Energy Recovery, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The financial statements are unaudited and prepared under U.S. GAAP. Energy Recovery designs, manufactures, and sells energy recovery devices, pumps, and related services, primarily for desalination and other industrial fluid-flow applications.
Key Financial Metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Net revenue | $8.6 million | $12.3 million | $14.9 million | $17.1 million |
| Gross profit | $5.3 million | $6.7 million | $8.3 million | $7.9 million |
| Gross margin | 61.6% | 54.2% | 55.5% | 46.4% |
| Operating income (loss) | $(1.3) million | $0.1 million | $(5.8) million | $(4.6) million |
| Net income (loss) | $(1.5) million | $0.4 million | $(6.0) million | $(4.2) million |
| Diluted earnings (loss) per share | $(0.03) | $0.01 | $(0.12) | $(0.08) |
| Cash flow from operations | Not separately provided | Not separately provided | $(2.6) million | $(1.9) million |
- Revenue mix: Six-month PX-device revenue was $10.7 million, or 72% of revenue, compared with $13.5 million, or 79%, in the prior-year period. Turbochargers, pumps, and related products increased to $4.2 million from $3.6 million.
- Geography: International revenue represented 95% of second-quarter revenue and 88% of first-half revenue.
- Liquidity: June 30 cash and cash equivalents were $11.4 million; short- and long-term investments totaled $16.2 million. Restricted cash was $9.5 million, primarily supporting letters of credit and other contractual requirements.
- Debt: No revolving advances were outstanding under the $16.0 million 2012 credit facility. The facility matures June 5, 2015, is secured by substantially all assets, and the company was in compliance with its covenants.
- Balance sheet: Total assets were $95.6 million and total liabilities were $12.8 million at June 30, 2013. Inventory increased to $7.4 million from $5.1 million at December 31, 2012, while accounts receivable and unbilled receivables declined.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 30% and first-half revenue declined 12%, primarily because the 2013 periods included fewer and smaller mega-project shipments. Management stated that OEM and aftermarket sales partially offset the decline.
- Gross margin improved substantially to 62% in the second quarter and 56% for the first half, driven by plant consolidation, vertical integration of ceramic processing, manufacturing efficiencies, and improved yields.
- Despite improved gross margins, operating expenses were essentially flat year over year in the second quarter and increased 13% for the first half. First-half sales and marketing expense rose 19% and research and development expense rose 42%, reflecting rebranding, market research, personnel additions, and oil-and-gas product development.
- The company moved from second-quarter net income of $0.4 million in 2012 to a net loss of $1.5 million in 2013. The first-half net loss widened from $4.2 million to $6.0 million.
- Operating cash use increased to $2.6 million from $1.9 million. Investing cash flow was $(2.9) million versus positive $6.3 million, primarily because the company purchased more marketable securities. Financing cash flow improved to positive $0.2 million from $(4.1) million, largely because there was no comparable $4.0 million share repurchase.
Guidance, Outlook, Risks, and Unusual Items
- Management expected a significant volume of mega-project shipments in the fourth quarter, but the filing does not provide quantitative revenue or earnings guidance.
- Management believes current gross-margin levels can be sustained if volume remains healthy, product mix favors PX devices, and production efficiencies and yields continue to improve.
- Sales and marketing and research and development expenses are expected to increase as the company expands beyond seawater desalination into other markets, including oil and gas. No oil-and-gas device shipment revenue had yet been recognized.
- Management stated that existing cash balances and operating cash generation should meet anticipated needs for at least the next twelve months, absent material acquisitions or investments. Additional capital or debt financing may be required in the future.
- The company implemented a new enterprise resource planning system on July 1, 2013. Stabilization was expected to continue through the remainder of the year, and disruptions could affect order processing, shipments, invoicing, financial reporting, and internal controls.
- Warranty reserves declined to $1.0 million after a $132,000 change in estimate during the quarter. The company recorded a $44,000 impairment loss on its Michigan facility held for sale.
- Outstanding standby letters of credit totaled $5.6 million and were collateralized by approximately $5.7 million of restricted cash. Operating lease commitments totaled $10.0 million, and cancellable open purchase orders totaled approximately $1.6 million.
- Litigation matters had no material developments from the 2012 Form 10-K; the company maintained existing accruals. Customer concentration and project timing remain important risks because large EPC projects can cause substantial quarter-to-quarter revenue volatility.
Most Important Facts for Investors to Verify
- Whether anticipated fourth-quarter mega-project shipments occurred and converted into revenue and positive operating cash flow.
- Whether the improved gross margin remained sustainable as product and customer mix changed.
- The pace of cash consumption, including the effect of inventory, receivables, restricted cash, and marketable-security purchases.
- Whether the new ERP system was stabilized without material disruptions to operations, financial reporting, or internal controls.
- Progress in diversifying beyond desalination and evidence of commercial revenue from oil-and-gas or other new-market applications.
- The status and collectibility of customer holdback receivables, letters of credit, warranty obligations, Michigan property held for sale, and disclosed litigation contingencies.