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

Rhea-AI Summary

Energy Recovery Inc. (Nasdaq:ERII) reported its financial results for Q3 2023, with revenue of $37.0 million, exceeding guidance. Gross margin was 69.9%, higher than estimates, and operating expenses were $16.7 million. Net income was $9.7 million and adjusted EBITDA was $12.0 million. The company also issued its annual Sustainability Report, committing to reduce emissions by 65% by 2026.

Positive

• Revenue for Q3 2023 exceeded guidance, reaching $37.0 million.
• Gross margin was 69.9%, higher than estimated.
• Net income for Q3 2023 was $9.7 million.
• Adjusted EBITDA for Q3 2023 was $12.0 million.
• The company issued its annual Sustainability Report, committing to reduce emissions by 65% by 2026.

Negative

• None.

SAN LEANDRO, Calif.--(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 10^th 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.

 

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Investor Relations

ir@energyrecovery.com

+1 (346) 382-6927

Source: Energy Recovery, Inc.

FAQ

What is the stock symbol for Energy Recovery Inc.?

The stock symbol for Energy Recovery Inc. is ERII (Nasdaq:ERII).

What was the revenue for Q3 2023?

The revenue for Q3 2023 was $37.0 million.

What was the gross margin for Q3 2023?

The gross margin for Q3 2023 was 69.9%.

What was the net income for Q3 2023?

The net income for Q3 2023 was $9.7 million.

What is the company's commitment in the annual Sustainability Report?

The company committed to reduce emissions by 65% by 2026 in the annual Sustainability Report.