Business context and reporting period
Consolidated Water Co. Ltd. filed this Form 10-K for the fiscal year ended December 31, 2020. It provides retail and bulk water, water infrastructure and operating services, and water-treatment equipment across the Cayman Islands, The Bahamas, the United States, and the British Virgin Islands. Comparisons below are full-year 2020 versus 2019, not fourth-quarter-only results.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $72.6 million | $68.8 million |
| Gross profit / margin | $26.8 million / 36.9% | $28.3 million / 41.1% |
| Operating income / margin | $8.35 million / 11.5% | $11.72 million / 17.0% |
| Continuing net income attributable to company shareholders | $8.61 million; diluted EPS $0.56 | $10.89 million; diluted EPS $0.72 |
| Total net income attributable to company shareholders, including discontinued operations | $3.71 million; diluted EPS $0.24 | $12.18 million; diluted EPS $0.80 |
| Operating cash flow from continuing operations | $18.97 million | $17.42 million |
| Cash and cash equivalents at year-end | $43.79 million | $42.07 million |
| Working capital at year-end | $66.0 million | Not clearly stated in the filing text |
Cash used in investing activities was $11.12 million, primarily reflecting the $8.5 million Aerex buyout and $0.9 million additional PERC investment; capital additions were $1.73 million. Financing activities used $5.17 million, mostly for dividends. Total debt was approximately $169,000 at year-end; operating lease liabilities were approximately $1.44 million. The company declared $0.34 per share in dividends for 2020.
Material changes versus 2019
- Revenue increased 5.6%, principally because PERC contributed a full year of services revenue. Services revenue rose to $12.94 million from $1.76 million.
- Despite higher revenue, gross profit fell 5.3% and gross margin declined to 36.9% from 41.1%. Operating income fell 28.7%; continuing net income attributable to shareholders fell 20.9%.
- Retail revenue fell to $22.95 million from $26.46 million. Cayman retail water volumes declined 13% amid the tourism shutdown, and fourth-quarter retail volume was down approximately 28% year over year. The retail segment moved from $1.82 million operating income to a $1.00 million operating loss.
- Bulk revenue fell to $24.31 million from $26.99 million. Lower contractual rates at Cayman bulk plants and lower energy pass-through revenue contributed; gross profit also reflected higher Bahamas maintenance costs.
- Manufacturing revenue declined to $12.43 million from $13.59 million, while gross margin improved to 34.6% from 33.1%, reflecting project mix and production efficiency.
- Full-year reported net income also reflects the Mexico project’s $4.90 million discontinued-operations loss, versus $1.29 million of discontinued-operations income in 2019, which included a gain on the Belize sale.
Outlook, risks, contingencies, and unusual items
- COVID-19 and tourism: Management expects material adverse effects on financial condition, results, and cash flows to continue, but cannot quantify the duration or impact. Cayman retail demand depends significantly on tourism; management could not determine when demand would return to pre-pandemic levels.
- Cayman retail license: The license’s last express extension expired January 31, 2018; the company continues operating under its terms while negotiations with OfReg remain ongoing. The government seeks restructuring that could materially reduce or eliminate historical retail operating income and cash flow. Retail represented about 32% of 2020 revenue and 44% of gross profit.
- Bahamas receivables and liquidity: WSC receivables, including accrued interest, were $16.8 million at year-end, about 76% delinquent; the balance was $19.6 million at February 28, 2021. No allowance was recorded, based on prior collection history. Continued delays could impair subsidiary liquidity and lead to a credit allowance or cessation of revenue recognition.
- Customer concentration: The Water and Sewerage Corporation of The Bahamas accounted for about 30% of consolidated revenue. One Aerex customer generated approximately 80% of manufacturing revenue and 89% of manufacturing gross profit in 2020. It suspended purchases after 2020 and expects, without assurance, to resume in early 2022; management warns 2021 manufacturing revenue and gross profit may decline.
- Mexico project termination: Baja California terminated the Rosarito desalination project contract in June 2020. The company recorded an approximately $3.0 million impairment of aqueduct rights-of-way and reported a $4.90 million discontinued-operations loss. It submitted a reimbursement claim for $51.1 million plus MXN 137.3 million, but cannot assure recovery. Related litigation remains a contingency; the filing says its eventual financial impact cannot presently be determined.
- Capital and distributions: Management projected approximately $6.3 million of 2021 capital expenditures, including $4.0 million to replace the 26-year-old West Bay plant, plus approximately $1.3 million for dividends payable. Future dividends remain subject to board approval and financial conditions.
- Other notable developments: the company acquired the remaining 49% of Aerex for $8.5 million, increased its PERC ownership to 61%, and ceased Bimini operations when the resort contract expired in December 2020. Annual goodwill testing found estimated reporting-unit fair values above carrying values, but the manufacturing outlook depends partly on the major Aerex customer resuming purchases.
Important facts for investors to verify
- Progress and economic terms of the Cayman retail license negotiations, including any changes to exclusivity, rates, or operating obligations.
- Collections from WSC, the aging and recoverability of the $16.8 million year-end receivable, and whether any allowance or revenue-recognition change becomes necessary.
- Aerex’s replacement sales, the major customer’s actual purchasing plans, and any resulting impairment or margin impact.
- Status and likely recoverability of the Mexico project reimbursement claim and related litigation, including the carrying value and potential sale of project land.
- Actual Cayman tourism recovery, retail water volumes, 2021 capital spending, and completion and cost of the West Bay plant replacement.