Consolidated Water Co. Ltd. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company produces and supplies desalinated water and provides water-treatment products and services across the Caribbean, Indonesia, Mexico and the United States. Figures are in U.S. dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $15.40 million | $14.49 million | $29.43 million | $29.15 million |
| Gross profit / margin | $6.59 million / 42.8% | $5.97 million / 41.2% | $12.77 million / 43.4% | $12.11 million / 41.5% |
| Operating income / margin | $1.66 million / 10.8% | $2.30 million / 15.9% | $3.37 million / 11.5% | $4.56 million / 15.6% |
| Net income attributable to CWCO shareholders | $2.20 million | $2.23 million | $4.26 million | $4.15 million |
| Diluted EPS | $0.15 | $0.15 | $0.29 | $0.28 |
- For the six months, operating cash flow was $2.70 million, down from $8.08 million. Operating cash flow reflected a roughly $4.1 million increase in receivables and a $1.1 million decrease in accounts payable and other current liabilities.
- Cash and cash equivalents were $37.08 million at June 30, down from $44.79 million at year-end. Working capital was approximately $50.9 million; current assets were $56.59 million and current liabilities $5.74 million.
- The company repaid its $7.0 million demand loan in May. At June 30, it reported a $490,000 note payable to Aerex’s former owner, due August 10, 2016; management expected to extend the maturity. The company also had loaned Aerex $510,000 on matching terms.
- Six-month investing cash flow was a $1.63 million use, including the $7.74 million Aerex acquisition, offset in part by a $5.64 million certificate-of-deposit maturity. Financing cash flow used $8.78 million, principally for debt repayment and dividends.
- Common dividends declared were $0.075 per share each quarter. The Board declared a further $0.075 dividend payable July 31, 2016.
Changes and operating drivers
- Q2 revenue rose 6.3%; six-month revenue rose 1.0%. Services revenue increased substantially following the February acquisition of a 51% interest in Aerex and work on the Cayman North Sound plant.
- Bulk revenue declined as lower fuel and electricity costs reduced energy-related rate charges. Lower energy costs also reduced bulk energy expense, supporting higher gross margins despite lower revenue.
- Retail water volumes rose about 10% in Q2 and 8% for the half, but lower energy pass-through charges and a 4.4% reduction in base rates limited revenue growth. Management said an unusual increase in usage by one commercial customer accounted for about 45% of Q2’s volume increase.
- Operating income fell year over year in both periods, despite higher gross profit, mainly as general and administrative expenses increased with Aerex and Mexican project-development costs. Six-month G&A rose to $9.40 million from $7.55 million.
- Aerex contributed approximately $1.9 million of revenue and a $319,000 net loss from acquisition through June 30. Acquisition accounting added $5.9 million of identifiable intangible assets and $8.0 million of goodwill.
Outlook, risks and unusual items
- Liquidity and spending: Management estimated approximately $2.5 million of capital expenditures for existing operations for the remainder of 2016 and said it expected liquidity to be sufficient. It also expected further NSC project-development costs. Cash transfers from Bahamas and Belize accounts require central-bank approval; balances there totaled about $18.5 million.
- Cayman retail license: The latest extension expired June 30, 2016. The company continued service while believing a further extension would be forthcoming; renewal negotiations remained ongoing. The license-supported retail business generated about 42% of first-half revenue and 56% of gross profit. A new rate model or other license terms could materially reduce earnings and cash flows.
- Mexico project: The State of Baja California selected the NSC-led consortium as the winning bidder for the proposed desalination project. A definitive public-private partnership agreement, financing, permits, water-purchase arrangements and other conditions remained outstanding. Failure to complete the project could put the approximately $20.6 million land carrying value at risk.
- NSC litigation: EWG challenged transactions underlying CWCO’s 99.9% ownership of NSC. The Amparo Court reversed the appointment of an inspector on July 29, 2016; other litigation issues remained unresolved. The company said the dispute could hinder the Mexico project.
- OC-BVI exposure: The BVI government disputes a valuation that would imply approximately $11.58 million payable to OC-BVI for the Baughers Bay plant. Timing, collection and any challenge were uncertain, and the amount was not recognized in OC-BVI results until paid. The company’s $4.7 million investment carrying value assumes, among other things, a new Bar Bay water-purchase agreement after the existing agreement expires in March 2017; failure to secure adequate replacement business could trigger impairment.
- Other risks: CW-Bali continued to operate at a loss, with a roughly $3.0 million plant carrying value, and required increased sales, local utility approval for new contracts or a strategic partner to avoid impairment risk. Belize regulatory proceedings and the Bahamas Windsor plant’s month-to-month supply arrangement also remained unresolved.
- The company recorded a $50,000 first-quarter impairment of its OC-BVI investment, but none in Q2. First-half results also included an income-tax benefit of $244,000. No formal full-year earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year performance.
Investor facts to verify
- Whether the Cayman retail license received a further extension and what renewal terms, rates and exclusivity provisions were agreed.
- Whether the Mexico consortium executed the definitive agreement, secured financing and satisfied required approvals and conditions, and how the EWG litigation affects progress.
- Whether the BVI government accepts or challenges the Baughers Bay valuation, pays any amount due, and renews the Bar Bay agreement before March 2017.
- Whether CW-Bali improves utilization or secures a partner, and whether impairment indicators emerge for its plant assets.
- Whether elevated receivables—particularly the increase in CW-Bahamas balances—are collected as management expects, and whether operating cash flow recovers.
- Whether the Aerex note maturity was extended and whether Aerex’s contribution and integration costs develop as anticipated.