0001421517-21-000014 8-K 17 20210311 2.02 9.01 20210311 20210311 Energy Recovery, Inc. 0001421517 3559 010616867 DE 1231 8-K 34 001-34112 21733528 1717 DOOLITTLE DRIVE SAN LEANDRO CA 94577 (510) 483-7370 1717 DOOLITTLE DRIVE SAN LEANDRO CA 94577 8-K 1 erii-20210311.htm FORM 8-K - EARNINGS RELEASE (Q4'2020) 0001421517false00014215172021-03-112021-03-11 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): March 11, 2021 [[Image Removed: erii-20210311_g1.jpg]] Energy Recovery, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 001-34112 01-0616867 (State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer Identification Incorporation) No.) 1717 Doolittle Dr., San Leandro, CA 94577 (Address of Principal Executive Offices) (Zip Code) 510-483-7370 (Registrant’s telephone number, including area code) Not applicable (Former Name or Former Address, if Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: ? Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) ? Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) ? Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) ? Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) 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 per share Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934. 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. ¨ -------------------------------------------------------------------------------- Item 2.02 Results of Operations and Financial Condition On March 11, 2021, Energy Recovery, Inc. issued an earnings press release announcing its financial results for the fourth quarter and year ended December 31, 2020. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference in its entirety. The information in this report (including Exhibit 99.1) is being furnished pursuant to Item 2.02 and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act. Item 9.01 Financial Statements and Exhibits (d) Exhibits Exhibit Number Description 99.1 Press release of Energy Recovery, Inc. dated March 11, 2021 to report its financial results for its fourth quarter and fiscal year ended December 31, 2020. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: March 11, 2021 Energy Recovery, Inc. By: /s/ William Yeung William Yeung Chief Legal Officer EX-99.1 2 ex991earningsrelease2020-q4.htm EXHIBIT 99.1 - Q4'2020 EARNINGS RELEASE [[Image Removed: erilogoh4c1a.jpg]] Energy Recovery Reports Product Revenue Growth of 26% for Fiscal Year 2020 $50 million Share Buyback Program Announced SAN LEANDRO, Calif. - March 11, 2021 - Energy Recovery, Inc. (Nasdaq: ERII) today announced its financial results for the fourth quarter and fiscal year ended December 31, 2020. The Company achieved 26% product revenue growth for the fiscal year 2020 across all business segments, which includes a 27% year-over-year growth in our core seawater desalination business. Strong 2020 results combined with projected growth in 2021 and 2022 will likely increase Energy Recovery’s cash balances. As a result, the Board of Directors of the Company approved a share repurchase program on March 9, 2021. Under this program, the Company may repurchase up to $50.0 million of the Company’s outstanding common stock. The repurchases will take place in open-market transactions and will focus on maximizing the number of shares purchased by Energy Recovery. “We ended a difficult 2020 stronger than we started,” said Bob Mao, Chairman of the Board, President and Chief Executive Officer of Energy Recovery. “We kept our employees safe while keeping our production running, grew our base water business and achieved record revenue despite the pandemic, launched our new Ultra PX™ energy recovery device for industrial wastewater treatment, and issued our first Environmental, Social and Governance (“ESG”) report.” Mr. Mao continued, “I believe 2021 is going to be an even more exciting year for Energy Recovery. In early March, we deployed the VorTeq at a live well with one of the largest independent oil producers in the U.S., a key step towards demonstrating the value proposition of the product and ensuring readiness for commercial deployment. We continue to work on the other critical hurdle for profitable commercialization - extending the service life of the VorTeq cartridges.” Mr. Mao concluded, “We also continue to push the boundaries of our core technology, the pressure exchanger, to handle new operating environments and industrial applications, including actively developing capabilities to handle gases. With this broader operating range, our first target is to address the challenges faced in industrial and commercial refrigeration. We are taking a disciplined approach to incubating new products, with clear financial and time bounds on each of our initiatives, which we believe will enable us to more rapidly drive shareholder value.” Financial Results Three Months Ended December 31, Years Ended December 31, 2020 2019 Variance 2020 2019 Variance (in millions, except earnings per share, percentages and basis points) Product revenue $ 26.4 $ 15.8 67 % $ 92.1 $ 72.8 26 % License and development revenue — 3.7 (100 %) 26.9 14.1 91 % Total revenue $ 26.4 $ 19.5 36 % $ 119.0 $ 86.9 37 % Product gross profit $ 18.2 $ 11.3 61 % $ 63.8 $ 52.5 22 % Product gross margin 69.0 % 71.5 % (250) bps 69.3 % 72.1 % (280) bps Operating Expense $ 14.4 $ 15.9 (9 %) $ 59.4 $ 56.2 6 % Operating income (loss) $ 3.8 $ (0.9) 519 % $ 31.3 $ 10.4 202 % Net income (loss) $ 3.5 $ (0.6) 667 % $ 26.4 $ 10.9 142 % Diluted earnings (deficit) per share $ 0.06 $ (0.01) $ 0.07 $ 0.47 $ 0.19 $ 0.28 Operating cash flow $ 6.5 $ 4.8 37 % $ 16.9 $ 5.3 220 % Cash and securities $ 114.7 $ 100.5 14 % $ 114.7 $ 100.5 14 % -------------------------------------------------------------------------------- Product Channel Revenue Three Months Ended December 31, 2020 Years Ended December 31, 2020 2019 Variance 2020 2019 Variance (In millions, except percentages) Megaproject $ 19.6 $ 6.2 215% $ 66.8 $ 38.2 75% Original equipment manufacturer 4.1 6.8 (39%) 15.8 23.0 (31%) Aftermarket 2.7 2.7 (3%) 9.5 11.7 (19%) Total product revenue $ 26.4 $ 15.8 67% $ 92.1 $ 72.8 26% “We beat our 2020 water guidance by more than 1%, a growth target that we first communicated in October 2019 and later reaffirmed once we understood the impact of the COVID-19 pandemic,” said Joshua Ballard, Chief Financial Officer of Energy Recovery. “In addition, we achieved our product gross margin target in 2020, and operating expenditures grew only 6% compared to a guidance of 10-12% in 2019, despite a $2.3 million one-time impairment charge. More importantly, in-line with our third quarter comments, VorTeq-related research and development (“R&D) spend fell 17% for the year, and 45% year-on-year in the fourth quarter. These OPEX results underscore our commitment to disciplined R&D, as well our ability to leverage our existing operations as we grow while increasing profitability. You can expect this disciplined approach to OPEX and new product introduction in 2021.” Fiscal Year 2020 Revenues For the year ended December 31, 2020, our total revenue increased 37% as compared to prior year driven by two primary factors: 27% growth in our core water desalination business, and a 91% increase in our oil & gas license development revenue due to the accelerated recognition of revenue associated with the termination of the Schlumberger exclusivity agreement. For the 5th consecutive year, our Water segment achieved record revenue for the year ended December 31, 2020, with the megaproject (“MPD”) channel as the main driver of our revenue growth. In 2020, large scale desalination projects were generally unaffected by COVID-19 and the decline in economic conditions. Strong growth in our MPD channel is indicative of the growing demand for potable water globally, as well as the technological conversion occurring within the industry as thermal desalination plants begin to be decommissioned and replaced with reverse osmosis plants. Our original equipment manufacturer (“OEM”) and aftermarket (“AM”) channels, which contain projects of shorter duration, were negatively affected by COVID-19 and the resulting decline in the economic conditions in fiscal year 2020, which ultimately delayed certain new installation and upgrade projects, as well as non-critical plant maintenance. Specifically, in our OEM channel, we sell into a number of industries, including tourism and hospitality, which were greatly affected by COVID-19. In our Oil & Gas segment we accelerated revenue recognition from the termination of the license agreement between us and Schlumberger in the second quarter of 2020. No revenue was recognized in the second half of 2020, and there will be no future license revenue recognized associated with this contract. Product Gross Margin For the year ended December 31, 2020 product gross margin decreased 280 basis points as compared to prior year. This decrease was primarily a result of costs associated with reduced utilization of our manufacturing facilities due to COVID-19, increased costs related to COVID-19 safety protocols, and overhead costs of our Tracy, California facility. The increasing size and volume of MPD customer projects has also exerted downward pressure on our average per unit selling price, which contributed to product gross margin reductions. Operating Expenses For the year ended December 31, 2020, operating expenses increased $3.2 million as compared to prior year. Excluding the $2.3 million impairment expense of certain long-lived assets that were directly related to the termination of the VorTeq License Agreement, the increase in operating expense was due primarily to growth in general and administrative (“G&A”) expenses. The increase in our G&A expenses is largely due to increased investment to protect our employees from COVID-19, full year effect of hires that occurred in 2019, increased facility costs, and professional fees related to our ESG efforts. Sales and marketing (“S&M”) expenses decreased as compared to prior year due primarily to COVID-19, as we temporarily reduced a majority of travel-related marketing events. -------------------------------------------------------------------------------- Research and development (“R&D”) expenses were relatively flat as compared to prior year. Expenditures related to the development of the VorTeq peaked in the first half of 2020, but fell 17% for the fiscal year as compared to prior year. This decrease in spending was partially offset by costs to support other incubation initiatives. Bottom Line Summary On an annual basis, we reported a net income of $26.4 million, or $0.47 per diluted share, for the year ended December 31, 2020, compared to a net income of $10.9 million, or $0.19 per diluted share, for the year ended December 31, 2019. Fourth Quarter 2020 Revenues For the fourth quarter ended December 31, 2020, total revenue increased 36% compared to the fourth quarter ended December 31, 2019. This increase was due primarily to 67% growth in product revenue in the Water segment, as compared to the fourth quarter ended December 31, 2019. In the Oil & Gas segment, there was no license and development revenue recognized as a result of the termination of the VorTeq License Agreement. The Water desalination business growth in the fourth quarter ended December 31, 2020 was driven by strong performance of our MPD channel. We continued to observe COVID-19 related slowdowns in our OEM and AM channels as industries such as tourism and hospitality deferred reverse osmosis projects. In our AM channel, some customers sought to delay non-critical maintenance. Product Gross Margin For the fourth quarter ended December 31, 2020, product gross margin decreased 250 basis points as compared to the fourth quarter ended December 31, 2019. The decrease in product gross margin was primarily related to lower average selling price of our PX as the growing magnitude of MPD projects exerted downward pressure on per unit pricing. Operating Expenses For the fourth quarter ended December 31, 2020 operating expenses decreased $1.5 million as compared to the fourth quarter ended December 31, 2019. This decrease was due primarily to lower R&D expenditures, driven by a 45% decrease in VorTeq-related testing activities, and partially offset by our continued investment in our incubation initiatives. G&A expenses increased as compared to the fourth quarter ended December 31, 2019, due primarily to higher personnel and facility-related costs and partially offset by lower travel and professional services expenditures. S&M expenses decreased as compared to the fourth quarter ended December 31, 2019, due primarily to COVID-19 related slowdowns in marketing and travel related activities. Bottom Line Summary On a quarterly basis, we reported a net income of $3.5 million, or $0.06 per diluted share, for the fourth quarter ended December 31, 2020, compared to a net deficit of $0.6 million, or ($0.01) per diluted share, for the fourth quarter ended December 31, 2019. Cash Flow Highlights We finished the year ended December 31, 2020 with cash and cash equivalents of $94.3 million, and short-term investments of $20.4 million, which represents a combined total of $114.7 million. Despite the COVID-19 pandemic, our customer collections, and therefore cash flows, remain strong, indicative of the overall strength of the desalination market in 2020. -------------------------------------------------------------------------------- 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 projected growth in 2021 and 2022 will increase the Company’s cash balances; that the deployment of the VorTeq at a live well will help demonstrate the value proposition of the VorTeq; that the Company will ever commercialize the VorTeq; that the Company will be able to extend the service life of the VorTeq cartridges; that the Company will be able to develop the pressure exchanger’s capabilities to handle gases; that the Company will be able to develop products to address challenges faced in industrial and commercial refrigeration; that the Company will be able to drive shareholder value; and that the Company will introduce new products in 2021. 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 Fourth Quarter and Fiscal Year End 2020 Financial Results LIVE CONFERENCE CALL: Thursday, March 11, 2021, 2:00 PM PST / 5:00 PM EST Listen-only, US / Canada Toll-Free: +1 (877) 709-8150 Listen-only, Local / International Toll: +1 (201) 689-8354 Access code: 13714951 CONFERENCE CALL REPLAY: Expiration: Sunday, April 11, 2021 US / Canada Toll-Free: +1 (877) 660-6853 Local / International Toll: +1 (201) 612-7415 Access code: 13714951 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 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 advancing 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. Contact Investor Relations ir@energyrecovery.com +1 (281) 962-8105 -------------------------------------------------------------------------------- ENERGY RECOVERY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, December 31, 2020 2019 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 94,255 $ 26,387 Short-term investments 20,446 58,736 Accounts receivable, net 11,792 12,979 Inventories, net 11,748 10,317 Prepaid expenses and other current assets 4,950 4,548 Total current assets 143,191 112,967 Long-term investments — 15,419 Deferred tax assets, non-current 11,030 16,897 Property and equipment, net 20,176 18,843 Operating lease, right of use asset 16,090 11,195 Goodwill and other intangible assets 12,839 12,855 Other assets, non-current 988 598 Total assets $ 204,314 $ 188,774 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,118 $ 1,192 Accrued expenses and other current liabilities 11,816 9,869 Lease liabilities 1,243 1,023 Contract liabilities 1,552 15,746 Total current liabilities 15,729 27,830 Lease liabilities, non-current 16,443 11,533 Contract liabilities, non-current 88 13,120 Other non-current liabilities 430 278 Total liabilities 32,690 52,761 Stockholders’ equity: Common stock 62 61 Additional paid-in capital 179,161 170,028 Accumulated other comprehensive income (loss) 53 (37) Treasury stock (30,486) (30,486) Retained earnings (accumulated deficit) 22,834 (3,553) Total stockholders’ equity 171,624 136,013 Total liabilities and stockholders’ equity $ 204,314 $ 188,774 -------------------------------------------------------------------------------- ENERGY RECOVERY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended December 31, Years Ended December 31, 2020 2019 2020 2019 (In thousands, except per share data) Product revenue $ 26,426 $ 15,784 $ 92,091 $ 72,834 Product cost of revenue 8,200 4,492 28,249 20,335 Product gross profit 18,226 11,292 63,842 52,499 License and development revenue — 3,717 26,895 14,108 Operating expenses: General and administrative 6,768 6,042 25,519 22,832 Sales and marketing 2,351 2,724 8,127 9,434 Research and development 5,290 7,048 23,449 23,402 Amortization of intangible assets 4 106 16 575 Impairment of long-lived assets — — 2,332 — Total operating expenses 14,413 15,920 59,443 56,243 Income (loss) from operations 3,813 (911) 31,294 10,364 Other income: Interest income 104 459 913 2,010 Other non-operating expense, net (15) (41) (74) (118) Total other income, net 89 418 839 1,892 Income (loss) before income taxes 3,902 (493) 32,133 12,256 Provision for income taxes 449 116 5,746 1,343 Net income (loss) $ 3,453 $ (609) $ 26,387 $ 10,913 Earnings (deficit) per share: Basic $ 0.06 $ (0.01) $ 0.47 $ 0.20 Diluted $ 0.06 $ (0.01) $ 0.47 $ 0.19 Number of shares used in per share calculations: Basic 56,113 55,201 55,709 54,740 Diluted 57,261 55,201 56,637 56,067 -------------------------------------------------------------------------------- ENERGY RECOVERY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Years Ended December 31, 2020 2019 (In thousands) Cash flows from operating activities: Net income $ 26,387 $ 10,913 Adjustments to reconcile net income to cash provided by operating activities Stock-based compensation 4,787 5,676 Depreciation and amortization 5,299 4,395 Amortization of premiums and discounts on investments 390 65 Deferred income taxes 5,867 1,421 Provision for warranty claims 403 402 Impairment of long-lived assets 2,332 — Other non-cash adjustments (8) 92 Changes in operating assets and liabilities: Accounts receivable, net 1,098 (2,679) Contract assets (1,200) 3,391 Inventories, net (1,622) (3,256) Prepaid and other assets 415 (263) Accounts payable (205) (373) Accrued expenses and other liabilities 164 (600) Income taxes (11) 27 Contract liabilities (27,226) (13,943) Net cash provided by operating activities 16,870 5,268 Cash flows from investing activities: Sales of marketable securities 10,573 7,608 Maturities of marketable securities 55,667 78,100 Purchases of marketable securities (12,855) (85,207) Capital expenditures (6,785) (7,382) Net cash provided by (used in) investing activities 46,600 (6,881) Cash flows from financing activities: Net proceeds from issuance of common stock 4,397 6,073 Tax payment for employee shares withheld (23) (110) Net cash provided by (used in) financing activities 4,374 5,963 Effect of exchange rate differences on cash and cash equivalents 26 — Net change in cash, cash equivalents and restricted cash 67,870 4,350 Cash, cash equivalents and restricted cash, beginning of year 26,488 22,138 Cash, cash equivalents and restricted cash, end of year $ 94,358 $ 26,488 -------------------------------------------------------------------------------- ENERGY RECOVERY, INC. SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited) Three Months Ended December 31, 2020 Three Months Ended December 31, 2019 Water Oil & Gas Corporate Total Water Oil & Gas Corporate Total (In thousands) Product revenue $ 26,396 $ 30 $ — $ 26,426 $ 15,784 $ — $ — $ 15,784 Product cost of revenue 8,190 10 — 8,200 4,493 (1) — 4,492 Product gross profit 18,206 20 — 18,226 11,291 1 — 11,292 License and development revenue — — — — — 3,717 — 3,717 Operating expenses General and administrative 729 457 5,582 6,768 45 369 5,628 6,042 Sales and marketing 1,651 6 694 2,351 2,014 67 643 2,724 Research and development 388 3,139 1,763 5,290 1,031 5,750 267 7,048 Amortization of intangible assets 4 — — 4 106 — — 106 Total operating expenses 2,772 3,602 8,039 14,413 3,196 6,186 6,538 15,920 Operating income (loss) $ 15,434 $ (3,582) $ (8,039) 3,813 $ 8,095 $ (2,468) $ (6,538) (911) Other income, net 89 418 Income before income taxes $ 3,902 $ (493) Year Ended December 31, 2020 Year Ended December 31, 2019 Water Oil & Gas Corporate Total Water Oil & Gas Corporate Total (In thousands) Product revenue $ 92,061 $ 30 $ — $ 92,091 $ 72,730 $ 104 $ — $ 72,834 Product cost of revenue 28,239 10 — 28,249 20,148 187 — 20,335 Product gross profit (loss) 63,822 20 — 63,842 52,582 (83) — 52,499 License and development revenue — 26,895 — 26,895 — 14,108 — 14,108 Operating expenses General and administrative 2,196 2,058 21,265 25,519 1,501 1,576 19,755 22,832 Sales and marketing 5,958 112 2,057 8,127 7,072 741 1,621 9,434 Research and development 2,973 15,859 4,617 23,449 3,825 19,085 492 23,402 Amortization of intangible assets 16 — — 16 575 — — 575 Impairment of long-lived assets — 2,332 — 2,332 — — — — Total operating expenses 11,143 20,361 27,939 59,443 12,973 21,402 21,868 56,243 Operating income (loss) $ 52,679 $ 6,554 $ (27,939) 31,294 $ 39,609 $ (7,377) $ (21,868) 10,364 Other income, net 839 1,892 Income before income taxes $ 32,133 $ 12,256