Energy Recovery, Inc. Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Energy Recovery designs and manufactures pressure-exchanger-based systems that reduce energy use, waste and operating costs in high-pressure fluid-flow applications. Its primary business is water desalination and treatment, with emerging initiatives in industrial wastewater, natural gas processing, hydraulic fracturing and commercial refrigeration.
This unaudited report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Beginning in Q1 2021, the Company reported Water and Emerging Technologies segments and recast prior-year segment information for comparability.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $28.9 million | $21.5 million | +34% |
| Product revenue | $28.9 million | $19.0 million | +52% |
| Product gross profit | $20.0 million | $13.3 million | +50% |
| Product gross margin | 69.0% | 70.1% | Down 110 basis points |
| Income from operations | $6.1 million | $0.1 million | +$6.0 million |
| Net income | $6.9 million | $0.6 million | +$6.2 million |
| Diluted earnings per share | $0.12 | $0.01 | Increase |
| Operating cash flow | $0.1 million | $(5.9) million | +$5.9 million |
Operating margin was approximately 21.2%, compared with approximately 0.6% in the prior-year quarter. Net margin was approximately 23.7%, compared with approximately 2.9%. The Q1 2021 tax result included a $1.6 million discrete tax benefit, primarily from stock-based compensation windfalls.
- Megaproject revenue was $23.8 million, or 82% of product revenue, up 64% year over year.
- OEM revenue was $2.8 million, down 22%, while aftermarket revenue was $2.4 million, up 142%.
- Revenue was concentrated geographically in the Middle East and Africa at $21.0 million and Asia at $7.2 million.
- Three customers represented 18%, 17% and 16% of product revenue, respectively; a fourth represented 15%.
- Cash and cash equivalents were $105.4 million, and short-term investments were $14.6 million at March 31, 2021.
- The Company reported no debt securities classified as debt, but had $12.9 million of outstanding standby letters of credit and $17.5 million of operating lease liabilities.
- Total assets were $215.2 million and stockholders’ equity was $186.3 million at March 31, 2021.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $7.4 million, driven by higher product revenue, particularly megaproject activity.
- License and development revenue declined to zero from $2.5 million. The VorTeq License Agreement with Schlumberger was terminated effective June 1, 2020, and no further license revenue is expected under that agreement.
- Gross margin declined because of lower average selling prices from product mix and higher manufacturing labor costs, partly offset by lower COVID-19-related charges.
- General and administrative expense declined 4%, sales and marketing expense increased 26%, and research and development expense declined 33%. The R&D reduction primarily reflected $1.9 million lower testing-supply spending as VorTeq testing decreased and resources shifted toward refrigeration and other initiatives.
- Emerging Technologies incurred a $5.3 million operating loss, including $3.5 million of VorTeq-related expense. The Water segment generated $15.7 million of operating income before corporate expenses.
- Operating cash flow improved to positive $0.1 million from negative $5.9 million, although accounts receivable increased by $4.6 million during the quarter.
- Cash increased by $11.2 million, supported by operating cash flow, $5.7 million of investment maturities and $6.1 million of equity issuance, partly offset by capital expenditures of $0.6 million.
Outlook, Commentary, Risks and Unusual Items
Management stated that existing cash, short-term investments and expected operating cash generation should satisfy anticipated liquidity needs for at least the next 12 months. Additional financing could be required for acquisitions, rapid market adoption of new technologies, expanded research and development, geographic expansion or substantial share repurchases.
- The Board authorized a share repurchase program of up to $50.0 million on March 9, 2021; no shares had been repurchased as of March 31, 2021.
- The Company announced a second contract award for its Ultra PX product for an industrial wastewater application in China and a joint-marketing initiative with DuPont Water Solutions.
- Management expects to continue developing CO2 refrigeration technology during 2021, with commercialization dependent on successful research, development and testing. The filing does not provide a quantitative revenue or earnings forecast.
- COVID-19 affected OEM demand, including projects tied to tourism and hospitality, and delayed certain installations, upgrades and non-critical maintenance.
- Key risks include dependence on large megaproject timing, customer and geographic concentration, foreign-exchange and collection risk, uncertain adoption of new technologies, potential warranty or product-liability claims, and the possibility that diversification into industrial wastewater, oil and gas or refrigeration will not succeed.
- The Company had approximately $6.7 million of open but cancellable purchase-order arrangements and $23.2 million of undiscounted remaining operating lease payments.
- Various litigation matters remain subject to uncertainty, but the Company reported no material losses that were probable or reasonably possible as of March 31, 2021.
Important Facts for Investors to Verify
- Whether megaproject revenue remains strong and whether the high Q1 customer and geographic concentration persists.
- The timing and conversion of the $13.2 million of remaining performance obligations, including $10.2 million expected during the remaining nine months of 2021.
- Whether the Water segment can offset continuing losses and spending in Emerging Technologies.
- The sustainability of the 69.0% product gross margin amid product-mix and manufacturing-cost pressures.
- The effect of the one-time $1.6 million tax benefit on reported net income and effective tax rate.
- Progress toward commercialization of Ultra PX, CO2 refrigeration and other emerging technologies, including associated development costs and warranty exposure.
- Future use of the $50.0 million repurchase authorization and its effect on liquidity and share count.
- Cash collection trends, given the increase in accounts receivable and the project-driven volatility of operating cash flow.