Sienna Resources

Energy Recovery Achieves Record-Breaking Fourth Quarter and Fiscal Year 2021 Product Revenue

24 February 2022

Energy Recovery, Inc. (Nasdaq:ERII) today announced its financial results for the fourth quarter and fiscal year ended December 31, 2021. The Company achieved 13% product revenue growth for the fiscal year 2021 across all business segments.

"We are pleased to report another year of record revenue in 2021. This achievement reflects the important role our products play in reliably delivering energy and cost savings, as well as emissions reduction for critical industries. Additionally, our performance highlights the ability of our team to adapt and perform at the highest level, despite the many challenges presented by the global pandemic," said Robert Mao, Chairman, President and Chief Executive Officer of Energy Recovery.

"We are well down the clear and disciplined path we defined two years ago for our industrial wastewater treatment and refrigeration businesses. We have announced multiple contracts for the Ultra PX for use in multiple industrial wastewater treatment applications. Furthermore, we are in discussions with several refrigeration rack manufacturers in North America and Europe and have signed our first agreement with one of these manufacturers for the joint development of a PX-centric next generation CO2 system utilizing our PX G1300," Mr. Mao continued.

"Energy Recovery's core strategy remains focused on accelerating the achievement of greater sustainability in critical industries with our PX technology. We are delivering on this promise, and through continuing innovation and dedication to delivering results, we are poised to continue our growth in the years to come."

Financial Results

       
 
 Three Months Ended December 31,  Years Ended December 31, 
 
 2021  2020  Variance  2021  2020  Variance 
 
 (In millions, except net income per share, percentages and basis points) 
Product revenue
 $33.6  $26.4   27% $103.9  $92.1   13%
License and development revenue (1)
  -   -   -%  -   26.9   (100)%
Total revenue
 $33.6  $26.4   27% $103.9  $119.0   (13)%
 
                        
Product gross profit
 $23.2  $18.2   27% $71.2  $63.8   12%
Product gross margin  68.9%  69.0%  (10) bps   68.6%  69.3% (70) bps 
 
                        
Operating expense
 $17.2  $14.4   19% $57.4  $59.4   (3)%
Operating income
 $6.0  $3.8   57% $13.8  $31.3   (56)%
 
                        
Net income
 $5.3  $3.5   52% $14.3  $26.4   (46)%
Diluted net income per share
 $0.09  $0.06  $0.03  $0.24  $0.47  $(0.23) 
 
                        
Operating cash flow
 $6.2  $6.5  $(0.3)  $13.5  $16.9  $(3.3) 
Cash and investments
 $108.0  $114.7   (6)% $108.0  $114.7   (6)%
                         
  1. In June 2020, the Company terminated the VorTeq License Agreement with Schlumberger Technology Corporation. As there were no future performance obligations to be recognized under the VorTeq License Agreement after the effective date, the Company recognized in full the remaining deferred revenue balance of $24.4 million in the second quarter of fiscal year 2020. In addition, no future license and development revenue was recognized under the VorTeq License Agreement after the second quarter of fiscal year 2020.

Product Channel Revenue

       
 
 Three Months Ended December 31,  Years Ended December 31, 
 
 2021  2020  Variance  2021  2020  Variance 
 
 (In millions, except percentages) 
Megaproject
 $25.1  $19.6   28% $75.4  $66.8   13%
Original equipment manufacturer
  5.7   4.1   37%  17.6   15.8   11%
Aftermarket
  2.8   2.7   5%  10.9   9.5   15%
Total product revenue
 $33.6  $26.4   27% $103.9  $92.1   13%
                         

"We comfortably exceeded our guidance for the year by 3% following historic high fourth quarter revenue. In addition, operating expenditures were only 55% of product revenue, which is a significant decrease from 2020 and within guidance," said Joshua Ballard, Chief Financial Officer of Energy Recovery. "Operating cash flow remained largely in line with 2020 even after making significant investments in inventories to protect against supply chain disruptions and growing inflation. We continue to show improvement in our base operations, increasing profitability and cash flows as we follow through on our strategy of disciplined growth. Overall, a very strong financial year for Energy Recovery."

Fourth Quarter 2021 Business Highlights

Water Segment

  1. We successfully balanced supply chain challenges to deliver recording-breaking product revenue of $33.6 million.
  2. Product gross margin came within guidance and in-line with recent quarters. We continue to invest in improving our PX devices and modernizing our manufacturing to ensure continued high-quality production with even greater efficiency.
  3. Operating expenses in this segment increased quarter-over-quarter due primarily to an increase in employee-related costs and R&D expenses.

Emerging Technologies Segment

  1. We continued our efforts to advance our overall PX and CO2 commercial refrigeration technology as well as to prepare and enhance our production, safety and testing measures for successful deployment of our first CO2 commercial installation.
  2. Operating expenses in this segment increased quarter-over-quarter, due primarily to an increase in expenditures for development of industrial and commercial refrigeration, including higher employee-related costs, partially offset by lower VorTeq-related expenses.

Fiscal Year 2021 Business Highlights

  1. New large greenfield plant installations and brownfield retrofits, and plant level resupply of critical components drove product revenues to exceed $100 million.
  2. Announced the first contract of our PX G1300 to a U.S. supermarket chain.
  3. Announced contracts to supply the Ultra PX to support the IWW treatment operations of two Chinese lithium-ion battery manufacturing facilities, as well as contracts with chemical manufacturing, landfill leachate and natural gas plants in China.
  4. Announced our joint-marketing effort with a global leader in purification and specialty-separation technologies, to spread the knowledge of advanced solutions improving the efficiency of many industrial wastewater treatment systems and the benefits of pairing our Ultra PX with third-party membranes in industrial wastewater treatment systems.
  5. Entered into a new $50 million credit agreement with JPMorgan Chase Bank, N.A. in December 2021 to replace our existing $16 million loan and pledge agreement with Citibank, N.A. This new credit agreement will provide us with additional capital for growth and expansion into emerging markets utilizing our pressure exchanger technology.

Bottom Line Summary

On a quarterly basis, we reported a net income of $5.3 million, or $0.09 per diluted share, for the fourth quarter ended December 31, 2021, compared to a net income of $3.5 million, or $0.06 per diluted share, for the fourth quarter ended December 31, 2020.

On an annual basis, we reported a net income of $14.3 million, or $0.24 per diluted share, for the year ended December 31, 2021, compared to a net income of $26.4 million, or $0.47 per diluted share, for the year ended December 31, 2020, which included license and development revenue of $26.9 million related to the VorTeq License Agreement which was terminated in 2020.

Cash Flow Highlights

The Company finished the fourth quarter ended December 31, 2021 with cash and cash equivalents of $74.4 million, and short-term and long-term investments of $33.6 million, which represents a combined total of $108.0 million. In the third quarter of 2021, we began shifting our investment strategy from holding cash in money market funds to investing in debt securities due to the strengthening of the economic environment.

Forward-Looking Statements

Certain matters discussed in this press release and on the conference call are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the Company's belief that the Company's products play an important role in reliably delivering energy, emissions and cost savings for critical industries; that the Company is well down the clear and disciplined path for our industrial wastewater treatment and refrigeration business; and that we are poised to continue our growth in the years to come. These forward-looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates, or projections and are not guarantees of future events or results. Potential risks and uncertainties include any other factors that may have been discussed herein regarding the risks and uncertainties of the Company's business, and the risks discussed under "Risk Factors" in the Company's Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") for the year ended December 31, 2020, as well as other reports filed by the Company with the SEC from time to time. Because such forward-looking statements involve risks and uncertainties, the Company's actual results may differ materially from the predictions in these forward-looking statements. All forward-looking statements are made as of today, and the Company assumes no obligation to update such statements.

Use of Non-GAAP Financial Measures

This press release includes certain non-GAAP financial measures, including Non-GAAP income (loss) from operations. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either exclude or include amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States of America, or GAAP. These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same captions, and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies. As such, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company uses these non-GAAP financial measures to analyze its operating performance and future prospects, develop internal budgets and financial goals, and to facilitate period-to-period comparisons. The Company believes these non-GAAP financial measures reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting its business.

Conference Call to Discuss Fourth Quarter and Year End 2021 Financial Results

LIVE CONFERENCE CALL:
Thursday, February 24, 2022, 2:00 PM PT / 5:00 PM ET
Listen-only, US / Canada Toll-Free: +1 (877) 709-8150
Listen-only, Local / International Toll: +1 (201) 689-8354
Access code: 13726065

CONFERENCE CALL REPLAY:
Expiration: Thursday, March 24, 2022
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13726065

Investors may also access the live call or the replay over the internet at ir.energyrecovery.com/websites/energyrecover/English/2200/calendar.html. The replay will be available approximately three hours after the live call concludes.

Disclosure Information

Energy Recovery uses the investor relations section on its website as means of complying with its disclosure obligations under Regulation FD. Accordingly, investors should monitor Energy Recovery's investor relations website in addition to following Energy Recovery's press releases, SEC filings, and public conference calls and webcasts.

About Energy Recovery

Energy Recovery creates technologies that solve complex challenges for industrial fluid-flow markets worldwide. Building on our pressure exchanger technology platform, we design and manufacture solutions that make industrial processes more efficient and sustainable. What began as a game-changing invention for desalination has grown into a global business accelerating the environmental sustainability of customers' operations in multiple industries. Headquartered in the San Francisco Bay Area, Energy Recovery has manufacturing, research and development facilities across California and Texas with sales and on-site technical support available globally. For more information, please visit www.energyrecovery.com.

Contact

Investor Relations
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+1 (281) 962-8105

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

       
 
 December 31,
2021
  December 31,
2020
 
 
 (In thousands) 
ASSETS
      
Current assets:
      
Cash and cash equivalents
 $74,358  $94,255 
Short-term investments
  31,332   20,446 
Accounts receivable, net
  20,615   11,792 
Inventories, net
  20,383   11,748 
Prepaid expenses and other assets
  5,075   4,950 
Total current assets
  151,763   143,191 
Long-term investments
  2,298   - 
Deferred tax assets, net
  11,421   11,030 
Property and equipment, net
  20,361   20,176 
Operating lease, right of use asset
  14,653   16,090 
Goodwill and other intangible assets
  12,827   12,839 
Other assets, non-current
  367   988 
Total assets
 $213,690  $204,314 
LIABILITIES AND STOCKHOLDERS' EQUITY
        
Current liabilities:
        
Accounts payable
 $909  $1,118 
Accrued expenses and other liabilities
  13,994   11,816 
Lease liabilities
  1,564   1,243 
Contract liabilities
  3,318   1,552 
Total current liabilities
  19,785   15,729 
Lease liabilities, non-current
  14,879   16,443 
Other liabilities, non-current
  247   518 
Total liabilities
  34,911   32,690 
 
        
Stockholders' equity:
        
Common stock
  64   62 
Additional paid-in capital
  195,593   179,161 
Accumulated other comprehensive (loss) income
  (149)   53 
Treasury stock
  (53,832)   (30,486) 
Retained earnings
  37,103   22,834 
Total stockholders' equity
  178,779   171,624 
Total liabilities and stockholders' equity
 $213,690  $204,314 
         

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

       
 
 Three Months Ended December 31,  Years Ended December 31, 
 
 2021  2020  2021  2020 
 
 (In thousands, except per share data) 
Product revenue
 $33,576  $26,426  $103,904  $92,091 
Product cost of revenue
  10,419   8,200   32,670   28,249 
Product gross profit
  23,157   18,226   71,234   63,842 
 
                
License and development revenue
  -   -   -   26,895 
 
                
Operating expenses:
                
General and administrative
  6,530   6,768   25,162   25,519 
Sales and marketing
  3,924   2,351   12,160   8,127 
Research and development
  6,727   5,290   20,069   23,449 
Amortization of intangible assets
  3   4   12   16 
Impairment of long-lived assets
  -   -   -   2,332 
Total operating expenses
  17,184   14,413   57,403   59,443 
Income from operations
  5,973   3,813   13,831   31,294 
 
                
Other income (expense):
                
Interest income
  25   104   204   913 
Other non-operating expense, net
  (10)   (15)   (31)   (74) 
Total other income, net
  15   89   173   839 
Income before income taxes
  5,988   3,902   14,004   32,133 
(Benefit from) provision for income taxes
  725   449   (265)   5,746 
Net income
 $5,263  $3,453  $14,269  $26,387 
 
                
Net income per share:
                
Basic
 $0.09  $0.06  $0.25  $0.47 
Diluted
 $0.09  $0.06  $0.24  $0.47 
 
                
Number of shares used in per share calculations:
                
Basic
  56,818   56,113   56,993   55,709 
Diluted
  58,502   57,261   58,723   56,637 
 
                

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

    
 
 Years Ended December 31, 
 
 2021  2020 
 
 (In thousands) 
Cash flows from operating activities:
      
Net income
 $14,269  $26,387 
Adjustments to reconcile net income to cash provided by operating activities
        
Stock-based compensation
  6,053   4,787 
Depreciation and amortization
  5,939   5,299 
Amortization of premiums and discounts on investments
  570   390 
Deferred income taxes
  (391)   5,867 
Impairment of long-lived assets
  -   2,332 
Other non-cash adjustments
  955   395 
Changes in operating assets and liabilities:
        
Accounts receivable, net
  (8,823)   1,098 
Contract assets
  1,399   (1,200) 
Inventories, net
  (8,766)   (1,622) 
Prepaid and other assets
  314   415 
Accounts payable
  (155)   (205) 
Accrued expenses and other liabilities
  396   153 
Contract liabilities
  1,766   (27,226) 
Net cash provided by operating activities
  13,526   16,870 
Cash flows from investing activities:
        
Sales of marketable securities
  -   10,573 
Maturities of marketable securities
  35,019   55,667 
Purchases of marketable securities
  (48,903)   (12,855) 
Capital expenditures
  (6,679)   (6,785) 
Net cash (used in) provided by investing activities
  (20,563)   46,600 
Cash flows from financing activities:
        
Net proceeds from issuance of common stock
  10,554   4,397 
Tax payment for employee shares withheld
  -   (23) 
Repurchase of common stock
  (23,346)   - 
Net cash (used in) provided by financing activities
  (12,792)   4,374 
Effect of exchange rate differences on cash and cash equivalents
  (68)   26 
Net change in cash, cash equivalents and restricted cash
  (19,897)   67,870 
Cash, cash equivalents and restricted cash, beginning of year
  94,358   26,488 
Cash, cash equivalents and restricted cash, end of year
 $74,461  $94,358 
         

ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)

      
 
 Three Months Ended December 31, 2021 Three Months Ended December 31, 2020 (Recast) 
 
 Water Emerging Technologies Corporate Total Water Emerging Technologies Corporate Total 
 
 (In thousands) 
Product revenue
 $33,576 $- $- $33,576 $26,396 $30 $- $26,426 
Product cost of revenue
  10,419  -  -  10,419  8,190  10  -  8,200 
Product gross profit
  23,157  -  -  23,157  18,206  20  -  18,226 
 
                         
Operating expenses
                         
General and administrative
  1,562  1,308  3,660  6,530  2,755  1,409  2,604  6,768 
Sales and marketing
  3,024  202  698  3,924  1,651  291  409  2,351 
Research and development
  731  5,996  -  6,727  388  4,902  -  5,290 
Amortization of intangible assets
  3  -  -  3  4  -  -  4 
Total operating expenses
  5,320  7,506  4,358  17,184  4,798  6,602  3,013  14,413 
Operating income (loss)
 $17,837 $(7,506) $(4,358)  5,973 $13,408 $(6,582) $(3,013)  3,813 
Other income, net
           15           89 
Income before income taxes
          $5,988          $3,902 
                          
      
 
 Year Ended December 31, 2021 Year Ended December 31, 2020 (Recast) 
 
 Water Emerging Technologies Corporate Total Water Emerging Technologies Corporate Total 
 
 (In thousands) 
Product revenue
 $103,851 $53 $- $103,904 $92,061 $30 $- $92,091 
Product cost of revenue
  32,670  -  -  32,670  28,239  10  -  28,249 
Product gross profit
  71,181  53  -  71,234  63,822  20  -  63,842 
 
                         
License and development revenue
  -  -  -  -  -  26,895  -  26,895 
 
                         
Operating expenses
                         
General and administrative
  6,330  5,162  13,670  25,162  9,172  5,410  10,937  25,519 
Sales and marketing
  9,559  937  1,664  12,160  5,958  1,192  977  8,127 
Research and development
  2,589  17,480  -  20,069  2,973  20,476  -  23,449 
Amortization of intangible assets
  12  -  -  12  16  -  -  16 
Impairment of long-lived assets
  -  -  -  -  -  2,332  -  2,332 
Total operating expenses
  18,490  23,579  15,334  57,403  18,119  29,410  11,914  59,443 
Operating income (loss)
 $52,691 $(23,526) $(15,334)  13,831 $45,703 $(2,495) $(11,914)  31,294 
Other income, net
           173           839 
Income before income taxes
          $14,004          $32,133 
                          

ENERGY RECOVERY, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Unaudited)

This press release includes certain non-GAAP financial information because we plan and manage our business using such information. Our Non-GAAP income (loss) from operations is determined by subtracting the license and development revenue and adding back the impairment of long-lived assets, both related to the VorTeq License Agreement activities.

    
 
 Years Ended December 31, 
 
 2021  2020  2019 
 
 (In thousands) 
GAAP income from operations
 $13,831  $31,294  $10,364 
Adjustments:
            
License and development revenue
  -   (26,895)   (14,108) 
Impairment of long-lived assets
  -   2,332   - 
Non-GAAP income (loss) from operations
 $13,831  $6,731  $(3,744) 
             

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