Consolidated Water Co. Ltd. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. The company supplies and treats water and provides water infrastructure, engineering and manufacturing services in the Cayman Islands, The Bahamas, the United States and the British Virgin Islands.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $20.73 million | $16.99 million |
| Gross profit | $8.44 million; 40.7% margin | $6.96 million; 41.0% margin |
| Operating income | $3.29 million | $2.63 million |
| Net income from continuing operations attributable to company shareholders | $2.89 million; $0.19 diluted EPS | $2.57 million; $0.17 diluted EPS |
| Net income attributable to company shareholders | $2.89 million | $6.19 million, including a $3.62 million gain on the sale of discontinued operations |
| Operating cash flow | $(0.29) million | $3.69 million |
| Cash and cash equivalents at period end | $32.31 million | $42.90 million at December 31, 2019 |
- Revenue rose 22.0% year over year, while operating income increased 25.0%. Gross margin was broadly stable. Income from continuing operations attributable to company shareholders rose 12.6%.
- Cash declined $10.59 million during the quarter. Investing outflows were $9.02 million, including $8.50 million to acquire the remaining 49% of Aerex; operating activities used $0.29 million. Dividends paid were $1.28 million.
- At March 31, total assets were $185.69 million, total liabilities $14.12 million, and equity $171.57 million. Working capital was $60.1 million. Reported long-term debt, including current maturities, was approximately $0.20 million; operating lease liabilities totaled $3.93 million.
- Accounts receivable were $25.62 million, including $17.8 million due from The Bahamas’ Water and Sewerage Corporation (WSC). Approximately 75% of CW-Bahamas’ WSC receivable was delinquent. No allowance was recorded against it.
Material changes and segment performance
- Retail: Revenue increased 9% to $7.26 million, principally as water volumes rose 10% amid unusually dry conditions on Grand Cayman. Operating income was $0.90 million.
- Bulk: Revenue declined 9% to $6.44 million and operating income fell to $1.58 million from $1.94 million. Lower-rate Water Authority-Cayman contracts reduced revenue and margins.
- Services: Revenue increased to $3.11 million, largely from PERC, acquired in October 2019; the segment recorded an operating loss of $0.29 million.
- Manufacturing: Revenue grew 27% to $3.91 million; operating income increased to $1.10 million, reflecting higher production, improved efficiency and a more favorable project mix.
- Q1 2019 included CW-Belize discontinued operations and the related $3.62 million sale gain; comparisons of total net income and EPS therefore overstate the deterioration in 2020 continuing performance.
Outlook, risks and contingencies
- COVID-19: Management expects a likely material adverse effect on future financial condition, results and cash flows, but could not quantify its size or duration. Tourism closures and reduced economic activity threaten demand, collections, liquidity and asset values. Cayman Water’s retail demand was nearly 13% lower in April 2020 than in March 2020 and April 2019; management expected Q2 retail sales to be below both Q1 2020 and Q2 2019.
- Collections and operating exposure: COVID-19 may worsen receivable aging and uncollectible balances. WSC collection delays already constrain CW-Bahamas liquidity and could lead to an allowance, cessation of revenue recognition under its supply agreements, or difficulty meeting obligations. Aerex relies on a single supplier for a major component; supply delays and workforce disruption are risks. PERC’s government-related customers may face financial pressure.
- Cayman retail license: The express extension of the exclusive license expired January 31, 2018; the company continues operating under its terms while negotiating with OfReg. The government has indicated that revised terms could materially reduce or eliminate historical retail income and cash flows, and could prompt impairment. Retail generated 35% of Q1 revenue and 51% of gross profit.
- Mexico desalination project: The proposed Rosarito project remains contingent on, among other things, public payment guarantees and trusts, rights of way, and debt financing. Required authorizations were renewed through June 30, 2020; legal challenges and minority-shareholder litigation remain. The equity funding agreement was extended to September 30, 2020. The company carries approximately $24.2 million of project land and rights-of-way assets that could lose value if the project does not proceed; project development costs incurred to date were approximately $31.5 million.
- Management estimated remaining-2020 liquidity needs of approximately $4.1 million for existing-operations capital expenditures, $3.0 million for Mexico project development, and $1.3 million for dividends payable. It believed liquidity was adequate apart from the CW-Bahamas collection risk.
- The company declared a quarterly dividend of $0.085 per share. Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and terms of Cayman retail-license negotiations, including any effect on earnings, cash flows and asset impairment.
- WSC payment timing, CW-Bahamas liquidity and recoverability of its $17.8 million receivable, including any subsequent allowance or revenue-recognition change.
- COVID-19 effects on water demand, customer collections, Aerex component supply and PERC customer funding.
- Whether Rosarito project conditions, authorizations, financing and litigation are resolved, and whether the $24.2 million of related assets remain recoverable.
- Cash generation and liquidity after the Aerex purchase, planned expenditures, project-development spending and dividends.