Consolidated Water Co. Ltd. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company supplies and treats water and provides water infrastructure, engineering, and manufacturing services in the Cayman Islands, The Bahamas, the United States, and the British Virgin Islands. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $16.41 million | $17.67 million | $50.22 million | $57.48 million |
| Gross profit / margin | $5.69 million / 34.7% | $6.22 million / 35.2% | $17.88 million / 35.6% | $21.96 million / 38.2% |
| Operating income | $1.33 million | $1.40 million | $0.89 million | $7.90 million |
| Continuing income attributable to company shareholders | $1.36 million | $1.81 million | $1.15 million | $7.64 million |
| Total income (loss) attributable to company shareholders | $0.29 million | $1.43 million | $(0.39) million | $3.20 million |
| Diluted EPS | $0.02 | $0.09 | $(0.03) | $0.21 |
- Cash flow: Nine-month operating cash flow was $4.46 million, down from $10.52 million. Continuing operations provided $5.29 million; discontinued operations used $0.82 million. Investing used $3.43 million and financing used $4.55 million, principally for dividends.
- Liquidity: September 30 cash and equivalents were $40.40 million, plus a $2.50 million certificate of deposit. Working capital was $69.3 million. Management said it expected sufficient liquidity for needs, subject to the Bahamas receivables risk.
- Debt and leases: Long-term debt, including current maturities, was approximately $0.19 million. Operating lease liabilities were approximately $2.88 million.
- Balance sheet: Total assets were $176.81 million and total liabilities $11.54 million at September 30, 2021. Accounts receivable was $26.38 million.
Changes versus comparable periods
- Q3 revenue fell 7.1% year over year; nine-month revenue fell 12.6%. Nine-month shareholder earnings from continuing operations dropped to $1.15 million from $7.64 million.
- Manufacturing was the largest source of deterioration. Nine-month manufacturing revenue declined to $3.24 million from $10.95 million; the segment recorded a $3.52 million operating loss versus $3.09 million operating income a year earlier. This included a $2.9 million goodwill impairment recorded in Q2.
- Retail nine-month revenue fell 8.7%, primarily as water volumes declined 9% amid reduced tourism in Grand Cayman. Bulk revenue rose 7.9%, supported by higher sales volume in The Bahamas and energy-cost pass-throughs. Services revenue increased 5.8%, mainly from new operations and maintenance contracts.
- The nine-month discontinued-operations loss narrowed to $1.54 million from $4.45 million, but total shareholder results moved to a loss, reflecting weaker continuing earnings. The 2020 comparison included a roughly $3.0 million write-off of Mexico project rights-of-way.
Outlook, commentary, and key risks
- No quantified earnings guidance was provided. Management expected COVID-19 effects to continue to adversely affect results, while noting substantial uncertainty about duration and magnitude.
- Management estimated approximately $1.9 million of remaining-2021 capital expenditures, including $855,000 to replace the 26-year-old West Bay desalination plant, and approximately $1.3 million of dividends payable. Future dividends remain subject to board approval.
- Manufacturing: Aerex’s former largest customer indicated purchases may resume in 2022 at substantially reduced levels. COVID-related supply shortages, higher input costs, delivery delays, and difficulty replacing lost sales weigh on the business. Further impairment of remaining manufacturing goodwill and acquired intangibles is possible.
- Bahamas receivables: CW-Bahamas was owed $21.4 million by the Water and Sewerage Corporation at September 30; about 78% was delinquent. No allowance was recorded, based on prior collection history. Continued noncollection could impair subsidiary liquidity and require an allowance or cessation of revenue recognition. The company reported approximately $18.0 million of payments from the government and utility through October 31, 2021.
- Cayman retail license: The most recent express extension expired January 31, 2018; negotiations with OfReg continue. The government has indicated that revised terms could materially reduce or eliminate historical retail income and cash flows. The licensed retail business generated about 33% of nine-month revenue and 47% of gross profit.
- Mexico project and legal matters: Baja California terminated the Rosarito project contract in 2020. A submitted reimbursement claim of about $51.1 million plus 137.3 million Mexican pesos remained unanswered. An investment dispute was unresolved after consultation meetings; recovery is uncertain. Separate shareholder litigation in Mexico remains pending, and the company said its ultimate impact cannot presently be determined.
- Inflation and supply-chain pressures may increase costs; the company noted retail rates have not increased since January 2018 amid the license negotiations. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Collection progress, aging, and any subsequent allowance or revenue-recognition changes for the $21.4 million WSC receivable.
- Aerex customer orders and margins, supply constraints, and any additional goodwill or intangible-asset impairment.
- Developments in Cayman retail-license negotiations, including potential tariff, exclusivity, or asset-impairment effects.
- Status and recoverability of the Mexico project reimbursement claim and Mexican VAT receivables, as well as litigation and arbitration developments.
- Actual capital spending, West Bay plant replacement timing, and operating cash flow relative to dividend and liquidity needs.