Energy Recovery Reports First Quarter Financial Results

SAN LEANDRO, CA / ACCESSWIRE / April 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 first quarter ended March 31, 2020.

First Quarter 2020 Highlights:

Total product revenue of $19.0 million, an increase of 18% year-over-year
Total revenue of $21.5 million, an increase of 9% year-over-year
Product gross margin of 70.1%, an increase of 80 basis points year-over-year
Net income of $0.6 million, or diluted earnings per share of $0.01, a decrease of $0.04 year-over-year

Chairman and Interim President and Chief Executive Officer Robert Mao remarked, "We came into the first quarter confident in our confirmed order backlog and successfully navigated the COVID-19 pandemic challenges late in the quarter. We delivered a strong Q1 in which we fulfilled all of our contractual shipments and achieved year-over-year quarterly revenue growth."

Mr. Mao continued, "These results are a testament to the talent, flexibility and hard work of our global team. Thanks to their calm and determined execution, we have been able to safely continue limited manufacturing operations in our San Leandro and Katy facilities and progress our newest manufacturing facility in Tracy, California in accordance with government guidance. Moreover, we have continued to close contracts since California's shelter-in-place order came into effect in mid-March, including large orders from China and Egypt. We cannot anticipate what events may transpire over the coming months, but we can say with certainty that we are as prepared as we can be, with a strong financial position, flexible balance sheet, a solid order backlog and a smart team with deep knowledge of our markets."

COVID-19 Pandemic

In response to measures taken in mid-March by the State of California and local governments in the State of California to fight the COVID-19 pandemic, we elected to temporarily suspend our manufacturing activities to assess the impact of these measures, and to implement health and safety actions recommended by government and health officials to better protect employees who are required to be present at our facilities. In addition, the majority of our office employees have been working remotely since that time. In early April, we commenced limited manufacturing and have continued shipping customer orders from our facilities in accordance with federal, state and local regulations and guidance.

While we cannot accurately predict COVID-19's long-term impact on our financial condition, result of operations, liquidity, and cash flows due to uncertainties, our compliance with these measures did not have a material adverse impact on our financial results for the first quarter of fiscal year 2020. However, to mitigate potential adverse impacts to our business and to conserve cash, we are managing our resources conservatively by reducing and/or deferring capital expenditures and operating expenses. Based on our current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures, and the effect of these on the industries in which we compete, we believe our cash on hand and marketable securities, as well as ongoing cash generated from our operations, should be sufficient to cover our capital requirements for the next 12 months. We believe our gross margins, which were negatively affected in the first quarter, will likely continue to be impacted until such time that we can operate our manufacturing facilities as originally planned.

Our available product inventory combined with our current rate of production leads us to believe that we can fulfill most, if not all, of our existing delivery obligations in fiscal year 2020. We are also closely monitoring the pandemic's impact on the industries in which we compete. While we believe the desalination industry appears to be showing some stability in fiscal year 2020, it is possible that future COVID-19 restrictions could cause reduced demand for our products if they result in a global recessionary economic environment or impact the construction of large desalination projects. For a discussion of the key trends and uncertainties that have affected our revenues, income and liquidity, see Part II, Item 1A, "Risk Factors," of our Q1'2020 Form 10-Q and Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10‑K for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission on March 6, 2020.

First Quarter 2020

Revenues

For the first quarter ended March 31, 2020, the Company generated total revenue of $21.5 million, an increase of $1.7 million, or 9%, compared to $19.8 million in the first quarter ended March 31, 2019.

The Water segment generated total product revenue of $19.0 million for the first quarter ended March 31, 2020, an increase of $3.0 million, or 19%, compared to $16.0 million for the first quarter ended March 31, 2019. This increase was due primarily to higher Mega-Project Development ("MPD") shipments. Government measures to fight COVID-19 did not have a material effect on our revenues in the first quarter.

The Oil & Gas segment generated total revenue of $2.5 million for the first quarter ended March 31, 2020, a decrease of $1.3 million, or (34%), compared to $3.8 million for the first quarter ended March 31, 2019. Oil & Gas revenue in the first quarter consisted only of license and development revenue, which is calculated as a percentage of cost to total cost. There was a decrease in expenditures in the first quarter due to the reallocation of resources to VorTeq related activities unrelated to the recognition of this license and development revenue, which subsequently reduced revenue recognition for the quarter.

Product Gross Margin

For the first quarter ended March 31, 2020, product gross margin was 70.1%, an increase of 80 basis points from 69.3% in the first quarter ended March 31, 2019. Despite an increase of $0.5 million, or 3%, in cost of product revenue related to the reduced utilization of our manufacturing facility in the last two weeks of the quarter due to our temporary manufacturing suspension in response to COVID-19-related government measures, product gross margin increased largely driven by favorable product mix.

Operating Expenses

For the first quarter ended March 31, 2020, GAAP operating expenses were $15.7 million, an increase of $3.6 million, or 29%, compared to $12.2 million for the first quarter ended March 31, 2019. This increase was due primarily to our continued investment in research and development in Oil & Gas and Water segments, Incubation initiatives, as well as growth in headcount and personnel-related costs.

COVID-19 did not have a material effect on operating expenditures during the three months ended March 31, 2020.

Bottom Line Summary

To summarize our financial performance, on a quarterly basis, we reported a GAAP net income of $0.6 million, or $0.01 per diluted share for the first quarter ended March 31, 2020, compared to a net income of $2.7 million, or $0.05 per diluted share for the first quarter ended March 31, 2019.

Cash Flow Highlights

We finished the three months ended March 31, 2020 with cash and cash equivalents of $32.8 million, and short-term and long-term investments of $60.4 million, which represents a combined total of $93.2 million.

Forward-Looking Statements

Certain matters discussed in this press release and on the conference call are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the Company's belief that the Company's cash on hand, marketable securities and ongoing cash generated from operations should be sufficient to cover the Company's capital requirements for the next 12 months; our belief that our gross margins will continue to be negatively affected until we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic; and our belief that we will be able to fulfill most, if not all, of our existing delivery obligations in fiscal year 2020. 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.

Use of Non-GAAP Financial Measures

This press release includes certain non-GAAP financial measures, including Total gross profit and Total gross margin. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either exclude or include amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States of America, or GAAP. These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same captions, and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies. As such, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The Company uses these non-GAAP financial measures to analyze its operating performance and future prospects, develop internal budgets and financial goals, and to facilitate period-to-period comparisons. The Company believes these non-GAAP financial measures reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting its business.

Conference Call to Discuss First Quarter 2020 Financial Results

LIVE CONFERENCE CALL:
Thursday, April 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: 13700231

CONFERENCE CALL REPLAY:
Expiration: Saturday, May 30, 2020
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13700231

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. Both our headquarters in San Leandro, California, and our Commercial Development Center in Katy, Texas house on-site research, development and manufacturing facilities. 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)

 
March 31,
2020
 
 
December 31,
2019
 

 
(In thousands, except share
data and par value)
 

ASSETS

Current assets:

Cash and cash equivalents

 
$
32,842
 
 
$
26,387
 

Short-term investments

 
 
40,995
 
 
 
58,736
 

Accounts receivable, net

 
 
13,841
 
 
 
12,979
 

Inventories, net

 
 
10,938
 
 
 
10,317
 

Prepaid expenses and other current assets

 
 
5,187
 
 
 
4,548
 

Total current assets

 
 
103,803
 
 
 
112,967
 

Long-term investments

 
 
19,361
 
 
 
15,419
 

Deferred tax assets, non-current

 
 
16,932
 
 
 
16,897
 

Property and equipment, net

 
 
19,780
 
 
 
18,843
 

Operating lease, right of use asset

 
 
17,253
 
 
 
11,195
 

Goodwill

 
 
12,790
 
 
 
12,790
 

Other intangible assets, net

 
 
61
 
 
 
65
 

Other assets, non-current

 
 
632
 
 
 
598
 

Total assets

 
$
190,612
 
 
$
188,774
 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

 
$
1,868
 
 
$
1,192
 

Accrued expenses and other current liabilities

 
 
6,156
 
 
 
9,869
 

Lease liabilities

 
 
1,209
 
 
 
1,023
 

Contract liabilities

 
 
16,509
 
 
 
15,746
 

Total current liabilities

 
 
25,742
 
 
 
27,830
 

Lease liabilities, non-current

 
 
17,523
 
 
 
11,533
 

Contract liabilities, non-current

 
 
8,805
 
 
 
13,120
 

Other non-current liabilities

 
 
277
 
 
 
278
 

Total liabilities

 
 
52,347
 
 
 
52,761
 

Commitments and contingencies (Note 8)

Stockholders' equity:

Common stock

 
 
61
 
 
 
61
 

Additional paid-in capital

 
 
171,954
 
 
 
170,028
 

Accumulated other comprehensive loss

 
 
(332
)
 
 
(37
)

Treasury stock

 
 
(30,486
)
 
 
(30,486
)

Accumulated deficit

 
 
(2,932
)
 
 
(3,553
)

Total stockholders' equity

 
 
138,265
 
 
 
136,013
 

Total liabilities and stockholders' equity

 
$
190,612
 
 
$
188,774
 

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

 
Three Months
Ended March 31,
 

 
2020
 
 
2019
 

 
(In thousands, except per share data)
 

Product revenue

 
$ 
19,001
 
 
$ 
16,072
 

Product cost of revenue

 
 
5,684
 
 
 
4,935
 

Product gross profit

 
 
13,317
 
 
 
11,137
 

License and development revenue

 
 
2,543
 
 
 
3,723
 

Operating expenses:

General and administrative

 
 
6,881
 
 
 
5,579
 

Sales and marketing

 
 
2,138
 
 
 
2,162
 

Research and development

 
 
6,709
 
 
 
4,254
 

Amortization of intangible assets

 
 
4
 
 
 
156
 

Total operating expenses

 
 
15,732
 
 
 
12,151
 

Income from operations

 
 
128
 
 
 
2,709
 

Other income (expense):

Interest income

 
 
420
 
 
 
523
 

Other non-operating expense, net

 
 
(12
)
 
 
(24
)

Total other income, net

 
 
408
 
 
 
499
 

Income before income taxes

 
 
536
 
 
 
3,208
 

(Benefit from) provision for income taxes

 
 
(85
)
 
 
554
 

Net income

 
$ 
621
 
 
$ 
2,654
 

Earnings per share:

Basic

 
$ 
0.01
 
 
$ 
0.05
 

Diluted

 
$ 
0.01
 
 
$ 
0.05
 

Number of shares used in per share calculations:

Basic

 
 
55,412
 
 
 
54,116
 

Diluted

 
 
56,542
 
 
 
55,368
 

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

 
Three Months
Ended March 31,
 

 
2020
 
 
2019
 

 
(In thousands)
 

Cash flows from operating activities:

Net income

 
$ 
621
 
 
$ 
2,654
 

Adjustments to reconcile net income to cash used in operating activities

Stock-based compensation

 
 
1,503
 
 
 
1,678
 

Depreciation and amortization

 
 
1,258
 
 
 
900
 

Amortization (accretion) of premiums and discounts on investments

 
 
220
 
 
 
(26
)

Deferred income taxes

 
 
(35
)
 
 
549
 

Provision for warranty claims

 
 
98
 
 
 
152
 

Other non-cash adjustments

 
 
47
 
 
 
(68
)

Changes in operating assets and liabilities:

Accounts receivable, net

 
 
(902
)
 
 
(7,162
)

Contract assets

 
 
(244
)
 
 
2,977
 

Inventories, net

 
 
(692
)
 
 
(218
)

Prepaid and other assets

 
 
(428
)
 
 
(140
)

Accounts payable

 
 
745
 
 
 
18
 

Accrued expenses and other liabilities

 
 
(4,514
)
 
 
(3,353
)

Income taxes

 
 
3
 
 
 
10
 

Contract liabilities

 
 
(3,552
)
 
 
(3,922
)

Net cash used in operating activities

 
 
(5,872
)
 
 
(5,951
)

Cash flows from investing activities:

Sales of marketable securities

 
 
4,974
 
 
 
–
 

Maturities of marketable securities

 
 
21,195
 
 
 
19,599
 

Purchases of marketable securities

 
 
(12,855
)
 
 
(19,198
)

Capital expenditures

 
 
(1,380
)
 
 
(1,566
)

Net cash provided by (used in) investing activities

 
 
11,934
 
 
 
(1,165
)

Cash flows from financing activities:

Net proceeds from issuance of common stock

 
 
440
 
 
 
2,191
 

Tax payment for employee shares withheld

 
 
(22
)
 
 
(34
)

Net cash provided by financing activities

 
 
418
 
 
 
2,157
 

Effect of exchange rate differences on cash and cash equivalents

 
 
(25
)
 
 
(4
)

Net change in cash, cash equivalents and restricted cash

 
 
6,455
 
 
 
(4,963
)

Cash, cash equivalents and restricted cash, beginning of year

 
 
26,488
 
 
 
22,138
 

Cash, cash equivalents and restricted cash, end of period

 
$ 
32,943
 
 
$ 
17,175
 

ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)

 
Three Months Ended
March 31, 2020
 
 
Three Months Ended
March 31, 2019
 

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

 
(In thousands)
 

Product revenue

 
$ 
19,001
 
 
$ 
–
 
 
$ 
–
 
 
$ 
19,001
 
 
$ 
15,968
 
 
$ 
104
 
 
$ 
–
 
 
$ 
16,072
 

Product cost of revenue

 
 
5,684
 
 
 
–
 
 
 
–
 
 
 
5,684
 
 
 
4,747
 
 
 
188
 
 
 
–
 
 
 
4,935
 

Product gross profit (loss)

 
 
13,317
 
 
 
–
 
 
 
–
 
 
 
13,317
 
 
 
11,221
 
 
 
(84
)
 
 
–
 
 
 
11,137
 

License and development revenue

 
 
–
 
 
 
2,543
 
 
 
–
 
 
 
2,543
 
 
 
–
 
 
 
3,723
 
 
 
–
 
 
 
3,723
 

Operating expenses

General and administrative

 
 
405
 
 
 
741
 
 
 
5,735
 
 
 
6,881
 
 
 
535
 
 
 
364
 
 
 
4,680
 
 
 
5,579
 

Sales and marketing

 
 
1,676
 
 
 
58
 
 
 
404
 
 
 
2,138
 
 
 
1,649
 
 
 
263
 
 
 
250
 
 
 
2,162
 

Research and development

 
 
902
 
 
 
5,247
 
 
 
560
 
 
 
6,709
 
 
 
804
 
 
 
3,363
 
 
 
87
 
 
 
4,254
 

Amortization of intangibles

 
 
4
 
 
 
–
 
 
 
–
 
 
 
4
 
 
 
156
 
 
 
–
 
 
 
–
 
 
 
156
 

Total operating expenses

 
 
2,987
 
 
 
6,046
 
 
 
6,699
 
 
 
15,732
 
 
 
3,144
 
 
 
3,990
 
 
 
5,017
 
 
 
12,151
 

Operating income (loss)

 
$ 
10,330
 
 
$ 
(3,503
)
 
$ 
(6,699
)
 
 
128
 
 
$ 
8,077
 
 
$ 
(351
)
 
$ 
(5,017
)
 
 
2,709
 

Other income, net

 
 
 
 
 
 
 
 
 
 
 
 
 
 
408
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
499
 

Income before income taxes

 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
536
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
3,208
 

ENERGY RECOVERY, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Unaudited)

This press release includes non-GAAP financial information because we plan and manage our business using such information. Our non-GAAP Total Gross Margin is determined by adding back the license and development revenue associated with the amortization of the VorTeq exclusivity fee.

 
Three Months
Ended March 31,
 

 
2020
 
 
2019
 

 
(In thousands, except per share data)
 

Product revenue

 
$ 
19,001
 
 
$ 
16,072
 

License and development revenue

 
 
2,543
 
 
 
3,723
 

Total revenue

 
$ 
21,544
 
 
$ 
19,795
 

Product gross profit

 
$ 
13,317
 
 
$ 
11,137
 

License and development revenue

 
 
2,543
 
 
 
3,723
 

Total gross profit (non-GAAP)

 
$ 
15,860
 
 
$ 
14,860
 

Product gross margin

 
 
70.1
%
 
 
69.3
%

Total gross margin (non-GAAP)

 
 
73.6
%
 
 
75.1
%

SOURCE: Energy Recovery Inc.

ReleaseID: 587806