Avalon Holdings Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Avalon operates waste management services and golf and related businesses, including country clubs, a hotel and a travel agency. Amounts below are in millions unless otherwise indicated.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net operating revenue | $14.6 | $14.4 | $39.2 | $37.4 |
| Operating income (loss) | $0.4 | $0.1 | $(1.1) | $(0.8) |
| Net income (loss) | $0.4 | $0.1 | $(0.9) | $(0.7) |
| Net income (loss) attributable to Avalon shareholders | $0.5 | $0.1 | $(0.5) | $(0.7) |
| Basic earnings (loss) per share | $0.14 | $0.03 | $(0.14) | $(0.18) |
- Q3 operating income improved to $0.4 million from $0.1 million; nine-month operating loss widened to $1.1 million from $0.8 million.
- Operating costs were $11.8 million in Q3 and $32.7 million for nine months; SG&A was $1.8 million and $5.7 million, respectively. Nine-month depreciation and amortization was $1.8 million, up from $1.6 million.
- Operating cash flow was $0.6 million for nine months, versus $0.1 million in 2014. Capital expenditures were $6.8 million, versus $4.2 million; investing cash outflow was $6.8 million. Financing activities provided $3.8 million.
- Cash fell to $1.8 million from $4.3 million at year-end 2014. At September 30, total assets were $61.1 million and equity was $42.0 million.
- Revolving credit borrowings were $7.6 million, with $1.4 million available under a $9 million facility. The facility bears interest at Prime plus 0.25% (3.50% at quarter-end), is secured by specified business assets and expires June 30, 2016. Avalon was covenant-compliant at September 30.
- Working capital was negative $5.9 million, compared with positive $4.0 million at December 31, 2014, principally because the full revolver balance was classified as current. Capital lease obligations totaled approximately $0.35 million.
Changes and segment results
- Q3 revenue rose about 1%; nine-month revenue rose about 5%. Golf and related operations grew 21% in Q3 and 16% year to date, substantially reflecting the Avalon Inn acquisition in August 2014. The Inn generated $0.7 million of Q3 and $1.5 million of nine-month 2015 revenue, while recording pre-tax losses of less than $0.1 million and $0.3 million, respectively, amid renovation-related room limitations.
- Waste management revenue declined 7% in Q3 and increased slightly year to date. Segment pre-tax income fell to $0.6 million for Q3 from $1.0 million and to $1.2 million for nine months from $2.2 million. Brokerage gross margin declined to approximately 17% from 21% in Q3 and 20% year to date.
- Golf and related segment pre-tax income improved to $0.5 million in Q3 from a loss of $0.1 million, and to $0.1 million for nine months from a loss of $0.7 million. Management cited lower employee, food and beverage, and operating costs. Average membership increased to 4,027 in Q3 from 3,759 and to 3,926 year to date from 3,739; revenue per member was pressured by membership mix and promotional programs.
- Q3 consolidated net income attributable to Avalon shareholders was $0.5 million versus $0.1 million; nine-month attributable loss narrowed to $0.5 million from $0.7 million. The filing reports consolidated net income of $0.4 million in Q3 and a consolidated nine-month loss of $0.9 million; non-controlling interest explains the difference from amounts attributable to Avalon shareholders.
Outlook, risks and unusual items
- Management expected 2015 capital expenditures of $8–$10 million, principally for renovation and expansion of the Avalon Inn, building improvements and equipment. It expected operating cash flows to meet foreseeable operating requirements, but said refinancing the credit facility was anticipated and not assured; alternative financing also was not guaranteed.
- Both saltwater injection wells were temporarily suspended following a magnitude 2.1 seismic event in August 2014. AWMS #2 remained suspended after the Ohio Oil and Gas Commission upheld the order in August 2015; Avalon appealed to the Franklin County Court of Common Pleas. Avalon also temporarily suspended AWMS #1 and said it would resume operations following a favorable ruling on #2. The wells generated only $0.2 million in revenue and a $0.8 million pre-tax loss in the first nine months of 2015, including appeal-related legal costs.
- The net book value of the wells was approximately $5.0 million. If the suspension is determined to be other than temporary and operations cannot resume, the company may need to assess impairment and could record a loss.
- Other disclosed risks include customer and contract concentration, variable event-project revenue, waste disposal pricing and regulatory changes, potential environmental or seismic events, competition for club members, weather seasonality, and the potential loss of liquor licenses. One customer represented 7.6% of consolidated nine-month revenue.
- Management reported no material adverse expectation from pending legal matters and stated disclosure controls were effective at a reasonable assurance level. The filing provides no specific earnings or revenue guidance.
Important facts for investors to verify
- Whether Avalon refinanced or otherwise addressed the $7.6 million facility before its June 30, 2016 maturity, and the resulting terms and liquidity position.
- Regulatory and court developments affecting the two injection wells, the timing of any restart, and any impairment assessment of the approximately $5.0 million carrying value.
- Actual completion costs, opening capacity and operating profitability of the Avalon Inn renovation, compared with the $8–$10 million capital expenditure outlook.
- Whether waste brokerage margins and customer activity recover, and whether membership growth translates into sustainable golf-segment profitability.