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03/07/18

Energy Recovery Reports Fiscal Year End 2017 Financial Results


SAN LEANDRO, Calif., March 7, 2018 /PRNewswire/ -- Energy Recovery Inc.  (NASDAQ: ERII) ("Energy Recovery" or the "Company"), the leader in pressure energy technology for industrial fluid flows, today announced its financial results for the fiscal year and fourth quarter ended on December 31, 2017.

Energy Recovery logo.

Full Year Summary:

  • Total revenue of $63.2 million, an increase of 15% year-over-year
  • Product gross margin of 67.2%
  • Total gross margin(1) of 69.8%
  • Net income of $12.4 million, or $0.22 per diluted share

Fourth Quarter Summary:

  • Total revenue of $22.4 million, an increase of 25% year-over-year
  • Product gross margin of 68.5%
  • Total gross margin(1) of 70.2%
  • Net income of $11.6 million, or $0.21 per diluted share

President and CEO Chris Gannon remarked, "2017 was a record year for the company, setting all-time highs in revenue in both our Water and Oil & Gas segments, as well as achieving record full year product and total gross margins(1). We believe that the current expansion phase in the desalination business cycle will continue throughout 2018. Cash-generation from our core business helps fund advanced R&D initiatives – the next platform for sustained growth for the company."

Mr. Gannon continued, "The long-term strategy of Energy Recovery remains unchanged. Our primary goals are 1) desalination market leadership, 2) commercialization of VorTeqTM, 3) further development of MTeqTM, and 4) continuous innovation of our core PX technology.  The dedicated efforts of our sales team continues to drive top line growth, while our operations team continues to maximize manufacturing efficiencies to generate increased profitability.  Our engineering team is tirelessly and methodically improving the VorTeq and MTeq systems.  Our balance sheet remains strong and the company has never been in a better position to deliver value to our shareholders."

Mr. Gannon concluded, "Through the observations and lessons learned from testing to-date, we have identified specific enhancements to the VorTeq system and are working toward implementation.  Based on the current component delivery, testing and assembly schedules, we expect to make material progress towards commercialization throughout 2018.  We will provide further detail during our conference call on March 8th, 2018."

Revenues

For the fiscal year ended December 31, 2017, the Company generated total revenue of $63.2 million.  Total revenue for fiscal year ended December 31, 2017 increased by $8.4 million, or 15%, from $54.7 million in the fiscal year ended December 31, 2016.  Of the $8.4 million increase in total revenue, $6.8 million was attributable to the Water segment and $1.7 million was attributable to the Oil & Gas segment. 

The Water segment generated total product revenue of $54.3 million for fiscal year ended December 31, 2017, compared to $47.5 million for fiscal year ended December 31, 2016.  The $6.8 million, or 14% increase in product revenue was due to higher Mega Project ("MPD") and Original Equipment Manufacturer ("OEM") shipments in 2017.

The Oil & Gas segment generated total revenue of $8.9 million for fiscal year ended December 31, 2017, compared to $7.2 million for fiscal year ended December 31, 2016.  The $1.7 million, or 24% increase in revenue was due to higher percentage-of-completion ("PoC") revenue recognition associated with the sale of multiple IsoBoost® systems as compared to 2016.  License and development revenue of $5.0 million was recognized in both 2017 and 2016. 

For the fourth quarter of 2017, the Company generated total revenue of $22.4 million.  Revenue increased by $4.5 million, or 25%, from $17.9 million in the fourth quarter of 2016.  Of the $4.5 million increase in revenue, $5.6 million was attributed to an increase in Water segment revenue due to higher MPD and OEM shipments in the fourth quarter of 2017, offset by a $1.1 million decrease in the Oil & Gas segment revenue due to lower PoC revenue recognition associated with the aforementioned sale of multiple IsoBoost systems.  License and development revenue of $1.25 million was recognized in each of the fourth quarters of 2017 and 2016, respectively.

Gross Margin

For the fiscal year ended December 31, 2017, product gross margin was 67.2%.  Product gross margin increased by 310 basis points from 64.1% in 2016.  This increase was largely driven by favorable price and product mix, manufacturing efficiencies, and higher production levels in the Water segment.  Including license and development revenue, total gross margin(1) was 69.8% for fiscal year ended December 31, 2017. Total gross margin(1) increased 240 basis points from 67.4% in 2016. 

The Water segment generated product gross margin of 70.5% for the fiscal year ended December 31, 2017.  Water segment product gross margin increased by 490 basis points, compared to 65.6% in 2016.  This increase was largely driven by favorable price and product mix, manufacturing efficiencies, and higher production levels in 2017.

The Oil & Gas segment generated product gross margin of 21.4% for the fiscal year ended December 31, 2017, compared to 31.1% in 2016.  This decrease was attributable to higher project costs and revenue adjustments.  Including license and development revenue, the Oil & Gas segment total gross margin(1) for fiscal year ended December 31, 2017 was 65.8%.

For the fourth quarter of 2017, product gross margin was 68.5%.  Product gross margin increased by 430 basis points from 64.2% in the fourth quarter of 2016.  This increase was largely driven by favorable price and product mix, and manufacturing efficiencies in the Water segment.  Including license and development revenue, total gross margin(1) was 70.2% for the fourth quarter of 2017.  Total gross margin(1) increased 350 basis points from 66.7% in the fourth quarter of 2016. 

Operating Expenses

For the fiscal year ended December 31, 2017, operating expenses were $40.8 million, an increase of $4.3 million from $36.5 million for fiscal year ended December 31, 2016.  The increase in operating expenses was primarily due to increases in the Oil & Gas and Water segments.

The Water segment operating expenses for fiscal year ended December 31, 2017 were $8.9 million, an increase of $0.8 million from $8.1 million for fiscal year ended December 31, 2016.  This increase was driven by higher sales and marketing expenses associated with increased Water segment sales.

The Oil & Gas segment operating expenses for fiscal year ended December 31, 2017 were $16.0 million, an increase of $3.3 million from $12.7 million for fiscal year ended December 31, 2016.  This increase was driven by the Company's continued investment in research and development activities.

The Corporate segment operating expenses of $15.9 million for fiscal year ended December 31, 2017 were $200 thousand higher than the fiscal year ended December 31, 2016.

For the fourth quarter of 2017, operating expenses were $12.7 million, an increase of $3.4 million from $9.3 million for fourth quarter of 2016.  This increase in operating expenses was primarily due to continued investment in research and development activities in the Oil & Gas segment and higher sales and marketing expenses in Water segment.

Bottom Line Summary

To summarize our financial performance, on a full year basis, the Company reported a net income of $12.4 million, or $0.22 per diluted share, compared to a net income of $1.0 million, or $0.02 per diluted share in 2016.  This increase was driven by a tax benefit of $8.4 million, which included a net release of tax valuation allowance, a one-time tax expense related to the 2017 Tax Cuts and Jobs Act, and other tax adjustments. Excluding the tax benefit, net income for fiscal year ended December 31, 2017 was $0.07 per diluted share.

On a quarterly basis, the Company reported a net income of $11.6 million, or $0.21 per diluted share for the fourth quarter of 2017, compared to a net income of $3.1 million, or $0.06 per diluted share for the fourth quarter of 2016.  As noted above, this increase was driven by a tax benefit of $8.4 million.  Excluding the tax benefit, net income for the fourth quarter of 2017 was $0.06 per diluted share.

Cash Flow Highlights

The Company ended the quarter with unrestricted cash of $27.8 million, current and non-current restricted cash of $2.8 million, and short-term investments of $70.0 million, all of which represent a combined total of $100.6 million.

For the fiscal year ended December 31, 2017, the Company's net cash provided by operating activities was $2.9 million driven by $12.4 million of net income, offset by $5.0 million amortization of the VorTeqTM License Agreement exclusivity fee, $4.1 million increase in working capital, and $0.4 million of non-cash adjustments, the largest of which were $8.9 million of income related to deferred income taxes, $4.1 million of share-based compensation, and $3.7 million of depreciation and amortization. Cash used in investing activities was $37.4 million driven by $31.5 million of net purchases of marketable securities and $7.4 million of capital expenditures, partially offset by a decrease in restricted cash of $1.5 million. Cash provided by financing activities was $0.9 million, driven by $5.5 million collected from the issuance of common stock related to option exercises, partially offset by $4.3 million in repurchases of common stock and $0.3 million in vested restricted shares withheld for tax withholdings.

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 current expansion phase in the desalination business cycle will continue through 2018, and the Company's belief that it will make material progress towards commercialization of the VorTeq system throughout 2018.  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 our ability to achieve the milestones under the VorTeq license agreement, any other factors that may have been discussed herein regarding the risks and uncertainties of our business, and the risks discussed under "Risk Factors" in our Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") for the year ended December 31, 2017 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 total gross margin.  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.

(1)

"Total gross margin" is a non-GAAP financial measure.  Please refer to the discussion under headings "Use of Non-GAAP Financial Measures" and "Reconciliations of Non-GAAP Financial Measures."

Conference Call to Discuss Fourth Quarter and Fiscal Year 2017 Financial Results

LIVE CONFERENCE CALL:
Thursday, March 8, 2018, 7:00 AM PST / 10:00 AM EST
Listen-only, US / Canada Toll-free: 877-709-8150
Listen-only, Local / International Toll: (+1) 201-689-8354
Access code: 13676918

CONFERENCE CALL REPLAY:
Expiration: Sunday, April 8, 2018
US / Canada Toll-free: 877-660-6853
Local / International Toll: (+1) 201-612-7415
Access code: 13676918

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.

Energy Recovery, Inc. (ERII) is an energy solutions provider to industrial fluid flow markets worldwide.  Energy Recovery solutions recycle and convert wasted pressure energy into a usable asset and preserve pumps that are subject to hostile processing environments.  With award-winning technology, Energy Recovery simplifies complex industrial systems while improving productivity, profitability, and efficiency within the oil & gas, chemical processing, and water industries.  Energy Recovery products save clients more than $1.8 billion (USD) annually.  Headquartered in the Bay Area, Energy Recovery has offices in Houston, Ireland, Shanghai, and Dubai.  For more information about the Company, please visit www.energyrecovery.com.

Contact
Brian Uhlmer
buhlmer@energyrecovery.com
(713) 858-2284

 

ENERGY RECOVERY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data and par value)

(Unaudited)



December 31,


2017


2016


ASSETS





Current assets:





Cash and cash equivalents

$

27,780



$

61,364



Restricted cash

2,664



2,297



Short-term investments

70,020



39,073



Accounts receivable, net of allowance for doubtful accounts of $103 and $130 at December 31, 2017 and 2016, respectively

12,465



11,759



Unbilled receivables, current

1,413



190



Cost and estimated earnings in excess of billings

4,998



1,825



Inventories

5,514



4,550



Prepaid expenses and other current assets

1,342



1,311



  Total current assets

126,196



122,369



Restricted cash, non-current

182



2,087



Deferred tax assets, non-current

7,902



1,270



Property and equipment, net

13,393



8,643



Goodwill

12,790



12,790



Other intangible assets, net

1,269



1,900



Other assets, non-current

12



4



  Total assets

$

161,744



$

149,063



LIABILITIES AND STOCKHOLDERS' EQUITY





Current liabilities:





Accounts payable

$

4,091



$

1,505



Accrued expenses and other current liabilities

9,322



9,019



Income taxes payable

432



16



Accrued warranty reserve

366



406



Deferred revenue, current

5,611



6,201



Current portion of long-term debt

11



11



  Total current liabilities

19,833



17,158



Long-term debt, less current portion

16



27



Deferred tax liabilities, non-current



2,233



Deferred revenue, non-current

59,006



63,958



Other non-current liabilities

358



554



  Total liabilities

79,213



83,930



Commitments and Contingencies (Note 8)





Stockholders' equity:





Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at December 31, 2017 and 2016





Common stock, $0.001 par value; 200,000,000 shares authorized; 58,168,433 shares issued and 53,905,600 shares outstanding at December 31, 2017 and 56,884,207 shares issued and 53,162,551 shares outstanding at December 31, 2016

58



57



Additional paid-in capital

149,006



139,676



Accumulated comprehensive loss

(125)



(118)



Treasury stock, at cost, 4,262,833 shares repurchased at December 31, 2017 and 3,721,656 shares repurchased at December 31, 2016

(20,486)



(16,210)



Accumulated deficit

(45,922)



(58,272)



Total stockholders' equity

82,531



65,133



  Total liabilities and stockholders' equity

$

161,744



$

149,063














 

ENERGY RECOVERY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)




Years Ended December 31,


2017


2016


2015


Product revenue

$

58,156



$

49,715



$

43,671



Product cost of revenue

19,061



17,849



19,111



Product gross profit

39,095



31,866



24,560










License and development revenue

5,000



5,000



1,042










Operating expenses:







General and administrative

17,354



16,626



19,773



Sales and marketing

9,391



9,116



9,326



Research and development

13,443



10,136



7,659



Amortization of intangible assets

631



631



635



  Total operating expenses

40,819



36,509



37,393



Income (loss) from operations

3,276



357



(11,791)










Other income (expense):







Interest income

870



309



53



Interest expense

(2)



(3)



(42)



Other non-operating expense, net

(188)



(19)



(192)



  Total other income (expense), net

680



287



(181)



Income (loss) before income taxes

3,956



644



(11,972)



Benefit from income taxes

(8,394)



(390)



(334



Net income (loss)

$

12,350



$

1,034



$

(11,638)










Income (loss) per share:







  Basic

$

0.23



$

0.02



$

(0.22)



  Diluted

$

0.22



$

0.02



$

(0.22)










Number of shares used in per share calculations:







  Basic

53,701



52,341



52,151



  Diluted

55,612



55,451



52,151


















 

ENERGY RECOVERY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



Years Ended December 31,


2017


2016


2015

Cash Flows From Operating Activities:






Net income (loss)

$

12,350



$

1,034



$

(11,638)


Adjustments to reconcile net income (loss) to net cash provided by operating activities:






Stock-based compensation

4,087



3,263



4,059


Depreciation and amortization

3,666



3,680



3,838


Amortization of premiums on investments

460



174



162


Provision for warranty claims

246



208



135


Reversal of accruals related to expired warranties

(200)



(236)



(395)


Unrealized loss on foreign currency translation

144



13



1


Provision for doubtful accounts

55



76



112


Adjustments for excess or obsolete inventory

201



(361)



(250)


Deferred income taxes

(8,865)



(459)



(326)


Other non-cash adjustments

(196)



(131)



23


Changes in operating assets and liabilities:






Accounts receivable

(761)



(244)



(743)


Unbilled receivables

(1,223)



1,695



(128)


Costs and estimated earnings in excess of billings

(3,173)



(1,825)




Inventories

(1,250)



2,287



1,951


Prepaid and other assets

(39)



(402)



316


Accounts payable

2,118



(360)



48


Accrued expenses and other liabilities

364



1,259



(708)


Income taxes payable

416



14



(3)


Litigation settlement





(1,700)


Deferred revenue, product

(505)



280



343


Deferred revenue, license and development

(5,000)



(5,000)



73,958


Net cash provided by operating activities

2,895



4,965



69,055


Cash Flows From Investing Activities:






Restricted cash

1,538



(577)



1,665


Maturities of marketable securities

49,106



7,535



12,925


Purchases of marketable securities

(80,641)



(46,552)




Capital expenditures

(7,376)



(1,112)



(572)


Net cash (used in) provided by investing activities

(37,373)



(40,706)



14,018


Cash Flows From Financing Activities:






Net proceeds from issuance of common stock

5,508



6,600



1,326


Tax payment for employee shares withheld

(270)






Proceeds from long-term debt





55


Repayment of long-term debt

(11)



(10)



(7)


Repurchase of common stock

(4,276)



(9,375)




Net cash provided by (used in) financing activities

951



(2,785)



1,374


Effect of exchange rate differences on cash and cash equivalents

(57)



(41)



(17)


Net change in cash and cash equivalents

(33,584)



(38,567)



84,430


Cash and cash equivalents, beginning of year

61,364



99,931



15,501


Cash and cash equivalents, end of year

$

27,780



$

61,364



$

99,931


 

ENERGY RECOVERY, INC.

FINANCIAL INFORMATION BY SEGMENT

(In thousands)

(Unaudited)



Three Months Ended

December 31, 2017


Three Months Ended 

December 31, 2016


Water


Oil &Gas


Total


Water


Oil &Gas


Total

Product revenue

$

20,594



$

545



$

21,139



$

14,953



$

1,714



$

16,667


Product cost of revenue

6,029



638



6,667



4,797



1,174



5,971


Product gross profit

14,565



(93)



14,472



10,156



540



10,696














License and development revenue



1,250



1,250





1,250



1,250














Operating expenses:












General and administrative

436



480



916



253



350



603


Sales and marketing

1,748



593



2,341



1,413



852



2,265


Research and development

254



4,483



4,737



377



2,311



2,688


Amortization of intangibles

158





158



158





158


  Operating expenses

2,596



5,556



8,152



2,201



3,513



5,714














Operating income (loss)

$

11,969



$

(4,399)



7,570



$

7,955



$

(1,723)



6,232














Less: Corporate operating expenses





4,513







3,552


Consolidated operating income





3,057







2,680


Non-operating income





220







152


Income before income taxes





$

3,277







$

2,832





























Year Ended December 31, 2017














Water


Oil &Gas


Total

Product revenue













$

54,301



$

3,855



$

58,156


Product cost of revenue













16,032



3,029



19,061


Product gross profit













38,269



826



39,095




















License and development revenue















5,000



5,000




















Operating expenses:


















General and administrative













1,401



1,565



2,966


Sales and marketing













5,787



2,228



8,015


Research and development













1,064



12,217



13,281


Amortization of intangibles













631





631


  Operating expenses













8,883



16,010



24,893




















Operating income (loss)













$

29,386



$

(10,184)



19,202




















Less: Corporate operating expenses

















15,926


Consolidated operating income

















3,276


Non-operating income

















680


Income before income taxes

















$

3,956





























Year Ended December 31, 2016














Water


Oil &Gas


Total

Product revenue













$

47,545



$

2,170



$

49,715


Product cost of revenue













16,353



1,496



17,849


Product gross profit













31,192



674



31,866




















License and development revenue















5,000



5,000




















Operating expenses:


















General and administrative













1,081



1,000



2,081


Sales and marketing













5,076



2,985



8,061


Research and development













1,331



8,705



10,036


Amortization of intangibles













631





631


  Operating expenses













8,119



12,690



20,809




















Operating income (loss)













$

23,073



$

(7,016)



16,057




















Less: Corporate operating expenses

















15,700


Consolidated operating income

















357


Non-operating income

















287


Income before income taxes

















$

644





























Year Ended December 31, 2015














Water


Oil &Gas


Total

Product revenue













$

43,530



$

141



$

43,671


Product cost of revenue













19,045



66



19,111


Product gross profit













24,485



75



24,560




















License and development revenue















1,042



1,042




















Operating expenses:


















General and administrative













936



1,797



2,733


Sales and marketing













4,918



4,070



8,988


Research and development













1,126



6,552



7,678


Amortization of intangibles













635





635


  Operating expenses













7,615



12,419



20,034




















Operating income (loss)













$

16,870



$

(11,302)



5,568




















Less: Corporate operating expenses

















17,359


Consolidated operating loss

















(11,791)


Non-operating expense

















(181)


Loss before income taxes

















$

(11,972)


 

ENERGY RECOVERY, INC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(In thousands, except per share data)

(Unaudited)


This press release includes non-GAAP financial information because we plan and manage our business using such information. Our non-GAAP Total Gross Margin is determined by adding back the license and development revenue associated with the amortization of the VorTeq exclusivity fee. Our non-GAAP Adjusted Net Income or Loss is determined by adding back non-recurring operating expenses.



Three Months Ended

December 31,


Years Ended

December 31,


2017


2016


2017


2016

Product revenue

$

21,139



$

16,667



$

58,156



$

49,715


License and development revenue

1,250



1,250



5,000



5,000


Total revenue

$

22,389



$

17,917



$

63,156



$

54,715










Product gross profit

$

14,472



$

10,696



$

39,095



$

31,866


License and development revenue

1,250



1,250



5,000



5,000


Total gross profit (non-GAAP)

$

15,722



$

11,946



$

44,095



$

36,866










Product gross margin

68.5

%


64.2

%


67.2

%


64.1

%

Total gross margin (non-GAAP)

70.2

%


66.7

%


69.8

%


67.4

%









Net income (loss)

$

11,625



$

3,123



$

12,350



$

1,034


Reversal of non-recurring expense (benefit) (non-GAAP)

(8,348)





(8,394)



1,008


Adjusted net income (loss) (non-GAAP)

$

3,277



$

3,123



$

3,956



$

2,042










Income (loss) per share:








Diluted

$

0.21



$

0.06



$

0.22



$

0.02


Diluted (non-GAAP)

$

0.06



$

0.06



$

0.07



$

0.04










Number of diluted shares used in per share calculations

55,715



55,947



55,612



55,451


 

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SOURCE Energy Recovery Inc.