Consolidated Water Co. Ltd. — Q2 2013 Form 10-Q
Business and period: The company produces and supplies desalinated water in the Cayman Islands, Belize and the Bahamas, and provides water-plant engineering and operating services. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the same 2012 periods. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $16.57 million | $16.23 million | $33.12 million | $32.96 million |
| Gross profit | $6.40 million | $5.41 million | $12.62 million | $11.35 million |
| Gross margin | 38.6% | 33.3% | 38.1% | 34.4% |
| Operating income | $2.80 million | $1.96 million | $5.45 million | $4.40 million |
| Net income attributable to company shareholders | $2.85 million | $1.96 million | $6.60 million | $4.30 million |
| Diluted EPS | $0.19 | $0.13 | $0.45 | $0.29 |
- Revenue increased about 2% in Q2 and 0.5% in the first half. Retail growth and services revenue increases largely offset lower bulk revenue.
- Improved gross profit and earnings reflected stronger retail and bulk segment margins. Bulk gross margin rose to 31% in Q2 from 23%, and to 29% in the first half from 23%, aided by lower depreciation and improved operating margins.
- First-half other income, net was $1.42 million, versus $117,000 a year earlier. The company reported $1.18 million in combined equity earnings and profit-sharing income from OC-BVI for the first half, including effects associated with the Baughers Bay litigation recovery.
- General and administrative expense rose to $3.59 million in Q2 and $7.16 million in the first half. NSC Mexico development costs, directors’ fees and employee costs contributed to the increases.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $34.86 million, marketable securities $8.58 million, and working capital approximately $46.3 million. Cash was $33.89 million at year-end 2012.
- First-half operating cash flow was $5.45 million, compared with $5.10 million in 2012. Investing activities used $1.74 million and financing activities used $2.75 million; cash increased $963,000 overall.
- Total debt was approximately $6.04 million, comprising $1.71 million current and $4.34 million long-term. The company reported approximately $849,000 of scheduled debt principal repayments in the first half and said it was in compliance with its debt agreements.
- Capital and development commitments are significant: management estimated about $21 million of remaining 2013 NSC project expenditures, including approximately $17 million for land and $3.1 million in development costs, as well as $1.7 million to complete the Bali plant and $1.6 million for other existing-operation capital expenditures. The $10.05 million obligation for land purchased in Mexico is due May 15, 2014; a further $6.98 million land balance is also due that date.
- Dividends declared were $0.075 per common share per quarter. The company paid approximately $2.2 million in dividends in the first half.
Segment and period changes
- Retail: Q2 revenue rose about 5%, supported by approximately 4% higher water volume; first-half revenue increased modestly on higher rates, with volume broadly unchanged. Retail remained a major earnings contributor.
- Bulk: Revenue declined slightly as the Lower Valley operating agreement expired in January 2013, removing approximately $510,000 of Q2 and $1.05 million of first-half 2012 comparison-period revenue. Higher revenue elsewhere partly offset the loss; bulk profitability improved.
- Services: Revenue increased, but the segment recorded operating losses of $588,000 in Q2 and $1.13 million in the first half, wider than in 2012. Higher engineering and employee costs and continued NSC development spending weighed on results.
- Bali: The company commissioned an initial 250,000 gallons-per-day capacity in late April and began serving a resort customer. Q2 revenue from that customer was approximately $21,000. Total planned initial investment was estimated at $4.2 million; approximately $2.5 million had been spent by June 30.
Outlook, risks and unusual items
- Management said cash on hand and expected operating cash generation should meet known needs, while warning that liquidity could fall if the company continues funding NSC and Bali. No earnings or revenue guidance was provided.
- The exclusive Cayman retail-water license extension expires September 30, 2013. Renewal negotiations and judicial review remain unresolved; a less favorable rate model or loss of favorable license terms could reduce cash flows and potentially impair goodwill of $3.50 million. Retail operations represented about 38% of first-half revenue and 54% of first-half gross profit.
- The Windsor plant’s Bahamas supply agreement expired after the contracted volume was delivered in July 2013. The company continued operating under existing terms through early September while the customer evaluated alternatives; extension and future terms were uncertain. The plant generated approximately $1.9 million of first-half 2013 revenue.
- The proposed 100-million-gallon-per-day Mexico desalination and pipeline project remains in development. It depends on land purchases, permits, customer contracts, feed-water and power arrangements, and project financing; management estimated development activities would continue at least through Q2 2014 and noted the project may not proceed. The company’s ownership in NSC rose to 99.9% after conversion of a loan into shares.
- In Belize, a regulatory dispute concerning licensing and operating requirements remained pending, with a temporary injunction staying enforcement of the regulator’s order. The company could not assess the financial impact.
- OC-BVI’s Baughers Bay litigation produced a final appellate ruling in 2012; the BVI government paid the remaining reported judgment balance in January 2013. The appellate court had yet to determine any additional compensation for the plant’s value. The company’s OC-BVI investment valuation also assumes continued performance under the Bar Bay water agreement.
- Management identified tourism, weather, government relationships, regulation, project execution, energy costs and foreign exchange exposure as risks. It reported no material change in market-risk exposure and said disclosure controls were effective.
Investor verification points
- Confirm the status and final terms of the Cayman retail license after the September 30, 2013 extension, including any rate-model or goodwill-impairment implications.
- Verify whether the Windsor agreement was renewed, on what terms, and the resulting revenue and utilization impact.
- Track Mexico land-payment deadlines, development spending, permitting, customer commitments and financing; assess the project’s funding needs against available liquidity.
- Separate recurring operating performance from OC-BVI litigation-related income and confirm any further Baughers Bay compensation or Bar Bay contract developments.
- Monitor the Belize regulatory proceeding and any effect on CW-Belize operations or cash transfers.