Consolidated Water Co. Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. The company supplies potable water, treats water for reuse, and provides water-related engineering, construction, operating and manufacturing services in the Cayman Islands, The Bahamas, the United States and the British Virgin Islands. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $17.10 million | $20.73 million; down 17.5% |
| Gross profit / margin | $6.13 million / 35.8% | $8.44 million / 40.7% |
| Operating income | $1.11 million | $3.74 million |
| Continuing-operations net income attributable to company shareholders | $1.30 million; $0.08 diluted EPS | $3.20 million; $0.21 diluted EPS |
| Net income attributable to company shareholders, including discontinued operations | $0.99 million; $0.06 diluted EPS | $2.89 million; $0.19 diluted EPS |
| Operating cash flow, continuing operations | $1.47 million | $0.28 million |
| Cash and cash equivalents, March 31 | $42.78 million | $43.79 million at December 31, 2020 |
Gross margin contracted as revenue fell. Other income, net, was $315,000 versus $27,000, including a $131,000 unrealized gain on PERC put/call options (compared with a $161,000 unrealized loss in Q1 2020). A $249,000 net loss on asset dispositions and impairments also reduced operating income. Discontinued operations, related to the terminated Mexico project, generated a $313,000 net loss.
At March 31, total assets were $179.77 million and total liabilities were $11.42 million. Long-term debt, including current maturities, was approximately $216,000; operating lease liabilities were approximately $2.98 million. Working capital was $67.4 million. Cash decreased by approximately $1.01 million from year-end; total operating cash flow, including discontinued operations, was $1.09 million. Investing used $251,000 and financing used $1.96 million, primarily for dividends.
Material changes and segment results
- Retail: Revenue fell 21% to $5.71 million as water volume declined 20% amid the continuing halt in Cayman tourism. Gross margin fell to 53% from 59%; the segment recorded a $618,000 operating loss versus $897,000 operating income.
- Bulk: Revenue decreased 3% to $6.25 million, partly due to lower Bahamas energy pass-through charges. Gross profit rose to $2.09 million from $1.88 million, helped by lower repairs and maintenance costs; operating income was $1.71 million.
- Services: Revenue increased 14% to $3.54 million, as new operations and maintenance work more than offset lower construction revenue. Gross margin declined to 23% from 27%; operating income was $96,000.
- Manufacturing: Revenue fell 59% to $1.61 million following the suspension of purchases by Aerex’s major customer. Gross margin fell to 13% from 37%; the segment recorded an $80,000 operating loss versus $1.10 million operating income.
Accounts receivable rose $3.2 million from year-end, principally due to a $2.7 million increase in CW-Bahamas receivables. Current inventory declined $894,000, primarily reflecting fewer Aerex orders. Property, plant and equipment declined $1.6 million, mainly from depreciation. A new office lease increased recognized right-of-use assets and lease liabilities.
Outlook, risks and contingencies
- No formal earnings guidance: Management did not provide a quantified full-year revenue or earnings forecast. It expected COVID-19 and reduced tourism to continue affecting results, particularly Cayman retail sales.
- Planned spending and dividends: Management projected approximately $6.0 million of capital expenditures for the remainder of 2021, including $3.9 million to replace the 26-year-old West Bay desalination plant, and approximately $1.3 million for dividends payable. Future dividends remain at the board’s discretion.
- Bahamas collections and liquidity: CW-Bahamas had $19.5 million due from the Water and Sewerage Corporation at quarter-end; approximately 78% was delinquent. The balance reached approximately $21.7 million by April 30, 2021. No doubtful-account allowance was recorded; management considers the balance collectible based on past payments, but warns that further delays could impair subsidiary liquidity and require revenue-recognition changes or an allowance.
- Cayman retail license: The last express extension of the exclusive license expired January 31, 2018. The company continues operating under its terms while negotiations with OfReg continue. Management says a revised license could materially reduce or eliminate retail income and cash flows; retail represented 33% of Q1 2021 revenue and 49% of gross profit.
- Aerex concentration and supply chain: Aerex’s former major customer suspended purchases after 2020 and indicated it presently expects to resume in Q1 2022, potentially at lower volumes; there is no assurance it will do so. Aerex also reported higher input prices, shortages and longer supplier lead times. These issues could affect revenue, margins and manufacturing goodwill.
- Mexico project and litigation: Baja California terminated the Rosarito desalination project contract in June 2020. The company discontinued development and is marketing project land carried at approximately $21.1 million. AdR submitted claimed non-recoverable expenses of about US$51.1 million plus MXN137.3 million; the authorities had not responded. The company cannot assure reimbursement. In April 2021, its Netherlands subsidiary asserted treaty claims and invited negotiations, with arbitration contemplated if unresolved. Separate Mexican litigation challenging ownership transactions remained unresolved; the company could not determine its financial impact.
- Other exposures: COVID-19 effects remain uncertain and could trigger impairment charges. PERC’s short-term operating and maintenance contracts include contracts representing about 20% of its Q1 revenue that expire through year-end 2021. The filing also notes performance guarantees for minimum weekly water deliveries under Bahamas supply contracts.
Most important facts for investors to verify
- Whether Cayman tourism recovery improves retail water volumes and the outcome and economics of the retail license negotiations.
- Actual collections of CW-Bahamas’ delinquent WSC receivables and any resulting liquidity, allowance or revenue-recognition consequences.
- Whether Aerex’s major customer resumes orders in 2022, whether replacement sales develop, and whether supply-chain constraints persist.
- Progress and recoverability of the Mexico project claims, land value and related litigation; reimbursement is not assured.
- Execution, cost and timing of the planned West Bay plant replacement and the company’s other 2021 capital spending and dividends.