Consolidated Water Co. Ltd. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. The company supplies potable water, treats wastewater, and provides water infrastructure, services, and specialized products in the Cayman Islands, The Bahamas, the United States, and the British Virgin Islands. Comparisons below are with the corresponding 2021 periods.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $25.1 million | $16.4 million | $65.7 million | $50.2 million |
| Gross profit; margin | $6.8 million; 27% | $5.7 million; 35% | $21.5 million; 33% | $17.9 million; 36% |
| Operating income | $1.2 million | $1.3 million | $6.1 million | $0.9 million |
| Continuing income attributable to company shareholders | $0.8 million | $1.4 million | $5.9 million | $1.2 million |
| Net income (loss) attributable to company shareholders, including discontinued operations | $0.3 million | $0.3 million | $4.3 million | $(0.4) million |
| Diluted EPS, including discontinued operations | $0.02 | $0.02 | $0.28 | $(0.03) |
- Cash flow: Nine-month operating cash flow was $15.8 million, including $16.9 million from continuing operations and $1.1 million used by discontinued operations. Investing activities used $0.4 million; financing activities used $5.0 million, mostly for dividends.
- Liquidity and debt: September 30 cash and cash equivalents were $51.1 million, and management reported working capital of $71.1 million. Current assets were $86.5 million and current liabilities $15.4 million. Reported long-term debt, including current maturities, totaled approximately $231,000; operating lease liabilities were approximately $2.3 million. The company had not drawn on its new $10 million revolving credit facility.
- Balance sheet: Total assets were $185.0 million and total equity $166.5 million. Cash increased from $40.4 million at December 31, 2021. Accounts receivable fell by about $3.0 million, principally as CW-Bahamas collected overdue amounts from the Bahamian utility.
Material changes and operating drivers
- Q3 revenue rose 53% year over year, led by services revenue, which increased to $8.7 million from $3.2 million, largely as PERC progressed on a water-treatment plant contract in Arizona. Retail and bulk revenue also increased, reflecting recovering tourism-related demand and higher energy pass-through charges.
- Q3 gross margin declined to 27% from 35%. Services margin fell as the Arizona construction project earned a lower margin than operating and maintenance work; bulk margin was pressured by repairs, maintenance, and supplies costs. Higher general and administrative expense, up to $5.6 million from $4.4 million, also weighed on results.
- Q3 continuing income attributable to shareholders declined despite higher revenue, to $0.8 million from $1.4 million. The comparison included a $247,000 unrealized loss on PERC-related put/call options in 2022 versus a $54,000 loss in 2021, as well as lower interest income.
- For the first nine months, revenue increased 31% and continuing income attributable to shareholders rose to $5.9 million from $1.2 million. The 2021 comparison included a $2.9 million manufacturing goodwill impairment; the 2022 period did not.
- Nine-month segment revenue increased in retail, bulk, services, and manufacturing. Manufacturing remained loss-making at the operating level: a $0.6 million loss for nine months, compared with a $3.5 million loss in 2021 that included the impairment charge.
Outlook, risks, contingencies, and unusual items
- Contract pipeline: Unsatisfied or partially unsatisfied performance obligations on contracts originally longer than one year totaled approximately $104.8 million at September 30. The company expected to recognize about $12.6 million in the remainder of 2022 and $92.2 million thereafter. These amounts are not presented as guaranteed future revenue.
- Capital needs: Management estimated approximately $6.0 million of capital expenditures for existing operations during the balance of 2022, including West Bay plant replacement and the Water Authority-Cayman Red Gate plant. The company also exercised an option to purchase PERC’s remaining 39% minority interest; the price is to be determined by an independent valuation.
- Cayman retail license: The express extension of the exclusive license expired in January 2018, while negotiations for a replacement continued. The government has indicated it may seek revised terms that could materially reduce or eliminate historical operating income and cash flows. The licensed retail business generated approximately 29% of nine-month 2022 revenue and 45% of gross profit.
- Bahamas receivables: CW-Bahamas had $15.2 million due from the Water and Sewerage Corporation at September 30, down from $21.5 million at year-end. The company recorded no allowance, citing prior collections and a government payment schedule, despite Moody’s downgrade of The Bahamas in October 2022.
- Mexico project dispute: Following the 2020 termination of the Rosarito desalination project contract, the company’s subsidiary filed international arbitration seeking damages in excess of US$51 million plus MXN$137 million, fees, costs, and interest. Discussions with the State began in July 2022, but their outcome is uncertain; recovery is not assured. Legal and arbitration costs are expected to be material. The project remains classified as discontinued operations, with $21.1 million of land among its assets.
- Other risks: Management cited continuing effects of COVID-19, tourism levels below pre-pandemic levels, inflation, higher energy and raw-material costs, supply-chain delays, customer order deferrals, and risks to construction and manufacturing contract margins. Aerex’s manufacturing reporting unit had only a 15% estimated fair-value cushion over carrying value at year-end 2021; further underperformance could result in impairment of goodwill or intangible assets.
- Near-term commitments: The company declared a $0.085-per-share dividend payable October 31, 2022. The new Cayman Water revolver provides up to $10 million at one-month SOFR plus 2.0%, is secured by Cayman Water assets, and is subject to financial covenants.
Important facts for investors to verify
- Progress and final economic terms of the Cayman retail-license negotiations, given the license’s material contribution to gross profit.
- Collections from the Bahamian utility and whether the $15.2 million receivable remains recoverable on the expected schedule.
- Developments, potential recovery, and ongoing legal costs in the Rosarito arbitration and government discussions.
- Margin, cost, and schedule performance on PERC’s Arizona projects, including the contract backlog and PERC minority-interest purchase valuation.
- Aerex customer demand, supply-chain conditions, and impairment sensitivity; also monitor the overall gross-margin decline and inflation-related costs.
- Actual capital spending, dividend decisions, and any future use of the revolving credit facility.