ENERGY RECOVERY, INC. Overview
Energy Recovery, Inc. (the "Company", "Energy Recovery", "we", "our" and "us") designs and manufactures solutions that make industrial processes more efficient and sustainable. Leveraging our pressure exchanger technology, which generates little to no emissions when operating, our solutions lower costs, save energy, reduce waste and minimize emissions for companies across a variety of industrial processes. As the world coalesces around the urgent need to address climate change and its impacts, we are helping companies reduce their energy consumption in their industrial processes, which in turn, reduces their carbon footprint. We believe that our customers do not have to sacrifice quality and cost savings for sustainability and are committed to developing solutions that drive long-term value - both financial and environmental. The original product application of our technology, the PX® Pressure Exchanger® ("PX") energy recovery device ("ERD"), was a major contributor to the advancement of seawater reverse osmosis desalination ("SWRO"), significantly lowering the energy intensity and cost of water production globally from SWRO. We have since introduced our pressure exchanger technology to the fast growing industrial wastewater ("IWW") filtration market, such as battery manufacturers, mining operations, and manufacturing plants that discharge wastewater with significant levels of metals and pollutants, as well as the commercial and industrial refrigeration market. Engineering, and research and development ("R&D"), have been, and remain, an essential part of our history, culture and corporate strategy. Since our formation, we have developed leading technology and engineering expertise through the continual evolution of our pressure exchanger technology, which can enhance environmental sustainability and improve productivity by reducing waste and energy consumption in high-pressure industrial fluid-flow systems. This versatile technology works as a platform to build product applications and is at the heart of many of our products. In addition, we have engineered and developed ancillary devices, such as our hydraulic turbochargers ("Turbochargers") and boosters, that complement our ERDs.
Quarterly Highlights
In January andApril 2022 , we announced contract awards totaling nearly$45.0 million for our PX ERDs as well as several of our PX PowerTrain™ solutions for desalination plants in theKingdom of Saudi Arabia and other countries within the Gulf region. These contract orders are expected to be fulfilled by the end of fiscal year 2023. InFebruary 2022 , we announced awards totaling$0.9 million to supply our PX ERDs and an array of pumps to support IWW treatment operations at a battery-grade lithium carbonate manufacturing facility inTibet ,China and a textile wastewater treatment facility inRajasthan, India . The textile wastewater treatment facility inIndia will utilize a combination of our PXs, turbochargers, and boosters to maximize efficiency. InApril 2022 ,IR Magazine , the independent, global voice of the investor relations profession, awarded toEnergy Recovery as the winner of the "Best ESG Reporting (small to mid-cap company)" for our 2020 ESG Report. For further details on our Environmental, Social and Governance ("ESG") efforts and initiative, please refer to our website at "https://ir.energyrecovery.com/websites/energyrecover/English/6500/esg-at-energy-recovery.html#". We have included this website address only as an inactive textual reference and do not intend it to be an active link to our website.Energy Recovery, Inc. | Q1'2022 Form 10-Q | 20
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Table of Contents Results of Operations A discussion regarding our financial condition and results of operations for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , is presented below. Revenue
Variability in revenue from quarter to quarter is typical, therefore year-on-year year-to-date comparisons are not necessarily indicative of the trend for the full year due to these variations.
Revenues by channel customers are presented in the following table.
Three Months Ended March 31,
2022 2021
$ % of Revenue $ % of Revenue Change
(In thousands, except percentages)
Megaproject$ 23,840 73 %$ 23,757 82 %$ 83 - % Original equipment manufacturer 4,671 14 % 2,791 10 % 1,880 67 % Aftermarket 4,035 13 % 2,392 8 % 1,643 69 % Total revenues$ 32,546 100 %$ 28,940 100 %$ 3,606 12 % The MPD channel is the main driver of our long-term growth as revenue from this channel benefits from the higher quantity of larger projects as well as long project cycles. Comparative differences over the prior year's revenue are subject to timing of delivery of PXs, which is dependent on the MPD shipment cycle which is project specific. During the first quarter, as compared to prior year, we have observed an increase in project sizes and project count, which will increase revenues as product is shipped according to the project schedule. The OEM channel, where we sell into a number of industries, including tourism and hospitality, contains projects of shorter duration. The increases in SWRO OEM channel revenues, as compared to the prior year, we believe were due primarily to pent up demand from the effects of COVID-19. The OEM channel had higher revenues related to increased project sizes in theMiddle East andAfrica ,Asia , and America regions. In addition, the IWW OEM channel revenues, which accounted for 9% of total OEM revenues in the first quarter of 2022, increased 21% over prior year. The AM channel revenues generally fluctuate from year-to-year depending on support and services rendered to our installed customer base. In 2022, we experienced increased sales of product which we believe is a result of our customers consuming their existing spare parts inventory and strategically increasing their stock of critical components in advance of greater expected water needs in the near future. The AM channel had higher revenues related to spare parts consumption in theAsia and America regions.
Gross Profit and Gross Margin
Gross profit represents our revenue less our cost of revenue. Our cost of revenue consists primarily of raw materials, personnel costs (including share-based compensation), manufacturing overhead, warranty costs, depreciation expense and manufactured components.
Three Months Ended March 31,
2022 2021
$ Gross Margin $ Gross Margin Change in Product Gross Profit
(Inthousands, except percentages)
Gross profit and gross margin$ 23,048 70.8 %$ 19,959 69.0 %$ 3,089 15.5 %
The increase in gross profit was due primarily to higher revenues related to increased sales of PXs, pumps and turbochargers, and an increase in product gross margin. The higher gross margin was due primarily to higher increased average selling price of our PXs and manufacturing efficiencies, partially offset by higher labor and material costs.
Energy Recovery, Inc. | Q1'2022 Form 10-Q | 21
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Table of Contents
Operating Expenses
Total Operating Expenses
Three Months Ended March 31,
2022 2021
$ % of Revenue $ % of Revenue Change
(In thousands, except percentages)
General and administrative$ 6,551 20 %$ 6,610 23 %$ (59) (1 %) Sales and marketing 3,364 10 % 2,703 9 % 661 24 % Research and development 4,911 15 % 4,502 16 % 409 9 % Total operating expenses$ 14,826 46 %$ 13,815 48 %$ 1,011 7 % General and Administrative Expenses. The decrease in general and administrative ("G&A") expenses was due primarily to lower legal fees and employee compensation costs, partially offset by higher bank charges and administrative costs.
Sales and Marketing Expenses. The increase in sales and marketing ("S&M") expenses was due primarily to higher employee-related costs, higher marketing costs, such as trade shows and marketing materials and increased travel expenditures.
Research and Development Expenses. The increase in R&D expenses was due primarily to an increase in expenditures related to CO2 and other projects, partially offset by lower employee compensation, share-based compensation and travel expenses.
Segment and Corporate Operating Expenses
Expense activities that are included in our Water and Emerging Technologies
segments and corporate operating expenses are presented below. See Note 9,
"Segment Reporting," of the Notes to Condensed Consolidated Financial Statements
in Part I, Item 1, "Financial Statements (unaudited)," of this Quarterly Report
on Form 10-Q (the "Notes") for further discussion regarding our segments.
Three Months Ended March 31, 2022 Three Months Ended March 31, 2021
Emerging Emerging
Water Technologies Corporate Total Water Technologies Corporate Total
(In thousands)
Operating expenses
General and administrative $ 1,464 $ 908 $ 4,179 $ 6,551 $ 1,561 $ 1,166 $ 3,883 $ 6,610
Sales and marketing 2,301 527 536 3,364 2,164 179 360 2,703
Research and development 800 4,111 - 4,911 501 4,001 - 4,502
Total operating expenses $ 4,565 $ 5,546 $ 4,715 $ 14,826 $ 4,226 $ 5,346 $ 4,243 $ 13,815
Water Segment. The increase in the Water segment operating expenses of
$0.3 million was due primarily to an increase in expenditures related to new
initiatives related to industrial wastewater, and an increase in travel costs,
partially offset by lower employee and share-based compensation expenses, and a
decrease in consulting expenses.
Emerging Technologies Segment. The increase of the Emerging Technologies segment
operating expenses of $0.2 million was due primarily to higher R&D expenditures
and an increase in consulting expenses, partially offset by lower employee and
share-based compensation expenses, and lower depreciation expenses. The higher
expenditures included an increase of $1.4 million related to refrigeration and
other initiatives, partially offset by a reduction in VorTeq-related
expenditures of $1.3 million .
Corporate Operating Expenses. The increase of the corporate operating expenses
of $0.5 million was due primarily to an increase in employee compensation,
share-based compensation and travel expenses, partially offset by lower legal
fees.
Energy Recovery, Inc. | Q1'2022 Form 10-Q | 22--------------------------------------------------------------------------------
Table of Contents
Other Income, Net
Three Months Ended March 31,
2022 2021 Change
(In thousands)
Interest income $ 61 $ 92 $ (31)
Other non-operating income (expense), net 56 (10) 66
Total other income, net $ 117 $ 82 $ 35 The increase in Total other income, net was due primarily to sales of scrap assets previously written off partially offset by lower interest income.
Income Taxes
Three Months Ended
2022 2021
(In thousands, except percentages)
Provision for (benefit from) income taxes $ 445 $ (640)
Discrete items 599 1,627
Provision for income taxes, excluding discrete items $ 1,044 $ 987
Effective tax rate 5.3 % (10.3 %)
Effective tax rate, excluding discrete items 12.5 % 15.8 %
The tax provision for interim periods is determined using an estimate of our
annual effective tax rate, adjusted for discrete items, if any, that arise
during the period. Each quarter, we update our estimate of the annual effective
tax rate, and if the estimated annual effective tax rate changes, we make a
cumulative adjustment in such period. The quarterly tax provision and estimate
of our annual effective tax rate are subject to variation due to several
factors, including variability in accurately predicting our pre-tax income or
loss and the mix of jurisdictions to which they relate, intercompany
transactions, the applicability of special tax regimes, and changes in how we do
business.
For the three months ended March 31, 2022 , the recognized income tax expense
included a benefit primarily related to the United States of America (the
"U.S.") federal foreign-derived intangible income ("FDII") deduction as we
expect to utilize all of our net operating loss ("NOL") carryforwards in fiscal
year 2022 due to our projected income exceeding the amount of NOL carryforwards,
and federal R&D tax credit, along with a discrete tax benefit due primarily to
stock-based compensation windfalls. For the three months ended March 31, 2021 ,
the recognized income tax benefit included the U.S. federal R&D tax credit along
with a discrete tax benefit due primarily to stock-based compensation windfalls.
The effective tax rate excluding discrete items was lower largely related to the FDII benefit projected for the 2022 fiscal year.
Energy Recovery, Inc. | Q1'2022 Form 10-Q | 23
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Table of Contents Liquidity and Capital Resources
Overview
From time-to-time, management and our Board of Directors review our liquidity and future cash needs and may make a decision on (1) the return of capital to our shareholders through a share repurchase program or dividend payout; or (2) seek additional debt or equity financing. As ofMarch 31, 2022 , our principal sources of liquidity consisted of (i) unrestricted cash and cash equivalents of$44.5 million ; (ii) investment-grade short-term and long-term marketable debt instruments of$52.0 million that are primarily invested in corporate notes and bonds; and (iii) accounts receivable, net of allowances, of$26.7 million . As ofMarch 31, 2022 , there were unrestricted cash and cash equivalents of$1.0 million held outside theU.S. We invest cash not needed for current operations predominantly in investment-grade, marketable debt instruments with the intent to make such funds available for operating purposes as needed. Although these securities are available for sale, we generally hold these securities to maturity, and therefore, do not currently see a need to trade these securities in order to support our liquidity needs in the foreseeable future. The risk of this portfolio to us is in the ability of the underlying companies to cover their obligations at maturity, not in our ability to trade these securities at a profit. Based on current projections, we believe existing cash balances and future cash inflows from this portfolio will meet our liquidity needs for at least the next 12 months.
Credit Arrangements
We entered into a credit agreement withJPMorgan Chase Bank, N.A . ("JPMC") onDecember 22, 2021 ("Credit Agreement") to provide us with additional capital to fuel our growth and expansion into emerging markets utilizing our pressure exchanger technology. The Credit Agreement, which will expire onDecember 21, 2026 , provides a committed revolving credit line of$50.0 million and includes both a revolving loan and a letters of credit ("LCs") component. Upon entering into the Credit Agreement, we terminated the existing Loan and Pledge Agreement datedJanuary 27, 2017 withCitibank, N.A . ("Loan and Pledge Agreement"). As ofMarch 31, 2022 we were in compliance with all covenants under the Credit Agreement. Under the Credit Agreement, as ofMarch 31, 2022 , there were no revolving loans outstanding. In addition, as ofMarch 31, 2022 , under the LCs component, we utilized$20.4 million of the maximum allowable credit line of$25.0 million , which includes newly issued LCs, and previously issued and unexpired stand-by letters of credits ("SBLCs") and certain non-expired commitments under the Company's previous Loan and Pledge Agreement which are guaranteed under the Credit Agreement. As ofMarch 31, 2022 , all of the issued and unexpired SBLCs issued under the Loan and Pledge Agreement were covered as a LC issuance under the Credit Agreement, and together with new LC issuances under the Credit Agreement, there were$13.1 million of outstanding LCs with a weighted average remaining life of twelve months. See Note 6, "Lines of Credit," of the Notes for further discussion related to the Credit Agreement.
Share Repurchase Program
OnMarch 9, 2021 , our Board of Directors authorized a share repurchase program (the "March 2021 Authorization") which we may repurchase, under management's discretion, up to$50.0 million in aggregate cost, which includes both the share value of the acquired common stock and the fees charged in connection with acquiring the common stock. Since inception of theMarch 2021 Authorization, we repurchased 1,680,659 shares at an aggregate cost of approximately$31.4 million . As ofMarch 31, 2022 , under theMarch 2021 Authorization, we may repurchase additional shares of our outstanding common stock at an aggregate cost of approximately$18.6 million .
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