Energy Recovery, Inc. Reports Second Quarter 2010 Financial Results

Second Quarter 2010 Highlights

    --  Net Revenues: $13.3 million
    --  Gross Margin: 50%
    --  GAAP Net Loss: $322,000; Non-GAAP Net Income $80,000
    --  GAAP Loss per Share: $0.01; Non-GAAP Earnings per Share $0.00
    --  Adjusted EBITDA: $1.5 million, or 11% of net revenue

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 second quarter ended June 30, 2010. In the second quarter of 2010, ERI achieved net revenue of $13.3 million, a 46% increase compared to the net revenue for the same period last year and within the Company's guidance range of $13 to $15 million. For the three months ended June 30, 2010, ERI reported a net loss on a generally accepted accounting principles (GAAP) basis of $322,000, or $0.01 per share, and non-GAAP net income of $80,000, or $0.00 per share. For the same period last year, ERI reported a GAAP net loss of $71,000, or $0.00 per share.

"Our second quarter results were in line with our expectations and we are seeing some real progress on key initiatives that strengthen our competitive position going forward," said G.G. Pique, President and CEO of Energy Recovery, Inc. "We have fully integrated the PEI sales organization into our existing Mega Projects and OEM sales groups and are showing one unified sales effort to our customers with a broad menu of energy recovery options and pumps. Additionally, we are getting traction on sales of our most advanced pressure exchanger, the PX-300 device. And finally, our state-of-the-art ceramics production facility has been substantially completed and we feel confident about our ability to successfully ramp up operations and reduce operating costs by achieving our targeted yields."

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 $322,000 was adjusted for depreciation and amortization expense of $1.1 million, net interest expense of $13,000, tax benefit of $492,000, share-based compensation expense of $711,000 and a purchase accounting adjustment for sale of acquired inventory of $428,000 for the second quarter of 2010.

In the guidance estimates below for the third 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 third quarter of 2010 and the full year:


                            Q3 2010                     Fiscal Year 2010

Estimated Net Revenue       $10 to $12 million          $52 to $56 million

Estimated Net Loss          ($1.6) to ($0.6) million    ($2.3) to ($0.8) million

Estimated Loss Per Share    ($0.03) to ($0.01)          ($0.04) to ($0.02)



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


                              Q3 2010                     Fiscal Year 2010

Estimated Adjusted Net        ($1.1) to ($0.2) million    ($0.1) to $1.4 million
Income (Loss) (1)

Estimated Adjusted
Earnings (Loss) Per Share     ($0.02) to ($0.00)          ($0.00) to $0.03
(2)

Estimated Adjusted EBITDA     ($0.2) to $1.2 million      $5 to $8 million
(3)



(1) Estimated Adjusted Net Income 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.

ERI provides the following guidance for the 2011 fiscal year:


                         FY 2011

Estimated Net Revenue    $60 to $70 million



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 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 third quarter and 2010 fiscal year and net revenue for the 2011 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 Second 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 1-877-941-8610 or +1-480-629-9820 and the access code is 4329430. 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: 4329430, until Thursday, August 19, 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. In total, Energy Recovery helps reduce CO2 emissions by more than 4.7 million tons per year and produce 1.6 billion gallons of potable water per day. 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      Six Months Ended

                                June 30,                June 30,

                                  2010        2009        2010        2009

Net revenue                     $ 13,304    $ 9,089     $ 25,919    $ 21,735

Cost of revenue                   6,676       3,291       11,933      7,864

Gross profit                      6,628       5,798       13,986      13,871

Operating expenses:

General and administrative        4,339       3,508       8,755       6,662

Sales and marketing               2,142       1,651       4,102       3,161

Research and development          863         826         1,691       1,630

Total operating expenses          7,344       5,985       14,548      11,453

Income (loss) from operations     (716   )    (187   )    (562   )    2,418

Interest expense                  (17    )    (10    )    (38    )    (24    )

Other non-operating income        (81    )    117         (99    )    29
(expense), net

Income (loss) before provision    (814   )    (80    )    (699   )    2,423
for income taxes

Provision for (benefit from)      (492   )    (9     )    (445   )    940
income taxes

Net income (loss)               $ (322   )  $ (71    )  $ (254   )  $ 1,483

Earnings (loss) per share:

Basic                           $ (0.01  )  $ (0.00  )  $ (0.00  )  $ 0.03

Diluted                         $ (0.01  )  $ (0.00  )  $ (0.00  )  $ 0.03

Number of shares used in per
share calculations:

Basic                             52,078      50,146      51,661      50,099

Diluted                           52,078      50,146      51,661      52,629




ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data and par value)

(unaudited)

                                                     June 30,     December 31,
                                                                  2009
                                                     2010

ASSETS

Current assets:

Cash and cash equivalents                            $ 52,109     $ 59,115

Restricted cash                                        7,557        5,271

Accounts receivable, net of allowance for doubtful
accounts of $35                                        14,914       12,683
and $196 at June 30, 2010 and December 31, 2009,
respectively

Unbilled receivables, current                          2,378        5,544

Inventories                                            12,208       10,359

Deferred tax assets, net                               1,467        1,466

Prepaid expenses and other current assets              3,479        1,741

Total current assets                                   94,112       96,179

Restricted cash, non-current                           2,311        5,555

Unbilled receivables, non-current                      1,060        --

Property and equipment, net                            22,585       16,958

Goodwill                                               12,790       12,790

Other intangible assets, net                           9,620        10,987

Deferred tax assets, non-current, net                  447          447

Other assets, non-current                              43           53

Total assets                                         $ 142,968    $ 142,969

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable                                     $ 3,611      $ 1,952

Accrued expenses and other current liabilities         9,217        9,492

Income taxes payable                                   45           350

Accrued warranty reserve                               850          605

Deferred revenue                                       4,149        4,628

Current portion of long-term debt                      128          265

Current portion of capital lease obligations           189          203

Total current liabilities                              18,189       17,495

Long-term debt                                         149          246

Capital lease obligations, non-current                 276          369

Other non-current liabilities                          1,838        3,890

Total liabilities                                      20,452       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;
52,436,769 and 51,215,653 shares issued and            52           51
outstanding at
June 30, 2010 and December 31, 2009, respectively

Additional paid-in capital                             110,364      108,626

Notes receivable from stockholders                     (37     )    (90     )

Accumulated other comprehensive loss                   (57     )    (66     )

Retained earnings                                      12,194       12,448

Total stockholders' equity                             122,516      120,969

Total liabilities and stockholders' equity           $ 142,968    $ 142,969



Energy Recovery Non-GAAP Financial Reconciliation (unaudited)

Second Quarter 2010:


Reconciliation of Adjusted Net Income        Q2 2010

                                             (in thousands)

Net income (loss)                            $ (322 )

Plus:

Purchase adjustment of acquired inventory      428

Amortization of purchased intangible assets    677

Income tax effect (1)                          (703 )

Adjusted net income                          $ 80



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


Reconciliation of Adjusted EBITDA          Q2 2010

                                           (in thousands)

Net income (loss)                          $ (322  )

Plus:

Net interest                                 13

Tax (benefit)                                (492  )

Depreciation of fixed assets                 457

Amortization of intangible assets            683

Share-based compensation                     711

Purchase adjustment of acquired inventory    428

Adjusted EBITDA                            $ 1,478



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


Reconciliation of Estimated
Adjusted Net                     Q3 2010               FY 2010

Income (Loss)

                                 Low         High      Low         High

Net income (loss)                $ (1,554 )  $ (628 )  $ (2,302 )  $ (781   )

Plus:

Purchase adjustment of acquired    20          20        870         870
inventory

Amortization of purchased          677         677       2,606       2,606
intangible assets

Income tax effect (1)              (258   )    (258 )    (1,286 )    (1,286 )

Adjusted net income (loss)       $ (1,115 )  $ (189 )  $ (112   )  $ 1,409



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


Reconciliation of Estimated        Q3 2010                FY 2010
Adjusted EBITDA

                                   Low         High       Low         High

Net income (loss)                  $ (1,554 )  $ (628  )  $ (2,302 )  $ (781  )

Plus:

Net interest                         7           7          41          41

Tax provision (benefit)              (913   )    (369  )    (1,351 )    (459  )

Depreciation of fixed assets         724         724        2,397       2,397

Amortization of intangible assets    689         689        2,632       2,632

Share-based compensation             779         779        2,959       2,959

Purchase adjustment of acquired      20          20         870         870
inventory

Adjusted EBITDA                    $ (248   )  $ 1,222    $ 5,246     $ 7,659




    Source: Energy Recovery, Inc.