Energy Recovery, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Energy Recovery develops and manufactures pressure-exchanger technologies and related equipment that reduce energy consumption, waste and operating costs in industrial fluid-flow applications. Its principal markets include seawater desalination, industrial wastewater, refrigeration, oil and gas, and natural gas processing. Reported segments are Water and Emerging Technologies.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The company is a smaller reporting company and its common stock trades on Nasdaq under ERII.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Product revenue | $20.8 million | $27.4 million | $70.3 million | $65.7 million |
| License and development revenue | — | — | — | $26.9 million |
| Total revenue | $20.8 million | $27.4 million | $70.3 million | $92.6 million |
| Product gross profit | $14.7 million | $19.6 million | $48.1 million | $45.6 million |
| Product gross margin | 70.6% | 71.5% | 68.4% | 69.5% |
| Income from operations | $1.4 million | $6.1 million | $7.9 million | $27.5 million |
| Net income | $1.1 million | $5.4 million | $9.0 million | $22.9 million |
| Diluted earnings per share | $0.02 | $0.10 | $0.15 | $0.41 |
Q3 product revenue decreased 24%, primarily because of the timing of megaproject shipments. Nine-month product revenue increased 7%, but total revenue declined 24% because the prior-year period included $26.9 million of license and development revenue related to the terminated VorTeq license agreement.
As of September 30, 2021, the company had $65.7 million of cash and cash equivalents, $42.7 million of short- and long-term investments, and $13.1 million of net accounts receivable. Total assets were $208.8 million and total liabilities were $32.0 million. The filing reports no financial debt; liabilities primarily comprise operating leases, including $16.8 million of lease liabilities. Outstanding standby letters of credit totaled $14.1 million.
For the nine months, operating cash flow was $7.3 million versus $10.4 million in the prior-year period. Investing cash flow was negative $27.5 million, principally reflecting purchases of marketable securities and $4.9 million of capital expenditures. Financing cash flow was negative $8.2 million, including $17.2 million of share repurchases and $8.9 million of equity issuance proceeds. Cash, cash equivalents and restricted cash declined by $28.5 million to $65.8 million.
Material changes versus the prior comparable period
- Q3 product revenue fell $6.6 million, or 24%, due mainly to lower megaproject shipments; megaproject revenue declined 36% while OEM revenue increased 19% and aftermarket revenue increased 2%.
- Nine-month product revenue increased $4.7 million, or 7%, driven by higher PX, pump and turbocharger sales. Megaproject revenue increased 7% and aftermarket revenue increased 19%.
- Product gross margin declined 90 basis points in Q3 and 110 basis points for the nine-month period, reflecting product mix and higher labor and overhead costs.
- Operating income declined 77% in Q3 and 71% for the nine-month period. The comparison was affected by the $26.9 million of VorTeq license revenue recognized in the first half of 2020 and the absence of that revenue in 2021.
- Sales and marketing expense increased 40% in Q3 and 43% year to date, while research and development expense declined 13% in Q3 and 27% year to date, primarily because of reduced VorTeq development spending.
- The company repurchased 952,666 shares for $17.2 million during the first nine months, including 295,728 shares for $5.6 million in Q3. Approximately $32.8 million remained available under the $50.0 million authorization at September 30, 2021.
- Inventory increased to $20.6 million from $11.7 million at December 31, 2020, as the company built raw-material and finished-goods stocks to mitigate supply-chain disruptions and support expected demand.
Guidance, outlook, commentary and risks
Management did not provide a specific quantitative revenue or earnings forecast in the filing. It expects continued product growth based on existing backlog, global water-production needs, plant-maintenance demand and potential recovery in industries affected by COVID-19. Product revenue remains subject to significant quarter-to-quarter variation because of megaproject shipment timing.
The PX G1300 refrigeration product entered a field-trial phase, including a planned deployment at a California grocery store. Management expects increased sales and marketing spending through the balance of 2021 and into 2022 to support refrigeration commercialization and related market development.
During the quarter, the company announced more than $6.0 million of contract awards for PX equipment and services at desalination facilities in Asia and awards involving Ultra PX and PX products for industrial wastewater applications in China.
Management stated that existing cash, investments and operating cash generation should meet anticipated liquidity needs for at least the next 12 months. Additional equity or debt financing could become necessary for acquisitions, rapid technology adoption, expanded operations or other material investments.
Key risks include COVID-19-related disruption, supplier shortages, port congestion, labor constraints, inflation, increased freight and component costs, customer concentration, megaproject timing, foreign-exchange exposure and the need to commercialize emerging technologies. The company had approximately $8.7 million of open cancellable purchase-order commitments, lease obligations with minimum future payments of $21.9 million, and no material litigation losses that were probable or reasonably possible as of September 30, 2021.
Important facts for investors to verify
- Whether megaproject shipment timing and backlog convert into the expected fourth-quarter and full-year product revenue.
- The sustainability of approximately 68% to 71% product gross margins amid labor, freight and material inflation.
- Inventory conversion and whether elevated inventory levels create obsolescence or working-capital risk.
- Commercial adoption, field-trial results and required investment for the PX G1300 and other Emerging Technologies products.
- The effect of continued share repurchases and equity compensation on outstanding shares and per-share results.
- Whether supply-chain disruptions, customer concentration or international collection and currency risks materially affect operations.
- The company’s ability to maintain liquidity without additional financing if growth investments or acquisitions accelerate.