Energy Recovery Reports Third Quarter Financial Results

SAN LEANDRO, CA / ACCESSWIRE / November 4, 2021/ Energy Recovery, Inc. (NASDAQ:ERII) today announced its financial results for the third quarter ended September 30, 2021.

"2021 is playing out as expected, and we are well positioned to end the year in record fashion. Our desalination business continues to demonstrate strength, and we are building our pipeline of new industrial wastewater orders, two sides of our commitment to helping to address the growing global need for freshwater. We believe the solution to the rapidly increasing freshwater gap requires both increasing supply and better stewardship of water we already have," said Robert Mao, Chairman of the Board, President and Chief Executive Officer of Energy Recovery.

Mr. Mao continued, "Beyond water, our growth initiative in refrigeration is gaining strong momentum. We have had many fruitful conversations with U.S. and international grocery chains, and have recently signed an agreement to install our PX G1300 energy recovery device in a Vallarta Supermarkets grocery store in California, and signed a letter of intent with another chain in Europe. In addition, we are in discussions with multiple refrigeration manufacturers to help design the next generation of CO ₂ refrigeration systems featuring our PX G1300 technology at its core. We believe our PX G1300 has the potential to maximize the savings offered by this next generation system, thus transforming the multi-billion dollar refrigeration market by making CO ₂ refrigeration systems more financially attractive versus incumbent CO₂ solutions."

Financial Results

	Three Months Ended September 30,									Nine Months Ended September 30,
	2021			2020			Variance			2021			2020			Variance
	(In millions, except net income per share, percentages and basis points)
Product revenue	$	20.8		$	27.4			(24%)		$	70.3		$	65.7			7%
License and development revenue (1)		-			-			-%			-			26.9			(100%)
Total revenue	$	20.8		$	27.4			(24%)		$	70.3		$	92.6			(24%)
Product gross profit	$	14.7		$	19.6			(25%)		$	48.1		$	45.6			5%
Product gross margin		70.6%			71.5%		(90) bps				68.4%			69.5%		(110) bps
Operating expense	$	13.3		$	13.5			(2%)		$	40.2		$	45.0			(11%)
Operating income	$	1.4		$	6.1			(77%)		$	7.9		$	27.5			(71%)
Net income	$	1.1		$	5.4			(80%)		$	9.0		$	22.9			(61%)
Diluted net income per share	$	0.02		$	0.10		$	(0.08)		$	0.15		$	0.41		$	(0.26)
Operating cash flow	$	(4.2)		$	10.6		$	(14.9)		$	7.3		$	10.4		$	(3.1)
Cash and investments	$	108.4		$	105.9			2%		$	108.4		$	105.9			2%

⁽¹⁾ In June 2020, the Company terminated the VorTeq License Agreement with Schlumberger Technology Corporation. As there were no future performance obligations to be recognized under the VorTeq License Agreement after the effective date, the Company recognized in full the remaining deferred revenue balance of $24.4 million in the second quarter of fiscal year 2020. In addition, no future license and development revenue was recognized under the VorTeq License Agreement after the second quarter of fiscal year 2020.

Product Channel Revenue

	Three Months Ended September 30,										Nine Months Ended September 30,
	2021			2020			Variance				2021			2020			Variance
	(In millions, except percentages)
Megaproject	$	13.3		$	20.7			(36%)			$	50.3		$	47.2			7%
Original equipment manufacturer		4.8			4.1			19%				11.9			11.7			2%
Aftermarket		2.7			2.6			2%				8.1			6.8			19%
Total product revenue	$	20.8		$	27.4			(24%)			$	70.3		$	65.7			7%

"We remain on track to finish our year with strong revenue results as we have guided since October last year, with the fourth quarter expected to be a historic revenue quarter," said Joshua Ballard, Chief Financial Officer of Energy Recovery. "While we are not immune to the ongoing global supply chain crisis and inflationary pressures, our team began preparing for this eventuality last year. We are in a strong position as we look to 2022 in our ability to both manufacture and deliver products to our customers. We continued to invest in increased levels of raw materials and finished goods to mitigate, or even avoid, exogenous shocks. Cash and security balances remain high due to our lower spend and strong collections even while executing over $21 million in cumulative share buybacks through the end of October."

Third Quarter 2021 Business Highlights

Water Segment

1. Product revenue of $20.8 million was in-line with management's guidance. We continued to experience rebounding sales in the original equipment manufacturer channel and saw growth in the aftermarket channel. The megaproject channel saw an expected decrease but is projected to rebound strongly in the fourth quarter.

2. A sixth purchase order was received in our industrial wastewater business, further strengthening our first full year in this market.

3. Our gross margin increased to 70.6% from our low in the second quarter. We have largely avoided raw material cost increases due to our timely build up of raw material inventory starting in 2020, as well as internal cost optimization efforts.

Emerging Technologies Segment

1. Our outreach efforts in the commercial refrigeration space have generated a positive response from industry leaders. In late October, we entered into an agreement to deploy the PX G1300 in a grocery store in California. We are targeting first commercial deployments of the PX G1300 in the first half of 2022.

2. During the quarter, we joined the North American Sustainable Refrigeration Council (the "NASRC"). The NASRC is an action-oriented non-profit charity, as defined under the U.S. Internal Revenue Code 501(c)(3), working in partnership with the supermarket industry to create a climate-friendly future for refrigeration by eliminating the barriers to natural refrigerant adoption in supermarkets. Natural refrigerants, such as CO ₂ , have near-zero Global Warming Potential ("GWP"), making it the safest climate-friendly alternative to hydrofluorocarbons which have a GWP into the thousands.

3. Operating expenses in this segment decreased quarter-over-quarter, due primarily to reduced research and development expenditures related to the VorTeq.

Bottom Line Summary

On a quarterly basis, we reported a net income of $1.1 million, or $0.02 per diluted share, for the third quarter ended September 30, 2021, compared to a net income of $5.4 million, or $0.10 per diluted share, for the third quarter ended September 30, 2020.

Cash Flow Highlights

The Company finished the first quarter ended September 30, 2021 with cash and cash equivalents of $65.7 million, and short-term and long-term investments of $42.7 million, which represents a combined total of $108.4 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 PX G1300 has the potential to maximize the savings offered by the next generation CO ₂ system; that the Company's technology can transform the multi-billion dollar refrigeration market by making CO ₂ refrigeration systems more financially attractive versus incumbent CO ₂ solutions; the Company's belief that the fourth quarter revenue will be historic and that the Company will meet its revenue guidance; the Company's belief that the Company will be able to manufacture and deliver products to its customers in 2022; and the Company's expectation that the Company will deploy its PX G1300 in the first half of 2022. 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, 2020, 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 2021 Financial Results

LIVE CONFERENCE CALL:

Thursday, November 4, 2021, 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: 13722959

CONFERENCE CALL REPLAY:

Expiration: Saturday, December 4, 2021

US / Canada Toll-Free: +1 (877) 660-6853

Local / International Toll: +1 (201) 612-7415

Access code: 13722959

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

Energy Recovery creates technologies that solve complex challenges for industrial fluid-flow markets worldwide. Building on our pressure exchanger technology platform, we design and manufacture solutions that make industrial processes more efficient and sustainable. What began as a game-changing invention for desalination has grown into a global business accelerating the environmental sustainability of customers' operations in multiple industries. Headquartered in the San Francisco Bay Area, Energy Recovery has manufacturing, research and development facilities across California and Texas with sales and on-site technical support available globally. For more information, please visit www.energyrecovery.com.

Contact

Investor Relations
ir@energyrecovery.com
+1 (281) 962-8105

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	September 30, 2021				December 31, 2020
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	65,745			$	94,255
Short-term investments		41,900				20,446
Accounts receivable, net		13,066				11,792
Inventories, net		20,557				11,748
Prepaid expenses and other assets		5,541				4,950
Total current assets		146,809				143,191
Long-term investments		765				-
Deferred tax assets, net		12,093				11,030
Property and equipment, net		20,905				20,176
Operating lease, right of use asset		15,021				16,090
Goodwill and other intangible assets		12,830				12,839
Other assets		365				988
Total assets	$	208,788			$	204,314
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3,663			$	1,118
Accrued expenses and other liabilities		9,582				11,816
Lease liabilities		1,518				1,243
Contract liabilities		1,452				1,552
Total current liabilities		16,215				15,729
Lease liabilities		15,284				16,443
Other liabilities		550				518
Total liabilities		32,049				32,690
Stockholders' equity:
Common stock		63				62
Additional paid-in capital		192,564				179,161
Accumulated other comprehensive (loss) income		(86	)			53
Treasury stock		(47,642	)			(30,486)
Retained earnings		31,840				22,834
Total stockholders' equity		176,739				171,624
Total liabilities and stockholders' equity	$	208,788			$	204,314

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2021				2020				2021				2020
	(In thousands, except per share data)
Product revenue	$	20,781			$	27,408			$	70,328			$	65,665
Product cost of revenue		6,089				7,816				22,251				20,049
Product gross profit		14,692				19,592				48,077				45,616
License and development revenue		-				-				-				26,895
Operating expenses:
General and administrative		5,851				6,271				18,632				18,751
Sales and marketing		2,996				2,141				8,236				5,776
Research and development		4,416				5,098				13,342				18,159
Amortization of intangible assets		2				4				9				12
Impairment of long-lived assets		-				-				-				2,332
Total operating expenses		13,265				13,514				40,219				45,030
Income from operations		1,427				6,078				7,858				27,481
Other income (expense):
Interest income		36				134				179				809
Other non-operating (expense) income, net		1				(29	)			(21	)			(59)
Total other income, net		37				105				158				750
Income before income taxes		1,464				6,183				8,016				28,231
(Benefit from) provision for income taxes		393				796				(990	)			5,297
Net income	$	1,071			$	5,387			$	9,006			$	22,934
Net income per share:
Basic	$	0.02			$	0.10			$	0.16			$	0.41
Diluted	$	0.02			$	0.10			$	0.15			$	0.41
Number of shares used in per share calculations:
Basic		57,026				55,692				57,053				55,573
Diluted		58,709				56,471				58,785				56,443

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

	Nine Months Ended September 30,
	2021				2020
	(In thousands)
Cash flows from operating activities:
Net income	$	9,006			$	22,934
Adjustments to reconcile net income to cash provided by (used in) operating activities
Stock-based compensation		4,574				3,672
Depreciation and amortization		4,141				3,963
Amortization of premiums and discounts on investments		340				311
Deferred income taxes		(1,063	)			5,443
Impairment of long-lived assets		-				2,332
Other non-cash adjustments		161				316
Changes in operating assets and liabilities:
Accounts receivable, net		(1,274	)			1,862
Contract assets		1,892				(747	)
Inventories, net		(8,874	)			(506	)
Prepaid and other assets		(1,097	)			295
Accounts payable		2,739				656
Accrued expenses and other liabilities		(3,132	)			(2,579	)
Contract liabilities		(119	)			(27,602	)
Net cash provided by operating activities		7,294				10,350
Cash flows from investing activities:
Sales of marketable securities		-				10,573
Maturities of marketable securities		20,686				50,467
Purchases of marketable securities		(43,339	)			(12,855	)
Capital expenditures		(4,899	)			(6,019	)
Other		5				-
Net cash (used in) provided by investing activities		(27,547	)			42,166
Cash flows from financing activities:
Net proceeds from issuance of common stock		8,939				1,260
Tax payment for employee shares withheld		-				(23	)
Repurchase of common stock		(17,156	)			-
Net cash (used in) provided by financing activities		(8,217	)			1,237
Effect of exchange rate differences on cash and cash equivalents		(40	)			11
Net change in cash, cash equivalents and restricted cash		(28,510	)			53,764
Cash, cash equivalents and restricted cash, beginning of year		94,358				26,488
Cash, cash equivalents and restricted cash, end of period	$	65,848			$	80,252

ENERGY RECOVERY, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(Unaudited)

	Three Months Ended September 30, 2021													Three Months Ended September 30, 2020 (Recast)
	Water			Emerging Technologies			Corporate			Total				Water			Emerging Technologies			Corporate			Total
	(In thousands)
Product revenue	$	20,767		$	14		$	-		$	20,781			$	27,408		$	-		$	-		$	27,408
Product cost of revenue		6,089			-			-			6,089				7,816			-			-			7,816
Product gross profit		14,678			14			-			14,692				19,592			-			-			19,592
Operating expenses
General and administrative		1,435			1,373			3,043			5,851				2,371			1,359			2,541			6,271
Sales and marketing		2,250			327			419			2,996				1,507			327			307			2,141
Research and development		762			3,654			-			4,416				723			4,375			-			5,098
Amortization of intangible assets		2			-			-			2				4			-			-			4
Total operating expenses		4,449			5,354			3,462			13,265				4,605			6,061			2,848			13,514
Operating income (loss)	$	10,229		$	(5,340	)	$	(3,462	)		1,427			$	14,987		$	(6,061	)	$	(2,848	)		6,078
Other income, net											37													105
Income before income taxes										$	1,464												$	6,183

	Nine Months Ended September 30, 2021													Nine Months Ended September 30, 2020 (Recast)
	Water			Emerging Technologies			Corporate			Total				Water				Emerging Technologies				Corporate				Total
	(In thousands)
Product revenue	$	70,275		$	53		$	-		$	70,328			$	65,665			$	-			$	-			$	65,665
Product cost of revenue		22,251			-			-			22,251				20,049				-				-				20,049
Product gross profit		48,024			53			-			48,077				45,616				-				-				45,616
License and development revenue		-			-			-			-				-				26,895				-				26,895
Operating expenses
General and administrative		4,768			3,854			10,010			18,632				6,417				4,001				8,333				18,751
Sales and marketing		6,535			735			966			8,236				4,307				901				568				5,776
Research and development		1,858			11,484			-			13,342				2,585				15,574				-				18,159
Amortization of intangible assets		9			-			-			9				12				-				-				12
Impairment of long-lived assets		-			-			-			-				-				2,332				-				2,332
Total operating expenses		13,170			16,073			10,976			40,219				13,321				22,808				8,901				45,030
Operating income (loss)	$	34,854		$	(16,020	)	$	(10,976	)		7,858			$	32,295			$	4,087			$	(8,901	)			27,481
Other income, net											158																750
Income before income taxes										$	8,016															$	28,231

SOURCE: Energy Recovery, Inc.

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