Avalon Holdings Corporation — Q1 2015 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2015, with comparison to Q1 2014. Avalon operates waste management services and golf and related operations, including country clubs and The Avalon Inn, acquired in August 2014.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net operating revenue | $10.700 million | $9.983 million |
| Operating loss | $(1.279) million | $(0.759) million |
| Net loss | $(1.219) million | $(0.700) million |
| Net loss attributable to Avalon common shareholders | $(1.040) million | $(0.699) million |
| Loss per share, basic and diluted | $(0.27) | $(0.18) |
| Cash used in operating activities | $(1.096) million | $(0.849) million |
| Cash used in investing activities | $(1.876) million | $(1.972) million |
Revenue rose approximately 7%. Operating loss margin widened to approximately 12.0% of revenue from 7.6%. Higher operating costs, depreciation and amortization, and SG&A contributed to the larger loss. The filing does not present a consolidated gross margin.
- Segments: Waste management revenue was $8.370 million versus $7.830 million; pretax income declined to $0.179 million from $0.508 million. Golf and related operations revenue was $2.356 million versus $2.172 million; pretax loss widened to $0.601 million from $0.498 million.
- Liquidity: Cash was $2.543 million at quarter-end, down from $4.329 million at December 31, 2014. Working capital was approximately $1.843 million, compared with $4.002 million at year-end.
- Debt: The unsecured $5.0 million revolving credit line was fully drawn, leaving no availability. The facility matures April 30, 2016; its stated rate was 2.87%. Avalon reported compliance with its debt covenants. Capital lease obligations totaled $0.377 million.
- Capital spending: Avalon incurred $2.8 million of capital expenditures in the quarter, principally for The Avalon Inn renovation and expansion, and paid vendors $1.876 million. The cash flow statement reports $0.884 million of capital expenditures included in accounts payable.
Material changes and management commentary
- Waste management revenue increased primarily from event work, partly offset by lower continuous work and customer-specific service revenue. The waste brokerage and management business’s average gross margin fell to approximately 17% from 18%, mainly due to lower-margin event work.
- The Avalon Inn contributed approximately $0.2 million of revenue and a $0.2 million pretax loss in Q1 2015; renovation limited available rooms. The acquisition purchase-price allocation remained preliminary, and asset valuations could be adjusted.
- Waste injection well operations contributed less than $0.1 million of revenue. The wells recorded a $0.3 million pretax loss, including limited disposal activity and legal costs.
- Management expects 2015 capital expenditures of $6 million to $8 million, principally for the Inn renovation and expansion, building improvements, and equipment. Management stated that anticipated cash from future operations should meet operating requirements for the foreseeable future, while noting possible financing alternatives if additional funds are needed.
Risks, contingencies and unusual items
- Following an August 2014 seismic event, regulators suspended both injection wells. Operations at well #1 resumed after the regulator concluded its injection was not related to the event. Well #2 remained suspended at March 31, 2015; an appeal hearing occurred in March, and a decision was pending. Avalon said it would assess impairment if it cannot resume operations.
- The waste brokerage business faces customer-retention, disposal-price, competition, regulatory, and waste-transport restrictions risks. Captive landfill management depends on one customer.
- Golf and related operations are seasonal and weather-sensitive, and depend significantly on retaining and attracting members. Avalon had not achieved its membership goals; the Inn expansion was expected to add amenities and capacity.
- Avalon described ordinary-course legal and environmental proceedings and did not expect uninsured liabilities from pending matters, individually or in aggregate, to materially adversely affect its financial condition, liquidity, or results. The injection-well appeal remains a specific operational uncertainty.
- The company maintained a valuation allowance against most deferred tax assets; the tax benefit otherwise associated with losses was offset by the allowance. No explicit earnings guidance was provided.
Investor verification points
- Track the regulatory appeal and operating status of well #2, and any resulting impairment assessment or additional costs.
- Monitor cash use, renovation spending, and whether the fully drawn credit facility can be refinanced or extended before its April 2016 maturity.
- Verify progress, room availability, and revenue contribution from The Avalon Inn as renovations proceed; the acquisition valuation was still preliminary.
- Assess whether waste segment growth and margins improve, particularly given the volatility of event work and the decline in average gross margin.
- Watch golf membership trends, seasonal results, and the company’s ability to fund planned capital expenditures from operations or other financing.