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08/12/08

Energy Recovery, Inc. Reports Second Quarter 2008 Financial Results


SAN LEANDRO, Calif.--(BUSINESS WIRE)--Aug. 12, 2008--Energy Recovery, Inc. (Nasdaq:ERII), a global leading provider of ultra efficient energy recovery products and technology for seawater desalination, announced today the results of its second quarter ended June 30, 2008. In the second quarter of 2008, ERI achieved net revenue of $12.0 million, an increase of 247% compared to revenue of $3.5 million reported for the same period a year ago. Year to date for 2008 net revenue was $21.1 million, which represented an increase of 99% over net revenue of $10.6 million for the six months ended June 30, 2007. ERI reported net income of $1.8 million, or $0.04 per diluted share, for the three months ended June 30, 2008 compared to a loss of $0.4 million, or $(0.01) per diluted share, for the same period last year. Year to date for 2008 net income was $2.8 million, or $0.07 per diluted share, compared to $0.7 million, or $0.02 per diluted share, for the same period last year.

In July 2008, ERI sold an aggregate of 16,100,000 shares of its common stock in its initial public offering ("IPO") at $8.50 per share, including the underwriters' over-allotment option. Of the shares sold in the offering, 10,178,566 shares were sold by the Company and 5,921,434 shares were sold by selling stockholders. ERI received net proceeds of approximately $77.1 million from the IPO, after deducting underwriting discounts and commissions and direct expenses. The financial effect of the IPO will be reflected in the Company's third quarter financial results.

"Our strong second quarter results reflect the continued growth of the desalination industry worldwide and our leading market share in the energy recovery segment," said GG Pique, President and CEO of Energy Recovery, Inc. "The recent IPO was a milestone event for the Company and our visibility as a leading player in our industry has risen as a result. The IPO proceeds put us on solid financial footing to pursue many important strategic initiatives that will further strengthen that leadership position."

ERI provides the following guidance for the third quarter of 2008 and the full year (in thousands, except per share data):

                             Q3 2008              Full Year 2008

Estimated net revenue  $6.8 to $7.2 million   $49.0 to $51.0 million

Estimated net income   $0.0 to $0.3 million    $6.5 to $7.3 million

Estimated Earnings per
 diluted share                $0.00               $0.14 to $0.15

Forward Looking Statements

This press release includes "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. Such forward-looking statements include statements regarding the Company's ability to achieve certain levels of revenue and earnings in the third quarter and full year of 2008, the Company's ability to successfully implement its strategic initiatives and the Company's position in the desalination industry. Because such forward-looking statements involve risks and uncertainties, the Company's actual results may differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, cyclical nature of sea water reverse osmosis plants, delays or postponements in the construction of desalination plants, the ability of our customers to obtain other key components of a plant, delays in governmental approvals, changes in customers' budgets for desalination plants and the timing of their purchasing decisions, interruption in the supply of key production components such as ceramic parts, shipping delays, and other risks detailed in the Company's filings with the Securities and Exchange Commission ("SEC"). All forward-looking statements are made as of today, and the Company assumes no obligation to update such statements. For more details relating to the risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements, please refer to the Company's SEC filings.

Conference Call to Discuss Second Quarter 2008 Results

The conference call scheduled today at 1:30 p.m. PDT will be in a "listen-only" mode for all participants other than the investment professionals who regularly follow the Company. The toll-free phone number for the call is 800-951-9235 and the access code is 56522909. Callers should dial in approximately 15 minutes prior to the scheduled start time. A telephonic replay will be available at 800-642-1687, Access Code: 56522909, from 5:30 p.m. PDT on Tuesday, August 12, 2008 to 5:30 p.m. PDT on Tuesday, August 26, 2008. Investors may also access the live call or the replay over the internet at www.energyrecovery.com. The replay will be available approximately three hours after the live call concludes.

About ERI(R)

Energy Recovery, Inc. (ERI) is a leading manufacturer of energy recovery devices, which significantly reduce energy consumption and help make desalination affordable. ERI's PX Pressure Exchanger(R) technology (PX(R)) is a rotary positive displacement pump that recovers energy from the high pressure reject stream of seawater reverse osmosis systems at up to 98% efficiency with no downtime or scheduled maintenance.

The Company has research, development and manufacturing facilities in San Leandro, California as well as direct sales offices and technical support centers in key desalination hubs such as Madrid, UAE, Shanghai and Florida. ERI services customers in Algeria, Australia, China, India, Korea, Mexico, Taiwan and the Caribbean. For more information on ERI and PX technology, please visit www.energyrecovery.com.

                        ENERGY RECOVERY, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           (unaudited, in thousands, except per share data)

                               Three Months Ended   Six Months Ended
                                    June 30,            June 30,
                               ------------------- -------------------
                                 2008      2007      2008      2007
                               --------- --------- --------- ---------
Net revenue                    $ 11,961  $  3,452  $ 21,081  $ 10,591
Cost of revenue(1)                3,951     1,574     7,625     4,428
                               --------- --------- --------- ---------
Gross profit                      8,010     1,878    13,456     6,163
Operating expenses:
   Sales and marketing(1)         1,453     1,224     2,796     2,415
   General and
    administrative(1)             2,854       960     5,515     1,733
   Research and development(1)      536       440     1,045       829
                               --------- --------- --------- ---------
Total operating expenses          4,843     2,624     9,356     4,977
                               --------- --------- --------- ---------
Income (loss) from operations     3,167      (746)    4,100     1,186
Other income (expense):
      Interest expense              (24)       (8)      (45)      (25)
      Interest and other
       income (expense)             (23)       22       624        36
                               --------- --------- --------- ---------
Income (loss) before provision
 for income taxes                 3,120      (732)    4,679     1,197
Provision for income taxes        1,291      (308)    1,903       502
                               --------- --------- --------- ---------
Net income (loss)              $  1,829  $   (424) $  2,776  $    695
                               ========= ========= ========= =========
Earnings (loss) per share:
      Basic                    $   0.05  $  (0.01) $   0.07  $   0.02
                               ========= ========= ========= =========
      Diluted                  $   0.04  $  (0.01) $   0.07  $   0.02
                               ========= ========= ========= =========
Number of shares used in per
 share calculations:
      Basic                      39,827    38,560    39,816    38,416
                               ========= ========= ========= =========
      Diluted                    42,284    38,560    42,240    40,747
                               ========= ========= ========= =========


------------------------------
(1) Includes stock-based compensation expense as follows:

                               Three Months Ended   Six Months Ended
                                    June 30,            June 30,
                               ------------------- -------------------
                                 2008      2007      2008      2007
                               --------- --------- --------- ---------
Cost of revenue                $      8  $     25  $     31  $     50
Sales and marketing                  29        96       102       168
General and administrative           49        83       142       188
Research and development             13        35        45        70
                               --------- --------- --------- ---------
         Total stock-based
          compensation         $     99  $    239  $    320  $    476
                               ========= ========= ========= =========
                        ENERGY RECOVERY, INC.
                CONDENSED CONSOLIDATED BALANCE SHEETS
             (unaudited, in thousands, except share data)

                                               June 30,   December 31,
                                                 2008         2007
                                             ------------ ------------
ASSETS
   Current Assets:
      Cash and cash equivalents              $     1,655  $       240
      Restricted cash                                 --          366
      Accounts receivable, net of allowance
       for doubtful accounts of $85 and $121
       at June 30, 2008 and December 31,
       2007, respectively                         12,595       12,849
      Unbilled receivables, current                2,693        1,733
      Notes receivable from stockholders               1           20
      Inventories                                  7,060        4,791
      Deferred tax assets, net                     1,052        1,052
      Prepaid expenses and other current
       assets                                      3,774          369
                                             ------------ ------------
            Total current assets                  28,830       21,420
   Unbilled receivables, non-current               2,544        2,457
   Restricted cash, non-current                       --        1,221
   Property and equipment, net                     1,736        1,671
   Intangible assets, net                            329          345
   Deferred tax assets, non-current, net             148          148
   Other assets, non-current                          51           42
                                             ------------ ------------
            Total Assets                     $    33,638  $    27,304
                                             ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
   Current Liabilities:
      Accounts payable                       $     1,834  $     1,697
      Accrued expenses and other current
       liabilities                                 5,362        1,868
      Liability for early exercise of stock
       options                                         1           20
      Income taxes payable                           455        1,154
      Accrued warranty reserve                       250          868
      Deferred revenue                               487          488
      Customer deposits                              835          318
      Current portion of long-term debt              172          172
      Current portion of capital lease
       obligations                                    37           38
                                             ------------ ------------
            Total current liabilities              9,433        6,623
   Long-term debt                                    471          557
   Capital lease obligations, non-current             46           63
                                             ------------ ------------
            Total Liabilities                      9,950        7,243
                                             ------------ ------------
   Commitments and Contingencies

   Stockholders' Equity:
      Preferred stock, $0.001 par value;
       10,000,000 shares authorized; no
       shares issued and outstanding                  --           --
      Common stock, $0.001 par value;
       45,000,000 shares authorized;
       39,825,782 and 39,777,446 shares
       issued and outstanding at June 30,
       2008 and December 31, 2007,
       respectively                                   40           40
      Additional paid-in capital                  21,131       20,762
      Notes receivable from stockholders            (340)        (835)
      Accumulated other comprehensive loss           (18)          (5)
      Retained earnings                            2,875           99
                                             ------------ ------------
            Total Stockholders' Equity            23,688       20,061
                                             ------------ ------------
            Total Liabilities and
             Stockholders' Equity            $    33,638  $    27,304
                                             ============ ============
                        ENERGY RECOVERY, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (unaudited, in thousands)

                                                     Six Months Ended
                                                         June 30,
                                                     -----------------
                                                       2008     2007
                                                     -------- --------
Cash Flows From Operating Activities
   Net income                                        $ 2,776  $   695
   Adjustments to reconcile net income to net cash
    from operating activities:
      Depreciation and amortization                      238      134
      Interest accrued on notes receivables from
       stockholders                                       (9)     (16)
      Stock-based compensation                           320      476
      Gain on foreign currency transactions             (586)      --
      Provision for doubtful accounts                      1      (13)
      Provision for warranty claims                     (550)       7
      Provision for excess or obsolete inventory          53       --
   Changes in operating assets and liabilities:
      Accounts receivable                                839      314
      Unbilled receivables                            (1,047)     280
      Inventories                                     (2,322)  (2,090)
      Prepaid and other assets                        (3,409)    (122)
      Accounts payable                                   137      342
      Accrued expenses and other liabilities           3,427     (395)
      Income taxes payable                              (699)    (494)
      Deferred revenue                                    (1)      81
      Customer deposits                                  517        7
                                                     -------- --------
            Net cash used in operating activities       (315)    (794)
                                                     -------- --------
Cash Flows From Investing Activities
   Capital expenditures                                 (286)    (297)
   Restricted cash                                     1,587      153
   Other                                                  (1)     (26)
                                                     -------- --------
            Net cash provided by (used in) investing
             activities                                1,300     (170)
                                                     -------- --------
Cash Flows From Financing Activities
   Proceeds from long-term debt                           --      177
   Repayment of long-term debt                           (86)     (33)
   Repayment of revolving note, net                       --     (438)
   Repayment of capital lease obligation                 (18)     (21)
   Net proceeds from issuance of common stock             35    5,004
   Repayment of notes receivables from stockholders      518       10
   Other short term financing activities                  (6)     367
                                                     -------- --------
            Net cash provided by financing
             activities                                  443    5,066
                                                     -------- --------
Effect of exchange rate differences on cash and cash
 equivalents                                             (13)      (3)
                                                     -------- --------
Net change in cash and cash equivalents                1,415    4,099
Cash and cash equivalents, beginning of period           240       42
                                                     -------- --------
Cash and cash equivalents, end of period             $ 1,655  $ 4,141
                                                     ======== ========
Supplemental disclosure of cash flow information
   Cash paid for interest                            $    45  $    27
                                                     ======== ========
   Cash paid for income taxes                        $ 2,603  $   996
                                                     ======== ========
Supplemental disclosure of non-cash transactions
   Issuance of common stock in exchange for notes
    receivable from stockholders                     $    14  $    49
                                                     ======== ========

CONTACT: Energy Recovery, Inc.
Tom Willardson, 510-483-7370
Chief Financial Officer

SOURCE: Energy Recovery, Inc.