Consolidated Water Co. Ltd. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; financial statements are unaudited. The company supplies desalinated water and water-related products and services. Comparisons below are to the corresponding 2018 periods.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $18.31 million | $15.06 million | $35.29 million | $29.62 million |
| Gross profit / margin | $7.55 million / 41% | $6.18 million / 41% | $14.52 million / 41% | $12.35 million / 42% |
| Operating income | $2.96 million | $1.74 million | $5.58 million | $3.24 million |
| Continuing net income attributable to CWCO shareholders | $2.48 million | $1.89 million | $5.04 million | $3.65 million |
| Diluted EPS from continuing operations | $0.16 | $0.12 | $0.33 | $0.24 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $8.55 million | $(2.42) million |
Revenue rose approximately 21% in Q2 and 19% in the first half. Q2 total net income attributable to shareholders was $2.48 million versus $2.19 million a year earlier; the prior-year figure included $0.30 million from discontinued operations. First-half total attributable income was $8.66 million versus $4.28 million, including a $3.62 million gain on the CW-Belize sale in 2019. Thus, continuing-operations results are more comparable than total net income.
Cash and cash equivalents were $41.88 million at June 30, with another $1.51 million restricted; combined cash and restricted cash was $43.38 million. Working capital was $65.9 million. The balance sheet lists no conventional borrowing balance; operating lease liabilities were $4.68 million ($0.65 million current). Total liabilities were $10.22 million and equity was $171.74 million.
Cash flow, liquidity and capital
- First-half operating cash flow was $8.55 million, versus cash used of $2.42 million in 2018. Investing activities provided $6.07 million, including $6.71 million of net proceeds from the CW-Belize sale; capital additions were $1.82 million. Financing used $2.57 million, mostly dividends.
- Cash and restricted cash increased $12.05 million during the half. The company cited collections on Bahamas receivables as a significant working-capital contributor, while manufacturing-related inventory increased about $1.53 million.
- Management estimated second-half 2019 requirements of approximately $2.2 million for existing-operations capital expenditures, $4.3 million for Mexico project development and $1.3 million for dividends payable. It said it expected sufficient liquidity, subject to the CW-Bahamas collection risk.
- Dividends declared were $0.085 per share per quarter, or $0.17 for the first half. A $0.085 dividend was declared for payment July 31, 2019.
Performance changes and management commentary
- Retail: Q2 revenue increased to $6.98 million from $6.27 million, with water volume almost 7% higher, which management attributed largely to lower rainfall; higher energy pass-through added about $111,000. The segment also recorded a $397,000 gain, primarily from CW-Bali asset and stock sales.
- Bulk: Q2 revenue declined to $6.94 million from $7.68 million. Lower rates under new Water Authority-Cayman contracts reduced revenue. A new seven-year North Side Water Works operating contract began July 1, 2019; its per-gallon price, excluding energy, is about 29% below the prior price. Higher Windsor plant depreciation also weighed on gross profit.
- Manufacturing: Q2 revenue rose to $4.29 million from $0.99 million, reflecting more orders and increased project production; the segment moved from a $272,000 operating loss to $869,000 operating income. Management cautioned that 2018 included intercompany work that was eliminated in consolidated reporting.
- Services: The segment reported a Q2 operating loss of $734,000, compared with a $647,000 loss, reflecting lower OC-BVI management fees and higher Mexico project costs.
- Consolidated Q2 G&A increased to $4.99 million from $4.45 million, including higher employee and business-development costs and Mexico project expenses. For the first half, G&A was $9.37 million versus $9.11 million.
Outlook, risks and contingencies
- Cayman retail license: The exclusive license expired January 31, 2018; service continues month-to-month under the expired terms while negotiations with OfReg continue. OfReg rejected the company’s proposed inflation-based rate adjustment, and current rates remain at January 2018 levels. The company says revised terms could materially reduce or eliminate retail earnings and cash flows, and could prompt asset impairment. This licensed business represented approximately 38% of Q2 revenue and 53% of gross profit.
- Bahamas collections: CW-Bahamas had $12.7 million due from the Water and Sewerage Corporation at June 30, down from $17.6 million at year-end; approximately 68% was delinquent. No allowance was recorded, based on prior eventual collections. Continued delays could require shareholder funding, revenue-recognition changes or an allowance, each potentially materially adverse.
- Mexico project: The proposed Rosarito project remains conditional on payment protections, rights of way and financing, among other items. Required state authorizations under Decreto #335 expire December 31, 2019, and related legal challenges remain. A separate minority-shareholder dispute concerning NSC is unresolved; its effect on project completion cannot presently be determined. Approximately $24.2 million of land and rights-of-way carrying value could be impaired if the project does not proceed. The project equity-funding agreement was extended to December 31, 2019.
- Other unusual items: CW-Belize was sold effective January 1, 2019, generating a $3.62 million gain; approximately $265,000 of the purchase price was withheld for indemnification obligations and was expected to be payable in Q3 2019 if not applied to claims. CW-Bali assets and stock sales generated most of the first-half $441,000 asset-disposition gain.
- The company adopted lease accounting in 2019, recognizing right-of-use assets and lease liabilities; management said adoption did not materially affect financial position, results or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms of the Cayman retail license negotiations, including any rate or exclusivity changes.
- Subsequent collection of the $12.7 million WSC receivable, delinquency levels and whether an allowance or additional CW-Bahamas funding becomes necessary.
- Status of Rosarito financing, rights of way, state payment protections and litigation before the December 31, 2019 authorization and equity-agreement deadlines; assess potential impairment exposure.
- Whether manufacturing growth and profitability continue, and the earnings effect of lower-priced bulk-water contracts.
- Receipt of the CW-Belize withheld purchase consideration and the use of cash for planned capital spending, project development and dividends.