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| 8-K - FORM 8-K - EARNINGS RELEASE (Q3'2020) - Energy Recovery, Inc. | a2020xq3earningsrelease.htm |
Exhibit 99.1
Energy Recovery Reports Third Quarter Financial Results
San Leandro, Calif., October 29, 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 third quarter ended September 30, 2020.
Third Quarter 2020 Highlights:
• | Product revenue of $27.4 million, an all-time quarterly record and an increase of 26% year-over-year |
• | Product gross margin of 71.5%, a decrease of 360 basis points year-over-year and in-line with expectations for the year |
• | Net income of $5.4 million, or diluted earnings per share of $0.10, an increase of $0.01 year-over-year |
Year-to-Date 2020 Highlights:
• | Product revenue of $65.7 million, an increase of 15% year-over-year |
• | Total revenue of $92.6 million, an increase of 37% year-over-year, of which $24.4 million is related to accelerated revenue recognition from the termination of the license agreement between the Company and Schlumberger |
• | Product gross margin of 69.5%, a decrease of 270 basis points year-over-year, of which 230 basis points are due to COVID-19 temporary reductions in manufacturing |
• | Net income of $22.9 million, or diluted earnings per share of $0.41, an increase of $0.20 year-over-year in part related to accelerated revenue recognition from the termination of the license agreement between the Company and Schlumberger |
“We surpassed our previous year’s quarterly product revenue record by 26 percent this quarter, which is a testament to our singular focus on meeting customer demand while keeping our employees safe. We remain on pace to achieve 25 percent year-over-year revenue growth in our water division this year, and we are preparing for further growth in 2021 and beyond. The desalination industry remains robust despite global economic uncertainty because affordable desalination is critical to meet growing water demand for people around the world. We are proud of the impact our technology has in making desalination more energy efficient and sustainable and believe the time has come to introduce pressure exchanger technology to other industries where we can drive efficiency improvements,” said Bob Mao, Chairman of the Board, President and Chief Executive Officer of Energy Recovery.
Mr. Mao continued, “Today we are advancing new products built on our pressure exchanger technology platform: the VorTeq, as well as incubation initiatives including a solution to improve the energy efficiency of wastewater treatment. We did not have an opportunity to go to a live well with the VorTeq last quarter, but we are ready to deploy and continue to pursue live well opportunities. While we remain confident in our ability to clear the hurdles that remain before full commercial deployment of the VorTeq, we have not lost sight of the need to produce results or stop investing. This same principle holds for all of our incubation initiatives, and I believe this disciplined approach will allow us to more rapidly achieve our profit and ROI objectives and deliver shareholder value.”
COVID-19 Pandemic
The Company’s production remained strong during the third quarter, with minimal impacts on production outputs due to the COVID-19 pandemic (“COVID-19”). COVID-19 has similarly had a limited effect on Energy Recovery’s financials; however, the Company’s gross margin for the nine months of 2020 was negatively affected due to reduced production output while its San Leandro facility was underutilized due to temporary suspension of manufacturing activities at the beginning of the COVID-19 pandemic. Enhanced safety measures for employees remain in effect today in the Company’s facilities, 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 2020, weekly COVID-19 testing of employees working on-site.
The Company successfully overcame challenges posed by COVID-19 to commission its Tracy, California production facility in July 2020, which further strengthens the Company’s ability to fulfill its strong backlog of orders through the remainder of fiscal year 2020 and beyond.
Third Quarter 2020
Revenues
For the third quarter ended September 30, 2020, the Water segment generated total product revenue of $27.4 million, an all-time quarterly record, and an increase of $5.7 million, or 26%, compared to $21.8 million in the third quarter ended September 30, 2019. This increase was due primarily to higher Mega-Project Development (“MPD”) shipments, offset by lower Original Equipment Manufacturer (“OEM”) and Aftermarket (“AM”) shipments.
For the third quarter ended September 30, 2020, there was no license and development revenue recognized as a result of the termination of the license agreement between the Company and Schlumberger.
Product Gross Margin
For the third quarter ended September 30, 2020, product gross margin was 71.5%, a decrease of 360 basis points from 75.1% in the third quarter ended September 30, 2019. The decrease in gross margin was due primarily to lower average selling prices due to higher MPD channel mix and costs related to reduced utilization of our manufacturing facilities related to COVID-19, partially offset by product mix.
Operating Expenses
For the third quarter ended September 30, 2020, operating expenses were $13.5 million, a decrease of $1.3 million, or (9%), compared to $14.9 million for the third quarter ended September 30, 2019. This decrease was due primarily to lower Oil & Gas testing expenditures as we reduce VorTeq related testing activities, lower depreciation expense related to long-lived assets, and lower travel expenses, partially offset by higher personnel-related costs and other R&D costs to support our incubation initiatives.
COVID-19 did not have a material effect on operating expenditures during the three months ended September 30, 2020.
Bottom Line Summary
To summarize the Company’s financial performance, on a quarterly basis, the Company reported a net income of $5.4 million, or $0.10 per diluted share for the third quarter ended September 30, 2020, compared to a net income of $5.1 million, or $0.09 per diluted share for the third quarter ended September 30, 2019.
Cash Flow Highlights
The Company finished the third quarter ended September 30, 2020 with cash and cash equivalents of $80.1 million, and short-term and long-term investments of $25.8 million, which represents a combined total of $105.9 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 the Company will achieve 25 percent year-over-year revenue growth in its water division in 2020; that the Company will achieve further growth in 2021 and beyond; and that the Company will be able to clear the hurdles that remain before full commercial deployment of the VorTeq. 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 Third Quarter 2020 Financial Results
LIVE CONFERENCE CALL:
Thursday, October 29, 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: 13710080
CONFERENCE CALL REPLAY:
Expiration: Sunday, November 29, 2020
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13710080
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)
September 30, 2020 | December 31, 2019 | ||||||
(In thousands) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 80,149 | $ | 26,387 | |||
Short-term investments | 24,373 | 58,736 | |||||
Accounts receivable, net | 11,055 | 12,979 | |||||
Inventories, net | 10,662 | 10,317 | |||||
Prepaid expenses and other current assets | 4,959 | 4,548 | |||||
Total current assets | 131,198 | 112,967 | |||||
Long-term investments | 1,418 | 15,419 | |||||
Deferred tax assets, non-current | 11,454 | 16,897 | |||||
Property and equipment, net | 20,535 | 18,843 | |||||
Operating lease, right of use asset | 16,444 | 11,195 | |||||
Goodwill | 12,790 | 12,790 | |||||
Other intangible assets, net | 53 | 65 | |||||
Other assets, non-current | 645 | 598 | |||||
Total assets | $ | 194,537 | $ | 188,774 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 1,951 | $ | 1,192 | |||
Accrued expenses and other current liabilities | 8,654 | 9,869 | |||||
Lease liabilities | 1,209 | 1,023 | |||||
Contract liabilities | 1,160 | 15,746 | |||||
Total current liabilities | 12,974 | 27,830 | |||||
Lease liabilities, non-current | 16,802 | 11,533 | |||||
Contract liabilities, non-current | 104 | 13,120 | |||||
Other non-current liabilities | 672 | 278 | |||||
Total liabilities | 30,552 | 52,761 | |||||
Stockholders’ equity: | |||||||
Common stock | 61 | 61 | |||||
Additional paid-in capital | 174,929 | 170,028 | |||||
Accumulated other comprehensive income (loss) | 100 | (37 | ) | ||||
Treasury stock | (30,486 | ) | (30,486 | ) | |||
Accumulated earnings (deficit) | 19,381 | (3,553 | ) | ||||
Total stockholders’ equity | 163,985 | 136,013 | |||||
Total liabilities and stockholders’ equity | $ | 194,537 | $ | 188,774 | |||
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
(In thousands, except per share data) | |||||||||||||||
Product revenue | $ | 27,408 | $ | 21,752 | $ | 65,665 | $ | 57,050 | |||||||
Product cost of revenue | 7,816 | 5,425 | 20,049 | 15,843 | |||||||||||
Product gross profit | 19,592 | 16,327 | 45,616 | 41,207 | |||||||||||
License and development revenue | — | 3,098 | 26,895 | 10,391 | |||||||||||
Operating expenses: | |||||||||||||||
General and administrative | 6,271 | 5,711 | 18,751 | 16,790 | |||||||||||
Sales and marketing | 2,141 | 2,367 | 5,776 | 6,710 | |||||||||||
Research and development | 5,098 | 6,620 | 18,159 | 16,354 | |||||||||||
Amortization of intangible assets | 4 | 156 | 12 | 469 | |||||||||||
Impairment of long-lived assets | — | — | 2,332 | — | |||||||||||
Total operating expenses | 13,514 | 14,854 | 45,030 | 40,323 | |||||||||||
Income from operations | 6,078 | 4,571 | 27,481 | 11,275 | |||||||||||
Other income (expense): | |||||||||||||||
Interest income | 134 | 500 | 809 | 1,551 | |||||||||||
Other non-operating expense, net | (29 | ) | (5 | ) | (59 | ) | (77 | ) | |||||||
Total other income, net | 105 | 495 | 750 | 1,474 | |||||||||||
Income before income taxes | 6,183 | 5,066 | 28,231 | 12,749 | |||||||||||
Provision for (benefit from) income taxes | 796 | (83 | ) | 5,297 | 1,227 | ||||||||||
Net income | $ | 5,387 | $ | 5,149 | $ | 22,934 | $ | 11,522 | |||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.10 | $ | 0.09 | $ | 0.41 | $ | 0.21 | |||||||
Diluted | $ | 0.10 | $ | 0.09 | $ | 0.41 | $ | 0.21 | |||||||
Number of shares used in per share calculations: | |||||||||||||||
Basic | 55,692 | 54,975 | 55,573 | 54,594 | |||||||||||
Diluted | 56,471 | 56,384 | 56,443 | 55,971 | |||||||||||
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | |||||||
2020 | 2019 | ||||||
(In thousands) | |||||||
Cash flows from operating activities: | |||||||
Net income | $ | 22,934 | $ | 11,522 | |||
Adjustments to reconcile net income to cash provided by operating activities | |||||||
Stock-based compensation | 3,672 | 4,425 | |||||
Depreciation and amortization | 3,963 | 3,440 | |||||
Amortization (accretion) of premiums and discounts on investments | 311 | (37 | ) | ||||
Deferred income taxes | 5,443 | 1,198 | |||||
Provision for warranty claims | 316 | 339 | |||||
Impairment of long-lived assets | 2,332 | — | |||||
Other non-cash adjustments | — | 197 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable, net | 1,862 | (10,617 | ) | ||||
Contract assets | (747 | ) | 2,993 | ||||
Inventories, net | (506 | ) | (1,885 | ) | |||
Prepaid and other assets | 295 | 383 | |||||
Accounts payable | 656 | (94 | ) | ||||
Accrued expenses and other liabilities | (2,561 | ) | (1,264 | ) | |||
Income taxes | (18 | ) | 30 | ||||
Contract liabilities | (27,602 | ) | (10,127 | ) | |||
Net cash provided by operating activities | 10,350 | 503 | |||||
Cash flows from investing activities: | |||||||
Sales of marketable securities | 10,573 | 3,535 | |||||
Maturities of marketable securities | 50,467 | 70,040 | |||||
Purchases of marketable securities | (12,855 | ) | (66,253 | ) | |||
Capital expenditures | (6,019 | ) | (5,501 | ) | |||
Net cash provided by investing activities | 42,166 | 1,821 | |||||
Cash flows from financing activities: | |||||||
Net proceeds from issuance of common stock | 1,260 | 5,424 | |||||
Tax payment for employee shares withheld | (23 | ) | (89 | ) | |||
Net cash provided by financing activities | 1,237 | 5,335 | |||||
Effect of exchange rate differences on cash and cash equivalents | 11 | — | |||||
Net change in cash, cash equivalents and restricted cash | 53,764 | 7,659 | |||||
Cash, cash equivalents and restricted cash, beginning of year | 26,488 | 22,138 | |||||
Cash, cash equivalents and restricted cash, end of period | $ | 80,252 | $ | 29,797 | |||
ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)
Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||
Water | Oil & Gas | Corporate | Total | Water | Oil & Gas | Corporate | Total | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Product revenue | $ | 27,408 | $ | — | $ | — | $ | 27,408 | $ | 21,752 | $ | — | $ | — | $ | 21,752 | |||||||||||||||
Product cost of revenue | 7,816 | — | — | 7,816 | 5,425 | — | — | 5,425 | |||||||||||||||||||||||
Product gross profit | 19,592 | — | — | 19,592 | 16,327 | — | — | 16,327 | |||||||||||||||||||||||
License and development revenue | — | — | — | — | — | 3,098 | — | 3,098 | |||||||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||||||
General and administrative | 606 | 439 | 5,226 | 6,271 | 359 | 431 | 4,921 | 5,711 | |||||||||||||||||||||||
Sales and marketing | 1,507 | 30 | 604 | 2,141 | 1,850 | 92 | 425 | 2,367 | |||||||||||||||||||||||
Research and development | 723 | 2,956 | 1,419 | 5,098 | 886 | 5,667 | 67 | 6,620 | |||||||||||||||||||||||
Amortization of intangible assets | 4 | — | — | 4 | 156 | — | — | 156 | |||||||||||||||||||||||
Total operating expenses | 2,840 | 3,425 | 7,249 | 13,514 | 3,251 | 6,190 | 5,413 | 14,854 | |||||||||||||||||||||||
Operating income (loss) | $ | 16,752 | $ | (3,425 | ) | $ | (7,249 | ) | 6,078 | $ | 13,076 | $ | (3,092 | ) | $ | (5,413 | ) | 4,571 | |||||||||||||
Other income, net | 105 | 495 | |||||||||||||||||||||||||||||
Income before income taxes | $ | 6,183 | $ | 5,066 | |||||||||||||||||||||||||||
Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||
Water | Oil & Gas | Corporate | Total | Water | Oil & Gas | Corporate | Total | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Product revenue | $ | 65,665 | $ | — | $ | — | $ | 65,665 | $ | 56,946 | $ | 104 | $ | — | $ | 57,050 | |||||||||||||||
Product cost of revenue | 20,049 | — | — | 20,049 | 15,655 | 188 | — | 15,843 | |||||||||||||||||||||||
Product gross profit (loss) | 45,616 | — | — | 45,616 | 41,291 | (84 | ) | — | 41,207 | ||||||||||||||||||||||
License and development revenue | — | 26,895 | — | 26,895 | — | 10,391 | — | 10,391 | |||||||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||||||
General and administrative | 1,467 | 1,601 | 15,683 | 18,751 | 1,456 | 1,207 | 14,127 | 16,790 | |||||||||||||||||||||||
Sales and marketing | 4,307 | 106 | 1,363 | 5,776 | 5,058 | 674 | 978 | 6,710 | |||||||||||||||||||||||
Research and development | 2,585 | 12,720 | 2,854 | 18,159 | 2,794 | 13,335 | 225 | 16,354 | |||||||||||||||||||||||
Amortization of intangible assets | 12 | — | — | 12 | 469 | — | — | 469 | |||||||||||||||||||||||
Impairment of long-lived assets | — | 2,332 | — | 2,332 | — | — | — | — | |||||||||||||||||||||||
Total operating expenses | 8,371 | 16,759 | 19,900 | 45,030 | 9,777 | 15,216 | 15,330 | 40,323 | |||||||||||||||||||||||
Operating income (loss) | $ | 37,245 | $ | 10,136 | $ | (19,900 | ) | 27,481 | $ | 31,514 | $ | (4,909 | ) | $ | (15,330 | ) | 11,275 | ||||||||||||||
Other income, net | 750 | 1,474 | |||||||||||||||||||||||||||||
Income before income taxes | $ | 28,231 | $ | 12,749 | |||||||||||||||||||||||||||