Energy Recovery Reports Second Quarter Financial Results

SAN LEANDRO, CA / ACCESSWIRE / July 30, 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 second quarter ended June 30, 2020.

Second Quarter 2020 Highlights:

Product revenue of $19.3 million, flat year-over-year and a sign of stability of the desalination industry in a period of global uncertainty
License and development revenue of $24.4 million related to the termination of the license agreement between the Company and Schlumberger Technology Corporation ("Schlumberger")
Product gross margin of 66.0%, a decrease of 550 basis points year-over-year, of which 370 basis points are due to COVID-19 temporary reductions in manufacturing
Net income of $16.9 million, or diluted earnings per share of $0.30, an increase of $0.23 year-over-year, including $17.2 million, net of tax related to the termination of the license agreement between the Company and Schlumberger and the impairment of related long-lived assets.

Year-to-Date 2020 Highlights:

Product revenue of $38.3 million, an increase of 8% year-over-year
License and development revenue of $26.9 million of which $24.4 million is related to the termination of the license agreement between the Company and Schlumberger
Product gross margin of 68.0%, a decrease of 250 basis points year-over-year
Net income of $17.5 million, or diluted earnings per share of $0.31, an increase of $0.20 year-over-year, including $17.2 million, net of tax related to the termination of the license agreement between the Company and Schlumberger and the impairment of related long-lived assets.

"Our performance this quarter demonstrates the resiliency of our business and the capabilities of our team to adapt to unprecedented global circumstances. Despite these challenges, the continued growth of mega SWRO projects and conversion of thermal desalination facilities to SWRO is driving increased demand for our technology and concurrent growth in our revenue," said Bob Mao, Chairman of the Board, President and CEO of Energy Recovery.

Mr. Mao continued, "I am pleased with these results and continue to expect 20 to 25 percent year-over-year annual growth in our water segment. In addition, we remain focused on generating near-term shareholder value from our VorTeq technology. We are in a good place following our simulated frac test with Liberty Oilfield Services in June 2020, and we are approaching the challenges that remain, including completing two to three live well beta tests, in a disciplined manner. As with any R&D initiative, we will not hesitate to shelve or stop spending on efforts that do not meet the technical readiness, profit and ROI objectives that we have set."

COVID-19 Pandemic

In early April 2020, following the Company's decision to temporarily suspend manufacturing activities at its San Leandro headquarters the last two weeks of March, the Company commenced limited manufacturing in accordance with federal, state and local regulations and guidance with enhanced safety measures in place, 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 weekly testing of employees working on site. The Company resumed full production in May 2020 with enhanced safety measures remaining in place to contain the spread of COVID-19 and to first of all ensure the health and safety of its employees, as well as to protect Energy Recovery's business in the future.

While any effect of the pandemic has had only a limited effect on the Company's financials to date, the Company's gross margin for the first half of 2020 was negatively affected due to reduced production output while the plant was underutilized. Based on the Company's current rate of production, the Company believes that it will be able to fulfill our existing delivery obligations in fiscal year 2020 and beyond.

Second Quarter 2020

Revenues

For the second quarter ended June 30, 2020, the Company generated total revenue of $43.6 million, an increase of $20.8 million, or 91%, compared to $22.8 million in the second quarter ended June 30, 2019.

The Water segment generated total product revenue of $19.3 million for the second quarter ended June 30, 2020, compared to $19.2 million for the second quarter ended June 30, 2019. This increase was due primarily to higher Mega-Project Development ("MPD") and Aftermarket ("AM") shipments offset by lower Original Equipment Manufacturer ("OEM") shipments. We view this stability in the water segment as a real sign of strength as Energy Recovery, and the overall desalination industry, finds its way through this pandemic. MPD has been largely unaffected by global events and continues to be the driver of growth in the desalination industry, and for Energy Recovery.

The Oil & Gas ("O&G") segment generated total revenue of $24.4 million for the second quarter ended June 30, 2020, an increase of $20.8 million, or 582%, compared to $3.6 million for the second quarter ended June 30, 2019. During the three months ended June 30, 2020, the Company and Schlumberger entered into an agreement to terminate the VorTeq License Agreement effective June 1, 2020. As there were no future performance obligations to be recognized under the VorTeq License Agreement, the Company recognized in full the remaining deferred revenue balance of $24.4 million during the quarter. There will be no license and development revenue recognized in future quarters in relation to the VorTeq License Agreement. As a result of the termination of the VorTeq License Agreement, the Company is now free to market the VorTeq™ technology to all companies in the broader pressure pumping market.

Product Gross Margin

For the second quarter ended June 30, 2020, product gross margin was 66.0%, a decrease of 550 basis points from 71.5% in the second quarter ended June 30, 2019. This decrease was due primarily to an increase of $0.7 million, or 370 basis points, in cost of product revenue related to the reduced utilization of the Company's manufacturing facilities during the second quarter prior to the Company's return to full manufacturing in May 2020, as well as the increased overhead costs of the Company's Tracy, California facility. Based on current production levels, the Company does not at this time expect to continue to experience decreases in the product gross margin due to the pandemic.

Operating Expenses

For the second quarter ended June 30, 2020, operating expenses were $15.8 million, an increase of $2.5 million, or 19%, compared to $13.3 million for the second quarter ended June 30, 2019. This increase was due primarily to $2.3 million in impairment expenses of certain long-lived assets that were directly related to the VorTeq License Agreement, continued investment in research and development including O&G testing activities, offset by lower personnel-related costs and travel expenses.

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

Bottom Line Summary

To summarize the Company's financial performance, on a quarterly basis, the Company reported a net income of $16.9 million, or $0.30 per diluted share for the second quarter ended June 30, 2020, compared to a net income of $3.7 million, or $0.07 per diluted share for the second quarter ended June 30, 2019.

Cash Flow Highlights

The Company finished the second quarter ended June 30, 2020 with cash and cash equivalents of $63.0 million, and short-term and long-term investments of $33.9 million, which represents a combined total of $96.9 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 there will be increased demand for our technology resulting in growth in our revenue; the Company will be able to generate near-term shareholder value from our VorTeq technology; the Company will be able to monetize the VorTeq technology; the Company we will be able to fulfill our existing delivery obligations in fiscal year 2020 and beyond; and at this time, we will not continue to experience decreases in the product gross margin due to the COVID-19 pandemic. 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 the Company's ability to achieve the milestones under the VorTeq license agreement, 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 Second Quarter 2020 Financial Results

LIVE CONFERENCE CALL:
Thursday, July 30, 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: 13704670

CONFERENCE CALL REPLAY:
Expiration: Sunday, August 30, 2020
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13704670

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)

 
June 30,
2020
 
 
December 31,
2019
 

 
(In thousands)
 

ASSETS

Current assets:

Cash and cash equivalents

 
$ 
62,970
 
 
$ 
26,387
 

Short-term investments

 
 
28,409
 
 
 
58,736
 

Accounts receivable, net

 
 
12,816
 
 
 
12,979
 

Inventories, net

 
 
9,915
 
 
 
10,317
 

Prepaid expenses and other current assets

 
 
4,987
 
 
 
4,548
 

Total current assets

 
 
119,097
 
 
 
112,967
 

Long-term investments

 
 
5,510
 
 
 
15,419
 

Deferred tax assets, non-current

 
 
12,231
 
 
 
16,897
 

Property and equipment, net

 
 
18,838
 
 
 
18,843
 

Operating lease, right of use asset

 
 
16,810
 
 
 
11,195
 

Goodwill

 
 
12,790
 
 
 
12,790
 

Other intangible assets, net

 
 
57
 
 
 
65
 

Other assets, non-current

 
 
639
 
 
 
598
 

Total assets

 
$ 
185,972
 
 
$ 
188,774
 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

 
$ 
1,860
 
 
$ 
1,192
 

Accrued expenses and other current liabilities

 
 
6,771
 
 
 
9,869
 

Lease liabilities

 
 
1,196
 
 
 
1,023
 

Contract liabilities

 
 
980
 
 
 
15,746
 

Total current liabilities

 
 
10,807
 
 
 
27,830
 

Lease liabilities, non-current

 
 
17,155
 
 
 
11,533
 

Contract liabilities, non-current

 
 
97
 
 
 
13,120
 

Other non-current liabilities

 
 
496
 
 
 
278
 

Total liabilities

 
 
28,555
 
 
 
52,761
 

Commitments and contingencies (Note 8)

Stockholders' equity:

Common stock

 
 
61
 
 
 
61
 

Additional paid-in capital

 
 
173,729
 
 
 
170,028
 

Accumulated other comprehensive income (loss)

 
 
119
 
 
 
(37
)

Treasury stock

 
 
(30,486
)
 
 
(30,486
)

Accumulated earnings (deficit)

 
 
13,994
 
 
 
(3,553
)

Total stockholders' equity

 
 
157,417
 
 
 
136,013
 

Total liabilities and stockholders' equity

 
$ 
185,972
 
 
$ 
188,774
 

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 

 
2020
 
 
2019
 
 
2020
 
 
2019
 

 
(In thousands, except per share data)
 

Product revenue

 
$ 
19,256
 
 
$ 
19,226
 
 
$ 
38,257
 
 
$ 
35,298
 

Product cost of revenue

 
 
6,549
 
 
 
5,483
 
 
 
12,233
 
 
 
10,418
 

Product gross profit

 
 
12,707
 
 
 
13,743
 
 
 
26,024
 
 
 
24,880
 

License and development revenue

 
 
24,352
 
 
 
3,570
 
 
 
26,895
 
 
 
7,293
 

Operating expenses:

General and administrative

 
 
5,599
 
 
 
5,500
 
 
 
12,480
 
 
 
11,079
 

Sales and marketing

 
 
1,497
 
 
 
2,181
 
 
 
3,635
 
 
 
4,343
 

Research and development

 
 
6,352
 
 
 
5,480
 
 
 
13,061
 
 
 
9,734
 

Amortization of intangible assets

 
 
4
 
 
 
157
 
 
 
8
 
 
 
313
 

Impairment of long-lived assets

 
 
2,332
 
 
 
–
 
 
 
2,332
 
 
 
–
 

Total operating expenses

 
 
15,784
 
 
 
13,318
 
 
 
31,516
 
 
 
25,469
 

Income from operations

 
 
21,275
 
 
 
3,995
 
 
 
21,403
 
 
 
6,704
 

Other income (expense):

Interest income

 
 
255
 
 
 
528
 
 
 
675
 
 
 
1,051
 

Other non-operating expense, net

 
 
(18
)
 
 
(48
)
 
 
(30
)
 
 
(72
)

Total other income, net

 
 
237
 
 
 
480
 
 
 
645
 
 
 
979
 

Income before income taxes

 
 
21,512
 
 
 
4,475
 
 
 
22,048
 
 
 
7,683
 

Provision for income taxes

 
 
4,586
 
 
 
756
 
 
 
4,501
 
 
 
1,310
 

Net income

 
$ 
16,926
 
 
$ 
3,719
 
 
$ 
17,547
 
 
$ 
6,373
 

Earnings per share:

Basic

 
$ 
0.30
 
 
$ 
0.07
 
 
$ 
0.32
 
 
$ 
0.12
 

Diluted

 
$ 
0.30
 
 
$ 
0.07
 
 
$ 
0.31
 
 
$ 
0.11
 

Number of shares used in per share calculations:

Basic

 
 
55,614
 
 
 
54,681
 
 
 
55,513
 
 
 
54,400
 

Diluted

 
 
56,371
 
 
 
56,110
 
 
 
56,438
 
 
 
55,764
 

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Six Months Ended June 30,
 

 
2020
 
 
2019
 

 
(In thousands)
 

Cash flows from operating activities:

Net income

 
$ 
17,547
 
 
$ 
6,373
 

Adjustments to reconcile net income to cash (used in) provided by operating activities

Stock-based compensation

 
 
2,595
 
 
 
3,071
 

Depreciation and amortization

 
 
2,751
 
 
 
1,952
 

Amortization (accretion) of premiums and discounts on investments

 
 
215
 
 
 
(30
)

Deferred income taxes

 
 
4,666
 
 
 
1,285
 

Provision for warranty claims

 
 
173
 
 
 
242
 

Impairment of long-lived assets

 
 
2,332
 
 
 
–
 

Other non-cash adjustments

 
 
55
 
 
 
259
 

Changes in operating assets and liabilities:

Accounts receivable, net

 
 
101
 
 
 
(4,986
)

Contract assets

 
 
(198
)
 
 
2,147
 

Inventories, net

 
 
260
 
 
 
(725
)

Prepaid and other assets

 
 
(278
)
 
 
1,026
 

Accounts payable

 
 
1,285
 
 
 
14
 

Accrued expenses and other liabilities

 
 
(4,012
)
 
 
(2,942
)

Income taxes

 
 
3
 
 
 
47
 

Contract liabilities

 
 
(27,789
)
 
 
(7,730
)

Net cash (used in) provided by operating activities

 
 
(294
)
 
 
3
 

Cash flows from investing activities:

Sales of marketable securities

 
 
9,767
 
 
 
–
 

Maturities of marketable securities

 
 
43,286
 
 
 
47,993
 

Purchases of marketable securities

 
 
(12,855
)
 
 
(46,549
)

Capital expenditures

 
 
(4,410
)
 
 
(4,685
)

Net cash provided by (used in) investing activities

 
 
35,788
 
 
 
(3,241
)

Cash flows from financing activities:

Net proceeds from issuance of common stock

 
 
1,128
 
 
 
4,581
 

Tax payment for employee shares withheld

 
 
(23
)
 
 
(62
)

Net cash provided by financing activities

 
 
1,105
 
 
 
4,519
 

Effect of exchange rate differences on cash and cash equivalents

 
 
(15
)
 
 
–
 

Net change in cash, cash equivalents and restricted cash

 
 
36,584
 
 
 
1,281
 

Cash, cash equivalents and restricted cash, beginning of year

 
 
26,488
 
 
 
22,138
 

Cash, cash equivalents and restricted cash, end of period

 
$ 
63,072
 
 
$ 
23,419
 

ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)

 
Three Months Ended June 30, 2020
 
 
Three Months Ended June 30, 2019
 

 
Water
 
 
Oil & Gas
 
 
Corporate
 
 
Total
 
 
Water
 
 
Oil & Gas
 
 
Corporate
 
 
Total
 

 
(In thousands)
 

Product revenue

 
$ 
19,256
 
 
$ 
–
 
 
$ 
–
 
 
$ 
19,256
 
 
$ 
19,226
 
 
$ 
–
 
 
$ 
–
 
 
$ 
19,226
 

Product cost of revenue

 
 
6,549
 
 
 
–
 
 
 
–
 
 
 
6,549
 
 
 
5,483
 
 
 
–
 
 
 
–
 
 
 
5,483
 

Product gross profit

 
 
12,707
 
 
 
–
 
 
 
–
 
 
 
12,707
 
 
 
13,743
 
 
 
–
 
 
 
–
 
 
 
13,743
 

License and development revenue

 
 
–
 
 
 
24,352
 
 
 
–
 
 
 
24,352
 
 
 
–
 
 
 
3,570
 
 
 
–
 
 
 
3,570
 

Operating expenses

General and administrative

 
 
456
 
 
 
421
 
 
 
4,722
 
 
 
5,599
 
 
 
563
 
 
 
412
 
 
 
4,525
 
 
 
5,500
 

Sales and marketing

 
 
1,124
 
 
 
18
 
 
 
355
 
 
 
1,497
 
 
 
1,559
 
 
 
319
 
 
 
303
 
 
 
2,181
 

Research and development

 
 
960
 
 
 
4,517
 
 
 
875
 
 
 
6,352
 
 
 
1,103
 
 
 
4,305
 
 
 
72
 
 
 
5,480
 

Amortization of intangible assets

 
 
4
 
 
 
–
 
 
 
–
 
 
 
4
 
 
 
157
 
 
 
–
 
 
 
–
 
 
 
157
 

Impairment of long-lived assets

 
 
–
 
 
 
2,332
 
 
 
–
 
 
 
2,332
 
 
 
–
 
 
 
–
 
 
 
–
 
 
 
–
 

Total operating expenses

 
 
2,544
 
 
 
7,288
 
 
 
5,952
 
 
 
15,784
 
 
 
3,382
 
 
 
5,036
 
 
 
4,900
 
 
 
13,318
 

Operating income (loss)

 
$ 
10,163
 
 
$ 
17,064
 
 
$ 
(5,952
)
 
 
21,275
 
 
$ 
10,361
 
 
$ 
(1,466
)
 
$ 
(4,900
)
 
 
3,995
 

Other income, net

 
 
 
 
 
 
 
 
 
 
 
 
 
 
237
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
480
 

Income before income taxes

 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
21,512
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
4,475
 

 
Six Months Ended June 30, 2020
 
 
Six Months Ended June 30, 2019
 

 
Water
 
 
Oil & Gas
 
 
Corporate
 
 
Total
 
 
Water
 
 
Oil & Gas
 
 
Corporate
 
 
Total
 

 
(In thousands)
 

Product revenue

 
$ 
38,257
 
 
$ 
–
 
 
$ 
–
 
 
$ 
38,257
 
 
$ 
35,194
 
 
$ 
104
 
 
$ 
–
 
 
$ 
35,298
 

Product cost of revenue

 
 
12,233
 
 
 
–
 
 
 
–
 
 
 
12,233
 
 
 
10,230
 
 
 
188
 
 
 
–
 
 
 
10,418
 

Product gross profit (loss)

 
 
26,024
 
 
 
–
 
 
 
–
 
 
 
26,024
 
 
 
24,964
 
 
 
(84
)
 
 
–
 
 
 
24,880
 

License and development revenue

 
 
–
 
 
 
26,895
 
 
 
–
 
 
 
26,895
 
 
 
–
 
 
 
7,293
 
 
 
–
 
 
 
7,293
 

Operating expenses

General and administrative

 
 
861
 
 
 
1,162
 
 
 
10,457
 
 
 
12,480
 
 
 
1,097
 
 
 
776
 
 
 
9,206
 
 
 
11,079
 

Sales and marketing

 
 
2,800
 
 
 
76
 
 
 
759
 
 
 
3,635
 
 
 
3,208
 
 
 
582
 
 
 
553
 
 
 
4,343
 

Research and development

 
 
1,862
 
 
 
9,764
 
 
 
1,435
 
 
 
13,061
 
 
 
1,908
 
 
 
7,668
 
 
 
158
 
 
 
9,734
 

Amortization of intangible assets

 
 
8
 
 
 
–
 
 
 
–
 
 
 
8
 
 
 
313
 
 
 
–
 
 
 
–
 
 
 
313
 

Impairment of long-lived assets

 
 
–
 
 
 
2,332
 
 
 
–
 
 
 
2,332
 
 
 
–
 
 
 
–
 
 
 
–
 
 
 
–
 

Total operating expenses

 
 
5,531
 
 
 
13,334
 
 
 
12,651
 
 
 
31,516
 
 
 
6,526
 
 
 
9,026
 
 
 
9,917
 
 
 
25,469
 

Operating income (loss)

 
$ 
20,493
 
 
$ 
13,561
 
 
$ 
(12,651
)
 
 
21,403
 
 
$ 
18,438
 
 
$ 
(1,817
)
 
$ 
(9,917
)
 
 
6,704
 

Other income, net

 
 
 
 
 
 
 
 
 
 
 
 
 
 
645
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
979
 

Income before income taxes

 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
22,048
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
7,683
 

SOURCE: Energy Recovery Inc.

ReleaseID: 599662