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08/03/16

Energy Recovery Reports Second Quarter and First-Half 2016 Results


SAN LEANDRO, Calif., Aug. 03, 2016 (GLOBE NEWSWIRE) -- Energy Recovery Inc. (NASDAQ:ERII), the leader in pressure energy technology for industrial fluid flows, today announced its financial results for the second quarter ended on June 30, 2016, as well as year-to-date results for the first half of 2016.

Joel Gay, President and Chief Executive Officer, said, “The second quarter is further evidence that 2016 is the year of delivery. Having only generated greater revenues once in a second quarter in the Company’s post-IPO history, our topline performance is a positive indicator of the full fiscal year prospects, especially as it relates to large-scale capital projects within the desalination business. The Company also secured a purchase order for the first multiple IsoBoost system installation for what will be one of the largest gas processing plants in the Middle East, generating more momentum for our centrifugal line of products in oil & gas. We also continue to advance toward the execution of the two performance milestones pursuant to our VorTeqTM licensing agreement with Schlumberger, which will trigger the incremental $50 million in up-front contract payments. As communicated at the onset of this year, through the execution of its long-term strategy, Energy Recovery will continue to protect its market share in desalination and further develop and gain traction in its emerging market segments with the singular objective of driving and sustaining long-term growth.”

Second Quarter 2016 Summary

  • Total revenue increased 26% to $13.2 million, one of the best second quarters in the Company’s post-IPO history
  • EPS of $0.01
  • Highest total gross margin(1) in the Company’s post-IPO history of 68% for the second quarter; product gross margin was 65% for the same period

Revenues

The Company generated total revenue of $13.2 million in the second quarter of 2016, and $24.5 million for the first half of 2016, compared to $10.5 million and $16.3 million in the same periods of the prior year. This marks one of the best second quarters in the Company’s history. The increase was primarily due to strong OEM and aftermarket shipments and the amortization of the Schlumberger exclusivity fee.

Energy Recovery had $12.0 million in product revenue in the second quarter of 2016, up from $10.5 million in the second quarter of 2015. Year-to-date, the Company reported product revenue of $22.0 million, up from $16.3 million in the first half of 2015.

The Company recognized $1.3 million in license and development revenue during the second quarter of 2016 and $2.5 million year-to-date. This revenue is associated with the amortization of the $75 million exclusivity fee paid by Schlumberger in the fourth quarter of 2015 for the exclusive use of the Company’s VorTeq hydraulic fracturing system. The Company recognized no such revenue during the same period last year. The Schlumberger exclusivity fee will continue to be amortized on a level basis through the duration of the 15-year agreement. Schlumberger will also pay two (2) separate $25 million payments (for a total of $50 million) subject to the Company satisfying certain milestones and key performance indicators. Following commercialization, Schlumberger will pay an annual royalty fee of $1.5 million per VorTeq in service per year for the duration of the license agreement. Total annual royalties are dictated by VorTeq minimum adoption requirements as a percentage of Schlumberger’s active fleets.

Gross Margin

Product gross margin increased 1,100 basis points to 65% for the second quarter of 2016, compared to 54% in the second quarter of 2015. Including license and development revenue associated with the Schlumberger exclusivity fee, total gross margin(1) increased by 1,400 basis points to 68%, which represents the highest total gross margin in the Company’s post-IPO history.

Operating Expenses

Operating expenses for the second quarter of 2016 decreased to $8.5 million from $8.9 million in the second quarter of 2015. Year to date, the Company reported operating expenses of $18.3 million, down from $20.3 million in the first half of 2015.

The decrease quarter over quarter was driven by a reduction in non-recurring expenses and administrative expenses, offset by higher R&D expenses associated with Schlumberger Milestone 1 testing. Non-recurring expenses in the second quarter of 2015 totaled $2.7 million - primarily due to the CEO transition - whereas the Company did not have any material non-recurring expenses in the second quarter of 2016.

Bottom Line Summary

To summarize financial performance, the Company reported net income of $0.5 million, or $0.01 per share, in the second quarter of 2016. Comparatively, the Company reported a net loss of $(3.3) million, or $(0.06) per share, in the second quarter of 2015. Summarizing the year to date financial performance, Energy Recovery reported a net loss of $(1.5) million, or $(0.03) per share, versus a net loss of $(11.6) million, or $(0.22) per share, for the first half of 2015.

The improvement was driven by strengthening demand in global desalination markets, a favorable shift in product mix, revenue associated with the Schlumberger exclusivity fee amortization, and a reduction in operating expenses.

Excluding non-recurring items, the Company reported adjusted net income(1) of $0.5 million, or $0.01 per share in the second quarter of 2016.

Comparatively, the Company reported an adjusted net loss(1) of $(0.7) million, or $(0.01) per share, in the second quarter of 2015(1). Year to date, the Company reported an adjusted net loss(1) of $(0.5) million versus a $(5.9) million for the first half of 2015.

Cash Flow Highlights

The Company ended the quarter with unrestricted cash of $79.0 million, current and non-current restricted cash of $4.1 million, and short-term investments of $15.1 million, all of which represent a combined total of $98.2 million.

During the second quarter of 2016, the Company’s net cash provided by operating activities was $1.1 million.  This includes net income of $0.5 million and non-cash expenses of $1.6 million, the largest of which were share-based compensation of $0.7 million and depreciation and amortization of $0.9 million. The reduction of inventory contributed $0.6 million and increases in other liabilities contributed $0.3 million to cash from operating activities, offset by $(0.6) million in increased accounts receivable and a reduction of $(1.3) million in deferred revenue related to the amortization of the Schlumberger exclusivity fee.  Cash used in investing activities was $(15.3) million driven by $(14.9) million in purchases of marketable securities and $(0.5) million in capital expenditures. Cash used in financing activities was $(3.3) million, attributed to stock repurchases of $(4.3) million, offset by $1.0 million collected from the issuance of common stock related to option exercises. 

During the first half of 2016, cash provided by operating activities was $0.8 million. This includes a net loss of $(1.5) million and non-cash expenses of $3.5 million, the largest of which were share-based compensation of $1.9 million and depreciation and amortization of $1.9 million. The monetization of receivables favorably impacted cash from operating activities by $3.4 million, offset by $(2.1) million in accounts payable and other liabilities and a reduction of $(2.5) million in deferred revenue related to the amortization of the Schlumberger exclusivity fee. Cash used in investing activities was $(15.8) million driven by $(14.9) million in purchases of marketable securities and $(0.6) million in capital expenditures. Cash used in financing activities was $(5.9) million, attributed to stock repurchases of $(8.4) million, offset by $2.5 million collected from the issuance of common stock related to option exercises. 

1 Total gross profit, total gross margin, adjusted net income (loss), and adjusted basic and diluted net income (loss) per share are Non-GAAP financial measures. Please refer to the discussion under headings “Use of Non-GAAP Financial Measures” and “Reconciliations of Non-GAAP Financial Measures.”

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 expectations for its financial performance in 2016 and the Company’s ability to achieve the milestones under the Schlumberger licensing agreement and receive the related contractual payments.  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 Schlumberger 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”) on March 3, 2016 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 profit, total gross margin, adjusted net income (loss), and adjusted basic and diluted net income (loss) per share. 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.

Conference Call to Discuss Second Quarter 2016 Results

   
LIVE CONFERENCE CALL WEBCAST:
Thursday, August 4, 2016, 7:30 AM PDT
Listen-only, Toll-free:  888-539-3612
Listen-only, Local:  719-457-2604
Access code:  5906242
CONFERENCE CALL REPLAY:
Expiration: August 18, 2016, 10:30 AM PDT
Toll-free:  888-203-1112
Local:  719-457-0820
Access code:  5906242
   

Investors may also access the live call or the replay over the internet at www.streetevents.com or www.energyrecovery.com. The replay will be available approximately three hours after the live call concludes.

About Energy Recovery Inc.

Energy Recovery (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 $1.7 billion (USD) annually.  Headquartered in the Bay Area, Energy Recovery has offices in Ireland, Shanghai, and Dubai.  For more information about the Company, please visit www.energyrecovery.com.

   
ENERGY RECOVERY, INC.  
CONDENSED CONSOLIDATED BALANCE SHEETS  
(in thousands, except share data and par value)  
(unaudited)  
   
  June 30, 2016
  December 31,    2015
 
ASSETS            
Current assets:            
Cash and cash equivalents $ 78,987   $ 99,931  
Restricted cash   1,058     1,490  
Short-term investments   15,095     257  
Accounts receivable, net of allowance for doubtful accounts of $168 and $166 at June 30, 2016 and December 31, 2015, respectively   8,242     11,590  
Unbilled receivables, current   1,804     1,879  
Inventories   6,178     6,503  
Deferred tax assets, net       938  
Prepaid expenses and other current assets   1,272     943  
Total current assets   112,636     123,531  
Restricted cash, non-current   3,065     2,317  
Unbilled receivables, non-current       6  
Deferred tax assets, non-current   885      
Property and equipment, net of accumulated depreciation of $19,872 and $18,338 at June 30, 2016 and December 31, 2015, respectively   9,762     10,622  
Goodwill   12,790     12,790  
Other intangible assets, net   2,216     2,531  
Other assets, non-current   2     2  
Total assets $ 141,356   $ 151,799  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current liabilities:            
Accounts payable $ 1,518   $ 1,865  
Accrued expenses and other current liabilities   5,233     7,808  
Income taxes payable   89     2  
Accrued warranty reserve   411     461  
Deferred revenue   6,772     5,878  
Current portion of long-term debt   10     10  
Total current liabilities   14,033     16,024  
Long-term debt, net of current portion   33     38  
Deferred tax liabilities, non-current   2,109     2,360  
Deferred revenue, non-current   66,462     69,000  
Other non-current liabilities   637     718  
Total liabilities   83,274     88,140  
Commitments and Contingencies (Note 9)            
Stockholders’ equity:            
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding        
Common stock, $0.001 par value; 200,000,000 shares authorized; 55,731,277 shares issued and 52,124,021 shares outstanding at June 30, 2016, and 54,948,235 shares issued and 52,468,779 shares outstanding at December 31, 2015   56     55  
Additional paid-in capital   134,156     129,809  
Accumulated other comprehensive loss   (101 )   (64 )
Treasury stock at cost, 3,607,256 and 2,479,456 shares repurchased at June 30, 2016 and December 31, 2015, respectively   (15,213 )   (6,835 )
Accumulated deficit   (60,816 )   (59,306 )
Total stockholders’ equity   58,082     63,659  
Total liabilities and stockholders’ equity $ 141,356   $ 151,799  
             


ENERGY RECOVERY, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(in thousands, except per share data)  
(unaudited)  
   
  Three Months Ended 
June 30,
    Six Months Ended 
June 30,
 
      2016        2015          2016        2015   
Product revenue $ 11,973   $ 10,484     $ 22,024   $ 16,348  
Product cost of revenue   4,236     4,836       7,910     7,367  
Product gross profit   7,737     5,648       14,114     8,981  
                           
License and development revenue   1,250           2,500      
                           
Operating expenses:                          
General and administrative   3,992     5,362       8,876     11,640  
Sales and marketing   1,935     1,994       4,005     4,427  
Research and development   2,422     1,410       5,087     3,943  
Amortization of intangible assets   158     158       315     317  
Total operating expenses   8,507     8,924       18,283     20,327  
Income (loss) from operations   480     (3,276 )     (1,669 )   (11,346 )
                           
Other expense:                          
Interest expense             (1 )   (40 )
Other non-operating income (expense)   79     20       58     (82 )
Income (loss) before income taxes   559     (3,256 )     (1,612 )   (11,468 )
Provision (benefit) for income taxes   103     71       (102 )   142  
Net income (loss) $ 456   $ (3,327 )   $ (1,510 ) $ (11,610 )
                           
Net income (loss) per share - basic $ 0.01   $ (0.06 )   $ (0.03 ) $ (0.22 )
Net income (loss) per share - diluted $ 0.01   $ (0.06 )   $ (0.03 ) $ (0.22 )
                           
Weighted average shares outstanding - basic   52,369     52,026       52,288     51,987  
Weighted average shares outstanding - diluted   55,698     52,026       52,288     51,987  
                           


ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
  Six Months Ended 
June 30, 
 
  2016    2015   
Cash Flows From Operating Activities            
Net loss $ (1,510 ) $ (11,610 )
Adjustments to reconcile net loss to net cash used in operating activities:            
Stock-based compensation   1,865     3,053  
Depreciation and amortization   1,851     1,959  
Provision for warranty claims   96     15  
Unrealized loss on foreign currency transactions   52     21  
Amortization of premiums on investments   34     130  
Change in fair value of put options   33      
Provision for doubtful accounts   16     59  
Valuation adjustments for excess or obsolete inventory   (42 )   21  
Other non-cash adjustments   (49 )   86  
Reversal of accruals related to expired warranties   (146 )    
Deferred income taxes   (199 )   131  
Changes in operating assets and liabilities:            
Accounts receivable   3,333     3,472  
Deferred revenue, product   855     714  
Inventories   389     (1,520 )
Income taxes payable   89     4  
Unbilled receivables   81     60  
Litigation settlement       (1,700 )
Accounts payable   (347 )   549  
Prepaid and other assets   (384 )   239  
Deferred revenue, SLB license   (2,500 )    
Accrued expenses and other liabilities   (2,668 )   (3,633 )
Net cash provided by (used in) operating activities   849     (7,950 )
             
Cash Flows From Investing Activities            
Maturities of marketable securities       8,235  
Restricted cash   (315 )   2,422  
Capital expenditures   (613 )   (429 )
Purchases of marketable securities   (14,903 )    
Net cash (used in) provided by investing activities   (15,831 )   10,228  
             
Cash Flows From Financing Activities            
Net proceeds from issuance of common stock   2,511     293  
Proceeds from long-term debt       55  
Repayment of long-term debt   (5 )   (2 )
Repurchase of common stock   (8,378 )    
Net cash (used in) provided by financing activities   (5,872 )   346  
Effect of exchange rate differences on cash and cash equivalents   (90 )   (18 )
Net change in cash and cash equivalents   (20,944 )   2,606  
Cash and cash equivalents, beginning of period   99,931     15,501  
Cash and cash equivalents, end of period $ 78,987   $ 18,107  
             

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 Profit, Total Gross Margin are determined by adding back the license and development revenue associated with the amortization of the Schlumberger exclusivity fee. Our non-GAAP Adjusted Net Income and per share information also exclude non-recurring expenses.

  Three Months Ended 
June 30

  Six Months Ended
June 30
   
      2016        2015      2016     2015    
Product revenue $ 11,973   $ 10,484   $ 22,024   $ 16,348    
License and development revenue   1,250     -           2,500    
Total revenue    13,223      10,484            24,524    
                           
Product gross profit   7,737     5,648           14,114    
License and development revenue   1,250     -           2,500    
Total gross profit (Non-GAAP)    8,987      5,648            16,614    
                           
Product gross margin   65 %   54 %   64 %   55 %  
Total gross margin (Non-GAAP)   68 %   54 %   68 %   55 %  
                           
Net income (loss)   456     (3,327 )   (1,510 )   (11,610 )  
Non-recurring operating expenses   -     2,674     1,008     5,719    
Adjusted net income (loss) (Non-GAAP)   456     (653 )   (502 )   (5,891 )  
                           
Basic and diluted net income (loss) per share   0.01     (0.06 )   (0.03 )   (0.22 )  
Adjusted basic and diluted net income (loss) per share (Non-GAAP)   0.01     (0.01 )   (0.01 )   (0.11 )  
                           
Weighted average shares outstanding - basic   52,369     52,026     52,288     51,987    
Weighted average shares outstanding - diluted   55,698     52,026     52,288     51,987    
Contact
Chris Gannon
Chief Financial Officer
510-483-7370

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Energy Recovery