Business context and reporting period
Consolidated Water Co. Ltd. filed this Form 10-K for the fiscal year ended December 31, 2019. It supplies desalinated water, develops and operates water and wastewater infrastructure, and manufactures water-treatment equipment. Operations span the Cayman Islands, The Bahamas, the United States and the British Virgin Islands. The filing reports annual results, not standalone fourth-quarter results.
Revenue mix in 2019 was approximately 38% retail water, 39% bulk water, 3% services and 20% manufacturing. Belize operations were sold in February 2019, effective January 1; Bali operations were sold in June 2019. The company acquired 51% of PERC in October 2019 and bought the remaining 49% of Aerex in January 2020 for $8.5 million.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $68.8 million | $65.7 million |
| Gross profit / margin | $28.3 million / 41% | $26.7 million / 41% |
| Income from operations | $9.4 million | $8.0 million |
| Net income from continuing operations attributable to company shareholders | $8.6 million; diluted EPS $0.56 | $10.2 million; diluted EPS $0.68 |
| Net income attributable to company shareholders, including discontinued operations | $12.2 million; diluted EPS $0.80 | $11.3 million; diluted EPS $0.75 |
| Operating cash flow | $15.2 million | $9.0 million |
| Cash and cash equivalents at year-end | $42.9 million | $31.3 million |
| Working capital at year-end | $65.3 million | Not stated here |
Consolidated gross margin was steady at 41%. Income from continuing operations attributable to shareholders fell 16%, mainly because OC-BVI investment and profit-sharing income declined after a one-time 2018 litigation settlement. Total 2019 shareholder net income included a $3.6 million gain on the Belize sale. The company reported $78,899 of long-term and current debt at year-end, plus $4.6 million of operating lease liabilities.
Operating cash flow improved year over year. Investing activities provided $1.5 million net, including $7.0 million from the Belize sale and $3.1 million net cash used to acquire PERC; capital additions used $3.5 million. Financing activities used $5.1 million, mostly for dividends. Dividends declared were $0.34 per share in both years.
Material changes versus 2018
- Manufacturing revenue rose to $13.6 million from $7.3 million, and the segment moved from a $0.1 million operating loss to $2.6 million operating income, reflecting increased orders and production efficiencies.
- Bulk revenue fell to $27.0 million from $31.0 million. New lower-rate Water Authority-Cayman contracts reduced revenue; stated per-gallon prices, excluding energy pass-throughs, were about 25% lower for North Sound/Red Gate and 29% lower for North Side Water Works.
- Retail revenue increased to $26.5 million from $25.6 million, while retail operating income declined to $1.8 million from $2.6 million, in part due to higher allocated administrative expenses.
- Services revenue was broadly flat at $1.8 million; its operating loss narrowed to $2.2 million from $2.6 million, with PERC contributing from late October.
- Cash rose by $11.6 million, supported by operating cash generation and the Belize sale. Year-end accounts receivable increased to $23.2 million from $22.5 million.
Outlook, management commentary, risks and unusual items
No quantified revenue or earnings guidance is provided. Management estimated 2020 liquidity needs of approximately $4.7 million for existing-operation capital expenditures, $3.9 million for noncancelable manufacturing raw-material orders, $3.0 million for Mexico project development and $1.3 million for dividends payable. The company said it expected adequate liquidity apart from the Bahamas subsidiary’s collection risk. The $8.5 million Aerex minority-interest purchase was completed in January 2020.
- Cayman retail license: The exclusive license’s last express extension expired January 31, 2018; the company continued operating under its terms while negotiations continued. The government had indicated it sought restructuring that could materially reduce retail operating income and cash flow. Retail operations generated about 38% of 2019 revenue and 53% of gross profit.
- Bahamas collections and customer concentration: Receivables due from the government-owned WSC were $18.4 million at year-end, approximately 76% delinquent; the company recorded no allowance. WSC accounted for 33% of consolidated revenue. Management attributed extended collection delays partly to Hurricane Dorian. At February 29, 2020, the balance was $18.2 million.
- Mexico project: The proposed Rosarito project remains conditional on financing, rights of way and public-sector payment arrangements, among other conditions. The company carried $24.2 million of land, rights-of-way and equipment for development and had incurred approximately $30.8 million of development expenses since project inception. Legal challenges and shareholder litigation could delay or prevent completion; the equity-funding agreement was extended to April 30, 2020. Failure to proceed could result in impairment or loss of project assets.
- Tourism, health and weather: Water demand is seasonal and affected by tourism and rainfall. The filing identified COVID-19 as a potential 2020 tourism and business risk, but its impact could not be determined. A January 2020 Grand Cayman earthquake damaged storage tanks; hurricanes and other natural disasters may also disrupt operations.
- Other items: OC-BVI earnings and profit-sharing income were markedly lower than in 2018, which included a $4.3 million net settlement payment. The company adopted lease accounting guidance in 2019; it reported no material effect on results or cash flows. The financial-statement audit opinion was unqualified; management and the auditor reported effective internal control, with PERC excluded from the 2019 control assessment because of its recent acquisition.
Important facts for investors to verify
- Progress, terms and potential economic impact of the Cayman retail license renewal.
- WSC payment timing, recoverability of the $18.4 million receivable and any future allowance or revenue-recognition changes.
- Whether the Rosarito project’s legal, financing, rights-of-way and government-support conditions are satisfied, and the recoverable value of its $24.2 million of recorded project assets.
- COVID-19, tourism, weather and earthquake effects on demand, collections, assets and operating costs.
- Whether manufacturing growth and PERC’s contribution continue to offset lower bulk-water revenue and reduced affiliate income.
- Cash and capital allocation after the Aerex buyout, planned project spending and dividends.