.5 million shareholder loss to $0.3 million of shareholder income. The waste segment’s pretax income rose to $2.0 million from $1.2 million, and golf and related operations reported $0.5 million of pretax income versus approximately $0.1 million.
- Accounts receivable increased to $13.7 million from $9.6 million; accounts payable rose to $10.2 million from $8.0 million. Management linked these changes primarily to higher waste activity, seasonal golf-business activity and payment timing. Deferred revenue from membership dues increased to $3.3 million from $2.4 million.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures of $2.8 million to $3.0 million, principally for The Avalon Inn renovation and expansion, building improvements and equipment. It anticipated refinancing the fully drawn credit facility before maturity, but said refinancing was not assured. Management stated it expected operating cash flows to meet requirements for the foreseeable future.
- Both injection wells remained suspended. Avalon was awaiting a court judgment following a November 1, 2016 hearing concerning the AWMS #2 suspension and was pursuing separate litigation against Ohio regulators. The company reported no injection-well revenue in 2016 and recorded related depreciation and legal costs.
- Management reported no change to its recoverability assessment for the injection-well assets at September 30. It warned that an impairment charge of up to $4.4 million could be recorded if the suspension is deemed other than temporary and the carrying amount is not recoverable.
- Other disclosed risks include customer retention and credit risk, dependence of captive landfill operations on one customer, waste-disposal pricing and regulation, environmental and seismic risks, golf membership and weather seasonality, and competition. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Management reported an overall effective tax rate of 0% excluding state tax provisions and minor tax credits, primarily because of changes in the valuation allowance on deferred tax assets.
Important facts for investors to verify
- Whether Avalon refinanced or extended the $9.0 million facility before its March 31, 2017 maturity, and the resulting terms and liquidity position.
- Developments in the injection-well suspension and related litigation, including whether operations resume and whether impairment testing changes.
- Whether elevated revenue from one-time waste projects is repeatable, given declines in continuous-work and certain service revenues.
- Progress on The Avalon Inn renovation, capital spending, hotel performance and club membership retention and economics.
- Receivable collections and operating cash generation, particularly given the sharp increase in accounts receivable and the working-capital deficit.