Consolidated Water Co. Ltd. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; balance-sheet figures are as of June 30, 2020. The company supplies and treats water and provides water infrastructure services and specialized manufacturing across the Cayman Islands, The Bahamas, the United States and the British Virgin Islands.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $19.09 million | $18.31 million | $39.81 million | $35.29 million |
| Gross profit | $7.30 million | $7.55 million | $15.74 million | $14.52 million |
| Gross margin | 38% | 41% | 40% | 41% |
| Operating income (loss) | $(0.59) million | $2.96 million | $2.70 million | $5.58 million |
| Net income (loss) attributable to company shareholders | $(1.13) million | $2.48 million | $1.76 million | $8.66 million |
| EPS attributable to common shareholders | $(0.07) | $0.16 | $0.12 | $0.58 |
The 2019 six-month shareholder earnings included $3.62 million from discontinued operations, the gain on the sale of CW-Belize. Continuing-operations earnings attributable to shareholders were $5.04 million in that period, versus $1.76 million in 2020.
- Q2 revenue increased 4% year over year, primarily due to PERC, acquired in late 2019; revenue declined in retail, bulk and manufacturing. Six-month revenue rose 13%, mainly from PERC and stronger manufacturing activity.
- Q2 operating results included a $3.0 million impairment of Mexico project rights-of-way after termination of the project contract. The impairment drove the operating loss; Q2 2019 included a $397,000 gain on asset dispositions.
- Cash from operations was $3.84 million for the first half, down from $8.55 million. Cash and equivalents declined from $42.90 million at year-end to $34.96 million at June 30. Investing cash use was $9.21 million, including $8.5 million to acquire the remaining Aerex interest; financing cash use was $2.58 million, principally dividends.
- At June 30, cash was $34.96 million, working capital was $62.8 million and total assets were $180.82 million. Long-term debt, including current maturities, was approximately $188,000; operating lease liabilities were $1.56 million. Total liabilities were $11.28 million.
- Accounts receivable totaled $26.86 million, up from $23.23 million at year-end. The filing attributes increases to Aerex, PERC and CW-Bahamas.
- Dividends declared were $0.085 per common and redeemable preferred share for Q2, unchanged from Q2 2019. Management estimated remaining-2020 capital expenditures of about $1.0 million and dividends payable of about $1.3 million.
Material developments, outlook and risks
- Rosarito project termination: On June 29, 2020, Baja California authorities notified AdR that the public-private partnership contract for the planned desalination plant and aqueduct was terminated, citing project cost and financial feasibility concerns. The company recorded a $3.0 million impairment on aqueduct rights-of-way and reduced related lease assets and liabilities. It intends to pursue available legal remedies and reimbursement, but gives no assurance it will recover project expenses or investments. The project land, carried at $21.1 million, was appraised above carrying value in July 2020.
- COVID-19: Management said the pandemic materially adversely affected results and expects continued adverse effects, but cannot quantify their duration or future impact. Q2 Cayman retail water volumes fell 16% year over year as tourism halted; first-half volumes fell 3%. Cayman Water recorded an $80,000 Q2 doubtful-account provision. Tourism closures and economic disruption also threaten demand, collections, liquidity and asset values across markets.
- Bahamas receivables: CW-Bahamas had $19.9 million due from the Water and Sewerage Corporation at June 30, with approximately 79% delinquent. No allowance was recorded, based on historical eventual collection. Continued delays could constrain subsidiary liquidity, require an allowance or affect revenue recognition.
- Cayman retail license: The express extension of the exclusive license expired January 31, 2018; the company continues operating under its terms while negotiations with OfReg continue. The government has indicated it may restructure the license, potentially materially reducing or eliminating a business that generated 31% of Q2 revenue and 44% of Q2 gross profit.
- Other operating exposure: Aerex relied on one supplier for a component associated with 86% of its first-half 2020 sales, and supplier shipments had sometimes fallen behind. PERC’s operations depend in part on short-term customer-renewable contracts; 21% of its first-half revenue was under contracts expiring through July 2021.
- Legal matters: Separate Mexican litigation concerning NSC ownership remains unresolved; the company cannot determine its ultimate financial effect. COVID-related court suspensions delayed some proceedings.
- Outlook and capital allocation: No numerical earnings or revenue guidance was provided. Management stated it cannot predict the duration of pandemic effects. On August 11, 2020, after quarter-end, the company acquired another 10% of PERC for $900,000, increasing ownership to 61%.
Important facts for investors to verify
- Progress and potential recoveries following termination of the Rosarito contract, including treatment of project land, rights-of-way and related litigation.
- Collection timing and credit quality of CW-Bahamas’ $19.9 million WSC receivable, including any subsequent payments or required allowance.
- Outcome and economics of the Cayman retail license negotiations and any effects on segment cash flows or asset impairment.
- How pandemic-related tourism disruption, customer collections and operating conditions affect future revenue, margins and operating cash flow.
- PERC contract renewals and Aerex’s single-supplier exposure, as well as the results and cash implications of the increased PERC ownership.