Consolidated Water Co. Ltd. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. The company supplies potable water, treats water and provides water-related services and products in the Cayman Islands, The Bahamas, the United States and the British Virgin Islands.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $16.70 million | $19.09 million | $33.80 million | $39.81 million |
| Gross profit / margin | $6.06 million / 36% | $7.30 million / 38% | $12.19 million / 36% | $15.74 million / 40% |
| Operating income (loss) | ($1.56 million) | $2.75 million | ($0.44 million) | $6.50 million |
| Net income (loss) from continuing operations attributable to company shareholders | ($1.51 million) | $2.63 million | ($0.21 million) | $5.83 million |
| Net income (loss) attributable to company shareholders, including discontinued operations | ($1.66 million) | ($1.13 million) | ($0.68 million) | $1.76 million |
| Basic and diluted EPS | ($0.11) | ($0.07) | ($0.04) | $0.12 |
Revenue declined about 12% in Q2 and 15% for the first half. Lower retail and manufacturing sales drove the decline; higher bulk and services revenue partly offset it. The $2.9 million manufacturing goodwill impairment was the main stated cause of Q2’s continuing-operations loss.
Segments and material changes
- Retail: Q2 revenue fell to $5.67 million from $5.97 million, with sales volume down 2%; first-half revenue was $11.39 million, down from $13.22 million, as volume fell 12%. Management attributed lower demand primarily to the pandemic-related collapse in Grand Cayman tourism. Retail operating losses were $0.42 million in Q2 and $1.04 million for the first half.
- Bulk: Q2 revenue increased to $6.71 million from $5.87 million; first-half revenue rose to $12.96 million from $12.31 million. Higher CW-Bahamas water volumes and energy pass-through charges contributed. First-half bulk operating income increased to $3.74 million from $3.25 million.
- Services: Q2 revenue was $3.76 million versus $3.48 million; first-half revenue was $7.30 million versus $6.59 million. New operations and maintenance contracts more than offset lower construction revenue. First-half operating income was broadly unchanged at $0.31 million.
- Manufacturing: Q2 revenue dropped to $0.55 million from $3.78 million; first-half revenue fell to $2.16 million from $7.69 million. The loss of orders from a former major customer reduced gross profit sharply; Q2 gross loss was $38,000. The segment recorded a $2.9 million goodwill impairment, leaving $1.99 million of manufacturing goodwill and $0.89 million of related intangible assets subject to possible further impairment.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $41.21 million at June 30, 2021, versus $43.79 million at year-end 2020. First-half net cash provided by operating activities was $1.06 million, including $1.66 million from continuing operations; operating cash flow was down from $3.84 million in the prior-year period.
- Investing activities used $0.45 million, principally for property and equipment. Financing activities used $3.28 million, largely for dividends. Total cash decreased $2.67 million during the period.
- Working capital was $68.8 million. Current assets were $75.1 million and current liabilities $6.3 million. Current and noncurrent long-term debt totaled approximately $0.20 million; operating lease liabilities were approximately $3.02 million.
- Accounts receivable rose to $26.12 million from $21.48 million, primarily due to an increase in amounts owed to CW-Bahamas by the Bahamas Water and Sewerage Corporation (WSC).
- Management estimated approximately $2.9 million of remaining-2021 capital expenditures, including $1.9 million for replacement of the 26-year-old West Bay desalination plant, and approximately $1.3 million for dividends payable.
Outlook, risks and unusual items
- COVID-19: Management said pandemic effects continued to materially harm results and may continue to do so; the duration and financial impact remained uncertain. Cayman Islands tourism restrictions weighed on retail demand. The company reported raw-material cost increases, shortages and longer delivery times affecting Aerex.
- Aerex customer concentration and impairment: A former major customer, which had accounted for substantial manufacturing revenue and gross profit in 2020, told Aerex in late July 2021 that it expected to resume purchases in 2022 but at substantially lower amounts than previously anticipated. Management cited this outlook and weak conditions in recording the impairment. It had retained manufacturing staff in anticipation of improved production activity in the second half of 2021, but disclosed no quantified guidance.
- Cayman retail license: The exclusive license’s latest express extension expired January 31, 2018. Operations continue under its terms while negotiations with OfReg remain ongoing. Management warned that revised terms could materially reduce or eliminate historical retail income and cash flows and could lead to further impairment.
- CW-Bahamas collections: WSC receivables were $21.3 million at June 30, of which approximately 78% was delinquent; the company recorded no allowance, citing prior collections and its belief the balance was collectible. Receivables reached about $23.5 million at July 31, and the company reported $14.4 million of WSC payments from January 1 through August 16, including $5.7 million received in August. Continued collection delays could impair CW-Bahamas liquidity and require a revenue-recognition change or credit-loss allowance.
- Mexico project: Baja California terminated the Rosarito desalination project contract in June 2020; project assets and results are reported as discontinued operations. The company is pursuing reimbursement of submitted expenses and investments, but said recovery cannot be assured. A Netherlands subsidiary initiated treaty consultations with Mexico; the dispute remained unresolved. Related litigation over NSC ownership and project matters also remained pending, and the company could not estimate its financial impact.
- The company declared quarterly dividends of $0.085 per share during the period. Future dividends remain subject to the board’s decision and the company’s financial condition and cash needs.
Important facts for investors to verify
- Whether WSC receivables are collected on schedule and whether any allowance or liquidity support becomes necessary.
- Progress and final terms of the Cayman retail license negotiations, including any effect on rates, earnings or asset values.
- Aerex order recovery, customer concentration, manufacturing margins and any additional impairment charges.
- Actual timing and cost of the West Bay plant replacement and other capital spending, alongside operating cash generation and dividends.
- Developments in the Rosarito reimbursement and treaty dispute and in the related Mexican litigation.
- The pace of tourism recovery and the continuing effects of COVID-19 on demand, supply costs and customer collections.