Consolidated Water Co. Ltd. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company produces and supplies desalinated water and provides water-related services and manufacturing across several markets, including the Caribbean, the United States and Indonesia. Financial statements are unaudited and in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $18.82 million | $16.57 million | $50.03 million | $47.53 million |
| Gross profit / margin | $7.53 million / 40% | $6.31 million / 38% | $20.73 million / 41% | $19.60 million / 41% |
| Operating income | $2.57 million | $0.83 million | $6.45 million | $3.32 million |
| Net income attributable to company shareholders | $4.55 million | $1.16 million | $8.83 million | $4.42 million |
| Diluted earnings per share | $0.30 | $0.08 | $0.58 | $0.29 |
- For the nine months, retail and bulk revenue grew to $18.88 million and $25.29 million, respectively; services revenue rose to $1.05 million, while manufacturing revenue declined to $4.80 million.
- Cash and cash equivalents were $34.37 million at September 30, down from $47.18 million at year-end 2017. Working capital was approximately $55.1 million. Total liabilities were $10.46 million; the balance sheet reported a $1.08 million current note payable to a related party and no material conventional borrowings disclosed in the supplied filing text.
- Nine-month operating cash flow was $5.39 million, versus $13.53 million in 2017. Investing activities used $14.78 million, principally for $13.71 million of property, plant and construction spending and $2.17 million for land and rights of way. Financing activities used $3.42 million, including $3.82 million of common dividends paid.
- Dividends declared were $0.085 per common share in Q3, versus $0.075 a year earlier; nine-month declared dividends were $0.255 per share.
Material changes versus the prior comparable period
- Q3 revenue increased about 14%, while nine-month revenue increased about 5%. Nine-month operating income rose to $6.45 million from $3.32 million, and attributable net income approximately doubled.
- Management attributed much of the earnings improvement to higher operating income and OC-BVI-related income following its September settlement of the Baughers Bay plant litigation. OC-BVI received a gross settlement of $4.43 million and a net payment of $4.27 million after expenses. The filing does not identify the settlement’s precise standalone contribution to consolidated net income.
- Higher energy prices increased bulk-water revenues in the Bahamas and Cayman Islands. Q3 services revenue also benefited from approximately $710,000 of Bar Bay plant refurbishment work for OC-BVI. The 2017 comparison included CW-Bali impairment charges, including approximately $1.5 million for the first nine months.
- Cash from operations weakened as accounts receivable increased, particularly at CW-Bahamas. Capital spending and development-related investment also contributed to the decline in cash.
Outlook, risks and unusual items
- Liquidity and receivables: CW-Bahamas’ receivable from the Bahamas Water and Sewerage Corporation reached $16.1 million, up from $9.1 million at year-end. The Ministry of Finance proposed a schedule to pay the September balance in full by June 2019. If collections remain delayed, the subsidiary could face liquidity constraints, and the company may need to stop recognizing related revenue or record a receivables allowance.
- Cayman retail license: The latest extension of Cayman Water’s exclusive retail license expired January 31, 2018. On November 2, 2018, OfReg rejected the company’s latest proposal and sought further concessions. The license negotiations’ outcome could materially reduce or eliminate income and cash flows from this business.
- Cayman bulk-water contract: A new five-year operating contract for the North Sound and Red Gate plants starts February 1, 2019. Excluding pass-through energy costs, revenues are expected to be about 31% lower than under the current agreements, assuming comparable volumes. The North Side plant agreement expires in June 2019; renewal terms were unresolved in the filing.
- Mexico project: The proposed Rosarito desalination project remains conditional on financing, permits, rights of way, payment mechanisms and other requirements. State authorization for public-entity payment obligations was due to expire December 31, 2018 absent further action. The company cited political, currency and financing uncertainty, as well as litigation challenging its ownership interests and project-related actions. Approximately $20.6 million of land and $3.0 million of rights-of-way deposits could be impaired if the project does not proceed.
- CW-Belize: A non-binding MOU contemplates a possible sale to Belize Water Services, with no binding transaction documents yet. Assistance under the MOU enabled repatriation of approximately $2.75 million during Q3 and another $1 million in October. Completion depends on price, financing, due diligence, approvals and further cash repatriation.
- Other contingencies: The Belize regulator appealed a favorable 2017 court ruling; the appeal remained pending. A CW-Bali customer’s appeal of a ruling requiring arbitration was rejected in October 2018. EWG’s Mexican litigation concerning NSC ownership and the project remained unresolved.
- Spending and accounting: Management estimated remaining-2018 capital spending of approximately $2.6 million, Mexican project-development spending of $0.9 million and dividends payable of $1.3 million. The company adopted revenue-recognition Topic 606 on January 1, 2018, with no opening-retained-earnings impact. It expected the upcoming lease standard to increase lease assets and liabilities, but not materially affect overall financial position, results or cash flows.
Important facts for investors to verify
- Whether CW-Bahamas receives payments on the proposed schedule and whether its receivables require a revenue-recognition change or allowance.
- Developments in the Cayman retail-license negotiations and any final license economics or competition decision.
- The earnings and cash-flow effect of the lower-priced North Sound and Red Gate contract, and the outcome of the North Side renewal.
- Whether the Rosarito project’s required authorizations, financing and other conditions were completed before applicable deadlines, and the status of the EWG litigation.
- Whether the CW-Belize sale advances to a binding agreement and whether remaining Belize cash can be repatriated.
- The extent to which Q3 and year-to-date earnings depend on the OC-BVI settlement and other non-recurring or investment-related income.