ERII

Business Context and Reporting Period

Company: Energy Recovery, Inc. (ERI)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter and six months ended June 30, 2026

Business Overview: Energy Recovery designs and manufactures energy-saving technology, primarily pressure exchangers, for desalination and wastewater treatment. The company recently restructured its reporting segments, splitting the former Water segment into Desalination and Wastewater, and winding down its Emerging Technologies (CO2 retail grocery) segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 57% in Q2 2026 compared to Q2 2025, driven primarily by an 82% drop in Megaproject revenue ($2.7M vs. $14.8M) and lower OEM shipments in Asia and Africa.
• Restructuring and Impairment: The company recorded significant non-recurring charges related to the wind-down of its CO2 retail grocery business:
  • Restructuring charges: $0.855 million (Q2) and $2.391 million (YTD).
  • Inventory reserve: $1.632 million (YTD).
  • Goodwill impairment: $1.662 million (YTD).
• Segment Performance: The Desalination segment generated $11.483 million in Q2 revenue, while the Wastewater segment generated $0.513 million. Corporate and Other expenses increased due to restructuring but decreased overall due to lower employee compensation and consulting costs.
• Share Repurchases: The company actively repurchased stock, spending approximately $20.7 million in the first half of 2026 under the August 2025 and May 2026 authorizations.

Guidance, Outlook, and Risks

• Liquidity: Management believes existing cash ($61.4M), investments ($36.6M), and operating cash flows are sufficient to meet liquidity needs for at least the next 12 months. A $50M credit facility with JPMorgan Chase is available, with $20M currently utilized for letters of credit.
• Outlook: Revenue variability is expected due to the project-driven nature of the business (large contracts up to 36 months). The company expects sales outside the U.S. to remain a significant portion of revenue.
• Key Risks:
  • Geopolitical Instability: Escalating conflicts in the Middle East (specifically Iran) and global economic uncertainty could delay or cancel large-scale desalination projects.
  • Manufacturing Expansion: Significant risks associated with the new manufacturing facility in Saudi Arabia, expected to begin operations in 2027, including regulatory, labor, and commissioning challenges.
  • Customer Concentration: Revenue is concentrated in specific countries (e.g., Egypt, Spain, Oman) and large customers, creating volatility.
• Tax Impact: The effective tax rate for the six months ended June 30, 2026, was 19.1%, influenced by the projection of no Foreign-Derived Intangible Income (FDII) deduction due to forecasted losses.

Investor Verification Checklist

• Verify the status and timeline of the new Saudi Arabia manufacturing facility and associated capital expenditures.
• Monitor the pipeline of large-scale desalination megaprojects, particularly in the Middle East, given the 82% drop in Megaproject revenue.
• Assess the impact of the CO2 business wind-down on future R&D and emerging technology revenue streams.
• Review the company's ability to maintain gross margins as project mix shifts and potential tariff impacts materialize.
• Track the utilization of the $50M credit facility and the remaining capacity under the May 2026 share repurchase authorization ($23.7M).