Consolidated Water Co. Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. The company produces and supplies desalinated water and provides water-related services and manufacturing across several countries. Comparisons are with Q1 2016 unless stated otherwise. All amounts are US dollars.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $15.68 million | $14.03 million | +11.7% |
| Gross profit / margin | $6.83 million / 43.6% | $6.18 million / 44.0% | Profit +10.6%; margin slightly lower |
| Operating income | $2.04 million | $1.72 million | +18.7% |
| Net income attributable to company stockholders | $2.63 million | $2.05 million | +28.1% |
| Diluted earnings per share | $0.18 | $0.14 | Increased |
| Operating cash flow | $(1.86) million | $(0.36) million | Greater cash use |
Revenue rose in retail, bulk and manufacturing; services revenue declined. Gross profit increased across all four segments, but higher general and administrative costs partially offset the improvement. Net other income included a $165,000 unrealized gain from revaluing Aerex put/call options; 2016 included a $50,000 impairment loss on the OC-BVI investment. The income-tax line was a benefit of $140,000, versus a $73,000 benefit in 2016.
Financial position and liquidity
- At March 31, cash and cash equivalents were $36.53 million, down $2.72 million from year-end 2016. Working capital was approximately $56.8 million; total current assets were $65.79 million and current liabilities $8.96 million.
- Total liabilities were $11.47 million, including $882,000 in current notes payable to a related party. The filing reports no material long-term borrowings on the balance sheet; it does disclose related-party notes issued to fund Aerex.
- Operating cash use reflected a roughly $6.1 million increase in receivables, partly offset by noncash depreciation and amortization of approximately $1.8 million. Investing activities used $141,000 net, and financing activities used $725,000, primarily for dividends.
- Receivables increased to $22.61 million from $16.50 million at year-end, mainly due to increases at CW-Bahamas and Aerex. Management expected collection based on prior payment history.
- Approximately $3.0 million of cash in the Bahamas and $5.4 million in Belize was held in local bank accounts; transfers abroad require central-bank approval. The company noted that Belize’s economic weakness limited its ability to transfer US dollars.
Material changes and segment performance
- Retail: Revenue increased 8% to $6.48 million, attributed mainly to higher water volumes amid lower rainfall in Grand Cayman. Operating income rose to $779,000. Gross margin improved to 59% from 56%.
- Bulk: Revenue increased to $7.69 million, mainly from higher energy-related rates in the Bahamas. Gross profit was nearly flat at $2.67 million; margin fell to approximately 35% from 37% as energy expense increased about $473,000.
- Services: Revenue was $130,000; operating loss narrowed to $715,000 from $823,000, reflecting lower employee and project-development costs.
- Manufacturing: Revenue increased to $1.38 million, but operating loss widened to $401,000. Results are not directly comparable because Q1 2017 includes a full quarter of Aerex, acquired in February 2016. Gross margin declined to 25% from 32%; the company previously recorded a $1.75 million Aerex goodwill impairment in 2016 and warned further impairment may be possible.
Outlook, risks and unusual items
- Management estimated 2017 liquidity needs of approximately $7.7 million for existing-operations capital expenditures, $882,000 for notes payable and $4.2 million for development of the Mexican project. It said it expected sufficient liquidity. The filing provides no earnings or revenue guidance.
- Cayman retail license: Renewal negotiations remain unresolved; the prior extension expired June 30, 2016, and the company continues operating while negotiations proceed. The retail business generated about 41% of consolidated revenue and 56% of gross profit in Q1. The new regulator, OFREG, assumed water-sector economic regulation under April 2017 legislation. A new rate model or license terms could materially reduce income and cash flows and prompt goodwill impairment.
- Mexico desalination project: The awarded Baja California project calls for a 100-million-gallon-per-day plant in two phases, with estimated total cost of about $463 million and projected annual revenue of about $52 million. The contract is conditional on permits, rights of way, payment arrangements and completed equity and debt financing. Peso weakness and macroeconomic changes raised costs; AdR requested a tariff increase, which was not assured. Failure to secure the tariff adjustment or financing could impair the approximately $20.6 million land carrying value. The filing anticipated further 2017 development spending.
- NSC litigation: A Mexican court declared EWG’s initial lawsuit filing expired on May 2, 2017, after the quarter end, but EWG may appeal or refile. The dispute challenges transactions that raised the company’s NSC ownership to 99.9% and could affect project completion.
- OC-BVI: Its Bar Bay water-supply agreement was extended for 14 years in February 2017, but the new price is approximately 31% below the prior price. A separate Baughers Bay court valuation would indicate $11.58 million payable to OC-BVI, but the government disputes the valuation; collection and amount remain uncertain, and no amount was recognized pending payment.
- CW-Bali: The plant remains loss-making, with Q1 operating loss of about $80,000 and revenue of $28,000. The company previously recorded a $2.0 million asset impairment and may cease operations or incur further impairment if it cannot secure a partner or increase sales.
- Other matters: CW-Belize regulatory proceedings remain pending, with financial impact unclear. Aerex option revaluation produced the $165,000 unrealized gain. Dividends declared were $0.075 per common share, the same as Q1 2016.
Most important facts for investors to verify
- Progress and economic terms of the Cayman retail-license renewal, including the effect of OFREG and any revised rate framework.
- Whether the Mexico project secures the requested tariff increase, required permits and rights of way, and firm equity and debt financing.
- Collection trends for the sharply higher receivables balance, especially at CW-Bahamas and Aerex, and transferability of cash held in Belize and the Bahamas.
- Whether CW-Bali can obtain a strategic partner or customers, and whether further operating losses or impairment charges arise.
- Developments in the EWG case and Baughers Bay valuation dispute, including any appeal, refiling, court decision or recovery by OC-BVI.
- Aerex operating performance and potential goodwill impairment; management’s stated 2017 capital and project-development spending needs.