ENERGY RECOVERY, INC. Overview
We create technologies that solve complex challenges for industrial fluid-flow
markets worldwide. Building on our pressure exchanger technology platform, we
design and manufacture solutions that improve operational efficiency by reducing
waste, energy consumption and costs across a range of industrial processes. What
began as a game-changing invention for desalination has grown into a global
business advancing the environmental sustainability of our customers' operations
in multiple industries. We are a global team with sales and on-site technical
support available worldwide, and we maintain international direct sales offices
and technical support centers to service the European, the Middle Eastern and
Asian markets.
Our core technology is the pressure exchanger. Our pressure exchanger technology
efficiently transfers energy between high-pressure and low-pressure liquid or
gas through continuously rotating ducts. Our PX® Pressure Exchanger® ("PX") can
operate in both low-pressure and high-pressure environments, between
1,000 pounds per square inch ("psi"), or 70 bar, and up to approximately
10,000 psi, or 700 bar. Our pressure exchanger technology can also handle a
variety of relatively clean to dirty liquids, and we are actively developing
capabilities to handle gases. When applied to industrial systems with pressure
differentials, pressure exchanger technology can provide certain benefits
including our customers' ability to reduce capital expenditures and energy use,
which leads to lower carbon emissions, as well as lower operating costs.
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
improve productivity by reducing waste and energy consumption in high-pressure
industrial fluid-flow systems. This versatile technology powers several of our
products, including our flagship PX energy recovery device ("ERD"), which we
believe is the industry standard for energy recovery in the seawater reverse
osmosis desalination ("SWRO") industry. Today, we continue to push the
boundaries of our pressure exchanger technology to handle different operating
environments and industrial applications. Leveraging our proven pressure
exchanger technology platform, we are identifying new ways to solve, and
developing new solutions for solving, challenges for critical industries, such
as industrial wastewater treatment, natural gas processing and hydraulic
fracturing.
Segments
We continue to monitor and review our segment reporting structure in accordance
with authoritative guidance to determine whether any changes have occurred that
would impact our reportable segments. As a result of the evolution of our
products, operations and R&D efforts in new product development, such as
industrial and commercial refrigeration applications, and the way in which our
chief operating decision maker ("CODM") manages and assesses the performance of
the business, starting in the first quarter of fiscal year 2021, we realigned
our segment reporting and have recast the prior year amounts for comparability.
In addition, to better align the activities of the Water segment, we have
re-allocated resources to this segment's operations.
Water Segment
Our Water segment includes sales and marketing ("S&M") and R&D efforts, and
certain general and administrative ("G&A") activities related to the sales and
services of our products for seawater desalination, industrial wastewater, and
other water treatment applications. Our Water segment revenue is principally
derived from the sale of ERDs and high-pressure and circulation pumps to our
megaproject ("MPD"), original equipment manufacturers ("OEM") and aftermarket
("AM") channels. MPD sales are typically made to global engineering, procurement
and construction ("EPC") firms to build very large desalination plants
worldwide. Our typical MPD sale primarily consists of our PX ERD. Each MPD sale
represents revenue opportunities generally ranging from $1 million to
$18 million . Our packaged solutions to OEMs include our PX, Turbochargers,
high-pressure pumps and circulation "booster" pumps for integration and use in
small to medium-sized desalination plants. OEM projects typically represent
revenue opportunities of up to $1 million . Our existing and expanding installed
base of ERD and pump products in water plants has created a growing customer
base comprised of plant operators and service providers who purchase spare
parts, replacement parts and service contracts through our AM channel.
Energy Recovery, Inc. | Q1'2021 Form 10-Q | 19
--------------------------------------------------------------------------------
Table of Contents
During the quarter,
•we announced our second contract award for our new Ultra PX™ energy recovery
device, which will support the industrial wastewater treatment operations of a
natural gas plant in the Sichuan Province of China . Our Ultra PX is designed to
dramatically reduce the energy needs, costs and environmental impacts associated
with treating industrial wastewater in Ultra High-Pressure Reverse Osmosis
("UHPRO") applications. Our Ultra PX recovers up to 60 percent of wasted energy
when applied to UHPRO systems; and
•we announced a joint-marketing effort with DuPont Water Solutions ("DuPont"), a
global leader in purification and specialty-separation technologies, to spread
the knowledge of advanced solutions improving the efficiency of many industrial
wastewater treatment systems. We co-hosted a webinar with DuPont to discuss the
benefits of pairing our Ultra PX with DuPont membranes in industrial wastewater
treatment systems.
Emerging Technologies Segment
Our Emerging Technologies segment includes our R&D efforts in the continued development of the VorTeq™, S&M and R&D efforts to support the sales and development, respectively, of the IsoBoost™ in natural gas processing, R&D efforts for new product development for other non-water treatment applications, such as industrial and commercial refrigeration applications, and certain emerging technologies-related S&M and G &A activity expenses previously reported under corporate operating expenses. Commercial and Industrial Refrigeration. The global refrigeration industry is a leading user and emitter of hydro fluorocarbons ("HFCs"), which are a group of powerful man-made greenhouse gases that can impact global warming thousands of times more than CO2. More than 120 countries have signed on to theKigali Amendment, an amendment to the Montreal Protocol, which states the goal of reducing HFC use by 80% by 2047. This yearthe United States ("U.S.") andChina have publicly committed to signing the Kigali Amendment. In addition, theU.S. Environmental Protection Agency announced onMay 3, 2021 its intention to reduce HFC emissions in theU.S. by 85% by 2036, 11 years prior to the 2047 Kigali Amendment target, by phasing down the production and import of HFCs. For the refrigeration industry, phasing out HFCs means moving to natural refrigerants such as ammonia or CO2. CO2 is stable, and more benign, and therefore the safer choice; however CO2 works at much higher pressures and requires more energy than HFCs, thereby increasing the operating cost of a CO2 refrigeration system. The challenge today is to make CO2 refrigeration systems less costly and more efficient to compete economically with incumbent refrigerants. While we are at the early stages of developing this technology, we believe we will be able to achieve efficiencies across a wider range of temperatures that exceed incumbent CO2 refrigeration technologies, helping customers reduce the operating cost of a natural gas refrigeration system and thereby easing this transition to CO2 in the coming years. We will continue development of this technology throughout 2021 with the goal of placing our product in a commercial setting as soon as research, development and testing is completed. Energy Recovery, Inc. | Q1'2021 Form 10-Q | 20 -------------------------------------------------------------------------------- Table of Contents Results of Operations A discussion regarding our financial condition and results of operations for the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 , is presented below. Total Revenue Three Months Ended March 31, 2021 2020 % of Total % of Total $ Revenue $ Revenue Change (In thousands, except percentages) Product revenue$ 28,940 100 %$ 19,001 88 %$ 9,939 52 % License and development revenue - - % 2,543 12 % (2,543) (100 %) Total revenue$ 28,940 100 %$ 21,544 100 %$ 7,396 34 % Product Revenue Variability in product revenue from quarter to quarter is typical, and year on year quarterly comparisons are not necessarily indicative of the trend for the full year due to these variations. Product revenue by channel customer is presented in the following table. Three Months Ended March 31, 2021 2020 % of Product % of Product $ Revenue $ Revenue Change (In
thousands, except percentages)
Megaproject$ 23,757 82 %$ 14,457 76 %$ 9,300 64 % Original equipment manufacturer 2,791 10 % 3,556 19 % (765) (22 %) Aftermarket 2,392 8 % 988 5 % 1,404 142 % Total product revenue$ 28,940 100 %$ 19,001 100 %$ 9,939 52 % Our MPD channel continues to be the main driver of our revenue growth as revenue from this channel benefits from the long project cycle. Our OEM channel, which contains projects of shorter duration, was negatively affected by the economic conditions in late fiscal year 2020 and early 2021, which ultimately delayed certain new installation and upgrade projects, as well as non-critical plant maintenance. Specifically, in our OEM channel, we sell into a number of industries, including tourism and hospitality, which were greatly affected by the COVID-19 pandemic. Our AM channel increased due primarily to an increase in support and services rendered to our large project installed based customers in the first quarter of fiscal year 2021.
License and Development Revenue
The change in license and development revenue was due to the termination of the VorTeq License Agreement. InJune 2020 , we andSchlumberger Technology Corporation ("Schlumberger") entered into an agreement to terminate the VorTeq License Agreement effectiveJune 1, 2020 . As there were no future performance obligations to be recognized under the VorTeq License Agreement after the effective date, we 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. Energy Recovery, Inc. | Q1'2021 Form 10-Q | 21 -------------------------------------------------------------------------------- Table of Contents Product Gross Profit and Gross Margin Product gross profit represents our product revenue less our product cost of revenue. Our product 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, 2021 2020 $ Gross Margin $ Gross Margin Change in Product Gross Profit (In
thousands, except percentages)
Product gross profit and gross margin$ 19,959 69.0 %$ 13,317 70.1 %$ 6,642 49.9 % The increase in product gross profit was due primarily to higher revenues, partially offset by a reduction in gross margin to 69.0% in the three months endedMarch 31, 2021 , from 70.1% in the three months endedMarch 31, 2020 . The decrease in gross margin was due primarily to lower average selling prices related to product mix and higher manufacturing labor expenses, partially offset by lower COVID-19 related charges. Energy Recovery, Inc. | Q1'2021 Form 10-Q | 22 --------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Total Operating Expenses
Three Months Ended March 31,
2021 2020
% of Total % of Total
$ Revenue $ Revenue Change
(In thousands, except percentages)
General and administrative$ 6,606 23 %$ 6,881 32 %$ (275) (4 %) Sales and marketing 2,703 9 % 2,138 10 % 565 26 % Research and development 4,502 16 % 6,709 31 % (2,207) (33 %) Amortization of intangible assets 4 - % 4 - % - - % Total operating expenses$ 13,815 48 %$ 15,732 73 %$ (1,917) (12 %) General and administrative expenses. G&A expenses decreased due primarily to a decrease in employee-related costs of$0.4 million , partially offset by higher other costs of$0.2 million . Employee-related costs, as compared to the prior year, decreased due primarily to lower recruiting costs related to our chief executive officer search in fiscal year 2020, partially offset by higher employee incentive compensation and share-based compensation expense.
Sales and marketing expenses. S&M expenses increased due primarily to an
increase in employee-related costs of
Research and development expenses. R&D expenses decreased due primarily to lower testing supplies expenditures of$1.9 million as we decreased testing activities on VorTeq and shifted testing activities to refrigeration and other new initiatives.
Segment and Corporate Operating Expenses
We continue to monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments. As a result of the evolution of our products, operations and R&D efforts in new product development, such as industrial and commercial refrigeration applications, and the way in which our CODM manages and assesses the performance of the business, starting in the first quarter of fiscal year 2021, we realigned our segment reporting and have recast the prior year amounts for comparability. In addition, to better align the activities of the Water segment, we have re-allocated resources to this segment's operations. Income and type of expense activities that are included in our Water and Emerging Technologies segments and corporate operating expenses are as follows: Water segment: Includes seawater desalination sales and service, industrial wastewater sales, service, R&D and S&M efforts, other water-related R&D activities, and certain water-related S&M and G &A activity expenses previously reported under corporate operating expenses. Emerging Technologies segment: Includes R&D efforts in the continued development of the VorTeq, S&M and R&D efforts to support the sales and development, respectively, of the IsoBoost in natural gas processing, and R&D efforts for new product development for other non-water treatment applications, such as industrial and commercial refrigeration applications, and certain emerging technologies-related S&M and G &A activity expenses previously reported under corporate operating expenses. Corporate operating expenses: Includes certain operating expenses related to corporate activities outside of the operating segments, such as audit and accounting expenses, general legal costs, board of director fees and expenses, and other separately managed general expenses not related to the identified segments.Energy Recovery, Inc. | Q1'2021 Form 10-Q | 23
--------------------------------------------------------------------------------
Table of Contents
Three Months Ended March 31, 2021 Three Months Ended March 31, 2020 (Recasted)
Emerging Emerging
Water Technologies Corporate Total Water Technologies Corporate Total
(In thousands)
Operating expenses
General and
administrative $ 1,557 $ 1,166 $
3,883
$ 3,310 $ 6,881 Sales and marketing 2,164 179 360 2,703 1,676 312 150 2,138 Research and development 501 4,001 - 4,502 902 5,807 - 6,709 Amortization of intangible assets 4 - - 4 4 - - 4 Total operating expenses$ 4,226 $ 5,346 $ 4,243 $ 13,815 $ 4,661 $ 7,611 $ 3,460 $ 15,732 Water segment. The decrease in the Water segment operating expenses was due primarily to lower overall G&A and R&D costs, both driven primarily by lower employee-related costs, and allocation of certain R&D costs to emerging technology projects. These costs were partially offset by higher overall S&M costs, driven by increased employee-related costs and share-based compensation. Emerging Technologies segment. The decrease of Emerging Technologies segment operating expenses, was due primarily to reduced VorTeq-related expense of$3.1 million , which was partially offset by a shift of expenditures for development of industrial and commercial refrigeration of$0.8 million during the three months endedMarch 31, 2021 . Total VorTeq-related expense was$3.5 million in the first quarter of fiscal year 2021, which included R&D expenditures of$2.8 million . Corporate operating expenses. The increase of corporate operating expenses was due primarily to higher employee-related costs primarily related to increased employee incentive compensation, higher share-based compensation expense, legal costs, and other costs, partially offset by lower recruiting costs related to our chief executive officer search in fiscal year 2020. Energy Recovery, Inc. | Q1'2021 Form 10-Q | 24 --------------------------------------------------------------------------------
Table of Contents
Other Income, Net
Three Months Ended March 31,
2021 2020 Change
(In thousands, except percentages)
Interest income $ 92 $ 420 $ (328)
Other non-operating income, net (10) (12) 2
Total other income, net $ 82 $ 408 $ (326) Total other income, net decreased due primarily to a decrease in interest income due to a shift from debt investments to investments in money market funds.
Income Taxes
Three Months Ended March 31,
2021 2020 Change
(In thousands, except percentages)
Benefit from income taxes $ (640) $ (85) $ (555)
Effective tax rate (10.3 %) (15.9 %)
Effective tax rate, excluding discrete items 15.8 % 19.5 %
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, 2021 , the recognized income tax benefit
included a discrete tax benefit of $1.6 million , due primarily to stock-based
compensation windfalls. For the three months ended March 31, 2020 , the
recognized income tax benefit included a discrete tax benefit of $0.2 million ,
due primarily to stock-based compensation windfalls.
Energy Recovery, Inc. | Q1'2021 Form 10-Q | 25
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Overview
From time to time, management and our Board of Directors reviews 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, 2021 , our principal sources of liquidity consisted of: (i) unrestricted cash and cash equivalents of$105.4 million ; (ii) short-term investments of$14.6 million that are primarily invested in marketable debt instruments such as corporate notes and bonds andU.S. Treasury securities; and (iii) accounts receivable, net of allowances of$16.4 million . As ofMarch 31, 2021 , there were unrestricted cash and cash equivalents of$0.9 million held outside theU.S. We invest cash not needed for current operations predominantly in high-quality, 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. As ofMarch 31, 2021 , we had$1.1 million of short-term contract assets which only represents unbilled trade receivables from certain Water segment contract sales which includes contractual holdback provisions, pursuant to which we will invoice the final retention payment due within the next 12 months. The customer holdbacks represent amounts intended to provide a form of security for the customer; and accordingly, these contract assets have not been discounted to present value. The retention payments with no performance conditions are recorded as trade receivables.
Loan and Pledge Agreement - Stand-By Letters of Credit
We entered into a loan and pledge agreement with a financial institution duringJanuary 2017 , which has been amended multiple times to accommodate the growth of the Company (the original loan and pledge agreement and its subsequent amendments are hereinafter referred to as the "Loan and Pledge Agreement"). Under the Loan and Pledge Agreement, we are allowed to issue stand-by letters of credit ("SBLCs") up to one year past the expiration date of the Loan and Pledge Agreement and to hold SBLCs with other financial institutions up to$5.1 million . SBLCs have a term limit of three years, are secured by pledgedU.S. investments, and do not have any cash collateral balance requirement. SBLCs are deducted from the total revolving credit line under the Loan and Pledge Agreement and are subject to a non-refundable quarterly fee that is in an amount equal to 0.7% per annum of the face amount of the outstanding SBLCs. As ofMarch 31, 2021 , outstanding SBLCs totaled$12.9 million .
Share Repurchase Program
OnMarch 9, 2021 , our Board of Directors authorized a share repurchase program (the "March 2021 Authorization") under which we, under management's discretion, may repurchase up to$50.0 million in aggregate cost of our outstanding common stock. As ofMarch 31, 2021 , no shares have been repurchased under theMarch 2021 Authorization.
© Edgar Online, source
