Energy Recovery, Inc. — Q2 2021 Form 10-Q Summary
Business Context and Reporting Period
Energy Recovery develops pressure exchanger-based technologies for industrial fluid-flow markets, including seawater desalination, wastewater, refrigeration, natural gas processing and oil and gas. Reported results cover the three and six months ended June 30, 2021. The financial statements are unaudited.
Beginning in the first quarter of 2021, the company realigned and recast its reportable segments: Water and Emerging Technologies. Water includes PX systems, turbochargers and pumps; Emerging Technologies includes VorTeq, ISOBoost, PX G1300 and other new products.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $20.6 million | $43.6 million | $49.5 million | $65.2 million |
| Product revenue | $20.6 million | $19.3 million | $49.5 million | $38.3 million |
| License and development revenue | — | $24.4 million | — | $26.9 million |
| Product gross profit | $13.4 million | $12.7 million | $33.4 million | $26.0 million |
| Product gross margin | 65.1% | 66.0% | 67.4% | 68.0% |
| Income from operations | $0.3 million | $21.3 million | $6.4 million | $21.4 million |
| Net income | $1.1 million | $16.9 million | $7.9 million | $17.5 million |
| Diluted EPS | $0.02 | $0.30 | $0.13 | $0.31 |
| Operating cash flow | Not separately disclosed for the quarter | $11.5 million | $(0.3) million |
Q2 product revenue increased 7%, and six-month product revenue increased 30%. Product gross profit increased 6% in Q2 and 28% year to date, while product gross margin declined modestly because of higher labor and overhead costs, lower average PX selling prices and product mix.
The Water segment generated operating income of $8.9 million in Q2 and $24.6 million for the first six months. Emerging Technologies generated operating losses of $5.3 million and $10.7 million, respectively. Consolidated operating income was reduced by corporate operating expenses of $3.3 million in Q2 and $7.5 million year to date.
Liquidity, Cash Flow and Capital Structure
- At June 30, 2021, cash and cash equivalents were $103.3 million, short-term investments were $17.4 million and net accounts receivable were $7.6 million.
- Total cash, cash equivalents and restricted cash were $103.4 million, up $9.0 million from year-end 2020.
- Six-month operating cash flow was $11.5 million, compared with cash used in operations of $0.3 million in the prior-year period.
- Capital expenditures were $2.4 million, and investing activities provided $0.4 million, primarily reflecting investment maturities and purchases.
- Financing activities used $2.9 million, including $11.6 million of share repurchases partially offset by $8.7 million of proceeds from equity issuances.
- The filing does not report traditional funded debt. Lease liabilities totaled $17.2 million, including $1.5 million current and $15.7 million non-current.
- Outstanding standby letters of credit totaled $12.2 million and are secured by pledged U.S. investments.
- Management believes existing resources and operating cash generation will satisfy anticipated needs for at least the next 12 months, but additional financing could be required for acquisitions or rapid investment in new technologies.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 53% in Q2 and 24% for the first six months because the prior-year periods included recognition of $24.4 million and $26.9 million, respectively, of remaining deferred VorTeq license revenue following termination of the Schlumberger license agreement effective June 1, 2020.
- Product revenue grew despite the absence of license revenue, driven primarily by higher PX, pump and turbocharger sales.
- Megaproject revenue increased 11% in Q2 and 40% year to date; OEM revenue increased 6% in Q2 but declined 7% year to date; aftermarket revenue declined 6% in Q2 but increased 29% year to date.
- Operating expenses declined 17% in Q2 and 14% year to date, primarily because the prior-year period included a $2.3 million impairment of VorTeq-related long-lived assets and higher VorTeq testing costs. Sales and marketing expenses increased as the company expanded headcount and commercial activities.
- Net income declined substantially because the prior-year period benefited from the one-time VorTeq license revenue. The 2021 tax results also included research and development credits and discrete tax benefits, producing an income tax benefit of $0.7 million in Q2 and $1.4 million year to date.
- The company repurchased 656,938 shares for $11.6 million under a $50.0 million authorization, leaving approximately $38.4 million available at June 30, 2021.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued product-revenue growth, supported by global water-production needs, plant maintenance purchases and recovery in OEM activity, assuming no new COVID-19 shutdown measures.
- The company expects increased sales and marketing spending through the balance of 2021 and early 2022 to support new markets and product initiatives.
- Management continues investing in VorTeq and PX G1300 and is developing pressure exchanger applications for refrigeration and other industrial markets. No quantitative revenue or earnings guidance is provided in the filing.
- During the quarter, the company announced more than $13.8 million of PX and PX PowerTrain awards for Israel’s Sorek B desalination plant, expected to ship in the third and fourth quarters of 2021. It also announced more than $55.0 million of worldwide MPD and OEM contracts.
- Future performance obligations totaled $16.2 million at June 30, 2021, including $4.0 million expected during the remaining six months of 2021 and $12.2 million in 2022.
- Revenue is project-driven and can vary significantly based on shipment timing. The company identifies dependence on major customers, international operations, foreign currency, interest rates, customer collections, supply and labor costs, COVID-19 developments, product adoption, intellectual property protection and litigation as relevant risks.
- Three customers represented at least 10% of six-month product revenue, with individual customer concentrations ranging from 11% to 22%. The filing states that no material litigation losses were probable or reasonably possible as of June 30, 2021.
- The company had approximately $6.7 million of open cancellable purchase-order arrangements and operating lease commitments with payments extending through 2030.
- Disclosure controls were evaluated as effective, and management reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether growth in recurring product revenue can offset the permanent loss of VorTeq license revenue.
- Timing, value and margins of the announced Sorek B and other MPD/OEM awards, including the $16.2 million of remaining performance obligations.
- Whether product gross margin stabilizes after the Q2 decline caused by labor, overhead, pricing and mix pressures.
- Progress toward commercialization of VorTeq, PX G1300 and refrigeration applications relative to continuing Emerging Technologies losses.
- Actual pace of OEM and aftermarket recovery as COVID-19 effects and project timing evolve.
- Use of the remaining $38.4 million share-repurchase authorization versus potential needs for acquisitions, research and development or other capital investments.
- Customer concentration, international collection exposure, supply-chain conditions and the effect of future foreign-exchange or interest-rate changes.