Consolidated Water Co. Ltd. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. The company supplies potable water, treats wastewater, and provides water infrastructure, services, and manufacturing across the Cayman Islands, The Bahamas, the United States, and the British Virgin Islands.
Financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $32.87 million | $19.56 million |
| Gross profit / margin | $10.56 million / 32% | $7.15 million / 37% |
| Operating income | $4.53 million | $2.29 million |
| Continuing net income attributable to shareholders | $4.07 million; $0.26 per diluted share | $2.32 million; $0.15 per diluted share |
| Net income attributable to shareholders, including discontinued operations | $3.81 million; $0.24 per diluted share | $1.72 million; $0.11 per diluted share |
| Net cash from operating activities | $5.35 million | $4.62 million |
Revenue rose approximately 68%. Revenue increased in all four segments: retail $7.77 million, bulk $9.00 million, services $12.72 million, and manufacturing $3.37 million. The gross margin declined to 32% from 37%, while operating income increased. General and administrative expense increased to $6.04 million from $4.87 million, primarily reflecting higher employee costs.
Operating cash flow was supported by higher earnings and contract-liability growth, partly offset by increases in receivables, contract assets, and inventory. Investing activities used $3.81 million, including $2.44 million cash paid to acquire the remaining PERC interest and $1.38 million in capital additions. Financing activities used $1.33 million, mostly for dividends.
Balance sheet and liquidity
At March 31, 2023, cash and cash equivalents were $51.10 million and working capital was $70.6 million. Total assets were $201.61 million; total liabilities were $33.19 million. Long-term debt was approximately $303,863, excluding operating lease liabilities. The company had $2.00 million of operating lease liabilities. It reported no borrowings under Cayman Water’s $10 million revolving credit facility.
Cash increased by approximately $0.39 million from year-end. Current liabilities rose to $30.87 million from $22.66 million, principally due to contract liabilities, which increased by $6.70 million. The company expects approximately $12 million of 2023 capital expenditures, including about $2.3 million for replacement of the West Bay desalination plant and $6.2 million for the WAC Red Gate plant.
Material changes and management commentary
- Services revenue increased substantially, mainly because PERC progressed on its Liberty Utilities water-treatment project in Arizona, contributing approximately $6.4 million of Q1 revenue. The company expects to recognize about $70.8 million of remaining performance obligations during the rest of 2023 and $15.4 million thereafter, for contracts with original terms longer than one year.
- Retail water volume increased 20%, reflecting higher tourism and direct sales to the Water Authority-Cayman. Retail revenue also benefited from higher energy pass-through charges.
- Bulk water volume increased 9%, while higher chemicals and maintenance costs reduced gross margin to 31% from 36%.
- Manufacturing revenue and margins improved as production activity recovered from earlier supply-chain disruption and delayed customer shipments.
- On January 4, 2023, the company acquired the remaining 39% of PERC for $2.44 million cash and 368,383 common shares valued at approximately $5.36 million, bringing ownership to 100%.
- The company declared dividends of $0.085 per common and redeemable preferred share, unchanged from the prior-year quarter. It paid a $0.085 dividend in April 2023.
Outlook, risks, and contingencies
- Cayman retail license: The express term of the exclusive 1990 license expired in January 2018; negotiations with OfReg for a replacement remain ongoing. Management says revised terms could materially reduce or eliminate retail operating income and cash flows and could lead to impairment. The retail business generated 24% of Q1 revenue and 40% of gross profit.
- Bahamas receivables: CW-Bahamas had $16.6 million due from the Water and Sewerage Corporation, approximately 65% delinquent. No doubtful-account allowance was recorded. Failure to collect could affect subsidiary liquidity, revenue recognition, and consolidated results.
- Mexico project dispute: The Rosarito desalination contract was terminated in 2020. The company is pursuing international arbitration seeking more than $51 million plus MXN 137 million and other amounts; recovery is uncertain, and legal and arbitration costs are expected to be material. The related land remains among discontinued-operation assets.
- Manufacturing impairment: Management cites raw-material inflation, procurement delays, customer conditions, and interest-rate sensitivity as risks to Aerex’s forecasts. Additional impairment of manufacturing goodwill or intangible assets is possible if future cash flows fall short.
- Project and cost risks: Fixed-price construction and manufacturing contracts depend on cost estimates; overruns could reduce margins or cause losses. Supply-chain disruption and inflation may also affect results and cash flows.
- Other risks: Some PERC operations and maintenance contracts are customer-renewable; approximately 8% of Q1 PERC revenue came from contracts expiring by December 31, 2023. CW-Bahamas also guarantees minimum water deliveries under long-term supply contracts.
The filing provides capital expenditure expectations and contract revenue timing, but no specific full-year earnings or revenue guidance. Management stated that, apart from the CW-Bahamas collection risk, it was not aware of a current liquidity shortfall. The company adopted the CECL credit-loss standard on January 1, 2023, with no material effect.
Key facts for investors to verify
- Progress and financial terms of Cayman retail-license negotiations, given the segment’s contribution to gross profit.
- Collections and aging of CW-Bahamas’s $16.6 million WSC receivable, including whether delinquent balances return to current status.
- Liberty Utilities project execution, remaining contract economics, and conversion of contract assets and liabilities into cash.
- Outcome and costs of the Mexico arbitration, and whether any recovery or land sale becomes probable and measurable.
- Aerex customer demand, supply-chain and input-cost trends, and assumptions supporting the manufacturing unit’s impairment headroom.
- Delivery, timing, and funding of the approximately $12 million planned 2023 capital program and any future dividend decisions.