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Thursday, August 4, 2016

Energy Technology News: Energy Recovery (NASDAQ: $ERII) Reports Second Quarter and First-Half 2016 Results

Energy Technology News: Energy Recovery (NASDAQ: $ERII) Reports Second Quarter and First-Half 2016 Results


SAN LEANDRO, Calif., -- (Investorideas Newswire) Energy Recovery Inc. (NASDAQ:ERII), the leader in pressure energy technology for industrial fluid flows,  announced  yesterday 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




Contact
Chris Gannon
Chief Financial Officer
510-483-7370

Source: Energy Recovery

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