Avalon Holdings Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; unaudited. Avalon operates waste management services and golf, club, hotel and related recreation businesses. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net operating revenue | $18.15 | $16.36 | $46.37 | $41.64 |
| Operating income (loss) | $0.93 | $0.53 | $0.74 | ($0.27) |
| Net income (loss) attributable to Avalon shareholders | $0.85 | $0.55 | $0.67 | ($0.26) |
| Basic earnings (loss) per share | $0.22 | $0.14 | $0.18 | ($0.07) |
- Revenue increased about 11% year over year in Q3 and 11% for the first nine months. Waste management revenue drove most of the increase: $12.56 million in Q3 and $32.53 million year to date. Golf and related revenue was $5.59 million and $13.84 million, respectively.
- Operating margin was approximately 5.1% in Q3 versus 3.2%; year-to-date it was 1.6% versus a loss of 0.6%. Q3 improvement reflected higher waste brokerage revenue and gross margin; golf segment pretax income declined to $0.46 million from $0.67 million, mainly on higher employee costs.
- Operating cash flow was $3.14 million for nine months, up from $1.34 million. Investing used $3.26 million, including $2.01 million of capital expenditures and $1.27 million for the Boardman facility acquisition. Financing used $0.61 million, principally for term-loan and lease principal payments.
- At September 30, cash and cash equivalents were $1.80 million and restricted cash was $1.33 million, compared with $1.03 million and $2.83 million at year-end 2017. Working capital was a deficit of $0.7 million, versus a $0.2 million deficit at year-end.
- Term debt was $11.04 million gross ($10.88 million net of issuance costs); capital-lease obligations totaled $0.97 million. The $12 million term loan carries a 5.35% fixed rate and matures in December 2026, with a final balloon payment. A new $5 million revolving credit line, maturing May 2020, was undrawn at quarter-end; its rate was 5.25% then and increased to 5.50% on October 1. Avalon reported covenant compliance.
Material changes versus prior period
- Q3 waste brokerage and management revenue rose to $12.01 million from $10.26 million, with higher continuous and one-time project work. Its gross margin increased to approximately 21% from 18%.
- Year-to-date golf revenue rose modestly, supported by higher hotel occupancy and room rates; average membership fell to 4,443 from 4,604. Food, beverage and merchandise revenue declined.
- Avalon acquired the Boardman Tennis Center facility in March for approximately $1.27 million net cash consideration and began converting it into a multipurpose recreation and fitness center during Q3.
- Shareholder-attributable results turned profitable for the first nine months, compared with a loss in 2017. The filing attributes the improvement principally to waste-segment growth and margin gains.
Outlook, commentary and risks
- Management expected 2018 capital expenditures of $3 million to $4 million, mainly for the Avalon Inn renovation and expansion, the Boardman facility renovation, building improvements and equipment. It expected operating cash flow to cover foreseeable operating needs and scheduled term-loan payments.
- The #2 saltwater injection well remained suspended. In July 2018, an Ohio appellate court reinstated the prior suspension decision; Avalon appealed to the Ohio Supreme Court in September. Management identified a possible impairment charge of up to $3.3 million if the suspension is deemed other than temporary and the asset is not recoverable.
- Other risks include environmental and seismic regulation, potential waste-disposal price increases and limits on out-of-state waste, customer retention and payment risk, dependence of captive-landfill revenue on one customer, golf membership and weather seasonality, and competition. Management said pending proceedings were not expected to have a material adverse effect, but outcomes are uncertain.
- The company had no specific earnings guidance in the supplied filing text. It was still estimating the full Tax Act impact and expected to finalize the accounting at year-end. Adoption of the new lease standard was expected to result in material right-of-use assets and lease liabilities.
- Revenue recognition changes adopted in 2018 did not materially change revenue recognition. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether waste brokerage growth and its approximately 21% gross margin persist, particularly given the variable nature of one-time project work.
- Progress and remaining funding needs for the Avalon Inn and Boardman renovations, including whether expected capital spending remains within the $3–$4 million range.
- Developments in the injection-well appeals, the well’s restart prospects, and the carrying-value assumptions behind the potential $3.3 million impairment.
- Cash conversion and working-capital trends, especially accounts receivable, accounts payable and deferred membership dues, alongside the company’s reliance on operating cash and restricted project funds.
- Term-loan balloon and prepayment terms, borrowing availability under the revolving line, and the material balance-sheet effect expected from lease-standard adoption.