Avalon Holdings Corporation — Q2 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2020, compared with the same 2019 periods. Avalon operates waste-management services and golf, resort, hotel and related businesses, primarily in Ohio and Pennsylvania. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net operating revenue | $13.07 | $18.43 | $27.47 | $33.03 |
| Operating income (loss) | $(0.22) | $0.57 | $(0.78) | $0.05 |
| Net income (loss) | $(0.45) | $0.45 | $(1.28) | $(0.21) |
| Net income (loss) attributable to Avalon shareholders | $(0.44) | $0.48 | $(1.25) | $(0.16) |
| Basic and diluted earnings (loss) per share | $(0.11) | $0.12 | $(0.32) | $(0.04) |
| Cash provided by operating activities | Not separately presented | $2.02 | $2.39 |
- Q2 revenue fell about 29% year over year; first-half revenue declined about 17%. Waste-management revenue was $9.09 million for Q2 and $20.22 million for the first half. Golf and related revenue was $3.98 million and $7.25 million, respectively.
- Waste-management segment pretax income was $0.81 million in Q2 and $1.86 million for the first half. Golf and related operations recorded pretax losses of $0.19 million and $0.92 million, respectively. Waste brokerage gross margin was approximately 21% in Q2 and 20% for the first half; the filing does not provide a clear consolidated gross-margin figure.
- At June 30, cash and cash equivalents were $5.53 million, with an additional $4.93 million of restricted cash. Current assets were $16.09 million and current liabilities $18.73 million, a working-capital deficit of approximately $2.6 million (versus $3.4 million at year-end 2019).
- Debt carrying value was $24.85 million, including $2.77 million of Paycheck Protection Program (PPP) loans; long-term debt, net of current portion, was $22.70 million. Finance- and operating-lease obligations totaled $2.63 million. The $5 million revolving credit facility had no borrowings outstanding at June 30.
- Six-month capital expenditures were $3.0 million incurred, of which $2.32 million was paid during the period. Cash, cash equivalents and restricted cash together increased $1.83 million during the first half.
Material changes and management commentary
- COVID-19 restrictions and customer shutdowns reduced waste brokerage continuous and project work. In Q2, event-work revenue declined to $3.3 million from $5.4 million and continuous-work revenue to $4.7 million from $6.4 million year over year.
- Restrictions on indoor dining, gatherings, lodging-related demand, fitness, salon and spa activities sharply reduced resort and hospitality revenue. Some operations reopened in late May and June under limits; management reported substantial room and event cancellations, with some rebookings in late 2020 and 2021.
- Management reduced costs through hiring freezes, headcount reductions and employee furloughs, and began rehiring in late May as restrictions eased. The company said it could not determine when demand or pricing would return to pre-pandemic levels.
- Interest expense increased to $0.30 million in Q2 and $0.61 million in the first half, despite lower average borrowing rates, due to higher average debt. First-half weighted average borrowing rates were 4.82% versus 5.45% in 2019.
Outlook, risks and unusual items
- Management expects 2020 capital expenditures of $4 million to $5 million, principally for Grand Resort renovations and expansion, funded from the restricted project fund. Management believes expected operating cash and PPP proceeds will support operations and scheduled term-loan payments; if conditions require, it may borrow under the revolving facility.
- The $23 million term loan bears 5% fixed interest until its fifth anniversary, then resets subject to a 7.35% cap. It has a December 2029 maturity with a final balloon payment and a 1.20 minimum fixed-charge coverage covenant, tested annually beginning December 31, 2020. Avalon reported compliance at June 30. The revolving facility maturity was extended after quarter-end, on August 5, 2020, to July 31, 2022.
- Avalon received approximately $2.8 million of PPP loans in Q2 and was using the amended 24-week forgiveness period. Forgiveness had not been established in the filing; amounts not forgiven or utilized are repayable, and any forgiveness would be recognized as a debt-extinguishment gain.
- Both saltwater injection wells have had no operating revenue while suspended following a 2014 seismic event. Court proceedings concerning possible restart and related claims remained pending; outcomes and restart timing were uncertain.
- Other disclosed risks include continued pandemic restrictions or weak demand, customer credit and retention, competition and disposal pricing, reliance on annual club memberships and a single captive-landfill customer, environmental regulation, seasonal weather, and debt covenant compliance. Management stated pending legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted.
Important facts for investors to verify
- Whether reopening translated into sustained improvement in waste brokerage volumes, resort occupancy, dining and event bookings after June 30.
- The amount and timing of PPP loan forgiveness, and any repayment obligation for unforgiven proceeds.
- Cash availability and use of restricted project funds, capital-spending pace, and compliance with the term-loan and revolving-credit covenants.
- Developments in the saltwater-well litigation and any regulatory path or conditions for restarting operations.
- Whether membership levels, customer collections and operating cash flow remain adequate amid the reported working-capital deficit and pandemic uncertainty.