ERII Energy Recovery Inc

Energy Recovery, Inc. (Nasdaq:ERII) (“Energy Recovery” or the “Company”) today announced its financial results for the fourth quarter and year ended December 31, 2023.

Fiscal Year 2023 Highlights

• Record annual revenue of $128.3 million, which includes a 79% growth in wastewater and represents nine consecutive years of revenue growth.
• Record quarterly revenue of $57.2 million, representing a 35% year-on-year growth with strong performance in Energy Recovery’s primary desalination business and the continued rapid expansion of the company’s wastewater sector. Water revenue was below guidance due to the delayed shipment of a single project to be shipped in 2024. This project was highlighted as a potential risk in the Q3 earnings call.
• Gross margin of 67.8%, within Energy Recovery’s expectations and above guidance.
• Operating expenses of $68.0 million, in line with Energy Recovery’s expectations.
• Income from operations of $19.1 million.
• Net income of $21.5 million and adjusted EBITDA(1) of $31.2 million.
• Operating cash flow for the year more than doubled largely due to strong customer collections and strategic efforts to optimize raw inventory turnover rates.
• Cash and investments of $122.4 million, which include cash, cash equivalents, and short-term and long-term investments.

“We achieved record annual and fourth quarter revenue in 2023, which represents our ninth consecutive year of revenue growth despite a shift of $8 million revenue associated with a single project that was pushed from the fourth quarter into 2024,” commented David Moon, President and CEO.

“Our core desalination business is healthy, our wastewater business continues to grow rapidly, and we are making progress in our CO2 refrigeration business. This year, we expect to see our newest and most efficient product, the PX Q400, achieve roughly 50% of sales in our megaproject channel. Wastewater could reach up to 10% of our Water revenue in just three years and we are pushing hard to get our PX G1300 in multiple supermarket chains in the U.S. and Europe.”

Mr. Moon added, “Our focus in 2024, and beyond, is rebuilding shareholder value and trust within the market. We remain committed to our growth strategy of diversification into new markets, which is key to Energy Recovery’s future. In 2024, we will continue to defend our leadership position in our core desalination business, and invest in new market opportunities in CO2 and wastewater, while managing both expenses and cash with discipline and a focus on investing in the highest and best use of shareholder capital. I am excited by the long-term growth prospects and believe we are well-positioned to continue to grow.”

Financial Highlights

 

Quarter-to-Date

 

 

Year-to-Date

 

Q4’2023

 

Q4’2022

 

vs. Q4’2022

 

 

2023

 

2022

 

2023 vs. 2022

 

(In millions, except net income per share, percentages and basis points)

Revenue

$57.2

 

$42.3

 

up 35%

 

 

$128.3

 

$125.6

 

up 2%

Gross margin

69.1%

 

70.7%

 

down 160 bps

 

 

67.8%

 

69.6%

 

down 180 bps

Operating margin

36.0%

 

34.5%

 

up 150 bps

 

 

14.8%

 

19.8%

 

down 500 bps

Net income

$19.8

 

$13.7

 

up 44%

 

 

$21.5

 

$24.0

 

down 11%

Net income per share

$0.34

 

$0.24

 

up 42%

 

 

$0.37

 

$0.42

 

down 12%

Effective tax rate

 

 

 

 

 

 

 

5.3%

 

7.8%

 

 

Cash provided by operations

$13.8

 

$6.4

 

 

 

 

$26.1

 

$12.6

 

 

Non-GAAP Financial Highlights (1)

 

Quarter-to-Date

 

 

Year-to-Date

 

Q4’2023

 

Q4’2022

 

vs. Q4’2022

 

 

2023

 

2022

 

2023 vs. 2022

 

(In millions, except adjusted net income per share, percentages and basis points)

Adjusted operating margin

39.9%

 

37.9%

 

up 200 bps

 

 

21.1%

 

26.2%

 

down 510 bps

Adjusted net income

$22.0

 

$14.7

 

up 50%

 

 

$28.9

 

$30.5

 

down 5%

Adjusted net income per share

$0.39

 

$0.26

 

up 50%

 

 

$0.51

 

$0.54

 

down 6%

Adjusted effective tax rate

 

 

 

 

 

 

 

6.1%

 

10.6%

 

 

Adjusted EBITDA

$23.9

 

$17.0

 

 

 

 

$31.2

 

$36.8

 

 

Free cash flow

$12.4

 

$5.1

 

 

 

 

$23.5

 

$8.4

 

 

___________

(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 expectations regarding the shipment of projects; our belief that our core desalination business remains strong; our expectations regarding the growth of our wastewater business; our belief we are making progress in our CO2 business; our belief that we can defend our position in seawater desalination; our ability to build shareholder value; and our belief that the Company is well positioned to continue to grow. 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 Fourth Quarter and Fiscal 2023 Financial Results

• Adjusted operating margin is a non-GAAP financial measure that the Company defines as income 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; and 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 income (expense), net; and v) provision for income taxes.
• Free cash flow is a non-GAAP financial measure that the Company defines as net cash provided by operating activities less capital expenditures.

Conference Call to Discuss Fourth Quarter and Fiscal 2023 Financial Results

LIVE CONFERENCE CALL: Wednesday, February 21, 2024, 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: March 22, 2024 US / Canada Toll-Free: +1 (877) 660-6853 Local / International Toll: +1 (201) 612-7415 Access code: 13743738

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)

 

 

2023

 

2022

 

(In thousands)

ASSETS

 

 

 

Cash, cash equivalents and investments

$

122,375

 

$

92,891

Accounts receivable and contract assets

 

47,529

 

 

35,782

Inventories, net

 

26,149

 

 

28,366

Prepaid expenses and other assets

 

3,251

 

 

3,886

Property, equipment and operating leases

 

30,168

 

 

32,695

Goodwill

 

12,790

 

 

12,790

Deferred tax assets and other assets

 

10,712

 

 

10,629

TOTAL ASSETS

$

252,974

 

$

217,039

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

Liabilities

 

 

 

Accounts payable and accrued expenses

$

18,583

 

$

15,507

Contract liabilities and other liabilities, non-current

 

1,304

 

 

1,316

Lease liabilities

 

13,279

 

 

14,878

Total liabilities

 

33,166

 

 

31,701

 

 

 

 

Stockholders’ equity

 

219,808

 

 

185,338

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

252,974

 

$

217,039

 

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended December 31,

 

Years Ended December 31,

 

2023

 

2022

 

2023

 

2022

 

(In thousands, except per share data)

Revenue

$

57,189

 

$

42,291

 

$

128,349

 

$

125,591

Cost of revenue

 

17,690

 

 

12,400

 

 

41,270

 

 

38,235

Gross profit

 

39,499

 

 

29,891

 

 

87,079

 

 

87,356

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

General and administrative

 

7,160

 

 

7,186

 

 

28,864

 

 

28,341

Sales and marketing

 

6,767

 

 

4,361

 

 

22,164

 

 

16,277

Research and development

 

4,958

 

 

3,739

 

 

17,001

 

 

17,909

Total operating expenses

 

18,885

 

 

15,286

 

 

68,029

 

 

62,527

Income from operations

 

20,614

 

 

14,605

 

 

19,050

 

 

24,829

Other income, net

 

1,298

 

 

765

 

 

3,655

 

 

1,242

Income before income taxes

 

21,912

 

 

15,370

 

 

22,705

 

 

26,071

Provision for income taxes

 

2,107

 

 

1,645

 

 

1,201

 

 

2,022

Net income

$

19,805

 

$

13,725

 

$

21,504

 

$

24,049

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

Basic

$

0.35

 

$

0.25

 

$

0.38

 

$

0.43

Diluted

$

0.34

 

$

0.24

 

$

0.37

 

$

0.42

 

 

 

 

 

 

 

 

Number of shares used in per share calculations

 

 

 

 

 

 

 

Basic

 

56,735

 

 

56,014

 

 

56,444

 

 

56,221

Diluted

 

57,671

 

 

57,433

 

 

57,740

 

 

57,641

 

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Years Ended December 31,

 

 

2023

 

 

 

2022

 

 

(In thousands)

Cash flows from operating activities:

 

 

 

Net income

$

21,504

 

 

$

24,049

 

Non-cash adjustments

 

13,889

 

 

 

14,447

 

Net cash used in operating assets and liabilities

 

(9,339

)

 

 

(25,865

)

Net cash provided by operating activities

 

26,054

 

 

 

12,631

 

 

 

 

 

Cash flows from investing activities:

 

 

 

Net investment in marketable securities

 

(16,634

)

 

 

(3,816

)

Capital expenditures

 

(2,567

)

 

 

(4,232

)

Proceeds from sales of fixed assets

 

87

 

 

 

1,102

 

Net cash used in investing activities

 

(19,114

)

 

 

(6,946

)

 

 

 

 

Cash flows from financing activities:

 

 

 

Net proceeds from issuance of common stock

 

4,794

 

 

 

2,986

 

Repurchase of common stock

 

—

 

 

 

(26,654

)

Net cash provided by (used in) financing activities

 

4,794

 

 

 

(23,668

)

 

 

 

 

Effect of exchange rate differences

 

33

 

 

 

(20

)

Net change in cash, cash equivalents and restricted cash

$

11,767

 

 

$

(18,003

)

Cash, cash equivalents and restricted cash, end of year

$

68,225

 

 

$

56,458

 

 

ENERGY RECOVERY, INC.

SUPPLEMENTAL FINANCIAL INFORMATION

(Unaudited)

 

Channel Revenue

 

 

Three Months Ended December 31,

 

Years Ended December 31,

 

2023

 

2022

 

vs. 2022

 

2023

 

2022

 

vs. 2022

 

(In thousands, except percentages)

Megaproject

$

41,382

 

$

30,631

 

up 35%

 

$

83,665

 

$

81,888

 

up 2%

Original equipment manufacturer

 

9,150

 

 

7,466

 

up 23%

 

 

25,995

 

 

28,858

 

down 10%

Aftermarket

 

6,657

 

 

4,194

 

up 59%

 

 

18,689

 

 

14,845

 

up 26%

Total revenue

$

57,189

 

$

42,291

 

up 35%

 

$

128,349

 

$

125,591

 

up 2%

 

Segment Activity

 

 

Three Months Ended December 31, 2023

 

Three Months Ended December 31, 2022

 

Water

 

Emerging Technologies

 

Corporate

 

Total

 

Water

 

Emerging Technologies

 

Corporate

 

Total

 

(In thousands)

Revenue

$

57,103

 

$

86

 

 

$

—

 

 

$

57,189

 

$

42,237

 

$

54

 

 

$

—

 

 

$

42,291

Cost of revenue

 

17,154

 

 

536

 

 

 

—

 

 

 

17,690

 

 

12,341

 

 

59

 

 

 

—

 

 

 

12,400

Gross profit (loss)

 

39,949

 

 

(450

)

 

 

—

 

 

 

39,499

 

 

29,896

 

 

(5

)

 

 

—

 

 

 

29,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

1,914

 

 

951

 

 

 

4,295

 

 

 

7,160

 

 

2,027

 

 

964

 

 

 

4,195

 

 

 

7,186

Sales and marketing

 

4,124

 

 

1,882

 

 

 

761

 

 

 

6,767

 

 

2,868

 

 

927

 

 

 

566

 

 

 

4,361

Research and development

 

1,130

 

 

3,828

 

 

 

—

 

 

 

4,958

 

 

992

 

 

2,747

 

 

 

—

 

 

 

3,739

Total operating expenses

 

7,168

 

 

6,661

 

 

 

5,056

 

 

 

18,885

 

 

5,887

 

 

4,638

 

 

 

4,761

 

 

 

15,286

Operating income (loss)

$

32,781

 

$

(7,111

)

 

$

(5,056

)

 

$

20,614

 

$

24,009

 

$

(4,643

)

 

$

(4,761

)

 

$

14,605

 

 

Year Ended December 31, 2023

 

Year Ended December 31, 2022

 

Water

 

Emerging Technologies

 

Corporate

 

Total

 

Water

 

Emerging Technologies

 

Corporate

 

Total

 

(In thousands)

Revenue

$

127,725

 

$

624

 

 

$

—

 

 

$

128,349

 

$

125,428

 

$

163

 

 

$

—

 

 

$

125,591

Cost of revenue

 

40,290

 

 

980

 

 

 

—

 

 

 

41,270

 

 

38,158

 

 

77

 

 

 

—

 

 

 

38,235

Gross profit (loss)

 

87,435

 

 

(356

)

 

 

—

 

 

 

87,079

 

 

87,270

 

 

86

 

 

 

—

 

 

 

87,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

7,751

 

 

3,927

 

 

 

17,186

 

 

 

28,864

 

 

6,936

 

 

4,104

 

 

 

17,301

 

 

 

28,341

Sales and marketing

 

13,691

 

 

6,053

 

 

 

2,420

 

 

 

22,164

 

 

11,065

 

 

3,047

 

 

 

2,165

 

 

 

16,277

Research and development

 

4,251

 

 

12,750

 

 

 

—

 

 

 

17,001

 

 

4,151

 

 

13,758

 

 

 

—

 

 

 

17,909

Total operating expenses

 

25,693

 

 

22,730

 

 

 

19,606

 

 

 

68,029

 

 

22,152

 

 

20,909

 

 

 

19,466

 

 

 

62,527

Operating income (loss)

$

61,742

 

$

(23,086

)

 

$

(19,606

)

 

$

19,050

 

$

65,118

 

$

(20,823

)

 

$

(19,466

)

 

$

24,829

 

Share-based Compensation

 

 

Three Months Ended December 31,

 

Years Ended December 31,

 

2023

 

2022

 

2023

 

2022

 

(In thousands)

Stock-based compensation expense charged to:

 

 

 

 

 

 

 

Cost of revenue

$

164

 

$

136

 

$

719

 

$

506

General and administrative

 

1,033

 

 

701

 

 

3,661

 

 

3,436

Sales and marketing

 

649

 

 

360

 

 

2,333

 

 

1,592

Research and development

 

381

 

 

210

 

 

1,325

 

 

977

Total stock-based compensation expense

$

2,227

 

$

1,407

 

$

8,038

 

$

6,511

 

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

 

Q4'2023

 

Q4'2022

 

 

2023

 

 

 

2022

 

 

(In millions, except shares, per share and percentages)

Operating margin

 

36.0

%

 

 

34.5

%

 

 

14.8

%

 

 

19.8

%

Share-based compensation

 

3.9

 

 

 

3.3

 

 

 

6.3

 

 

 

5.2

 

Severance

 

—

 

 

 

—

 

 

 

—

 

 

 

0.2

 

Accelerated depreciation

 

—

 

 

 

—

 

 

 

—

 

 

 

0.7

 

Litigation charges

 

—

 

 

 

—

 

 

 

—

 

 

 

0.3

 

Adjusted operating margin

 

39.9

%

 

 

37.9

%

 

 

21.1

%

 

 

26.2

%

 

 

 

 

 

 

 

 

Net income

$

19.8

 

 

$

13.7

 

 

$

21.5

 

 

$

24.0

 

Share-based compensation (2)

 

2.2

 

 

 

1.4

 

 

 

8.0

 

 

 

6.5

 

Severance (2)

 

—

 

 

 

—

 

 

 

—

 

 

 

0.3

 

Accelerated depreciation (2)

 

—

 

 

 

—

 

 

 

—

 

 

 

0.7

 

Litigation charges (2)

 

—

 

 

 

—

 

 

 

—

 

 

 

0.4

 

Share-based compensation discrete tax item

 

—

 

 

 

(0.4

)

 

 

(0.7

)

 

 

(1.4

)

Adjusted net income

$

22.0

 

 

$

14.7

 

 

$

28.9

 

 

$

30.5

 

 

 

 

 

 

 

 

 

Net income per share

$

0.34

 

 

$

0.24

 

 

$

0.37

 

 

$

0.42

 

Adjustments to net income per share (3)

 

0.05

 

 

 

0.02

 

 

 

0.14

 

 

 

0.12

 

Adjusted net income per share

$

0.39

 

 

$

0.26

 

 

$

0.51

 

 

$

0.54

 

 

 

 

 

 

 

 

 

Effective tax rate

 

 

 

 

 

5.3

%

 

 

7.8

%

Adjustments to effective tax rate (3)

 

 

 

 

 

0.8

 

 

 

2.9

 

Adjusted effective tax rate

 

 

 

 

 

6.1

%

 

 

10.6

%

 

 

 

 

 

 

 

 

Net income

$

19.8

 

 

$

13.7

 

 

$

21.5

 

 

$

24.0

 

Share-based compensation

 

2.2

 

 

 

1.4

 

 

 

8.0

 

 

 

6.5

 

Severance

 

—

 

 

 

—

 

 

 

—

 

 

 

0.3

 

Depreciation and amortization

 

1.0

 

 

 

1.0

 

 

 

4.1

 

 

 

4.8

 

Litigation charges

 

—

 

 

 

—

 

 

 

—

 

 

 

0.4

 

Other income, net

 

(1.3

)

 

 

(0.8

)

 

 

(3.7

)

 

 

(1.2

)

Provision for income taxes

 

2.1

 

 

 

1.6

 

 

 

1.2

 

 

 

2.0

 

Adjusted EBITDA

$

23.9

 

 

$

17.0

 

 

$

31.2

 

 

$

36.8

 

 

 

 

 

 

 

 

 

Free cash flow

 

 

 

 

 

 

 

Net cash provided by operating activities

$

13.8

 

 

$

6.4

 

 

$

26.1

 

 

$

12.6

 

Capital expenditures

 

(1.4

)

 

 

(1.2

)

 

 

(2.6

)

 

 

(4.2

)

Free cash flow

$

12.4

 

 

$

5.1

 

 

$

23.5

 

 

$

8.4

 

___________

(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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