Consolidated Water Co. Ltd. — Q3 2023 Form 10-Q
Business context and period. The company supplies potable water, treats wastewater, and provides water infrastructure construction, operations, consulting, and manufacturing services in the Caribbean and United States. This unaudited filing covers the quarter and nine months ended September 30, 2023; financial amounts are in U.S. dollars. Comparisons are with the corresponding 2022 periods.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $49.9 million | $25.1 million | $127.0 million | $65.7 million |
| Gross profit / margin | $16.6 million / 33% | $6.8 million / 27% | $42.6 million / 34% | $21.5 million / 33% |
| Operating income | $10.7 million | $1.2 million | $24.7 million | $6.1 million |
| Net income attributable to company stockholders, including discontinued operations | $8.6 million; diluted EPS $0.54 | $0.3 million; diluted EPS $0.02 | $19.7 million; diluted EPS $1.24 | $4.3 million; diluted EPS $0.28 |
| Continuing-operations net income attributable to company stockholders | $8.8 million | $0.8 million | $20.4 million | $5.9 million |
- Revenue mix and drivers: Services revenue rose to $29.4 million in Q3 and $66.2 million year to date, principally from progress on PERC’s Liberty Utilities water treatment plant project and the WAC Red Gate plant. Manufacturing revenue also increased; bulk revenue dipped slightly in Q3, while retail revenue grew.
- Margins and earnings: Services segment results benefited from favorable revisions to estimated costs on two construction contracts, increasing Q3 revenue, gross profit, and operating income by $1.8 million and nine-month amounts by $3.5 million. Management said these adjustments increased diluted EPS by $0.08 and $0.17, respectively. The filing also cites improved construction and operations-and-maintenance margins.
- Cash flow: Nine-month net cash provided by operating activities was $8.4 million, down from $15.8 million. Continuing-operations operating cash flow was $9.2 million versus $16.9 million. The company attributed the cash conversion in part to increases in receivables, contract assets, and inventory. Investing activities used $6.5 million, including $4.1 million of capital spending and $2.4 million cash paid for the remaining PERC interest; financing activities used $4.0 million, mostly for dividends.
- Liquidity and debt: September 30 cash and cash equivalents were $48.8 million, and working capital was $83.1 million. Current and noncurrent long-term debt totaled approximately $0.25 million; the company had not drawn on Cayman Water’s $10 million revolving credit facility. Lease liabilities are reported separately.
- Balance sheet changes: Total assets were $211.6 million, compared with $193.0 million at year-end 2022. Receivables increased $11.1 million, contract assets increased $6.1 million, and construction in progress increased $2.7 million. Total equity was $182.9 million.
Outlook, commentary, and material risks
- At September 30, the company reported approximately $189.3 million of transaction price for unsatisfied or partially unsatisfied obligations on contracts with an original expected term over one year. It expected to recognize about $28.8 million during the remainder of 2023 and $160.5 million thereafter. These are expected contract revenues, not earnings guidance.
- The Liberty Utilities construction contract was expected to be substantially completed by the end of Q2 2024. The company also cited approximately $5.1 million of projected Q4 2023 capital expenditures and $4.7 million of outstanding raw-material purchase commitments as of September 30.
- Grand Cayman retail license: The express extension of the 1990 exclusive license expired in January 2018; negotiations with OfReg remain ongoing. The government has indicated it seeks changes that could significantly reduce or eliminate historical retail operating income and cash flow. The licensed retail business generated 18% of nine-month 2023 revenue and 29% of gross profit.
- Bahamas collections: Receivables from the Water and Sewerage Corporation were $23.2 million at September 30, with approximately 76% delinquent. No doubtful-account allowance was recorded. Failure to collect could constrain subsidiary liquidity, affect revenue recognition, or require an allowance. The Bahamas government reportedly intends to bring the receivables current.
- Mexico project: The discontinued Rosarito project remains subject to international arbitration seeking more than US$51 million plus MXN$137 million, fees, costs, and interest. Recovery is uncertain, and related legal and arbitration costs continue. The company also disclosed EWG’s attempted precautionary measures against NSC assets; the measures had not been enforced, and NSC obtained a definitive injunction subject to a guarantee that it submitted.
- Contract estimates and supply conditions: Construction and manufacturing profitability depends on estimates of costs to complete fixed-price contracts. Inflation, raw-material prices, shortages, and delivery delays may affect results. The services-segment estimate revisions were favorable, but estimates may change as work progresses.
- Manufacturing impairment risk: Management said the manufacturing reporting unit’s estimated fair value exceeded carrying value by 63% at December 31, 2022, but further impairment could arise if Aerex’s expected cash flows weaken. At September 30, related goodwill and unamortized intangible assets were approximately $2.0 million and $0.7 million.
- Subsequent event: On November 2, 2023, PERC agreed to acquire 100% of Ramey Environmental Compliance for approximately $4.2 million; about $3.85 million was paid at closing. Initial purchase accounting was not complete when the financial statements were prepared.
Most important facts for investors to verify
- Whether the favorable construction-contract estimate revisions are sustainable and how remaining project costs and margins develop.
- Collection timing and credit quality of the $23.2 million WSC receivable, including the portion delinquent and any subsequent payments.
- Developments in the Cayman retail-license negotiations and potential effects on rates, exclusivity, cash flows, and asset values.
- Progress, costs, and revenue recognition on Liberty Utilities, Red Gate, and the Hawaii desalination project, along with the contract backlog and projected revenue timing.
- Material developments in the Mexico arbitration and EWG litigation, and any related costs or asset restrictions.
- The financial contribution and final purchase accounting for the November 2023 REC acquisition, and the company’s liquidity after acquisition, capital spending, and dividends.