Avalon Holdings Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Amounts are in millions of dollars unless otherwise indicated. Avalon operates waste-management services and golf, resort, and related businesses.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $18.018 | $18.148 | $51.051 | $46.369 |
| Operating income | $0.345 | $0.927 | $0.396 | $0.739 |
| Income (loss) before tax | $0.164 | $0.805 | $0.053 | $0.445 |
| Net income (loss) attributable to Avalon shareholders | $0.144 | $0.849 | $(0.015) | $0.673 |
| Basic earnings (loss) per share | $0.04 | $0.22 | $(0.00) | $0.18 |
- Q3 revenue edged down 0.7%; nine-month revenue rose 10.1%. Operating margin was approximately 1.9% in Q3 and 0.8% year to date, versus 5.1% and 1.6% in the comparable periods.
- Waste-management revenue fell to $11.6 million in Q3 from $12.6 million, mainly because lower one-time project (“event work”) revenue outweighed growth in golf and related operations, which rose to $6.4 million from $5.6 million. For nine months, waste revenue increased to $35.9 million from $32.5 million, and golf-related revenue rose to $15.1 million from $13.8 million.
- Q3 earnings weakened as the golf segment’s pretax income declined to $0.1 million from $0.5 million and waste-segment pretax income declined to $1.1 million from $1.2 million. Year-to-date golf operations recorded a $0.4 million pretax loss versus $0.5 million income in 2018; waste pretax income increased to $3.3 million from $2.8 million.
- Nine-month operating cash flow was $3.099 million, compared with $3.144 million. Cash capital expenditures were $5.689 million, up from $2.012 million; operating cash flow less cash capital expenditures was therefore approximately negative $2.590 million. Cash and equivalents were $1.942 million at September 30, 2019, versus $1.406 million at year-end 2018.
- Current assets were $15.435 million and current liabilities $18.419 million, a working-capital deficit of approximately $3.0 million and a current ratio of about 0.84. Total assets were $71.059 million and equity $37.415 million.
- At September 30, long-term debt net of current portion was $13.058 million; current debt was $0.782 million and line-of-credit borrowings were $0.575 million. Finance- and operating-lease obligations totaled $2.270 million. Debt and lease balances reflect different obligations and should not be treated as a single debt measure without review.
Changes, outlook, and risks
- Capital spending principally funded continued renovation and expansion of The Grand Resort and improvements to Avalon’s athletic and club facilities. Management expected 2019 capital expenditures of $7.5–$8.5 million, funded by project-fund cash, credit facilities, operating cash, and cash generated from operations.
- In May 2019, Avalon acquired New Castle Country Club’s real-property assets, assuming approximately $0.8 million of debt at closing; its operating results are included from the acquisition date. The resort formerly known as The Avalon Inn was renamed The Grand Resort in Q3.
- A new $3.0 million term loan was obtained in March 2019 for resort renovation and expansion. Its proceeds, like the remaining proceeds from the earlier project fund, were fully utilized by September 30. Avalon also extended its $5.0 million revolving credit facility’s maturity to May 2021; $0.575 million was drawn at quarter-end. The company reported compliance with debt covenants.
- Management said anticipated cash from future operations was expected to cover foreseeable operating needs and required monthly debt payments. This is not a guarantee; the filing notes possible reliance on refinancing, additional borrowing, or equity issuance if further funding is needed.
- The two salt-water injection wells remained suspended, with no operating revenue. Following the unsuccessful appeal and regulatory restrictions, Avalon had recorded a $3.3 million impairment in Q4 2018. Further court proceedings were pending in 2019; restart is uncertain and management said it would pursue available remedies.
- Other risks include variable event-work volumes, customer retention and credit risk, disposal-site consolidation and pricing pressure, potential restrictions on waste transportation, golf membership and weather seasonality, and regulatory or environmental risks associated with injection wells. The golf segment had not yet attained its membership goals.
- Avalon adopted lease accounting on January 1, 2019, recording operating-lease right-of-use assets and liabilities. The filing says the adoption of the revenue-recognition standard did not materially change revenue accounting. Management assessed disclosure controls as effective at a reasonable assurance level.
Most important facts for investors to verify
- Whether cash generation and available credit can fund the remaining resort and facility spending, given the working-capital deficit and year-to-date cash capital spending above operating cash flow.
- Actual project costs, completion timing, and returns from The Grand Resort and the New Castle and Boardman facilities; management did not provide a quantified return or earnings outlook.
- Whether waste event-work revenue and margins recover, and whether golf membership growth offsets higher operating, labor, food, and maintenance costs.
- Progress and potential financial consequences of the suspended injection-well litigation and regulatory proceedings; no restart timetable or recovery value is established in the filing.
- Debt repayment, covenant headroom, variable-rate credit exposure, and future balloon-payment obligations under the term loans and mortgage.