Graphite One

Energy Recovery Sets Product Revenue Record in the First Quarter

06 May 2021

Energy Recovery, Inc. (Nasdaq:ERII) today announced its financial results for the first quarter ended March 31, 2021. The Company posted record-high quarterly product revenue in its core Water segment with 52% growth compared to the first quarter of 2020.

"Today, Energy Recovery is at a key inflection point as we embark on a path of sustainable, disciplined, and diversified growth. First, we must protect and grow our seawater desalination business, which is thriving as our quarterly results show," said Robert Mao, Chairman of the Board, President, and Chief Executive Officer of Energy Recovery.

Mr. Mao continued, "Second, we are expanding our pressure exchanger technology's aperture and developing pressure exchanger-based solutions for new industries. We specifically look for markets where we can reduce costs and accelerate customers' environmental sustainability. I am particularly excited by our progress developing an energy recovery device for carbon dioxide (CO2) commercial refrigeration. The U.S. Environmental Protection Agency just this week announced an accelerated phase out of HFCs which should hasten adoption of CO2 technology in the U.S. in the coming years. Our testing indicates that our solution excels at saving energy where today's market-leading technology fails - in warmer climates."

Mr. Mao concluded, "The coming months will be an exciting time for Energy Recovery. Significant growth in our core desalination market, combined with our strong financial position and exciting research and development ("R&D") results, gives us confidence that the future is bright."

Financial Results

   
 
 
Three Months Ended March 31,
 
 
2021
2020
Variance
 
 
(In millions, except net income per share, percentages and basis points)
Product revenue
 
$
28.9
 
$
19.0
 
 
52%
 
 
License and development revenue
 
 
-
 
 
2.5
 
 
(100%)
 
 
Total revenue
 
$
28.9
 
$
21.5
 
 
34%
 
 
 
 
 
 
 
 
 
 
 
 
 
Product gross profit
 
$
20.0
 
$
13.3
 
 
50%
 
 
Product gross margin
 
 
69.0%
 
 
70.1%
 
 
(110)
bps
 
 
 
 
 
 
 
 
 
 
 
 
Operating expense
 
$
13.8
 
$
15.7
 
 
(12%)
 
 
Operating income
 
$
6.1
 
$
0.1
 
 
4700%
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
6.9
 
$
0.6
 
 
1006%
 
 
Diluted net income per share
 
$
0.12
 
$
0.01
 
$
0.11
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating cash flow
 
$
0.1
 
$
(5.9)
 
$
5.9
 
 
Cash and investments
 
$
120.0
 
$
93.2
 
 
29%
 
 
            

Product Channel Revenue

    
 
 Three Months Ended March 31, 
 
 2021  2020  Variance 
 
 (In millions, except percentages) 
Megaproject
 $23.7  $14.4   64% 
Original equipment manufacturer
  2.8   3.6   (22%) 
Aftermarket
  2.4   1.0   142% 
Total product revenue
 $28.9  $19.0   52% 
             

"Our desalination business drove significant growth in the first quarter, and we continue to work towards a more diversified revenue stream for the future," said Joshua Ballard, Chief Financial Officer of Energy Recovery. "We also maintained our discipline in OPEX. General and administrative ("G&A") spend was 4% lower year-over-year, and we reduced our R&D spend over 30% while still making significant progress in our emerging technology projects. With our healthy gross margin, we can both improve profitability and invest in disciplined future growth."

Segment Reporting

To reflect Energy Recovery's evolving business, the Company realigned its segment reporting starting in the first quarter of fiscal year 2021 and recast the prior year amounts for comparability. Income and type of expense activities included in the Company's Water and Emerging Technologies segments and corporate operating expenses are as follows:

Water segment: Includes seawater desalination and industrial wastewater sales and service, SWRO and industrial wastewater R&D and sales & marketing ("S&M") efforts, other water-related R&D activities, and certain water-related S&M and G&A expenses previously reported under corporate expenses.

Emerging Technologies segment: Includes R&D efforts in continued development of the VorTeq, sales and support of the IsoBoost® in natural gas processing which lowers the energy needed for sour gas treatment, and R&D efforts for new product development outside of desalination and industrial wastewater, and certain emerging technologies-related S&M and G&A activity expenses previously reported under corporate expenses.

Corporate operating expense: Includes certain operating expenses related to corporate activities outside of the operating segments, such as audit and accounting, some corporate legal, Board, and other separately managed general expenses not related to the identified segments.

First Quarter 2021 Business Highlights

Water Segment

  • Megaproject and aftermarket channels contributed to strong sales growth while original equipment manufacturer sales remain affected by the global slowdown in tourism and hospitality.
  • Product gross margin came within guidance and in-line with recent quarters, primarily due to reduction in average sales prices that began in 2020.
  • We announced a joint marketing effort with DuPont Water Solutions, a global leader in purification and specialty-separation technologies, to build awareness of the benefits of pairing our Ultra PX energy recovery devices with DuPont membranes in industrial wastewater treatment systems. Our focus remains on marketing and further developing our industrial wastewater customer pipeline in China and India.
  • Operating expenses in this segment decreased year-over-year primarily due to lower G&A expenses, in part due to Covid-19 related slowdown in travel and lower other office expenditures. In addition R&D expenses fell year-over-year, but are expected to increase as PX development for industrial wastewater picks up.

Emerging Technologies Segment

  • We completed our first live well field trials of the VorTeq technology alongside Liberty Oilfield Services and one of the largest independent oil producers in the United States. The VorTeq took part in more than 25 stages on a multi-well pad in New Mexico in the first quarter. Our focus remains on extending the service life of the VorTeq cartridges, a critical hurdle for profitable commercialization.
  • Investments continue in pressure exchanger-based incubation initiatives, most notably in our CO2 commercial refrigeration efforts. Our testing indicates that our new PX can process CO2 within the refrigeration cycle more efficiently than existing technologies and the product is undergoing design and testing in preparation for beta tests.
  • Operating expenses in this segment decreased year-over-year, primarily due to reduced development expenditures related to the VorTeq, which were partially offset by a shift of R&D investment to our CO2 activities and lower employee-related costs.

Corporate Operating Expenses

  • Operating expenses increased year-over-year due primarily to higher employee-related costs largely related to higher share-based compensation expense and legal costs, partially offset by lower recruiting costs related to Energy Recovery's chief executive officer search in the first quarter of fiscal year 2020.

Bottom Line Summary

On a quarterly basis, we reported a net income of $6.9 million, or $0.12 per diluted share, for the first quarter ended March 31, 2021, compared to a net income of $0.6 million, or $0.01 per diluted share, for the first quarter ended March 31, 2020.

Cash Flow Highlights

The Company finished the first quarter ended March 31, 2021 with cash and cash equivalents of $105.4 million, and short-term investments of $14.6 million, which represents a combined total of $120.0 million.

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 is embarking on a path of sustainable, disciplined and diversified growth; our ability to develop pressure exchanged-based solutions for new industries; our belief that our carbon dioxide commercial refrigeration solution excels in warmer climates as compared to the market-leading technology; our belief that the Company's future is bright; our belief that the Company can work towards a more diversified revenue stream for the future; and our belief that the Company is making significant progress in our emerging technology projects. 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.

Conference Call to Discuss First Quarter 2021 Financial Results

LIVE CONFERENCE CALL:

Thursday, May 6, 2021, 2:00 PM PDT / 5:00 PM EDT
Listen-only, US / Canada Toll-Free: +1 (877) 709-8150
Listen-only, Local / International Toll: +1 (201) 689-8354
Access code: 13718447

CONFERENCE CALL REPLAY:

Expiration: Sunday, June 6, 2021
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13718447

Investors may also access the live call or the replay over the internet at ir.energyrecovery.com. 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)

       
 
 March 31,
2021
  December 31,
2020
 
 
 (In thousands) 
ASSETS
      
Current assets:
      
Cash and cash equivalents
 $105,431  $94,255 
Short-term investments
  14,617   20,446 
Accounts receivable, net
  16,397   11,792 
Inventories, net
  11,925   11,748 
Prepaid expenses and other current assets
  4,470   4,950 
Total current assets
  152,840   143,191 
Deferred tax assets, non-current
  11,699   11,030 
Property and equipment, net
  20,734   20,176 
Operating lease, right of use asset
  15,739   16,090 
Goodwill and other intangible assets
  12,835   12,839 
Other assets, non-current
  1,371   988 
Total assets
 $215,218  $204,314 
LIABILITIES AND STOCKHOLDERS' EQUITY
        
Current liabilities:
        
Accounts payable
 $1,957  $1,118 
Accrued expenses and other current liabilities
  7,756   11,816 
Lease liabilities, current
  1,428   1,243 
Contract liabilities, current
  1,136   1,552 
Total current liabilities
  12,277   15,729 
Lease liabilities, non-current
  16,074   16,443 
Contract liabilities, non-current
  96   88 
Other non-current liabilities
  431   430 
Total liabilities
  28,878   32,690 
 
        
Stockholders' equity:
        
Common stock
  63   62 
Additional paid-in capital
  187,083   179,161 
Accumulated other comprehensive (loss) income
  (20)   53 
Treasury stock
  (30,486)   (30,486) 
Retained earnings
  29,700   22,834 
Total stockholders' equity
  186,340   171,624 
Total liabilities and stockholders' equity
 $215,218  $204,314 
         

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

    
 
 Three Months Ended March 31, 
 
 2021  2020 
 
 (In thousands, except per share data) 
Product revenue
 $28,940  $19,001 
Product cost of revenue
  8,981   5,684 
Product gross profit
  19,959   13,317 
 
        
License and development revenue
  -   2,543 
 
        
Operating expenses:
        
General and administrative
  6,606   6,881 
Sales and marketing
  2,703   2,138 
Research and development
  4,502   6,709 
Amortization of intangible assets
  4   4 
Total operating expenses
  13,815   15,732 
Income from operations
  6,144   128 
 
        
Other income (expense):
        
Interest income
  92   420 
Other non-operating expense, net
  (10)   (12) 
Total other income, net
  82   408 
Income before income taxes
  6,226   536 
Benefit from income taxes
  (640)   (85) 
Net income
 $6,866  $621 
 
        
Net income per share:
        
Basic
 $0.12  $0.01 
Diluted
 $0.12  $0.01 
 
        
Number of shares used in per share calculations:
        
Basic
  56,877   55,412 
Diluted
  58,597   56,542 
         

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

    
 
 Three Months Ended March 31, 
 
 2021  2020 
 
 (In thousands) 
Cash flows from operating activities:
      
Net income
 $6,866  $621 
Adjustments to reconcile net income to cash provided by (used in) operating activities
        
Stock-based compensation
  1,913   1,503 
Depreciation and amortization
  1,347   1,258 
Amortization of premiums and discounts on investments
  71   220 
Deferred income taxes
  (669)   (35) 
Other non-cash adjustments
  (12)   145 
Changes in operating assets and liabilities:
        
Accounts receivable, net
  (4,605)   (902) 
Contract assets
  (183)   (244) 
Inventories, net
  (186)   (692) 
Prepaid and other assets
  281   (428) 
Accounts payable
  821   745 
Accrued expenses and other liabilities
  (5,182)   (4,511) 
Contract liabilities
  (408)   (3,552) 
Net cash provided by (used in) operating activities
  54   (5,872) 
Cash flows from investing activities:
        
Sales of marketable securities
  -   4,974 
Maturities of marketable securities
  5,710   21,195 
Purchases of marketable securities
  -   (12,855) 
Proceeds from sale of assets
  5   - 
Capital expenditures
  (627)   (1,380) 
Net cash provided by investing activities
  5,088   11,934 
Cash flows from financing activities:
        
Net proceeds from issuance of common stock
  6,059   440 
Tax payment for employee shares withheld
  -   (22) 
Net cash provided by financing activities
  6,059   418 
Effect of exchange rate differences on cash and cash equivalents
  (25)   (25) 
Net change in cash, cash equivalents and restricted cash
  11,176   6,455 
Cash, cash equivalents and restricted cash, beginning of year
  94,358   26,488 
Cash, cash equivalents and restricted cash, end of period
 $105,534  $32,943 
         

ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION

(Unaudited)

 
 
Three Months Ended March 31, 2021 Three Months Ended March 31, 2020 (Recasted)
 
Water Emerging
Technologies
Corporate Total Water Emerging
Technologies
Corporate Total
 
 
Product revenue
$ 28,940 $ - $ - $ 28,940 $ 19,001 $ - $ - $ 19,001
Product cost of revenue
8,981 - - 8,981 5,684 - - 5,684
Product gross profit
19,959 - - 19,959 13,317 - - 13,317
 
License and development revenue
- - - - - 2,543 - 2,543
 
Operating expenses
General and administrative
1,557 1,166 3,883 6,606 2,079 1,492 3,310 6,881
Sales and marketing
2,164 179 360 2,703 1,676 312 150 2,138
Research and development
501 4,001 - 4,502 902 5,807 - 6,709
Amortization of intangible assets
4 - - 4 4 - - 4
Total operating expenses
4,226 5,346 4,243 13,815 4,661 7,611 3,460 15,732
 
Operating income (loss)
$ 15,733 $ (5,346) $ (4,243) 6,144 $ 8,656 $ (5,068) $ (3,460) 128
Other income, net
82 408
Income before income taxes
$ 6,226 $ 536
 

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