Consolidated Water Co. Ltd. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 9, 2018. The company produces and supplies desalinated water and provides water-related services and manufacturing across the Caribbean, the United States, and Indonesia. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $15.87 million | $15.28 million | $31.21 million | $30.96 million |
| Gross profit / margin | $6.60 million / 42% | $6.46 million / 42% | $13.20 million / 42% | $13.29 million / 43% |
| Operating income | $2.04 million | $0.46 million | $3.88 million | $2.50 million |
| Net income attributable to shareholders | $2.19 million | $0.62 million | $4.28 million | $3.26 million |
| Diluted EPS | $0.14 | $0.04 | $0.28 | $0.22 |
| Operating cash flow | Not presented quarterly | $(2.11) million | $10.64 million |
Q2 revenue rose about 4%; first-half revenue rose about 1%. First-half shareholder net income increased about 31%, while gross profit declined slightly and gross margin fell one percentage point. Q2 earnings benefited from lower G&A and higher other income, including OC-BVI earnings and a favorable option revaluation; foreign-currency losses partly offset those gains. First-half operating cash flow turned negative, mainly reflecting a $7.1 million increase in receivables.
Segments and material changes
- Retail: First-half revenue increased to $12.70 million from $12.54 million, with water volume up just under 3%; retail operating income was $1.14 million versus a $0.07 million loss. The 2017 comparison included a $1.0 million CW-Bali impairment.
- Bulk: First-half revenue rose to $16.72 million from $15.73 million, primarily reflecting energy-cost pass-throughs. Higher energy and Bahamas maintenance costs reduced gross margin to 33% from 35%; operating income was $4.84 million versus $4.94 million.
- Services: First-half operating loss narrowed to $1.31 million from $1.59 million, principally on lower Mexican project-development costs.
- Manufacturing: First-half revenue declined to $1.55 million from $2.44 million, partly because affiliate work was eliminated in consolidation. Operating loss widened slightly to $0.79 million from $0.77 million.
Financial position and liquidity
- At June 30, cash and cash equivalents were $34.09 million, down from $47.18 million at year-end 2017. Working capital was approximately $55.7 million; current assets were $63.13 million and current liabilities $7.42 million.
- Total liabilities were $9.03 million, including a $0.29 million related-party note payable; the filing reports no material conventional long-term debt balance.
- Accounts receivable increased to $22.16 million from $15.05 million, mainly due to Bahamas Water and Sewerage Corporation (WSC) receivables. Construction in progress rose to $11.40 million from $1.82 million, reflecting plant projects.
- Investing activities used $8.05 million, including $8.73 million of property and construction additions. Financing activities used $2.93 million, including $2.54 million of common dividends. Cash declined by $13.09 million during the half.
- Management projected approximately $9.5 million of remaining-2018 capital spending for existing operations, $4.5 million for Mexican project development, and $1.3 million of dividends payable. These are expected liquidity needs, not formal earnings guidance.
Outlook, risks, contingencies, and unusual items
- Bahamas collections: WSC owed CW-Bahamas $16.6 million at June 30, up from $9.1 million at year-end. The company recorded no allowance, citing prior full collections and its belief the balance is collectible. WSC paid $2 million in mid-July; subsequent correspondence alleged certain contract-compliance issues but did not dispute the receivable or that it was due. Management warned that continued collection delays could impair CW-Bahamas’ operations, plant refurbishment, revenue recognition, and receivable valuation.
- Cayman retail license: The latest extension expired January 31, 2018; negotiations with OfReg continued, and the company was operating on the assumption the license had been further extended. This business generated about 40% of first-half revenue and 54% of gross profit. Unfavorable renewal terms could materially reduce income and cash flow or trigger goodwill impairment.
- Mexico project: The 100-million-gallon-per-day Rosarito project remains conditional. A June 2018 contract amendment expanded Phase 1 to include an aqueduct originally assigned to Phase 2; project cost and tariff remain unset pending financial close and prevailing economic conditions. Effectiveness depends on permits, rights of way, public payment arrangements, and completed debt financing. Equity funding agreements and a Suez construction contract are also conditional. Land and right-of-way deposits carried at approximately $20.6 million and $1.3 million, respectively, could be impaired if the project does not proceed. EWG litigation presents additional uncertainty; a temporary suspension of certain challenged court writs was granted.
- Other operating and legal exposures: Cayman bulk agreements for North Sound and Red Gate expire in February 2019 and North Side in June 2019; replacement agreements are not assured. The Belize regulator appealed a favorable ruling, with the appeal pending. A CW-Bali customer’s damages claim totals about $5.8 million equivalent; an Indonesian court dismissed the case for lack of jurisdiction, but the customer appealed.
- Other items: The company adopted the new revenue standard on January 1, 2018 with no opening retained-earnings impact. It expects the lease standard, effective for it in 2019, to materially increase balance-sheet assets and liabilities. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
- No formal full-year revenue or earnings guidance is provided in the filing. Management said it expected to have sufficient liquidity for 2018 and thereafter, subject to the disclosed Bahamas and Belize liquidity constraints. Some Bahamas and Belize cash transfers require central-bank approval; approximately $6.3 million and $5.8 million, respectively, was held in those countries at June 30.
Investor verification priorities
- Track WSC payments, CW-Bahamas receivable aging, contract-compliance correspondence, and any allowance or revenue-recognition change.
- Confirm the status and terms of the Cayman retail license renewal and the WAC bulk-contract bidding process.
- Verify Rosarito project conditions precedent, financing close, final Phase 1 cost and tariff, ownership funding, and developments in EWG and Decreto #168 litigation.
- Monitor operating cash flow, capital spending, dividends, and access to cash held in Belize and the Bahamas.
- Check the CW-Bali appeal and Belize regulatory appeal, as well as future impairment assessments for Aerex goodwill and Mexican project assets.