Consolidated Water Co. Ltd. quarterly report, Q1 FY2024

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Consolidated Water Co. Ltd. — Q1 2024 Form 10-Q

Business context and reporting period. The unaudited quarter ended March 31, 2024. Consolidated Water supplies potable water and provides water infrastructure, operating, consulting and manufacturing services in the Cayman Islands, The Bahamas, the United States and the British Virgin Islands. It reports retail, bulk, services and manufacturing segments. Results include the Mexico project as discontinued operations.

Financial performance and position

  • Revenue: $39.69 million, up 20.8% from $32.87 million a year earlier. Gross profit was $13.88 million versus $10.56 million; gross margin increased to 35% from 32%.
  • Operating income: $7.31 million, compared with $4.53 million. General and administrative expense increased to $6.56 million from $6.04 million.
  • Net income attributable to shareholders: $6.47 million, or $0.40 diluted EPS, including a $0.47 million discontinued-operations loss. Continuing-operations income attributable to shareholders was $6.94 million, or $0.43 diluted EPS, versus $4.07 million and $0.26, respectively, in Q1 2023.
  • Segment operating income: Retail $0.97 million (prior year $0.04 million); bulk $2.43 million ($2.42 million); services $3.15 million ($1.59 million); manufacturing $0.76 million ($0.48 million).
  • Cash flow: Operating cash flow was $5.95 million, including $6.35 million from continuing operations and $0.40 million used by discontinued operations. Capital expenditures were $0.53 million; cash increased $3.86 million to $46.18 million from December 31, 2023.
  • Liquidity and debt: Working capital was $95.0 million. Current assets were $118.77 million and current liabilities $23.80 million. Long-term debt, including its current portion, totaled approximately $0.33 million; operating lease liabilities totaled $2.12 million. The $10 million revolving credit facility was undrawn at quarter-end.
  • Dividends: $0.095 per common and redeemable preferred share was declared for the quarter, versus $0.085 in Q1 2023. The company reported paying the January dividend in the quarter and the April dividend after quarter-end.

Material changes versus Q1 2023

  • Services revenue rose to $17.42 million from $12.72 million, led by higher operations and maintenance revenue, including REC (acquired in October 2023) and new PERC contracts. Services gross margin rose to 27% from 21%.
  • Manufacturing revenue increased to $5.30 million from $3.37 million, but gross margin fell to 24% from 27% because of a lower-margin product mix.
  • Retail revenue rose to $8.62 million from $7.77 million, reflecting a 6% overall increase in water volume sold and higher average rates from a greater mix of retail-area sales. Bulk revenue declined to $8.34 million from $9.00 million, reflecting a 2% volume decrease and lower energy pass-through rates.
  • Higher interest income contributed to other income of $0.42 million, versus $0.16 million a year earlier; management attributed much of the increase to interest earned on CW-Bahamas receivables.
  • The discontinued Mexico project loss increased to $0.47 million from $0.26 million.

Outlook, risks and unusual items

  • Contract work: Unsatisfied or partially unsatisfied performance obligations on contracts with original terms over one year totaled approximately $152.3 million at March 31. The company expects approximately $15.0 million of related revenue during the remainder of 2024 and $137.3 million thereafter. The Liberty Utilities construction contract was substantially complete; final completion was expected by the end of Q2 2024.
  • Investment plans: Projected 2024 capital expenditures for existing operations were approximately $9.0 million, including $2.8 million for the new West Bay plant. Kalaeloa Desalco has a contract to design and build a 1.7-million-gallon-per-day Hawaii desalination plant; about 80% of its $150 million construction price is subject to inflation-index adjustments before construction begins.
  • Cayman retail license: The 1990 exclusive license was not expressly extended beyond January 2018; negotiations with OfReg remain ongoing. Management says revised terms could materially reduce or eliminate historical retail operating income and cash flows and could prompt asset impairment. The licensed retail business generated about 22% of Q1 revenue and 37% of gross profit.
  • Bahamas receivables: CW-Bahamas had $25.6 million due from the government-owned Water and Sewerage Corporation at March 31, of which approximately 79% was delinquent. The subsidiary’s liquidity has been affected and it has been unable to pay a dividend since August 2022. The government indicated it intended to substantially reduce the receivable during 2024. Management recorded no material credit-loss allowance, citing prior collections, but warns noncollection could affect liquidity, revenue recognition and credit-loss expense.
  • Mexico project: The government terminated the Rosarito desalination contract in 2020. The company is pursuing international arbitration for damages in excess of US$51 million plus MXN$137 million, fees, costs and interest; recovery is uncertain, and arbitration-related expenses are material. The project land remains among discontinued-operation assets.
  • Other risks: Construction and manufacturing profitability depends on estimates of costs and contract completion; fixed-price work is exposed to cost overruns. Inflation, customer payment capacity, tourism and weather, and political, regulatory and government-customer relationships may also affect results. The filing provides no formal earnings or revenue guidance.
  • Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No material market-risk change was reported.

Important facts for investors to verify

  1. Progress and final terms of the Cayman retail-license negotiations, given the license’s contribution to gross profit.
  2. Collections from the Bahamas WSC, the timing and amount of the stated 2024 receivable reduction, and CW-Bahamas’ liquidity and credit-loss assessment.
  3. Execution, remaining costs and margin realization on the $152.3 million contract-performance-obligation balance, including the Hawaii project’s inflation adjustments.
  4. Developments, legal costs and potential recovery in the Mexico arbitration, and any change in the valuation or sale prospects of the project land.
  5. Whether Q1 segment margin trends persist, particularly the services improvement and manufacturing mix-related margin decline.