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Energy Recovery Reports Third Quarter Financial Results


29 Oct 2020

SAN LEANDRO, CA / ACCESSWIRE / October 29, 2020 / Energy Recovery Inc. (Nasdaq:ERII) ("Energy Recovery," "we," "our," or the "Company"), a leader in pressure energy technology for industrial fluid flows, today announced its financial results for the third quarter ended September 30, 2020.

Third Quarter 2020 Highlights:

  • Product revenue of $27.4 million, an all-time quarterly record and an increase of 26% year-over-year
  • Product gross margin of 71.5%, a decrease of 360 basis points year-over-year and in-line with expectations for the year
  • Net income of $5.4 million, or diluted earnings per share of $0.10, an increase of $0.01 year-over-year

Year-to-Date 2020 Highlights:

  • Product revenue of $65.7 million, an increase of 15% year-over-year
  • Total revenue of $92.6 million, an increase of 37% year-over-year, of which $24.4 million is related to accelerated revenue recognition from the termination of the license agreement between the Company and Schlumberger
  • Product gross margin of 69.5%, a decrease of 270 basis points year-over-year, of which 230 basis points are due to COVID-19 temporary reductions in manufacturing
  • Net income of $22.9 million, or diluted earnings per share of $0.41, an increase of $0.20 year-over-year in part related to accelerated revenue recognition from the termination of the license agreement between the Company and Schlumberger

"We surpassed our previous year's quarterly product revenue record by 26 percent this quarter, which is a testament to our singular focus on meeting customer demand while keeping our employees safe. We remain on pace to achieve 25 percent year-over-year revenue growth in our water division this year, and we are preparing for further growth in 2021 and beyond. The desalination industry remains robust despite global economic uncertainty because affordable desalination is critical to meet growing water demand for people around the world. We are proud of the impact our technology has in making desalination more energy efficient and sustainable and believe the time has come to introduce pressure exchanger technology to other industries where we can drive efficiency improvements," said Bob Mao, Chairman of the Board, President and Chief Executive Officer of Energy Recovery.

Mr. Mao continued, "Today we are advancing new products built on our pressure exchanger technology platform: the VorTeq, as well as incubation initiatives including a solution to improve the energy efficiency of wastewater treatment. We did not have an opportunity to go to a live well with the VorTeq last quarter, but we are ready to deploy and continue to pursue live well opportunities. While we remain confident in our ability to clear the hurdles that remain before full commercial deployment of the VorTeq, we have not lost sight of the need to produce results or stop investing. This same principle holds for all of our incubation initiatives, and I believe this disciplined approach will allow us to more rapidly achieve our profit and ROI objectives and deliver shareholder value."

COVID-19 Pandemic

The Company's production remained strong during the third quarter, with minimal impacts on production outputs due to the COVID-19 pandemic ("COVID-19"). COVID-19 has similarly had a limited effect on Energy Recovery's financials; however, the Company's gross margin for the nine months of 2020 was negatively affected due to reduced production output while its San Leandro facility was underutilized due to temporary suspension of manufacturing activities at the beginning of the COVID-19 pandemic. Enhanced safety measures for employees remain in effect today in the Company's facilities, including staggered shifts to ensure social distancing between workers, personal safety equipment for each worker, including masks and gloves, cleanings and disinfections between and during shifts, and, starting in July 2020, weekly COVID-19 testing of employees working on-site.

The Company successfully overcame challenges posed by COVID-19 to commission its Tracy, California production facility in July 2020, which further strengthens the Company's ability to fulfill its strong backlog of orders through the remainder of fiscal year 2020 and beyond.

Third Quarter 2020

Revenues

For the third quarter ended September 30, 2020, the Water segment generated total product revenue of $27.4 million, an all-time quarterly record, and an increase of $5.7 million, or 26%, compared to $21.8 million in the third quarter ended September 30, 2019. This increase was due primarily to higher Mega-Project Development ("MPD") shipments, offset by lower Original Equipment Manufacturer ("OEM") and Aftermarket ("AM") shipments.

For the third quarter ended September 30, 2020, there was no license and development revenue recognized as a result of the termination of the license agreement between the Company and Schlumberger.

Product Gross Margin

For the third quarter ended September 30, 2020, product gross margin was 71.5%, a decrease of 360 basis points from 75.1% in the third quarter ended September 30, 2019. The decrease in gross margin was due primarily to lower average selling prices due to higher MPD channel mix and costs related to reduced utilization of our manufacturing facilities related to COVID-19, partially offset by product mix.

Operating Expenses

For the third quarter ended September 30, 2020, operating expenses were $13.5 million, a decrease of $1.3 million, or (9%), compared to $14.9 million for the third quarter ended September 30, 2019. This decrease was due primarily to lower Oil & Gas testing expenditures as we reduce VorTeq related testing activities, lower depreciation expense related to long-lived assets, and lower travel expenses, partially offset by higher personnel-related costs and other R&D costs to support our incubation initiatives.

COVID-19 did not have a material effect on operating expenditures during the three months ended September 30, 2020.

Bottom Line Summary

To summarize the Company's financial performance, on a quarterly basis, the Company reported a net income of $5.4 million, or $0.10 per diluted share for the third quarter ended September 30, 2020, compared to a net income of $5.1 million, or $0.09 per diluted share for the third quarter ended September 30, 2019.

Cash Flow Highlights

The Company finished the third quarter ended September 30, 2020 with cash and cash equivalents of $80.1 million, and short-term and long-term investments of $25.8 million, which represents a combined total of $105.9 million.

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 Company will achieve 25 percent year-over-year revenue growth in its water division in 2020; that the Company will achieve further growth in 2021 and beyond; and that the Company will be able to clear the hurdles that remain before full commercial deployment of the VorTeq. 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, 2019 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.

Conference Call to Discuss Third Quarter 2020 Financial Results

LIVE CONFERENCE CALL:

Thursday, October 29, 2020, 2:00 PM PDT / 5:00 PM EDT
Listen-only, US / Canada Toll-Free: +1 (877) 709-8150
Listen-only, Local / International Toll: +1 (201) 689-8354
Access code: 13710080

CONFERENCE CALL REPLAY:

Expiration: Sunday, November 29, 2020
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13710080

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.

For more than 20 years, Energy Recovery, Inc. (NASDAQ: ERII) has created technologies that solve complex challenges in industrial fluid-flow markets. We design and manufacture solutions that reduce waste, improve operational efficiencies, and lower the production costs of clean water and oil and gas. What began as a game-changing invention for water desalination has grown into a global business delivering solutions that enable more affordable access to these critical resources. Headquartered in the San Francisco Bay Area, Energy Recovery has manufacturing, research and development facilities across California and Texas. In addition, our worldwide sales and technical service organization provides on-site support for our line of water solutions. For more information, please visit www.energyrecovery.com.

Contact

Investor Relations
ir@energyrecovery.com
(281) 962-8105

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30,2020 December 31,2019
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents
$ 80,149 $ 26,387
Short-term investments
24,373 58,736
Accounts receivable, net
11,055 12,979
Inventories, net
10,662 10,317
Prepaid expenses and other current assets
4,959 4,548
Total current assets
131,198 112,967
Long-term investments
1,418 15,419
Deferred tax assets, non-current
11,454 16,897
Property and equipment, net
20,535 18,843
Operating lease, right of use asset
16,444 11,195
Goodwill
12,790 12,790
Other intangible assets, net
53 65
Other assets, non-current
645 598
Total assets
$ 194,537 $ 188,774
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$ 1,951 $ 1,192
Accrued expenses and other current liabilities
8,654 9,869
Lease liabilities
1,209 1,023
Contract liabilities
1,160 15,746
Total current liabilities
12,974 27,830
Lease liabilities, non-current
16,802 11,533
Contract liabilities, non-current
104 13,120
Other non-current liabilities
672 278
Total liabilities
30,552 52,761
Stockholders' equity:
Common stock
61 61
Additional paid-in capital
174,929 170,028
Accumulated other comprehensive income (loss)
100 (37)
Treasury stock
(30,486) (30,486)
Accumulated earnings (deficit)
19,381 (3,553)
Total stockholders' equity
163,985 136,013
Total liabilities and stockholders' equity
$ 194,537 $ 188,774

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020 2019 2020 2019
(In thousands, except per share data)
Product revenue
$ 27,408 $ 21,752 $ 65,665 $ 57,050
Product cost of revenue
7,816 5,425 20,049 15,843
Product gross profit
19,592 16,327 45,616 41,207
License and development revenue
- 3,098 26,895 10,391
Operating expenses:
General and administrative
6,271 5,711 18,751 16,790
Sales and marketing
2,141 2,367 5,776 6,710
Research and development
5,098 6,620 18,159 16,354
Amortization of intangible assets
4 156 12 469
Impairment of long-lived assets
- - 2,332 -
Total operating expenses
13,514 14,854 45,030 40,323
Income from operations
6,078 4,571 27,481 11,275
Other income (expense):
Interest income
134 500 809 1,551
Other non-operating expense, net
(29) (5) (59) (77)
Total other income, net
105 495 750 1,474
Income before income taxes
6,183 5,066 28,231 12,749
Provision for (benefit from) income taxes
796 (83) 5,297 1,227
Net income
$ 5,387 $ 5,149 $ 22,934 $ 11,522
Earnings per share:
Basic
$ 0.10 $ 0.09 $ 0.41 $ 0.21
Diluted
$ 0.10 $ 0.09 $ 0.41 $ 0.21
Number of shares used in per share calculations:
Basic
55,692 54,975 55,573 54,594
Diluted
56,471 56,384 56,443 55,971

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended
September 30,
2020 2019
(In thousands)
Cash flows from operating activities:
Net income
$ 22,934 $ 11,522
Adjustments to reconcile net income to cash provided by operating activities
Stock-based compensation
3,672 4,425
Depreciation and amortization
3,963 3,440
Amortization (accretion) of premiums and discounts on investments
311 (37)
Deferred income taxes
5,443 1,198
Provision for warranty claims
316 339
Impairment of long-lived assets
2,332 -
Other non-cash adjustments
- 197
Changes in operating assets and liabilities:
Accounts receivable, net
1,862 (10,617)
Contract assets
(747) 2,993
Inventories, net
(506) (1,885)
Prepaid and other assets
295 383
Accounts payable
656 (94)
Accrued expenses and other liabilities
(2,561) (1,264)
Income taxes
(18) 30
Contract liabilities
(27,602) (10,127)
Net cash provided by operating activities
10,350 503
Cash flows from investing activities:
Sales of marketable securities
10,573 3,535
Maturities of marketable securities
50,467 70,040
Purchases of marketable securities
(12,855) (66,253)
Capital expenditures
(6,019) (5,501)
Net cash provided by investing activities
42,166 1,821
Cash flows from financing activities:
Net proceeds from issuance of common stock
1,260 5,424
Tax payment for employee shares withheld
(23) (89)
Net cash provided by financing activities
1,237 5,335
Effect of exchange rate differences on cash and cash equivalents
11 -
Net change in cash, cash equivalents and restricted cash
53,764 7,659
Cash, cash equivalents and restricted cash, beginning of year
26,488 22,138
Cash, cash equivalents and restricted cash, end of period
$ 80,252 $ 29,797

ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION

(Unaudited)

Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
Water Oil & Gas Corporate Total Water Oil & Gas Corporate Total
(In thousands)
Product revenue
$ 27,408 $ - $ - $ 27,408 $ 21,752 $ - $ - $ 21,752
Product cost of revenue
7,816 - - 7,816 5,425 - - 5,425
Product gross profit
19,592 - - 19,592 16,327 - - 16,327
License and development revenue
- - - - - 3,098 - 3,098
Operating expenses
General and administrative
606 439 5,226 6,271 359 431 4,921 5,711
Sales and marketing
1,507 30 604 2,141 1,850 92 425 2,367
Research and development
723 2,956 1,419 5,098 886 5,667 67 6,620
Amortization of intangible assets
4 - - 4 156 - - 156
Total operating expenses
2,840 3,425 7,249 13,514 3,251 6,190 5,413 14,854
Operating income (loss)
$ 16,752 $ (3,425) $ (7,249) 6,078 $ 13,076 $ (3,092) $ (5,413) 4,571
Other income, net
105 495
Income before income taxes
$ 6,183 $ 5,066
Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
Water Oil & Gas Corporate Total Water Oil & Gas Corporate Total
(In thousands)
Product revenue
$ 65,665 $ - $ - $ 65,665 $ 56,946 $ 104 $ - $ 57,050
Product cost of revenue
20,049 - - 20,049 15,655 188 - 15,843
Product gross profit (loss)
45,616 - - 45,616 41,291 (84) - 41,207
License and development revenue
- 26,895 - 26,895 - 10,391 - 10,391
Operating expenses
General and administrative
1,467 1,601 15,683 18,751 1,456 1,207 14,127 16,790
Sales and marketing
4,307 106 1,363 5,776 5,058 674 978 6,710
Research and development
2,585 12,720 2,854 18,159 2,794 13,335 225 16,354
Amortization of intangible assets
12 - - 12 469 - - 469
Impairment of long-lived assets
- 2,332 - 2,332 - - - -
Total operating expenses
8,371 16,759 19,900 45,030 9,777 15,216 15,330 40,323
Operating income (loss)
$ 37,245 $ 10,136 $ (19,900) 27,481 $ 31,514 $ (4,909) $ (15,330) 11,275
Other income, net
750 1,474
Income before income taxes
$ 28,231 $ 12,749

SOURCE: Energy Recovery Inc. via EQS Newswire



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