Consolidated Water Co. Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Financial amounts are in U.S. dollars. The company produces and supplies desalinated water and provides water-related engineering, services, and manufacturing. CW-Belize was sold in February 2019, effective January 1, and is reported as discontinued operations.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $16.99 million | $14.55 million | +16.7% |
| Gross profit | $6.96 million | $6.17 million | +12.9% |
| Gross margin | 41.0% | 42.4% | Down 1.4 percentage points |
| Operating income | $2.63 million | $1.51 million | +74.5% |
| Continuing net income attributable to company shareholders | $2.57 million | $1.77 million | +45.3% |
| Total net income attributable to company shareholders | $6.19 million | $2.09 million | Includes $3.62 million CW-Belize sale gain |
| Diluted EPS | $0.41 | $0.14 | Includes $0.24 from discontinued operations in 2019 |
| Operating cash flow | $3.69 million | $0.74 million from continuing operations | Improved |
Q1 2019 total cost of revenues was $10.03 million and general and administrative expense was $4.38 million, versus $8.39 million and $4.66 million, respectively, in Q1 2018. Continuing-operations diluted EPS was $0.17, compared with $0.12. Dividends declared were $0.085 per common and redeemable preferred share in both periods.
Revenue mix and material period changes
- Manufacturing revenue rose to $3.09 million from $0.55 million, as orders and production activity increased. The segment moved from a $0.52 million operating loss to $0.45 million operating income.
- Retail revenue increased to $6.69 million from $6.43 million. Water volume fell just under 2%, while higher energy pass-through charges added approximately $246,000. Retail operating income was $0.74 million, up from $0.52 million.
- Bulk revenue declined to $7.11 million from $7.45 million, mainly due to lower rates under new Water Authority-Cayman contracts. Bulk operating income fell to $1.94 million from $2.16 million.
- Services revenue was $0.10 million versus $0.12 million; the segment reported a $0.51 million operating loss, compared with a $0.66 million loss.
- CW-Belize sale proceeds were approximately $7.0 million after adjustments; $6.735 million had been paid, with approximately $265,000 withheld for indemnification obligations. The sale generated a $3.62 million gain.
Cash, liquidity, debt, and balance sheet
- At March 31, 2019, cash and cash equivalents were $38.02 million, with a further $1.50 million of restricted cash. Combined cash and restricted cash was $39.52 million. Working capital was approximately $61.8 million.
- Operating activities provided $3.69 million; investing activities provided $5.78 million, including $6.71 million of CW-Belize sale proceeds; financing activities used $1.30 million, primarily for dividends. Capital additions used $1.34 million.
- Total assets were $181.23 million and total liabilities were $12.16 million. The filing reports no interest expense in Q1 2019 and shows no conventional borrowing balance on the balance sheet. Operating lease liabilities totaled $3.46 million following adoption of the new lease standard.
- Management projected 2019 remaining-year needs of approximately $3.3 million for existing-operations capital expenditures, $5.3 million for Mexico project development, and $1.3 million for dividends payable, in addition to any future dividends declared.
- Aerex borrowed $2.5 million under a company-approved revolving facility in March and a further $1.5 million in April. The $4 million facility bears 3% interest and is repayable in December 2019.
Outlook, risks, contingencies, and unusual items
- No specific earnings guidance is provided. Management said it generally expects sufficient liquidity for 2019 and thereafter, subject to the CW-Bahamas collection issue and planned project spending.
- The Cayman retail license expired January 31, 2018; the company continues service month-to-month while negotiating with OfReg. The government has indicated it may restructure terms in a way that could materially reduce or eliminate historic retail operating income and cash flows. OfReg deferred the company’s proposed January 2019 rate adjustment.
- CW-Bahamas had $16.9 million due from the Bahamas Water and Sewerage Corporation at March 31; approximately 75% was delinquent. No allowance was recorded. The company received about $7.4 million in April, reducing the balance to approximately $11.6 million at April 30. Continued collection delays could strain subsidiary liquidity or require revenue recognition changes or an allowance.
- The Rosarito, Mexico desalination project remains contingent on conditions including payment trusts and guarantees, water purchase and sale agreements, rights of way, and debt financing. Required state authorizations were renewed through December 31, 2019. The equity funding agreement was set to expire June 30, 2019 unless extended. The project faces political, peso, interest-rate, financing, and execution risks; failure to proceed could impair land and right-of-way assets carried at approximately $21.1 million and $3.0 million, respectively.
- EWG’s Tijuana litigation challenges transactions underlying the company’s ownership of NSC and includes preliminary relief affecting project-related matters. In April 2019, the court rejected NSC’s arbitration request; appeals and other remedies remained unresolved. The company could not determine the ultimate effect on its ability to complete the project.
- A new seven-year North Side Water Works operating contract begins July 1, 2019. Its per-gallon price, excluding energy pass-through, is approximately 13% below the price in effect at quarter-end; the WAC will pay energy costs directly.
- The company adopted lease accounting effective January 1, 2019, recognizing $3.46 million of lease assets and liabilities; management said adoption had no material impact on financial position, results, or cash flows. The $1.5 million restricted deposit secures a standby letter of credit.
Most important facts for investors to verify
- Progress and final terms of the Cayman retail license negotiations, including any rate changes or impairment implications.
- Collections from WSC, aging and recoverability of CW-Bahamas receivables, and whether an allowance or shareholder funding becomes necessary.
- Whether all Rosarito project conditions, financing, equity commitments, and permits are secured, and whether the equity agreement was extended beyond June 30, 2019.
- Developments in the Tijuana litigation and any effects on project rights, financing, or the carrying value of Mexico project assets.
- Actual effect of lower bulk-water contract pricing, especially the new North Side Water Works agreement beginning July 2019.
- Whether manufacturing growth and margins persist, and how planned project spending, Aerex borrowing, and dividends affect liquidity.