Consolidated Water Co. Ltd. — Q2 2023 Form 10-Q
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Consolidated Water supplies and treats water and provides water infrastructure, engineering, construction, and manufacturing services in the Cayman Islands, The Bahamas, the United States, and the British Virgin Islands. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $44.2 million | $21.1 million | $77.1 million | $40.6 million |
| Gross profit / margin | $15.5 million / 35% | $7.5 million / 35% | $26.0 million / 34% | $14.6 million / 36% |
| Operating income | $9.5 million | $2.6 million | $14.0 million | $4.8 million |
| Net income attributable to shareholders, including discontinued operations | $7.3 million | $2.3 million | $11.1 million | $4.0 million |
| Diluted EPS, including discontinued operations | $0.46 | $0.15 | $0.70 | $0.26 |
- At June 30, cash and cash equivalents were $47.7 million, down from $50.7 million at December 31, 2022. Working capital was $75.5 million; total assets were $205.1 million and total equity was $175.0 million.
- Six-month operating cash flow was $5.0 million, versus $13.2 million in 2022. Continuing-operations operating cash flow was $5.6 million, compared with $13.9 million. The decline reflected working-capital investment, including increases in receivables, contract assets, and inventory.
- Investing cash use was $5.5 million, including $3.1 million in capital additions and $2.4 million cash paid to acquire the remaining PERC interest. Financing cash use was $2.7 million, mostly dividends.
- Reported long-term debt, including current maturities, was approximately $276,000. A $10 million revolving credit facility is available to Cayman Water but had not been drawn. Operating lease liabilities were approximately $2.1 million.
Material changes versus prior comparable periods
- Revenue growth was led by services: Q2 services revenue rose to $24.1 million from $5.1 million, primarily as PERC progressed on the Liberty Utilities water-treatment project in Arizona. Manufacturing and retail revenue also increased; bulk revenue was nearly flat in Q2.
- For the first half, services revenue was $36.8 million versus $9.8 million. Management attributed growth chiefly to Liberty Utilities construction progress. Revenue from that contract was approximately $24.1 million in the first half.
- Management recorded a favorable $1.76 million estimate adjustment on two construction contracts, increasing services operating income and consolidated net income by that amount; the adjustment added $0.11 to diluted EPS. Project cost estimates are subject to change.
- Six-month gross margin declined to 34% from 36%, despite higher gross profit. Bulk margin fell to 30% from 34%, partly due to higher chemicals, repairs, and maintenance costs. Higher employee costs and professional fees contributed to increased G&A.
- Retail water sales volumes benefited from increased tourism on Grand Cayman. Bulk volume also increased, while lower energy pass-through revenue in The Bahamas partly offset volume growth. Manufacturing results improved with higher production and revenue, though supply-chain delays continued.
- In January 2023, the company acquired the remaining 39% of PERC for $2.4 million in cash and 368,383 common shares, bringing ownership to 100%.
Outlook, risks, contingencies, and unusual items
- No formal earnings or revenue guidance is provided in the filing. Management estimated approximately $7.6 million of capital expenditures for the remainder of 2023, including about $4.3 million for the WAC Red Gate plant and $0.6 million for the West Bay desalination plant replacement. The company expected to have sufficient liquidity for its needs, subject to the Bahamas receivables risk described below.
- At June 30, approximately $67.3 million of transaction price remained on unsatisfied or partially unsatisfied obligations for longer-term contracts. Management expected to recognize about $45.6 million in the remainder of 2023 and $21.7 million thereafter; timing and project execution remain relevant.
- The Cayman retail license’s most recent express extension expired January 31, 2018, and renewal negotiations remain ongoing. The company continues operating under the license terms and pays a 7.5% royalty. Management says revised terms could materially reduce or eliminate historical retail earnings and cash flows; the license operations contributed about 20% of first-half revenue and 32% of gross profit.
- CW-Bahamas had $16.4 million due from the government-owned Water and Sewerage Corporation at June 30; approximately 64% was delinquent. No allowance was recorded, based on historical collections and government correspondence, but delayed or insufficient collections could impair subsidiary liquidity and require an allowance or cessation of revenue recognition.
- The discontinued Rosarito, Mexico desalination project remains subject to international arbitration. The company seeks damages exceeding US$51 million plus MXN$137 million, costs, and interest, but gives no assurance of recovery. Project land and related assets remain classified as discontinued operations; first-half discontinued-operations loss was $0.47 million.
- Management cites ongoing supply-chain, raw-material cost, and delivery risks, as well as potential impairment exposure for Aerex goodwill and intangible assets. At June 30, these balances were $1.99 million and $0.71 million, respectively. Significant discount-rate or cash-flow changes could trigger impairment.
- The Board declared a $0.085 per-share dividend payable July 31, 2023. Future dividends remain at the Board’s discretion. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress, remaining costs, billings, and margin assumptions for the Liberty Utilities and other fixed-price projects; in particular, the $1.76 million favorable contract-estimate adjustment.
- Collections on the $16.4 million WSC receivable, delinquency levels, and whether the company’s no-allowance judgment remains supportable.
- Outcome and economics of Cayman retail-license negotiations, including potential effects on rates, exclusivity, and segment profitability.
- Status and potential recoverability of the Rosarito arbitration claim and value of the related discontinued-operation assets.
- Capital spending against the 2023 plan, cash conversion as contract activity expands, and any use of the revolving credit facility.