Avalon Holdings Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results; amounts below are in U.S. dollars. Financial statement amounts are generally shown in millions, except per-share data.
Business context
Avalon operates waste management services and golf and related operations. Waste management includes brokerage and disposal management, a captive landfill, construction mat sales, and saltwater injection wells. Golf and related operations include golf and country club facilities; the segment began including The Magnuson Grand Hotel, renamed The Avalon Resort and Spa, following its August 1, 2014 acquisition.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net operating revenue | $14.437m | $16.386m | $37.436m | $46.788m |
| Operating income (loss) | $0.131m | $0.401m | $(0.829)m | $0.608m |
| Net income (loss) attributable to Avalon shareholders | $0.098m | $0.415m | $(0.689)m | $0.730m |
| Basic EPS | $0.03 | $0.11 | $(0.18) | $0.19 |
| Operating cash flow | Not presented separately | Not presented separately | $0.147m | $1.563m |
Revenue fell about 12% in Q3 and 20% for the first nine months year over year. Q3 net income attributable to shareholders declined; the nine-month period moved from profit to loss. Waste brokerage and management gross margin improved to 19.7% from 16.4% in Q3 and to 19.5% from 16.5% for the nine months, but lower revenue weighed on segment income.
At September 30, cash was $6.166m, down from $9.798m at year-end 2013; working capital was $3.4m versus $9.5m. Nine-month investing cash use was $7.269m, including $4.161m of capital expenditures and $3.122m for the hotel acquisition. Financing cash provided was $3.490m, including $2.9m borrowed on the revolving line. The balance sheet reported $2.9m of line-of-credit borrowings and approximately $0.406m of capital lease obligations. The unsecured credit facility was increased from $1m to $5m; borrowings bear interest at LIBOR plus 2.70% and the facility renews annually on April 30.
Material changes and unusual items
- Waste segment: Q3 revenue was $10.391m versus $12.487m; nine-month revenue was $27.567m versus $37.148m. Management attributed the decline mainly to fewer one-time event projects and reduced consulting and support work for one customer. The segment’s Q3 pretax income was $0.996m versus $1.064m; nine-month pretax income was $2.186m versus $2.932m.
- Injection wells: The two wells began limited operations in April. A magnitude 2.1 seismic event led Ohio regulators to suspend both wells on September 3. The order for AWMS #1 was terminated September 18 and operations resumed; AWMS #2 remained suspended at the filing date. Avalon appealed the orders on October 3. The wells generated $0.7m revenue in the first nine months; the segment reported a $0.1m pretax loss for the period.
- Hotel acquisition: Avalon paid $3.1m in cash and assumed certain operating leases for the hotel and adjoining tennis center. The preliminary purchase allocation included $2.570m of property and equipment, $0.818m of intangible assets, and $0.266m of deferred rental income; the valuation remained provisional. From acquisition through September 30, the hotel contributed $0.3m revenue and $9,000 net income. Avalon recorded $67,000 of acquisition costs.
- Golf segment: Q3 revenue rose to $4.072m from $3.912m, including the hotel, but pretax results shifted to a $0.068m loss from $0.170m income. Nine-month pretax results were a $0.721m loss versus $0.018m income, primarily due to higher employee, utility, and operating-supply costs. Management cited adverse weather and ongoing difficulty meeting membership goals.
Outlook, risks, and contingencies
Management expected 2014 capital expenditures of $6.5m–$7.5m, with fourth-quarter spending principally for hotel renovations. It stated that operating cash flow, working capital, and borrowing capacity should be sufficient for foreseeable operating requirements and capital programs. No specific revenue or earnings guidance was provided.
Key risks include the unresolved AWMS #2 suspension and possible adverse effects if it is suspended indefinitely; dependence on fluctuating, often non-long-term waste customer work; disposal pricing and regulatory restrictions; a captive landfill’s reliance on one customer; customer payment defaults; and seasonal, weather-sensitive golf operations and membership retention. Avalon said ordinary-course legal and environmental matters were not expected to have a material adverse effect, though outcomes cannot be predicted. It maintained a valuation allowance against most deferred tax assets. Management reported disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Current status and operating conditions for AWMS #2, and the outcome of Avalon’s regulatory appeal.
- Whether the hotel’s final purchase-price allocation, renovation spending, and integration affect results as expected.
- Drivers behind continued weakness in waste revenue, including event work and customer-specific services, and sustainability of improved gross margins.
- Liquidity and covenant headroom under the $5m credit facility, particularly alongside planned capital spending and reduced cash.
- The filing’s market-risk discussion says Avalon has “no debt outstanding,” which appears inconsistent with the balance sheet’s $2.9m line borrowing and capital lease obligations; clarify this disclosure.