Avalon Holdings Corporation — Q1 2017 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Avalon provides waste brokerage and management services, captive landfill management and saltwater injection well operations, and operates golf, club and hotel facilities. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net operating revenue | $10.702 | $10.999; down 2.7% |
| Operating loss | $(0.901) | $(0.976) |
| Net loss | $(1.019) | $(1.000) |
| Net loss attributable to Avalon shareholders | $(0.926); $(0.24) per share | $(0.908); $(0.24) per share |
| Cash flow from operations | $(0.581) | $(0.567) |
| Capital expenditures paid to vendors | $0.460 | $0.494 |
| Cash and cash equivalents, period-end | $1.079 | $2.299 at Dec. 31, 2016 |
| Working capital | $(0.8) | $0.2 at Dec. 31, 2016 |
| Total debt, net of issuance costs | $11.685 | $11.811 at Dec. 31, 2016 |
Quarter-end restricted cash was $2.905 million, reserved for the Avalon Inn project. Cash decreased $1.220 million during the quarter. The company also reported $1.2 million of capital expenditures incurred, including $0.6 million of golf equipment acquired through capital leases. Capital lease obligations totaled $1.178 million at March 31. No amounts were drawn on the line of credit. No consolidated profit margin was reported.
Changes and segment results
- Waste management: Revenue fell 8% to $7.6 million, while pretax income rose to $0.543 million from $0.373 million. Management attributed the improvement partly to higher-margin continuous work; brokerage and management gross margin increased to 23% from 18%. Lower one-time event work and services for one customer reduced revenue. The suspended injection wells generated no revenue and incurred an approximately $0.2 million pretax loss in each comparative quarter.
- Golf and related operations: Revenue increased 14% to $3.1 million, supported by hotel room and food-and-beverage sales and higher membership dues. Membership averaged 4,714, versus 4,373. Pretax loss widened to $0.597 million from $0.516 million, primarily due to employee costs and depreciation.
- Consolidated operating loss improved, but net loss attributable to shareholders increased slightly. Interest expense rose to $0.175 million from $0.087 million; the weighted average interest rate on borrowings was 5.35%, versus 3.75%.
Outlook, risks and unusual items
- Management expects 2017 capital expenditures of $4 million to $6 million, principally for the Avalon Inn renovation and expansion, building improvements and equipment. Management believes anticipated operating cash flows will cover foreseeable operating needs and required term-loan payments.
- The $12 million term loan bears fixed interest at 5.35% through its fifth anniversary, then resets subject to a 7.50% cap. It matures in December 2026 and has a balloon payment; early repayment carries a penalty. Avalon reported compliance with debt covenants at quarter-end.
- On April 25, 2017, after quarter-end, the revolving credit facility was increased from $4 million to $5 million and extended to May 31, 2019, with a possible one-year extension subject to conditions.
- The Ohio appellate court stayed the order permitting restart of AWMS #2 while the state’s appeal proceeds. The wells remained suspended, and restart timing was uncertain. The company stated that failure to resume operations and a conclusion that the assets are unrecoverable could result in an impairment charge of up to $4.1 million.
- Avalon is pursuing a separate legal claim related to the well suspension. Management said pending legal matters were not expected to have a material adverse effect, but outcomes cannot be predicted.
- Risks include waste-industry regulation and disposal pricing, customer retention and credit losses, dependence of the captive landfill operation on one customer, seismic/environmental and regulatory exposure, golf membership levels and weather-related seasonality. The company noted that golf operations had not achieved membership goals and might not become profitable on a predictable timetable.
- Revenue standard adoption was planned for Q1 2018; the company was still assessing whether principal-versus-agent presentation would change revenue reported for services provided to one waste-segment customer. Management did not expect a fundamental change to revenue recognition policies.
Important facts for investors to verify
- Whether the AWMS #2 appeal is resolved and when, if ever, operations can restart; assess the potential impairment exposure.
- Whether the Avalon Inn project remains within the $4 million–$6 million 2017 capital-spending range and how it is funded.
- Cash generation, working-capital needs and access to the amended credit facility, particularly given low unrestricted cash and negative working capital.
- Whether waste-segment revenue and golf membership growth continue, and whether the hotel and club operations improve profitability.
- Any changes to debt covenant compliance, refinancing needs or the loan’s future interest rate and balloon-payment obligations.