Energy Recovery Reports Third Quarter and Year-to-Date 2017 Results
SAN LEANDRO, Calif., Nov. 1, 2017 /PRNewswire/ -- 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 of 2017 as well as the year-to-date results for the first nine months of 2017.
Third Quarter Summary:
-- Total revenue of $15.1 million, an increase of 23% year-over-year;
highest Q3 revenue in Company history
-- Product gross margin of 69.3%; highest product gross margin in Company
history
-- Total gross margin((1)) of 71.8%; highest total gross margin in Company
history
-- Net income of $1.7 million, or $0.03 per share
Year-to-Date Summary:
-- Total revenue of $40.8 million, an increase of 11% year-over-year;
highest nine month revenue in Company history
-- Product gross margin of 66.5%; highest nine month product gross margin
in Company history
-- Total gross margin((1)) of 69.6%; highest nine month total gross
margin((1)) in Company history
-- Net income of $0.7 million, or $0.01 per share
President and CEO Joel Gay remarked, "In addition to posting yet again record-breaking financial results in the quarter, the Company concluded full-scale, private testing of the second generation VorTeq system at an undisclosed facility, and in doing so, executed the most successful examination of the technology to date. While we have in the past refrained from disclosing discreet testing results, due to the swelling anticipation as to the outcome of this process and its materiality to the Company, we feel our shareholders deserve an unfiltered account of what are indisputable proof points as to the product's commercial potential.
The following serves as a synopsis of the testing highlights:
1. Achieved individual pressure exchanger flow rates of up to 8.5 barrels
per minute at 9,000 psi clean, which is to say without proppant, all 12
pressure exchangers achieved rate;
2. Achieved duration runs of 60 barrels per minute at 9,000 psi clean, again
without proppant;
3. Pumped 100,000 lbs of proppant at rates of 62 to 64 barrels per minute,
proppant concentration of up to 2.4 pounds per gallon added and at
pressures ranging from 6,800 psi to 7,200 psi; with 87,000 lbs of
proppant being processed in a continuous, uninterrupted 33-minute run.
Suffice it to say that such results outperformed our expectations as they were achieved during the first and only private testing session which lasted approximately one week. It should be further noted that the second generation VorTeq system is entirely bespoke and distinct from the first generation, which is to say we did not export a single component from Gen-I to Gen-II. That we executed the design, manufacturing and successful testing of a product of this size and complexity in 10 months is an achievement that stands on its own merit. Importantly, we did not witness a single failure mode attributed to the vibrational concerns experienced last year during the testing of the Gen-I system."
Mr. Gay continued, "The technical challenges to executing such an experiment are awesome, specifically simulating a well and having to dissipate up to 20 megawatts of energy contained in a proppant-laden fluid. To simulate the back pressure of a well, we employed a series of progressive chokes downstream of the VorTeq. To this end, while we were able to reach the desired pressure of 9,000 psi without proppant, proppant testing proved more challenging as the very minute sand was introduced to the testing system, the progressive chokes began to rapidly erode - much like the valves in a typical fracking pump - thereby limiting our ability to reach higher pressures. This learning will invariably influence how we design the testing apparatus for future tests up to and including milestone one. In this, success by the year-end remains our objective, yet we will employ the same diligent approach as we have heretofore, keeping a keen eye on the one and only objective: commercialization.
We are hopeful that this fulsome disclosure allows the discourse to progress beyond "does the VorTeq work," to "how and when will it be commercialized?" We have been working flat-out throughout the year to arrive at this point and I am proud of the incredibly talented men and women that constitute our Engineering Team, as well the balance of the organization whose peer group-leading performance has not gone unnoticed by Management."
Revenues
For the third quarter of 2017, the Company generated total revenue of $15.1 million, representing the strongest third quarter top-line performance in Company history, for both the Water and Oil & Gas Segments. Revenue increased by $2.8 million, or 23%, from $12.3 million in the third quarter of 2016. Of the $2.8 million increase in revenue, $2.6 million was attributable to the Water Segment and $0.2 million was attributable to the Oil & Gas Segment.
The Water Segment generated total product revenue of $13.2 million, compared to $10.6 million in the third quarter of 2016. The $2.6 million, or 25%, increase in revenue was due to higher Mega Project ("MPD") and Original Equipment Manufacturer ("OEM") shipments during the third quarter of 2017.
The Oil & Gas Segment generated total revenue of $1.9 million, compared to $1.7 million in the third quarter of 2016. The $0.2 million, or 9%, increase in revenue was due to higher percentage-of-completion ("PoC") revenue recognition associated with the sale of multiple IsoBoost® systems compared to the third quarter of 2016. License and development revenue of $1.25 million was recognized in each of the third quarters of 2017 and 2016.
Gross Margin
For the third quarter of 2017, product gross margin was 69.3%, representing the highest product gross margin in Company history. Product gross margin increased 520 basis points from 64.0% in the third quarter of 2016. This increase was largely driven by manufacturing efficiencies, higher MPD volume and favorable price and product mix in the Water Segment. Including license and development revenue, total gross margin((1) )of 71.8% for the third quarter of 2017 was the highest total gross margin((1)) in Company history. Total gross margin((1)) increased 410 basis points from 67.7% in the third quarter of 2016.
The Water Segment generated product gross margin of 71.1%, representing the highest Water Segment product gross margin in Company history. Water Segment product gross margin increased by 6.0%, compared to 65.5% in the third quarter of 2016. This increase was largely driven by manufacturing efficiencies, higher volume and favorable price and product mix in the third quarter of 2017.
The Oil & Gas Segment generated product gross margin of 28.2%, compared to 29.6% in the third quarter of 2016. This decrease was attributable to PoC revenue recognition costs. Including license and development revenue, the Oil & Gas Segment total gross margin((1)) for the third quarter of 2017 was 76.5%.
Operating Expenses
For the third quarter of 2017, operating expenses were $9.3 million, an increase of $0.3 million from $9.0 million in the third quarter of 2016. The increase in operating expense was primarily due to increased operating expense in the Oil & Gas Segment offset by slightly lower operating expenses in the Water Segment.
The Water Segment operating expenses for the third quarter of 2017 were $2.1 million, a decrease of $0.1 million from $2.2 million in the third quarter of 2016.
The Oil & Gas Segment operating expenses for the third quarter of 2017 were $3.5 million, an increase of $0.4 million from $3.1 million in the third quarter of 2016. This increase was driven by the Company's continued investment in research and development activities.
Finally, corporate operating expenses of $3.7 million for the third quarter of 2017 were on par with the third quarter of 2016.
Bottom Line Summary
To summarize financial performance for the third quarter of 2017, the Company reported a net income of $1.7 million, or $0.03 per share. Comparatively, the Company reported a net loss of $0.6 million, or $(0.01) per share, for the third quarter of 2016.
Cash Flow Highlights
The Company ended the quarter with unrestricted cash of $19.2 million, current and non-current restricted cash of $3.1 million, and short-term investments of $72.2 million, all of which represent a combined total of $94.5 million.
During the nine months ended September 30, 2017, the Company's net cash used by operating activities was ($2.2) million. This includes a net income of $0.7 million and non-cash expenses of $5.6 million, the largest of which were share-based compensation of $3.1 million and depreciation and amortization of $2.7 million. Unfavorably impacting cash flow from operating activities was a reduction in deferred revenue related to the amortization of the VorTeq License Agreement exclusivity fee of ($3.8) million, an increase in estimated earnings in excess of billings of ($2.6) million associated with our PoC revenue recognition, a decrease in accrued liabilities of ($1.7) million and an increase in inventory of ($1.5) million, partially offset by an increase in accounts payable of $1.8 million. Cash used in investing activities was ($39.1) million driven by the net purchases of marketable securities of ($33.6) million and capital expenditures of ($6.8) million, partially offset by a decrease in restricted cash of $1.3 million. Cash used in financing activities was ($0.8) million, driven by common stock repurchases of ($4.3) million and vested restricted stock shares withheld for tax withholdings of ($0.2) million, partially offset by the issuance of common stock related to option exercises of $3.7 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 expected timing with respect to milestone testing, and the Company's belief that it will commercialize the VorTeq system. 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 our 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 our business, and the risks discussed under "Risk Factors" in our Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on March 10, 2017 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. 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 Third Quarter 2017 Financial Results
LIVE CONFERENCE CALL:
Thursday, November 2, 2017, 8:00 AM PDT / 11:00 AM EDT
Listen-only, US / Canada Toll-free: 888-394-8218
Listen-only, Local / International Toll: (+1) 719-325-2202
Access code: 7579235
CONFERENCE CALL REPLAY:
Expiration: Thursday, November 16, 2017
US / Canada Toll-free: 888-203-1112
Local / International Toll: (+1) 719-457-0820
Access code: 7579235
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 oil & gas, chemical processing, and water industries. Energy Recovery products save clients more than $1.8 billion (USD) annually. Headquartered in the Bay Area, Energy Recovery has offices in Houston, Ireland, Shanghai, and Dubai. For more information about the Company, please visit www.energyrecovery.com.
Contact
Brian Uhlmer
buhlmer@energyrecovery.com
(713) 858-2284
(1) "Total gross margin" is a non-GAAP financial measures. Please refer to the discussion under headings "Use of Non-GAAP Financial Measures" and "Reconciliations of Non-GAAP Financial Measures."
ENERGY RECOVERY INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and par value)
(unaudited)
September 30, December 31,
2017 2016
---- ----
ASSETS
Current assets:
Cash
and
cash
equivalents $19,245 $61,364
Restricted
cash 2,908 2,297
Short-
term
investments 72,241 39,073
Accounts
receivable, $130
net at
of September
allowance 30,
for 2017
doubtful and
accounts December
of 31,
$96 2016,
and 11,929 11,759
Unbilled
receivables,
current 573 190
Cost
and
estimated
earnings
in
excess
of
billings 4,453 1,825
Inventories 6,283 4,550
Prepaid
expenses
and
other
current
assets 1,663 1,311
----- -----
Total
current
assets 119,295 122,369
Restricted
cash,
non-
current 182 2,087
Deferred
tax
assets,
non-
current 1,711 1,270
Property
and at
equipment, September
net 30,
of 2017
accumulated and
depreciation December
of 31,
$23,352 2016,
and respectively
$21,385 13,632 8,643
Goodwill 12,790 12,790
Other
intangible
assets,
net 1,427 1,900
Other
assets,
non-
current 2 4
--- ---
Total
assets $149,039 $149,063
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts
payable $3,336 $1,505
Accrued
expenses
and
other
current
liabilities 7,657 9,019
Income
taxes
payable 142 16
Accrued
warranty
reserve 314 406
Deferred
revenue 6,230 6,201
Current
portion
of
long-
term
debt 11 11
--- ---
Total
current
liabilities 17,690 17,158
Long-
term
debt,
net
of
current
portion 19 27
Deferred
tax
liabilities,
non-
current 2,428 2,233
Deferred
revenue,
non-
current 60,223 63,958
Other
non-
current
liabilities 411 554
--- ---
Total
liabilities 80,771 83,930
------ ------
Commitments and
Contingencies (Note 9)
Stockholders' equity:
Preferred
stock, or
$0.001 outstanding
par
value;
10,000,000
shares
authorized;
no
shares
issued - -
Common
stock, and shares
$0.001 53,592,430 issued
par shares and
value; outstanding 53,162,551,
200,000,000 at shares
shares September outstanding
authorized; 30, at
57,855,263 2017, December
shares and 31,
issued 58 57
Additional
paid-
in
capital 146,320 139,676
Accumulated
other
comprehensive
loss (77) (118)
Treasury
stock, 3,721,656
at repurchased
cost, at
4,262,833 December
repurchased 31,
at 2016
September
30,
2017
and (20,486) (16,210)
Accumulated
deficit (57,547) (58,272)
------- -------
Total
stockholders'
equity 68,268 65,133
------ ------
Total
liabilities
and
stockholders'
equity $149,039 $149,063
======== ========
ENERGY RECOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
---- ---- ---- ----
Product revenue $13,834 $11,024 $37,017 $33,048
Product cost of
revenue 4,254 3,968 12,394 11,878
----- ----- ------ ------
Product gross profit 9,580 7,056 24,623 21,170
----- ----- ------ ------
License and
development revenue 1,250 1,250 3,750 3,750
Operating expenses:
General and
administrative 4,034 3,971 12,369 12,847
Sales and marketing 2,061 2,512 6,688 6,517
Research and
development 3,038 2,319 8,624 7,406
Amortization of
intangible assets 157 158 473 473
--- --- --- ---
Total operating
expenses 9,290 8,960 28,154 27,243
----- ----- ------ ------
Income (loss) from
operations 1,540 (654) 219 (2,323)
Other (expense) income:
Interest expense (1) (1) (2) (2)
Other non-operating
income 233 79 462 137
--- --- --- ---
Income (loss) before
income taxes 1,772 (576) 679 (2,188)
Provision for
(benefit from)
income taxes 66 3 (46) (99)
--- --- --- ---
Net income (loss) $1,706 $(579) $725 $(2,089)
====== ===== ==== =======
Basic net income
(loss) per share $0.03 $(0.01) $0.01 $(0.04)
===== ====== ===== ======
Diluted net income
(loss) per share $0.03 $(0.01) $0.01 $(0.04)
===== ====== ===== ======
Shares used in basic
per share
calculation 53,580 52,106 53,717 52,227
====== ====== ====== ======
Shares used in
diluted per share
calculation 55,140 52,106 55,571 52,227
====== ====== ====== ======
ENERGY RECOVERY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2017 2016
---- ----
Cash Flows From Operating
Activities
Net income
(loss) $725 $(2,089)
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by
operating activities:
Share-based
compensation 3,136 2,640
Depreciation
and
amortization 2,704 2,771
Amortization
of premiums
on
investments 379 94
Provision for
warranty
claims 145 134
Unrealized
loss on
foreign
currency
transactions 69 65
Provision for
doubtful
accounts 16 68
Change in fair
value of put
options - 33
Other non-
cash
adjustments (145) (120)
Valuation
adjustments
for excess or
obsolete
inventory (230) (175)
Reversal of
accruals
related to
expired
warranties (237) (201)
Deferred
income taxes (244) (270)
Changes in operating assets and
liabilities:
Accounts
payable 1,831 (69)
Deferred
revenue,
product 81 557
Income taxes
payable 126 135
Accounts
receivable (186) 3,330
Prepaid and
other assets (350) (598)
Unbilled
receivables (383) 971
Inventories (1,503) 839
Accrued
expenses and
other
liabilities (1,728) (1,598)
Cost and
estimated
earnings in
excess of
billings (2,628) (440)
Deferred
revenue,
license and
development (3,750) (3,750)
------ ------
Net cash (used
in) provided
by operating
activities (2,172) 2,327
------ -----
Cash Flows From Investing
Activities
Maturities of
marketable
securities 30,977 1,000
Restricted
cash 1,294 (15)
Capital
expenditures (6,843) (900)
Purchases of
marketable
securities (64,530) (15,912)
------- -------
Net cash used
in investing
activities (39,102) (15,827)
------- -------
Cash Flows From Financing
Activities
Net proceeds
from issuance
of common
stock 3,722 3,708
Repayment of
long-term
debt (8) (7)
Tax payment
for employee
shares
withheld (228) -
Repurchase of
common stock (4,276) (9,375)
------ ------
Net cash used
in financing
activities (790) (5,674)
---- ------
Effect of
exchange rate
differences
on cash and
cash
equivalents (55) (66)
--- ---
Net change in
cash and cash
equivalents (42,119) (19,240)
Cash and cash
equivalents,
beginning of
period 61,364 99,931
------ ------
Cash and cash
equivalents,
end of period $19,245 $80,691
======= =======
ENERGY RECOVERY, INC.
FINANCIAL INFORMATION BY SEGMENT
(in thousands)
(unaudited)
Three Months Ended Three Months Ended
September 30, 2017 September 30, 2016
------------------ ------------------
Water Oil &Gas Total Water Oil &Gas Total
----- -------- ----- ----- -------- -----
Product revenue $13,227 $607 $13,834 $10,568 $456 $11,024
Product cost of
revenue 3,818 436 4,254 3,647 321 3,968
----- --- ----- ----- --- -----
Product gross profit 9,409 171 9,580 6,921 135 7,056
----- --- ----- ----- --- -----
License and
development revenue - 1,250 1,250 - 1,250 1,250
Operating expenses:
General and
administrative 334 361 695 346 278 624
Sales and marketing 1,296 431 1,727 1,434 750 2,184
Research and
development 316 2,669 2,985 262 2,023 2,285
Amortization of
intangibles 157 - 157 158 - 158
--- --- --- --- --- ---
Total operating
expenses 2,103 3,461 5,564 2,200 3,051 5,251
----- ----- ----- ----- ----- -----
Operating income
(loss) $7,306 $(2,040) 5,266 $4,721 $(1,666) 3,055
====== ======= ====== =======
Less:
Corporate operating expenses 3,726 3,709
----- -----
Consolidated operating (loss) income 1,540 (654)
Non-operating income 232 78
--- ---
(Loss) income before income taxes $1,772 $(576)
====== =====
Nine Months Ended Nine Months Ended
September 30, 2017 September 30, 2016
Water Oil &Gas Total Water Oil &Gas Total
----- -------- ----- ----- -------- -----
Product revenue $33,707 $3,310 $37,017 $32,592 $456 $33,048
Product cost of
revenue 10,003 2,391 12,394 11,557 321 11,878
------ ----- ------ ------ --- ------
Product gross profit 23,704 919 24,623 21,035 135 21,170
------ --- ------ ------ --- ------
License and
development revenue - 3,750 3,750 - 3,750 3,750
Operating expenses:
General and
administrative 965 1,085 2,050 828 650 1,478
Sales and marketing 4,039 1,635 5,674 3,663 2,133 5,796
Research and
development 810 7,734 8,544 954 6,394 7,348
Amortization of
intangibles 473 - 473 473 - 473
--- --- --- --- --- ---
Total operating
expenses 6,287 10,454 16,741 5,918 9,177 15,095
----- ------ ------ ----- ----- ------
Operating income
(loss) $17,417 $(5,785) 11,632 $15,117 $(5,292) 9,825
======= ======= ======= =======
Less:
Corporate operating expenses 11,413 12,148
------ ------
Consolidated operating loss 219 (2,323)
Non-operating income 460 135
--- ---
Loss before income taxes $679 $(2,188)
==== =======
ENERGY RECOVERY, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(in thousands, except per share data)
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 Income or Loss is determined by adding back non-recurring operating expenses
Three Months Ended Nine Months Ended
September 30,
September 30,
2017 2016 2017 2016
---- ---- ---- ----
Product revenue $13,834 $11,024 $37,017 $33,048
License and
development
revenue 1,250 1,250 3,750 3,750
----- ----- ----- -----
Total revenue $15,084 $12,274 $40,767 $36,798
======= ======= ======= =======
Product gross
profit $9,580 $7,056 $24,623 $21,170
License and
development
gross profit 1,250 1,250 3,750 3,750
----- ----- ----- -----
Total gross
profit (non-
GAAP) $10,830 $8,306 $28,373 $24,920
======= ====== ======= =======
Product gross
margin 69.3% 64.0% 66.5% 64.1%
Total gross
margin (non-
GAAP) 71.8% 67.7% 69.6% 67.7%
Net income /
(loss) $1,706 $(579) $725 $(2,089)
Non-recurring
operating
expenses (non-
GAAP) - - - 1,008
--- --- --- -----
Adjusted net
income /(loss)
(non-GAAP) $1,706 $(579) $725 $(1,081)
====== ===== ==== =======
Basic and diluted
net income /
(loss) per share $0.03 $(0.01) $0.01 $(0.04)
Adjusted basic
and diluted net
loss per share
(non-GAAP) $0.03 $(0.01) $0.01 $(0.02)
Weighted average
shares
outstanding -
basic 53,580 52,106 53,717 52,227
====== ====== ====== ======
Weighted average
shares
outstanding -
diluted 55,140 52,106 55,571 52,227
====== ====== ====== ======
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SOURCE Energy Recovery, Inc.
