Energy Recovery Reports Third Quarter Financial Results
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Energy Recovery Reports Third Quarter Financial Results

Thursday, October 29, 2020 4:00 PM
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SAN LEANDRO, CA / ACCESSWIRE / October 29, 2020 / Energy Recovery Inc. (Nasdaq:ERII) ("Energy Recovery," "we," "our," or the "Company"), a leader in pressure energy technology for industrial fluid flows, today announced its financial results for the third quarter ended September 30, 2020.

Third Quarter 2020 Highlights:

  • Product revenue of $27.4 million, an all-time quarterly record and an increase of 26% year-over-year
  • Product gross margin of 71.5%, a decrease of 360 basis points year-over-year and in-line with expectations for the year
  • Net income of $5.4 million, or diluted earnings per share of $0.10, an increase of $0.01 year-over-year

Year-to-Date 2020 Highlights:

  • Product revenue of $65.7 million, an increase of 15% year-over-year
  • Total revenue of $92.6 million, an increase of 37% year-over-year, of which $24.4 million is related to accelerated revenue recognition from the termination of the license agreement between the Company and Schlumberger
  • Product gross margin of 69.5%, a decrease of 270 basis points year-over-year, of which 230 basis points are due to COVID-19 temporary reductions in manufacturing
  • Net income of $22.9 million, or diluted earnings per share of $0.41, an increase of $0.20 year-over-year in part related to accelerated revenue recognition from the termination of the license agreement between the Company and Schlumberger

"We surpassed our previous year's quarterly product revenue record by 26 percent this quarter, which is a testament to our singular focus on meeting customer demand while keeping our employees safe. We remain on pace to achieve 25 percent year-over-year revenue growth in our water division this year, and we are preparing for further growth in 2021 and beyond. The desalination industry remains robust despite global economic uncertainty because affordable desalination is critical to meet growing water demand for people around the world. We are proud of the impact our technology has in making desalination more energy efficient and sustainable and believe the time has come to introduce pressure exchanger technology to other industries where we can drive efficiency improvements," said Bob Mao, Chairman of the Board, President and Chief Executive Officer of Energy Recovery.

Mr. Mao continued, "Today we are advancing new products built on our pressure exchanger technology platform: the VorTeq, as well as incubation initiatives including a solution to improve the energy efficiency of wastewater treatment. We did not have an opportunity to go to a live well with the VorTeq last quarter, but we are ready to deploy and continue to pursue live well opportunities. While we remain confident in our ability to clear the hurdles that remain before full commercial deployment of the VorTeq, we have not lost sight of the need to produce results or stop investing. This same principle holds for all of our incubation initiatives, and I believe this disciplined approach will allow us to more rapidly achieve our profit and ROI objectives and deliver shareholder value."

COVID-19 Pandemic

The Company's production remained strong during the third quarter, with minimal impacts on production outputs due to the COVID-19 pandemic ("COVID-19"). COVID-19 has similarly had a limited effect on Energy Recovery's financials; however, the Company's gross margin for the nine months of 2020 was negatively affected due to reduced production output while its San Leandro facility was underutilized due to temporary suspension of manufacturing activities at the beginning of the COVID-19 pandemic. Enhanced safety measures for employees remain in effect today in the Company's facilities, including staggered shifts to ensure social distancing between workers, personal safety equipment for each worker, including masks and gloves, cleanings and disinfections between and during shifts, and, starting in July 2020, weekly COVID-19 testing of employees working on-site.

The Company successfully overcame challenges posed by COVID-19 to commission its Tracy, California production facility in July 2020, which further strengthens the Company's ability to fulfill its strong backlog of orders through the remainder of fiscal year 2020 and beyond.

Third Quarter 2020

Revenues

For the third quarter ended September 30, 2020, the Water segment generated total product revenue of $27.4 million, an all-time quarterly record, and an increase of $5.7 million, or 26%, compared to $21.8 million in the third quarter ended September 30, 2019. This increase was due primarily to higher Mega-Project Development ("MPD") shipments, offset by lower Original Equipment Manufacturer ("OEM") and Aftermarket ("AM") shipments.

For the third quarter ended September 30, 2020, there was no license and development revenue recognized as a result of the termination of the license agreement between the Company and Schlumberger.

Product Gross Margin

For the third quarter ended September 30, 2020, product gross margin was 71.5%, a decrease of 360 basis points from 75.1% in the third quarter ended September 30, 2019. The decrease in gross margin was due primarily to lower average selling prices due to higher MPD channel mix and costs related to reduced utilization of our manufacturing facilities related to COVID-19, partially offset by product mix.

Operating Expenses

For the third quarter ended September 30, 2020, operating expenses were $13.5 million, a decrease of $1.3 million, or (9%), compared to $14.9 million for the third quarter ended September 30, 2019. This decrease was due primarily to lower Oil & Gas testing expenditures as we reduce VorTeq related testing activities, lower depreciation expense related to long-lived assets, and lower travel expenses, partially offset by higher personnel-related costs and other R&D costs to support our incubation initiatives.

COVID-19 did not have a material effect on operating expenditures during the three months ended September 30, 2020.

Bottom Line Summary

To summarize the Company's financial performance, on a quarterly basis, the Company reported a net income of $5.4 million, or $0.10 per diluted share for the third quarter ended September 30, 2020, compared to a net income of $5.1 million, or $0.09 per diluted share for the third quarter ended September 30, 2019.

Cash Flow Highlights

The Company finished the third quarter ended September 30, 2020 with cash and cash equivalents of $80.1 million, and short-term and long-term investments of $25.8 million, which represents a combined total of $105.9 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 will achieve 25 percent year-over-year revenue growth in its water division in 2020; that the Company will achieve further growth in 2021 and beyond; and that the Company will be able to clear the hurdles that remain before full commercial deployment of the VorTeq. 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, 2019 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 Third Quarter 2020 Financial Results

LIVE CONFERENCE CALL:

Thursday, October 29, 2020, 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: 13710080

CONFERENCE CALL REPLAY:

Expiration: Sunday, November 29, 2020
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13710080

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 Inc.

For more than 20 years, Energy Recovery, Inc. (NASDAQ: ERII) has created technologies that solve complex challenges in industrial fluid-flow markets. We design and manufacture solutions that reduce waste, improve operational efficiencies, and lower the production costs of clean water and oil and gas. What began as a game-changing invention for water desalination has grown into a global business delivering solutions that enable more affordable access to these critical resources. Headquartered in the San Francisco Bay Area, Energy Recovery has manufacturing, research and development facilities across California and Texas. In addition, our worldwide sales and technical service organization provides on-site support for our line of water solutions. For more information, please visit www.energyrecovery.com.

Contact

Investor Relations
[email protected]
(281) 962-8105

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
  September 30,2020     December 31,2019  
 
  (In thousands)  
ASSETS
           
Current assets:
           
Cash and cash equivalents
  80,149     26,387  
Short-term investments
    24,373       58,736  
Accounts receivable, net
    11,055       12,979  
Inventories, net
    10,662       10,317  
Prepaid expenses and other current assets
    4,959       4,548  
Total current assets
    131,198       112,967  
Long-term investments
    1,418       15,419  
Deferred tax assets, non-current
    11,454       16,897  
Property and equipment, net
    20,535       18,843  
Operating lease, right of use asset
    16,444       11,195  
Goodwill
    12,790       12,790  
Other intangible assets, net
    53       65  
Other assets, non-current
    645       598  
Total assets
  194,537     188,774  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  1,951     1,192  
Accrued expenses and other current liabilities
    8,654       9,869  
Lease liabilities
    1,209       1,023  
Contract liabilities
    1,160       15,746  
Total current liabilities
    12,974       27,830  
Lease liabilities, non-current
    16,802       11,533  
Contract liabilities, non-current
    104       13,120  
Other non-current liabilities
    672       278  
Total liabilities
    30,552       52,761  
 
               
Stockholders' equity:
               
Common stock
    61       61  
Additional paid-in capital
    174,929       170,028  
Accumulated other comprehensive income (loss)
    100       (37 )
Treasury stock
    (30,486 )     (30,486 )
Accumulated earnings (deficit)
    19,381       (3,553 )
Total stockholders' equity
    163,985       136,013  
Total liabilities and stockholders' equity
  194,537     188,774  
                 

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
  Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
 
  2020     2019     2020     2019  
 
  (In thousands, except per share data)  
Product revenue
  27,408     21,752     65,665     57,050  
Product cost of revenue
    7,816       5,425       20,049       15,843  
Product gross profit
    19,592       16,327       45,616       41,207  
 
                               
License and development revenue
    -       3,098       26,895       10,391  
 
                               
Operating expenses:
                               
General and administrative
    6,271       5,711       18,751       16,790  
Sales and marketing
    2,141       2,367       5,776       6,710  
Research and development
    5,098       6,620       18,159       16,354  
Amortization of intangible assets
    4       156       12       469  
Impairment of long-lived assets
    -       -       2,332       -  
Total operating expenses
    13,514       14,854       45,030       40,323  
Income from operations
    6,078       4,571       27,481       11,275  
 
                               
Other income (expense):
                               
Interest income
    134       500       809       1,551  
Other non-operating expense, net
    (29 )     (5 )     (59 )     (77 )
Total other income, net
    105       495       750       1,474  
Income before income taxes
    6,183       5,066       28,231       12,749  
Provision for (benefit from) income taxes
    796       (83 )     5,297       1,227  
Net income
  5,387     5,149     22,934     11,522  
 
                               
Earnings per share:
                               
Basic
  0.10     0.09     0.41     0.21  
Diluted
  0.10     0.09     0.41     0.21  
 
                               
Number of shares used in per share calculations:
                               
Basic
    55,692       54,975       55,573       54,594  
Diluted
    56,471       56,384       56,443       55,971  
                                 

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
  Nine Months Ended
September 30,
 
 
  2020     2019  
 
  (In thousands)  
Cash flows from operating activities:
           
Net income
  22,934     11,522  
Adjustments to reconcile net income to cash provided by operating activities
               
Stock-based compensation
    3,672       4,425  
Depreciation and amortization
    3,963       3,440  
Amortization (accretion) of premiums and discounts on investments
    311       (37 )
Deferred income taxes
    5,443       1,198  
Provision for warranty claims
    316       339  
Impairment of long-lived assets
    2,332       -  
Other non-cash adjustments
    -       197  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    1,862       (10,617 )
Contract assets
    (747 )     2,993  
Inventories, net
    (506 )     (1,885 )
Prepaid and other assets
    295       383  
Accounts payable
    656       (94 )
Accrued expenses and other liabilities
    (2,561 )     (1,264 )
Income taxes
    (18 )     30  
Contract liabilities
    (27,602 )     (10,127 )
Net cash provided by operating activities
    10,350       503  
Cash flows from investing activities:
               
Sales of marketable securities
    10,573       3,535  
Maturities of marketable securities
    50,467       70,040  
Purchases of marketable securities
    (12,855 )     (66,253 )
Capital expenditures
    (6,019 )     (5,501 )
Net cash provided by investing activities
    42,166       1,821  
Cash flows from financing activities:
               
Net proceeds from issuance of common stock
    1,260       5,424  
Tax payment for employee shares withheld
    (23 )     (89 )
Net cash provided by financing activities
    1,237       5,335  
Effect of exchange rate differences on cash and cash equivalents
    11       -  
Net change in cash, cash equivalents and restricted cash
    53,764       7,659  
Cash, cash equivalents and restricted cash, beginning of year
    26,488       22,138  
Cash, cash equivalents and restricted cash, end of period
  80,252     29,797  
                 

ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION

(Unaudited)

 
  Three Months Ended September 30, 2020     Three Months Ended September 30, 2019  
 
  Water     Oil & Gas     Corporate     Total     Water     Oil & Gas     Corporate     Total  
 
  (In thousands)  
Product revenue
  27,408     -     -     27,408     21,752     -     -     21,752  
Product cost of revenue
    7,816       -       -       7,816       5,425       -       -       5,425  
Product gross profit
    19,592       -       -       19,592       16,327       -       -       16,327  
 
                                                               
License and development revenue
    -       -       -       -       -       3,098       -       3,098  
 
                                                               
Operating expenses
                                                               
General and administrative
    606       439       5,226       6,271       359       431       4,921       5,711  
Sales and marketing
    1,507       30       604       2,141       1,850       92       425       2,367  
Research and development
    723       2,956       1,419       5,098       886       5,667       67       6,620  
Amortization of intangible assets
    4       -       -       4       156       -       -       156  
Total operating expenses
    2,840       3,425       7,249       13,514       3,251       6,190       5,413       14,854  
 
                                                               
Operating income (loss)
  16,752     (3,425 )   (7,249 )     6,078     13,076     (3,092 )   (5,413 )     4,571  
Other income, net
                            105                               495  
Income before income taxes
                          6,183                             5,066  
                                                                 
                                                                 
 
  Nine Months Ended September 30, 2020     Nine Months Ended September 30, 2019  
 
  Water     Oil & Gas     Corporate     Total     Water     Oil & Gas     Corporate     Total  
 
  (In thousands)  
Product revenue
  65,665     -     -     65,665     56,946     104     -     57,050  
Product cost of revenue
    20,049       -       -       20,049       15,655       188       -       15,843  
Product gross profit (loss)
    45,616       -       -       45,616       41,291       (84 )     -       41,207  
 
                                                               
License and development revenue
    -       26,895       -       26,895       -       10,391       -       10,391  
 
                                                               
Operating expenses
                                                               
General and administrative
    1,467       1,601       15,683       18,751       1,456       1,207       14,127       16,790  
Sales and marketing
    4,307       106       1,363       5,776       5,058       674       978       6,710  
Research and development
    2,585       12,720       2,854       18,159       2,794       13,335       225       16,354  
Amortization of intangible assets
    12       -       -       12       469       -       -       469  
Impairment of long-lived assets
    -       2,332       -       2,332       -       -       -       -  
Total operating expenses
    8,371       16,759       19,900       45,030       9,777       15,216       15,330       40,323  
 
                                                               
Operating income (loss)
  37,245     10,136     (19,900 )     27,481     31,514     (4,909 )   (15,330 )     11,275  
Other income, net
                            750                               1,474  
Income before income taxes
                          28,231                             12,749  

SOURCE: Energy Recovery Inc. via EQS Newswire

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