Energy Recovery Reports Third Quarter 2019 Financial Results

SAN LEANDRO, CA / ACCESSWIRE / October 31, 2019 / Energy Recovery Inc. (Nasdaq:ERII) (“Energy Recovery” or the “Company”), the leader in pressure energy technology for industrial fluid flows, today announced its financial results for the third quarter ended on September 30, 2019.

Third Quarter Summary:

  • Total revenue of $24.9 million, an increase of 12% year-over-year
  • Product gross margin of 75.1%, an increase of 210 basis points year-over-year
  • Total gross margin(1) of 78.2%, an increase of 80 basis points year-over-year
  • Net income of $5.1 million with a diluted earnings per share of $0.09, an increase of $0.01 year-over-year
  • Adjusted net income(1) of $4.2 million with a non-GAAP diluted earnings per share(1) of $0.07, a decrease of $0.01 year-over-year

Year-to-Date Summary:

  • Total revenue of $67.4 million, an increase of 19% year-over-year
  • Product gross margin of 72.2%, an increase of 260 basis points year-over-year
  • Total gross margin(1) of 76.5%, an increase of 170 basis points year-over-year
  • Net income of $11.5 million with a diluted earnings per share of $0.21, a decrease of $0.15 year-over-year
  • Adjusted net income(1) of $10.6 million with a non-GAAP diluted earnings per share(1) of $0.19, an increase of $0.03 year-over-year

President and CEO Chris Gannon remarked, “Energy Recovery’s track record of strong performance continued in the third quarter. The tremendous performance of our Water business demonstrates that the surge of desalination growth we have anticipated is here. As the size and pace at which projects are being awarded increases, our proactive investments in Water, including an expansion of our manufacturing capacity, are positioning us to capitalize on this historic growth. In the third quarter, we further strengthened our backlog and pipeline for the remainder of 2019, 2020, and 2021, a clear sign that equipment procurement is taking place earlier in the desalination project development cycle.”

Mr. Gannon added, “In our Oil & Gas business, we are gaining insight and achieving advancements with our VorTeq technology. We are principally focused on accumulating run-time on and identifying failure modes of the VorTeq system as we continue to improve the reliability and repeatability of our technology. The VorTeq is an entirely new, potentially game-changing, technology to be deployed in a mature and vastly competitive industry, and it must work flawlessly once out in the field.”

Mr. Gannon concluded, “As we near the end of 2019, Energy Recovery remains focused on our near-term strategic objectives – growth and reinvestment in Water and advancement towards VorTeq commercialization. I am proud of the work our team is doing in both areas and believe our strong third quarter results reflect our focus.”

Revenues

For the third quarter ended September 30, 2019, the Company generated total revenue of $24.9 million, an increase of $2.6 million, or 12%, compared to $22.2 million in the third quarter ended September 30, 2018.

The Water segment generated total product revenue of $21.8 million for the third quarter ended September 30, 2019, an increase of $3.3 million, or 18%, compared to $18.5 million in the third quarter ended September 30, 2018. This increase was due primarily to higher shipments across all channels, including Aftermarket (“AM”), Mega-Project Development (“MPD”) and Original Equipment Manufacturer (“OEM”).

The Oil & Gas segment generated total revenue of $3.1 million for the third quarter ended September 30, 2019, a decrease of $0.7 million, or (18)%, compared to $3.8 million in the third quarter ended September 30, 2018. The decrease in license and development revenue, which is calculated as a percentage of Cost to Total Cost, was due primarily to an increase in total estimated project costs. There was no product revenue recognized for the Oil & Gas segment for the quarter ended September 30, 2019.

Gross Margin

For the third quarter ended September 30, 2019, product gross margin was 75.1%, an increase of 210 basis points from 73.0% in the third quarter ended September 30, 2018. Including license and development revenue, total gross margin(1) was 78.2%, an increase of 80 basis points from 77.4% in the third quarter ended September 30, 2018.

The Water segment generated product gross margin of 75.1% for the third quarter ended September 30, 2019, an increase of 140 basis points, compared to 73.7% in the third quarter ended September 30, 2018. This increase was due primarily to higher volume of products sold and favorable price and product mix.

The Oil & Gas segment generated no product gross margin in the third quarter ended September 30, 2019, compared to (50.0)% for the third quarter ended September 30, 2018. This was due to no Oil & Gas product revenue recognized in the third quarter ended September 30, 2019.

Operating Expenses

For the third quarter ended September 30, 2019, operating expenses were $14.9 million, an increase of $3.3 million, or 28%, compared to $11.6 million for the third quarter ended September 30, 2018.

The Water segment operating expenses for the third quarter ended September 30, 2019 were $3.3 million, an increase of $0.6 million, or 25%, compared to $2.6 million for the third quarter ended September 30, 2018. This increase was due primarily to research and development investment in the Water segment, and growth in headcount and personnel-related costs.

The Oil & Gas segment operating expenses for the third quarter ended September 30, 2019 were $6.2 million, an increase of $1.8 million, or 40%, compared to $4.4 million for the third quarter ended September 30, 2018. This increase was due primarily to the Company’s continued investment in Oil & Gas research and development, and growth in headcount and personnel-related costs.

The Corporate operating expenses for the third quarter ended September 30, 2019 were $5.4 million, an increase of $0.9 million, or 19%, compared to $4.5 million for the third quarter ended September 30, 2018. This increase was due primarily to an increase in headcount and personnel-related costs, partially offset by lower professional services costs.

Bottom Line Summary

To summarize the Company’s financial performance, on a quarterly basis, the Company reported a net income of $5.1 million, or $0.09 per diluted share for the third quarter ended September 30, 2019, compared to a net income of $4.7 million, or $0.08 per diluted share for the third quarter ended September 30, 2018. This increase was driven by a discrete tax benefit of $1.0 million related to an increase in prior year U.S. federal research and development credits. On an adjusted basis and excluding the discrete tax benefit, the Company reported an adjusted net income(1) of $4.2 million, or $0.07 per non-GAAP diluted share for the third quarter ended September 30, 2019.

Cash Flow Highlights

The Company finished the third quarter ended September 30, 2019 with cash, cash equivalents, and short-term and long-term restricted cash of $29.8 million, and short-term and long-term investments of $67.5 million, a combined total of $97.3 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 optimism for the long-term health of our Water business, the Company’s belief that the Company will successfully commercialize the VorTeq system, and the Company’s belief that our business will continue to grow over the next several years. 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, 2018 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 margin, adjusted net income and non-GAAP earnings per share. 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.

(1) “Total gross margin,” “Adjusted net income” and “Non-GAAP earnings per share” are non-GAAP financial measures. Please refer to the discussion under headings “Use of Non-GAAP Financial Measures” and “Reconciliations of Non-GAAP Financial Measures.”

Conference Call to Discuss Third Quarter 2019 Financial Results

LIVE CONFERENCE CALL:

Thursday, October 31, 2019, 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: 13694261

CONFERENCE CALL REPLAY:

Expiration: Saturday, November 30, 2019
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13694261

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.

Energy Recovery, Inc. (ERII) is an energy solutions provider to industrial fluid flow markets worldwide. Energy Recovery solutions recycle and convert wasted pressure energy into a usable asset and preserve pumps that are subject to hostile processing environments. With award-winning technology, Energy Recovery simplifies complex industrial systems while improving productivity, profitability, and efficiency within the water, oil & gas, and chemical processing industries. Energy Recovery products annually save customers $2 billion (USD) and offset more than 11.5 million metric tons of carbon dioxide. Headquartered in the Bay Area, Energy Recovery has offices in Dubai, Houston, Madrid, and Shanghai. For more information about the Company, please visit www.energyrecovery.com.

Contact

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

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
  September 30,
2019
    December 31,
2018
 
 
  (In thousands, except share data and par value)  
ASSETS
           
Current assets:
           
Cash, cash equivalents and restricted cash
  $ 29,696     $ 22,052  
Short-term investments
    59,905       73,338  
Accounts receivable, net of allowance for doubtful accounts of $377 and $396 at September 30, 2019 and December 31, 2018, respectively
    20,848       10,212  
Contract assets
    1,090       4,083  
Inventories, net
    8,977       7,138  
Prepaid expenses and other current assets
    3,148       2,825  
Total current assets
    123,664       119,648  
Long-term investments
    7,549       1,269  
Deferred tax assets, non-current
    17,120       18,318  
Property and equipment, net
    17,442       14,619  
Operating lease, right of use asset
    11,449       12,189  
Goodwill
    12,790       12,790  
Other intangible assets, net
    171       640  
Other assets, non-current
    402       368  
Total assets
  $ 190,587     $ 179,841  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,559     $ 1,439  
Accrued expenses and other current liabilities
    8,519       8,497  
Lease liabilities
    1,019       926  
Contract liabilities
    17,507       16,270  
Total current liabilities
    28,604       27,132  
Lease liabilities, non-current
    11,777       12,556  
Contract liabilities, non-current
    15,175       26,539  
Other non-current liabilities
    277       236  
Total liabilities
    55,833       66,463  
 
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at September 30, 2019 and December 31, 2018
           
Common stock, $0.001 par value; 200,000,000 shares authorized; 60,569,655 shares issued and 55,113,720 shares outstanding at September 30, 2019 and 59,396,020 shares issued and 53,940,085 shares outstanding at December 31, 2018
    60       59  
Additional paid-in capital
    168,150       158,404  
Accumulated other comprehensive loss
    (26 )     (133 )
Treasury stock, at cost, 5,455,935 shares repurchased at September 30, 2019 and December 31, 2018
    (30,486 )     (30,486 )
Accumulated deficit
    (2,944 )     (14,466 )
Total stockholders’ equity
    134,754       113,378  
Total liabilities and stockholders’ equity
  $ 190,587     $ 179,841  

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
  Three Months Ended September 30,     Nine Months Ended September 30,  
 
  2019     2018     2019     2018  
 
  (In thousands, except per share data)  
Product revenue
  $ 21,752     $ 18,578     $ 57,050     $ 47,042  
Product cost of revenue
    5,425       5,022       15,843       14,312  
Product gross profit
    16,327       13,556       41,207       32,730  
License and development revenue
    3,098       3,661       10,391       9,768  
 
                               
Operating expenses:
                               
General and administrative
    5,711       5,266       16,790       16,030  
Sales and marketing
    2,367       1,873       6,710       5,643  
Research and development
    6,620       4,270       16,354       11,792  
Amortization of intangible assets
    156       158       469       474  
Total operating expenses
    14,854       11,567       40,323       33,939  
Income from operations
    4,571       5,650       11,275       8,559  
 
                               
Other income (expense):
                               
Interest income
    500       369       1,551       1,043  
Interest expense
                      (1 )
Other non-operating expense, net
    (5 )     (22 )     (77 )     (66 )
Total other income, net
    495       347       1,474       976  
Income before income taxes
    5,066       5,997       12,749       9,535  
Provision for (benefit from) income taxes
    (83 )     1,339       1,227       (10,140 )
Net income
  $ 5,149     $ 4,658     $ 11,522     $ 19,675  
 
                               
Earnings per share:
                               
Basic
  $ 0.09     $ 0.09     $ 0.21     $ 0.37  
Diluted
  $ 0.09     $ 0.08     $ 0.21     $ 0.36  
 
                               
Number of shares used in per share calculations:
                               
Basic
    54,975       53,665       54,594       53,719  
Diluted
    56,384       55,295       55,971       55,382  

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
  Nine Months Ended September 30,  
 
  2019     2018  
Cash flows from operating activities:
  (In thousands)  
Net income
  $ 11,522     $ 19,675  
Adjustments to reconcile net income to cash provided by operating activities
               
Stock-based compensation
    4,425       4,226  
Depreciation and amortization
    3,440       2,898  
(Accretion) amortization of premiums and discounts on investments
    (37 )     380  
Provision for warranty claims
    339       213  
Unrealized gain on foreign currency translation
    (18 )      
Realized gain on sale of investments
    (5 )      
Reversal of accruals related to expired warranties
    (131 )     (171 )
Provision for doubtful accounts
    (19 )     336  
Adjustments for excess or obsolete inventory
    (7 )     132  
Deferred income taxes
    1,198       (10,150 )
Loss on disposal of fixed assets
    377       58  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (10,617 )     4,463  
Contract assets, costs and estimated earnings in excess of billings
    2,993       2,934  
Inventories, net
    (1,885 )     (894 )
Prepaid and other assets
    383       (445 )
Accounts payable
    (94 )     (2,198 )
Accrued expenses and other liabilities
    (1,264 )     (1,270 )
Income taxes
    30       (638 )
Contract liabilities, cost in excess of billings
    (10,127 )     (9,800 )
Net cash provided by operating activities
    503       9,749  
Cash flows from investing activities:
               
Sales of marketable securities
    3,535        
Maturities of marketable securities
    70,040       62,213  
Purchases of marketable securities
    (66,253 )     (60,334 )
Capital expenditures
    (5,501 )     (2,029 )
Net cash provided by (used in) investing activities
    1,821       (150 )
Cash flows from financing activities:
               
Net proceeds from issuance of common stock
    5,424       3,873  
Tax payment for employee shares withheld
    (89 )     (115 )
Repayment of long-term debt
          (8 )
Repurchase of common stock
          (10,000 )
Net cash provided by (used in) financing activities
    5,335       (6,250 )
Effect of exchange rate differences on cash and cash equivalents
          14  
Net change in cash, cash equivalents and restricted cash
    7,659       3,363  
Cash, cash equivalents and restricted cash, beginning of year
    22,138       30,626  
Cash, cash equivalents and restricted cash, end of period
  $ 29,797     $ 33,989  

ENERGY RECOVERY, INC.
FINANCIAL INFORMATION BY SEGMENT

(Unaudited)

 
  Three Months Ended September 30, 2019     Nine Months Ended September 30, 2019  
 
  Water     Oil & Gas     Total     Water     Oil & Gas     Total  
 
  (In thousands)  
Product revenue
  $ 21,752     $     $ 21,752     $ 56,946     $ 104     $ 57,050  
Product cost of revenue
    5,425             5,425       15,655       188       15,843  
Product gross profit (loss)
    16,327             16,327       41,291       (84 )     41,207  
License and development revenue
          3,098       3,098             10,391       10,391  
Operating expenses
                                               
General and administrative
    359       431       790       1,456       1,207       2,663  
Sales and marketing
    1,850       92       1,942       5,058       674       5,732  
Research and development
    886       5,667       6,553       2,794       13,335       16,129  
Amortization of intangibles
    156             156       469             469  
Total operating expenses
    3,251       6,190       9,441       9,777       15,216       24,993  
Operating income (loss)
  $ 13,076     $ (3,092 )     9,984     $ 31,514     $ (4,909 )     26,605  
Less: Corporate operating expenses                     5,413                       15,330  
Income from operations                     4,571                       11,275  
Other income                     495                       1,474  
Income before income taxes                   $ 5,066                     $ 12,749  
                                                 
                                                 
 
  Three Months Ended September 30, 2018     Nine Months Ended September 30, 2018  
 
  Water     Oil & Gas     Total     Water     Oil & Gas     Total  
 
  (In thousands)  
Product revenue
  $ 18,464     $ 114     $ 18,578     $ 46,628     $ 414     $ 47,042  
Product cost of revenue
    4,851       171       5,022       13,719       593       14,312  
Product gross profit (loss)
    13,613       (57 )     13,556       32,909       (179 )     32,730  
License and development revenue
          3,661       3,661             9,768       9,768  
Operating expenses
                                               
General and administrative
    470       373       843       1,441       1,395       2,836  
Sales and marketing
    1,435       335       1,770       4,243       997       5,240  
Research and development
    545       3,713       4,258       1,019       10,753       11,772  
Amortization of intangibles
    158             158       474             474  
Total operating expenses
    2,608       4,421       7,029       7,177       13,145       20,322  
Operating income (loss)
  $ 11,005     $ (817 )     10,188     $ 25,732     $ (3,556 )     22,176  
Less: Corporate operating expenses
                    4,538                       13,617  
Income from operations
                    5,650                       8,559  
Other income
                    347                       976  
Income before income taxes
                  $ 5,997                     $ 9,535  
 
                                               

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

(Unaudited)

 
  Three Months Ended September 30,     Nine Months Ended September 30,  
 
  2019     2018     2019     2018  
 
  (In thousands, except per share data)  
Product revenue
  21,752     18,578     57,050     47,042  
License and development revenue
    3,098       3,661       10,391       9,768  
Total revenue
  24,850     22,239     67,441     56,810  
Product gross profit
  16,327     13,556     41,207     32,730  
License and development revenue
    3,098       3,661       10,391       9,768  
Total gross profit (non-GAAP)
  19,425     17,217     51,598     42,498  
Product gross margin
    75.1 %     73.0 %     72.2 %     69.6 %
Total gross margin (non-GAAP)
    78.2 %     77.4 %     76.5 %     74.8 %
Net income
  5,149     4,658     11,522     19,675  
Reversal of non-recurring tax benefit
                      (10,763 )
Reversal of federal research and development tax credits
    (971 )           (971 )      
Adjusted net income (non-GAAP)
  4,178     4,658     10,551     8,912  
Income per share:
                               
Diluted
  0.09     0.08     0.21     0.36  
Diluted (non-GAAP)
  0.07     0.08     0.19     0.16  
Number of diluted shares used in per share calculations:
                               
Diluted shares
    56,384       55,295       55,971       55,382  

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. Our non-GAAP adjusted net income or loss and non-GAAP earnings per share is determined by adding back non-recurring operating and tax expenses/(benefits).

SOURCE: Energy Recovery Inc.

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