Consolidated Water Co. Ltd. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Interim financial statements are unaudited. The company produces and supplies desalinated water and provides water-related services and equipment in the Caribbean, the United States, and Indonesia.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $15.25 million | $15.38 million | $30.90 million | $29.39 million |
| Gross profit | $6.49 million | $6.70 million | $13.36 million | $12.97 million |
| Gross margin | 42.5% | 43.6% | 43.2% | 44.1% |
| Operating income | $1.53 million | $1.81 million | $3.64 million | $3.68 million |
| Continuing-operations income attributable to shareholders | $1.69 million | $2.34 million | $4.40 million | $4.38 million |
| Net income attributable to shareholders, including discontinued operations | $0.62 million | $2.20 million | $3.26 million | $4.26 million |
| Diluted EPS | $0.04 | $0.15 | $0.21 | $0.29 |
- Q2 revenue decreased 0.8% year over year; six-month revenue increased 5.1%. Q2 continuing-operations income attributable to shareholders fell about 28%, while the six-month measure was broadly flat.
- Q2 results included a $1.0 million impairment charge for CW-Bali, reported in discontinued operations. The six-month discontinued-operations loss was $1.14 million, versus $0.12 million a year earlier.
- Cash and cash equivalents were $45.95 million at June 30, up from $39.13 million at year-end 2016. Working capital was approximately $58.6 million. Total liabilities were $10.30 million; current liabilities were $7.91 million. Current notes payable to an Aerex former shareholder were $392,000. The filing reports no material change in market-risk exposure.
- For the first six months, operating cash flow was $9.58 million, including $9.66 million from continuing operations. Investing activities used $0.43 million; financing activities used $2.33 million, principally dividends. Cash increased by $6.82 million.
Material changes and operating drivers
- Bulk: Six-month revenue rose to $15.73 million from $14.71 million, principally because higher fuel and electricity prices increased energy-related rates in the Bahamas. Higher energy expense also pressured the six-month gross margin, which declined to about 35% from 36%.
- Retail: Six-month revenue increased to $12.48 million from $12.22 million, with water volume up 4%. Retail operating income declined to $1.07 million from $1.47 million, reflecting higher general and administrative costs. Q2 retail volume declined 1% year over year, and additional maintenance expense reduced Q2 gross margin.
- Services: Six-month revenue fell to $249,000 from $585,000, largely because the prior-year period included work refurbishing the North Sound plant. The segment continued to report an operating loss.
- Manufacturing: Six-month revenue rose to $2.44 million from $1.88 million, but comparability is affected by the 2016 Aerex acquisition: 2017 includes a full six months of operations. The segment reported a $774,000 operating loss.
- Consolidated six-month G&A increased to $9.71 million from $9.30 million, including higher employee and Aerex project-development costs. Other income declined to $425,000 from $632,000, partly because 2016 included a roughly $272,000 equipment-sale gain and higher interest and OC-BVI income.
Outlook, risks, and contingencies
- CW-Bali exit: On May 23, 2017, the board resolved to discontinue CW-Bali after persistent operating losses and unsuccessful efforts to find a strategic partner. Management expected to stop production and exit the market within six months. The investment was written down to an estimated fair value of approximately $832,000; further losses may arise if the assets cannot be sold for that value.
- Cayman retail license: The exclusive license, a source of about 40% of six-month revenue and 54% of gross profit, had been extended through January 31, 2018, with formal documentation pending. Negotiations for a new license began with OfReg in July 2017. Management warned that the outcome could materially reduce retail operating income and cash flow and could trigger goodwill impairment.
- Mexico desalination project: The Baja California project’s first phase is planned at 50 million gallons per day, with estimated cost of 9.1 billion Mexican pesos and expected annual revenue of 1.79 billion pesos. The public-private partnership contract remains conditional on permits, rights of way, government payment arrangements, and completed equity and debt financing. AdR requested a tariff increase; management said failure to obtain it could prevent financing. The company also cautioned that the approximately $20.6 million land carrying value could be impaired if the project does not proceed. No definitive project financing or tariff outcome is provided.
- Other exposures: Cash transfers from Belize and the Bahamas require central-bank approval; approximately $5.7 million was held in Belize and $12.5 million in the Bahamas, and Belize’s dollar-transfer constraints limited mobility of funds. The Belize regulatory dispute remained unresolved. EWG’s challenge to the company’s ownership of NSC was declared expired by a Mexican court in May 2017, but EWG could appeal or refile. OC-BVI’s renewed 14-year Bar Bay water contract carries a price about 31% lower than before, and management expected lower related earnings; a separate Baughers Bay valuation dispute remained unresolved.
- Capital and dividends: Management estimated 2017 needs of approximately $6.7 million for existing-operations capital expenditures, $392,000 for notes payable, $1.2 million in dividends payable, and $4.6 million for Mexico project development. Further dividends depended on board decisions. No earnings guidance was provided.
Most important facts for investors to verify
- Progress and final terms of the Cayman retail license negotiations, including the license’s extension after January 31, 2018.
- Whether the Mexico tariff request is approved and all contract conditions, permits, financing, and equity requirements are met; assess potential impairment of the land and project assets.
- Execution and costs of the CW-Bali shutdown and asset disposition, including whether additional impairment is required.
- Cash availability and transfer restrictions in Belize and the Bahamas, alongside planned capital spending, project-development costs, and dividends.
- Continuing operating performance and margin trends in bulk, retail, services, and Aerex manufacturing, and the effect of the lower-priced OC-BVI contract.