Avalon Holdings Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is with Q1 2018. Avalon provides waste management services and operates golf, resort, hotel, fitness and related businesses. Amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net operating revenue | $14.61 | $11.52 |
| Operating loss | $(0.52) | $(0.78) |
| Loss before income taxes | $(0.61) | $(0.90) |
| Net loss attributable to Avalon common shareholders | $(0.64) | $(0.80) |
| Basic and diluted loss per share | $(0.16) | $(0.21) |
| Net cash from operating activities | $(0.13) | $0.77 |
Revenue rose 26.8%, primarily from waste brokerage and management services. Waste revenue was $11.43 million, up from $8.46 million; golf and related revenue was $3.17 million, up from $3.06 million. The operating loss narrowed, while the common-shareholder net loss improved by $0.16 million. The reported tax provision was $0.04 million, despite the pretax loss; Avalon maintains a valuation allowance against most deferred tax assets.
Waste brokerage and management revenue included $4.4 million of one-time event work, compared with $2.2 million a year earlier; continuous work increased to $6.3 million from $5.5 million. Gross margin for that business declined to approximately 19% from 21%. Waste segment pretax income improved to $1.0 million from $0.5 million. Golf and related operations recorded a pretax loss of $0.6 million, versus $0.4 million, primarily due to higher employee costs. Golf-course revenue was minimal in both periods because of adverse weather.
Depreciation and amortization was $0.60 million, down from $0.73 million, partly reflecting the prior-year impairment of the injection-well assets. SG&A was approximately $2.23 million in both periods; interest expense was $0.16 million versus $0.17 million.
Cash, debt and liquidity
Cash and cash equivalents were $1.24 million at March 31, 2019, down from $1.41 million at year-end. Restricted cash was $2.98 million, bringing cash, cash equivalents and restricted cash to $4.21 million. The restricted funds are loan proceeds designated for the Avalon Inn renovation and expansion and are not equivalent to unrestricted operating cash. Operating cash flow was negative $0.13 million, compared with positive $0.77 million in Q1 2018. Investing used $0.37 million; financing provided $2.80 million, including the new $3.0 million term loan. Capital expenditures incurred were $1.3 million, of which $0.4 million was paid during the quarter.
Working capital deficit widened to approximately $2.3 million from $0.7 million at December 31, 2018. Net debt carrying value was $13.56 million, comprising $0.71 million current and $12.85 million long-term. Avalon also reported $2.55 million of lease obligations, including $1.63 million under operating leases recognized following adoption of the lease standard. The $5.0 million revolving credit facility was undrawn; it matures May 31, 2020, and borrowings above $1.0 million are subject to a borrowing base. Avalon reported compliance with its debt covenants at quarter-end.
Material changes, outlook and risks
On March 29, Avalon borrowed $3.0 million under a new term loan, with proceeds largely placed in a restricted project fund for Avalon Inn renovations. The loan bears fixed interest of 6.25% through its fifth anniversary, has a balloon maturity on December 20, 2026, and is secured by a second-priority mortgage on the Inn property. The existing $12.0 million term loan carries a 5.35% fixed rate until its fifth-anniversary reset and also matures in 2026 with a balloon payment. Avalon adopted lease accounting on January 1, 2019, recognizing approximately $1.7 million of operating-lease assets and liabilities.
Management expects 2019 capital expenditures of $3.0–$3.5 million, principally for the Avalon Inn expansion, Boardman Athletic Club renovations, building improvements and equipment. It believes anticipated operating cash flows will meet operating needs and scheduled term-loan payments; it may consider refinancing, additional borrowing or equity issuance if additional capital is needed. No earnings or revenue guidance is provided. The filing cautions that interim results are not necessarily indicative of full-year results.
The two saltwater injection wells remain suspended following regulatory action tied to seismicity concerns; they generated no revenue in either period. After an unfavorable Ohio appellate decision and the Ohio Supreme Court’s refusal to review the matter, Avalon recorded a $3.3 million impairment in Q4 2018. On April 5, 2019, after quarter-end, Avalon filed a motion to vacate prior agency decisions and appealed a separate summary judgment ruling in favor of the Ohio Department of Natural Resources. Management says there is no assurance the wells will restart and that restart conditions proposed by the regulator are economically unfeasible.
Other disclosed risks include the variability of one-time waste projects, exposure to disposal and transport regulation and pricing, customer retention and credit risk, dependence of captive-landfill revenue on one customer, golf-club membership and weather seasonality, and potential environmental or seismic liabilities. Management does not expect pending legal matters to have a material adverse effect, but outcomes are uncertain. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether waste revenue growth can be sustained as one-time event work fluctuates, and whether brokerage margins recover from 19%.
- Unrestricted liquidity and operating cash generation, given the working capital deficit and the restricted nature of most quarter-end cash and restricted cash combined.
- Renovation spending, project-fund availability, debt-service capacity, covenant compliance and the 2026 balloon obligations.
- Developments in the injection-well proceedings, possible restart economics, and any further impairment or legal costs.
- Golf and resort membership trends, weather effects, and progress toward profitability in the golf and related operations segment.