Avalon Holdings Corporation (NYSE American: AWX) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement figures are in thousands unless stated otherwise. Avalon provides waste management services and operates golf, country club, hotel, fitness and related facilities.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net operating revenue | $18.425 million | $16.705 million | $33.033 million | $28.221 million |
| Operating income (loss) | $569,000 | $596,000 | $51,000 | $(188,000) |
| Income (loss) before tax | $502,000 | $535,000 | $(111,000) | $(360,000) |
| Net income (loss) attributable to Avalon common shareholders | $479,000 | $623,000 | $(159,000) | $(176,000) |
| Basic and diluted earnings (loss) per share | $0.12 | $0.16 | $(0.04) | $(0.05) |
- Revenue: Q2 increased 10% year over year, principally from waste management; first-half revenue increased 17%. Waste management revenue was $12.9 million in Q2 and $24.3 million for the half, versus $11.5 million and $20.0 million, respectively. Golf and related revenue was $5.5 million in Q2 and $8.7 million for the half.
- Profit and margins: Q2 operating income was slightly lower despite higher revenue. First-half operating results improved from a loss to modest income, but the company still reported a first-half net loss attributable to shareholders. Waste brokerage and management gross margin was about 20% in both Q2 and the first half, versus 21% in the comparable 2018 periods. Golf and related operations generated $181,000 of pretax income in Q2, down from $381,000, and a $463,000 first-half pretax loss, versus breakeven.
- Cash flow: First-half operating cash flow was $2.388 million, compared with $2.165 million. Investing cash use was $2.912 million, including $2.867 million of capital expenditures paid; financing provided $2.397 million, including $3.0 million of new term-loan proceeds. Cash, cash equivalents and restricted cash ended at $3.781 million, including $3.280 million of unrestricted cash.
- Liquidity: Current assets were $18.1 million and current liabilities $20.7 million at June 30, 2019, a working-capital deficit of approximately $2.6 million, compared with a $0.7 million deficit at year-end 2018. Management attributed the deterioration in part to deferred membership revenue and construction-related payables. Management stated anticipated operating cash flow should cover foreseeable operating requirements and scheduled term-loan payments.
- Debt: Long-term debt, net of current portion, was $13.3 million; current debt was $771,000. Total reported debt before debt issuance costs was $14.2 million. Finance-lease obligations were $873,000 and operating-lease obligations were $1.7 million. Avalon had no balance drawn on its $5 million revolving credit facility at quarter-end; its maturity was extended to May 31, 2021. The company reported compliance with applicable loan covenants.
Material changes and business developments
- Waste-management revenue growth included one-time event projects: $5.4 million in Q2 versus $4.0 million, and $9.7 million for the first half versus $6.2 million. Management cautioned that this work can fluctuate significantly. Continuous waste brokerage work also grew.
- Golf and related revenue increased, supported by higher membership and food and beverage sales. Average club membership was 4,870 in Q2 versus 4,512 a year earlier; the company reported 4,996 members at June 30, 2019.
- On May 13, Avalon acquired New Castle Country Club real property, rebranded as The Avalon Field Club at New Castle. It assumed approximately $787,000 of debt and related obligations as consideration; operations were limited in Q2 and their results were not significant.
- First-half capital expenditures incurred were approximately $4.5 million, primarily for The Avalon Inn expansion and, to a lesser extent, the Boardman Athletic Club. The filing reported $2.9 million paid during the period and $1.6 million of capital expenditures included in accounts payable.
- Avalon adopted lease accounting on January 1, 2019, recognizing approximately $1.7 million of operating-lease right-of-use assets and liabilities. The filing states this was an accounting presentation change, not a material operating impact.
Outlook, risks and unusual items
- Capital spending outlook: Management expected 2019 aggregate capital expenditures of $6 million to $7 million, principally for The Avalon Inn and improvements to its club facilities. Funding was expected from project-fund cash, operating cash and cash generated from operations.
- No earnings or revenue guidance: The filing provides no quantified revenue or earnings forecast. Management’s liquidity view is subject to actual operating results and business conditions.
- Injection wells and litigation: Saltwater injection operations remained suspended, with no related operating revenue. After unsuccessful appeals, management said restart was not expected in the near future under the conditions proposed by regulators. Avalon had recorded a $3.3 million impairment in Q4 2018 and continued legal efforts, including a 2019 appeal and a motion to vacate prior decisions. Outcomes and any recovery are uncertain.
- Operating risks: Waste event work is variable; some customer relationships lack long-term contracts; the captive landfill operation depends on a single customer. Waste disposal regulation, vendor pricing and customers’ ability to pay may affect results. Golf and resort operations are seasonal and weather-sensitive, and member retention and growth remain important; management noted membership goals had not been reached.
- Taxes and contingencies: Avalon maintained a full valuation allowance against federal deferred tax assets, limiting recognition of tax benefits. The company stated that pending ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Other notable disclosure: In May 2019, the Audit Committee dismissed BDO USA LLP and engaged Grant Thornton LLP as independent registered public accounting firm. Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of waste-management growth depends on nonrecurring event projects, and whether margins can recover from the reported 20% level.
- Whether operating cash flow can support the remaining planned capital spending, construction payables and scheduled debt service given the working-capital deficit.
- The operating contribution and ongoing financing obligations of the New Castle acquisition and other club expansion projects.
- Any material developments in the injection-well suspension and related litigation; no restart or legal recovery is assured.
- Membership trends, golf-segment profitability, and the impact of seasonality and weather on second-half results.