UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File Number: 001-34112
Energy Recovery, Inc.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 01-0616867 | |||||||||||||
| (State or Other Jurisdiction of Incorporation) | (I.R.S. Employer Identification No.) | |||||||||||||
1717 Doolittle Drive, San Leandro, California 94577
(Address of Principal Executive Offices) (Zip Code)
(510) 483-7370
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.001 par value | ERII | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☑
As of October 27, 2022, there were 55,995,969 shares of the registrant’s common stock outstanding.
ENERGY RECOVERY, INC.
TABLE OF CONTENTS
| Page No. | ||||||||
Condensed Consolidated Balance Sheets — September 30, 2022 and December 31, 2021 | ||||||||
Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2022 and 2021 | ||||||||
Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2022 and 2021 | ||||||||
Condensed Consolidated Statements of Stockholders’ Equity — Three and Nine Months Ended September 30, 2022 and 2021 | ||||||||
Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2022 and 2021 | ||||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q
Forward-Looking Information
This Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022, including Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (the “MD&A”) and certain information incorporated by reference, contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report include, but are not limited to, statements about our expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future.
Forward-looking statements represent our current expectations about future events, are based on assumptions, and involve risks and uncertainties. If the risks or uncertainties occur or the assumptions prove incorrect, then our results may differ materially from those set forth or implied by the forward-looking statements. Our forward-looking statements are not guarantees of future performance or events.
Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “continue,” “could,” “may,” “potential,” “should,” “will,” “would,” variations of such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified under Part II, Item 1A, “Risk Factors,” and elsewhere in this report for factors that may cause actual results to be different from those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Forward-looking statements in this report include, without limitation, statements about the following:
•our belief that the pressure exchanger is the industry standard for energy recovery in the seawater reverse osmosis desalination (“SWRO”) industry; | ||
•forecasted production and evaluations and judgments regarding supply chain matters, particularly in light of the global supply environment; | ||
•our belief that we have sufficient raw material and finished goods to mitigate supply chain issues; | ||
•our belief that the scalability and versatility of our platform can help us achieve success in emerging markets similar to SWRO; | ||
•our belief that the Ultra PX™ addresses key challenges associated with treating industrial wastewater in a range of reverse osmosis (“RO”) applications; | ||
•our belief that the Ultra PX can accelerate adoption of RO in the growing zero liquid discharge (“ZLD”) and minimal liquid discharge (“MLD”) markets; | ||
•our belief that the Ultra PX can help make RO the preferred treatment option to achieve ZLD and MLD requirements by enhancing RO’s affordability and efficiency compared to thermal treatment options. | ||
•our belief that pressure exchanger technology can provide benefits to our customers, including the reduction of capital expenditures and energy use; | ||
•our belief that our pressure exchanger technology can address inefficiencies and waste within industrial systems and processes that involve high-pressure and low-pressure fluid flows; | ||
•our belief that our PX® Pressure Exchanger® (“PX”) has helped make SWRO an economically viable and more sustainable option in the production of potable water; | ||
•our belief that our hydraulic turbochargers (“Turbochargers”) deliver substantial savings and ease of integration into desalination systems; | ||
•our anticipation that markets not traditionally associated with desalination, such as the United States of America (the “U.S.”) and China will inevitably develop and provide further revenue growth opportunities; | ||
•our belief that countries around the world will continue to mandate ZLD or MLD requirements for specific industries; | ||
•our belief that leveraging the Ultra PX with RO will significantly lower thermal demand; | ||
•our belief that the PX Q400 will be the highest-performing and highest capacity PX available for SWRO desalination and industrial wastewater facilities; | ||
•our belief that, as the existing thermal technology is replaced with RO technology, demand for our products will be created; | ||
•our belief that ongoing operating costs rather than capital expenditures is the key factor in the selection of an ERD solution for megaproject (“MPD”) customers; | ||
•our belief that our PX offers market-leading value with the highest technological and economic benefit; | ||
•our belief that our solutions offer a competitive advantage compared to our competitors’ solutions because our ERDs provide the lowest life-cycle cost and are, therefore, the most cost-effective ERD solutions for RO desalination applications; | ||
•our belief that leveraging our pressure exchanger technology will unlock new commercial opportunities in the future; | ||
•our belief that sales of carbon dioxide (“CO2”) refrigeration systems will increase in response to regulations and supermarkets’ search for safe natural refrigerants; | ||
•our belief that our pressure exchanger technology can significantly help reduce the operating costs of CO2 refrigeration systems by recycling the pressure energy of CO2 gas thereby significantly reducing the energy needed to operate these systems; | ||
•our belief that the PX G1300™ could eventually alter the standard refrigeration system architecture by reducing costs for retail end users such as grocery stores; | ||
•our belief that we will be able to achieve efficiencies across a wider range of temperatures that exceed incumbent CO2 refrigeration technologies; | ||
•our belief that the Ultra PX™ can address the key challenges associated with treating industrial wastewater in ultra high-pressure reverse osmosis (“UHPRO”) applications; | ||
•our belief that the Ultra PX can help make UHPRO the preferred treatment option to achieve ZLD and MLD requirements by enhancing UHPRO’s affordability and efficiency compared to thermal treatment options; | ||
•our belief that our Ultra PX enables customers to optimize their wastewater treatment process for ZLD and MLD; | ||
•our objective of finding new applications for our technology and developing new products for use outside of desalination; | ||
•our belief that our current facilities will be adequate for the foreseeable future; | ||
•our belief that by investing in research and development, we will be well positioned to continue to execute on our product strategy; | ||
•our expectation that sales outside of the U.S. will remain a significant portion of our revenue; | ||
•the timing of our receipt of payment for products or services from our customers; | ||
•our belief that our existing cash and cash equivalents, our short and/or long-term investments, and the ongoing cash generated from our operations, will be sufficient to meet our anticipated liquidity needs for the foreseeable future, with the exception of a decision to enter into an acquisition and/or fund investments in our latest technology arising from rapid market adoption that could require us to seek additional equity or debt financing; | ||
•our belief that we will be in compliance with the terms of the existing credit agreement, as amended, in the future; | ||
•our tax and accounting estimates and estimates regarding any potential operational cost savings as a result of our decision to cease the VorTeq™ commercialization efforts; | ||
•our belief that we expect to utilize all of our net operating loss (“NOL”) carryforwards in fiscal year 2022 due to our projected income exceeding the amount of NOL carryforwards; | ||
•our expectation that we will continue to receive a tax benefit related to U.S. federal foreign-derived intangible income; | ||
•our expectation that we will be able to enforce our intellectual property (“IP”) rights; | ||
•our expectation that the adoption of new accounting standards will not have a material impact on our financial position or results of operations; | ||
•the impact of changes in internal control over financial reporting; and | ||
•other factors disclosed under the MD&A and Part I, Item 3, “Quantitative and Qualitative Disclosures about Market Risk,” and elsewhere in this Form 10-Q. | ||
You should not place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of the filing of this Quarterly Report on Form 10-Q. All forward-looking statements included in this document are subject to additional risks and uncertainties further discussed under Part II, Item 1A, “Risk Factors,” and are based on information available to us as of November 2, 2022. We assume no obligation to update any such forward-looking statements, certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are disclosed from time to time in our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q and Current Reports on Form 8‑K filed with or furnished to the Securities and Exchange Commission (the “SEC”), as well as in Part II, Item 1A, “Risk Factors,” within this Quarterly Report on Form 10-Q.
It is important to note that our actual results could differ materially from the results set forth or implied by our forward-looking statements. The factors that could cause our actual results to differ from those included in such forward-looking statements are set forth under the heading Item 1A, “Risk Factors,” in our Quarterly Reports on Form 10-Q, and in our Annual Reports on Form 10-K, and from time-to-time, in our results disclosed on our Current Reports on Form 8-K. In addition, when preparing the MD&A below, we presume the readers have access to and have read the MD&A in our Annual Report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.
We provide our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, Proxy Statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large shareholders, and any amendments to those documents filed or furnished pursuant to the Securities Exchange Act of 1934, free of charge on the Investor Relations section of our website, www.energyrecovery.com. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. From time to time, we may use our website as a channel of distribution of material company information.
We also make available in the Investor Relations section of our website our corporate governance documents including our code of business conduct and ethics and the charters of the audit, compensation and nominating and governance committees. These documents, as well as the information on the website, are not intended to be part of this Quarterly Report on Form 10-Q. We use the Investor Relations section of our website as a means of complying with our disclosure obligations under Regulation FD. Accordingly, you should monitor the Investor Relations section of our website in addition to following our press releases, SEC filings and public conference calls and webcasts.
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements (unaudited)
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 52,131 | $ | 74,358 | |||||||
| Short-term investments | 30,156 | 31,332 | |||||||||
| Accounts receivable, net | 18,422 | 20,615 | |||||||||
| Inventories, net | 32,132 | 20,383 | |||||||||
| Prepaid expenses and other assets | 6,377 | 5,075 | |||||||||
| Total current assets | 139,218 | 151,763 | |||||||||
| Long-term investments | 4,271 | 2,298 | |||||||||
| Deferred tax assets, net | 11,214 | 11,421 | |||||||||
| Property and equipment, net | 18,724 | 20,361 | |||||||||
| Operating lease, right of use asset | 13,510 | 14,653 | |||||||||
| Goodwill and other intangible assets | 12,819 | 12,827 | |||||||||
| Other assets, non-current | 365 | 367 | |||||||||
| Total assets | $ | 200,121 | $ | 213,690 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 1,931 | $ | 909 | |||||||
| Accrued expenses and other liabilities | 11,319 | 13,994 | |||||||||
| Lease liabilities | 1,552 | 1,564 | |||||||||
| Contract liabilities | 2,157 | 3,318 | |||||||||
| Total current liabilities | 16,959 | 19,785 | |||||||||
| Lease liabilities, non-current | 13,732 | 14,879 | |||||||||
| Other liabilities, non-current | 127 | 247 | |||||||||
| Total liabilities | 30,818 | 34,911 | |||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock | 64 | 64 | |||||||||
| Additional paid-in capital | 202,807 | 195,593 | |||||||||
| Accumulated other comprehensive loss | (509) | (149) | |||||||||
| Treasury stock | (80,486) | (53,832) | |||||||||
| Retained earnings | 47,427 | 37,103 | |||||||||
| Total stockholders’ equity | 169,303 | 178,779 | |||||||||
| Total liabilities and stockholders’ equity | $ | 200,121 | $ | 213,690 | |||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 1
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||
| Revenue | $ | 30,462 | $ | 20,781 | $ | 83,300 | $ | 70,328 | |||||||||||||||
| Cost of revenue | 9,417 | 6,089 | 25,835 | 22,251 | |||||||||||||||||||
| Gross profit | 21,045 | 14,692 | 57,465 | 48,077 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| General and administrative | 7,608 | 5,853 | 21,155 | 18,641 | |||||||||||||||||||
| Sales and marketing | 4,703 | 2,996 | 11,916 | 8,236 | |||||||||||||||||||
| Research and development | 3,828 | 4,416 | 14,170 | 13,342 | |||||||||||||||||||
| Total operating expenses | 16,139 | 13,265 | 47,241 | 40,219 | |||||||||||||||||||
| Income from operations | 4,906 | 1,427 | 10,224 | 7,858 | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 259 | 36 | 486 | 179 | |||||||||||||||||||
| Other non-operating (expense) income, net | (5) | 1 | (9) | (21) | |||||||||||||||||||
| Total other income, net | 254 | 37 | 477 | 158 | |||||||||||||||||||
| Income before income taxes | 5,160 | 1,464 | 10,701 | 8,016 | |||||||||||||||||||
| Provision for (benefit from) income taxes | 371 | 393 | 377 | (990) | |||||||||||||||||||
| Net income | $ | 4,789 | $ | 1,071 | $ | 10,324 | $ | 9,006 | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 0.09 | $ | 0.02 | $ | 0.18 | $ | 0.16 | |||||||||||||||
| Diluted | $ | 0.08 | $ | 0.02 | $ | 0.18 | $ | 0.15 | |||||||||||||||
| Number of shares used in per share calculations: | |||||||||||||||||||||||
| Basic | 55,881 | 57,026 | 56,291 | 57,053 | |||||||||||||||||||
| Diluted | 57,372 | 58,709 | 57,708 | 58,785 | |||||||||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 2
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net income | $ | 4,789 | $ | 1,071 | $ | 10,324 | $ | 9,006 | |||||||||||||||
| Other comprehensive (loss) income, net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustments | 34 | (20) | 38 | (40) | |||||||||||||||||||
| Unrealized loss on investments | (28) | (13) | (398) | (99) | |||||||||||||||||||
| Total other comprehensive (loss) income, net of tax | 6 | (33) | (360) | (139) | |||||||||||||||||||
| Comprehensive income | $ | 4,795 | $ | 1,038 | $ | 9,964 | $ | 8,867 | |||||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 3
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands, except shares) | |||||||||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Beginning balance | $ | 64 | $ | 63 | $ | 64 | $ | 62 | |||||||||||||||
| Issuance of common stock, net | — | — | — | 1 | |||||||||||||||||||
| Ending balance | 64 | 63 | 64 | 63 | |||||||||||||||||||
| Additional paid-in capital | |||||||||||||||||||||||
| Beginning balance | 200,129 | 191,087 | 195,593 | 179,161 | |||||||||||||||||||
| Issuance of common stock, net | 1,259 | 242 | 2,244 | 8,938 | |||||||||||||||||||
| Stock-based compensation | 1,419 | 1,235 | 4,970 | 4,465 | |||||||||||||||||||
| Ending balance | 202,807 | 192,564 | 202,807 | 192,564 | |||||||||||||||||||
| Accumulated other comprehensive loss | |||||||||||||||||||||||
| Beginning balance | (515) | (53) | (149) | 53 | |||||||||||||||||||
| Other comprehensive (loss) income | |||||||||||||||||||||||
| Foreign currency translation adjustments | 34 | (20) | 38 | (40) | |||||||||||||||||||
| Unrealized loss on investments | (28) | (13) | (398) | (99) | |||||||||||||||||||
| Total other comprehensive (loss) income, net | 6 | (33) | (360) | (139) | |||||||||||||||||||
| Ending balance | (509) | (86) | (509) | (86) | |||||||||||||||||||
| Treasury stock | |||||||||||||||||||||||
| Beginning balance | (80,455) | (42,040) | (53,832) | (30,486) | |||||||||||||||||||
| Common stock repurchased | (31) | (5,602) | (26,654) | (17,156) | |||||||||||||||||||
| Ending balance | (80,486) | (47,642) | (80,486) | (47,642) | |||||||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Beginning balance | 42,638 | 30,769 | 37,103 | 22,834 | |||||||||||||||||||
| Net income | 4,789 | 1,071 | 10,324 | 9,006 | |||||||||||||||||||
| Ending balance | 47,427 | 31,840 | 47,427 | 31,840 | |||||||||||||||||||
| Total stockholders’ equity | $ | 169,303 | $ | 176,739 | $ | 169,303 | $ | 176,739 | |||||||||||||||
| Common stock issued (shares) | |||||||||||||||||||||||
| Beginning balance | 63,935,378 | 63,267,293 | 63,544,419 | 61,798,004 | |||||||||||||||||||
| Issuance of common stock, net | 196,110 | 31,690 | 587,069 | 1,500,979 | |||||||||||||||||||
| Ending balance | 64,131,488 | 63,298,983 | 64,131,488 | 63,298,983 | |||||||||||||||||||
| Treasury stock (shares) | |||||||||||||||||||||||
| Beginning balance | 8,146,859 | 6,112,873 | 6,721,153 | 5,455,935 | |||||||||||||||||||
| Common stock repurchased | 1,653 | 295,728 | 1,427,359 | 952,666 | |||||||||||||||||||
| Ending balance | 8,148,512 | 6,408,601 | 8,148,512 | 6,408,601 | |||||||||||||||||||
| Total common stock outstanding (shares) | 55,982,976 | 56,890,382 | 55,982,976 | 56,890,382 | |||||||||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 4
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 10,324 | $ | 9,006 | |||||||
| Adjustments to reconcile net income to cash provided by (used in) operating activities | |||||||||||
| Stock-based compensation | 5,101 | 4,574 | |||||||||
| Depreciation and amortization | 4,946 | 4,141 | |||||||||
| Amortization of premiums and discounts on investments | 647 | 340 | |||||||||
| Deferred income taxes | 207 | (1,063) | |||||||||
| Other non-cash adjustments | 235 | 161 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | 2,208 | (1,274) | |||||||||
| Contract assets | (398) | 1,892 | |||||||||
| Inventories, net | (11,848) | (8,874) | |||||||||
| Prepaid and other assets | (461) | (1,097) | |||||||||
| Accounts payable | 1,121 | 2,739 | |||||||||
| Accrued expenses and other liabilities | (4,617) | (3,132) | |||||||||
| Contract liabilities | (1,197) | (119) | |||||||||
| Net cash provided by operating activities | 6,268 | 7,294 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Maturities of marketable securities | 34,107 | 20,686 | |||||||||
| Purchases of marketable securities | (35,964) | (43,339) | |||||||||
| Capital expenditures | (2,999) | (4,899) | |||||||||
| Proceeds from sales of fixed assets | 734 | 5 | |||||||||
| Net cash used in investing activities | (4,122) | (27,547) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Net proceeds from issuance of common stock | 2,244 | 8,939 | |||||||||
| Repurchase of common stock | (26,654) | (17,156) | |||||||||
| Net cash used in financing activities | (24,410) | (8,217) | |||||||||
| Effect of exchange rate differences on cash, cash equivalents and restricted cash | 38 | (40) | |||||||||
| Net change in cash, cash equivalents and restricted cash | (22,226) | (28,510) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 74,461 | 94,358 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 52,235 | $ | 65,848 | |||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 5
Note 1 — Description of Business and Significant Accounting Policies
Energy Recovery, Inc. and its wholly-owned subsidiaries (the “Company” or “Energy Recovery”) designs and manufactures solutions that make industrial processes more efficient and sustainable. Leveraging the Company’s pressure exchanger technology, which generates little to no emissions when operating, the Company’s solutions lower costs, save energy, reduce waste and minimize emissions for companies across a variety of industrial processes. As the world coalesces around the urgent need to address climate change and its impacts, the Company is helping companies reduce their energy consumption in their industrial processes, which in turn, reduces their carbon footprint. The Company believes that its customers do not have to sacrifice quality and cost savings for sustainability and is committed to developing solutions that drive long-term value – both financial and environmental. The Company’s solutions are marketed, sold in, or developed for, the fluid-flow and gas markets, such as seawater and industrial wastewater desalination, natural gas, chemical processing and refrigeration systems, under the trademarks ERI®, PX®, Pressure Exchanger®, PX® Pressure Exchanger® (“PX”), Ultra PX™, PX G1300™, PX G™, PX PowerTrain™, IsoBoost™, AT™, and Aquabold™. The Company owns, manufactures and/or develops its solutions, in whole or in part, in the United States of America (the “U.S.”).
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Energy Recovery, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2021 Condensed Consolidated Balance Sheet was derived from audited financial statements and may not include all disclosures required by GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading.
The September 30, 2022 unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2022 (the “2021 Annual Report”).
All adjustments consisting of normal recurring adjustments that are necessary to present fairly the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Reclassifications
Certain prior period amounts have been reclassified in the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows and certain notes to the Condensed Consolidated Financial Statements to conform to the current period presentation.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements, in conformity with GAAP, requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes.
The accounting policies that reflect the Company’s more significant estimates and judgments and that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results are revenue recognition; valuation of stock options; useful life and valuation of equipment; valuation and impairment of goodwill; inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies. Those estimates could change, and as a result, actual results could differ materially from those estimates.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 6
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Although there has been uncertainty and disruption in the global economy, supply chain and financial markets, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of November 2, 2022, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. The Company undertakes no obligation to update publicly these estimates for any reason after the date of this Quarterly Report on Form 10-Q, except as required by law.
Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies in Note 1, “Description of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” in the 2021 Annual Report.
Recently Adopted Accounting Pronouncement
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provided optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The FASB later issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, to clarify the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848 (“ASU 2021-01”). Entities may apply the provisions of the new standards as of the beginning of the reporting period when the election is made (i.e., as early as the first quarter of 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to have been completed. An entity may elect to apply amendments prospectively through December 31, 2022.
On July 15, 2022, the Company amended its existing credit agreement (as defined in Note 6, “Lines of Credit”) to change the reference rate for borrowings from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The Company applied ASU 2020-04 and the optional expedients at the time of this modification. The Company’s adoption of ASU 2020-04 and ASU 2021-01 on July 15, 2022, did not have a material impact on the Company’s financial condition, results of operations, and cash flows. Refer to Note 6, “Lines of Credit,” for more information.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 7
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 — Revenue
Disaggregation of Revenue
The following tables present the disaggregated revenues by segment, and within each segment, by product type, by primary geographical market based on the customer “shipped to” address, and by channel customers.
The Company classifies its channel customers as follows:
•Megaproject (“MPD”). MPD customers are major firms that develop, design, build, own and/or operate large-scale desalination plants.
•Original Equipment Manufacturer (“OEM”). OEM customers are companies that supply equipment, packaged systems, and various operating and maintenance solutions for small to medium-sized desalination plants, utilized by commercial and industrial entities, as well as national, state and local municipalities worldwide.
•Aftermarket (“AM”). AM customers are desalination plant owners and/or operators who can utilize our technology to upgrade or keep their plant running.
Sales and usage-based taxes are excluded from revenues. See Note 9, “Segment Reporting,” for further discussion related to the Company’s segments.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 8
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contract Balances
The following table presents contract balances by category.
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Accounts receivable, net | $ | 18,422 | $ | 20,615 | |||||||
| Contract assets, current (included in prepaid expenses and other assets) | 891 | 493 | |||||||||
| Contract liabilities: | |||||||||||
| Contract liabilities, current | $ | 2,157 | $ | 3,318 | |||||||
| Contract liabilities, non-current (included in other liabilities, non-current) | 52 | 88 | |||||||||
| Total contract liabilities | $ | 2,209 | $ | 3,406 | |||||||
Contract Liabilities
The Company records contract liabilities, which consist of customer deposits and deferred revenue, when cash payments are received in advance of the Company’s performance. The following table presents significant changes in contract liabilities during the period.
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Contract liabilities, beginning of year | $ | 3,406 | $ | 1,640 | |||||||
| Revenue recognized | (3,049) | (1,415) | |||||||||
| Cash received, excluding amounts recognized as revenue during the period | 1,852 | 3,181 | |||||||||
| Contract liabilities, end of period | $ | 2,209 | $ | 3,406 | |||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 9
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Future Performance Obligations
As of September 30, 2022, the following table presents the future estimated revenue by year expected to be recognized related to performance obligations that are unsatisfied or partially unsatisfied.
| Year Recognized | Future Performance Obligations | |||||||
| (In thousands) | ||||||||
| 2022 (remaining three months) | $ | 3,660 | ||||||
| 2023 | 4,452 | |||||||
| 2024 | 7,493 | |||||||
| Total | $ | 15,605 | ||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 10
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 — Net Income Per Share
Net income for the reported period is divided by the weighted average number of common shares outstanding during the reported period to calculate basic net income per common share.
•Basic net income per common share excludes any dilutive effect of stock options and restricted stock units ("RSU").
•Diluted net income per common share reflects the potential dilution that would occur if outstanding stock options to purchase common stock were exercised for shares of common stock, using the treasury stock method, and if the shares of common stock underlying each unvested RSU were issued.
Outstanding stock options to purchase common stock and unvested RSUs are collectively referred to as “stock awards.”
The following table presents the computation of basic and diluted net income per common share.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands, except per share amounts) | |||||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net income | $ | 4,789 | $ | 1,071 | $ | 10,324 | $ | 9,006 | |||||||||||||||
| Denominator (weighted average shares) | |||||||||||||||||||||||
| Basic common shares outstanding | 55,881 | 57,026 | 56,291 | 57,053 | |||||||||||||||||||
| Dilutive stock awards | 1,491 | 1,683 | 1,417 | 1,732 | |||||||||||||||||||
| Diluted common shares outstanding | 57,372 | 58,709 | 57,708 | 58,785 | |||||||||||||||||||
| Net income per share | |||||||||||||||||||||||
| Basic | $ | 0.09 | $ | 0.02 | $ | 0.18 | $ | 0.16 | |||||||||||||||
| Diluted | $ | 0.08 | $ | 0.02 | $ | 0.18 | $ | 0.15 | |||||||||||||||
Certain shares of common stock issuable under stock awards have been omitted from the diluted net income per common share calculations because their inclusion is considered anti-dilutive. The following table presents the weighted potential common shares issuable under stock awards that were excluded from the computation of diluted net income per common share.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Anti-dilutive stock award shares | 387 | 26 | 522 | 456 | |||||||||||||||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 11
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 — Other Financial Information
Cash, Cash Equivalents and Restricted Cash
The Condensed Consolidated Statements of Cash Flows explain the changes in the total of cash, cash equivalents and restricted cash. The following table presents a reconciliation of cash, cash equivalents and restricted cash, such as cash amounts deposited in restricted cash accounts in connection with the Company’s credit cards, reported within the Condensed Consolidated Balance Sheets that sum to the total of such amounts presented.
| September 30, 2022 | December 31, 2021 | September 30, 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cash and cash equivalents | $ | 52,131 | $ | 74,358 | $ | 65,745 | |||||||||||
| Restricted cash, non-current (included in other assets, non-current) | 104 | 103 | 103 | ||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 52,235 | $ | 74,461 | $ | 65,848 | |||||||||||
Accounts Receivable, net
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Accounts receivable, gross | $ | 18,522 | $ | 20,732 | |||||||
| Allowance for doubtful accounts | (100) | (117) | |||||||||
| Accounts receivable, net | $ | 18,422 | $ | 20,615 | |||||||
Inventories, net
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Raw materials | $ | 12,751 | $ | 7,352 | |||||||
| Work in process | 3,266 | 3,406 | |||||||||
| Finished goods | 16,832 | 10,274 | |||||||||
| Inventories, gross | 32,849 | 21,032 | |||||||||
| Valuation adjustments for excess and obsolete inventory | (717) | (649) | |||||||||
| Inventories, net | $ | 32,132 | $ | 20,383 | |||||||
Inventory amounts are stated at the lower of cost or net realizable value, using the first-in, first-out method.
Prepaid Expenses and Other Assets
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Contract assets | $ | 891 | $ | 493 | |||||||
| Cloud computing arrangement implementation costs | 881 | 1,041 | |||||||||
| Supplier advances | 2,079 | 1,717 | |||||||||
| Other prepaid expenses and other assets | 2,526 | 1,824 | |||||||||
| Total prepaid expenses and other assets | $ | 6,377 | $ | 5,075 | |||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 12
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill and Other Intangible Assets
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Goodwill | $ | 12,790 | $ | 12,790 | |||||||
| Other intangible assets, net | 29 | 37 | |||||||||
| Total goodwill and other intangible assets | $ | 12,819 | $ | 12,827 | |||||||
Goodwill
Goodwill is tested for impairment annually in the third quarter of the Company’s fiscal year or more frequently if indicators of potential impairment exist. The recoverability of goodwill is measured at the reporting unit level, which represents the operating segment.
On July 1, 2022, the Company estimated the fair value of its reporting units using both the discounted cash flow and market approaches. The forecast of future cash flows, which is based on the Company’s best estimate of future net sales and operating expenses, is based primarily on expected category expansion, pricing, market segment, and general economic conditions. The Company incorporates other significant inputs to its fair value calculations, including discount rate and market multiples, to reflect current market conditions. The analysis performed indicated that the fair value of each reporting unit that is allocated goodwill significantly exceeds its carrying value. As a result, no impairment charge was recorded during the three months ended September 30, 2022. The Company continues to actively monitor the industries in which it operates and its business performance for indicators of potential impairment.
Accrued Expenses and Other Liabilities
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Current | |||||||||||
| Payroll, incentives and commissions payable | $ | 7,516 | $ | 10,170 | |||||||
| Warranty reserve | 910 | 879 | |||||||||
| Legal costs | 583 | 317 | |||||||||
| Other accrued expenses and other liabilities | 2,310 | 2,628 | |||||||||
| Total accrued expenses and other liabilities | 11,319 | 13,994 | |||||||||
| Other liabilities, non-current | 127 | 247 | |||||||||
| Total accrued expenses, and current and non-current other liabilities | $ | 11,446 | $ | 14,241 | |||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 13
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 — Investments and Fair Value Measurements
Available-for-Sale Investments
The Company’s investments in investment-grade short-term and long-term marketable debt instruments, such as corporate notes and bonds, are classified as available-for-sale. Available-for-sale investments are classified on the Condensed Consolidated Balance Sheets as either short-term and/or long-term investments.
The classification of available-for-sale investments on the Condensed Consolidated Balance Sheets and definition of each of these classifications are provided in Note 1, “Description of Business and Significant Accounting Policies - Significant Accounting Policies,” subsections “Cash and Cash Equivalents” and “Short-term and Long-term Investments,” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” in the 2021 Annual Report.
Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. The Company generally holds available-for-sale investments until maturity; however, from time-to-time, the Company may elect to sell certain available-for-sale investments prior to contractual maturity.
Fair Value of Financial Instruments
All of the Company’s financial assets and liabilities are remeasured and reported at fair value at each reporting period, and are classified and disclosed in one of the following three pricing category levels:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
Level 3 — Unobservable inputs in which little or no market activity exists, thereby requiring an entity to develop its own assumptions that market participants would use in pricing.
The following table presents the Company’s financial assets measured on a recurring basis by contractual maturity, including pricing category, amortized cost, gross unrealized gains and losses, and fair value. As of the dates reported in the table, the Company had no financial liabilities and no Level 3 financial assets.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 14
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents a summary of the fair value and gross unrealized losses on the available-for-sale securities that have been in a continuous unrealized loss position, aggregated by type of investment instrument. The available-for-sale securities that were in an unrealized gain position have been excluded from the table.
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Corporate notes and bonds | $ | 34,427 | $ | (555) | $ | 33,630 | $ | (48) | |||||||||||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 15
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 — Lines of Credit
Credit Agreement
The Company entered into a credit agreement with JPMorgan Chase Bank, N.A. (“JPMC”) on December 22, 2021 (the “Credit Agreement”). The Credit Agreement, which will expire on December 21, 2026, provides a committed revolving credit line of $50.0 million and includes both a revolving loan and a letters of credit (“LCs”) component. Under the Credit Agreement, as of September 30, 2022, there were no revolving loans outstanding. In addition, under the LCs component, the Company utilized $16.7 million of the maximum allowable credit line of $25.0 million, which includes newly issued LCs, and previously issued and unexpired stand-by letters of credits (“SBLCs”) and certain non-expired commitments under the Company’s previous Loan and Pledge Agreement with Citibank, N.A. which are guaranteed under the Credit Agreement.
On July 15, 2022, the Company and JPMC agreed to a modification of the Credit Agreement to change the indicated reference rate from LIBOR to SOFR. Changes in the Credit Agreement reference rate to SOFR did not materially change the provisions defined in the original Credit Agreement nor did this change materially affect the Company’s financial statements.
The following table presents the total outstanding LCs and SBLCs issued by the Company to our customers related to product warranty and performance guarantees.
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Outstanding letters of credit | $ | 13,523 | $ | 13,960 | |||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 16
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 — Commitments and Contingencies
Warranty
The following table presents the changes in the Company’s accrued product warranty reserve.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Warranty reserve balance, beginning of period | $ | 897 | $ | 809 | $ | 879 | $ | 760 | |||||||||||||||
| Warranty costs charged to cost of revenue | 109 | 104 | 311 | 312 | |||||||||||||||||||
| Utilization charges against reserve | (7) | (1) | (31) | (14) | |||||||||||||||||||
| Release of accrual related to expired warranties | (89) | (82) | (249) | (228) | |||||||||||||||||||
| Warranty reserve balance, end of period | $ | 910 | $ | 830 | $ | 910 | $ | 830 | |||||||||||||||
Litigation
From time-to-time, the Company has been named in and subject to various proceedings and claims in connection with its business. The Company may in the future become involved in litigation in the ordinary course of business, including litigation that could be material to its business. The Company considers all claims, if any, on a quarterly basis and, based on known facts, assesses whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, the Company then evaluates disclosure requirements and whether to accrue for such claims in its consolidated financial statements. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and are adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Other than noted below, as of September 30, 2022, the Company was not involved in any material lawsuits and there were no material losses which were probable or reasonably possible.
In June 2022, Mr. Blanco, the Company’s former Senior Vice President, Sales, petitioned the Spanish court to reopen the previously closed case regarding unpaid bonus, stock options, and non-compete compensation. The Company denies any allegations of wrongdoing; however, the Company determined it was in its best interest to seek a settlement. Accordingly, an immaterial probable loss was recorded as of September 30, 2022. In October 2022, the Company settled the matter with no material impact to the financial statements.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 17
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 — Income Taxes
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 371 | $ | 393 | $ | 377 | $ | (990) | |||||||||||||||
| Discrete items | 331 | 9 | 1,134 | 2,364 | |||||||||||||||||||
| Provision for income taxes, excluding discrete items | $ | 702 | $ | 402 | $ | 1,511 | $ | 1,374 | |||||||||||||||
| Effective tax rate | 7.2 | % | 26.8 | % | 3.5 | % | (12.4 | %) | |||||||||||||||
| Effective tax rate, excluding discrete items | 13.6 | % | 27.5 | % | 14.1 | % | 17.2 | % | |||||||||||||||
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period. The Company’s quarterly tax provision and estimate of its annual effective tax rate are subject to variation due to several factors, including variability in accurately predicting its pre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax regimes, and changes in how the Company does business.
For the three and nine months ended September 30, 2022, the recognized provision for income tax included benefits primarily related to the U.S. federal foreign-derived intangible income (“FDII”) and federal research and development (“R&D”) tax credit, along with a discrete tax benefit due primarily to stock-based compensation. For the three and nine months ended September 30, 2021, the recognized (benefit from)/provision for income tax included the U.S. federal R&D tax credit along with a discrete tax benefit due primarily to stock-based compensation.
The effective tax rate excluding discrete items for the nine months ended September 30, 2022, as compared to the prior year, was marginally lower largely related to the projected FDII benefit, partially offset by reduced federal R&D tax credit benefit for fiscal year 2022.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 18
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 — Segment Reporting
The Company’s chief operating decision-maker (“CODM”) is its chief executive officer. The Company continues to monitor and review its segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact its reportable segments.
The following tables present a summary of the Company’s financial information by segment and corporate operating expenses.
.
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| Water | Emerging Technologies | Total | Water | Emerging Technologies | Total | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 30,462 | $ | — | $ | 30,462 | $ | 83,191 | $ | 109 | $ | 83,300 | |||||||||||||||||||||||
| Cost of revenue | 9,417 | — | 9,417 | 25,817 | 18 | 25,835 | |||||||||||||||||||||||||||||
| Gross profit | 21,045 | — | 21,045 | 57,374 | 91 | 57,465 | |||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| General and administrative | 1,911 | 878 | 2,789 | 4,909 | 3,140 | 8,049 | |||||||||||||||||||||||||||||
| Sales and marketing | 3,242 | 960 | 4,202 | 8,197 | 2,120 | 10,317 | |||||||||||||||||||||||||||||
| Research and development | 1,216 | 2,612 | 3,828 | 3,159 | 11,011 | 14,170 | |||||||||||||||||||||||||||||
| Total operating expenses | 6,369 | 4,450 | 10,819 | 16,265 | 16,271 | 32,536 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 14,676 | $ | (4,450) | 10,226 | $ | 41,109 | $ | (16,180) | 24,929 | |||||||||||||||||||||||||
| Less: Corporate operating expenses | 5,320 | 14,705 | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 4,906 | $ | 10,224 | |||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||
| Water | Emerging Technologies | Total | Water | Emerging Technologies | Total | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 20,767 | $ | 14 | $ | 20,781 | $ | 70,275 | $ | 53 | $ | 70,328 | |||||||||||||||||||||||
| Cost of revenue | 6,089 | — | 6,089 | 22,251 | — | 22,251 | |||||||||||||||||||||||||||||
| Gross profit | 14,678 | 14 | 14,692 | 48,024 | 53 | 48,077 | |||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| General and administrative | 1,437 | 1,373 | 2,810 | 4,777 | 3,854 | 8,631 | |||||||||||||||||||||||||||||
| Sales and marketing | 2,250 | 327 | 2,577 | 6,535 | 735 | 7,270 | |||||||||||||||||||||||||||||
| Research and development | 762 | 3,654 | 4,416 | 1,858 | 11,484 | 13,342 | |||||||||||||||||||||||||||||
| Total operating expenses | 4,449 | 5,354 | 9,803 | 13,170 | 16,073 | 29,243 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 10,229 | $ | (5,340) | 4,889 | $ | 34,854 | $ | (16,020) | 18,834 | |||||||||||||||||||||||||
| Less: Corporate operating expenses | 3,462 | 10,976 | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 1,427 | $ | 7,858 | |||||||||||||||||||||||||||||||
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 19
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 — Concentrations
Revenue
The following table presents the Water segment customers that account for 10% or more of the Company’s Water segment revenues. Although certain customers might account for greater than 10% of revenues at any one point in time, the concentration of revenue between a limited number of customers shifts regularly, depending on timing of shipments. The percentages by customer reflect specific relationships or contracts that would concentrate revenue for the periods presented and do not indicate a trend specific to any one customer.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Customer A | ** | 20% | ** | 19% | ||||||||||||||||||||||
| Customer B | ** | ** | 17% | ** | ||||||||||||||||||||||
| Customer C | ** | ** | ** | 16% | ||||||||||||||||||||||
| Customer D | 29% | ** | 15% | ** | ||||||||||||||||||||||
| Customer E | ** | 25% | ** | 12% | ||||||||||||||||||||||
** Zero or less than 10%.
The following table presents the Emerging Technologies segment customers that account for 10% or more of the Company’s Emerging Technologies segment revenues.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Customer A | ** | 100% | 72% | 100% | ||||||||||||||||||||||
| Customer B | ** | ** | 28% | ** | ||||||||||||||||||||||
** Zero or less than 10%.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 20
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 — Stockholders’ Equity
Share Repurchase Program
On March 9, 2021, the Company’s Board of Directors authorized a share repurchase program under which the Company may repurchase its outstanding common stock, at the discretion of management, up to $50.0 million in aggregate cost, which includes both the share value of the acquired common stock and the fees charged in connection with acquiring the common stock (the “March 2021 Authorization”). Under the March 2021 Authorization, purchases of shares of common stock may be made from time to time in the open market, or in privately negotiated transactions, in compliance with applicable state and federal securities laws. The March 2021 Authorization does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time without prior notice.
The following table presents the share repurchase activities under the March 2021 Authorization as of September 30, 2022.
| Number of Shares Purchased | Average Price Paid per Share(1) | Plan Activity | |||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| March 2021 Authorization | $ | 50,000 | |||||||||||||||||||||
| Repurchases under March 2021 Authorization | 2,692,577 | $18.55 | (50,000) | ||||||||||||||||||||
| Remaining amount under March 2021 Authorization | $ | — | |||||||||||||||||||||
(1) Excluding commissions
On July 1, 2022, the Company concluded all share repurchases under the March 2021 Authorization. As of September 30, 2022, the Company has repurchased 8,148,512 shares of its common stock at an aggregate cost of $80.5 million under all of its share repurchase programs.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 21
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Energy Recovery, Inc. (the “Company”, “Energy Recovery”, “we”, “our” and “us”) designs and manufactures solutions that make industrial processes more efficient and sustainable. Leveraging our pressure exchanger technology, which generates little to no emissions when operating, our solutions lower costs, save energy, reduce waste and minimize emissions for companies across a variety of industrial processes. As the world coalesces around the urgent need to address climate change and its impacts, we are helping companies reduce their energy consumption in their industrial processes, which in turn, reduces their carbon footprint. We believe that our customers do not have to sacrifice quality and cost savings for sustainability and are committed to developing solutions that drive long-term value – both financial and environmental.
The original product application of our technology, the PX® Pressure Exchanger® (“PX”) energy recovery device (“ERD”), was a major contributor to the advancement of seawater reverse osmosis desalination (“SWRO”), significantly lowering the energy intensity and cost of water production globally from SWRO. We have since introduced our pressure exchanger technology to the fast growing industrial wastewater (“IWW”) filtration market, such as battery manufacturers, mining operations, and manufacturing plants that discharge wastewater with significant levels of metals and pollutants, as well as the commercial and industrial refrigeration market.
Engineering, and research and development (“R&D”), have been, and remain, an essential part of our history, culture and corporate strategy. Since our formation, we have developed leading technology and engineering expertise through the continual evolution of our pressure exchanger technology, which can enhance environmental sustainability and improve productivity by reducing waste and energy consumption in high-pressure industrial fluid-flow systems. This versatile technology works as a platform to build product applications and is at the heart of many of our products. In addition, we have engineered and developed ancillary devices, such as our hydraulic turbochargers (“Turbochargers”) and circulation “booster” pumps, that complement our ERDs.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 22
Quarterly Highlights
In September 2022, we announced awards totaling $12.6 million to supply our PX ERDs and an array of pumps to support SWRO desalination facilities in North Africa. We expect all orders under this award to be fulfilled by the end of 2022.
In September 2022, we released our third annual Environmental, Social, and Governance (“ESG”) report, which details our efforts to accelerate the environmental sustainability of our customers’ operations and enhance the management of ESG issues in our own operations. The report provides examples and data illustrating our products’ positive environmental impacts across the industries where we operate. We understand the importance of being a responsible corporate citizen and believe our ESG program provides us with a strategic roadmap to become a more sustainable and resilient business. Our ESG report outlines our ESG goals and aligns to leading sustainability frameworks and reporting standards, including the Sustainability Accounting Standards Board as well as select disclosures from the Global Reporting Initiative and the United Nations Sustainable Development Goals. Our complete 2021 ESG report can be found on our website at: https://ir.energyrecovery.com/websites/energyrecover/English/6500/esg-at-energy-recovery.html#. The foregoing link to our 2021 ESG report is an inactive textual reference, and the 2021 ESG report is not incorporated by reference into, and is not a part of, this Form 10-Q.
During the third quarter, we successfully installed and commissioned our PX G1300™ fully integrated with the carbon dioxide (“CO2“) refrigeration rack for Vallarta Supermarkets in California.
In October 2022, we announced the launch of the PX Q400 pressure exchanger, the next evolution of our industry-leading PX pressure exchanger technology. The PX Q400 is the new flagship solution in our PX family of products and we expect it to be the highest-performing and highest-capacity PX available for SWRO and IWW facilities.
Key advantages of the PX Q400 are:
•Highest average efficiency compared to other PX technology products;
•At 400 gallons per minute, it is the highest capacity PX yet, which results in 25% fewer energy recovery devices compared to the PX Q300 (depending on plant size);
•Less than 3% volumetric mixing; and
•Offers the lowest projected life cycle cost of any energy recovery device for SWRO desalination.
Energy Recovery, Inc. | Q3'2022 Form 10-Q | 23
Results of Operations
A discussion regarding our financial condition and results of operations for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, is presented below.
Revenue
Variability in revenue from quarter to quarter is typical, therefore year-on-year quarterly and year-to-date comparisons are not necessarily indicative of the trend for the full year due to these variations. In addition, there is no specific seasonality in our revenues to highlight that occurs throughout a calendar year.
Revenues by channel customers are presented in the following tables.
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| $ | % of Revenue | $ | % of Revenue | Change | |||||||||||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Megaproject | $ | 17,347 | 57 | % | $ | 13,275 | 64 | % | $ | 4,072 | 31 | % | |||||||||||||||||||||||
| Original equipment manufacturer | 9,032 | 30 | % | 4,844 | 23 | % | 4,188 | 86 | % | ||||||||||||||||||||||||||
| Aftermarket | 4,083 | 13 | % | 2,662 | 13 | % | 1,421 | 53 | % | ||||||||||||||||||||||||||
| Total revenue | $ | 30,462 | 100 | % | $ | 20,781 | 100 | % | $ | 9,681 | 47 | % | |||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| $ | % of Revenue | $ | % of Revenue | Change | |||||||||||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Megaproject | $ | 51,257 | 62 | % | $ | 50,307 | 71 | % | $ | 950 | 2 | % | |||||||||||||||||||||||
| Original equipment manufacturer | 21,392 | 26 | % | 11,909 | 17 | % | 9,483 | 80 | % | ||||||||||||||||||||||||||
| Aftermarket | 10,651 | 12 | % | 8,112 | 12 | % | 2,539 | 31 | % | ||||||||||||||||||||||||||
| Total revenues | $ | 83,300 | 100 </ | ||||||||||||||||||||||||||||||||