Business context and reporting period
Consolidated Water Co. Ltd. supplies desalinated water and provides water-related services and manufacturing across the Cayman Islands, The Bahamas, the British Virgin Islands and the United States. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019; amounts are in U.S. dollars.
Results reflect continuing operations unless stated otherwise. CW-Belize was sold effective January 1, 2019, and is reported as discontinued operations; the company also sold most CW-Bali assets and stock in June 2019.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $15.89 million | $18.05 million | $51.18 million | $47.67 million |
| Gross profit (margin) | $6.71 million (42%) | $7.12 million (39%) | $21.22 million (41%) | $19.48 million (41%) |
| Operating income | $1.89 million | $2.31 million | $7.47 million | $5.55 million |
| Continuing net income attributable to company shareholders | $1.73 million | $4.31 million | $6.77 million | $7.96 million |
| Total net income attributable to company shareholders | $1.73 million | $4.55 million | $10.39 million | $8.83 million |
| Diluted EPS | $0.11 | $0.30 | $0.69 | $0.58 |
For the nine-month period, total net income includes a $3.62 million gain on the CW-Belize sale. Nine-month continuing net income declined despite higher revenue and operating income, in part because OC-BVI’s prior-year results included a substantial litigation settlement.
Cash, liquidity and capital
- Cash and cash equivalents were $42.0 million at September 30, 2019; restricted cash was $1.61 million. Working capital was $67.9 million.
- Nine-month operating cash flow was $10.53 million, versus $5.39 million in 2018. Investing activities provided $5.58 million, including $6.97 million of net proceeds from the CW-Belize sale; capital additions used $2.67 million. Financing activities used $3.84 million, almost all for dividends.
- Total liabilities were $9.84 million. The company reported no conventional borrowings outstanding; operating lease liabilities were $4.46 million following adoption of the new lease standard.
- Dividends declared were $0.085 per common and redeemable preferred share per quarter. The filing anticipated approximately $0.5 million of remaining-2019 capital expenditures, $0.6 million of Mexico project development costs and $1.3 million of dividends payable.
Material changes and management commentary
- Q3 revenue fell about 12%, while nine-month revenue rose about 7%. Retail revenue increased modestly in Q3; lower bulk, services and manufacturing revenue drove the quarterly decline. Nine-month growth came mainly from retail and manufacturing.
- Bulk revenue declined because OC-Cayman began lower-rate supply contracts with Water Authority-Cayman in 2019. Manufacturing’s nine-month revenue rose to $10.45 million from $4.80 million, with higher order activity and production efficiencies; manufacturing operating results moved from a loss to income.
- Q3 operating income was lower year over year despite a higher gross margin. Retail moved to an operating loss, and OC-BVI-related income was substantially below the prior-year quarter, which included litigation-settlement-related earnings.
- Management said it expects to have sufficient liquidity for 2019 and thereafter, subject to the collection risk at CW-Bahamas. No formal earnings or revenue guidance is provided.
- After quarter-end, the company acquired a 51% interest in PERC Water Corporation for approximately $4.1 million cash. PERC develops and operates water and wastewater infrastructure.
Risks, contingencies and unusual items
- Cayman retail license: The express extension of the exclusive license expired January 31, 2018; negotiations with OfReg continue. The government has indicated that revised terms could materially reduce or eliminate historical operating income and cash flows. OfReg rejected the company’s proposed inflation-based rate increase, and current rates remain at levels set in January 2018. The licensed business generated about 39% of nine-month revenue and 53% of gross profit.
- Bahamas receivables: CW-Bahamas was owed $16.2 million by the Water and Sewerage Corporation at September 30, of which approximately 74% was delinquent. The company recorded no allowance, citing past collections, but said continued delays could impair subsidiary liquidity, require an allowance or lead to cessation of revenue recognition. Management said Hurricane Dorian likely exacerbated delays.
- Rosarito project: The proposed Mexico desalination project remains subject to financing, government payment-support arrangements and rights-of-way conditions before the APP Contract becomes effective. Legal challenges to state authorizations and a minority-shareholder lawsuit remain unresolved. Approximately $24.2 million of land and project-related assets could be impaired if the project does not proceed; development costs to date were approximately $30.4 million.
- Other: CW-Bahamas contracts include minimum weekly water-delivery guarantees. The company also disclosed historical Aerex goodwill impairments and the possibility of further impairment if performance falls short of projections. Adoption of lease accounting added lease assets and liabilities; management said the adoption had no material effect on financial position, results or cash flows.
Important facts for investors to verify
- Progress and economic terms of the Cayman retail-license negotiations, including rates and any potential impairment implications.
- Collection timing for CW-Bahamas’s delinquent WSC receivables and whether any allowance or revenue-recognition change becomes necessary.
- Whether Rosarito financing, government guarantees, rights of way and outstanding litigation are resolved, and whether the project can proceed on viable terms.
- The effect of PERC’s acquisition and subsequent operating results, including the options relating to the remaining 49% ownership.
- Comparability of reported earnings: the 2019 Belize-sale gain and discontinued operations, prior-year OC-BVI settlement-related income, and CW-Bali asset disposals.