Energy Recovery Achieves 22% Year-on-Year Quarterly Revenue Growth, Beating Guidance

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SAN LEANDRO, Calif., November 01, 2023--(BUSINESS WIRE)--Energy Recovery, Inc. (Nasdaq:ERII) ("Energy Recovery" or the "Company") today announced its financial results for the third quarter and nine months ended September 30, 2023.

Third Quarter Highlights

  • Revenue of $37.0 million, exceeding the upper end of our guidance which was attributed to an increase in megaproject revenues.

  • Gross margin of 69.9%, higher than our estimates due to a change in product mix coupled with an increase in sales of our PX®.

  • Operating expenses of $16.7 million, in line with prior quarters.

  • Income from operations of $9.1 million.

  • Net income of $9.7 million and adjusted EBITDA(1) of $12.0 million

  • Cash and investments of $105.9 million, which include cash, cash equivalents, and short-term and long-term investments.

  • Issued our annual Sustainability Report, which includes our commitment to reduce our emissions in relation to revenue by 65% by 2026. The full Sustainability Report can be found on our Sustainability page at energyrecovery.com.

David Moon, Interim Chief Executive Officer, commented on the financial results, "We delivered strong third quarter results, beating the upper end of our guidance for the quarter and we remain well-positioned to deliver on our overall Water guidance for the full year. As we look to 2024, we see growth in desalination for the 10th consecutive year despite a challenging macroeconomic environment and project to potentially double wastewater revenue in 2024. Further, we continue to see a path to our 2026 water revenue targets."

Mr. Moon added, "In our CO2 business, we have a number of new installations of our PX G1300 planned for the fourth quarter, have received repeat orders for additional deployments from current end-users, and are currently in advanced talks with a number of national, and multi-national, supermarket chains in Europe and the United States. We were also awarded the Refrigeration Innovation of the Year for the XTE by RAC Cooling Industry Awards, together with our partner Epta, for Epta’s next-generation commercial CO2 refrigeration system, which utilizes the PX G1300. This award provides further third-party validation of our technology. It’s an exciting time to join the Energy Recovery team as the Interim President and CEO, and I look forward to working with the management team to help ensure we make substantial progress in 2024."

Financial Highlights

Quarter-to-Date

Year-to-Date

Q3’2023

Q3’2022

vs. Q3’2022

2023

2022

2023 vs. 2022

(In millions, except net income per share, percentages and basis points)

Revenue

$37.0

$30.5

up 22%

$71.2

$83.3

down 15%

Gross margin

69.9%

69.1%

up 80 bps

66.9%

69.0%

down 210 bps

Operating margin

24.7%

16.1%

up 860 bps

(2.2%)

12.3%

NM

Net income

$9.7

$4.8

up 102%

$1.7

$10.3

down 84%

Net income per share

$0.17

$0.08

up 113%

$0.03

$0.18

down 83%

Effective tax rate

(114.2%)

3.5%

Cash provided by (used for) operations

$7.7

($1.2)

$12.3

$6.3

Non-GAAP Financial Highlights (1)

Quarter-to-Date

Year-to-Date

Q3’2023

Q3’2022

vs. Q3’2022

2023

2022

2023 vs. 2022

(In millions, except adjusted net income per share, percentages and basis points)

Adjusted operating margin

29.5%

22.4%

up 710 bps

6.0%

20.3%

NM

Adjusted net income

$11.4

$6.5

up 76%

$6.8

$15.8

down 57%

Adjusted net income per share

$0.20

$0.12

up 67%

$0.12

$0.28

down 57%

Adjusted effective tax rate

(3.5%)

9.1%

Adjusted EBITDA

$12.0

$7.7

$7.3

$19.8

Free cash flow

$7.4

($1.6)

$11.1

$3.3

_______________

NM

Not material

(1)

Refer to the sections "Use of Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Financial Measures" for definition of adjustment to GAAP presentation.

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 our belief that the Company is well positioned to deliver on full year water guidance; our belief that desalination revenue may grow in 2024; our belief that wastewater revenue may potentially double in 2024; and our belief that a path to 2026 water revenue targets exist. 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 risks relating to the future demand for our products, risks relating to performance by our customers and third-party partners, risks relating to the timing of revenue, and 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, 2022, as supplemented by the risks discussed under "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, 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 adjusted operating margin, adjusted net income, adjusted net income per share, adjusted effective tax rate, adjusted EBITDA and free cash flow. 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.

Notes to the Third Quarter Financial Results

  • Adjusted operating margin is a non-GAAP financial measure that the Company defines as income (loss) from operations which excludes i) share-based compensation; and ii) non-core operational costs, such as VorTeq-related severance costs and accelerated depreciation, divided by revenues.

  • Adjusted net income is a non-GAAP financial measure that the Company defines as net income which excludes i) share-based compensation; ii) non-core operational costs, such as VorTeq-related severance costs and accelerated depreciation; and iii) the applicable tax effect of the excluded items including the share-based compensation discrete tax item.

  • Adjusted net income per share is a non-GAAP financial measure that the Company defines as net income, which excludes i) share-based compensation; ii) non-core operational costs, such as VorTeq-related severance costs and accelerated depreciation; and iii) the applicable tax effect of the excluded items including the share-based compensation discrete tax item, divided by basic shares outstanding.

  • Adjusted effective tax rate reflects adjustments for share-based compensation discrete tax item, share-based compensation, and VorTeq-related severance costs and accelerated depreciation.

  • Adjusted EBITDA is a non-GAAP financial measure that the Company defines as net income which excludes i) depreciation and amortization; ii) share-based compensation; iii) non-core operational costs, such as VorTeq-related severance costs; iv) other income, net, such as interest income and other non-operating expense, net; and v) provision for (benefit from) income taxes.

  • Free cash flow is a non-GAAP financial measure that the Company defines as net cash provided by (used in) operating activities less capital expenditures.

Conference Call to Discuss Third Quarter 2023 Financial Results

LIVE CONFERENCE CALL:
Wednesday, November 1, 2023, 2:00 PM PT / 5:00 PM ET
Listen-only, US / Canada Toll-Free: +1 (877) 709-8150
Listen-only, Local / International Toll: +1 (201) 689-8354

CONFERENCE CALL REPLAY:
Expiration: December 1, 2023
US / Canada Toll-Free: +1 (877) 660-6853
Local / International Toll: +1 (201) 612-7415
Access code: 13741003

Investors may access the live call and the replay (approximately three hours after the live call concludes) over the internet on the "Events" page at: https://ir.energyrecovery.com/news-events/ir-calendar.

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 (Nasdaq: ERII) is a trusted global leader in energy efficiency technology. Building on our pressure exchanger technology platform, we design and manufacture reliable, high-performance solutions that generate cost savings and increase energy efficiency across several industries. With a strong foundation in the desalination industry, Energy Recovery has delivered transformative solutions that optimize operations and deliver positive environmental impact to our customers worldwide for more than 30 years. Headquartered in the San Francisco Bay Area, Energy Recovery has manufacturing and research and development facilities across California and Texas with sales and on-site technical support available globally. To learn more, visit https://energyrecovery.com/.

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30,

2023

December 31,

2022

(In thousands)

ASSETS

Cash, cash equivalents and investments

$

105,929

$

92,891

Accounts receivable and contract assets

23,337

35,782

Inventories, net

33,888

28,366

Prepaid expenses and other assets

4,508

3,886

Property, equipment and operating leases

30,639

32,695

Goodwill

12,790

12,790

Deferred tax assets and other assets

11,570

10,629

TOTAL ASSETS

$

222,661

$

217,039

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Accounts payable and accrued expenses

$

13,211

$

15,507

Contract liabilities and other liabilities, non-current

1,689

1,316

Lease liabilities

13,732

14,878

Total liabilities

28,632

31,701

Stockholders’ equity

194,029

185,338

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

222,661

$

217,039

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2023

2022

2023

2022

(In thousands, except per share data)

Revenue

$

37,036

$

30,462

$

71,160

$

83,300

Cost of revenue

11,154

9,417

23,580

25,835

Gross profit

25,882

21,045

47,580

57,465

Operating expenses

General and administrative

7,369

7,608

21,704

21,155

Sales and marketing

5,411

4,703

15,397

11,916

Research and development

3,969

3,828

12,043

14,170

Total operating expenses

16,749

16,139

49,144

47,241

Income (loss) from operations

9,133

4,906

(1,564

)

10,224

Other income, net

1,045

254

2,357

477

Income before income taxes

10,178

5,160

793

10,701

Provision for (benefit from) income taxes

518

371

(906

)

377

Net income

$

9,660

$

4,789

$

1,699

$

10,324

Net income per share

Basic

$

0.17

$

0.09

$

0.03

$

0.18

Diluted

$

0.17

$

0.08

$

0.03

$

0.18

Number of shares used in per share calculations

Basic

56,443

55,881

56,346

56,291

Diluted

57,969

57,372

57,761

57,708

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine Months Ended September 30,

2023

2022

(In thousands)

Cash flows from operating activities:

Net income

$

1,699

$

10,324

Non-cash adjustments

8,817

11,136

Net cash provided by (used in) operating assets and liabilities

1,756

(15,192

)

Net cash provided by operating activities

12,272

6,268

Cash flows from investing activities:

Net investment in marketable securities

(17,278

)

(1,857

)

Capital expenditures

(1,179

)

(2,999

)

Proceeds from sales of fixed assets

82

734

Net cash used in investing activities

(18,375

)

(4,122

)

Cash flows from financing activities:

Net proceeds from issuance of common stock

1,184

2,244

Repurchase of common stock

—

(26,654

)

Net cash provided by (used in) financing activities

1,184

(24,410

)

Effect of exchange rate differences

27

38

Net change in cash, cash equivalents and restricted cash

$

(4,892

)

$

(22,226

)

Cash, cash equivalents and restricted cash, end of period

$

51,566

$

52,235

ENERGY RECOVERY, INC.

SUPPLEMENTAL FINANCIAL INFORMATION

(Unaudited)

Channel Revenue

Three Months Ended September 30,

Nine Months Ended September 30,

2023

2022

vs. 2022

2023

2022

vs. 2022

(In thousands, except percentages)

Megaproject

$

26,829

$

17,347

up 55%

$

42,283

$

51,257

down 18%

Original equipment manufacturer

5,307

9,032

down 41%

16,845

21,392

down 21%

Aftermarket

4,900

4,083

up 20%

12,032

10,651

up 13%

Total revenue

$

37,036

$

30,462

up 22%

$

71,160

$

83,300

down 15%

Segment Activity

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

Water

Emerging

Technologies

Corporate

Total

Water

Emerging

Technologies

Corporate

Total

(In thousands)

Revenue

$

36,812

$

224

$

—

$

37,036

$

30,462

$

—

$

—

$

30,462

Cost of revenue

11,114

40

—

11,154

9,417

—

—

9,417

Gross profit

25,698

184

—

25,882

21,045

—

—

21,045

Operating expenses

General and administrative

2,039

1,061

4,269

7,369

1,911

878

4,819

7,608

Sales and marketing

3,272

1,560

579

5,411

3,242

960

501

4,703

Research and development

1,098

2,871

—

3,969

1,216

2,612

—

3,828

Total operating expenses

6,409

5,492

4,848

16,749

6,369

4,450

5,320

16,139

Operating income (loss)

$

19,289

$

(5,308

)

$

(4,848

)

$

9,133

$

14,676

$

(4,450

)

$

(5,320

)

$

4,906

Nine Months Ended September 30, 2023

Nine Months Ended September 30, 2022

Water

Emerging Technologies

Corporate

Total

Water

Emerging Technologies

Corporate

Total

(In thousands)

Revenue

$

70,622

$

538

$

—

$

71,160

$

83,191

$

109

$

—

$

83,300

Cost of revenue

23,136

444

—

23,580

25,817

18

—

25,835

Gross profit

47,486

94

—

47,580

57,374

91

—

57,465

Operating expenses

General and administrative

5,837

2,976

12,891

21,704

4,909

3,140

13,106

21,155

Sales and marketing

9,567

4,171

1,659

15,397

8,197

2,120

1,599

11,916

Research and development

3,121

8,922

—

12,043

3,159

11,011

—

14,170

Total operating expenses

18,525

16,069

14,550

49,144

16,265

16,271

14,705

47,241

Operating income (loss)

$

28,961

$

(15,975

)

$

(14,550

)

$

(1,564

)

$

41,109

$

(16,180

)

$

(14,705

)

$

10,224

Share-based Compensation

Three Months Ended September 30,

Nine Months Ended September 30,

2023

2022

2023

2022

(In thousands)

Stock-based compensation expense charged to:

Cost of revenue

$

158

$

124

$

555

$

370

General and administrative

905

743

2,628

2,735

Sales and marketing

436

426

1,684

1,232

Research and development

292

205

944

767

Total stock-based compensation expense

$

1,791

$

1,498

$

5,811

$

5,104

ENERGY RECOVERY, INC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (1)

(Unaudited)

This press release includes certain non-GAAP financial information because we plan and manage our business using such information. The following table reconciles the GAAP financial information to the non-GAAP financial information.

Quarter-to-Date

Year-to-Date

Q3'2023

Q3'2022

Q3'2023

Q3'2022

(In millions, except shares, per share and percentages)

Operating margin

24.7

%

16.1

%

(2.2

%)

12.3

%

Share-based compensation

4.8

4.9

8.2

6.1

Severance

—

—

—

0.4

Accelerated depreciation

—

—

—

1.0

Litigation charges

—

1.4

—

0.5

Adjusted operating margin

29.5

%

22.4

%

6.0

%

20.3

%

Net income

$

9.7

$

4.8

$

1.7

$

10.3

Share-based compensation (2)

1.8

1.5

5.8

5.1

Severance (2)

—

—

—

0.3

Accelerated depreciation (2)

—

—

—

0.7

Litigation charges (2)

—

0.4

—

0.4

Other (2)

—

—

—

—

Share-based compensation discrete tax item

(0.1

)

(0.2

)

(0.7

)

(1.0

)

Adjusted net income

$

11.4

$

6.5

$

6.8

$

15.8

Net income per share

$

0.17

$

0.08

$

0.03

$

0.18

Adjustments to net income per share (3)

0.03

0.04

0.09

0.10

Adjusted net income per share

$

0.20

$

0.12

$

0.12

$

0.28

Effective tax rate

(114.2

%)

3.5

%

Adjustments to effective tax rate (3)

110.7

5.6

Adjusted effective tax rate

(3.5

%)

9.1

%

Net income

$

9.7

$

4.8

$

1.7

$

10.3

Share-based compensation

1.8

1.5

5.8

5.1

Severance

—

—

—

0.3

Depreciation and amortization

1.1

0.9

3.1

3.8

Litigation charges

—

0.4

—

0.4

Other

—

—

—

—

Other income, net

(1.0

)

(0.3

)

(2.4

)

(0.5

)

Provision for (benefit from) income taxes

0.5

0.4

(0.9

)

0.4

Adjusted EBITDA

$

12.0

$

7.7

$

7.3

$

19.8

Free cash flow

Net cash provided by (used in) operating activities

$

7.7

$

(1.2

)

$

12.3

$

6.3

Capital expenditures

(0.3

)

(0.4

)

(1.2

)

(3.0

)

Free cash flow

$

7.4

$

(1.6

)

$

11.1

$

3.3

_______________

(1)

Amounts may not total due to rounding.

(2)

Amount presented are net of tax.

(3)

Refer to the sections "Use of Non-GAAP Financial Measures" for description of items included in adjustments.

View source version on businesswire.com: https://www.businesswire.com/news/home/20231101635811/en/

Contacts

Investor Relations
ir@energyrecovery.com
+1 (346) 382-6927

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