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Energy Recovery Reports Record Q4 Revenue, 75% Annual Earnings Per Share Growth

22 February 2023

SAN LEANDRO, CA / ACCESSWIRE / February 22, 2023 / Energy Recovery, Inc. (NASDAQ:ERII) ("Energy Recovery" or the "Company") today announced its financial results for the fourth quarter ended December 31, 2022.

Fiscal Year 2022 Highlights

  • Revenue growth of 21% over the prior year and within the November 2022 guidance.
  • Achieved the highest revenue quarter in the company's history during the fourth quarter of fiscal year 2022 of $42.3 million. Growth was driven by our core desalination business and industrial wastewater growth.
  • Gross margin of 69.6%, up 100 basis points compared to the prior year, due to increased pricing and product mix.
  • Operating expenditures grew 9% over the prior year, which included VorTeq-related costs and litigation expenses that comprised 3% of the growth.
  • Net income of $24.0 million, a growth of 69% over the prior year, and adjusted EBITDA of $36.8 million, up 50% over the prior year. Profitability increased on the basis of increased gross margin and a reduction of operating expenditures as a percent of revenue, which in turn drove earnings per share up nearly 75% to $0.42.
  • Operating cash flow for the year was 7% below 2021 largely due to the timing of customer collections for shipments that occurred late in the fourth quarter.

Robert Mao, Chairman, President and CEO, commented on the financial results: "Despite the macro-economic headwinds we are all experiencing globally, we achieved 21% annual revenue growth in 2022. Our core desalination business has never been stronger, and our new PX Q400 will help us maintain a competitive advantage in the coming years. Additionally, we exceeded our industrial wastewater 2022 guidance by nearly 30%, our annual operating income nearly doubled, and earnings per share grew 75%. All of these metrics show that our focus on thoughtful organic growth is having a real and positive impact on the business."

Mr. Mao added, "In our CO2 refrigeration business, we are investing in additional resources to support the growth of this burgeoning business, including sales account managers for the U.S. and European markets, as well as field technicians. Our manufacturing partners are beginning to highlight our PX G1300 to their supermarket clients now that our PX technology has demonstrated its reliability and efficiency gains out in the field. We have received repeat orders for additional PX G1300 units to be deployed this year, and are in discussions with some partners for regional distribution agreements. We are confident that our clear and disciplined growth strategy is moving us to where we need to be in this high-quality and opportunity-rich market, which we believe will create significant value for our shareholders."

Financial Highlights

 
 Quarter-to-Date  Year-to-Date   
 
  Q4 2022   Q4 2021 
vs. Q4 2021
  2022   2021 
2022 vs. 2021
   
 (In millions, except net income per share, percentages and basis points)
Revenue
 $42.3  $33.6 
up 26%
 $125.6  $103.9 
up 21%
   
Gross margin
  70.7%  68.9%
up 180 bps
  69.6%  68.6%
up 100 bps
   
Operating margin
  34.5%  17.8%
up 1670 bps
  19.8%  13.3%
up 650 bps
   
Net income
 $13.7  $5.3 
up 161%
 $24.0  $14.3 
up 69%
   
Net income per share
 $0.24  $0.09 
up 167%
 $0.42  $0.24 
up 75%
   
Effective tax rate
  10.7%  12.1%
 
  7.8%  (1.9%)
 
   
Cash provided by operations
 $6.4  $6.2 
 
 $12.6  $13.5 
 
   
Cash and investments
        
 
 $92.9  $108.0 
 
   

Non-GAAP Financial Highlights

 
 Quarter-to-Date  Year-to-Date 
 
 Q4'2022  Q4'2021 
vs. Q4'2021
 2022  2021 
2022 vs. 2021
 
 
 (In millions, except net income per share, percentages and basis points) 
Adjusted operating margin
  37.9%  22.8%
up 1510 bps
  26.2%  19.3%
up 690 bps
 
Adjusted net income
 $14.7  $6.4 
up 130%
 $30.5  $17.6 
up 73%
 
Adjusted net income per share
 $0.26  $0.11 
up 136%
 $0.54  $0.31 
up 74%
 
Adjusted effective tax rate
  12.2%  16.0%
 
  10.6%  12.9%
 
 
Adjusted EBITDA
 $17.0  $9.1 
up 87%
 $36.8  $24.6 
up 50%
 
Free cash flow
 $5.1  $4.4 
up 15%
 $8.4  $6.8 
up 23%
 
  1. Refer to the sections "Use of Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Financial Measures" for definition of adjustment to GAAP presentation.

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 our expectations on full year revenue and gross margin guidance; our belief that the Company's core desalination business has never been stronger; the timing of any new hires to support our CO2 business; the timing of any CO2 deployments; our ability to finalize and enter into any regional distribution agreements; and our belief that the Company's CO2 business will create significant value for our shareholders. 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, 2021, 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 adjusted gross margin, adjusted operating margin, adjusted net income, adjusted net income per share, adjusted effective tax rate, adjusted EBITDA and free cash flow. 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.

Notes to the Fourth Quarter and Year to Date 2022 Financial Results

  • Adjusted operating expense is a non-GAAP financial measure that the Company defines as operating expense which excludes non-core operational costs, such as VorTeq-related severance costs, litigation charges and accelerated depreciation.
  • Adjusted operating margin is a non-GAAP financial measure that the Company defines as income from operations which excludes i) share-based compensation; and ii) non-core operational costs, such as VorTeq-related severance costs, litigation charges and accelerated depreciation, divided by revenues.
  • Adjusted net income is a non-GAAP financial measure that the Company defines as net income which excludes i) share-based compensation; ii) non-core operational costs, such as VorTeq-related severance costs, litigation charges and accelerated depreciation; and iii) the applicable tax effect of the excluded items including the share-based compensation discrete tax item.
  • Adjusted net income per share is a non-GAAP financial measure that the Company defines as net income, which excludes i) share-based compensation; and ii) non-core operational costs, such as VorTeq-related severance costs, litigation charges and accelerated depreciation, and iii) the applicable tax effect of the excluded items including the share-based compensation discrete tax item, divided by basic shares outstanding.
  • Adjusted effective tax rate reflects adjustments for share-based compensation discrete tax item, share-based compensation, severance costs, litigation charges and accelerated depreciation.
  • Adjusted EBITDA is a non-GAAP financial measure that the Company defines as net income which excludes i) depreciation and amortization; ii) share-based compensation; iii) non-core operational costs, such as VorTeq-related severance costs and litigation charges; iv) other income, net, such as interest income and other non-operating income (expense), net; and v) provision for (benefit from) income taxes.
  • Free cash flow is a non-GAAP financial measure that the Company defines as net cash provided by operating activities less capital expenditures.

Conference Call to Discuss Fourth Quarter and Year to Date 2022 Financial Results

LIVE CONFERENCE CALL:
Wednesday, February 22, 2023, 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

CONFERENCE CALL REPLAY:
Expiration: Wednesday, March 22, 2023
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13735467

Investors may access the live call and the replay (approximately three hours after the live call concludes) over the internet at:
ir.energyrecovery.com/websites/energyrecover/English/2200/calendar.html

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, Inc., creates technologies that solve complex challenges for commercial and industrial fluid-flow markets worldwide. Building on an innovative pressure exchanger technology platform, they design and manufacture solutions that make commercial and 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 and research and development facilities across California and Texas with sales and on-site technical support available globally. To learn more, visit https://energyrecovery.com/

Contact

Investor Relations
This email address is being protected from spambots. You need JavaScript enabled to view it.
+1 (281) 962-8105

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

 
 2022  2021 
 
 (In thousands) 
ASSETS
      
Cash, cash equivalents and investments
 $92,891  $107,988 
Accounts receivable and contract assets
  35,782   21,108 
Inventories, net
  28,366   20,383 
Prepaid expenses and other assets
  3,886   4,582 
Property, equipment and operating leases
  32,695   35,014 
Goodwill and other intangible assets
  12,790   12,827 
Deferred tax assets and other assets
  10,629   11,788 
TOTAL ASSETS
 $217,039  $213,690 
 
        
LIABILITIES AND STOCKHOLDERS' EQUITY
        
Liabilities
        
Accounts payable and accrued expenses
 $15,507  $14,903 
Contract liabilities and other liabilities, non-current
  1,316   3,565 
Lease liabilities
  14,878   16,443 
Total liabilities
  31,701   34,911 
 
        
Stockholders' equity
  185,338   178,779 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 $217,039  $213,690 

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

 
 Three Months Ended December 31,  Years Ended December 31, 
 
 2022  2021  2022  2021 
 
 (In thousands, except per share data) 
Product revenue
 $42,291  $33,576  $125,591  $103,904 
Cost of product revenue
  12,400   10,419   38,235   32,670 
Gross profit
  29,891   23,157   87,356   71,234 
 
                
Operating expenses
                
General and administrative
  7,186   6,533   28,341   25,174 
Sales and marketing
  4,361   3,924   16,277   12,160 
Research and development
  3,739   6,727   17,909   20,069 
Total operating expenses
  15,286   17,184   62,527   57,403 
Income from operations
  14,605   5,973   24,829   13,831 
Other income, net
  765   15   1,242   173 
Income before income taxes
  15,370   5,988   26,071   14,004 
Provision for (benefit from) income taxes
  1,645   725   2,022   (265)
Net income
 $13,725  $5,263  $24,049  $14,269 
 
                
Net income per share
                
Basic
 $0.25  $0.09  $0.43  $0.25 
Diluted
 $0.24  $0.09  $0.42  $0.24 
 
                
Number of shares used in per share calculations
                
Basic
  56,014   56,818   56,221   56,993 
Diluted
  57,433   58,502   57,641   58,723 

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

 
 Years Ended December 31, 
 
 2022  2021 
 
 (In thousands) 
Cash flows from operating activities:
      
Net income
 $24,049  $14,269 
Non-cash adjustments
  14,447   13,126 
Net cash used in operating assets and liabilities
  (25,865)  (13,869)
Net cash provided by operating activities
  12,631   13,526 
 
        
Cash flows from investing activities:
        
Net investment in marketable securities
  (3,816)  (13,884)
Capital expenditures, net
  (3,130)  (6,679)
Net cash used in investing activities
  (6,946)  (20,563)
 
        
Cash flows from financing activities:
        
Net proceeds from issuance of common stock
  2,986   10,554 
Repurchase of common stock
  (26,654)  (23,346)
Net cash used in financing activities
  (23,668)  (12,792)
 
        
Effect of exchange rate differences
  (20)  (68)
Net change in cash, cash equivalents and restricted cash
 $(18,003) $(19,897)
Cash, cash equivalents and restricted cash, end of year
 $56,458  $74,461 

ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)

Channel Revenue

  Three Months Ended December 31,  Years Ended December 31, 
 
 2022  2021 
vs. 2021
 2022  2021 
vs. 2021
 
 
 (In thousands, except percentages) 
Megaproject
 $30,631  $25,084 
up 22%
 $81,888  $75,391 
up 9%
 
Original equipment manufacturer
  7,466   5,695 
up 31%
  28,858   17,604 
up 64%
 
Aftermarket
  4,194   2,797 
up 50%
  14,845   10,909 
up 36%
 
Total Revenues
 $42,291  $33,576 
up 26%
 $125,591  $103,904 
up 21%
 

Segment Activity

 
 Three Months Ended December 31, 2022 Three Months Ended December 31, 2021 
  Water Emerging Technologies Corporate Total Water Emerging Technologies Corporate Total 
 
 (In thousands) 
Product revenue
 $42,237 $54 $- $42,291 $33,576 $- $- $33,576 
Product cost of revenue
  12,341  59  -  12,400  10,419  -  -  10,419 
Gross profit (loss)
  29,896  (5) -  29,891  23,157  -  -  23,157 
 
                         
Operating expenses
                         
General and administrative
  2,027  964  4,195  7,186  1,565  1,308  3,660  6,533 
Sales and marketing
  2,868  927  566  4,361  3,024  202  698  3,924 
Research and development
  992  2,747  -  3,739  731  5,996  -  6,727 
Total operating expenses
  5,887  4,638  4,761  15,286  5,320  7,506  4,358  17,184 
Operating income (loss)
 $24,009 $(4,643)$(4,761)$14,605 $17,837 $(7,506)$(4,358)$5,973 

SPACE

 
 Year Ended December 31, 2022 Year Ended December 31, 2021 
 
 Water Emerging Technologies Corporate Total Water Emerging Technologies Corporate Total 
 
 (In thousands) 
Product revenue
 $125,428 $163 $- $125,591 $103,851 $53 $- $103,904 
Product cost of revenue
  38,158  77  -  38,235  32,670  -  -  32,670 
Gross profit
  87,270  86  -  87,356  71,181  53  -  71,234 
 
                         
Operating expenses
                         
General and administrative
  6,936  4,104  17,301  28,341  6,342  5,162  13,670  25,174 
Sales and marketing
  11,065  3,047  2,165  16,277  9,559  937  1,664  12,160 
Research and development
  4,151  13,758  -  17,909  2,589  17,480  -  20,069 
Total operating expenses
  22,152  20,909  19,466  62,527  18,490  23,579  15,334  57,403 
Operating income (loss)
 $65,118 $(20,823)$(19,466)$24,829 $52,691 $(23,526)$(15,334)$13,831 

Share-based Compensation

 
 Three Months Ended December 31,  Years Ended December 31, 
 
 2022  2021  2022  2021 
 
 (In thousands) 
Stock-based compensation expense charged to:
            
Cost of revenue
 $136  $100  $506  $414 
General and administrative
  701   682   3,436   2,917 
Sales and marketing
  360   435   1,592   1,483 
Research and development
  210   263   977   1,242 
Total stock-based compensation expense
 $1,407  $1,480  $6,511  $6,056 

ENERGY RECOVERY, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (1)
(Unaudited)

This press release includes certain non-GAAP financial information because we plan and manage our business using such information. The following table reconciles the GAAP financial information to the non-GAAP financial information.

  Quarter-do-Date  Year-to-Date 
  Q4' 2022  Q4' 2021  2022  2021 
  (In millions, except shares, per share and percentage) 
Operating expense
 $15.3  $17.2  $62.5  $57.4 
Severance
  -   (0.2)  (0.3)  (0.2)
Accelerated depreciation
  -   -   (0.9)  - 
Litigation charges
  -   -   (0.4)  - 
Adjusted operating expense
 $15.3  $17.0  $60.9  $57.2 
 
                
Operating margin
  34.5%  17.8%  19.8%  13.3%
Share-based compensation
  3.3%  4.4%  5.2%  5.8%
Severance
  -%  0.6%  0.2%  0.2%
Accelerated depreciation
  -%  -%  0.7%  -%
Litigation charges
  -%  -%  0.3%  -%
Adjusted operating margin
  37.9%  22.8%  26.2%  19.3%
 
                
Net income
 $13.7  $5.3  $24.0  $14.3 
Share-based compensation (2)
  1.4   1.5   6.5   6.1 
Severance (2)
  -   0.2   0.3   0.2 
Accelerated depreciation (2)
  -   -   0.7   - 
Litigation charges (2)
  -   -   0.4   - 
Share-based compensation discrete tax item
  (0.4)  (0.5)  (1.4)  (2.9)
Adjusted net income
 $14.7  $6.4  $30.5  $17.6 
 
                
Net income per share
 $0.24  $0.09  $0.42  $0.24 
Adjustments to net income per share (3)
  0.02   0.02   0.12   0.07 
Adjusted net income per share
 $0.26  $0.11  $0.54  $0.31 
 
                
Effective tax rate
  10.7%  12.1%  7.8%  (1.9%)
Adjustments to effective tax rate (3)
  1.5%  3.9%  2.9%  14.8%
Adjusted effective tax rate
  12.2%  16.0%  10.6%  12.9%
 
                
Net income
 $13.7  $5.3  $24.0  $14.3 
Share-based compensation
  1.4   1.5   6.5   6.1 
Severance
  -   0.2   0.3   0.2 
Depreciation and amortization
  1.0   1.4   4.8   4.5 
Litigation charges
  -   -   0.4   - 
Other income, net
  (0.8)  -   (1.2)  (0.2)
Provision for (benefit from) income taxes
  1.6   0.7   2.0   (0.3)
Adjusted EBITDA
 $17.0  $9.1  $36.8  $24.6 
 
                
Free cash flow
                
Net cash provided by operating activities
 $6.4  $6.2  $12.6  $13.5 
Capital expenditures
  (1.2)  (1.8)  (4.2)  (6.7)
Free cash flow
 $5.1  $4.4  $8.4  $6.8 
  1. Amounts may not total due to rounding.
  2. Amount presented are net of tax.
  3. Refer to the sections "Use of Non-GAAP Financial Measures" for description of items included in adjustments.

SOURCE: Energy Recovery

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