Consolidated Water Co. Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The company produces and supplies desalinated water in the Cayman Islands, Belize, The Bahamas and Indonesia, and provides water-plant engineering and operating services. Financial amounts are in U.S. dollars.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $16.35 million | $16.56 million; down 1.2% |
| Gross profit / margin | $5.97 million / 36.5% | $6.22 million / 37.6% |
| Operating income | $0.63 million | $2.65 million |
| Net income attributable to company shareholders | $0.65 million; $0.04 diluted EPS | $3.74 million; $0.26 diluted EPS |
| Operating cash flow | $(2.13) million | $3.18 million |
| Cash and cash equivalents at quarter-end | $24.69 million | $33.63 million at December 31, 2013 |
| Total assets / liabilities | $159.75 million / $18.25 million | $165.36 million / $23.87 million at December 31, 2013 |
Cash and working capital at March 31 were approximately $24.7 million and $45.6 million, respectively. The company repaid its remaining bonds in February; no current portion of long-term debt was reported at quarter-end. A $10.05 million land purchase obligation remained current. The board declared dividends of $0.075 per common share, unchanged from Q1 2013.
Changes and drivers versus prior year
- Shareholder net income fell sharply, mainly because Q1 2013 included income associated with the final $2.0 million Baughers Bay court-award payment to affiliate OC-BVI. OC-BVI earnings and profit-sharing income were $74,739 in Q1 2014 versus $1.08 million in Q1 2013.
- General and administrative expense increased to $5.34 million from $3.57 million, including approximately $1.5 million more in Mexico project-development costs. The company also cited higher professional fees and employee costs.
- Retail revenue decreased 4.4% to $6.11 million as water volume sold declined approximately 4%. Management attributed lower demand partly to customer conservation and Grand Cayman rainfall that was twelve times greater than in Q1 2013. Retail gross margin fell to 52% from 56%.
- Bulk revenue was broadly stable at $9.96 million. Bulk gross profit increased to $2.85 million from $2.67 million, with improved Cayman bulk margins.
- Services segment operating loss widened to $2.08 million from $0.54 million, largely due to NSC development spending. The segment had negative gross profit in both periods.
- Operating cash flow turned negative, and cash declined by $8.93 million during the quarter. Financing outflows included $5.30 million of debt principal repayments and $1.10 million of dividends; investing outflows included a $1.0 million certificate of deposit purchase.
Outlook, risks and unusual items
- Liquidity and spending: Management estimated remaining-2014 needs of approximately $5.1 million for existing-operation capital expenditures, $17.0 million for NSC land purchases and $6.7 million for NSC development, in addition to possible dividends. A commitment for a $10.0 million NSC demand loan was obtained, with quarterly payments under a five-year amortization schedule and the remaining principal due after two years, at LIBOR plus 1.5%. Management said it expected adequate liquidity, while noting that cash and working capital could decline as NSC spending continues. The Bahamas government paid $11.0 million toward delinquent accounts receivable during Q2 2014.
- Mexico project: NSC is pursuing a proposed 100-million-gallon-per-day desalination plant and pipeline. The company estimated development might continue at least through Q1 2015 before construction could begin. Customer contracts, land acquisition, permits, supplies, engineering and project financing remain necessary; completion is uncertain. NSC’s development expenses were $1.98 million in Q1 2014. It exercised a $1.0 million share-purchase option and paid a contractor $350,000 after deciding not to extend its pilot-program agreement. A letter of intent with Otay Water District contemplated delivery of 20–40 million gallons per day, not a final water-sale contract.
- Cayman retail license: The exclusive license, a material source of revenue and gross profit, was extended only through June 30, 2014. A judicial-review hearing took place April 1, 2014, with the court’s findings pending. Renewal terms and the possible use of a return-on-invested-capital rate model remain unresolved; less favorable terms could reduce cash flow and potentially impair goodwill.
- OC-BVI valuation: The $5.97 million investment carrying value depends on estimates of future Bar Bay plant cash flows and recovery of a disputed Baughers Bay award. The company identified approximately $2.8 million of underlying goodwill in the investment and warned that future impairment could materially affect earnings.
- Other contingencies: The Windsor plant’s Bahamas supply agreement expired in July 2013; the company continued operating while the government considered an extension, with terms unresolved. Belize regulatory litigation remained pending under a temporary injunction, and the company could not determine the outcome’s financial impact.
- The company reported no material change in market-risk exposure and stated that disclosure controls were effective. It gave no specific earnings or revenue guidance.
Important facts for investors to verify
- Whether the Cayman retail license was renewed after June 30, 2014, and on what rate-setting and operating terms.
- Whether the $17.0 million NSC land purchases were completed and the $10.0 million financing was finalized, and how project funding and customer-contract progress evolved.
- Collection and timing of the Bahamas government’s $11.0 million Q2 payment, and whether the Windsor agreement was extended.
- OC-BVI’s recovery prospects and the assumptions underlying its carrying value, including the risk of further impairment.
- Whether operating cash flow improves as receivables are collected and NSC development spending proceeds.