OREANDA-NEWS. August 04, 2016. Energy Recovery Inc. (NASDAQ:ERII), the leader in pressure energy technology for industrial fluid flows, today announced its financial results for the second quarter ended on June 30, 2016, as well as year-to-date results for the first half of 2016.

Joel Gay, President and Chief Executive Officer, said, “The second quarter is further evidence that 2016 is the year of delivery. Having only generated greater revenues once in a second quarter in the Company’s post-IPO history, our topline performance is a positive indicator of the full fiscal year prospects, especially as it relates to large-scale capital projects within the desalination business. The Company also secured a purchase order for the first multiple IsoBoost system installation for what will be one of the largest gas processing plants in the Middle East, generating more momentum for our centrifugal line of products in oil & gas. We also continue to advance toward the execution of the two performance milestones pursuant to our VorTeqTM licensing agreement with Schlumberger, which will trigger the incremental \\$50 million in up-front contract payments. As communicated at the onset of this year, through the execution of its long-term strategy, Energy Recovery will continue to protect its market share in desalination and further develop and gain traction in its emerging market segments with the singular objective of driving and sustaining long-term growth.”

Second Quarter 2016 Summary

  • Total revenue increased 26% to \\$13.2 million, one of the best second quarters in the Company’s post-IPO history
  • EPS of \\$0.01
  • Highest total gross margin(1) in the Company’s post-IPO history of 68% for the second quarter; product gross margin was 65% for the same period

Revenues

The Company generated total revenue of \\$13.2 million in the second quarter of 2016, and \\$24.5 million for the first half of 2016, compared to \\$10.5 million and \\$16.3 million in the same periods of the prior year. This marks one of the best second quarters in the Company’s history. The increase was primarily due to strong OEM and aftermarket shipments and the amortization of the Schlumberger exclusivity fee.

Energy Recovery had \\$12.0 million in product revenue in the second quarter of 2016, up from \\$10.5 million in the second quarter of 2015. Year-to-date, the Company reported product revenue of \\$22.0 million, up from \\$16.3 million in the first half of 2015.

The Company recognized \\$1.3 million in license and development revenue during the second quarter of 2016 and \\$2.5 million year-to-date. This revenue is associated with the amortization of the \\$75 million exclusivity fee paid by Schlumberger in the fourth quarter of 2015 for the exclusive use of the Company’s VorTeq hydraulic fracturing system. The Company recognized no such revenue during the same period last year. The Schlumberger exclusivity fee will continue to be amortized on a level basis through the duration of the 15-year agreement. Schlumberger will also pay two (2) separate \\$25 million payments (for a total of \\$50 million) subject to the Company satisfying certain milestones and key performance indicators. Following commercialization, Schlumberger will pay an annual royalty fee of \\$1.5 million per VorTeq in service per year for the duration of the license agreement. Total annual royalties are dictated by VorTeq minimum adoption requirements as a percentage of Schlumberger’s active fleets.

Gross Margin

Product gross margin increased 1,100 basis points to 65% for the second quarter of 2016, compared to 54% in the second quarter of 2015. Including license and development revenue associated with the Schlumberger exclusivity fee, total gross margin(1) increased by 1,400 basis points to 68%, which represents the highest total gross margin in the Company’s post-IPO history.

Operating Expenses

Operating expenses for the second quarter of 2016 decreased to \\$8.5 million from \\$8.9 million in the second quarter of 2015. Year to date, the Company reported operating expenses of \\$18.3 million, down from \\$20.3 million in the first half of 2015.

The decrease quarter over quarter was driven by a reduction in non-recurring expenses and administrative expenses, offset by higher R&D expenses associated with Schlumberger Milestone 1 testing. Non-recurring expenses in the second quarter of 2015 totaled \\$2.7 million - primarily due to the CEO transition - whereas the Company did not have any material non-recurring expenses in the second quarter of 2016.

Bottom Line Summary

To summarize financial performance, the Company reported net income of \\$0.5 million, or \\$0.01 per share, in the second quarter of 2016. Comparatively, the Company reported a net loss of \\$(3.3) million, or \\$(0.06) per share, in the second quarter of 2015. Summarizing the year to date financial performance, Energy Recovery reported a net loss of \\$(1.5) million, or \\$(0.03) per share, versus a net loss of \\$(11.6) million, or \\$(0.22) per share, for the first half of 2015.

The improvement was driven by strengthening demand in global desalination markets, a favorable shift in product mix, revenue associated with the Schlumberger exclusivity fee amortization, and a reduction in operating expenses.

Excluding non-recurring items, the Company reported adjusted net income(1) of \\$0.5 million, or \\$0.01 per share in the second quarter of 2016.

Comparatively, the Company reported an adjusted net loss(1) of \\$(0.7) million, or \\$(0.01) per share, in the second quarter of 2015(1). Year to date, the Company reported an adjusted net loss(1) of \\$(0.5) million versus a \\$(5.9) million for the first half of 2015.

Cash Flow Highlights

The Company ended the quarter with unrestricted cash of \\$79.0 million, current and non-current restricted cash of \\$4.1 million, and short-term investments of \\$15.1 million, all of which represent a combined total of \\$98.2 million.

During the second quarter of 2016, the Company’s net cash provided by operating activities was \\$1.1 million.  This includes net income of \\$0.5 million and non-cash expenses of \\$1.6 million, the largest of which were share-based compensation of \\$0.7 million and depreciation and amortization of \\$0.9 million. The reduction of inventory contributed \\$0.6 million and increases in other liabilities contributed \\$0.3 million to cash from operating activities, offset by \\$(0.6) million in increased accounts receivable and a reduction of \\$(1.3) million in deferred revenue related to the amortization of the Schlumberger exclusivity fee.  Cash used in investing activities was \\$(15.3) million driven by \\$(14.9) million in purchases of marketable securities and \\$(0.5) million in capital expenditures. Cash used in financing activities was \\$(3.3) million, attributed to stock repurchases of \\$(4.3) million, offset by \\$1.0 million collected from the issuance of common stock related to option exercises. 

During the first half of 2016, cash provided by operating activities was \\$0.8 million. This includes a net loss of \\$(1.5) million and non-cash expenses of \\$3.5 million, the largest of which were share-based compensation of \\$1.9 million and depreciation and amortization of \\$1.9 million. The monetization of receivables favorably impacted cash from operating activities by \\$3.4 million, offset by \\$(2.1) million in accounts payable and other liabilities and a reduction of \\$(2.5) million in deferred revenue related to the amortization of the Schlumberger exclusivity fee. Cash used in investing activities was \\$(15.8) million driven by \\$(14.9) million in purchases of marketable securities and \\$(0.6) million in capital expenditures. Cash used in financing activities was \\$(5.9) million, attributed to stock repurchases of \\$(8.4) million, offset by \\$2.5 million collected from the issuance of common stock related to option exercises. 

1 Total gross profit, total gross margin, adjusted net income (loss), and adjusted basic and diluted net income (loss) 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.”

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 expectations for its financial performance in 2016 and the Company’s ability to achieve the milestones under the Schlumberger licensing agreement and receive the related contractual payments.  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 Schlumberger 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 3, 2016 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 profit, total gross margin, adjusted net income (loss), and adjusted basic and diluted net income (loss) 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.

Conference Call to Discuss Second Quarter 2016 Results

  
LIVE CONFERENCE CALL WEBCAST:
Thursday, August 4, 2016, 7:30 AM PDT
Listen-only, Toll-free:  888-539-3612
Listen-only, Local:  719-457-2604
Access code:  5906242		CONFERENCE CALL REPLAY:
Expiration: August 18, 2016, 10:30 AM PDT
Toll-free:  888-203-1112
Local:  719-457-0820
Access code:  5906242
  

Investors may also access the live call or the replay over the internet at www.streetevents.com or www.energyrecovery.com. The replay will be available approximately three hours after the live call concludes.

About Energy Recovery Inc.

Energy Recovery (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 \\$1.7 billion (USD) annually.  Headquartered in the Bay Area, Energy Recovery has offices in Ireland, Shanghai, and Dubai.  For more information about the Company, please visit www.energyrecovery.com.

  
ENERGY RECOVERY, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(in thousands, except share data and par value) 
(unaudited) 
  
 June 30, 2016
 December 31,    2015
 
ASSETS      
Current assets:      
Cash and cash equivalents\\$78,987 \\$99,931 
Restricted cash 1,058  1,490 
Short-term investments 15,095  257 
Accounts receivable, net of allowance for doubtful accounts of \\$168 and \\$166 at June 30, 2016 and December 31, 2015, respectively 8,242  11,590 
Unbilled receivables, current 1,804  1,879 
Inventories 6,178  6,503 
Deferred tax assets, net —  938 
Prepaid expenses and other current assets 1,272  943 
Total current assets 112,636  123,531 
Restricted cash, non-current 3,065  2,317 
Unbilled receivables, non-current —  6 
Deferred tax assets, non-current 885  — 
Property and equipment, net of accumulated depreciation of \\$19,872 and \\$18,338 at June 30, 2016 and December 31, 2015, respectively 9,762  10,622 
Goodwill 12,790  12,790 
Other intangible assets, net 2,216  2,531 
Other assets, non-current 2  2 
Total assets\\$141,356 \\$151,799 
       
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable\\$1,518 \\$1,865 
Accrued expenses and other current liabilities 5,233  7,808 
Income taxes payable 89  2 
Accrued warranty reserve 411  461 
Deferred revenue 6,772  5,878 
Current portion of long-term debt 10  10 
Total current liabilities 14,033  16,024 
Long-term debt, net of current portion 33  38 
Deferred tax liabilities, non-current 2,109  2,360 
Deferred revenue, non-current 66,462  69,000 
Other non-current liabilities 637  718 
Total liabilities 83,274  88,140 
Commitments and Contingencies (Note 9)      
Stockholders’ equity:      
Preferred stock, \\$0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding —  — 
Common stock, \\$0.001 par value; 200,000,000 shares authorized; 55,731,277 shares issued and 52,124,021 shares outstanding at June 30, 2016, and 54,948,235 shares issued and 52,468,779 shares outstanding at December 31, 2015 56  55 
Additional paid-in capital 134,156  129,809 
Accumulated other comprehensive loss (101) (64)
Treasury stock at cost, 3,607,256 and 2,479,456 shares repurchased at June 30, 2016 and December 31, 2015, respectively (15,213) (6,835)
Accumulated deficit (60,816) (59,306)
Total stockholders’ equity 58,082  63,659 
Total liabilities and stockholders’ equity\\$141,356 \\$151,799 
       
ENERGY RECOVERY, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
(in thousands, except per share data) 
(unaudited) 
  
 Three Months Ended 
June 30,
  Six Months Ended 
June 30,
 
    2016      2015       2016      2015   
Product revenue\\$11,973 \\$10,484  \\$22,024 \\$16,348 
Product cost of revenue 4,236  4,836   7,910  7,367 
Product gross profit 7,737  5,648   14,114  8,981 
              
License and development revenue 1,250  —   2,500  — 
              
Operating expenses:             
General and administrative 3,992  5,362   8,876  11,640 
Sales and marketing 1,935  1,994   4,005  4,427 
Research and development 2,422  1,410   5,087  3,943 
Amortization of intangible assets 158  158   315  317 
Total operating expenses 8,507  8,924   18,283  20,327 
Income (loss) from operations 480  (3,276)  (1,669) (11,346)
              
Other expense:             
Interest expense —  —   (1) (40)
Other non-operating income (expense) 79  20   58  (82)
Income (loss) before income taxes 559  (3,256)  (1,612) (11,468)
Provision (benefit) for income taxes 103  71   (102) 142 
Net income (loss)\\$456 \\$(3,327) \\$(1,510)\\$(11,610)
              
Net income (loss) per share - basic\\$0.01 \\$(0.06) \\$(0.03)\\$(0.22)
Net income (loss) per share - diluted\\$0.01 \\$(0.06) \\$(0.03)\\$(0.22)
              
Weighted average shares outstanding - basic 52,369  52,026   52,288  51,987 
Weighted average shares outstanding - diluted 55,698  52,026   52,288  51,987 
              
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 Six Months Ended 
June 30, 
 
 2016   2015   
Cash Flows From Operating Activities      
Net loss\\$(1,510)\\$(11,610)
Adjustments to reconcile net loss to net cash used in operating activities:      
Stock-based compensation 1,865  3,053 
Depreciation and amortization 1,851  1,959 
Provision for warranty claims 96  15 
Unrealized loss on foreign currency transactions 52  21 
Amortization of premiums on investments 34  130 
Change in fair value of put options 33  — 
Provision for doubtful accounts 16  59 
Valuation adjustments for excess or obsolete inventory (42) 21 
Other non-cash adjustments (49) 86 
Reversal of accruals related to expired warranties (146) — 
Deferred income taxes (199) 131 
Changes in operating assets and liabilities:      
Accounts receivable 3,333  3,472 
Deferred revenue, product 855  714 
Inventories 389  (1,520)
Income taxes payable 89  4 
Unbilled receivables 81  60 
Litigation settlement —  (1,700)
Accounts payable (347) 549 
Prepaid and other assets (384) 239 
Deferred revenue, SLB license (2,500) — 
Accrued expenses and other liabilities (2,668) (3,633)
Net cash provided by (used in) operating activities 849  (7,950)
       
Cash Flows From Investing Activities      
Maturities of marketable securities —  8,235 
Restricted cash (315) 2,422 
Capital expenditures (613) (429)
Purchases of marketable securities (14,903) — 
Net cash (used in) provided by investing activities (15,831) 10,228 
       
Cash Flows From Financing Activities      
Net proceeds from issuance of common stock 2,511  293 
Proceeds from long-term debt —  55 
Repayment of long-term debt (5) (2)
Repurchase of common stock (8,378) — 
Net cash (used in) provided by financing activities (5,872) 346 
Effect of exchange rate differences on cash and cash equivalents (90) (18)
Net change in cash and cash equivalents (20,944) 2,606 
Cash and cash equivalents, beginning of period 99,931  15,501 
Cash and cash equivalents, end of period\\$78,987 \\$18,107 
       

ENERGY RECOVERY, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(in thousands, except per share data)
(unaudited)

This press release includes non-GAAP financial information because we plan and manage our business using such information. Our non-GAAP Total Gross Profit, Total Gross Margin are determined by adding back the license and development revenue associated with the amortization of the Schlumberger exclusivity fee. Our non-GAAP Adjusted Net Income and per share information also exclude non-recurring expenses.

 Three Months Ended 
June 30
 Six Months Ended
June 30
  
    2016      2015    2016  2015  
Product revenue\\$11,973 \\$10,484 \\$22,024 \\$16,348  
License and development revenue 1,250  -     2,500  
Total revenue  13,223    10,484       24,524   
              
Product gross profit 7,737  5,648     14,114  
License and development revenue 1,250  -     2,500  
Total gross profit (Non-GAAP)  8,987    5,648       16,614   
              
Product gross margin 65% 54% 64% 55% 
Total gross margin (Non-GAAP) 68% 54% 68% 55% 
              
Net income (loss) 456  (3,327) (1,510) (11,610) 
Non-recurring operating expenses -  2,674  1,008  5,719  
Adjusted net income (loss) (Non-GAAP) 456  (653) (502) (5,891) 
              
Basic and diluted net income (loss) per share 0.01  (0.06) (0.03) (0.22) 
Adjusted basic and diluted net income (loss) per share (Non-GAAP) 0.01  (0.01) (0.01) (0.11) 
              
Weighted average shares outstanding - basic 52,369  52,026  52,288  51,987  
Weighted average shares outstanding - diluted 55,698  52,026  52,288  51,987