Consolidated Water Co. Ltd. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with fiscal 2020. The company supplies desalinated water, develops and operates water-treatment and reuse infrastructure, and manufactures water-related equipment in the Caribbean and United States.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $66.9 million | $72.6 million |
| Gross profit / margin | $23.5 million / 35% | $26.8 million / 37% |
| Operating income | $2.0 million | $8.3 million |
| Continuing income attributable to shareholders | $3.45 million ($0.23 diluted EPS) | $8.61 million ($0.56 diluted EPS) |
| Total income attributable to shareholders, including discontinued operations | $0.88 million ($0.06 diluted EPS) | $3.71 million ($0.24 diluted EPS) |
| Operating cash flow | $7.0 million | $17.3 million |
At year-end, cash and cash equivalents were $40.4 million, plus a $2.5 million certificate of deposit; working capital was $69.2 million. Total debt was approximately $0.21 million, excluding operating lease liabilities. Cash declined from $43.8 million at the prior year-end. Dividends declared were $0.34 per share, unchanged from 2020.
Changes versus 2020
- Revenue fell 8%, primarily because manufacturing revenue declined by $8.4 million as Aerex lost orders from a major customer. Manufacturing gross margin fell to 6% from 35%, and the segment recorded a $2.9 million goodwill impairment; its operating loss was $4.0 million.
- Bulk revenue grew 10% to $26.8 million, reflecting higher energy pass-through charges and a 5% increase in water volume sold by CW-Bahamas. Bulk operating income increased to $7.7 million.
- Services revenue increased 7% to $13.9 million, supported by new operating and maintenance contracts; operating income was broadly flat at $0.4 million.
- Retail revenue decreased 4% to $22.1 million as tourism-related demand remained depressed in Grand Cayman. Retail recorded a $2.0 million operating loss, versus a $1.0 million loss in 2020.
- Continuing net income attributable to shareholders declined 60%. Discontinued Mexico project losses narrowed to $2.6 million from $4.9 million, but total shareholder income still fell substantially.
Liquidity, investment and outlook
- Operating cash flow from continuing operations was $8.6 million. Investing activities used $3.9 million, including a $2.5 million certificate-of-deposit purchase and $1.5 million of property and equipment additions. Financing activities used $5.9 million, mainly for dividends.
- Management estimated 2022 capital expenditures of approximately $9.5 million, including $5.6 million for the first phase of replacing the West Bay desalination plant. The replacement is expected to cost $7.2 million in total and be completed in 2023. The company also anticipated approximately $1.3 million of dividends payable; future dividends remain subject to Board approval.
- No formal revenue or earnings guidance is provided. Management expects COVID-related effects, including depressed Cayman tourism, to continue to affect results, but cannot determine when demand will return to pre-pandemic levels.
- Management cited supply-chain shortages, longer delivery times, and rising raw-material and fuel costs. These pressures may hinder manufacturing output and margins. Water rates in several markets include inflation adjustments, but Cayman retail rates have not increased since January 2018 amid license negotiations.
Material risks, contingencies and unusual items
- Cayman retail license: The exclusive license’s last express extension expired January 31, 2018; negotiations for a new license remain unresolved. The government has indicated that revised terms could materially reduce, or eliminate, historical retail operating income and cash flow. Retail operations generated about 33% of 2021 revenue and 47% of gross profit.
- Bahamas receivables: CW-Bahamas had $21.5 million due from the Water and Sewerage Corporation at year-end, with about 76% delinquent and no allowance recorded. The balance rose to $26.4 million by February 28, 2022; the company reported receiving $7.6 million in payments during the first three weeks of March. Collection delays constrain the subsidiary’s liquidity and create potential revenue-recognition or credit-loss exposure.
- Customer and impairment concentration: One former Aerex customer generated 80% of segment revenue in 2020; its 2021 purchases were sharply reduced, and any restart was expected at substantially lower levels, possibly not until late 2022 or 2023. Year-end goodwill fair-value headroom was only 15% for both manufacturing and services, making further impairment possible.
- Mexico project: Baja California terminated the Rosarito desalination project contract in 2020. The company reported a $2.6 million discontinued-operations loss in 2021 and filed international arbitration in February 2022 seeking damages exceeding US$51 million plus MXN$137 million, interest and costs. Recovery is uncertain; legal and arbitration expenses are expected to be material. A remaining $340,910 Mexican VAT receivable may also be uncollectible.
- Other significant exposures include dependence on the WSC, tourism and weather variability, performance guarantees under water-supply contracts, natural disasters, regulatory and environmental changes, and potential future impairment of assets. The filing reports no formal forecast of the financial effects of these uncertainties.
Most important facts for investors to verify
- Progress and economic terms of the Cayman retail-license negotiations, including rate adjustments and any effect on exclusivity.
- Subsequent collections from the Bahamas WSC, compliance with its repayment schedule, and whether an allowance or revenue-recognition change becomes necessary.
- Aerex’s customer order recovery, replacement sales, material availability and costs, and manufacturing-unit impairment headroom.
- Updates on the Mexico arbitration, potential recoveries, legal costs and the disposition or value of the project land.
- Tourism recovery, 2022 capital spending and West Bay replacement timing, and the company’s ability to sustain dividends while funding these needs.
Audit note: The independent auditor issued an unmodified opinion on the financial statements. The auditor identified goodwill impairment assessment as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective at the reasonable-assurance level; the auditor did not provide an internal-control opinion.