Consolidated Water Co. Ltd. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Amounts are in U.S. dollars. The company supplies and treats water and provides water infrastructure, operating, engineering, and manufacturing services in the Cayman Islands, The Bahamas, the United States, and the British Virgin Islands.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $19.56 million | $17.10 million |
| Gross profit (margin) | $7.15 million (about 36.5%) | $6.13 million (about 35.8%) |
| Operating income | $2.29 million | $1.11 million |
| Continuing-operations net income attributable to company shareholders | $2.32 million; $0.15 diluted EPS | $1.30 million; $0.08 diluted EPS |
| Net income attributable to company shareholders, including discontinued operations | $1.72 million; $0.11 diluted EPS | $0.99 million; $0.06 diluted EPS |
| Net cash from operating activities | $4.62 million | $1.09 million |
| Cash and cash equivalents at quarter-end | $43.14 million | $40.36 million at Dec. 31, 2021 |
- Revenue increased about 14%; gross profit rose about 17%, and operating income more than doubled. G&A remained broadly steady at $4.87 million versus $4.76 million.
- Discontinued Mexico project operations recorded a $607,000 loss, including a $377,000 provision for uncollected value-added taxes; the comparable 2021 loss was $313,000.
- Cash from operating activities was $4.62 million, including $4.88 million from continuing operations and $255,000 used by discontinued operations. Investing activities used $735,000 and financing activities used $1.31 million, mostly for dividends.
- Working capital was $70.9 million. Total debt was approximately $200,000, comprising $62,000 current and $137,000 noncurrent debt. Operating lease liabilities were approximately $2.55 million.
- Capital spending for existing operations projected for the rest of 2022 was approximately $10.8 million, including $5.3 million for the West Bay plant replacement and $1.9 million for the WAC Red Gate plant. Management also cited approximately $1.3 million of dividends payable.
Material changes and segment performance
- Retail: Revenue rose 11% to $6.31 million as water volume increased 8%; operating loss narrowed to $191,000 from $618,000. Tourism-related volumes remained below pre-pandemic levels.
- Bulk: Revenue rose 18% to $7.35 million and operating income increased to $2.35 million from $1.71 million. Higher energy pass-through charges at CW-Bahamas and a 6% increase in its water volume contributed to growth.
- Services: Revenue increased 34% to $4.74 million, and operating income rose to $327,000 from $96,000, reflecting higher plant design and operations-and-maintenance revenue.
- Manufacturing: Revenue declined 28% to $1.15 million and operating loss widened to $197,000 from $80,000. Product delivery timing, raw-material delays and costs, and lower production affected results.
- Inventory increased about $597,000, mainly from Aerex materials for projects not yet in production. Construction in progress rose about $615,000, primarily for the West Bay desalination plant.
Outlook, risks, and unusual items
- Management expects COVID-19 effects to continue weighing on results; Cayman tourism and retail water volumes remained below pre-pandemic levels. No full-year earnings guidance was provided.
- The Cayman retail license’s most recent express extension expired in January 2018. The company continues operating under its terms while negotiations continue; proposed changes could materially reduce or eliminate retail operating income and cash flows. Retail generated about 32% of Q1 revenue and 46% of gross profit.
- CW-Bahamas had $21.2 million due from the government-owned WSC at quarter-end, about 77% delinquent; no doubtful-account allowance was recorded. The Bahamas government provided a 2022 payment schedule, and the balance was $18.7 million at April 30. Non-collection could harm subsidiary liquidity and require revenue recognition changes or an allowance.
- The cancelled Rosarito, Mexico project remains in discontinued operations. In February 2022, the company filed for international arbitration seeking damages exceeding US$51 million plus MXN$137 million, fees, costs, and interest. Recovery is uncertain; related legal and arbitration costs are expected to be material. The company also disclosed separate Mexican litigation related to NSC ownership and stated its eventual financial impact cannot presently be determined.
- Manufacturing and services goodwill impairment risk remains: year-end 2021 fair value exceeded carrying value by only 15% for each reporting unit. Further deterioration in Aerex or PERC cash flows could lead to impairment.
- Management cited supply-chain delays, shortages, and rising material, labor, and energy costs, as well as inflation and customer order delays, as risks to margins and cash flows. PERC also has customer-operated contracts subject to renewal, including contracts representing about 19% of its Q1 revenue that expire by year-end 2022.
- Subsequent event: On May 10, 2022, the company signed a definitive agreement with the Water Authority-Cayman to design, build, and commission a plant over about 18 months, then sell it to the authority and operate it for 10 years. Planned capacity is up to 2.64 million gallons per day.
Important facts for investors to verify
- Progress and terms of the Cayman retail license negotiations, including effects on rates, exclusivity, and segment cash flows.
- WSC payments against delinquent CW-Bahamas receivables and any change to the unreserved balance or revenue recognition.
- Rosarito arbitration developments, estimated legal costs, and prospects for recovering project investments.
- Aerex’s customer orders, material availability, and performance relative to impairment assumptions; PERC contract renewals and services backlog.
- Costs, schedule, funding, and contractual economics for the West Bay replacement and WAC plant projects, including the May 2022 agreement.