Energy Recovery, Inc. Reports Third Quarter 2010 Financial Results

Third Quarter 2010 Highlights

    --  Net Revenues: $6.9 million
    --  Gross Margin: 34%
    --  GAAP Net Loss: $3.9 million; Non-GAAP Net Loss $3.3 million
    --  GAAP Loss per Share: $0.07; Non-GAAP Loss per Share $0.06
    --  Adjusted EBITDA: ($2.4) million

SAN LEANDRO, Calif.--(BUSINESS WIRE)-- Energy Recovery, Inc. (Nasdaq:ERII), a leader in the design and development of energy recovery devices for desalination, announced today the results of its third quarter ended September 30, 2010. In the third quarter of 2010, ERI achieved net revenue of $6.9 million, a 27% decrease compared to the net revenue for the same period last year and below the Company's guidance range of $10 to $12 million. For the three months ended September 30, 2010, ERI reported a net loss on a generally accepted accounting principles (GAAP) basis of $3.9 million, or $0.07 per share, and non-GAAP loss of $3.3 million, or $0.06 per share. For the same period last year, ERI reported a GAAP net profit of $550,000, or $0.01 per share.

"Due to the summer holiday season, our third quarter revenue is historically our lightest of the year and this year was no exception," said G.G. Pique, President and CEO of Energy Recovery, Inc. "Our OEM business continues to be strong and we are solidifying our leadership position with the broadest array of products and solutions for small to medium size projects. Demand for larger SWRO projects continues to be choppy, but we have experienced these cycles before and we are ready when the market strengthens with the most advanced and competitively priced product offerings in the industry."

Non-GAAP Financial Measures

In evaluating the operating performance of Energy Recovery's business, Energy Recovery management utilizes financial measures described in this press release that exclude certain non-cash charges and charges related to the purchase of Pump Engineering required by U.S. generally accepted accounting principles, or GAAP. Energy Recovery believes this additional information provides investors and management with additional insight into its underlying core operating performance.

For the calculation of Adjusted EBITDA, a net loss of $3.9 million was adjusted for depreciation and amortization expense of $1.5 million, net interest expense of $10,000, tax benefit of $833,000, share-based compensation expense of $719,000 and a purchase accounting adjustment for sale of acquired inventory of $20,000 for the third quarter of 2010.

In the guidance estimates below for the fourth quarter and full year 2010, net income and earnings are adjusted for the purchase accounting required under GAAP for the acquisition of Pump Engineering. For the full year, the estimates include adjustments of $870,000 for a purchase accounting adjustment for the sale of acquired inventory, $2.6 million in amortization of purchased intangibles, and offset by a tax benefit of approximately $1.3 million based on a statutory tax rate.

A reconciliation of Energy Recovery's non-GAAP financial measures to the most directly comparable GAAP measures can be found under the heading "Energy Recovery Non-GAAP Financial Reconciliation" below.

Outlook

ERI provides the following guidance on a GAAP basis for the fourth quarter of 2010 and the full year:


                           Q4 2010                   Fiscal Year 2010

Estimated Net Revenue      $18 to $20 million        $51 to $53 million

Estimated Net Income       ($1.8) to $1.0 million    ($5.9) to ($3.1) million
(Loss)

Estimated Income (Loss)    ($0.03) to $0.02          ($0.11) to ($0.06)
Per Share



ERI provides the following non-GAAP guidance for the fourth quarter of 2010 and the full year:


                              Q4 2010                   Fiscal Year 2010

Estimated Adjusted Net        ($1.4) to $1.3 million    ($3.7) to ($0.9) million
Income (Loss) (1)

Estimated Adjusted
Earnings (Loss) Per Share     ($0.03) to $0.02          ($0.07) to ($0.02)
(2)

Estimated Adjusted EBITDA     ($1.0) to $3.3 million    $0.3 to $4.7 million
(3)



(1) Estimated Adjusted Net Income (Loss) is defined as GAAP net income adjusted for the purchase accounting for the acquisition of Pump Engineering. The purchase accounting includes a purchase accounting adjustment for sale of acquired inventory, the amortization of intangible assets that were booked as a result of the acquisition, and the tax benefit generated as a result of the purchase accounting expense.

(2) Estimated Adjusted Earnings per Share is defined as Estimated Adjusted Net Income divided by the fully diluted shares. Estimated Adjusted Loss per Share is defined as Estimated Adjusted Net Loss divided by basic shares.

(3) Estimated Adjusted EBITDA is defined net income adjusted for interest expense (income), taxes, depreciation, amortization, share-based compensation, and a purchase accounting adjustment for sale of acquired inventory.

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. These forward-looking statements include our belief that our OEM business will continue to be strong and demand for larger SWRO projects will strengthen, statements about ERI's estimated net revenue, GAAP and non-GAAP net income or loss and earnings or loss per share, and estimated adjusted net income or loss, adjusted earnings or loss per share and adjusted EBITDA, for the fourth quarter and 2010 fiscal year. Because such forward-looking statements involve risks and uncertainties, the Company's actual results may differ materially from the predictions in those forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, delays in, or cancellation of, the construction of desalination plants, the inability of our customers to obtain project financing, delays in governmental approvals, changes in end users' budgets for desalination plants or the timing of their purchasing decisions, our inability to integrate Pump Engineering's business into ERI's operations successfully, our ability to ship new products to meet scheduled delivery times; the world economic crisis 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 Third Quarter 2010 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 1-877-941-2333 or +1-480-629-9723 and the access code is 4371229. Callers should dial in approximately 15 minutes prior to the scheduled start time. A telephonic replay will be available at 1-800-406-7325 or +1-303-590-3030, Access Code: 4371229, until Thursday, November 18, 2010. 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. (NASDAQ:ERII) designs and develops energy recovery devices that help make desalination affordable by significantly reducing energy consumption. Energy Recovery technologies include the PX Pressure Exchanger(R) device for desalination and the Turbocharger hydraulic turbine energy recovery device and pump for desalination, gas and liquid processing applications. PX devices also reduce the carbon footprint of desalination, saving more than 970 MW of energy and reducing CO2 emissions by more than 5.2 million tons per year worldwide. More than 8,600 PX devices are currently deployed or under contract to be installed at desalination plants around the globe. The company is headquartered in the San Francisco Bay Area with offices near Detroit and in key desalination centers worldwide, including Madrid, Shanghai and Dubai. For more information about Energy Recovery, Inc. please visit www.energyrecovery.com.


Unaudited Financial Results

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

                               Three Months Ended      Nine Months Ended

                               September 30,           September 30,

                                 2010        2009        2010        2009

Net revenue                    $ 6,921     $ 9,545     $ 32,840    $ 31,280

Cost of revenue                  4,537       3,387       16,470      11,251

Gross profit                     2,384       6,158       16,370      20,029

Operating expenses:

General and administrative       4,018       3,043       12,773      9,705

Sales and marketing              1,860       1,634       5,962       4,795

Research and development         1,252       779         2,943       2,409

Total operating expenses         7,130       5,456       21,678      16,909

Income (loss) from operations    (4,746 )    702         (5,308 )    3,120

Interest expense                 (15    )    (10    )    (53    )    (34    )

Other non-operating income       78          30          (21    )    59
(expense), net

Income (loss) before provision   (4,683 )    722         (5,382 )    3,145
for income taxes

Provision for (benefit from)     (833   )    172         (1,278 )    1,112
income taxes

Net income (loss)              $ (3,850 )  $ 550       $ (4,104 )  $ 2,033

Earnings (loss) per share:

Basic                          $ (0.07  )  $ 0.01      $ (0.08  )  $ 0.04

Diluted                        $ (0.07  )  $ 0.01      $ (0.08  )  $ 0.04

Number of shares used in per
share calculations:

Basic                            52,447      50,160      51,923      50,120

Diluted                          52,447      52,584      51,923      52,614




ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data and par value)

(unaudited)

                                                     September 30,  December 31,

                                                     2010           2009

ASSETS

Current assets:

Cash and cash equivalents                            $ 56,802       $ 59,115

Restricted cash                                        5,650          5,271

Accounts receivable, net of allowance for doubtful
accounts of $26 and $196 at September 30, 2010 and     6,209          12,683
December 31, 2009, respectively

Unbilled receivables, current                          1,868          5,544

Inventories                                            12,080         10,359

Deferred tax assets, net                               1,416          1,466

Prepaid expenses and other current assets              4,234          1,741

Total current assets                                   88,259         96,179

Restricted cash, non-current                           2,277          5,555

Property and equipment, net                            22,866         16,958

Goodwill                                               12,790         12,790

Other intangible assets, net                           8,937          10,987

Deferred tax assets, non-current, net                  447            447

Other assets, non-current                              41             53

Total assets                                         $ 135,617      $ 142,969

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable                                     $ 1,675        $ 1,952

Accrued expenses and other current liabilities         7,168          9,492

Income taxes payable                                   38             350

Accrued warranty reserve                               883            605

Deferred revenue                                       4,016          4,628

Current portion of long-term debt                      128            265

Current portion of capital lease obligations           182            203

Total current liabilities                              14,090         17,495

Long-term debt                                         117            246

Capital lease obligations, non-current                 231            369

Other non-current liabilities                          1,812          3,890

Total liabilities                                      16,250         22,000

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; 52,479,358 and 51,215,653 shares issued    52             51
and outstanding at September 30, 2010 and December
31, 2009, respectively

Additional paid-in capital                             111,084        108,626

Notes receivable from stockholders                     (38     )      (90     )

Accumulated other comprehensive loss                   (75     )      (66     )

Retained earnings                                      8,344          12,448

Total stockholders' equity                             119,367        120,969

Total liabilities and stockholders' equity           $ 135,617      $ 142,969




Energy Recovery Non-GAAP Financial Reconciliation (unaudited)

Third Quarter 2010:

Reconciliation of Adjusted Net Income (Loss) Q3 2010

                                             (in thousands)

Net income (loss)                            $ (3,850 )

Plus:

Purchase adjustment of acquired inventory      20

Amortization of purchased intangible assets    677

Income tax effect (1)                          (166   )

Adjusted net income (loss)                   $ (3,319 )

(1) Represents the application of the effective tax rate to the non-GAAP
adjustments




Reconciliation of Adjusted EBITDA         Q3 2010

                                          (in thousands)

Net income (loss)                         $ (3,850 )

Plus:

Net interest                                10

Tax (benefit)                               (833   )

Depreciation of fixed assets                836

Amortization of intangible assets           683

Share-based compensation                    719

Purchase adjustment of acquired inventory   20

Adjusted EBITDA                           $ (2,415 )




Guidance for the fourth quarter of 2010 and the full year (amounts in
thousands):

Reconciliation of Estimated
Adjusted Net                    Q4 2010                FY 2010

Income (Loss)

                                Low         High       Low         High

Net income (loss)               $ (1,789 )  $ 983      $ (5,892 )  $ (3,120 )

Plus:

Purchase adjustment of acquired   --          --         870         870
inventory

Amortization of purchased         570         570        2,600       2,600
intangible assets

Income tax effect (1)             (211   )    (211  )    (1,284 )    (1,284 )

Adjusted net income (loss)      $ (1,430 )  $ 1,342    $ (3,706 )  $ (934   )

(1) Represents the application of statutory tax rate to the non-GAAP
adjustments




Reconciliation of Estimated Adjusted Q4 2010            FY 2010
EBITDA

                                     Low        High    Low        High

Net income (loss)                    $ (1,789 ) $ 983   $ (5,892 ) $ (3,120 )

Plus:

Net interest                           20         20      59         59

Tax provision (benefit)                (1,369 )   253     (2,647 )   (1,026 )

Depreciation of fixed assets           785        785     2,519      2,519

Amortization of intangible assets      576        576     2,625      2,625

Share-based compensation               731        731     2,759      2,759

Purchase adjustment of acquired        --         --      870        870
inventory

Adjusted EBITDA                      $ (1,046 ) $ 3,348 $ 293      $ 4,686




    Source: Energy Recovery, Inc.