Pure Cycle Corporation (NASDAQ: PCYO) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended February 28, 2023. Financial statements are unaudited; amounts below are in millions unless otherwise noted.
Business context
Pure Cycle combines wholesale water and wastewater services with development of its Sky Ranch master-planned community in Colorado. It is also building a single-family rental business. The filing reports two operating segments: water and wastewater resource development, and land development.
Financial performance
| Metric | Three months ended Feb. 28, 2023 | Six months ended Feb. 28, 2023 | Comparable 2022 period |
|---|---|---|---|
| Revenue | $2.99 | $4.33 | $4.66 / $8.94 |
| Operating income (loss) | $(0.24) | $(1.73) | $1.51 / $2.99 |
| Net income | $0.19 | $0.35 | $1.69 / $3.21 |
| Diluted EPS | $0.01 | $0.01 | $0.07 / $0.13 |
| Operating cash flow | $(7.86) for six months | $(13.69) |
Revenue fell 36% for the quarter and 52% for the six-month period. The six-month decline chiefly reflected lower lot-sale revenue and sharply lower oil-and-gas water sales. Six-month water deliveries declined 63% to 79.0 million gallons; oil-and-gas deliveries fell 78%. Quarterly operating results were also affected by slower Sky Ranch construction and reduced commercial water usage.
For the six months, the water and wastewater segment generated $2.24 of revenue and $0.02 of segment profit, versus $3.88 and $1.87 a year earlier. Land development generated $2.04 of revenue and $1.56 of segment profit, versus $5.02 and $4.15. Segment profit is before corporate general and administrative expenses and other items.
Six-month other income was $2.30, including interest on the Sky Ranch Community Authority Board (CAB) receivable and $0.9 of oil-and-gas right-of-way and surface-use payments. Net income therefore remained positive despite an operating loss. The company also recorded a $0.2 gain from acquiring the remaining interests in a contingent export-water obligation.
Liquidity, cash flow and debt
- At February 28, cash and cash equivalents were $7.22; Treasury bills were $15.25 and matured in March 2023. Restricted cash was $2.33. Working capital was $20.3.
- Cash, cash equivalents and restricted cash decreased $27.67 over six months. Investing activities used $19.70, including the $15.0 Treasury-bill purchase, rental-home construction and water-system investment.
- Total debt, net of financing costs, was approximately $3.96, including $0.01 current. The company had not drawn on its $5.0 working-capital credit line.
- Four construction letters of credit totaled $2.3 and were secured by restricted cash. Management said it had sufficient working capital to fund operations for the next 12 months.
Changes, outlook and risks
- Sky Ranch Phase 2A was approximately 87% complete; Phase 2B construction began after the quarter. The company delayed Phase 2B by about three months in response to weaker housing demand. Subsequent to quarter-end, it received $4.1 in initial milestone payments from three builders.
- Management estimated total infrastructure costs for Sky Ranch Phase 2 at $74.3, with up to $18.0 of spending and approximately $20.0 of milestone, lot-completion and tap-fee receipts expected over the next 12 months. These estimates depend on construction pace and market conditions.
- The company expects to spend approximately $4.3 during the remainder of fiscal 2023 on public improvements reimbursable by the Sky Ranch CAB. The related receivable was $20.6 and accrues interest at 6%; no payments were received during the six-month period. Repayment depends on the CAB’s ability to generate tax or other revenues.
- After quarter-end amendments, the company had reserved 65 Phase 2 lots for rentals; together with four existing rentals, this represents a planned portfolio of 69 units. Ten homes were under construction, with completion expected during fiscal 2023. Management’s longer-term strategy is to expand the rental business to more than 200 units.
- Management cited higher mortgage rates, inflation, economic uncertainty, reduced housing demand, supply-chain delays, labor shortages and rising costs as headwinds. Oil-and-gas water demand is also variable and depends on drilling decisions outside the company’s control. Drought restrictions could reduce usage revenue.
- Management identified collectability of CAB reimbursements, construction cost estimates, water availability and regulatory requirements as ongoing uncertainties. It also cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the CAB can repay the $20.6 related-party receivable, and the timing and funding sources for reimbursement.
- Actual progress, costs and builder payments for Sky Ranch Phase 2, given the housing slowdown and delayed start to Phase 2B.
- Whether water sales—particularly oil-and-gas usage—recover, and how lower deliveries affect segment economics.
- Cash use and funding needs as Sky Ranch infrastructure and rental-home construction continue; verify the expected receipts and expenditures against actual results.
- Rental-home financing and leasing progress, including the status of financing for units under construction and the economics of the planned expansion.