Document

“We are pleased to report another year of record revenue in 2021. This achievement reflects the important role our products play in reliably delivering energy and cost savings, as well as emissions reduction for critical industries. Additionally, our performance highlights the ability of our team to adapt and perform at the highest level, despite the many challenges presented by the global pandemic,” said Robert Mao, Chairman, President and Chief Executive Officer of Energy Recovery.

“We are well down the clear and disciplined path we defined two years ago for our industrial wastewater treatment and refrigeration businesses. We have announced multiple contracts for the Ultra PX™ for use in multiple industrial wastewater treatment applications. Furthermore, we are in discussions with several refrigeration rack manufacturers in North America and Europe and have signed our first agreement with one of these manufacturers for the joint development of a PX-centric next generation CO2 system utilizing our PX G1300,” Mr. Mao continued.

“Energy Recovery’s core strategy remains focused on accelerating the achievement of greater sustainability in critical industries with our PX technology. We are delivering on this promise, and through continuing innovation and dedication to delivering results, we are poised to continue our growth in the years to come.”


	Three Months Ended December 31,								Years Ended December 31,
	2021			2020			Variance		2021			2020			Variance
	(In millions, except net income per share, percentages and basis points)
Product revenue	$	33.6		$	26.4		27%		$	103.9		$	92.1		13%
License and development revenue (1)	—			—			—%		—			26.9			(100%)
Total revenue	$	33.6		$	26.4		27%		$	103.9		$	119.0		(13%)

Product gross profit	$	23.2		$	18.2		27%		$	71.2		$	63.8		12%
Product gross margin	68.9		%	69.0		%	(10) bps		68.6		%	69.3		%	(70) bps

Operating expense	$	17.2		$	14.4		19%		$	57.4		$	59.4		(3%)
Operating income	$	6.0		$	3.8		57%		$	13.8		$	31.3		(56%)

Net income	$	5.3		$	3.5		52%		$	14.3		$	26.4		(46%)
Diluted net income per share	$	0.09		$	0.06		$	0.03	$	0.24		$	0.47		$	(0.23)

Operating cash flow	$	6.2		$	6.5		$	(0.3)	$	13.5		$	16.9		$	(3.3)
Cash and investments	$	108.0		$	114.7		(6%)		$	108.0		$	114.7		(6%)

(1)In June 2020, the Company terminated the VorTeq License Agreement with Schlumberger Technology Corporation. As there were no future performance obligations to be recognized under the VorTeq License Agreement after the effective date, the Company recognized in full the remaining deferred revenue balance of $24.4 million in the second quarter of fiscal year 2020. In addition, no future license and development revenue was recognized under the VorTeq License Agreement after the second quarter of fiscal year 2020.


	Three Months Ended December 31,						Years Ended December 31,
	2021		2020			Variance		2021	2020			Variance
	(In millions, except percentages)

Megaproject	$	25.1		$	19.6		28%			$	75.4		$	66.8	13%
Original equipment manufacturer	5.7			4.1			37%			17.6			15.8		11%
Aftermarket	2.8			2.7			5%			10.9			9.5		15%

Total product revenue	$	33.6		$	26.4		27%			$	103.9		$	92.1	13%

“We comfortably exceeded our guidance for the year by 3% following historic high fourth quarter revenue. In addition, operating expenditures were only 55% of product revenue, which is a significant decrease from 2020 and within guidance,” said Joshua Ballard, Chief Financial Officer of Energy Recovery. “Operating cash flow remained largely in line with 2020 even after making significant investments in inventories to protect against supply chain disruptions and growing inflation. We continue to show improvement in our base operations, increasing profitability and cash flows as we follow through on our strategy of disciplined growth. Overall, a very strong financial year for Energy Recovery.”

4.Announced our joint-marketing effort with a global leader in purification and specialty-separation technologies, to spread the knowledge of advanced solutions improving the efficiency of many industrial wastewater treatment systems and the benefits of pairing our Ultra PX with third-party membranes in industrial wastewater treatment systems.

5.Entered into a new $50 million credit agreement with JPMorgan Chase Bank, N.A. in December 2021 to replace our existing $16 million loan and pledge agreement with Citibank, N.A. This new credit agreement will provide us with additional capital for growth and expansion into emerging markets utilizing our pressure exchanger technology.

On an annual basis, we reported a net income of $14.3 million, or $0.24 per diluted share, for the year ended December 31, 2021, compared to a net income of $26.4 million, or $0.47 per diluted share, for the year ended December 31, 2020, which included license and development revenue of $26.9 million related to the VorTeq License Agreement which was terminated in 2020.

The Company finished the fourth quarter ended December 31, 2021 with cash and cash equivalents of $74.4 million, and short-term and long-term investments of $33.6 million, which represents a combined total of $108.0 million. In the third quarter of 2021, we began shifting our investment strategy from holding cash in money market funds to investing in debt securities due to the strengthening of the economic environment.

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 Company’s products play an important role in reliably delivering energy, emissions and cost savings for critical industries; that the Company is well down the clear and disciplined path for our industrial wastewater treatment and refrigeration business; and that we are poised to continue our growth in the years to come. 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 any other factors that may have been discussed herein regarding the risks and uncertainties of the Company’s business, and the risks discussed under “Risk Factors” in the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) for the year ended December 31, 2020, 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.

This press release includes certain non-GAAP financial measures, including Non-GAAP income (loss) from operations. 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.

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.

Energy Recovery creates technologies that solve complex challenges for industrial fluid-flow markets worldwide. Building on our pressure exchanger technology platform, we design and manufacture solutions that make industrial processes more efficient and sustainable. What began as a game-changing invention for desalination has grown into a global business accelerating the environmental sustainability of customers’ operations in multiple industries. Headquartered in the San Francisco Bay Area, Energy Recovery has manufacturing, research and development facilities across California and Texas with sales and on-site technical support available globally. For more information, please visit www.energyrecovery.com.


	December 31, 2021		December 31, 2020
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	74,358	$	94,255
Short-term investments	31,332		20,446
Accounts receivable, net	20,615		11,792
Inventories, net	20,383		11,748

Prepaid expenses and other assets	5,075		4,950
Total current assets	151,763		143,191
Long-term investments	2,298		—
Deferred tax assets, net	11,421		11,030
Property and equipment, net	20,361		20,176
Operating lease, right of use asset	14,653		16,090
Goodwill and other intangible assets	12,827		12,839

Other assets, non-current	367		988
Total assets	$	213,690	$	204,314
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	909	$	1,118
Accrued expenses and other liabilities	13,994		11,816
Lease liabilities	1,564		1,243
Contract liabilities	3,318		1,552
Total current liabilities	19,785		15,729
Lease liabilities, non-current	14,879		16,443



Other liabilities, non-current	247		518
Total liabilities	34,911		32,690

Stockholders’ equity:

Common stock	64		62
Additional paid-in capital	195,593		179,161
Accumulated other comprehensive (loss) income	(149)		53
Treasury stock	(53,832)		(30,486)
Retained earnings	37,103		22,834
Total stockholders’ equity	178,779		171,624
Total liabilities and stockholders’ equity	$	213,690	$	204,314


	Three Months Ended December 31,				Years Ended December 31,
	2021		2020		2021		2020
	(In thousands, except per share data)
Product revenue	$	33,576	$	26,426	$	103,904	$	92,091
Product cost of revenue	10,419		8,200		32,670		28,249
Product gross profit	23,157		18,226		71,234		63,842

License and development revenue	—		—		—		26,895

Operating expenses:
General and administrative	6,530		6,768		25,162		25,519
Sales and marketing	3,924		2,351		12,160		8,127
Research and development	6,727		5,290		20,069		23,449
Amortization of intangible assets	3		4		12		16

Impairment of long-lived assets	—		—		—		2,332


Total operating expenses	17,184		14,413		57,403		59,443
Income from operations	5,973		3,813		13,831		31,294

Other income (expense):
Interest income	25		104		204		913

Other non-operating expense, net	(10)		(15)		(31)		(74)
Total other income, net	15		89		173		839
Income before income taxes	5,988		3,902		14,004		32,133
(Benefit from) provision for income taxes	725		449		(265)		5,746
Net income	$	5,263	$	3,453	$	14,269	$	26,387

Net income per share:
Basic	$	0.09	$	0.06	$	0.25	$	0.47
Diluted	$	0.09	$	0.06	$	0.24	$	0.47

Number of shares used in per share calculations:
Basic	56,818		56,113		56,993		55,709
Diluted	58,502		57,261		58,723		56,637


	Years Ended December 31,
		2021		2020
		(In thousands)
Cash flows from operating activities:
Net income		$	14,269	$	26,387
Adjustments to reconcile net income to cash provided by operating activities
Stock-based compensation		6,053		4,787
Depreciation and amortization		5,939		5,299
Amortization of premiums and discounts on investments		570		390
Deferred income taxes		(391)		5,867
Impairment of long-lived assets		—		2,332











Other non-cash adjustments		955		395
Changes in operating assets and liabilities:
Accounts receivable, net		(8,823)		1,098

Contract assets		1,399		(1,200)
Inventories, net		(8,766)		(1,622)
Prepaid and other assets		314		415
Accounts payable		(155)		(205)

Accrued expenses and other liabilities		396		153

Contract liabilities		1,766		(27,226)
Net cash provided by operating activities		13,526		16,870
Cash flows from investing activities:
Sales of marketable securities		—		10,573
Maturities of marketable securities		35,019		55,667
Purchases of marketable securities		(48,903)		(12,855)
Capital expenditures		(6,679)		(6,785)

Net cash (used in) provided by investing activities		(20,563)		46,600
Cash flows from financing activities:
Net proceeds from issuance of common stock		10,554		4,397
Tax payment for employee shares withheld		—		(23)



Repurchase of common stock		(23,346)		—
Net cash (used in) provided by financing activities		(12,792)		4,374
Effect of exchange rate differences on cash and cash equivalents		(68)		26
Net change in cash, cash equivalents and restricted cash		(19,897)		67,870
Cash, cash equivalents and restricted cash, beginning of year		94,358		26,488
Cash, cash equivalents and restricted cash, end of year		$	74,461	$	94,358


	Three Months Ended December 31, 2021								Three Months Ended December 31, 2020 (Recast)
	Water		Emerging Technologies		Corporate		Total		Water		Emerging Technologies		Corporate		Total
	(In thousands)
Product revenue	$	33,576	$	—	$	—	$	33,576	$	26,396	$	30	$	—	$	26,426
Product cost of revenue	10,419		—		—		10,419		8,190		10		—		8,200
Product gross profit	23,157		—		—		23,157		18,206		20		—		18,226



Operating expenses
General and administrative	1,562		1,308		3,660		6,530		2,755		1,409		2,604		6,768
Sales and marketing	3,024		202		698		3,924		1,651		291		409		2,351
Research and development	731		5,996		—		6,727		388		4,902		—		5,290
Amortization of intangible assets	3		—		—		3		4		—		—		4

Total operating expenses	5,320		7,506		4,358		17,184		4,798		6,602		3,013		14,413
Operating income (loss)	$	17,837	$	(7,506)	$	(4,358)	5,973		$	13,408	$	(6,582)	$	(3,013)	3,813
Other income, net							15								89
Income before income taxes							$	5,988							$	3,902


	Year Ended December 31, 2021								Year Ended December 31, 2020 (Recast)
	Water		Emerging Technologies		Corporate		Total		Water		Emerging Technologies		Corporate		Total
	(In thousands)
Product revenue	$	103,851	$	53	$	—	$	103,904	$	92,061	$	30	$	—	$	92,091
Product cost of revenue	32,670		—		—		32,670		28,239		10		—		28,249
Product gross profit	71,181		53		—		71,234		63,822		20		—		63,842

License and development revenue	—		—		—		—		—		26,895		—		26,895

Operating expenses
General and administrative	6,330		5,162		13,670		25,162		9,172		5,410		10,937		25,519
Sales and marketing	9,559		937		1,664		12,160		5,958		1,192		977		8,127
Research and development	2,589		17,480		—		20,069		2,973		20,476		—		23,449
Amortization of intangible assets	12		—		—		12		16		—		—		16
Impairment of long-lived assets	—		—		—		—		—		2,332		—		2,332
Total operating expenses	18,490		23,579		15,334		57,403		18,119		29,410		11,914		59,443
Operating income (loss)	$	52,691	$	(23,526)	$	(15,334)	13,831		$	45,703	$	(2,495)	$	(11,914)	31,294
Other income, net							173								839
Income before income taxes							$	14,004							$	32,133

This press release includes certain non-GAAP financial information because we plan and manage our business using such information. Our Non-GAAP income (loss) from operations is determined by subtracting the license and development revenue and adding back the impairment of long-lived assets, both related to the VorTeq License Agreement activities.