Consolidated Water Co. Ltd. — Q2 2022 Form 10-Q
Business and period: The company supplies potable water, treats wastewater, and provides water infrastructure, engineering, operating, and manufacturing services in the Cayman Islands, The Bahamas, the United States, and the British Virgin Islands. This unaudited filing covers the three and six months ended June 30, 2022; comparisons are with the same periods in 2021. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $21.07m | $16.70m | $40.63m | $33.80m |
| Gross profit (margin) | $7.48m (35%) | $6.06m (36%) | $14.62m (36%) | $12.19m (36%) |
| Operating income (loss) | $2.55m | ($1.56m) | $4.85m | ($0.44m) |
| Continuing income (loss) attributable to company shareholders | $2.71m | ($1.51m) | $5.03m | ($0.21m) |
| Total net income (loss) attributable to company shareholders, including discontinued operations | $2.29m | ($1.66m) | $4.01m | ($0.68m) |
| Basic and diluted EPS | $0.15 | ($0.11) | $0.26 | ($0.04) |
Revenue increased approximately 26% in Q2 and 20% for the first half. Gross margin was broadly stable, though slightly lower in Q2. The prior-year operating losses included a $2.9m manufacturing goodwill impairment; its absence was a major contributor to the year-over-year profit turnaround.
Cash flow and liquidity: First-half operating cash flow was $13.21m, compared with $1.06m in 2021; continuing-operations operating cash flow was $13.87m. Investing used $1.79m, including $1.80m of property and construction additions; financing used $3.09m, mainly dividends. Cash and equivalents were $49.09m at June 30, up from $40.36m at year-end; an additional $2.52m certificate of deposit was reported separately. Management reported working capital of $71.6m and said it expected sufficient liquidity.
Balance sheet and debt: Total assets were $182.58m and total liabilities $15.11m. Long-term debt, including current maturities, was approximately $0.25m. Operating lease liabilities totaled approximately $2.41m and should be considered separately from debt. Shareholders’ equity, including non-controlling interests, was $167.47m.
Material changes and operating drivers
- Retail: Q2 revenue rose to $6.53m from $5.67m, including an 8% increase in water volume; the segment returned to a small operating profit. Tourism recovery and higher energy pass-through charges helped, but volumes remained below pre-pandemic levels.
- Bulk: Q2 revenue increased to $8.42m from $6.71m, primarily due to higher energy pass-through charges. First-half volume at CW-Bahamas rose 4% year over year.
- Services: Q2 revenue increased to $5.06m from $3.76m, reflecting growth in construction and operating and maintenance work.
- Manufacturing: Q2 revenue increased to $1.06m from $0.55m, but the segment still recorded a $0.24m operating loss. First-half revenue was nearly flat at $2.21m. Supply delays, customer-requested delivery deferrals, and low production levels continued to weigh on margins.
- First-half accounts receivable decreased about $4.7m, substantially reflecting collection of CW-Bahamas receivables. Contract liabilities increased about $2.7m, largely from billings on a new PERC wastewater treatment facility contract in Arizona.
Outlook, risks, contingencies, and unusual items
- No formal earnings guidance is provided. The company estimated approximately $10.1m of capital expenditures for the balance of 2022, including $3.3m for the West Bay desalination plant replacement and $3.5m for the WAC Red Gate plant. It disclosed approximately $102.7m of transaction price on longer-term contracts with unsatisfied or partially unsatisfied obligations; about $34.3m was expected to be recognized in the remainder of 2022 and $68.4m thereafter. These are contract expectations, not overall revenue guidance.
- Cayman retail license: The express extension of the exclusive 1990 license expired January 31, 2018; negotiations for a replacement remain ongoing. The company says revised terms could materially reduce or eliminate historical retail operating income and cash flow. The licensed business generated about 31% of Q2 revenue and 46% of Q2 gross profit.
- Mexico project and arbitration: Following termination of the Rosarito desalination project contract, the company’s subsidiary filed international arbitration seeking damages exceeding US$51m plus MXN$137m, fees, costs, and interest. The company cautions recovery is uncertain and expects material arbitration-related costs. The State began discussions in July 2022, but arbitration efforts continued; no outcome was certain. The discontinued operation recorded a first-half loss of $1.03m, including a $0.38m provision for potentially uncollectible VAT refunds. The related land was carried at about $21.1m.
- Bahamas receivables: CW-Bahamas collected approximately $16.4m from the Water and Sewerage Corporation in Q2; the balance due was $13.5m at June 30. Collection timing remains a consideration, despite a government payment schedule and the company’s history of eventual collection.
- Manufacturing and supply chain: Management cited rising material and labor costs, shortages, delayed deliveries, and customer order delays. The manufacturing reporting unit’s fair value exceeded carrying value by only 15% at year-end 2021; weaker Aerex cash flows could require further impairment of $1.99m of goodwill and $0.80m of remaining acquired intangible assets.
- Other risks: COVID-19-related tourism and economic effects were still cited as adverse; tourism in Grand Cayman remained roughly half of pre-pandemic levels. About 36% of PERC’s first-half revenue was under O&M contracts expiring by June 30, 2023. The company also disclosed performance guarantees under its Bahamas water-supply contracts and potential exposure to cost overruns on fixed-price contracts.
- The company reported a $0.28m first-half unrealized gain on PERC put/call option valuation, a non-cash item. It declared a $0.085 per-share dividend payable July 29, 2022; the filing states future dividends are subject to board decisions and financial circumstances.
Important facts for investors to verify
- Progress and economic terms of the Cayman retail license negotiations, given the license’s significant contribution to gross profit.
- Updates on Mexico arbitration, the State’s discussions, potential recovery, ongoing legal costs, and the carrying value or marketability of the project land.
- Whether CW-Bahamas collects the remaining WSC receivable on schedule and whether future payment delays recur.
- Aerex customer demand, supply-chain conditions, manufacturing margins, and any indicators requiring goodwill or intangible-asset impairment.
- Execution, cost, and timing of the West Bay and Red Gate projects, as well as PERC contract renewals and completion of its Arizona project.
- How much first-half operating cash flow reflects recurring operations versus working-capital movements and receivable collections.